10-Q 1 d10q.htm FORM 10-Q Form 10-Q
Table of Contents

 

 

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

 

þ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2011, or

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                         to                         .

Commission file number: 1-3754

ALLY FINANCIAL INC.

(Exact name of registrant as specified in its charter)

 

Delaware   38-0572512

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

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.

Yes þ                    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 þ                    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):

 

Large accelerated filer ¨    Accelerated filer ¨    Non-accelerated filer þ   Smaller reporting company ¨
      (Do not check if a smaller reporting company)  

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 August 9, 2011, the number of shares outstanding of the Registrant’s common stock was 1,330,970 shares.

 

 

 


Table of Contents

ALLY FINANCIAL INC.

INDEX

 

        

Page

 
Part I — Financial Information   
Item 1.   Financial Statements      3   
  Condensed Consolidated Statement of Income (unaudited) for the Three and Six Months Ended June 30, 2011 and 2010      3   
  Condensed Consolidated Balance Sheet (unaudited) at June 30, 2011 and December 31, 2010      5   
  Condensed Consolidated Statement of Changes in Equity (unaudited) for the Six Months Ended June 30, 2011 and 2010      7   
  Condensed Consolidated Statement of Cash Flows (unaudited) for the Six Months Ended June 30, 2011 and 2010      8   
  Notes to Condensed Consolidated Financial Statements (unaudited)      10   
Item 2.   Management’s Discussion and Analysis of Financial Condition and Results of Operations      88   
Item 3.   Quantitative and Qualitative Disclosures About Market Risk      152   
Item 4.   Controls and Procedures      152   
Part II — Other Information   
Item 1.   Legal Proceedings      153   
Item 1A.   Risk Factors      153   
Item 2.   Unregistered Sales of Equity Securities and Use of Proceeds      158   
Item 3.   Defaults Upon Senior Securities      159   
Item 4.   (Removed and Reserved)      159   
Item 5.   Other Information      159   
Item 6.   Exhibits      159   
Signatures      160   
Index of Exhibits      161   

 

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3

Item 1. Financial Statements

ALLY FINANCIAL INC.

CONDENSED CONSOLIDATED STATEMENT OF INCOME (unaudited)

 

    Three months
ended June  30,
    Six months
ended June  30,
 
($ in millions)       2011             2010             2011             2010      

Financing revenue and other interest income

       

Interest and fees on finance receivables and loans

  $ 1,676      $ 1,617      $ 3,299      $ 3,235   

Interest on loans held-for-sale

    98        156        206        371   

Interest on trading securities

    3        6        6        7   

Interest and dividends on available-for-sale investment securities

    108        90        212        189   

Interest-bearing cash

    15        18        27        32   

Operating leases

    620        1,011        1,300        2,174   

 

 

Total financing revenue and other interest income

    2,520        2,898        5,050        6,008   

Interest expense

       

Interest on deposits

    175        155        347        313   

Interest on short-term borrowings

    108        99        234        210   

Interest on long-term debt

    1,334        1,409        2,744        2,842   

 

 

Total interest expense

    1,617        1,663        3,325        3,365   

Depreciation expense on operating lease assets

    192        526        477        1,182   

 

 

Net financing revenue

    711        709        1,248        1,461   

Other revenue

       

Servicing fees

    353        384        724        769   

Servicing asset valuation and hedge activities, net

    (105     (21     (192     (154

 

 

Total servicing income, net

    248        363        532        615   

Insurance premiums and service revenue earned

    433        477        866        945   

Gain on mortgage and automotive loans, net

    115        266        207        537   

Loss on extinguishment of debt

    (25     (3     (64     (121

Other gain on investments, net

    92        112        176        255   

Other income, net of losses

    253        173        469        255   

 

 

Total other revenue

    1,116        1,388        2,186        2,486   

Total net revenue

    1,827        2,097        3,434        3,947   

Provision for loan losses

    51        218        164        362   

Noninterest expense

       

Compensation and benefits expense

    424        388        858        814   

Insurance losses and loss adjustment expenses

    244        224        430        435   

Other operating expenses

    916        832        1,688        1,714   

 

 

Total noninterest expense

    1,584        1,444        2,976        2,963   

Income from continuing operations before income tax expense

    192        435        294        622   

Income tax expense from continuing operations

    82        33        14        69   

 

 

Net income from continuing operations

    110        402        280        553   

 

 

Income (loss) from discontinued operations, net of tax

    3        163        (21     174   

 

 

Net income

  $ 113      $ 565      $ 259      $ 727   

 

 

 

Statement continues on the next page.

The Notes to the Condensed Consolidated Financial Statements (unaudited) are an integral part of these statements.


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4

ALLY FINANCIAL INC.

CONDENSED CONSOLIDATED STATEMENT OF INCOME (unaudited)

 

    Three months
ended June 30,
    Six months
ended June 30,
 
($ in millions except per share data)       2011             2010             2011             2010      

Net (loss) income attributable to common shareholders

       

Net income from continuing operations

  $ 110      $ 402      $ 280      $ 553   

Preferred stock dividends — U.S. Department of Treasury

    (134            (267     (386

Preferred stock dividends

    (57     (25     (127     (142

Impact of preferred stock amendment

                  32          

 

 

Net (loss) income from continuing operations attributable to common shareholders (a)

    (81     377        (82     25   

 

 

Income (loss) from discontinued operations, net of tax

    3        163        (21     174   

 

 

Net (loss) income attributable to common shareholders

  $ (78   $ 540      $ (103   $ 199   

 

 

Basic weighted-average common shares outstanding

    1,330,970        799,120        1,330,970        799,120   

 

 

Diluted weighted-average common shares outstanding (a)

    1,330,970        1,787,320        1,330,970        799,120   

 

 

Basic earnings per common share

       

Net (loss) income from continuing operations

  $ (61   $ 472      $ (62   $ 32   

Income (loss) from discontinued operations, net of tax

    2        204        (16     217   

 

 

Net (loss) income

  $ (59   $ 676      $ (78   $ 249   

 

 

Diluted earnings per common share (a)

       

Net (loss) income from continuing operations

  $ (61   $ 211      $ (62   $ 32   

Income (loss) from discontinued operations, net of tax

    2        91        (16     217   

 

 

Net (loss) income

  $ (59   $ 302      $ (78   $ 249   

 

 
(a) Due to the antidilutive effect of converting the Fixed Rate Cumulative Mandatorily Convertible Preferred Stock into common shares and the net loss attributable to common shareholders for the for the three and six months ended June 30, 2011 and the six months ended June 30, 2010, income attributable to common shareholders and basic weighted-average common shares outstanding were used to calculate basic and diluted earnings per share.

The Notes to the Condensed Consolidated Financial Statements (unaudited) are an integral part of these statements.


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ALLY FINANCIAL INC.

CONDENSED CONSOLIDATED BALANCE SHEET (unaudited)

 

($ in millions)    June 30, 2011     December 31, 2010  

Assets

    

Cash and cash equivalents

    

Noninterest-bearing

   $ 2,039      $ 1,714   

Interest-bearing

     12,862        9,956   

 

 

Total cash and cash equivalents

     14,901        11,670   

Trading securities

     311        240   

Investment securities

     15,961        14,846   

Loans held-for-sale, net ($2,545 and $6,424 fair value-elected)

     7,168        11,411   

Finance receivables and loans, net

    

Finance receivables and loans, net ($946 and $1,015 fair value-elected)

     110,725        102,413   

Allowance for loan losses

     (1,739     (1,873

 

 

Total finance receivables and loans, net

     108,986        100,540   

Investment in operating leases, net

     9,015        9,128   

Mortgage servicing rights

     3,701        3,738   

Premiums receivable and other insurance assets

     2,124        2,181   

Other assets

     16,722        18,254   

 

 

Total assets

   $ 178,889      $ 172,008   

 

 

Liabilities

    

Deposit liabilities

    

Noninterest-bearing

   $ 2,405      $ 2,131   

Interest-bearing

     39,857        36,917   

 

 

Total deposit liabilities

     42,262        39,048   

Short-term borrowings

     7,130        7,508   

Long-term debt ($899 and $972 fair value-elected)

     91,723        86,612   

Interest payable

     1,734        1,829   

Unearned insurance premiums and service revenue

     2,845        2,854   

Reserves for insurance losses and loss adjustment expenses

     782        862   

Accrued expenses and other liabilities ($19 and $ — fair value-elected)

     11,990        12,806   

 

 

Total liabilities

     158,466        151,519   

Equity

    

Common stock and paid-in capital

     19,668        19,668   

Mandatorily convertible preferred stock held by U.S. Department of Treasury

     5,685        5,685   

Preferred stock

     1,255        1,287   

Accumulated deficit

     (6,508     (6,410

Accumulated other comprehensive income

     323        259   

 

 

Total equity

     20,423        20,489   

 

 

Total liabilities and equity

   $ 178,889      $ 172,008   

 

 

The Notes to the Condensed Consolidated Financial Statements (unaudited) are an integral part of these statements.

 

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ALLY FINANCIAL INC.

CONDENSED CONSOLIDATED BALANCE SHEET (unaudited)

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 were as follows.

($ in millions)    June 30, 2011     December 31, 2010  

Assets

    

Loans held-for-sale, net

   $ 10      $ 21   

Finance receivables and loans, net

    

Finance receivables and loans, net ($946 and $1,015 fair value-elected)

     40,497        33,483   

Allowance for loan losses

     (287     (238

 

 

Total finance receivables and loans, net

     40,210        33,245   

Investment in operating leases, net

     971        1,065   

Other assets

     3,156        3,279   

 

 

Total assets

   $ 44,347      $ 37,610   

 

 

Liabilities

    

Short-term borrowings

   $ 924      $ 964   

Long-term debt ($899 and $972 fair value-elected)

     29,863        24,466   

Interest payable

     15        15   

Accrued expenses and other liabilities

     393        397   

 

 

Total liabilities

   $ 31,195      $ 25,842   

 

 

The Notes to the Condensed Consolidated Financial Statements (unaudited) are an integral part of these statements.

 

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7

ALLY FINANCIAL INC.

CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN EQUITY (unaudited)

Six Months Ended June 30, 2011 and 2010

 

($ in millions)   Common
stock and
paid-in
capital
    Mandatorily
convertible
preferred
stock
held by
U.S.
Department
of Treasury
    Preferred
stock
   

Accumulated

deficit

    Accumulated
other
comprehensive
income
    Total
equity
    Comprehensive
income
 

Balance at January 1, 2010, before cumulative effect of adjustments

  $ 13,829      $ 10,893      $ 1,287      $ (5,630   $ 460      $ 20,839     

Cumulative effect of a change in accounting principle, net of tax (a)

          (57     4        (53  

 

 

Balance at January 1, 2010, after cumulative effect of adjustments

  $ 13,829      $ 10,893      $ 1,287      $ (5,687   $ 464      $ 20,786     

Net income

          727          727      $ 727   

Preferred stock dividends paid to the U.S. Department of Treasury

          (386       (386  

Preferred stock dividends

          (142       (142  

Dividends to shareholders

          (7       (7  

Other comprehensive loss

            (279     (279     (279

Other (b)

          74          74     

 

 

Balance at June 30, 2010

  $ 13,829      $ 10,893      $ 1,287      $ (5,421   $ 185      $ 20,773      $ 448   

 

 

Balance at January 1, 2011

  $ 19,668      $ 5,685      $ 1,287      $ (6,410   $ 259      $ 20,489     

Net income

          259          259      $ 259   

Preferred stock dividends paid to the U.S. Department of Treasury

          (267       (267  

Preferred stock dividends

          (127       (127  

Series A preferred stock amendment (c)

        (32     32         

Other comprehensive income

            64        64        64   

Other (b)

          5          5     

 

 

Balance at June 30, 2011

  $ 19,668      $ 5,685      $ 1,255      $ (6,508   $ 323      $ 20,423      $ 323   

 

 
(a) Cumulative effect of change in accounting principle, net of tax, due to adoption of ASU 2009-17, Improvements to Financial Reporting by Enterprises Involved with Variable Interest Entities.
(b) Represents a reduction of the estimated payment accrued for tax distributions as a result of the completion of the GMAC LLC U.S. Return of Partnership Income for the tax period January 1, 2009 through June 30, 2009.
(c) Refer to Note 16 to the Condensed Consolidated Financial Statements for further details.

The Notes to the Condensed Consolidated Financial Statements (unaudited) are an integral part of these statements.


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8

ALLY FINANCIAL INC.

CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS (unaudited)

 

Six months ended June 30, ($ in millions)    2011     2010  

Operating activities

    

Net income

   $ 259      $ 727   

Reconciliation of net income to net cash provided by operating activities

    

Depreciation and amortization

     1,418        2,249   

Other impairment

     6        16   

Changes in fair value of mortgage servicing rights

     115        944   

Provision for loan losses

     163        382   

Gain on sale of loans, net

     (215     (559

Net gain on investment securities

     (183     (256

Loss on extinguishment of debt

     64        116   

Originations and purchases of loans held-for-sale

     (25,874     (27,600

Proceeds from sales and repayments of loans held-for-sale

     29,166        35,564   

Net change in:

    

Trading securities

     (154     (28

Deferred income taxes

     (66     (198

Interest payable

     (111     61   

Other assets

     (1,288     1,322   

Other liabilities

     1,815        375   

Other, net

     (752     (1,532

 

 

Net cash provided by operating activities

     4,363        11,583   

 

 

Investing activities

    

Purchases of available-for-sale securities

     (10,982     (11,994

Proceeds from sales of available-for-sale securities

     8,423        9,854   

Proceeds from maturities of available-for-sale securities

     2,386        2,535   

Net increase in finance receivables and loans

     (8,669     (8,175

Proceeds from sales of finance receivables and loans

     1,346        2,362   

Purchases of operating lease assets

     (3,817     (1,491

Disposals of operating lease assets

     3,621        4,435   

Proceeds from sale of business units, net (a)

     47        (12

Other, net

     871        1,678   

 

 

Net cash used in investing activities

     (6,774     (808

 

 

 

Statement continues on the next page.

The Notes to the Condensed Consolidated Financial Statements (unaudited) are an integral part of these statements.


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9

ALLY FINANCIAL INC.

CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS (unaudited)

 

Six months ended June 30, ($ in millions)    2011     2010  

Financing activities

    

Net change in short-term borrowings

     (227     (3,827

Net increase in bank deposits

     2,570        2,720   

Proceeds from issuance of long-term debt

     26,225        20,996   

Repayments of long-term debt

     (22,951     (32,307

Dividends paid

     (419     (532

Other, net

     551        773   

 

 

Net cash provided by (used in) financing activities

     5,749        (12,177

Effect of exchange-rate changes on cash and cash equivalents

     (78     619   

 

 

Net increase (decrease) in cash and cash equivalents

     3,260        (783

Adjustment for change in cash and cash equivalents of operations held-for-sale (a)(b)

     (29     343   

Cash and cash equivalents at beginning of year

     11,670        14,788   

 

 

Cash and cash equivalents at June 30,

   $ 14,901      $ 14,348   

 

 

Supplemental disclosures

    

Cash paid for

    

Interest

   $ 2,886      $ 3,209   

Income taxes

     471        306   

Noncash items

    

Increase in finance receivables and loans due to a change in accounting principle (c)

            17,990   

Increase in long-term debt due to a change in accounting principle (c)

            17,054   

Transfer of mortgage servicing rights into trading securities through certification

     266          

Other disclosures

    

Proceeds from sales and repayments of mortgage loans held-for-investment originally designated as held-for-sale

     110        249   

 

 
(a) The amounts are net of cash and cash equivalents of $88 million at June 30, 2011, and $745 million at June 30, 2010, of business units at the time of disposition.
(b) Cash flows of discontinued operations are reflected within operating, investing, and financing activities in the Condensed Consolidated Statement of Cash Flows. The cash balance of these operations is reported as assets of operations held-for-sale on the Condensed Consolidated Balance Sheet.
(c) Relates to the adoption of ASU 2009-17, Improvements to Financial Reporting by Enterprises Involved with Variable Interest Entities.

The Notes to the Condensed Consolidated Financial Statements (unaudited) are an integral part of these statements.


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ALLY FINANCIAL INC.

NOTES TO CONDENSED

CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

 

1. Description of Business, Basis of Presentation, and Changes in Significant Accounting Policies

Ally Financial Inc. (formerly GMAC Inc. and referred to herein as Ally, we, our, or us) is a leading, independent, globally diversified, financial services firm. Founded in 1919, we are a leading automotive financial services company with over 90 years experience providing a broad array of financial products and services to automotive dealers and their customers. We are also one of the largest residential mortgage companies in the United States. We became a bank holding company on December 24, 2008, under the Bank Holding Company Act of 1956, as amended. Our banking subsidiary, Ally Bank, is an indirect wholly owned subsidiary of Ally Financial Inc. and a leading franchise in the growing direct (online and telephonic) banking market.

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 June 30, 2011, and for the three months and six months ended June 30, 2011, and 2010, 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, 2010, as filed on February 25, 2011, with the U.S. Securities and Exchange Commission (SEC).

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 beginning in 2007. 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 may also be negatively impacted by exposure to representation and warranty obligations, adverse outcomes with respect to current or future litigation, fines, penalties, or settlements related to our mortgage-related activities and additional expenses to address regulatory requirements. ResCap’s consolidated tangible net worth, as defined, was $772 million at June 30, 2011, 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 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 conforming and government-insured residential mortgage loans; 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 2009 and 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. 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 Origination and Servicing operations will be predominately the origination and sale of conforming and government-insured residential mortgages and mortgage servicing.

 

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ALLY FINANCIAL INC.

NOTES TO CONDENSED

CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

 

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, asset sales, or other business 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 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 June 30, 2011, we had $1.9 billion in secured financing arrangements with ResCap of which $1.3 billion in loans was utilized. At June 30, 2011, there was no net exposure under the hedging arrangements because the arrangements were fully collateralized. 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 $772 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.

Relationship and Transactions with General Motors Company

General Motors Company (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.

GM is no longer considered a related party for purposes of applicable disclosure within the Notes to Condensed Consolidated Financial Statements, as it beneficially owns less than 10% of the voting interests in Ally and does not control or have the ability to significantly influence the management and policies of Ally. In addition, the Federal Reserve has determined that GM is no longer considered an “affiliate” of Ally Bank for purposes of Sections 23A and 23B of the Federal Reserve Act, which impose limitations on transactions between banks and their affiliates.

Refer to Note 26 to the Consolidated Financial Statements in our 2010 Annual Report on Form 10-K for a summary of related party transactions with GM during 2010.

 

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ALLY FINANCIAL INC.

NOTES TO CONDENSED

CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

 

Significant Accounting Policies

Earnings per Common Share

We compute earnings (loss) per common share by dividing net income (loss) (after deducting dividends on preferred stock) by the weighted-average number of common shares outstanding during the period. We compute diluted earnings (loss) per common share by dividing net income (loss) (after deducting dividends on preferred stock) by the weighted-average number of common shares outstanding during the period plus the dilution resulting from the conversion of convertible preferred stock, if applicable.

Refer to Note 1 to the Consolidated Financial Statements in our 2010 Annual Report on Form 10-K regarding additional significant accounting policies.

Recently Adopted Accounting Standards

Receivables — Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses (ASU 2010-20)

During the three months ended March 31, 2011, Accounting Standards Update (ASU) 2010-20 required us to disclose a rollforward of the allowance for loan losses, additional activity-based disclosures for both financing receivables, and the allowance for each reporting period. We early adopted the rollforward requirement during the December 31, 2010, reporting period. Since the guidance relates only to disclosures, adoption did not have a material impact on our consolidated financial condition or results of operations.

Revenue Recognition — Revenue Arrangements with Multiple Deliverables (ASU 2009-13)

As of January 1, 2011, we adopted ASU 2009-13, which amends Accounting Standards Codification (ASC) 605, Revenue Recognition. The guidance significantly changed the accounting for revenue recognition in arrangements with multiple deliverables and eliminated the residual method, which allocated the discount of a multiple deliverable arrangement among the delivered items. The guidance requires entities 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. The adoption did not have a material impact to our consolidated financial condition or results of operations.

Recently Issued Accounting Standards

Financial Services — Insurance — Accounting for Costs Associated with Acquiring or Renewing Insurance Contracts (ASU 2010-26)

In December 2010, the FASB issued ASU 2010-26, which amends ASC 944, Financial Services — Insurance. The amendments in this ASU specify which costs incurred in the acquisition of new and renewal insurance contracts should be capitalized. All other acquisition-related costs should be expensed as incurred. If the initial application of the amendments in this ASU results in the capitalization of acquisition costs that had not been previously capitalized, an entity may elect not to capitalize those types of costs. The ASU will be effective for us on January 1, 2012.

We do not expect the adoption to have a material impact to our consolidated financial condition or results of operations.

Receivables — A Creditor’s Determination of Whether a Restructuring Is a Troubled Debt Restructuring (ASU 2011-02)

In April 2011, the FASB issued ASU 2011-02, which amends ASC 310, Receivables. The amendments in this ASU clarify which loan modifications constitute a troubled debt restructuring. It is intended to assist creditors in determining whether a modification of the terms of a receivable meets the criteria to be considered a troubled debt restructuring, both for purposes of recording an impairment loss and for disclosure of troubled debt restructurings. The ASU was effective for us on July 1, 2011, and must be applied retrospectively to modifications made subsequent to the beginning of the annual period of adoption, which for us is January 1, 2011.

If, as a result of applying these amendments, we identify receivables that are newly considered impaired, we are required to apply the measurement portion of the amendments to these newly identified impairments at the end of the reporting period

 

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ALLY FINANCIAL INC.

NOTES TO CONDENSED

CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

 

of adoption. Effective September 30, 2011, we will also be required to retrospectively disclose the total amount of receivables and the allowance for credit losses as of January 1, 2011, related to those receivables that are newly considered impaired for which impairment was previously measured under ASC 450-20, Contingencies — Loss Contingencies.

We do not expect the adoption to have a material impact to our consolidated financial condition or results of operations.

Fair Value Measurement — Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and International Financial Reporting Standards (IFRS) (ASU 2011-04)

In May 2011, the FASB issued ASU 2011-04, which amends ASC 820, Fair Value Measurements. The amendments in this ASU clarify how to measure fair value. It is intended to improve the comparability of fair value measurements presented and disclosed in financial statements prepared in accordance with GAAP and IFRS. The ASU will be effective for us on January 1, 2012, and must be applied prospectively.

Early adoption is permitted. We do not expect the adoption to have a material impact to our consolidated financial condition or results of operations.

Comprehensive Income — Presentation of Comprehensive Income (ASU 2011-05)

In June 2011, the FASB issued ASU 2011-05, which amends ASC 220, Comprehensive Income. The amendments will increase the prominence of items reported in other comprehensive income and facilitate convergence between GAAP and IFRS. This ASU will require that nonowner changes in stockholders’ equity be presented either in a single continuous statement of comprehensive income or in two separate but consecutive statements. The ASU will be effective for us on January 1, 2012.

Early adoption is permitted. Since the guidance relates only to disclosures, the adoption will have no impact to our consolidated financial condition or results of operations.

 

2. Discontinued Operations

We classified certain operations as discontinued when 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.

Select Insurance Operations

During the second quarter of 2011, we completed the sale of our U.K. consumer property and casualty insurance business.

Select International Automotive Finance Operations

We completed the sale of our Ecuador operations during the first quarter of 2011. We expect to complete the sale of our Venezuela operations by December 31, 2011.

 

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ALLY FINANCIAL INC.

NOTES TO CONDENSED

CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

 

Select Financial Information

The pretax income or loss recognized 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.

Selected financial information of discontinued operations is summarized below.

 

     Three months ended
June  30,
     Six months ended
June  30,
 
($ in millions)        2011             2010              2011             2010      

Select Insurance operations

         

Total net revenue

   $ 40      $ 61       $ 96      $ 300   

Pretax income (loss) including direct costs to transact a sale (a)

     6        (6      13        (6

Tax (benefit)

            (5             (1

Select International operations

         

Total net revenue

   $ 5      $ 39       $ 10      $ 80   

Pretax (loss) income including direct costs to transact a sale (a)

     (3     59         (34     64   

Tax (benefit) expense

            (6             2   

Select Mortgage — Legacy and Other operations

         

Total net revenue

   $      $ 16       $      $ 44   

Pretax income including direct costs to transact a sale

            89                102   

Tax (benefit)

            (9             (8

Select Commercial Finance operations

         

Total net revenue

   $      $ 3       $      $ 11   

Pretax (loss) income including direct costs to transact a sale (a)

            (3             7   

Tax (benefit)

            (4               

 

 
(a) Includes certain income tax activity recognized by Corporate and Other.

 

3. Other Income, Net of Losses

Details of other income, net of losses, were as follows.

 

     Three months ended
June  30,
     Six months ended
June  30,
 
($ in millions)        2011             2010              2011             2010      

Securitization income (loss) other

   $ 127      $ 3       $ 149      $ (46

Mortgage processing fees and other mortgage income

     44        41         88        94   

Remarketing fees

     31        36         68        67   

Late charges and other administrative fees

     24        35         57        72   

Income from equity-method investments

     20        13         42        25   

Full-service leasing fees

     9        13         24        41   

Real estate services, net

            2                9   

Change due to fair value option elections (a)

     (22     (56      (39     (129

Fair value adjustment on derivatives (b)

     (65     (2      (79     (58

Other, net

     85        88         159        180   

 

 

Total other income, net of losses

   $ 253      $ 173       $ 469      $ 255   

 

 
(a) Refer to Note 21 for a description of fair value option elections.
(b) Refer to Note 19 for a description of derivative instruments and hedging activities.

 

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ALLY FINANCIAL INC.

NOTES TO CONDENSED

CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

 

4. Other Operating Expenses

Details of other operating expenses were as follows.

 

     Three months ended
June  30,
       Six months ended
June  30,
 
($ in millions)        2011              2010                2011              2010      

Mortgage representation and warranty, net

   $ 184       $ 97         $ 210       $ 146   

Insurance commissions

     124         150           249         296   

Technology and communications

     116         134           236         272   

Professional services

     79         63           147         119   

Lease and loan administration

     45         35           89         66   

Advertising and marketing

     41         50           95         74   

Vehicle remarketing and repossession

     37         47           73         102   

State and local non-income taxes

     35         36           66         60   

Regulatory and licensing fees

     34         25           71         55   

Premises and equipment depreciation

     24         20           50         38   

Occupancy

     23         26           46         51   

Full-service leasing vehicle maintenance costs

     11         6           22         36   

Restructuring

     6         14           3         56   

Other

     157         129           331         343   

 

 

Total other operating expenses

   $ 916       $ 832         $ 1,688       $ 1,714   

 

 

 

5. Trading Securities

The composition of trading securities was as follows.

 

($ in millions)    June 30, 2011      December 31, 2010  

U.S. Treasury

   $       $ 77   

Mortgage-backed residential

     311         69   

Asset-backed

             94   

 

 

Total trading securities

   $ 311       $ 240   

 

 

 

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ALLY FINANCIAL INC.

NOTES TO CONDENSED

CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

 

6. Investment Securities

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 securities were as follows.

 

     June 30, 2011      December 31, 2010  
     Cost      Gross unrealized     Fair
value
     Cost      Gross unrealized     Fair
value
 
($ in millions)       gains      losses           gains      losses    

Available-for-sale securities

                     

Debt securities

                     

U.S. Treasury and federal agencies

   $ 1,155       $ 14       $      $ 1,169       $ 3,307       $ 22       $ (11   $ 3,318   

States and political subdivisions

     1                        1         3                 (1     2   

Foreign government

     1,308         19         (1     1,326         1,231         19         (2     1,248   

Mortgage-backed residential (a)

     7,869         55         (77     7,847         5,844         60         (79     5,825   

Asset-backed

     2,195         31         (5     2,221         1,934         15         (1     1,948   

Corporate debt

     1,543         18         (8     1,553         1,537         34         (13     1,558   

Other

     674                        674         152                 (1     151   

 

 

Total debt securities (b)

     14,745         137         (91     14,791         14,008         150         (108     14,050   

Equity securities

     1,171         57         (58     1,170         766         60         (30     796   

 

 

Total available-for-sale securities (c)

   $ 15,916       $ 194       $ (149   $ 15,961       $ 14,774       $ 210       $ (138   $ 14,846   

 

 
(a) Residential mortgage-backed securities include agency-backed bonds totaling $6,161 million and $4,503 million at June 30, 2011, and December 31, 2010, respectively.
(b) In connection with certain borrowings and letters of credit relating to certain assumed reinsurance contracts, $57 million and $153 million of primarily U.K. Treasury securities were pledged as collateral at June 30, 2011, and December 31, 2010, respectively.
(c) Certain entities related to our Insurance operations are required to deposit securities with state regulatory authorities. These deposited securities totaled $15 million and $12 million at June 30, 2011, and December 31, 2010, respectively.

 

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ALLY FINANCIAL INC.

NOTES TO CONDENSED

CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

 

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.

 

    Total     Due in
one year
or less
    Due after
one year
through
five years
    Due after
five years
through
ten years
    Due after
ten years (a)
 
($ in millions)   Amount     Yield     Amount     Yield     Amount     Yield     Amount     Yield     Amount     Yield  

June 30, 2011

                   

Fair value of available-for-sale debt securities (b)

                   

U.S. Treasury and federal agencies

  $ 1,169        0.6   $ 10        4.6   $ 1,152        0.6   $ 7        3.2   $       

States and political subdivisions

    1        8.9                                                  1        8.9   

Foreign government

    1,326        3.3        106        2.6        1,017        3.4        203        3.4                 

Mortgage-backed residential

    7,847        2.7                      3        6.3        51        5.8        7,793        2.7   

Asset-backed

    2,221        1.2        22        0.3        1,367        0.9        360        1.3        472        2.0   

Corporate debt

    1,553        4.5        11        2.6        672        3.6        724        5.2        146        5.6   

Other

    674        1.4        674        1.4                                             

 

     

 

 

     

 

 

     

 

 

     

 

 

   

Total available-for-sale debt securities

  $ 14,791        2.5      $ 823        1.6      $ 4,211        1.8      $ 1,345        3.9      $ 8,412        2.7   

 

 

Amortized cost of available-for-sale debt securities

  $ 14,745        $ 822        $ 4,168        $ 1,336        $ 8,419     

 

 

December 31, 2010

                   

Fair value of available-for-sale debt securities (b)

                   

U.S. Treasury and federal agencies

  $ 3,318        1.4   $ 124        1.2   $ 3,094        1.3   $ 100        3.7   $       

States and political subdivisions

    2        8.7                                                  2        8.7   

Foreign government

    1,248        3.1        7        2.2        1,092        3.1        149        3.5                 

Mortgage-backed residential

    5,825        3.8                      57        3.2        64        4.4        5,704        3.8   

Asset-backed

    1,948        2.5                      1,146        2.2        500        2.4        302        4.0   

Corporate debt

    1,558        3.9        22        5.7        811        3.5        593        4.3        132        4.0   

Other

    151        1.5        151        1.5                                             

 

     

 

 

     

 

 

     

 

 

     

 

 

   

Total available-for-sale debt securities

  $ 14,050        3.0      $ 304        1.7      $ 6,200        2.1      $ 1,406        3.5      $ 6,140        3.8   

 

 

Amortized cost of available-for-sale debt securities

  $ 14,008        $ 305        $ 6,152        $ 1,388        $ 6,163     

 

 
(a) Investments with no stated maturities are included as contractual maturities of greater than 10 years. Actual maturities may differ due to call or prepayment options.
(b) Yields on tax-exempt obligations are computed on a tax-equivalent basis.

The balances of cash equivalents were $6.9 billion and $5.3 billion at June 30, 2011, and December 31, 2010, respectively, and were composed primarily of money market accounts and short-term securities, including U.S. Treasury bills.

The following table presents gross gains and losses realized upon the sales of available-for-sale securities. During the three months and six months ended June 30, 2011, we did not recognize other-than-temporary impairment on available-for-sale securities.

 

    Three months ended
June  30,
    Six months ended
June  30,
 
($ in millions)       2011             2010             2011             2010      

Gross realized gains

  $ 100      $ 126      $ 194      $ 277   

Gross realized losses

    (8     (13     (18     (21

Other-than-temporary impairment

           (1            (1

 

 

Net realized gains

  $ 92      $ 112      $ 176      $ 255   

 

 

 

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ALLY FINANCIAL INC.

NOTES TO CONDENSED

CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

 

The following table presents interest and dividends on available-for-sale securities.

 

     Three months ended
June  30,
     Six months ended
June  30,
 
($ in millions)        2011              2010              2011              2010      

Taxable interest

   $ 102       $ 83       $ 201       $ 171   

Taxable dividends

     6         4         11         8   

Interest and dividends exempt from U.S. federal income tax

             3                 10   

 

 

Total interest and dividends on available-for-sale securities

   $ 108       $ 90       $ 212       $ 189   

 

 

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 June 30, 2011, we did 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 June 30, 2011, 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 June 30, 2011. Refer to Note 1 to the Consolidated Financial Statements in our 2010 Annual Report on Form 10-K for additional information related to investment securities and our methodology for evaluating potential other-than-temporary impairments.

 

    June 30, 2011     December 31, 2010  
    Less than
12 months
    12 months
or longer
    Less than
12 months
    12 months
or longer
 
($ in millions)   Fair
value
    Unrealized
loss
    Fair
value
    Unrealized
loss
    Fair
value
    Unrealized
loss
    Fair
value
    Unrealized
loss
 

Available-for-sale securities

               

Debt securities

               

U.S. Treasury and federal agencies

  $ 64      $      $      $      $ 702      $ (11   $      $   

States and political subdivisions

    1                             2        (1              

Foreign government

    462        (1                   323        (2              

Mortgage-backed residential

    3,878        (77     1               3,159        (77     11        (2

Asset-backed

    474        (5                   238        (1     2          

Corporate debt

    627        (8                   653        (13     5          

Other

    61                             80        (1              

 

 

Total temporarily impaired debt securities

    5,567        (91     1               5,157        (106     18        (2

Temporarily impaired equity securities

    422        (38     137        (20     250        (27     26        (3

 

 

Total temporarily impaired available-for-sale securities

  $ 5,989      $ (129   $ 138      $ (20   $ 5,407      $ (133   $ 44      $ (5

 

 

 

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ALLY FINANCIAL INC.

NOTES TO CONDENSED

CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

 

7. Loans Held-for-sale, Net

The composition of loans held-for-sale, net, was as follows.

 

     June 30, 2011      December 31, 2010  
($ in millions)    Domestic      Foreign      Total      Domestic      Foreign      Total  

Consumer mortgage

                 

1st Mortgage

   $ 6,188       $ 223       $ 6,411       $ 10,191       $ 364       $ 10,555   

Home equity

     757                 757         856                 856   

 

 

Total loans held-for-sale (a)(b)

   $ 6,945       $ 223       $ 7,168       $ 11,047       $ 364       $ 11,411   

 

 
(a) Fair value option-elected domestic consumer mortgages were $2.5 billion and $6.4 billion at June 30, 2011, and December 31, 2010, respectively. Refer to Note 21 for additional information.
(b) Totals are net of unamortized premiums and discounts and deferred fees and costs. Included in the totals are net unamortized discounts of $246 million and $161 million at June 30, 2011, and December 31, 2010, respectively.

The following table summarizes held-for-sale mortgage loans reported at carrying value by higher-risk loan type.

 

($ in millions)    June 30, 2011      December 31, 2010  

High original loan-to-value (greater than 100%) mortgage loans

   $ 273       $ 331   

Payment-option adjustable-rate mortgage loans

     10         16   

Interest-only mortgage loans

     460         481   

Below-market rate (teaser) mortgages

     129         151   

 

 

Total (a)

   $ 872       $ 979   

 

 
(a) The majority of these loans are held by our Mortgage Legacy Portfolio and Other operations at June 30, 2011, and December 31, 2010.

 

8. Finance Receivables and Loans, Net

The composition of finance receivables and loans, net, reported at carrying value before allowance for loan losses was as follows.

 

     June 30, 2011      December 31, 2010  
($ in millions)    Domestic      Foreign      Total      Domestic      Foreign      Total  

Consumer automobile

   $ 41,495       $ 17,240       $ 58,735       $ 34,604       $ 16,650       $ 51,254   

Consumer mortgage

                 

1st Mortgage

     6,857         286         7,143         6,917         390         7,307   

Home equity

     3,269                 3,269         3,441                 3,441   

 

 

Total consumer mortgage

     10,126         286         10,412         10,358         390         10,748   

Commercial

                 

Commercial and industrial

                 

Automobile

     26,125         9,250         35,375         24,944         8,398         33,342   

Mortgage

     1,185         28         1,213         1,540         41         1,581   

Other

     1,432         234         1,666         1,795         312         2,107   

Commercial real estate

                 

Automobile

     2,129         208         2,337         2,071         216         2,287   

Mortgage

             41         41         1         78         79   

 

 

Total commercial

     30,871         9,761         40,632         30,351         9,045         39,396   

Loans at fair value (a)

     618         328         946         663         352         1,015   

 

 

Total finance receivables and loans (b)

   $ 83,110       $ 27,615       $ 110,725       $ 75,976       $ 26,437       $ 102,413   

 

 
(a) Includes domestic consumer mortgages at fair value as a result of fair value option election. Refer to Note 21 for additional information.
(b) Totals are net of unearned income, unamortized premiums and discounts, and deferred fees and costs of $3.0 billion and $2.9 billion at June 30, 2011, and December 31, 2010, respectively.

 

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ALLY FINANCIAL INC.

NOTES TO CONDENSED

CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

 

The following tables present an analysis of the activity in the allowance for loan losses on finance receivables and loans.

 

Three months ended June 30, 2011 ($ in millions)   

Consumer

automobile

   

Consumer

mortgage

    Commercial     Total  

Allowance at April 1, 2011

   $ 916      $ 563      $ 327      $ 1,806   

Charge-offs

        

Domestic

     (95     (48     (12     (155

Foreign

     (33     (2     (17     (52

 

 

Total charge-offs

     (128     (50     (29     (207

 

 

Recoveries

        

Domestic

     51        6        6        63   

Foreign

     17               6        23   

 

 

Total recoveries

     68        6        12        86   

 

 

Net charge-offs

     (60     (44     (17     (121

Provision for loan losses

     51        39        (39     51   

Other

     4               (1     3   

 

 

Allowance at June 30, 2011

   $ 911      $ 558      $ 270      $ 1,739   

 

 
Three months ended June 30, 2010 ($ in millions)   

Consumer

automobile

   

Consumer

mortgage

    Commercial     Total  

Allowance at April 1, 2010

   $ 1,120      $ 634      $ 726      $ 2,480   

Charge-offs

        

Domestic

     (151     (77     (91     (319

Foreign

     (50            (49     (99

 

 

Total charge-offs

     (201     (77     (140     (418

 

 

Recoveries

        

Domestic

     74        4        5        83   

Foreign

     18        1        9        28   

 

 

Total recoveries

     92        5        14        111   

 

 

Net charge-offs

     (109     (72     (126     (307

Provision for loan losses

     117        97        4        218   

Discontinued operations

     2        1        (2     1   

Other

     (10     (1     (4     (15

 

 

Allowance at June 30, 2010

   $ 1,120      $ 659      $ 598      $ 2,377   

 

 

 

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ALLY FINANCIAL INC.

NOTES TO CONDENSED

CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

 

Six months ended June 30, 2011 ($ in millions)   

Consumer

automobile

   

Consumer

mortgage

    Commercial     Total  

Allowance at January 1, 2011

   $ 970      $ 580      $ 323      $ 1,873   

Charge-offs

        

Domestic

     (234     (108     (18     (360

Foreign

     (75     (2     (48     (125

 

 

Total charge-offs

     (309     (110     (66     (485

 

 

Recoveries

        

Domestic

     101        9        12        122   

Foreign

     36               17        53   

 

 

Total recoveries

     137        9        29        175   

 

 

Net charge-offs

     (172     (101     (37     (310

Provision for loan losses

     104        79        (19     164   

Other

     9               3        12   

 

 

Allowance at June 30, 2011

   $ 911      $ 558      $ 270      $ 1,739   

 

 

Allowance for loan losses

        

Individually evaluated for impairment

   $      $ 94      $ 57      $ 151   

Collectively evaluated for impairment

     899        464        213        1,576   

Loans acquired with deteriorated credit quality

     12                      12   

Finance receivables and loans at historical cost

        

Ending balance

     58,735        10,412        40,632        109,779   

Individually evaluated for impairment

            549        1,070        1,619   

Collectively evaluated for impairment

     58,612        9,863        39,562        108,037   

Loans acquired with deteriorated credit quality

     123                      123   

 

 
Six months ended June 30, 2010 ($ in millions)   

Consumer

automobile

   

Consumer

mortgage

    Commercial     Total  

Allowance at January 1, 2010

   $ 1,024      $ 640      $ 781      $ 2,445   

Cumulative effect of change in accounting principles (a)

     222                      222   

Charge-offs

        

Domestic

     (437     (109     (152     (698

Foreign

     (109     (2     (53     (164

 

 

Total charge-offs

     (546     (111     (205     (862

 

 

Recoveries

        

Domestic

     177        8        9        194   

Foreign

     35        1        9        45   

 

 

Total recoveries

     212        9        18        239   

 

 

Net charge-offs

     (334     (102     (187     (623

Provision for loan losses

     225        115        22        362   

Discontinued operations

     5               (3     2   

Other

     (22     6        (15     (31

 

 

Allowance at June 30, 2010

   $ 1,120      $ 659      $ 598      $ 2,377   

 

 

Allowance for loan losses

        

Individually evaluated for impairment

   $      $ 102      $ 277      $ 379   

Collectively evaluated for impairment

     1,090        557        321        1,968   

Loans acquired with deteriorated credit quality

     30                      30   

Finance receivables and loans at historical cost

        

Ending balance

     41,715        11,286        37,370        90,371   

Individually evaluated for impairment

            398        1,727        2,125   

Collectively evaluated for impairment

     41,490        10,888        35,643        88,021   

Loans acquired with deteriorated credit quality

     225                      225   

 

 
(a) Effect of change in accounting principle due to adoption of ASU 2009-17, Improvements to Financial Reporting by Enterprises Involved with Variable Interest Entities.

 

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ALLY FINANCIAL INC.

NOTES TO CONDENSED

CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

 

Loans are considered impaired when we determine it is probable that we will be unable to collect all amounts due according to the terms of the loan agreement.

The following table presents information about significant sales of finance receivables and loans.

 

($ in millions)    Three months ended
June 30, 2011
     Six months ended
June 30, 2011
 

Sales

     

Consumer automobile

   $ 1,318       $ 1,318   

Consumer mortgage

     28         93   

Commercial

             6   

 

 

Total sales

   $ 1,346       $ 1,417   

 

 

The following table presents information about our impaired finance receivables and loans.

 

($ in millions)   

Unpaid

principal

balance

     Carrying
value before
allowance
    

Impaired

with no

allowance

    

Impaired

with an

allowance

    

Allowance
for

impaired

loans

 

June 30, 2011

              

Consumer mortgage

              

1st Mortgage

   $ 465       $ 459       $       $ 459       $ 54   

Home equity

     90         91                 91         40   

 

 

Total consumer mortgage

     555         550                 550         94   

Commercial

              

Commercial and industrial

              

Automobile

     388         388         56         332         27   

Mortgage

     29         29         1         28         5   

Other

     58         55         19         36         7   

Commercial real estate

              

Automobile

     129         129         78         51         16   

Mortgage

     38         38         8         30         2   

 

 

Total commercial

     642         639         162         477         57   

 

 

Total consumer and commercial

   $ 1,197       $ 1,189       $ 162       $ 1,027       $ 151   

 

 

December 31, 2010

              

Consumer mortgage

              

1st Mortgage

   $ 410       $ 404       $       $ 404       $ 59   

Home equity

     82         83                 83         40   

 

 

Total consumer mortgage

     492         487                 487         99   

Commercial

              

Commercial and industrial

              

Automobile

     340         356         33         323         23   

Mortgage

     44         40                 40         14   

Other

     135         133         20         113         51   

Commercial real estate

              

Automobile

     206         197         108         89         29   

Mortgage

     71         71         28         43         10   

 

 

Total commercial

     796         797         189         608         127   

 

 

Total consumer and commercial

   $ 1,288       $ 1,284       $ 189       $ 1,095       $ 226   

 

 

 

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ALLY FINANCIAL INC.

NOTES TO CONDENSED

CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

 

The following tables present average balance and interest income for our impaired finance receivables and loans.

 

     2011      2010  
Three months ended June 30, ($ in millions)   

Average

balance

    

Interest

income

    

Average

balance

    

Interest

income

 

Consumer mortgage

           

1st Mortgage

   $ 448       $ 4       $ 307       $ 3   

Home equity

     90         1         60         1   

 

 

Total consumer mortgage

     538         5         367         4   

Commercial

           

Commercial and industrial

           

Automobile

     360         1         345         1   

Mortgage

     32                           

Other

     99                 877         1   

Commercial real estate

           

Automobile

     140                 279         1   

Mortgage

     45                 193           

 

 

Total commercial

     676         1         1,694         3   

 

 

Total consumer and commercial

   $ 1,214       $ 6       $ 2,061       $ 7   

 

 
     2011      2010  
Six months ended June 30, ($ in millions)   

Average

balance

    

Interest

income

    

Average

balance

    

Interest

income

 

Consumer mortgage

           

1st Mortgage

   $ 435       $ 8       $ 276       $ 5   

Home equity

     88         2         51         2   

 

 

Total consumer mortgage

     523         10         327         7   

Commercial

           

Commercial and industrial

           

Automobile

     353         1         391         1   

Mortgage

     36         5                   

Other

     113         1         918         1   

Commercial real estate

           

Automobile

     162                 279         1   

Mortgage

     55         1         229         1   

 

 

Total commercial

     719         8         1,817         4   

 

 

Total consumer and commercial

   $ 1,242       $ 18       $ 2,144       $ 11   

 

 

At June 30, 2011, and December 31, 2010, commercial commitments to lend additional funds to debtors owing receivables whose terms had been modified in a troubled debt restructuring were $11 million and $15 million, respectively.

 

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ALLY FINANCIAL INC.

NOTES TO CONDENSED

CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

 

The following table presents an analysis of our past due finance receivables and loans.

 

($ in millions)   

30-59 days

past due

    

60-89 days

past due

    

90 days

or more

past due

    

Total

past due

     Current     

Total

finance receivables

and loans

 

June 30, 2011

                 

Consumer automobile

   $ 727       $ 159       $ 169       $ 1,055       $ 57,680       $ 58,735   

Consumer mortgage

                 

1st Mortgage

     100         46         184         330         6,813         7,143   

Home equity

     22         9         11         42         3,227         3,269   

 

 

Total consumer mortgage

     122         55         195         372         10,040         10,412   

Commercial

                 

Commercial and industrial

                 

Automobile

     14         15         126         155         35,220         35,375   

Mortgage

                     1         1         1,212         1,213   

Other

                     1         1         1,665         1,666   

Commercial real estate

                 

Automobile

             3         50         53         2,284         2,337   

Mortgage

                     38         38         3         41   

 

 

Total commercial

     14         18         216         248         40,384         40,632   

 

 

Total consumer and commercial

   $ 863       $ 232       $ 580       $ 1,675       $ 108,104       $ 109,779   

 

 

December 31, 2010

                 

Consumer automobile

   $ 828       $ 175       $ 197       $ 1,200       $ 50,054       $ 51,254   

Consumer mortgage

                 

1st Mortgage

     115         67         205         387         6,920         7,307   

Home equity

     20         12         13         45         3,396         3,441   

 

 

Total consumer mortgage

     135         79         218         432         10,316         10,748   

Commercial

                 

Commercial and industrial

                 

Automobile

     21         19         85         125         33,217         33,342   

Mortgage

             36         4         40         1,541         1,581   

Other

                     20         20         2,087         2,107   

Commercial real estate

                 

Automobile

             4         78         82         2,205         2,287   

Mortgage

                     71         71         8         79   

 

 

Total commercial

     21         59         258         338         39,058         39,396   

 

 

Total consumer and commercial

   $ 984       $ 313       $ 673       $ 1,970       $ 99,428       $ 101,398   

 

 

 

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ALLY FINANCIAL INC.

NOTES TO CONDENSED

CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

 

The following table presents the carrying amount of our finance receivables and loans on nonaccrual status.

 

($ in millions)    June 30, 2011      December 31, 2010  

Consumer automobile

   $ 184       $ 207   

Consumer mortgage

     

1st Mortgage

     344         500   

Home equity

     54         61   

 

 

Total consumer mortgage

     398         561   

Commercial

     

Commercial and industrial

     

Automobile

     360         296   

Mortgage

     29         40   

Other

     55         134   

Commercial real estate

     

Automobile

     127         199   

Mortgage

     38         71   

 

 

Total commercial

     609         740   

 

 

Total consumer and commercial

   $ 1,191       $ 1,508   

 

 

Management performs a quarterly analysis of the consumer automobile, consumer mortgage, and commercial portfolios using a range of credit quality indicators to assess the adequacy of the allowance based on historical and current trends. The tables below present select credit quality indicators that are used in the determination of allowance for our consumer automobile, consumer mortgage, and commercial portfolios.

The following table presents performing and nonperforming credit quality indicators in accordance with our internal accounting policies for our consumer finance receivables and loans.

 

     June 30, 2011      December 31, 2010  
($ in millions)    Performing      Nonperforming      Total      Performing      Nonperforming      Total  

Consumer automobile

   $ 58,551       $ 184       $ 58,735       $ 51,047       $ 207       $ 51,254   

 

 

Consumer mortgage

                 

1st Mortgage

     6,799         344         7,143         6,807         500         7,307   

Home equity

     3,215         54         3,269         3,380         61         3,441   

 

 

Total consumer mortgage

   $ 10,014       $ 398       $ 10,412       $ 10,187       $ 561       $ 10,748   

 

 

The following table presents pass and criticized credit quality indicators based on regulatory definitions for our commercial finance receivables and loans.

 

     June 30, 2011      December 31, 2010  
($ in millions)    Pass      Criticized (a)      Total      Pass      Criticized (a)      Total  

Commercial

                 

Commercial and industrial

                 

Automobile

   $ 32,790       $ 2,585       $ 35,375       $ 31,254       $ 2,088       $ 33,342   

Mortgage

     1,134         79         1,213         1,504         77         1,581   

Other

     1,025         641         1,666         1,041         1,066         2,107   

Commercial real estate

                 

Automobile

     2,123         214         2,337         2,013         274         2,287   

Mortgage

     1         40         41                 79         79   

 

 

Total commercial

   $ 37,073       $ 3,559       $ 40,632       $ 35,812       $ 3,584       $ 39,396   

 

 
(a) Includes loans classified as special mention, substandard, or doubtful. These classifications are based on regulatory definitions and generally represent loans within our portfolio that have a higher default risk or have already defaulted.

 

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ALLY FINANCIAL INC.

NOTES TO CONDENSED

CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

 

The following table summarizes held-for-investment mortgage finance receivables and loans recorded at historical cost and reported at carrying value before allowance for loan losses by higher-risk loan type.

 

($ in millions)    June 30, 2011      December 31, 2010  

High original loan-to-value (greater than 100%) mortgage loans

   $ 5       $ 5   

Payment-option adjustable-rate mortgage loans

     4         5   

Interest-only mortgage loans

     3,284         3,681   

Below-market rate (teaser) mortgages

     266         284   

 

 

Total (a)

   $ 3,559       $ 3,975   

 

 
(a) The majority of these loans are held by our Mortgage Legacy Portfolio and Other operations at June 30, 2011, and December 31, 2010.

 

9. Investment in Operating Leases, Net

Investments in operating leases were as follows.

 

($ in millions)    June 30, 2011     December 31, 2010  

Vehicles and other equipment

   $ 11,622      $ 13,571   

Accumulated depreciation

     (2,607     (4,443

 

 

Investment in operating leases, net

   $ 9,015      $ 9,128   

 

 

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.

 

     Three months ended
June  30,
    Six months ended
June 30,
 
($ in millions)        2011             2010             2011             2010      

Depreciation expense on operating lease assets (excluding remarketing gains)

   $ 356      $ 725      $ 759      $ 1,565   

Gross remarketing gains

     (164     (199     (282     (383

 

 

Depreciation expense on operating lease assets

   $ 192      $ 526      $ 477      $ 1,182   

 

 

 

10. Securitizations and Variable Interest Entities

Overview

We are involved in several types of securitization and financing transactions that utilize special-purpose entities (SPEs). An SPE is an entity that is designed to fulfill a specified limited need of the sponsor. Our principal use of SPEs is to obtain liquidity and favorable capital treatment by securitizing certain of our financial assets.

The SPEs involved in securitization and other financing transactions are generally considered variable interest entities (VIEs). VIEs are entities that have either a total equity investment that is insufficient to permit the entity to finance its activities without additional subordinated financial support or whose equity investors lack the ability to control the entity’s activities.

Securitizations

We provide a wide range of consumer and commercial automobile loans, operating leases, and mortgage loan products to a diverse customer base. We often securitize these loans and leases (which we collectively describe as loans or financial assets) through the use of securitization entities, which may or may not be consolidated on our Condensed Consolidated Balance Sheet. We securitize consumer and commercial automobile loans through private-label securitizations. We securitize consumer mortgage loans through transactions involving 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 or GSEs), or private-label mortgage securitizations. During the six months ended June 30, 2011 and 2010, our consumer mortgage loans were primarily securitized through the GSEs.

 

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ALLY FINANCIAL INC.

NOTES TO CONDENSED

CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

 

In executing a securitization transaction, we typically sell pools of financial assets to a wholly owned, bankruptcy-remote SPE, which then transfers the financial assets to a separate, transaction-specific securitization entity for cash, servicing rights, and in some transactions, other retained interests. The securitization entity is funded through the issuance of beneficial interests in the securitized financial assets. The beneficial interests take the form of either notes or trust certificates, which are sold to investors and/or retained by us. These beneficial interests are collateralized by the transferred loans and entitle the investors to specified cash flows generated from the securitized loans. In the aggregate, these beneficial interests have the same average life as the transferred financial assets. In addition to providing a source of liquidity and cost-efficient funding, securitizing these financial assets also reduces our credit exposure to the borrowers beyond any economic interest we may retain. We securitize conforming residential mortgage loans through GSE securitizations and nonconforming mortgage loans through private-label securitizations.

Each securitization is governed by various legal documents that limit and specify the activities of the securitization entity. The securitization entity is generally allowed to acquire the loans, to issue beneficial interests to investors to fund the acquisition of the loans, and to enter into derivatives or other yield maintenance contracts (e.g., coverage by monoline bond insurers) to hedge or mitigate certain risks related to the financial assets or beneficial interests of the entity. Additionally, the securitization entity is required to service the assets it holds and the beneficial interests it issues. A servicer, who is generally us, is appointed pursuant to the underlying legal documents to perform these functions. Servicing functions include, but are not limited to, making certain payments of property taxes and insurance premiums, default and property maintenance payments, as well as advancing principal and interest payments before collecting them from individual borrowers. Our servicing responsibilities, which constitute continued involvement in the transferred financial assets, consist of primary servicing (i.e., servicing the underlying transferred financial assets) and/or master servicing (i.e., servicing the beneficial interests that result from the securitization transactions). Certain securitization entities also require the servicer to advance scheduled principal and interest payments due on the beneficial interests issued by the entity regardless of whether cash payments are received on the underlying transferred financial assets. Accordingly, we are required to provide these servicing advances when applicable. Refer to Note 11 for additional information regarding our servicing rights.

The GSEs provide a guarantee of the payment of principal and interest on the beneficial interests issued in securitizations. In private-label securitizations, cash flows from the assets initially transferred into the securitization entity represent the sole source for payment of distributions on the beneficial interests issued by the securitization entity and for payments to the parties that perform services for the securitization entity, such as the servicer or the trustee. In certain private-label securitization transactions, a liquidity facility may exist to provide temporary liquidity to the entity. The liquidity provider generally is reimbursed prior to other parties in subsequent distribution periods. Monoline insurance may also exist to cover certain shortfalls to certain investors in the beneficial interests issued by the securitization entity. As noted above, in certain private-label securitizations, the servicer is required to advance scheduled principal and interest payments due on the beneficial interests regardless of whether cash payments are received on the underlying transferred financial assets. The servicer is allowed to reimburse itself for these servicing advances. Additionally, certain private-label securitization transactions may allow for the acquisition of additional loans subsequent to the initial loan transfer. Principal collections on other loans and/or the issuance of new beneficial interests, such as variable funding notes, generally fund these loans; we are often contractually required to invest in these new interests.

We may retain beneficial interests in our private-label securitizations, which may represent a form of significant continuing economic interest. These 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 trust as they may absorb credit losses or other cash shortfalls. Additionally, the securitization agreements 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.

We generally hold certain conditional repurchase options that allow us to repurchase assets from the securitization entity. The majority of the securitizations provide us, as servicer, with a call option that allows us to repurchase the remaining transferred financial assets or outstanding beneficial interests at our discretion once the asset pool reaches a predefined level, which represents the point where servicing becomes burdensome (a clean-up call option). The repurchase price is typically the par amount of the loans plus accrued interest. Additionally, we may hold other conditional repurchase options that allow us to

 

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ALLY FINANCIAL INC.

NOTES TO CONDENSED

CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

 

repurchase a transferred financial 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 only when it is in our best interest.

Other than our customary representation and warranty provisions, these securitizations are nonrecourse to us, thereby transferring the risk of future credit losses to the extent the beneficial interests in the securitization entities are held by third parties. Our obligation to provide support is limited to the customary representation and warranty provisions. Representation and warranty provisions generally require us to repurchase loans or indemnify the investor for incurred losses to the extent it is determined that the loans were ineligible or were otherwise defective at the time of sale. Refer to Note 24 for detail on representation and warranty provisions. We did not provide any noncontractual financial support to any of these entities during the six months ended June 30, 2011 and 2010.

Other Variable Interest Entities

Servicer Advance Funding Entity

To assist in the financing of our servicer advance receivables, we formed an SPE that issues term notes to third-party investors that are collateralized by servicer advance receivables. These servicer advance receivables are transferred to the SPE and consist of delinquent principal and interest advances we made 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 activities. This SPE is consolidated on our balance sheet at June 30, 2011, and December 31, 2010. The beneficial interest holder of this SPE 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 have we provided noncontractual financial support to the entity during the six months ended June 30, 2011 and 2010.

Other

In 2010, we sold a portfolio of resort finance-backed receivables to a third party that financed the acquisition through an SPE. We provided seller financing for the purchase of these assets and also hold a contingent value right in the SPE, which were both recorded at fair value. We do not consolidate the SPE because we have no control over the activities of the SPE.

We have involvements with various other on-balance sheet, immaterial SPEs. Most of these SPEs are used for additional liquidity whereby we sell certain financial assets into the VIE and issue beneficial interests to third parties for cash.

We also provide long-term guarantee contracts to certain nonconsolidated affordable housing entities. Since we do not have control over the entities or the power to make decisions, we do not consolidate the entities and our involvement is limited to the guarantee.

Involvement with Variable Interest Entities

The determination of whether financial assets transferred by us to these VIEs (and related liabilities) are consolidated on our balance sheet (also referred to as on-balance sheet) or not consolidated on our balance sheet (also referred to as off-balance sheet) depends on the terms of the related transaction and our continuing involvement (if any) with the SPE. Subsequent to the adoption of ASU 2009-17, Improvements to Financial Reporting by Enterprises Involved with Variable Interest Entities, on January 1, 2010, we are deemed the primary beneficiary and therefore consolidate VIEs for which we have both (a) the power, through voting rights or similar rights, to direct the activities that most significantly impact the VIE’s economic performance, and (b) a variable interest (or variable interests) that (i) obligates us to absorb losses that could potentially be significant to the VIE and/or (ii) provides us the right to receive residual returns of the VIE that could potentially be significant to the VIE. We determine whether we hold a significant variable interest in a VIE based on a consideration of both qualitative and quantitative factors regarding the nature, size, and form of our involvement with the VIE. We assess whether we are the primary beneficiary of a VIE on an ongoing basis.

 

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ALLY FINANCIAL INC.

NOTES TO CONDENSED

CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

 

Our involvement with consolidated and nonconsolidated VIEs in which we hold variable interests is presented below.

 

($ in millions)    Consolidated
involvement
with VIEs
    Assets of
nonconsolidated
VIEs (a)
    Maximum exposure to
loss in nonconsolidated
VIEs
 

June 30, 2011

      

On-balance sheet variable interest entities

      

Consumer automobile

   $ 24,684      $      $   

Consumer mortgage — private-label

     1,244                 

Commercial automobile

     17,469                 

Other

     950                 

Off-balance sheet variable interest entities

      

Consumer mortgage — Ginnie Mae

     2,876 (b)      42,324        42,324 (c) 

Consumer mortgage — CMHC

     93 (b)      3,882        93 (d) 

Consumer mortgage — private-label

     178 (b)      4,977        4,977 (c) 

Consumer mortgage — other

            (e)      19 (f) 

Commercial other

     398 (g)      (h)      598   

 

 

Total

   $ 47,892      $ 51,183      $ 48,011   

 

 

December 31, 2010

      

On-balance sheet variable interest entities

      

Consumer automobile

   $ 20,064      $      $   

Consumer mortgage — private-label

     1,397                 

Commercial automobile

     15,114                 

Other

     1,035                 

Off-balance sheet variable interest entities

      

Consumer mortgage — Ginnie Mae

     2,909 (b)      43,595        43,595 (c) 

Consumer mortgage — CMHC

     124 (b)      4,222        124 (d) 

Consumer mortgage — private-label

     183 (b)      5,371        5,371 (c) 

Commercial other

     483 (g)      (h)      698   

 

 

Total

   $ 41,309      $ 53,188      $ 49,788   

 

 
(a) Asset values represent the current unpaid principal balance of outstanding consumer finance receivables and loans within the VIEs.
(b) Includes $2.4 billion and $2.5 billion classified as mortgage loans held-for-sale, $126 million and $162 million classified as trading securities or other assets, and $601 million and $569 million classified as mortgage servicing rights at June 30, 2011, and December 31, 2010, respectively. CMHC is the Canada Mortgage and Housing Corporation.
(c) Maximum exposure to loss represents the current unpaid principal balance of outstanding loans based on our customary representation and warranty provisions. This measure is based on the unlikely event that all of the loans have underwriting defects or other defects that trigger a representation and warranty provision and the collateral supporting the loans are worthless. This required disclosure is not an indication of our expected loss.
(d) Due to combination of the credit loss insurance on the mortgages and the guarantee by CMHC on the issued securities, the maximum exposure to loss would be limited to the amount of the retained interests. Additionally, the maximum loss would occur only in the event that CMHC dismisses us as servicer of the loans due to servicer performance or insolvency.
(e) Includes a VIE for which we have no management oversight and therefore we are not able to provide the total assets of the VIE. However, in March 2011 we sold excess servicing rights valued at $266 million to the VIE.
(f) Our maximum exposure to loss in this VIE is a component of servicer advances made that are allocated to the trust. The maximum exposure to loss presented represents the unlikely event that every loan underlying the excess servicing rights sold defaults, and we, as servicer, are required to advance the entire excess service fee to the trust for the contractually established period. This required disclosure is not an indication of our expected loss.
(g) Includes $430 million and $515 million classified as finance receivables and loans, net, and $20 million and $20 million classified as other assets, offset by $52 million and $52 million classified as accrued expenses and other liabilities at June 30, 2010, and December 31, 2010, respectively.
(h) Includes VIEs for which we have no management oversight and therefore we are not able to provide the total assets of the VIEs. However, in 2010 we sold loans with an unpaid principal balance of $1.5 billion into these VIEs.

 

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ALLY FINANCIAL INC.

NOTES TO CONDENSED

CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

 

On-balance Sheet Variable Interest Entities

We engage in securitization and other financing transactions that do not qualify for off-balance sheet treatment. In these situations, we hold beneficial interests or other interests in the VIE, which represent a form of significant continuing economic interest. The interests held include, but are not limited to, senior or subordinate mortgage- or asset-backed securities, interest-only strips, principal-only strips, residuals, and servicing rights. Certain of these retained interests provide credit enhancement to the securitization entity 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 these securitization entities are consolidated, these retained interests and servicing rights are not recognized as separate assets on our Condensed Consolidated Balance Sheet.

Subsequent to adoption of ASU 2009-17 as of January 1, 2010, we consolidated certain of these entities because we had a controlling financial interest in the VIE, primarily due to our servicing activities, and because we hold a significant variable interest in the VIE. Under ASC 810, Consolidation, as amended by ASU 2009-17, we are generally the primary beneficiary of automobile securitization entities, as well as certain mortgage private-label securitization entities for which we perform servicing activities and have retained a significant variable interest in the form of a beneficial interest. In cases where we did not meet sale accounting under previous guidance, unless we have made modifications to the overall transaction, we do not meet sale accounting under current guidance as we are not permitted to revisit sale accounting guidelines under the current guidance. In cases where substantive modifications are made, we then reassess the transaction under the amended guidance, based on the new circumstances.

The consolidated VIEs included in the Condensed Consolidated Balance Sheet represent separate entities with which we are involved. The third-party investors in the obligations of consolidated VIEs have legal recourse only to the assets of the VIEs and do not have such recourse to us, except for the customary representation and warranty provisions or when we are the counterparty to certain derivative transactions involving the VIE. In addition, the cash flows from the assets are restricted only to pay such liabilities. Thus, our economic exposure to loss from outstanding third-party financing related to consolidated VIEs is significantly less than the carrying value of the consolidated VIE assets. All assets are restricted for the benefit of the beneficial interest holders. Refer to Note 21 for discussion of the assets and liabilities for which the fair value option has been elected.

Off-balance Sheet Variable Interest Entities

The nature, purpose, and activities of nonconsolidated securitization entities are similar to those of our consolidated securitization entities with the primary difference being the nature and extent of our continuing involvement. The cash flows from the assets of nonconsolidated securitization entities generally are the sole source of payment on the securitization entities’ liabilities. The creditors of these securitization entities have no recourse to us with the exception of market customary representation and warranty provisions as described in Note 24.

Subsequent to the adoption of ASU 2009-17 as of January 1, 2010, nonconsolidated VIEs include entities for which we either do not hold significant variable interests or do not provide servicing or asset management functions for the financial assets held by the securitization entity. Additionally, to qualify for off-balance sheet treatment, transfers of financial assets must meet the sale accounting conditions in ASC 860, Transfers and Servicing. Our residential mortgage loan securitizations consist of GSEs and private-label securitizations. Under ASU 2009-17, we are not the primary beneficiary of any GSE loan securitization transaction because we do not have the power to direct the significant activities of such entities. Additionally, under ASU 2009-17, we do not consolidate certain private-label mortgage securitizations because we do not have a variable interest that could potentially be significant or we do not have power to direct the activities that most significantly impact the performance of the VIE.

For nonconsolidated securitization entities, the transferred financial assets are removed from our balance sheet provided the conditions for sale accounting are met. The financial assets obtained from the securitization are primarily reported as cash, servicing rights, or retained interests (if applicable). Typically, we conclude that the fee we are paid for servicing consumer automobile finance receivables represents adequate compensation, and consequently, we do not recognize a servicing asset or

 

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NOTES TO CONDENSED

CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

 

liability. As an accounting policy election, we elected fair value treatment for our existing mortgage servicing rights (MSR) portfolio. Liabilities incurred as part of these securitization transactions, 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, 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 all pretax gains and losses recognized on financial assets sold into nonconsolidated securitization and similar asset-backed financing entities.

 

     Three months ended June 30,      Six months ended June 30,  
($ in millions)            2011                      2010                     2011                    2010         

Consumer mortgage — GSEs

   $ 267       $ 192       $ 265       $ 374   

Consumer mortgage — private-label

     2         2         1         5   

 

 

Total pretax gain

   $ 269       $ 194       $ 266       $ 379   

 

 

The following table summarizes cash flows received from and paid related to securitization entities, asset-backed financings, or other similar transfers of financial assets where the transfer is accounted for as a sale and we have a continuing involvement with the transferred assets (e.g., servicing) that were outstanding during the six months ended June 30, 2011 and 2010. Additionally, this table contains information regarding cash flows received from and paid to nonconsolidated securitization entities that existed during each period.

 

Six months ended June 30, ($ in millions)   

Consumer mortgage

GSEs

   

Consumer mortgage

private-label

 

2011

    

Cash proceeds from transfers completed during the period

   $ 28,418      $ 727   

Cash flows received on retained interests in securitization entities

            37   

Servicing fees

     495        72   

Purchases of previously transferred financial assets

     (1,068     (11

Representations and warranties obligations

     (100     (28

Other cash flows

     67        141   

 

 

2010

    

Cash proceeds from transfers completed during the period

   $ 27,006      $ 472   

Cash flows received on retained interests in securitization entities

            37   

Servicing fees

     391        102   

Purchases of previously transferred financial assets

     (811     (13

Representations and warranties obligations

     (248     (5

Other cash flows

     71        (50

 

 

 

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ALLY FINANCIAL INC.

NOTES TO CONDENSED

CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

 

The following table represents on-balance sheet loans held-for-sale and finance receivable and loans, off-balance sheet securitizations, and whole-loan sales where we have continuing involvement. The table presents quantitative information about delinquencies and net credit losses. Refer to Note 11 for further detail on total serviced assets.

 

     Total finance
receivables and loans
     Amount 60 days
or more past due
 
($ in millions)   

June 30,

2011

    

December 31,

2010

    

June 30,

2011

    

December 31,

2010

 

On-balance sheet loans

           

Consumer automobile

   $ 58,735       $ 51,254       $ 328       $ 373   

Consumer mortgage (a)

     18,526         23,174         3,286         3,437   

Commercial automobile

     37,712         35,629         194         186   

Commercial mortgage

     1,254         1,660         39         110   

Commercial other

     1,666         2,107         1         20   

 

 

Total on-balance sheet loans

     117,893         113,824         3,848         4,126   

 

 

Off-balance sheet securitization entities

           

Consumer mortgage — GSEs

     260,595         253,192         10,132         13,990   

Consumer mortgage — private-label

     69,681         73,638         11,884         12,220   

 

 

Total off-balance sheet securitization entities

     330,276         326,830         22,016         26,210   

 

 

Whole-loan transactions (b)

     36,097         38,212         2,200         2,950   

 

 

Total

   $ 484,266       $ 478,866       $ 28,064       $ 33,286   

 

 
(a) Includes loans subject to conditional repurchase options of $2.3 billion guaranteed by the GSEs at both June 30, 2011, and December 31, 2010, and $135 million and $146 million sold to certain private-label mortgage securitization entities at June 30, 2011, and December 31, 2010, respectively.
(b) Whole-loan transactions are not part of a securitization transaction, but represent consumer automobile and consumer mortgage pools of loans sold to private-label investors.

 

     Net credit losses  
     Three months ended     Six months ended  
($ in millions)   

June 30,

2011

    

June 30,

2010

   

June 30,

2011

    

June 30,

2010

 

On-balance sheet loans

          

Consumer automobile

   $ 60       $ 120      $ 172       $ 359   

Consumer mortgage

     33         (6     81         (35

Commercial automobile

     8         23        11         40   

Commercial mortgage

     9         7        25         49   

Commercial other

             96        1         98   

 

 

Total on-balance sheet loans

     110         240        290         511   

 

 

Off-balance sheet securitization entities

          

Consumer mortgage — GSEs (a)

     n/m         n/m        n/m         n/m   

Consumer mortgage — private-label

     1,010         1,257        2,299         2,638   

 

 

Total off-balance sheet securitization entities

     1,010         1,257        2,299         2,638   

 

 

Whole-loan transactions

     55         341        270         690   

 

 

Total

   $ 1,175       $ 1,838      $ 2,859       $ 3,839   

 

 

n/m = not meaningful

(a) Anticipated credit losses are not meaningful due to the GSE guarantees.

 

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ALLY FINANCIAL INC.

NOTES TO CONDENSED

CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

 

Changes in Accounting for Variable Interest Entities

For the six months ended June 30, 2011 and 2010, there were no material changes in the accounting for variable interest entities except the initial adoption of ASU 2009-17 on January 1, 2010. Refer to Note 11 to the Consolidated Financial Statements in our 2010 Annual Report on Form 10-K regarding this initial adoption.

 

11. Servicing Activities

Mortgage Servicing Rights

The following table summarizes activity related to MSRs, which are carried at fair value.

 

Three months ended June 30, ($ in millions)    2011     2010  

Estimated fair value at April 1,

   $ 3,774      $ 3,543   

Additions recognized on sale of mortgage loans

     144        167   

Additions from purchases of servicing rights

     15        20   

Changes in fair value

    

Due to changes in valuation inputs or assumptions used in the valuation model

     (135     (543

Other changes in fair value

     (97     (206

Other changes that affect the balance

            2   

 

 

Estimated fair value at June 30,

   $ 3,701      $ 2,983   

 

 

Six months ended June 30, ($ in millions)

     2011        2010   

 

 

Estimated fair value at January 1,

   $ 3,738      $ 3,554   

Additions recognized on sale of mortgage loans

     328        369   

Additions from purchases of servicing rights

     16        21   

Subtractions from disposition of servicing assets

     (266       

Changes in fair value

    

Due to changes in valuation inputs or assumptions used in the valuation model

     163        (494

Other changes in fair value

     (278     (450

Decrease due to change in accounting principle

            (19

Other changes that affect the balance

            2   

 

 

Estimated fair value at June 30,

   $ 3,701      $ 2,983   

 

 

Changes in fair value due to changes in valuation inputs or assumptions used in the valuation model include all changes due to a 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. The decrease due to change in accounting principle reflects the effect of the initial adoption of ASU 2009-17.

The key economic assumptions and sensitivity of the fair value of MSRs to immediate 10% and 20% adverse changes in those assumptions were as follows.

 

($ in millions)    June 30, 2011     December 31, 2010  

Weighted average life (in years)

     8.2        7.0   

Weighted average prepayment speed

     7.3     9.8

Impact on fair value of 10% adverse change

   $ (127   $ (155

Impact on fair value of 20% adverse change

     (246     (295

 

 

Weighted average discount rate

     12.5     12.3

Impact on fair value of 10% adverse change

   $ (102   $ (80

Impact on fair value of 20% adverse change

     (198     (156

 

 

These sensitivities are hypothetical and should be considered with caution. Changes in fair value based on a 10% and 20% variation in assumptions generally cannot be extrapolated because the relationship of the change in assumptions to the

 

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NOTES TO CONDENSED

CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

 

change in fair value may not be linear. Also, the effect of a variation in a particular assumption on the fair value is calculated without changing any other assumption. In reality, changes in one factor may result in changes in another (e.g., increased market interest rates may result in lower prepayments and increased credit losses) that could magnify or counteract the sensitivities. Further, these sensitivities show only the change in the asset balances and do not show any expected change in the fair value of the instruments used to manage the interest rates and prepayment risks associated with these assets.

Risk Mitigation Activities

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 that could reduce the value of the MSRs. We economically hedge the impact of these risks with both derivative and nonderivative financial instruments. Refer to Note 19 for additional information regarding the derivative financial instruments used to economically hedge MSRs.

The components of servicing valuation and hedge activities, net, were as follows.

 

     Three months ended
June  30,
    Six months ended
June  30,
 
($ in millions)      2011         2010         2011         2010    

Change in estimated fair value of mortgage servicing rights

   $ (232   $ (748   $ (115   $ (944

Change in fair value of derivative financial instruments

     127        727        (77     790   

 

 

Servicing valuation and hedge activities, net

   $ (105   $ (21   $ (192   $ (154

 

 

Mortgage Servicing Fees

The components of mortgage servicing fees were as follows.

 

     Three months ended
June  30,
     Six months ended
June  30,
 
($ in millions)      2011          2010          2011          2010    

Contractual servicing fees, net of guarantee fees and including subservicing

   $ 258       $ 266       $ 528       $ 524   

Late fees

     16         19         37         38   

Ancillary fees

     38         43         72         90   

 

 

Total mortgage servicing fees

   $ 312       $ 328       $ 637       $ 652   

 

 

Mortgage Servicing Advances

In connection with our primary servicing activities (i.e., servicing of mortgage loans), we make certain payments of property taxes and insurance premiums, default and property maintenance payments, as well as advances of principal and interest payments before collecting them from individual borrowers. Servicing advances including contractual interest are priority cash flows in the event of a loan principal reduction or foreclosure and ultimate liquidation of the real estate-owned property, thus making their collection reasonably assured. These servicing advances are included in other assets on the Condensed Consolidated Balance Sheet and totaled $1.8 billion and $1.9 billion at June 30, 2011, and December 31, 2010, respectively. We maintain an allowance for uncollected primary servicing advances of $22 million and $25 million at June 30, 2011, and December 31, 2010, respectively. Our potential obligation is influenced by the loan’s performance and credit quality.

When we act as a subservicer of mortgage loans we perform the responsibilities of a primary servicer but do not own the corresponding primary servicing rights. We receive a fee from the primary servicer for such services. As the subservicer, we would have the same responsibilities of a primary servicer in that we would make certain payments of property taxes and insurance premiums, default and property maintenance, as well as advances of principal and interest payments before collecting them from individual borrowers. At June 30, 2011, and December 31, 2010, outstanding servicer advances related to subserviced loans were $122 million and $140 million, respectively, and we had a reserve for uncollected subservicer advances of $2 million and $1 million, respectively.

 

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ALLY FINANCIAL INC.

NOTES TO CONDENSED

CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

 

In many cases, where we act as master servicer, we also act as primary servicer. In connection with our master-servicing activities, we service the mortgage-backed and mortgage-related asset-backed securities and whole-loan packages sold to investors. As the master servicer, we collect mortgage loan payments from primary servicers and distribute those funds to investors in the mortgage-backed and mortgage-related asset-backed securities and whole-loan packages. As the master servicer, we are required to advance scheduled payments to the securitization trust or whole-loan investors. To the extent the primary servicer does not advance the payments, we are responsible for advancing the payment to the trust or whole-loan investors. Master-servicing advances, including contractual interest, are priority cash flows in the event of a default, thus making their collection reasonably assured. In most cases, we are required to advance these payments to the point of liquidation of the loan or reimbursement of the trust or whole-loan investors. We had outstanding master-servicing advances of $114 million and $90 million at June 30, 2011, and December 31, 2010, respectively. We had no reserve for uncollected master-servicing advances at June 30, 2011, or December 31, 2010.

Serviced Mortgage Assets

The unpaid principal balance of our serviced mortgage assets was as follows.

 

($ in millions)    June 30, 2011      December 31, 2010  

On-balance sheet mortgage loans

     

Held-for-sale and investment

   $ 18,057       $ 20,224   

Off-balance sheet mortgage loans

     

Loans sold to third-party investors

     

Private-label

     58,530         63,685   

GSEs

     262,748         255,388   

Whole-loan

     17,543         17,524   

Purchased servicing rights

     3,576         3,946   

 

 

Total primary serviced mortgage loans

     360,454         360,767   

Subserviced mortgage loans

     23,737         24,173   

Master-servicing-only mortgage loans

     9,649         10,548   

 

 

Total serviced mortgage loans

   $ 393,840       $ 395,488   

 

 

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 GSEs. At June 30, 2011, our Mortgage operations were in compliance with the servicer-rating requirements of the master agreements.

In certain domestic securitizations of our Mortgage operations, the surety or other provider of contractual credit support is entitled to declare a servicer default and terminate the servicer upon the failure of the loans to meet certain portfolio delinquency and/or cumulative-loss thresholds. Our Mortgage operations did not receive notice of termination from surety providers during the six months ended June 30, 2011.

Automobile Servicing Activities

We service consumer automobile contracts. Historically, we have sold a portion of our consumer automobile contracts. With respect to contracts we sell, we retain the right to service and earn a servicing fee for our servicing function. Typically, we conclude that the fee we are paid for servicing consumer automobile finance receivables represents adequate compensation, and consequently, we do not recognize a servicing asset or liability. We recognized automobile servicing fees of $41 million and $87 million for the three months and six months ended June 30, 2011, respectively, compared to $56 million and $117 million for the three months and six months ended June 30, 2010.

 

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ALLY FINANCIAL INC.

NOTES TO CONDENSED

CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

 

Automobile Serviced Assets

The total serviced automobile loans outstanding were as follows.

 

($ in millions)    June 30, 2011      December 31, 2010  

On-balance sheet automobile loans

     

Consumer automobile

   $ 58,735       $ 51,254   

Commercial automobile

     37,712         35,629   

Operating leases

     9,015         9,128   

Operations held-for-sale

     10         242   

Off-balance sheet automobile loans

     

Loans sold to third-party investors

     

Whole-loan

     14,961         18,126   

Other

     1,191         979   

 

 

Total serviced automobile loans

   $ 121,624       $ 115,358   

 

 

 

12. Other Assets

The components of other assets were as follows.

 

($ in millions)    June 30, 2011     December 31, 2010  

Property and equipment at cost

   $ 1,306      $ 1,315   

Accumulated depreciation

     (940     (939

 

 

Net property and equipment

     366        376   

Fair value of derivative contracts in receivable position

     4,154        3,966   

Servicer advances

     2,012        2,137   

Restricted cash collections for securitization trusts (a)

     1,730        1,705   

Restricted cash and cash equivalents

     1,324        1,323   

Collateral placed with counterparties

     1,042        1,569   

Cash reserve deposits held for securitization trusts (b)

     921        1,168   

Debt issuance costs

     736        704   

Prepaid expenses and deposits

     722        638   

Other accounts receivable

     582        641   

Goodwill

     526        525   

Nonmarketable equity securities

     457        504   

Real estate and other investments

     336        280   

Interests retained in financial asset sales

     307        568   

Investment in used vehicles held-for-sale

     279        386   

Accrued interest and rent receivable

     218        238   

Repossessed and foreclosed assets

     164        211   

Assets of operations held-for-sale (c)

     (48     690   

Other assets

     894        625   

 

 

Total other assets

   $ 16,722      $ 18,254   

 

 
(a) Represents cash collection from customer payments on securitized receivables. These funds are distributed to investors as payments on the related secured debt.
(b) Represents credit enhancement in the form of cash reserves for various securitization transactions.
(c) Includes $94 million of unrecognized translation losses in the measurement of impairment at both June 30, 2011, and December 31, 2010 related to our International Automotive Finance operations in Venezuela.

 

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ALLY FINANCIAL INC.

NOTES TO CONDENSED

CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

 

13. Deposit Liabilities

Deposit liabilities consisted of the following.

 

($ in millions)    June 30, 2011      December 31, 2010  

Domestic deposits

     

Noninterest-bearing deposits

   $ 2,405       $ 2,108   

NOW and money market checking accounts

     8,287         8,081   

Certificates of deposit

     26,178         23,728   

Dealer deposits

     1,715         1,459   

 

 

Total domestic deposit liabilities

     38,585         35,376   

 

 

Foreign deposits

     

Noninterest-bearing deposits

             23   

NOW and money market checking accounts

     1,188         961   

Certificates of deposit

     2,171         2,390   

Dealer deposits

     318         298   

 

 

Total foreign deposit liabilities

     3,677         3,672   

 

 

Total deposit liabilities

   $ 42,262       $ 39,048   

 

 

Noninterest-bearing deposits primarily represent third-party escrows associated with our mortgage loan-servicing portfolio. The escrow deposits are not subject to an executed agreement and can be withdrawn without penalty at any time. At June 30, 2011, and December 31, 2010, certificates of deposit included $8.5 billion and $7.0 billion, respectively, of domestic certificates of deposit in denominations of $100 thousand or more.

 

14. Short-term Borrowings

The following table presents the composition of our short-term borrowings portfolio.

 

     June 30, 2011      December 31, 2010  
($ in millions)    Unsecured      Secured      Total      Unsecured      Secured      Total  

Demand notes

   $ 2,446       $       $ 2,446       $ 2,033       $       $ 2,033   

Bank loans and overdrafts

     1,654                 1,654         1,970                 1,970   

Federal Home Loan Bank

             1,000         1,000                 1,300         1,300   

Other (a)

     197         1,833         2,030         224         1,981         2,205   

 

 

Total short-term borrowings

   $ 4,297       $ 2,833       $ 7,130       $ 4,227       $ 3,281       $ 7,508   

 

 
(a) Other primarily includes nonbank secured borrowings at our Mortgage and International Automotive Finance operations.

 

15. Long-term Debt

The following tables present the composition of our long-term debt portfolio.

 

     June 30, 2011      December 31, 2010  
($ in millions)    Unsecured      Secured      Total      Unsecured      Secured      Total  

Long-term debt

                 

Due within one year

   $ 6,382       $ 12,267       $ 18,649       $ 8,555       $ 13,603       $ 22,158   

Due after one year (a)

     39,610         33,021         72,631         38,499         25,508         64,007   

Fair value adjustment

     443                 443         447                 447   

 

 

Total long-term debt (b)

   $ 46,435       $ 45,288       $ 91,723       $ 47,501       $ 39,111       $ 86,612   

 

 
(a) Includes $7.4 billion guaranteed by the Federal Deposit Insurance Corporation (FDIC) under the Temporary Liquidity Guarantee Program (TLGP) and $2.6 billion of trust preferred securities at both June 30, 2011, and December 31, 2010.
(b) Includes fair value option-elected secured long-term debt of $899 million and $972 million at June 30, 2011, and December 31, 2010, respectively. Refer to Note 21 for additional information.

 

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ALLY FINANCIAL INC.

NOTES TO CONDENSED

CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

 

The following table presents the scheduled remaining maturity of long-term debt at June 30, 2011, assuming no early redemptions will occur. The actual payment of secured debt may vary based on the payment activity of the related pledged assets.

 

Year ended December 31, ($ in millions)   2011     2012     2013     2014     2015     2016 and
thereafter
    Fair value
adjustment
    Total  

Unsecured

               

Long-term debt

  $ 4,415      $ 12,256      $ 1,919      $ 5,737      $ 3,749      $ 20,480      $ 443      $ 48,999   

Original issue discount

    (369     (351     (264     (190     (56     (1,334            (2,564

 

 

Total unsecured

    4,046        11,905        1,655        5,547        3,693        19,146        443        46,435   

 

 

Secured

               

Long-term debt

    6,733        10,616        11,232        7,998        4,456        3,956               44,991   

Troubled debt restructuring concession (a)

    51        105        82        46        13                      297   

 

 

Total secured

    6,784        10,721        11,314        8,044        4,469        3,956               45,288   

 

 

Total long-term debt

  $ 10,830      $ 22,626      $ 12,969      $ 13,591      $ 8,162      $ 23,102      $ 443      $ 91,723   

 

 
(a) In the second quarter of 2008, ResCap executed an exchange offer that resulted in a concession being recognized as an adjustment to the carrying value of certain secured notes. This concession is being amortized over the life of the notes through a reduction to interest expense using an effective yield methodology.

The following table presents the scheduled remaining maturity of long-term debt held by ResCap at June 30, 2011, assuming no early redemptions will occur. The actual payment of secured debt may vary based on the payment activity of the related pledged assets.

 

Year ended December 31, ($ in millions)    2011      2012      2013      2014      2015      2016 and
thereafter
     Fair value
adjustment
     Total  

ResCap

                       

Unsecured debt

                       

Long-term debt

   $       $ 377       $ 530       $ 103       $ 114       $       $ 25       $ 1,149   

Secured debt

                       

Long-term debt

                     731         707         707         1,784                 3,929   

Troubled debt restructuring concession

     51         105         82         46         13                         297   

 

 

Total secured debt

     51         105         813         753         720         1,784                 4,226   

 

 

ResCap — Total long-term debt

   $ 51       $ 482       $ 1,343       $ 856       $ 834       $ 1,784       $ 25       $ 5,375   

 

 

 

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ALLY FINANCIAL INC.

NOTES TO CONDENSED

CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

 

The following summarizes assets restricted as collateral for the payment of the related debt obligation primarily arising from securitization transactions accounted for as secured borrowings and repurchase agreements.

 

     June 30, 2011      December 31, 2010  
($ in millions)    Total      Ally Bank (a)      Total      Ally Bank (a)  

Trading securities

   $ 31       $       $ 36       $   

Investment securities

     1,972         1,972         2,191         2,190   

Loans held-for-sale

     919                 1,035           

Mortgage assets held-for-investment and lending receivables

     11,725         10,589         12,451         11,137   

Consumer automobile finance receivables

     36,601         19,287         27,164         14,927   

Commercial automobile finance receivables

     19,176         12,689         19,741         15,034   

Investment in operating leases, net

     894         565         3,199           

Mortgage servicing rights

     2,807         1,774         2,801         1,746   

Other assets

     4,079         1,907         3,990         1,700   

 

 

Total assets restricted as collateral (b)

   $ 78,204       $ 48,783       $ 72,608       $ 46,734   

 

 

Secured debt (c)

   $ 48,121       $ 23,882       $ 42,392       $ 20,199   

 

 
(a) Ally Bank is a component of the total column.
(b) Ally Bank has an advance agreement with the Federal Home Loan Bank of Pittsburgh (FHLB) and access to the Federal Reserve Bank Discount Window. Ally Bank had assets pledged and restricted as collateral to the FHLB and Federal Reserve Bank totaling $10.9 billion and $15.2 billion at June 30, 2011, and December 31, 2010, respectively. These assets were composed of consumer and commercial mortgage finance receivables and loans, net; consumer automobile finance receivables and loans, net; and investment securities. Under the agreement with the FHLB, Ally Bank also had assets pledged as collateral under a blanket lien totaling $8.2 billion and $5.3 billion at June 30, 2011, and December 31, 2010, respectively. These assets were primarily composed of mortgage servicing rights; consumer mortgage finance receivables and loans, net; and other assets. Availability under these programs is generally only for the operations of Ally Bank and cannot be used to fund the operations or liabilities of Ally or its subsidiaries.
(c) Includes $2,833 million and $3,281 million of short-term borrowings at June 30, 2011, and December 31, 2010, respectively.

Trust Preferred Securities

On December 30, 2009, we entered into a Securities Purchase and Exchange Agreement with U.S. Department of Treasury (Treasury) and GMAC Capital Trust I, a Delaware statutory trust (the Trust), which is a finance subsidiary that is wholly owned by Ally. As part of the agreement, the Trust sold to Treasury 2,540,000 trust preferred securities (TRUPS) issued by the Trust with an aggregate liquidation preference of $2.5 billion. Additionally, we issued and sold to Treasury a ten-year warrant to purchase up to 127,000 additional TRUPS with an aggregate liquidation preference of $127 million, at an initial exercise price of $0.01 per security, which Treasury immediately exercised in full.

On March 1, 2011, the Declaration of Trust and certain other documents related to the TRUPS were amended and all the outstanding TRUPS held by Treasury were designated 8.125% Fixed Rate / Floating Rate Trust Preferred Securities, Series 2 (Series 2 TRUPS). On March 7, 2011, Treasury sold 100% of the Series 2 TRUPS in an offering registered with the SEC. Ally did not receive any proceeds from the sale.

Each Series 2 TRUPS security has a liquidation amount of $25. Distributions are cumulative and are payable until redemption at the applicable coupon rate. Distributions are payable at an annual rate of 8.125% payable quarterly in arrears, beginning August 15, 2011, to but excluding February 15, 2016. From and including February 15, 2016, to but excluding February 15, 2040, distributions will be payable at an annual rate equal to three-month London interbank offer rate plus 5.785% payable quarterly in arrears, beginning May 15, 2016. Ally has the right to defer payments of interest for a period not exceeding 20 consecutive quarters. The Series 2 TRUPS have no stated maturity date, but must be redeemed upon the redemption or maturity of the related debentures (Debentures), which mature on February 15, 2040. The Series 2 TRUPS are generally nonvoting, other than with respect to certain limited matters. During any period in which any Series 2 TRUPS remain outstanding but in which distributions on the Series 2 TRUPS have not been fully paid, none of Ally or its subsidiaries will be permitted to (i) declare or pay dividends on, make any distributions with respect to, or redeem, purchase, acquire or otherwise make a liquidation payment with respect to, any of Ally’s capital stock or make any guarantee payment with respect thereto; or (ii) make any payments of principal, interest, or premium on, or repay, repurchase or redeem, any debt securities or guarantees that rank on a parity with or junior in interest to the Debentures with certain specified exceptions in each case.

 

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ALLY FINANCIAL INC.

NOTES TO CONDENSED

CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

 

Funding Facilities

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.

As of June 30, 2011, Ally Bank had exclusive access to $9.5 billion of funding capacity from committed credit facilities. Ally Bank also has access to a $4.1 billion committed facility that is shared with the parent company. Funding programs supported by the Federal Reserve and the FHLB complement Ally Bank’s private committed facilities.

The total capacity in our committed funding facilities is provided by banks and other financial institutions through private transactions. The committed secured funding facilities can be revolving in nature and allow for additional funding during the commitment period, or they can be amortizing and do not allow for any further funding after the closing date. At June 30, 2011, $31.3 billion of our $37.5 billion of committed capacity was revolving. Our revolving facilities generally have an original tenor ranging from 364 days to two years. At June 30, 2011, we had $12.3 billion of committed funding capacity with a remaining tenor greater than 364 days, which is an increase of $2.9 billion from March 31, 2011.

Committed Funding Facilities

 

     Outstanding      Unused capacity (a)      Total capacity  
($ in billions)   

June 30,

2011

    

Dec. 31,

2010

    

June 30,

2011

    

Dec. 31,

2010

    

June 30,

2011

    

Dec. 31,

2010

 

Bank funding

                 

Secured

   $ 6.4       $ 6.4       $ 3.1       $ 1.9       $ 9.5       $ 8.3   

Nonbank funding

                 

Unsecured

                 

Automotive Finance operations

     0.3         0.8         0.5                 0.8         0.8   

Secured

                 

Automotive Finance operations

     12.0         8.3         9.5         9.1         21.5         17.4   

Mortgage operations

     1.0         1.0         0.6         0.6         1.6         1.6   

 

 

Total nonbank funding

     13.3         10.1         10.6         9.7         23.9         19.8   

Shared capacity (b)

     0.1         0.2         4.0         3.9         4.1         4.1   

 

 

Total committed facilities

   $ 19.8       $ 16.7       $ 17.7       $ 15.5       $ 37.5       $ 32.2   

 

 
(a) Funding from committed secured facilities is available on request in the event excess collateral resides in certain facilities or is available to the extent incremental collateral is available and contributed to the facilities.
(b) Funding is generally available for assets originated by Ally Bank or the parent company, Ally Financial Inc.

Uncommitted Funding Facilities

 

     Outstanding      Unused capacity      Total capacity  
($ in billions)   

June 30,

2011

    

Dec. 31,

2010

    

June 30,

2011

    

Dec. 31,

2010

    

June 30,

2011

    

Dec. 31,

2010

 

Bank funding

                 

Secured

                 

Federal Reserve funding programs

   $       $       $ 3.9       $ 4.0       $ 3.9       $ 4.0   

FHLB advances

     4.5         5.3         1.4         0.2         5.9         5.5   

 

 

Total bank funding

     4.5         5.3         5.3         4.2         9.8         9.5   

 

 

Nonbank funding

                 

Unsecured

                 

Automotive Finance operations

     1.7         1.4         0.6         0.6         2.3         2.0   

Secured

                 

Automotive Finance operations

     0.1         0.1         0.1                 0.2         0.1   

Mortgage operations

                     0.1         0.1         0.1         0.1   

 

 

Total nonbank funding

     1.8         1.5         0.8         0.7         2.6         2.2   

 

 

Total uncommitted facilities

   $ 6.3       $ 6.8       $ 6.1       $ 4.9       $ 12.4       $ 11.7   

 

 

 

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ALLY FINANCIAL INC.

NOTES TO CONDENSED

CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

 

16. Equity

The following table summarizes information about our Series F-2, Series A, and Series G preferred stock.

 

      June 30, 2011   December 31, 2010

Mandatorily convertible preferred stock held by U.S. Department of Treasury (a)

Series F-2 preferred stock

    

Carrying value ($ in millions)

   $5,685   $5,685

Par value (per share)

   $0.01   $0.01

Liquidation preference (per share)

   $50   $50

Number of shares authorized

   228,750,000   228,750,000

Number of shares issued and outstanding

   118,750,000   118,750,000

Dividend/coupon

   Fixed 9%  

Redemption/call feature

   Perpetual(b)  

Preferred stock

    

Series A preferred stock (c)

    

Carrying value ($ in millions)

   $1,021   $1,053

Par value (per share)

   $0.01   $0.01

Liquidation preference (per share)

   $25   $1,000

Number of shares authorized

   160,870,560   4,021,764

Number of shares issued and outstanding

   40,870,560   1,021,764

Dividend/coupon

    

Prior to May 15, 2016

   8.5%  

On and after May 15, 2016

   LIBOR + 6.243%  

Redemption/call feature

   Perpetual(d)  

Series G preferred stock

    

Carrying value ($ in millions)

   $234   $234

Par value (per share)

   $0.01   $0.01

Liquidation preference (per share)

   $1,000   $1,000

Number of shares authorized

   2,576,601   2,576,601

Number of shares issued and outstanding

   2,576,601   2,576,601

Dividend/coupon

   Fixed 7%  

Redemption/call feature

   Perpetual(e)  

 

(a) Mandatorily convertible to common equity on December 30, 2016.
(b) Convertible prior to mandatory conversion date with consent of Treasury.
(c) Refer to next section of this note for a description of an amendment to the Series A preferred stock that occurred on March 25, 2011.
(d) Nonredeemable prior to May 15, 2016.
(e) Nonredeemable prior to December 31, 2011.

Series A Preferred Stock

On March 1, 2011, pursuant to a registration rights agreement between Ally and GM, GM notified Ally of its intent to sell shares of Ally’s existing Fixed Rate Perpetual Preferred Stock, Series A (Existing Series A Preferred Stock), held by a subsidiary of GM. On March 25, 2011, Ally filed a Certificate of Amendment of Amended and Restated Certificate of Incorporation (the Amendment) with the Secretary of State of the State of Delaware. Pursuant to the Amendment, Ally’s Certificate of Incorporation, which included the terms of the Existing Series A Preferred Stock, was amended to modify certain terms of the Existing Series A Preferred Stock. As part of the Amendment, the Existing Series A Preferred Stock was redesignated as Ally’s Fixed Rate / Floating Rate Perpetual Preferred Stock, Series A (the Amended Series A Preferred Stock) and the liquidation amount was reduced from $1,000 per share to $25 per share. The Amendment, and a corresponding amendment to Ally’s bylaws, also increased the authorized number of shares of Amended Series A Preferred Stock to 160,870,560 shares, which was adjusted to account for the decreased liquidation amount per share. The total number of shares outstanding following the Amendment is 40,870,560 shares.

Immediately following the Amendment, the subsidiary of GM that held all of the outstanding Amended Series A Preferred Stock sold 100% of such stock in an offering registered with the SEC. Ally did not receive any proceeds from the sale.

 

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ALLY FINANCIAL INC.

NOTES TO CONDENSED

CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

 

Holders of the Amended Series A Preferred Stock are entitled to receive, when, and if declared by Ally, noncumulative cash dividends. Beginning March 25, 2011, to but excluding May 15, 2016, dividends accrue at a fixed rate of 8.500% per annum. Beginning on May 15, 2016, dividends will accrue at a rate equal to three-month London interbank offer rate (LIBOR) plus 6.243%, commencing on August 15, 2016, in each case on the 15th day of February, May, August, and November. Dividends will be payable to holders of record at the close of business on the preceding February 1, May 1, August 1, or November 1, as the case may be, or on such other date, not more than seventy calendar days prior to the dividend payment date, as will be fixed by the Ally Board of Directors. In the event that dividends with respect to a dividend period have not been paid in full on the dividend payment date, we will be prohibited, subject to certain specified exceptions, from (i) redeeming, purchasing or otherwise acquiring, any stock that ranks on a parity basis with, or junior in interest to, the Amended Series A Preferred Stock; (ii) paying any dividends or making any distributions with respect to any stock that ranks junior in interest to the Amended Series A Preferred Stock, until such time as Ally has paid the dividends payable on shares of the Amended Series A Preferred Stock with respect to a subsequent dividend period; and (iii) declaring or paying any dividend on any stock ranking on a parity basis with the Amended Series A Preferred Stock, subject to certain exceptions.

The holders of the Amended Series A Preferred Stock do not have voting rights other than those set forth in the certificate of designations for the Amended Series A Preferred Stock included in Ally’s Certificate of Incorporation. Ally may not redeem the Amended Series A Preferred Stock before May 15, 2016, and after such time the Amended Series A Preferred Stock may be redeemed in certain circumstances. In the event of any liquidation, dissolution or winding up of the affairs of Ally, holders of the Amended Series A Preferred Stock will be entitled to receive the liquidation amount per share of Amended Series A Preferred Stock and an amount equal to all declared, but unpaid dividends declared prior to the date of payment out of assets available for distribution, before any distribution is made for holders of stock that ranks junior in interest to the Amended Series A Preferred Stock, subject to the rights of Ally’s creditors.

The changes to the terms of the Existing Series A Preferred Stock pursuant to the terms of the Amendment were deemed substantive, and as a result, the transaction was accounted for as a redemption of the Existing Series A Preferred Stock and the issuance of the Amended Series A Preferred Stock. The Existing Series A Preferred Stock was removed at its carrying value, the Amended Series A Preferred Stock was recognized at its fair value, and the difference of $32 million was recorded as an increase to retained earnings, which impacted the income available to common stockholders used for the earnings per common share calculation. Refer to Note 20 to the Consolidated Financial Statements in our 2010 Annual Report on Form 10-K for terms of the Series A Preferred Stock prior to the Amendment.

 

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CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

 

17. Earnings per Common Share

The following table presents the calculation of basic and diluted earnings per common share.

 

     Three months ended
June 30,
    Six months ended
June 30,
 
($ in millions except per share data)    2011     2010     2011     2010  

Net income from continuing operations

   $ 110      $ 402      $ 280      $ 553   

Preferred stock dividends — U.S. Department of Treasury (a)

     (134            (267     (386

Preferred stock dividends (a)

     (57     (25     (127     (142

Impact of preferred stock amendment

                   32          

 

 

Net (loss) income from continuing operations attributable to common shareholders (b)

     (81     377        (82     25   

 

 

Income (loss) from discontinued operations, net of tax

     3        163        (21     174   

 

 

Net (loss) income attributable to common shareholders

   $ (78   $ 540      $ (103   $ 199   

 

 

Basic weighted-average common shares outstanding

     1,330,970        799,120        1,330,970        799,120   

 

 

Diluted weighted-average common shares outstanding (b)

     1,330,970        1,787,320        1,330,970        799,120   

 

 

Basic earnings per common share

        

Net (loss) income from continuing operations

   $ (61   $ 472      $ (62   $ 32   

Income (loss) from discontinued operations, net of tax

     2        204        (16     217   

 

 

Net (loss) income

   $ (59   $ 676      $ (78   $ 249   

 

 

Diluted earnings per common share (b)

        

Net (loss) income from continuing operations

   $ (61   $ 211      $ (62   $ 32   

Income (loss) from discontinued operations, net of tax

     2        91        (16     217   

 

 

Net (loss) income

   $ (59   $ 302      $ (78   $ 249   

 

 
(a) The first quarter of 2010 included two quarterly cash dividends each for the Fixed Rate Cumulative Mandatorily Convertible Preferred Stock, Series F-2, and Fixed Rate Cumulative Perpetual Preferred Stock, Series G, totaling $477 million, which were deducted from income to arrive at basic and diluted earnings per common share. Traditionally, the second dividend in the first quarter of 2010 totaling $303 million would have been declared in the second quarter and deducted from income to arrive at basic and diluted earnings per common share for the second quarter.
(b) Due to the antidilutive effect of converting the Fixed Rate Cumulative Mandatorily Convertible Preferred Stock into common shares and the net loss attributable to common shareholders for the for the three and six months ended June 30, 2011, and the six months ended June 30, 2010, income attributable to common shareholders and basic weighted-average common shares outstanding were used to calculate basic and diluted earnings per share.

The effects of converting the outstanding Fixed Rate Cumulative Mandatorily Convertible Preferred Stock into common shares are not included in the diluted earnings per share calculation for the three and six months ended June 30, 2011, and the six months ended June 30, 2010, as the effects would be antidilutive for those periods. As such, 574,156 of potential common shares were excluded from the diluted earnings per share calculation for the three and six months ended June 30, 2011, and 988,200 of potential common shares were excluded from the diluted earnings per share calculation for the six months ended June 30, 2010.

 

18. Regulatory Capital

As a bank holding company, we and our wholly owned state-chartered banking subsidiary, Ally Bank, are subject to risk-based capital and leverage guidelines issued by federal and state banking 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 the consolidated financial statements or the results of operations and financial condition of Ally and Ally Bank. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, we must meet specific capital guidelines that

 

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CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

 

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 ratios are 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 that present 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 senior preferred stock issued and sold to Treasury under TARP) 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 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 have 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 meets the regulatory definition of “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% and for insured depository institutions, when its leverage ratio equals or exceeds 5%, unless subject to a regulatory directive to maintain higher capital levels.

In conjunction with the Supervisory Capital Assessment Program (S-CAP), the banking regulators have developed a new 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 Federal Deposit Insurance Corporation (FDIC) entered into a Capital and Liquidity Maintenance Agreement (CLMA) that superseded an 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 previously 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.

 

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CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

 

The following table summarizes our capital ratios.

 

     June 30, 2011     December 31, 2010     Required
minimum
    Well-capitalized
minimum
 
($ in millions)    Amount      Ratio     Amount      Ratio      

Risk-based capital

              

Tier 1 (to risk-weighted assets)

              

Ally Financial Inc.

   $ 22,116         14.65   $ 22,189         15.00     4.00     6.00

Ally Bank

     11,768         17.54        10,738         19.23        4.00        6.00   

Total (to risk-weighted assets)

              

Ally Financial Inc.

   $ 23,966         15.87   $ 24,213         16.36     15.00 %(a)      10.00

Ally Bank

     12,591         18.76        11,438         20.48        8.00        10.00   

Tier 1 leverage (to adjusted average assets) (b)

              

Ally Financial Inc.

   $ 22,116         12.47   $ 22,189         13.05     3.00–4.00          (c) 

Ally Bank

     11,768         15.63        10,738         15.81        15.00 (d)      5.00

Tier 1 common (to risk-weighted assets)

              

Ally Financial Inc.

   $ 12,635         8.37   $ 12,677         8.57     n/a        n/a   

Ally Bank

     n/a         n/a        n/a         n/a        n/a        n/a   

 

 

n/a = not applicable

(a) Ally is subject to a directive from the Board of Governors of the Federal Reserve System (FRB) to maintain a Total risk-based capital ratio of 15% which expires no later than December 31, 2011.
(b) Federal regulatory reporting guidelines require the calculation of adjusted average assets using a daily average methodology. We currently calculate using a combination of monthly and daily average methodologies.
(c) There is no Tier 1 leverage component in the definition of a well-capitalized bank holding company.
(d) Ally Bank, in accordance with the CLMA, is required to maintain a Tier 1 leverage ratio of at least 15%.

At June 30, 2011, Ally and Ally Bank were “well-capitalized” and met all capital requirements to which we were subject.

Basel Capital Accord

The minimum risk-based capital requirements adopted by the federal banking agencies follow the Capital Accord (Capital Accord) of the Bank for International Settlements’ Basel Committee on Banking Supervision (Basel Committee). The Capital Accord was published in 1988 and generally applies to depository institutions and their holding companies in the United States. In 2004, the Basel Committee published a revision to the Capital Accord (Basel II). The goal of the Basel II capital rules is to provide more risk-sensitive regulatory capital calculations and promote enhanced risk management practices among large, internationally active banking organizations. U.S. banking regulators published final Basel II rules in December 2007. Ally is required to comply with the Basel II rules, as implemented by the U.S. banking regulators. Prior to full implementation of the Basel II rules, Ally is required to complete a qualification period that includes four consecutive quarters during which it needs to demonstrate that it meets the requirements of the rules to the satisfaction of its primary U.S. banking regulator. During this period, capital is calculated using both Basel I and Basel II methodologies. Upon completion of this parallel run and with the approval of the primary U.S. banking regulator, Ally will begin to use Basel II to calculate regulatory capital. However, under a recently finalized capital rule that implements a provision of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act), Ally must continue to calculate its risk-based capital requirements under Basel I, with certain exceptions, and the capital requirements it computes under Basel I will serve as a floor for its risk-based capital requirement computed under Basel II.

In addition to Basel II, the Basel Committee adopted new capital, leverage, and liquidity guidelines under the Basel Accord (Basel III) in 2010, which, when implemented in the United States, may have the effect of raising capital requirements beyond those required by current law and the Dodd-Frank Act. Basel III increases the minimum Tier 1 common equity ratio to 4.5%, net of regulatory deductions, and introduces a capital conservation buffer of an additional 2.5% of common equity to risk-weighted assets, raising the target minimum common equity ratio to 7.0%. Basel III increases the minimum Tier 1 capital ratio to 8.5% inclusive of the capital conservation buffer, increases the minimum total capital ratio to 10.5% inclusive of the capital buffer, and introduces a countercyclical capital buffer of up to 2.5% of common equity or other fully loss absorbing

 

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capital for periods of excess credit growth. Basel III also introduces a non-risk-adjusted Tier 1 leverage ratio of 3%, based on a measure of the total exposure rather than total assets, and new liquidity standards. The Basel III capital, leverage, and liquidity standards will be phased in over a multiyear period. The Basel III rules, when implemented, will also impose a 15% cap on the amount of the common equity component of Tier 1 capital that can be met, in the aggregate, through significant investments in the common shares of unconsolidated financial subsidiaries, MSRs and deferred tax assets through timing differences, as well as a 10% cap on the amount of each of the three individual items that may be included in the common equity component of Tier 1 capital. In addition, under Basel III rules, after a ten-year phaseout period beginning on January 1, 2013, trust preferred and other “hybrid” securities will no longer qualify as Tier 1 capital. However, under the Dodd-Frank Act, subject to certain exceptions, trust preferred and other “hybrid” securities are phased out from Tier 1 capital in a three-year period starting January 1, 2013.

Pending final rules for Basel III and subsequent regulatory interpretation, there remains a degree of uncertainty on the full impact of Basel III. Additionally, it is anticipated that during 2011 the U.S. banking agencies will issue final rules based on the 2010 Notice of Proposed Rulemaking on the Risk-Based Capital Guidelines for Market Risk. We continue to monitor developments with respect to both Basel III and Market Risk rules.

In July 2011, the Financial Stability Board, which is an inter-governmental body coordinating the overall set of measures to reduce the moral hazard posed by global systemically important financial institutions, approved a consultative paper, which, if implemented in the United States, would require global systemically important banks in the United States to hold additional Tier 1 common equity of 1% to 2.5% of risk-weighted assets plus another 1% for material growth. The additional capital requirement would be phased in between January 1, 2016 and January 1, 2019. We are not able to predict at this time whether Ally would meet the qualifications of a global systemically important bank and whether these additional capital requirements, when implemented in the United States, would apply to Ally.

Compliance with Basel regulation is a strategic priority for Ally. We expect to be in compliance with all relevant Basel rules within the established timelines.

 

19. Derivative Instruments and Hedging Activities

We enter into interest rate and foreign-currency swaps, futures, forwards, options, and swaptions 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, MSRs, debt, and deposits. In addition, we use foreign exchange contracts to mitigate foreign-currency risk associated with foreign-currency-denominated debt, foreign exchange transactions, and our net investment in foreign subsidiaries. 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.

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 and certain variable-rate instruments to a fixed rate. We monitor our mix of fixed- and variable-rate debt in relation 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. In June 2011, we also executed qualifying accounting hedges of an existing variable-rate liability in which pay fixed swaps are designated as hedges of the expected future cash flows in the form of interest payments on the outstanding borrowing associated with Ally Bank’s secured floating-rate credit facility.

We apply hedge accounting to certain relationships in which we utilize derivative instruments to hedge interest rate risk associated with our fixed- and variable-rate debt. 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

 

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CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

 

 

this risk, we maintain a portfolio of financial instruments, primarily derivative instruments, which increase in value when interest rates decline. The primary objective is to minimize the overall risk of loss in the value of MSRs and retained interests 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, mortgage-backed securities (MBS), futures, U.S. Treasury futures, interest rate swaps, interest rate floors, and interest rate caps. We monitor and actively manage our risk on a daily basis, and therefore, trading volume can be large.

 

   

Mortgage loan commitments and mortgage 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 increase and vice versa. Our primary objective in risk management activities related to IRLCs and mortgage 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 the risk management objective for mortgage loans and IRLCs is forward sales of mortgage-backed securities, primarily Fannie Mae or 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 economically hedge 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 this derivative portfolio.

 

   

Debt — With the exception of a portion of our fixed-rate debt and a portion of our outstanding floating-rate borrowing associated with Ally Bank’s secured floating-rate credit facility, we do not apply hedge accounting to our derivative portfolio held to mitigate interest rate risk associated with 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, and swaptions to economically hedge our net fixed versus variable interest rate exposure. We also enter into equity options to economically hedge our exposure to the equity markets.

Foreign Currency Risk

We enter into derivative financial instrument contracts to mitigate the risk associated with variability in cash flows related to foreign-currency financial instruments. Currency swaps and forwards are used to economically hedge foreign exchange exposure on foreign-currency-denominated debt by converting the funding currency to the same currency of the assets being financed. Similar to our interest rate derivatives, 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. In March 2011, we elected to dedesignate all of our existing net investment hedge relationships and changed our method of measuring hedge effectiveness from the spot method to the forward method for new hedge relationships entered into during the remainder of the quarter and prospectively. For the net investment hedges that were designated under the spot method for the first portion of the quarter, the hedges were recorded at fair value with changes recorded to other comprehensive income (loss) with the exception of the spot to forward difference that was recorded to earnings. For the new net investment hedges

 

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that were designated under the forward method, the hedges were recorded at fair value with the changes recorded to other comprehensive income (loss) including the spot to forward difference. 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 associated foreign-currency transactions.

Except for our net investment hedges, we generally have not elected 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 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 our 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.

Certain derivative instruments contain provisions that require us to either post additional collateral or immediately settle any outstanding liability balances upon the occurrence of a specified credit risk-related event. If a credit risk related event had been triggered at June 30, 2011, the amount of additional collateral required to be posted by us would have been insignificant.

We placed cash and securities collateral totaling $1.0 billion and $1.6 billion at June 30, 2011, and December 31, 2010, respectively, in accounts maintained by counterparties. We received cash collateral from counterparties totaling $797 million and $916 million at June 30, 2011, and December 31, 2010, respectively. The receivables for collateral placed and the payables for collateral 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 Condensed Consolidated Balance Sheet unless certain conditions are met. At June 30, 2011, and December 31, 2010, we received noncash collateral of $120 million and $29 million, respectively.

 

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NOTES TO CONDENSED

CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

 

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.

 

     June 30, 2011      December 31, 2010  
     Fair value of
derivative contracts in
            Fair value of
derivative contracts in
        
($ in millions)    receivable
position (a)
     payable
position (b)
     Notional
amount
     receivable
position (a)
     payable
position (b)
     Notional
amount
 

Qualifying accounting hedges

                 

Interest rate risk

                 

Fair value accounting hedges

   $ 420       $ 60       $ 11,043       $ 443       $ 114       $ 11,895   

Cash flow hedges

     5                 3,000                           

Foreign exchange risk

                 

Net investment accounting hedges

     34         39         8,006         12         72         4,407   

 

 

Total qualifying accounting hedges

     459         99         22,049         455         186         16,302   

 

 

Economic hedges

                 

Interest rate risk

                 

MSRs and retained interests

     3,345         3,452         593,225         2,896         3,118         325,768   

Mortgage loan commitments and mortgage loans held-for-sale

     70         89         32,334         232         80         38,788   

Debt

     147         60         24,778         160         107         21,269   

Other

     69         50         36,336         80         129         32,734   

 

 

Total interest rate risk

     3,631         3,651         686,673         3,368         3,434         418,559   

Foreign exchange risk

     64         99         9,381         143         240         14,359   

 

 

Total economic hedges

     3,695         3,750         696,054         3,511         3,674         432,918   

 

 

Total derivatives

   $ 4,154       $ 3,849       $ 718,103       $ 3,966       $ 3,860       $ 449,220   

 

 
(a) Reported as other assets on the Condensed Consolidated Balance Sheet. Includes accrued interest of $175 million and $263 million at June 30, 2011, and December 31, 2010, respectively.
(b) Reported as accrued expenses and other liabilities on the Condensed Consolidated Balance Sheet. Includes accrued interest of $19 million and $23 million at June 30, 2011, and December 31, 2010, respectively.

 

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CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

 

Statement of Income Presentation and Accumulated Other Comprehensive Income

The following table summarizes the location and amounts of gains and losses reported in our Condensed Consolidated Statement of Income on derivative instruments.

 

     Three months ended
June 30,
    Six months ended
June 30,
 
($ in millions)        2011             2010             2011             2010      

Qualifying accounting hedges

        

Gain recognized in earnings on derivatives (a)

        

Interest rate contracts

        

Interest on long-term debt

   $ 262      $ 316      $ 114      $ 397   

Loss recognized in earnings on hedged items (b)

        

Interest rate contracts

        

Interest on long-term debt

     (254     (285     (108     (347

 

 

Total qualifying accounting hedges

     8        31        6        50   

 

 

Economic hedges

        

Gain (loss) recognized in earnings on derivatives

        

Interest rate contracts

        

Servicing asset valuation and hedge activities, net

     127        727        (77     790   

Loss on mortgage and automotive loans, net

     (190     (257     (230     (401

Other gain on investments, net

                   1          

Other income, net of losses

     (41     13        (33     (26

Other operating expenses

     4        (2     8        (6

 

 

Total interest rate contracts

     (100     481        (331     357   

 

 

Foreign exchange contracts (c)

        

Interest on long-term debt

     48        (96     61        (235

Other income, net of losses

     (28     224        (133     573   

 

 

Total foreign exchange contracts

     20        128        (72     338   

 

 

(Loss) gain recognized in earnings on derivatives

   $ (72   $ 640      $ (397   $ 745   

 

 
(a) Amounts exclude gains related to interest for qualifying accounting hedges of debt, which are primarily offset by the fixed coupon payment on the long-term debt. The gains were $82 million and $103 million for the three months ended June 30, 2011 and 2010, respectively, and $170 million and $189 million for the six months ended June 30, 2011 and 2010, respectively.
(b) Amounts exclude gains related to amortization of deferred basis adjustments on the hedged items. The gains were $53 million and $45 million for the three months ended June 30, 2011 and 2010, respectively, and $117 million and $84 million for the six months ended June 30, 2011 and 2010, respectively.
(c) Amounts exclude gains and losses related to the revaluation of the related foreign-denominated debt or receivable. Losses of $33 million and $114 million were recognized for the three months ended June 30, 2011 and 2010, respectively. Gains of $57 million and losses of $359 million were recognized for the six months ended June 30, 2011 and 2010, respectively.

The following table summarizes derivative instruments used in net investment hedge accounting relationships.

 

     Three months ended
June 30,
     Six months ended
June 30,
 
($ in millions)        2011             2010              2011             2010      

Net investment hedges

         

Foreign exchange contracts

         

Losses recorded directly to other income, net of losses (a)

   $      $       $ (3   $ (1

(Losses) gains recognized in other comprehensive income (b)

     (79     65         (226     21   

(Losses) gains reclassified from accumulated other comprehensive income to other income, net of losses

     (5     16         (8     17   

 

 
(a) The amounts represent the forward points which were excluded from the assessment of hedge effectiveness for hedges designated prior to March 16, 2011.
(b) The amounts represent the effective portion of net investment hedges. There are offsetting amounts recognized in accumulated other comprehensive income related to the revaluation of the related net investment in foreign operations. There was offsetting income of $63 million and offsetting losses of $67 million for the three months ended June 30, 2011 and 2010, respectively. There was offsetting income of $209 million and offsetting losses of $23 million for the six months ended June 30, 2011 and 2010, respectively.

 

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CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

 

20. Income Taxes

We recognized total income tax expense from continuing operations of $82 million and $14 million during the three months and six months ended June 30, 2011, respectively, and income tax expense from continuing operations of $33 million and $69 million during the three months and six months ended June 30, 2010, 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.

 

     Three months ended June 30,  
     2011     2010  
($ in millions)    Amount     Percent     Amount     Percent  

Statutory U.S. federal tax expense and rate

   $ 67        35.0   $ 152        35.0

Change in tax rate resulting from

        

Effect of valuation allowance change

     46        24.0        (154     (35.4

Foreign tax differential

     (32     (16.7     4        0.9   

Taxes on unremitted foreign earnings

     12        6.3        (18     (4.1

State and local income taxes, net of federal income tax benefit

     (5     (2.6     (2     (0.5

Tax-exempt income

                   (2     (0.5

Foreign capital loss

                   54        12.4   

Other, net

     (6     (3.3     (1     (0.2

 

 

Tax expense and effective tax rate

   $ 82        42.7   $ 33        7.6

 

 

 

     Six months ended June 30,  
     2011     2010  
($ in millions)    Amount     Percent     Amount     Percent  

Statutory U.S. federal tax expense and rate

   $ 103        35.0   $ 218        35.0

Change in tax rate resulting from

        

Effect of valuation allowance change

     (48     (16.3     (193     (31.0

Foreign tax differential

     (45     (15.3     (7     (1.1

Taxes on unremitted foreign earnings

     18        6.1        5        0.8   

State and local income taxes, net of federal income tax benefit

     (7     (2.4     5        0.8   

Tax-exempt income

     (2     (0.7     (5     (0.8

Foreign capital loss

                   54        8.7   

Other, net

     (5     (1.6     (8     (1.3

 

 

Tax expense and effective tax rate

   $ 14        4.8   $ 69        11.1

 

 

During the six months ended June 30, 2011, we recorded a $101 million reversal of valuation allowance on net deferred tax assets in one of our Canadian subsidiaries. The reversal related to modifications to the legal structure of our Canadian operations. Additionally, we recorded other net increases to our consolidated valuation allowance on deferred tax assets of $153 million, stemming primarily from net increases to our deferred tax assets during the period.

 

21. Fair Value

Fair Value Measurements

For purposes of this disclosure, fair value is defined as the exchange price that would be received to sell an asset or paid to transfer a liability (exit price) in the principal or most advantageous market in an orderly transaction between market participants at the measurement date. Fair value is based on the assumptions market participants would use when pricing an asset or liability. 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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NOTES TO CONDENSED

CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

 

GAAP specifies a three-level hierarchy that is used when measuring and disclosing fair value. 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). 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.

 

Level 1    Inputs are quoted prices in active markets for identical assets or liabilities at the measurement date. Additionally, the entity must have the ability to access the active market, and the quoted prices cannot be adjusted by the entity.
Level 2    Inputs are other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. Level 2 inputs include quoted prices in active markets for similar assets or liabilities; quoted prices in inactive markets for identical or similar assets or liabilities; or inputs that are observable or can be corroborated by observable market data by correlation or other means for substantially the full term of the assets or liabilities.
Level 3    Unobservable inputs are supported by little or no market activity. The unobservable inputs represent management’s best assumptions of how market participants would price the assets or liabilities. Generally, Level 3 assets and liabilities are valued using pricing models, discounted cash flow methodologies, or similar techniques that require significant judgment or estimation.
Transfers    Transfers into or out of any hierarchy level are recognized at the end of the reporting period in which the transfer occurred. There were no significant transfers between any levels during the six months ended June 30, 2011.

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.

 

   

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).

 

   

Loans held-for-sale, net — Our mortgage loans held-for-sale are accounted for at either fair value because of fair value option elections or they are accounted for at the lower-of-cost or fair value. Mortgage loans held-for-sale are typically pooled together and sold into certain exit markets depending on underlying attributes of the loan, such as GSE 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 agency-eligible mortgage loans carried at fair value due to fair value option election, which are valued predominantly using published forward agency prices. It also includes any domestic loans and foreign 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.

Level 3 mortgage loans — This includes all conditional repurchase option loans carried at fair value due to the fair value option election and all nonagency eligible residential mortgage loans that are accounted for at the lower of cost or fair value. The fair value of these residential mortgage loans are determined using internally developed valuation models because observable market prices were not available. The loans are priced on a discounted cash flow basis utilizing cash flow projections from internally developed models that

 

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CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

 

utilize prepayment, default, and discount rate assumptions. To the extent available, we will utilize market observable inputs such as interest rates and market spreads. If market observable inputs are not available, we are required to utilize internal inputs, such as prepayment speeds, credit losses, and discount rates.

Refer to the section within this note titled Fair Value Option for Financial Assets and Financial Liabilities for further information about the fair value elections.

 

   

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 consolidated upon adoption of ASU 2009-17. 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. 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 June 30, 2011, and December 31, 2010. 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.

 

   

MSRs — We typically retain MSRs when we sell assets into the secondary market. MSRs are classified as Level 3 because they 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. 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.

 

   

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; therefore, we classified these assets as Level 3. 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).

 

   

Derivative instruments — We enter into a variety of derivative financial instruments as part of our risk management strategies. Certain of these derivatives are exchange traded, such as Eurodollar futures. To determine the fair value of these instruments, we utilize the exchange prices for the particular derivative contracts; therefore, we classified these contracts as Level 1.

We also execute over-the-counter derivative contracts, such as interest rate swaps, swaptions, forwards, caps, floors, and agency to-be-announced securities. We utilize third-party-developed valuation models that are widely

 

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CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

 

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 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. Additionally, we hold some foreign currency derivative contracts that utilize an in-house valuation model to determine the fair value of the contracts. Accordingly, we classified all of the above-mentioned derivative contracts as Level 3.

We are required to consider all aspects of nonperformance risk, including our own credit standing, when measuring fair value of a liability. 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. In the event that we do not enter into legally enforceable agreements that enable the posting and receiving of collateral, we will 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.

 

   

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.

 

   

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.

 

   

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. 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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NOTES TO CONDENSED

CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

 

Recurring Fair Value

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.

 

     Recurring fair value measurements  
June 30, 2011 ($ in millions)        Level 1             Level 2             Level 3             Total      

Assets

        

Trading securities

        

Mortgage-backed residential

   $      $ 272      $ 39      $ 311   

Investment securities

        

Available-for-sale securities

        

Debt securities

        

U.S. Treasury and federal agencies

     585        584               1,169   

States and political subdivisions

            1               1   

Foreign government

     969        357               1,326   

Mortgage-backed residential

            7,846        1        7,847   

Asset-backed

            2,154        67        2,221   

Corporate debt securities

     13        1,540               1,553   

Other debt securities

            674               674   

 

 

Total debt securities

     1,567        13,156        68        14,791   

Equity securities (a)

     1,155        15               1,170   

 

 

Total available-for-sale securities

     2,722        13,171        68        15,961   

Mortgage loans held-for-sale, net (b)

            2,523        22        2,545   

Consumer mortgage finance receivables and loans, net (b)

                   946        946   

Mortgage servicing rights

                   3,701        3,701   

Other assets

        

Interests retained in financial asset sales

                   307        307   

Fair value of derivative contracts in receivable position

        

Interest rate

     45        3,874        137        4,056   

Foreign currency

            97        1        98   

 

 

Total fair value of derivative contracts in receivable position

     45        3,971        138        4,154   

Collateral placed with counterparties (c)

     176                      176   

 

 

Total assets

   $ 2,943      $ 19,937      $ 5,221      $ 28,101   

 

 

Liabilities

        

Long-term debt

        

On-balance sheet securitization debt (b)

   $      $      $ (899   $ (899

Accrued expenses and other liabilities

        

Fair value of derivative contracts in payable position

        

Interest rate

     (45     (3,616     (50     (3,711

Foreign currency

            (137     (1     (138

 

 

Total fair value of derivative contracts in payable position

     (45     (3,753     (51     (3,849

Loan repurchase liabilities (b)

                   (19     (19

Trading liabilities

            (182            (182

 

 

Total liabilities

   $ (45   $ (3,935   $ (969   $ (4,949

 

 
(a) Our investment in one industry did not exceed 20%.
(b) Carried at fair value due to fair value option elections.
(c) Represents collateral in the form of investment securities. Cash collateral was excluded above.

 

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CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

 

     Recurring fair value measurements  
December 31, 2010 ($ in millions)    Level 1     Level 2     Level 3     Total  

Assets

        

Trading securities

        

U.S. Treasury and federal agencies

   $ 77      $      $      $ 77   

Mortgage-backed residential

            25        44        69   

Asset-backed

                   94        94   

 

 

Total trading securities

     77        25        138        240   

Investment securities

        

Available-for-sale securities

        

Debt securities

        

U.S. Treasury and federal agencies

     3,313        5               3,318   

States and political subdivisions

            2               2   

Foreign government

     873        375               1,248   

Mortgage-backed residential

            5,824        1        5,825   

Asset-backed

            1,948               1,948   

Corporate debt securities

            1,558               1,558   

Other debt securities

            151               151   

 

 

Total debt securities

     4,186        9,863        1        14,050   

Equity securities (a)

     796                      796   

 

 

Total available-for-sale securities

     4,982        9,863        1        14,846   

Mortgage loans held-for-sale, net (b)

            6,420        4        6,424   

Consumer mortgage finance receivables and loans, net (b)

                   1,015        1,015   

Mortgage servicing rights

                   3,738        3,738   

Other assets

        

Interests retained in financial asset sales

                   568        568   

Fair value of derivative contracts in receivable position

        

Interest rate

     242        3,464        105        3,811   

Foreign currency

            155               155   

 

 

Total fair value of derivative contracts in receivable position

     242        3,619        105        3,966   

Collateral placed with counterparties (c)

     728                      728   

 

 

Total assets

   $ 6,029      $ 19,927      $ 5,569      $ 31,525   

 

 

Liabilities

        

Long-term debt

        

On-balance sheet securitization debt (b)

   $      $      $ (972   $ (972

Accrued expenses and other liabilities

        

Fair value of derivative contracts in payable position

        

Interest rate

     (208     (3,222     (118     (3,548

Foreign currency

            (312            (312

 

 

Total fair value of derivative contracts in payable position

     (208     (3,534     (118     (3,860

 

 

Total liabilities

   $ (208   $ (3,534   $ (1,090   $ (4,832

 

 
(a) Our investment in one industry did not exceed 23%.
(b) Carried at fair value due to fair value option elections.
(c) Represents collateral in the form of investment securities. Cash collateral was excluded above.

 

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NOTES TO CONDENSED

CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

 

The following tables present the reconciliation for all Level 3 assets and liabilities 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.

 

    Level 3 recurring fair value measurements  
    Fair value
at
April 1,
2011
    Net realized/unrealized
gains (losses)
    Purchases     Sales     Issuances     Settlements     Fair value
at
June 30,
2011
    Net unrealized
gains (losses)
included

in earnings
still held at
June 30,
2011
 
($ in millions)    

included

in earnings

   

included

in other

comprehensive

income

             

Assets

                 

Trading securities

                 

Mortgage-backed residential

  $ 40      $ 2 (a)    $      $      $      $      $ (3   $ 39      $ 6 (a) 

Investment securities

                 

Available-for-sale securities

                 

Debt securities

                 

Mortgage-backed residential

    1                                                  1          

Asset-backed

    117        20 (b)      (6            (64                   67          

 

 

Total investment securities

    118        20        (6            (64                   68          

Mortgage loans held-for-sale, net (c)

    18                      9        (1            (4     22          

Consumer mortgage finance receivables and loans, net (c)

    971        101 (c)                                  (126     946        50 (c) 

Mortgage servicing rights

    3,774        (232 )(d)             15               144               3,701        (232 )(d) 

Other assets

                 

Interests retained in financial asset sales

    569        134 (e)                           1        (397     307        (2 )(e) 

Derivative contracts, net

                 

Interest rate

    111        (12 )(f)                                  (12     87        (25 )(f) 

Foreign currency

    2        (2 )(f)                                                (2 )(f) 

 

 

Total fair value of derivative contracts in receivable (payable) position, net

    113        (14                                 (12     87        (27

 

 

Total assets

  $ 5,603      $ 11      $ (6   $ 24      $ (65   $ 145      $ (542   $ 5,170      $ (205

 

 

Liabilities

                 

Long-term debt

                 

On-balance sheet securitization debt (c)

  $ (922   $ (100 )(c)    $      $      $      $      $ 123      $ (899   $ (44 )(c) 

Accrued expenses and other liabilities

                 

Loan repurchases liabilities (c)

    (14                   (9                   4        (19       

 

 

Total liabilities

  $ (936   $ (100   $      $ (9   $      $      $ 127      $ (918   $ (44

 

 
(a) The fair value adjustment was reported as other income, net of losses, and the related interest was reported as interest on trading securities in the Condensed Consolidated Statement of Income.
(b) The fair value adjustment was reported as other income, net of losses, and the related interest was reported as interest and dividends on available-for-sale investment securities in the Condensed Consolidated Statement of Income.
(c) Carried at fair value due to fair value option elections. Refer to the next section of this note titled Fair Value Option for Financial Assets and Liabilities for the location of the gains and losses in the Condensed Consolidated Statement of Income.
(d) Fair value adjustment was reported as servicing-asset valuation and hedge activities, net, in the Condensed Consolidated Statement of Income.
(e) Reported as other income, net of losses, in the Condensed Consolidated Statement of Income.
(f) Refer to Note 19 for information related to the location of the gains and losses on derivative instruments in the Condensed Consolidated Statement of Income.

 

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ALLY FINANCIAL INC.

NOTES TO CONDENSED

CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

 

     Level 3 recurring fair value measurements  
     Fair value
at
April 1,
2010
    Net realized/unrealized
gain (losses)
    Purchases,
issuances,
and
settlements,
net
    Fair value
at
June 30,
2010
    Net unrealized
gains (losses)
included in
earnings still
held at
June 30,
2010
 
($ in millions)     

included

in

earnings

   

included in

other

comprehensive

income

       

Assets

            

Trading securities

            

Mortgage-backed residential

   $ 54      $ (4 )(a)    $      $ (4   $ 46      $ 2 (a) 

Asset-backed

     89               (2            87          

 

 

Total trading securities

     143        (4     (2     (4     133        2   

Investment securities

            

Available-for-sale securities

            

Debt securities

            

Mortgage-backed residential

     3               (1            2          

Asset-backed

     13                      (5     8          

 

 

Total investment securities

     16               (1     (5     10          

Consumer mortgage finance receivables and loans, net (b)

     2,572        375 (b)             (602     2,345        166 (b) 

Mortgage servicing rights

     3,543        (748 )(c)             188        2,983        (748 )(c) 

Other assets

            

Cash reserve deposits held-for-securitization trusts

     2                             2          

Interests retained in financial asset sales

     411        30 (d)             24        465        4 (d) 

Derivative contracts, net

            

Interest rate contracts in receivable (payable) position, net

     4        136 (e)             (35     105        196 (e) 

 

 

Total assets

   $ 6,691      $ (211   $ (3   $ (434   $ 6,043      $ (380

 

 

Liabilities

            

Long-term debt

            

On-balance sheet securitization debt (b)

   $ (2,384   $ (361 )(b)    $      $ 567      $ (2,178   $ (201 )(b) 

 

 

Total liabilities

   $ (2,384   $ (361   $      $ 567      $ (2,178   $ (201

 

 
(a) The fair value adjustment was reported as other income, net of losses, and the related interest was reported as interest on trading securities in the Condensed Consolidated Statement of Income.
(b) Carried at fair value due to fair value option elections. Refer to next section of this note titled Fair Value Option for Financial Assets and Liabilities for the location of the gains and losses in the Condensed Consolidated Statement of Income.
(c) Fair value adjustment was reported as servicing-asset valuation and hedge activities, net, in the Condensed Consolidated Statement of Income.
(d) Reported as other income, net of losses, in the Condensed Consolidated Statement of Income.
(e) Refer to Note 19 for information related to the location of the gains and losses on derivative instruments in the Condensed Consolidated Statement of Income.

 

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ALLY FINANCIAL INC.

NOTES TO CONDENSED

CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

 

    Level 3 recurring fair value measurements  
    Fair value
at
January 1,
2011
    Net realized/unrealized
gains (losses)
    Purchases     Sales     Issuances     Settlements     Fair value
at
June 30,
2011
    Net unrealized
gains  (losses)
included

in earnings
still held at
June 30,
2011
 
($ in millions)     included
in earnings
    included
in other
comprehensive
income
             

Assets

                 

Trading securities

                 

Mortgage-backed residential

  $ 44      $ 3 (a)    $      $      $      $      $ (8   $ 39      $ 8 (a) 

Asset-backed

    94                             (94                            

 

 

Total trading securities

    138        3                      (94            (8     39        8   

Investment securities

                 

Available-for-sale securities

                 

Debt securities

                 

Mortgage-backed residential

    1                                                  1          

Asset-backed

           20 (b)      17        94        (64                   67          

 

 

Total investment securities

    1        20        17        94        (64                   68          

Mortgage loans held-for-sale, net (c)

    4                      23        (1            (4     22          

Consumer mortgage finance receivables and loans, net (c)

    1,015        174 (c)      1                             (244     946        66 (c) 

Mortgage servicing rights

    3,738        (115 )(d)             16        (266 )(e)      328               3,701        (115 )(d) 

Other assets

                 

Interests retained in financial asset sales

    568        157 (f)                           1        (419     307        (8 )(f) 

Derivative contracts, net

                 

Interest rate

    (13     129 (g)                                  (29     87        98 (g) 

 

 

Total assets

  $ 5,451      $ 368      $ 18      $ 133      $ (425   $ 329      $ (704   $ 5,170      $ 49   

 

 

Liabilities

                 

Long-term debt

                 

On-balance sheet securitization debt (c)

  $ (972   $ (167 )(c)    $ 1      $      $      $      $ 239      $ (899   $ (39 )(c) 

Accrued expenses and other liabilities

                 

Loan repurchases liabilities (c)

                         (23                   4        (19       

 

 

Total liabilities

  $ (972   $ (167   $ 1      $ (23   $      $      $ 243      $ (918   $ (39

 

 
(a) The fair value adjustment was reported as other income, net of losses, and the related interest was reported as interest on trading securities in the Condensed Consolidated Statement of Income.
(b) The fair value adjustment was reported as other income, net of losses, and the related interest was reported as interest and dividends on available-for-sale investment securities in the Condensed Consolidated Statement of Income.
(c) Carried at fair value due to fair value option elections. Refer to the next section of this note titled Fair Value Option for Financial Assets and Liabilities for the location of the gains and losses in the Condensed Consolidated Statement of Income.
(d) Fair value adjustment was reported as servicing-asset valuation and hedge activities, net, in the Condensed Consolidated Statement of Income.
(e) Represents excess mortgage servicing rights transferred to an agency-controlled trust in exchange for trading securities. These securities were then sold instantaneously to third-party investors for $266 million.
(f) Reported as other income, net of losses, in the Condensed Consolidated Statement of Income.
(g) Refer to Note 19 for information related to the location of the gains and losses on derivative instruments in the Condensed Consolidated Statement of Income.

 

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ALLY FINANCIAL INC.

NOTES TO CONDENSED

CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

 

     Level 3 recurring fair value measurements  
($ in millions)    Fair value
at
January 1,
2010
    Net realized/unrealized
gain (losses)
    Purchases,
issuances,
and
settlements,
net
    Fair value
at
June 30,
2010
    Net unrealized
gains (losses)
included in
earnings still
held at
June 30,
2010
 
     included
in
earnings
    included in
other
comprehensive
income
       

Assets

            

Trading securities

            

Mortgage-backed residential

   $ 99      $ (a)    $      $ (53   $ 46      $ 11 (a) 

Asset-backed

     596                      (509     87          

 

 

Total trading securities

     695                      (562     133        11   

Investment securities

            

Available-for-sale securities

            

Debt securities

            

Mortgage-backed residential

     6               (1     (3     2          

Asset-backed

     20                      (12     8          

 

 

Total investment securities

     26               (1     (15     10          

Consumer mortgage finance receivables and loans, net (b)

     1,303        788 (b)             254        2,345        368 (b) 

Mortgage servicing rights

     3,554        (944 )(c)             373        2,983        (944 )(c) 

Other assets

            

Cash reserve deposits held-for-securitization trusts

     31                      (29     2          

Interests retained in financial asset sales

     471        33 (d)             (39     465        6 (d) 

Derivative contracts, net

            

Interest rate contracts in receivable (payable) position, net

     103        (9 )(e)             11        105        139 (e) 

 

 

Total assets

   $ 6,183      $ (132   $ (1   $ (7   $ 6,043      $ (420

 

 

Liabilities

            

Long-term debt

            

On-balance sheet securitization debt (b)

   $ (1,294   $ (774 )(b)    $      $ (110   $ (2,178   $ (442 )(b) 

 

 

Total liabilities

   $ (1,294   $ (774   $      $ (110   $ (2,178   $ (442

 

 
(a) The fair value adjustment was reported as other income, net of losses, and the related interest was reported as interest on trading securities in the Condensed Consolidated Statement of Income.
(b) Carried at fair value due to fair value option elections. Refer to next section of this note titled Fair Value Option for Financial Assets and Liabilities for the location of the gains and losses in the Condensed Consolidated Statement of Income.
(c) Fair value adjustment was reported as servicing-asset valuation and hedge activities, net, in the Condensed Consolidated Statement of Income.
(d) Reported as other income, net of losses, in the Condensed Consolidated Statement of Income.
(e) Refer to Note 19 for information related to the location of the gains and losses on derivative instruments in the Condensed Consolidated Statement of Income.

 

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ALLY FINANCIAL INC.

NOTES TO CONDENSED

CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

 

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. These items would constitute nonrecurring fair value measures.

The following tables display the assets and liabilities measured at fair value on a nonrecurring basis.

 

    Nonrecurring
fair value measures
    Lower of
cost or
fair value
or valuation
reserve
allowance
    Total loss
included in
earnings  for
the three
months ended
    Total loss
included in
earnings  for
the six
months ended
 
June 30, 2011 ($ in millions)   Level 1     Level 2     Level 3     Total        

Assets

             

Mortgage loans held-for-sale (a)

  $      $      $ 855      $ 855      $ (57     n/m (b)      n/m (b) 

Commercial finance receivables and loans, net (c)

             

Automotive

                  427        427        (42     n/m (b)      n/m (b) 

Mortgage

           8        22        30        (5     n/m (b)      n/m (b) 

Other

                  57        57        (10     n/m (b)      n/m (b) 

 

 

Total commercial finance receivables and loans, net

           8        506        514        (57     n/m (b)      n/m (b) 

Other assets

             

Property and equipment

           13               13        n/m (d)    $ (8   $ (8

Repossessed and foreclosed assets (e)

           40        29        69        (9     n/m (b)      n/m (b) 

 

 

Total assets

  $      $ 61      $ 1,390      $ 1,451      $ (123   $ (8   $ (8

 

 

n/m = not meaningful

(a) Represents loans held-for-sale that are required to be measured at the lower-of-cost or fair value. The table above includes only loans with fair values below cost during 2011. The related valuation allowance represents the cumulative adjustment to fair value of those specific loans.
(b) We consider the applicable valuation or loan loss allowance to be the most relevant indicator of the impact on earnings caused by the fair value measurement. Accordingly, the table above excludes total gains and losses included in earnings for these items. The carrying values are inclusive of the respective valuation or loan loss allowance.
(c) Represents the portion of the portfolio specifically impaired during 2011. The related valuation allowance represents the cumulative adjustment to fair value of those specific receivables.
(d) The total gain (loss) included in earnings is the most relevant indicator of the impact on earnings.
(e) The allowance provided for repossessed and foreclosed assets represents any cumulative valuation adjustment recognized to adjust the assets to fair value.

 

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ALLY FINANCIAL INC.

NOTES TO CONDENSED

CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

 

    Nonrecurring
fair value measures
    Lower of
cost or
fair value
or valuation
reserve
allowance
    Total gains
included in
earnings  for
the three
months ended
    Total gains
included in
earnings  for
the six
months ended
 
June 30, 2010 ($ in millions)   Level 1     Level 2     Level 3     Total        

Assets

             

Loans held-for-sale, net (a)

             

Automotive

  $      $      $ 295      $ 295      $ (96     n/m (b)      n/m (b) 

Mortgage

                  835        835        (61     n/m (b)      n/m (b) 

 

 

Total loans held-for-sale, net

                  1,130        1,130        (157     n/m (b)      n/m (b) 

Commercial finance receivables and loans, net (c)

             

Automotive

                  379        379        (81     n/m (b)      n/m (b) 

Mortgage

           44        65        109        (59     n/m (b)      n/m (b) 

Other

                  486        486        (161     n/m (b)      n/m (b) 

 

 

Total commercial finance receivables and loans, net

           44        930        974        (301     n/m (b)      n/m (b) 

Other assets

             

Real estate and other investments (d)

           23               23        n/m (e)   $ 1      $ 2   

Repossessed and foreclosed assets (f)

           44        73        117        (29     n/m (b)      n/m (b) 

 

 

Total assets

  $      $ 111      $ 2,133      $ 2,244      $ (487   $ 1      $ 2   

 

 

n/m = not meaningful

(a) Represents loans held-for-sale that are required to be measured at the lower of cost or fair value. The table above includes only loans with fair values below cost during 2010. The related valuation allowance represents the cumulative adjustment to fair value of those specific loans.
(b) We consider the applicable valuation or loan loss allowance to be the most relevant indicator of the impact on earnings caused by the fair value measurement. Accordingly, the table above excludes total gains and losses included in earnings for these items. The carrying values are inclusive of the respective valuation or loan loss allowance.
(c) Represents the portion of the portfolio specifically impaired during 2010. The related valuation allowance represents the cumulative adjustment to fair value of those specific receivables.
(d) Represents model homes impaired during 2010. The total gain included in earnings represents adjustments to the fair value of the portfolio based on actual sales during the three months and six months ended June 30, 2010.
(e) The total gain (loss) included in earnings is the most relevant indicator of the impact on earnings.
(f) The allowance provided for repossessed and foreclosed assets represents any cumulative valuation adjustment recognized to adjust the assets to fair value.

Fair Value Option for Financial Assets and Financial Liabilities

A description of the financial assets and liabilities elected to be measured at fair value is as follows. 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.

 

   

On-balance sheet mortgage securitizations — 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. The fair value-elected loans are classified as 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 long-term debt on the Condensed Consolidated Balance Sheet. Our policy is to separately record interest expense on the fair value-elected debt, which continues to be classified as interest on long-term debt 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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ALLY FINANCIAL INC.

NOTES TO CONDENSED

CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

 

   

Conforming and government-insured mortgage loans held-for-sale — We elected the fair value option for conforming and government-insured 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 conforming and government-insured 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 conforming and government-insured 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 conforming and government-insured 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.

 

   

Nongovernment eligible mortgage loans held-for-sale subject to conditional repurchase options — As of January 1, 2011, we elected the fair value option for both nongovernment eligible mortgage loans held-for-sale subject to conditional repurchase options and the related liability. These conditional repurchase options within our private label securitizations allow us to repurchase a transferred financial 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 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 only when it is in our best interest. We record the asset and the corresponding liability on our balance sheet when the option becomes exercisable. The fair value option election must be made at initial recording. As such, the conditional repurchase option assets and liabilities recorded prior to January 1, 2011, were ineligible for the fair value election.

We carry these fair value-elected optional repurchase loan balance as loans held-for-sale, net, on the Condensed Consolidated Balance Sheet. The fair value adjustment recorded for these loans is classified as other income, net of losses, in the Condensed Consolidated Statement of Income. We carry the fair value elected corresponding liability as accrued expenses and other liabilities on the Condensed Consolidated Balance Sheet. The fair value adjustment recorded for these liabilities are classified as other income, net of losses, in the Condensed Consolidated Statement of Income.

 

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ALLY FINANCIAL INC.

NOTES TO CONDENSED

CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

 

The following table summarizes the fair value option elections and information regarding the amounts recorded as earnings for each fair value option-elected item.

 

    Changes included in the Condensed Consolidated Statement of  Income  
Three months ended
June 30, ($ in millions)
 

Interest
and fees

on finance
receivables
and loans

   

Interest

on loans
held-for-sale

   

Interest

on

long-term
debt

    Gain on
mortgage
loans, net
    Other
income,
net of losses
    Total
included in
earnings
    Change in
fair value
due to
credit risk (a)
 

2011

             

Assets

             

Mortgage loans held-for-sale, net

  $      $ 38 (b)    $      $ 244      $      $ 282      $ (c) 

Consumer mortgage finance receivables and loans, net

    52 (b)                           49        101        22 (d) 

Liabilities

             

Long-term debt

             

On-balance sheet securitization debt

  $      $      $ (29 )(e)    $      $ (71   $ (100   $ (50 )(f) 

 

           

 

 

   

Total

            $ 283     

 

 

2010

             

Assets

             

Mortgage loans held-for-sale, net

  $      $ 36  (b)    $      $ 225      $      $ 261      $ (c) 

Consumer mortgage finance receivables and loans, net

    159  (b)                           215        374        (35 )(d) 

Liabilities

             

Long-term debt

             

On-balance sheet securitization debt

  $ (18   $      $ (71 )(e)    $      $ (271   $ (360   $ 34  (f) 

 

           

 

 

   

Total

            $ 275     

 

 
(a) Factors other than credit quality that impact fair value include changes in market interest rates and the illiquidity or marketability in the current marketplace. Lower levels of observable data points in illiquid markets generally result in wide bid/offer spreads.
(b) Interest income is measured by multiplying the unpaid principal balance on the loans by the coupon rate and the number of days of interest due.
(c) The credit impact for agency eligible loans held-for-sale is assumed to be zero because the loans are either suitable for sale or are covered by a government guarantee. The credit impact for nonagency eligible loans was quantified by applying internal credit loss assumptions to cash flow models.
(d) The credit impact for consumer mortgage finance receivables and loans was quantified by applying internal credit loss assumptions to cash flow models.
(e) Interest expense is measured by multiplying bond principal by the coupon rate and the number of days of interest due to the investor.
(f) The credit impact for on-balance sheet securitization debt is assumed to be zero until our economic interests in a particular securitization is reduced to zero at which point the losses on the underlying collateral will be expected to be passed through to third-party bondholders. Losses allocated to third-party bondholders, including changes in the amount of losses allocated, will result in fair value changes due to credit. We also monitor credit ratings and will make credit adjustments to the extent any bond classes are downgraded by rating agencies.

 

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ALLY FINANCIAL INC.

NOTES TO CONDENSED

CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

 

    Changes included in the Condensed Consolidated Statement of  Income  

Six months ended June 30,

($ in millions)

 

Interest
and fees

on finance
receivables
and loans

   

Interest

on loans
held-for-sale

   

Interest

on

long-term
debt

    Gain on
mortgage
loans, net
    Other
income,
net of losses
    Total
included in
earnings
    Change in
fair value
due to
credit risk (a)
 

2011

             

Assets

             

Mortgage loans held-for-sale, net

  $      $ 79 (b)    $      $ 284      $      $ 363      $ (c) 

Consumer mortgage finance receivables and loans, net

    106 (b)                           68        174        (d) 

Liabilities

             

Long-term debt

             

On-balance sheet securitization debt

  $      $      $ (60 )(e)    $      $ (107   $ (167   $ (23 )(f) 

 

           

 

 

   

Total

            $ 370     

 

 

2010

             

Assets

             

Mortgage loans held-for-sale, net

  $      $ 92 (b)    $      $ 409      $      $ 501      $ (c) 

Consumer mortgage finance receivables and loans, net

    328 (b)                           459        787        (69 )(d) 

Liabilities

             

Long-term debt

             

On-balance sheet securitization debt

  $ (18   $      $ (167 )(e)    $      $ (588   $ (773   $ 71 (f) 

 

           

 

 

   

Total

            $ 515     

 

 
(a) Factors other than credit quality that impact fair value include changes in market interest rates and the illiquidity or marketability in the current marketplace. Lower levels of observable data points in illiquid markets generally result in wide bid/offer spreads.
(b) Interest income is measured by multiplying the unpaid principal balance on the loans by the coupon rate and the number of days of interest due.
(c) The credit impact for agency eligible loans held-for-sale is assumed to be zero because the loans are either suitable for sale or are covered by a government guarantee. The credit impact for nonagency eligible loans was quantified by applying internal credit loss assumptions to cash flow models.
(d) The credit impact for consumer mortgage finance receivables and loans was quantified by applying internal credit loss assumptions to cash flow models.
(e) Interest expense is measured by multiplying bond principal by the coupon rate and the number of days of interest due to the investor.
(f) The credit impact for on-balance sheet securitization debt is assumed to be zero until our economic interests in a particular securitization is reduced to zero at which point the losses on the underlying collateral will be expected to be passed through to third-party bondholders. Losses allocated to third-party bondholders, including changes in the amount of losses allocated, will result in fair value changes due to credit. We also monitor credit ratings and will make credit adjustments to the extent any bond classes are downgraded by rating agencies.

 

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ALLY FINANCIAL INC.

NOTES TO CONDENSED

CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

 

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.

 

     June 30, 2011     December 31, 2010  
($ in millions)    Unpaid
principal
balance
    Fair
value (a)
    Unpaid
principal
balance
    Fair
value (a)
 

Assets

        

Mortgage loans held-for-sale, net

        

Total loans

   $ 2,469      $ 2,545      $ 6,354      $ 6,424   

Nonaccrual loans

     35        19        3        1   

Loans 90+ days past due (b)

     35        19                 

Consumer mortgage finance receivables and loans, net

        

Total loans

     2,698        946        2,905        1,015   

Nonaccrual loans (c)

     533        242        586        260   

Loans 90+ days past due (b)(c)

     372        188        366        184   

Liabilities

        

Long-term debt

        

On-balance sheet securitization debt

   $ (2,790   $ (899   $ (2,969   $ (972

Accrued expenses and other liabilities

        

Loan repurchase liabilities

     (35     (19              

 

 
(a) Excludes accrued interest receivable.
(b) Loans 90+ days past due are also presented within the nonaccrual loan balance and the total loan balance; however, excludes government-insured loans that are still accruing interest.
(c) The fair value of consumer mortgage finance receivables and loans is calculated on a pooled basis; therefore, we allocated the fair value of nonaccrual loans and loans 90+ days past due to individual loans based on the unpaid principal balances. For further discussion regarding the pooled basis, refer to the previous section of this note titled Consumer mortgage finance receivables and loans, net.

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 June 30, 2011, and December 31, 2010.

 

     June 30, 2011      December 31, 2010  
($ in millions)    Carrying
value
     Fair
value
     Carrying
value
     Fair
value
 

Financial assets

           

Trading securities

   $ 311       $ 311       $ 240       $ 240   

Investment securities

     15,961         15,961         14,846         14,846   

Loans held-for-sale, net

     7,168         7,266         11,411         11,449   

Finance receivables and loans, net

     108,986         108,914         100,540         99,462   

Interests retained in financial asset sales

     307         307         568         568   

Fair value of derivative contracts in receivable position

     4,154         4,154         3,966         3,966   

Collateral placed with counterparties (a)

     176         176         728         728   

Financial liabilities

           

Deposit liabilities (b)

   $ 40,229       $ 40,696       $ 37,291       $ 37,546   

Short-term borrowings

     7,130         7,116         7,508         7,509   

Long-term debt (c)

     92,304         91,640         87,181         88,996   

Fair value of derivative contracts in liability position

     3,849         3,849         3,860         3,860   

Trading liabilities

     182         182                   

 

 
(a) Represents collateral in the form of investment securities. Cash collateral was excluded above.
(b) The carrying value and fair value amounts exclude dealer deposits.
(c) Debt includes deferred interest for zero-coupon bonds of $581million and $569 million at June 30, 2011, and December 31, 2010, respectively.

 

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ALLY FINANCIAL INC.

NOTES TO CONDENSED

CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

 

The following describes the methodologies and assumptions used to determine fair value for the significant 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.

 

   

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.

For mortgage loans held-for-investment used as collateral for securitization debt, we used a portfolio approach 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.

 

22. Segment and Geographic Information

Operating segments are defined as components of an enterprise that engage in business activity from which revenues are earned and expenses incurred for which discrete financial information is available that is evaluated regularly by our chief operating decision maker in deciding how to allocate resources and in assessing performance.

 

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ALLY FINANCIAL INC.

NOTES TO CONDENSED

CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

 

We report our results of operations on a line-of-business basis through five operating segments — North American Automotive Finance operations, International Automotive Finance operations, Insurance operations, Mortgage — Origination and Servicing operations, and Mortgage — Legacy Portfolio and Other operations, with the remaining activity reported in Corporate and Other. The operating segments are determined based on the products and services offered and geographic considerations, and reflect the manner in which financial information is currently evaluated by management. The following is a description of each of our reportable operating segments.

 

   

North American Automotive Finance operations — Provides automotive financing services to consumers and automotive dealers in the United States and Canada and includes the automotive activities of Ally Bank and ResMor Trust. For consumers, we offer retail automotive financing and leasing for new and used vehicles, and through our commercial automotive financing operations, we fund dealer purchases of new and used vehicles through wholesale or floorplan financing.

 

   

International Automotive Finance operations — Provides automotive financing and full-service leasing to consumers and dealers outside of the United States and Canada. Our International Automotive Finance operations will focus the majority of new originations in five core international markets: Germany, the United Kingdom, Brazil, Mexico, and China through our joint venture.

 

   

Insurance operations — Offers consumer and commercial insurance products sold primarily through the dealer channel including vehicle extended service contracts, commercial insurance coverage in the United States and internationally (primarily covering dealers’ wholesale vehicle inventory), and personal automobile insurance in certain countries outside the United States.

 

   

Mortgage — Origination and Servicing operations —The principal activities include originating, purchasing, selling, and securitizing conforming and government-insured residential mortgage loans in the United States and Canada; servicing residential mortgage loans for ourselves and others; and providing collateralized lines of credit to other mortgage originators, which we refer to as warehouse lending. We also originate high-quality prime jumbo mortgage loans in the United States. We finance our mortgage loan originations primarily in Ally Bank in the United States and in our trust company, ResMor Trust, in Canada.

 

   

Mortgage — Legacy Portfolio and Other operations — Primarily consists of loans originated prior to January 1, 2009, and includes noncore business activities including discontinued operations, portfolios in runoff, our mortgage reinsurance business, and cash held in the ResCap legal entity. These activities, all of which we have discontinued, included, among other things: lending to real estate developers and homebuilders in the United States and United Kingdom; and purchasing, selling, and securitizing nonconforming residential mortgage loans (with the exception of U.S. prime jumbo mortgage loans originated subsequent to January 1, 2009, which are included in our Origination and Servicing operations) in both the United States and internationally.

Corporate and Other consists 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 activities (ALM), noninterest expenses associated with deposit gathering activities, and reclassifications and eliminations between the reportable operating segments.

We utilize an FTP methodology for the majority of our business operations. The FTP methodology assigns charge rates and credit rates to classes of assets and liabilities based on expected duration and the LIBOR swap curve plus an assumed credit spread. Matching duration allocates interest income and interest expense to these reportable segments so their respective results are insulated from interest rate risk. This methodology is consistent with our ALM practices, which includes managing interest rate risk centrally at a corporate level. The net residual impact of the FTP methodology is included within the results of Corporate and Other.

The information presented in our reportable operating segments and geographic areas tables that follow are based in part on internal allocations, which involve management judgment.

 

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ALLY FINANCIAL INC.

NOTES TO CONDENSED

CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

 

Financial information for our reportable operating segments is summarized as follows.

 

    Global Automotive Services     Mortgage (a)              

Three months ended June 30,

($ in millions)

 

North
American

Automotive

Finance

operations

   

International

Automotive

Finance

operations (b)

    Insurance
operations
    Origination
and
Servicing
operations
   

Legacy

Portfolio

and Other
operations

    Corporate
and
Other (c)
    Consolidated (d)  

2011

             

Net financing revenue (loss)

  $ 878      $ 176      $ 23      $ (18   $ 78      $ (426   $ 711   

Other revenue

    114        65        493        322        15        107        1,116   

 

 

Total net revenue (loss)

    992        241        516        304        93        (319     1,827   

Provision for loan losses

    55        7                      38        (49     51   

Other noninterest expense

    378        163        443        257        229        114        1,584   

 

 

Income (loss) from continuing operations before income tax

  $ 559      $ 71      $ 73      $ 47      $ (174   $ (384   $ 192   

 

 

Total assets

  $ 90,943      $ 16,582      $ 8,533      $ 20,010      $ 11,313      $ 31,508      $ 178,889   

 

 

2010

             

Net financing revenue (loss)

  $ 851      $ 173      $ 23      $ (18   $ 172      $ (492   $ 709   

Other revenue

    186        85        550        459        72        36        1,388   

 

 

Total net revenue (loss)

    1,037        258        573        441        244        (456     2,097   

Provision for loan losses

    106        9               (35     127        11        218   

Other noninterest expense

    339        154        465        227        136        123        1,444   

 

 

Income (loss) from continuing operations before income tax

  $ 592      $ 95      $ 108      $ 249      $ (19   $ (590   $ 435   

 

 

Total assets

  $ 74,146      $ 16,596      $ 8,552      $ 20,014      $ 26,029      $ 31,465      $ 176,802   

 

 
(a) Represents the ResCap legal entity and the mortgage activities of Ally Bank and ResMor Trust.
(b) Amounts include intrasegment eliminations between our North American Automotive Finance operations, International Automotive Finance operations, and Insurance operations.
(c) Total assets for the Commercial Finance Group were $1.3 billion and $2.4 billion at June 30, 2011 and 2010, respectively.
(d) Net financing revenue (loss) after the provision for loan losses totaled $660 million and $491 million for the three months ended June 30, 2011 and 2010, respectively.

 

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ALLY FINANCIAL INC.

NOTES TO CONDENSED

CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

 

    Global Automotive Services     Mortgage (a)              

Six months ended June 30,

($ in millions)

 

North
American

Automotive

Finance

operations

   

International

Automotive

Finance

operations (b)

    Insurance
operations
    Origination
and
Servicing
operations
   

Legacy

Portfolio

and Other
operations

    Corporate
and
Other (c)
    Consolidated (d)  

2011

             

Net financing revenue (loss)

  $ 1,696      $ 347      $ 45      $ (48   $ 156      $ (948   $ 1,248   

Other revenue

    223        140        991        673        27        132        2,186   

 

 

Total net revenue (loss)

    1,919        487        1,036        625        183        (816     3,434   

Provision for loan losses

    101        44               2        83        (66     164   

Other noninterest expense

    741        332        829        503        313        258        2,976   

 

 

Income (loss) from continuing operations before income tax

  $ 1,077      $ 111      $ 207      $ 120      $ (213   $ (1,008   $ 294   

 

 

Total assets

  $ 90,943      $ 16,582      $ 8,533      $ 20,010      $ 11,313      $ 31,508      $ 178,889   

 

 

2010

             

Net financing revenue (loss)

  $ 1,723      $ 351      $ 53      $ (29   $ 365      $ (1,002   $ 1,461   

Other revenue

    389        177        1,141        805        95        (121     2,486   

 

 

Total net revenue (loss)

    2,112        528        1,194        776        460        (1,123     3,947   

Provision for loan losses

    207        30               (34     133        26        362   

Other noninterest expense

    701        356        903        490        261        252        2,963   

 

 

Income (loss) from continuing operations before income tax

  $ 1,204      $ 142      $ 291      $ 320      $ 66      $ (1,401   $ 622   

 

 

Total assets

  $ 74,146      $ 16,596      $ 8,552      $ 20,014      $ 26,029      $ 31,465      $ 176,802   

 

 
(a) Represents the ResCap legal entity and the mortgage activities of Ally Bank and ResMor Trust.
(b) Amounts include intrasegment eliminations between our North American Automotive Finance operations, International Automotive Finance operations, and Insurance operations.
(c) Total assets for the Commercial Finance Group were $1.3 billion and $2.4 billion at June 30, 2011 and 2010, respectively.
(d) Net financing revenue (loss) after the provision for loan losses totaled $1.1 billion for the six months ended June 30, 2011 and 2010.

 

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ALLY FINANCIAL INC.

NOTES TO CONDENSED

CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

 

Information concerning principal geographic areas was as follows.

 

Three months ended June 30, ($ in millions)    Revenue (a)     

Income (loss)

from continuing

operations

before income tax
expense (benefit) (b)

   

Net income

(loss) (b)

 

2011

       

Canada

   $ 250       $ 133      $ 98   

Europe (c)

     149         60        49   

Latin America

     251         73        62   

 

 

Total foreign

     650         266        209   

Total domestic (d)

     1,177         (74     (96

 

 

Total

   $ 1,827       $ 192      $ 113   

 

 

2010

       

Canada

   $ 206       $ 86      $ 73   

Europe (c)

     127         72        68   

Latin America

     213         45        52   

Asia-Pacific

             (2     (23

 

 

Total foreign

     546         201        170   

Total domestic (d)

     1,551         234        395   

 

 

Total

   $ 2,097       $ 435      $ 565   

 

 
(a) Revenue consists of net financing revenue and total other revenue as presented in our Condensed Consolidated Statement of Income.
(b) The domestic amounts include original discount amortization of $257 million and $293 million for the three months ended June 30, 2011 and 2010, respectively.
(c) Amounts include eliminations between our foreign operations.
(d) Amounts include eliminations between our domestic and foreign operations.

 

Six months ended June 30, ($ in millions)    Revenue (a)     

Income (loss)

from continuing

operations

before income tax
expense (benefit) (b)

   

Net income

(loss) (b)

 

2011

       

Canada

   $ 437       $ 211      $ 275   

Europe (c)

     318         123        98   

Latin America

     488         146        94   

Asia-Pacific

     1         (1     (1

 

 

Total foreign

     1,244         479        466   

Total domestic (d)

     2,190         (185     (207

 

 

Total

   $ 3,434       $ 294      $ 259   

 

 

2010

       

Canada

   $ 367       $ 137      $ 117   

Europe (c)

     332         28        34   

Latin America

     420         90        87   

Asia-Pacific

     2         5        (46

 

 

Total foreign

     1,121         260        192   

Total domestic (d)

     2,826         362        535   

 

 

Total

   $ 3,947       $ 622      $ 727   

 

 
(a) Revenue consists of net financing revenue and total other revenue as presented in our Condensed Consolidated Statement of Income.
(b) The domestic amounts include original discount amortization of $556 million and $589 million for the six months ended June 30, 2011 and 2010, respectively.
(c) Amounts include eliminations between our foreign operations.
(d) Amounts include eliminations between our domestic and foreign operations.

 

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ALLY FINANCIAL INC.

NOTES TO CONDENSED

CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

 

23. Parent and Guarantor Consolidating Financial Statements

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 Corporation. 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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ALLY FINANCIAL INC.

NOTES TO CONDENSED

CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

 

Condensed Consolidating Statement of Income

 

Three months ended June 30, 2011 ($ in millions)   Parent     Guarantors     Nonguarantors    

Consolidating

adjustments

   

Ally

consolidated

 

Financing revenue and other interest income

         

Interest and fees on finance receivables and loans

  $ 269      $ 7      $ 1,404      $ (4   $ 1,676   

Interest and fees on finance receivables and loans — intercompany

    83        6        5        (94       

Interest on loans held-for-sale

                  98               98   

Interest on trading facilities

                  3               3   

Interest and dividends on available-for-sale investment securities

                  108               108   

Interest and dividends on available-for-sale investment securities — intercompany

                  (2     2          

Interest-bearing cash

    1               14               15   

Operating leases

    307               313               620   

 

 

Total financing revenue and other interest income

    660        13        1,943        (96     2,520   

Interest expense

         

Interest on deposits

    16               159               175   

Interest on short-term borrowings

    13        1        94               108   

Interest on long-term debt

    915        3        416               1,334   

Interest on intercompany debt

    (4     6        94        (96       

 

 

Total interest expense

    940        10        763        (96     1,617   

Depreciation expense on operating lease assets

    69               123               192   

 

 

Net financing (loss) revenue

    (349     3        1,057               711   

Dividends from subsidiary

         

Nonbank subsidiaries

    10                      (10       

Other revenue

         

Servicing fees

    59               294               353   

Servicing asset valuation and hedge activities, net

                  (105            (105

 

 

Total servicing income, net

    59               189               248   

Insurance premiums and service revenue earned

                  433               433   

Gain on mortgage and automotive loans, net

    20               95               115   

Loss on extinguishment of debt

    (25                          (25

Other gain on investments, net

                  92               92   

Other income, net of losses

    (60     1        467        (155     253   

 

 

Total other revenue

    (6     1        1,276        (155     1,116   

Total net revenue

    (345     4        2,333        (165     1,827   

Provision for loan losses

    (44     1        94               51   

Noninterest expense

         

Compensation and benefits expense

    192        3        229               424   

Insurance losses and loss adjustment expenses

                  244               244   

Other operating expenses

    117        1        953        (155     916   

 

 

Total noninterest expense

    309        4        1,426        (155     1,584   

(Loss) income from continuing operations before income tax (benefit) expense and undistributed income of subsidiaries

    (610     (1     813        (10     192   

Income tax (benefit) expense from continuing operations

    (141     5        218               82   

 

 

Net (loss) income from continuing operations

    (469     (6     595        (10     110   

 

 

(Loss) income from discontinued operations, net of tax

    (5            8               3   

Undistributed income of subsidiaries

         

Bank subsidiary

    245        245               (490       

Nonbank subsidiaries

    342        116               (458       

 

 

Net income

  $ 113      $ 355      $ 603      $ (958   $ 113   

 

 

 

73


Table of Contents

ALLY FINANCIAL INC.

NOTES TO CONDENSED

CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

 

Three months ended June 30, 2010 ($ in millions)   Parent     Guarantors     Nonguarantors    

Consolidating

adjustments

   

Ally

consolidated

 

Financing revenue and other interest income

         

Interest and fees on finance receivables and loans

  $ 175      $ 6      $ 1,436      $      $ 1,617   

Interest and fees on finance receivables and loans — intercompany

    137               (1     (136       

Interest on loans held-for-sale

    21               135               156   

Interest on trading facilities

                  6               6   

Interest and dividends on available-for-sale investment securities

                  90               90   

Interest and dividends on available-for-sale investment securities — intercompany

    18               1        (19       

Interest-bearing cash

    4               14               18   

Operating leases

    283               728               1,011   

 

 

Total financing revenue and other interest income

    638        6        2,409        (155     2,898   

Interest expense

         

Interest on deposits

    12               143               155   

Interest on short-term borrowings

    10               89               99   

Interest on long-term debt

    921        4        484               1,409   

Interest on intercompany debt

    (5            169        (164       

 

 

Total interest expense

    938        4        885        (164     1,663   

Depreciation expense on operating lease assets

    79               447               526   

 

 

Net financing (loss) revenue

    (379     2        1,077        9        709   

Dividends from subsidiaries

         

Nonbank subsidiaries

    11        1               (12       

Other revenue

         

Servicing fees

    99               285               384   

Servicing asset valuation and hedge activities, net

                  (21            (21

 

 

Total servicing income, net

    99               264               363   

Insurance premiums and service revenue earned

                  477               477   

Gain on mortgage and automotive loans, net

    20               246               266   

Loss on extinguishment of debt

                  (3            (3

Other gain on investments, net

                  112               112   

Other income, net of losses

    12        1        300        (140     173   

 

 

Total other revenue

    131        1        1,396        (140     1,388   

Total net revenue

    (237     4        2,473        (143     2,097   

Provision for loan losses

    (29     (1     248               218   

Noninterest expense

         

Compensation and benefits expense

    184        4        200               388   

Insurance losses and loss adjustment expenses

                  224               224   

Other operating expenses

    170               801        (139     832   

 

 

Total noninterest expense

    354        4        1,225        (139     1,444   

(Loss) income from continuing operations before income tax (benefit) expense and undistributed income of subsidiaries

    (562     1        1,000        (4     435   

Income tax (benefit) expense from continuing operations

    (148            181               33   

 

 

Net (loss) income from continuing operations

    (414     1        819        (4     402   

 

 

Income from discontinued operations, net of tax

    64               99               163   

Undistributed income of subsidiaries

         

Bank subsidiary

    124        124               (248       

Nonbank subsidiaries

    791        86               (877       

 

 

Net income

  $ 565      $ 211      $ 918      $ (1,129   $ 565   

 

 

 

74


Table of Contents

ALLY FINANCIAL INC.

NOTES TO CONDENSED

CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

 

Six months ended June 30, 2011 ($ in millions)   Parent     Guarantors     Nonguarantors     Consolidating
adjustments
    Ally
consolidated
 

Financing revenue and other interest income

         

Interest and fees on finance receivables and loans

  $ 521      $ 14      $ 2,768      $ (4   $ 3,299   

Interest and fees on finance receivables and loans — intercompany

    174        11        12        (197       

Interest on loans held-for-sale

                  206               206   

Interest on trading facilities

                  6               6   

Interest and dividends on available-for-sale investment securities

    3               209               212   

Interest-bearing cash

    4               23               27   

Operating leases

    615               685               1,300   

 

 

Total financing revenue and other interest income

    1,317        25        3,909        (201     5,050   

Interest expense

         

Interest on deposits

    31               316               347   

Interest on short-term borrowings

    26        1        207               234   

Interest on long-term debt

    1,903        5        836               2,744   

Interest on intercompany debt

    (8     13        196        (201       

 

 

Total interest expense

    1,952        19        1,555        (201     3,325   

Depreciation expense on operating lease assets

    200               277               477   

 

 

Net financing (loss) revenue

    (835     6        2,077               1,248   

Dividends from subsidiary

         

Nonbank subsidiaries

    511                      (511       

Other revenue

         

Servicing fees

    139               585               724   

Servicing asset valuation and hedge activities, net

                  (192            (192

 

 

Total servicing income, net

    139               393               532   

Insurance premiums and service revenue earned

                  866               866   

Gain on mortgage and automotive loans, net

    20               187               207   

Loss on extinguishment of debt

    (64                          (64

Other gain on investments, net

    9               167               176   

Other income, net of losses

    (45     1        816        (303     469   

 

 

Total other revenue

    59        1        2,429        (303     2,186   

Total net revenue

    (265     7        4,506        (814     3,434   

Provision for loan losses

    78               86               164   

Noninterest expense

         

Compensation and benefits expense

    390        5        463               858   

Insurance losses and loss adjustment expenses

                  430               430   

Other operating expenses

    235        2        1,754        (303     1,688   

 

 

Total noninterest expense

    625        7        2,647        (303     2,976   

(Loss) income from continuing operations before income tax (benefit) expense and undistributed income of subsidiaries

    (968            1,773        (511     294   

Income tax (benefit) expense from continuing operations

    (289     5        298               14   

 

 

Net (loss) income from continuing operations

    (679     (5     1,475        (511     280   

 

 

Loss from discontinued operations, net of tax

    (10            (11            (21

Undistributed income of subsidiaries

         

Bank subsidiary

    496        496               (992       

Nonbank subsidiaries

    452        313               (765       

 

 

Net income

  $ 259      $ 804      $ 1,464      $ (2,268   $ 259   

 

 

 

75


Table of Contents

ALLY FINANCIAL INC.

NOTES TO CONDENSED

CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

 

Six months ended June 30, 2010 ($ in millions)   Parent     Guarantors     Nonguarantors     Consolidating
adjustments
    Ally
consolidated
 

Financing revenue and other interest income

         

Interest and fees on finance receivables and loans

  $ 491      $ 14      $ 2,730      $      $ 3,235   

Interest and fees on finance receivables and loans — intercompany

    314        1               (315       

Interest on loans held-for-sale

    67               304               371   

Interest on trading facilities

                  7               7   

Interest and dividends on available-for-sale investment securities

                  191        (2     189   

Interest and dividends on available-for-sale investment securities — intercompany

    40               2        (42       

Interest-bearing cash

    5               27               32   

Operating leases

    483               1,691               2,174   

 

 

Total financing revenue and other interest income

    1,400        15        4,952        (359     6,008   

Interest expense

         

Interest on deposits

    22               291               313   

Interest on short-term borrowings

    19               191               210   

Interest on long-term debt

    1,829        9        1,004               2,842   

Interest on intercompany debt

    (11     1        338        (328       

 

 

Total interest expense

    1,859        10        1,824        (328     3,365   

Depreciation expense on operating lease assets

    149               1,033               1,182   

 

 

Net financing (loss) revenue

    (608     5        2,095        (31     1,461   

Dividends from subsidiaries

         

Nonbank subsidiaries

    16        1               (17       

Other revenue

         

Servicing fees

    243               526               769   

Servicing asset valuation and hedge activities, net

                  (154            (154

 

 

Total servicing income, net

    243               372               615   

Insurance premiums and service revenue earned

                  945               945   

(Loss) gain on mortgage and automotive loans, net

    (11            548               537   

Loss on extinguishment of debt

    (116            (5            (121

Other gain on investments, net

                  256        (1     255   

Other income, net of losses

    (64     1        595        (277     255   

 

 

Total other revenue

    52        1        2,711        (278     2,486   

Total net revenue

    (540     7        4,806        (326     3,947   

Provision for loan losses

    (48     (1     411               362   

Noninterest expense

         

Compensation and benefits expense

    379        7        428               814   

Insurance losses and loss adjustment expenses

                  435               435   

Other operating expenses

    323        13        1,655        (277     1,714   

 

 

Total noninterest expense

    702        20        2,518        (277     2,963   

(Loss) income from continuing operations before income tax (benefit) expense and undistributed income of subsidiaries

    (1,194     (12     1,877        (49     622   

Income tax (benefit) expense from continuing operations

    (313            382               69   

 

 

Net (loss) income from continuing operations

    (881     (12     1,495        (49     553   

 

 

Income from discontinued operations, net of tax

    80               94               174   

Undistributed income of subsidiaries

         

Bank subsidiary

    349        349               (698       

Nonbank subsidiaries

    1,179        137               (1,316       

 

 

Net income

  $ 727      $ 474      $ 1,589      $ (2,063   $ 727   

 

 

 

76


Table of Contents

ALLY FINANCIAL INC.

NOTES TO CONDENSED

CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

 

Condensed Consolidating Balance Sheet

 

June 30, 2011 ($ in millions)   Parent     Guarantors     Nonguarantors     Consolidating
adjustments
    Ally
consolidated
 

Assets

         

Cash and cash equivalents

         

Noninterest-bearing

  $ 1,720      $      $ 319      $      $ 2,039   

Interest-bearing

    5,503        18        7,341               12,862   

Interest-bearing — intercompany

                  305        (305       

 

 

Total cash and cash equivalents

    7,223        18        7,965        (305     14,901   

Trading securities

                  311               311   

Investment securities

                  15,961               15,961   

Loans held-for-sale, net

                  7,168               7,168   

Finance receivables and loans, net

         

Finance receivables and loans, net

    15,770        421        94,534               110,725   

Intercompany loans to
Bank subsidiary

    2,300                      (2,300       

Nonbank subsidiaries

    7,733        396        487        (8,616       

Allowance for loan losses

    (303     (1     (1,435            (1,739

 

 

Total finance receivables and loans, net

    25,500        816        93,586        (10,916     108,986   

Investment in operating leases, net

    4,734               4,281               9,015   

Intercompany receivables from

         

Bank subsidiary

    6,226                      (6,226       

Nonbank subsidiaries

    318        2        838        (1,158       

Investment in subsidiaries

         

Bank subsidiary

    11,922        11,922               (23,844       

Nonbank subsidiaries

    17,908        3,845               (21,753       

Mortgage servicing rights

                  3,701               3,701   

Premiums receivable and other insurance assets

    (7            2,134        (3     2,124   

Other assets

    2,690        3        14,702        (673     16,722   

 

 

Total assets

  $ 76,514      $ 16,606      $ 150,647      $ (64,878   $ 178,889   

 

 

Liabilities

         

Deposit liabilities

         

Noninterest-bearing

  $      $      $ 2,405      $      $ 2,405   

Interest-bearing

    1,715               38,142               39,857   

 

 

Total deposit liabilities

    1,715               40,547               42,262   

Short-term borrowings

    2,446        94        4,590               7,130   

Long-term debt

    42,677        241        48,805               91,723   

Intercompany debt to Nonbank subsidiaries

    305        487        10,429        (11,221       

Intercompany payables to Nonbank subsidiaries

    6,625        1        758        (7,384       

Interest payable

    1,191        5        538               1,734   

Unearned insurance premiums and service revenue

                  2,845               2,845   

Reserves for insurance losses and loss adjustment expenses

                  782               782   

Accrued expenses and other liabilities

    1,132        8        11,525        (675     11,990   

 

 

Total liabilities

    56,091        836        120,819        (19,280     158,466   

 

 

Total equity

    20,423        15,770        29,828        (45,598     20,423   

 

 

Total liabilities and equity

  $ 76,514      $ 16,606      $ 150,647      $ (64,878   $ 178,889   

 

 

 

77


Table of Contents

ALLY FINANCIAL INC.

NOTES TO CONDENSED

CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

 

December 31, 2010 ($ in millions)   Parent     Guarantors     Nonguarantors    

Consolidating

adjustments

   

Ally

consolidated

 

Assets

         

Cash and cash equivalents

         

Noninterest-bearing

  $ 1,251      $      $ 463      $      $ 1,714   

Interest-bearing

    3,414        1        6,541               9,956   

Interest-bearing — intercompany

                  504        (504       

 

 

Total cash and cash equivalents

    4,665        1        7,508        (504     11,670   

Trading securities

                  240               240   

Investment securities

    1,488               13,358               14,846   

Investment securities — intercompany

    2                      (2       

Loans held-for-sale, net

                  11,411               11,411   

Finance receivables and loans, net

         

Finance receivables and loans, net

    10,047        425        91,941               102,413   

Intercompany loans to
Bank subsidiary

    3,650                      (3,650       

Nonbank subsidiaries

    9,461        367        463        (10,291       

Allowance for loan losses

    (266     (1     (1,606            (1,873

 

 

Total finance receivables and loans, net

    22,892        791        90,798        (13,941     100,540   

Investment in operating leases, net

    3,864               5,264               9,128   

Intercompany receivables from

         

Bank subsidiary

    5,930                      (5,930       

Nonbank subsidiaries

           213               (213       

Investment in subsidiaries

         

Bank subsidiary

    10,886        10,886               (21,772       

Nonbank subsidiaries

    23,632        3,123               (26,755       

Mortgage servicing rights

                  3,738               3,738   

Premiums receivable and other insurance assets

                  2,190        (9     2,181   

Other assets

    2,752        3        16,389        (890     18,254   

 

 

Total assets

  $ 76,111      $ 15,017      $ 150,896      $ (70,016   $ 172,008   

 

 

Liabilities

         

Deposit liabilities

         

Noninterest-bearing

  $      $      $ 2,131      $      $ 2,131   

Interest-bearing

    1,459               35,458               36,917   

 

 

Total deposit liabilities

    1,459               37,589               39,048   

Short-term borrowings

    2,519        89        4,900               7,508   

Long-term debt

    43,897        239        42,476               86,612   

Intercompany debt to

         

Nonbank subsidiaries

    504        462        13,481        (14,447       

Intercompany payables to

         

Nonbank subsidiaries

    4,466               1,716        (6,182       

Interest payable

    1,229        3        597               1,829   

Unearned insurance premiums and service revenue

                  2,854               2,854   

Reserves for insurance losses and loss adjustment expenses

                  862               862   

Accrued expenses and other liabilities

    1,548        1        12,117        (860     12,806   

 

 

Total liabilities

    55,622        794        116,592        (21,489     151,519   

 

 

Total equity

    20,489        14,223        34,304        (48,527     20,489   

 

 

Total liabilities and equity

  $ 76,111      $ 15,017      $ 150,896      $ (70,016   $ 172,008   

 

 

 

78


Table of Contents

ALLY FINANCIAL INC.

NOTES TO CONDENSED

CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

 

Condensed Consolidating Statement of Cash Flows

 

Six months ended June 30, 2011 ($ in millions)   Parent     Guarantors     Nonguarantors    

Consolidating

adjustments

   

Ally

consolidated

 

Operating activities

         

Net cash provided by operating activities

  $ 4,533      $ 218      $ 124      $ (512   $ 4,363   

Investing activities

         

Purchases of available-for-sale securities

                  (10,982            (10,982

Proceeds from sales of available-for-sale securities

    1,494               6,929               8,423   

Proceeds from maturities of available-for-sale securities

    1               2,385               2,386   

Net (increase) decrease in finance receivables and loans

    (7,165     4        (1,508            (8,669

Proceeds from sales of finance receivables and loans

    1,346                             1,346   

Net decrease (increase) in loans — intercompany

    3,078        (30     (24     (3,024       

Net (increase) decrease in operating lease assets

    (1,004            808               (196

Capital contributions to subsidiaries

    (1,091     (500            1,591          

Returns of contributed capital

    4,037                      (4,037       

Proceeds from sale of business units, net

                  47               47   

Other, net

    (185            1,056               871   

 

 

Net cash used in investing activities

    511        (526     (1,289     (5,470     (6,774

Financing activities

         

Net change in short-term debt — third party

    (73     6        (160            (227

Net increase in bank deposits

                  2,570               2,570   

Proceeds from issuance of long-term debt — third party

    2,549        45        23,631               26,225   

Repayments of long-term debt — third party

    (4,598     (43     (18,310            (22,951

Net change in debt — intercompany

    (199     24        (3,048     3,223          

Dividends paid — third party

    (419                          (419

Dividends paid and returns of contributed capital — intercompany

           (207     (4,342     4,549          

Capital contributions from parent

           500        1,091        (1,591       

Other, net

    254               297               551   

 

 

Net cash (used in) provided by financing activities

    (2,486     325        1,729        6,181        5,749   

Effect of exchange-rate changes on cash and cash equivalents

                  (78            (78

 

 

Net increase in cash and cash equivalents

    2,558        17        486        199        3,260   

Adjustment for change in cash and cash equivalents of operations held-for-sale

                  (29            (29

Cash and cash equivalents at beginning of year

    4,665        1        7,508        (504     11,670   

 

 

Cash and cash equivalents at June 30

  $ 7,223      $ 18      $ 7,965      $ (305   $ 14,901   

 

 

 

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Six months ended June 30, 2010 ($ in millions)   Parent     Guarantors     Nonguarantors    

Consolidating

adjustments

   

Ally

consolidated

 

Operating activities

         

Net cash provided by operating activities

  $ 575      $ 23      $ 11,002      $ (17   $ 11,583   

Investing activities

         

Purchases of available-for-sale securities

                  (11,994            (11,994

Proceeds from sales of available-for-sale securities

    41               9,854        (41     9,854   

Proceeds from maturities of available-for-sale securities

                  2,535               2,535   

Net increase in investment securities — intercompany

    54               (245     191          

Net (increase) decrease in finance receivables and loans

    (2,947     177        (5,405            (8,175

Proceeds from sales of finance receivables and loans

    4               2,358               2,362   

Net decrease in loans — intercompany

    2,974        37        77        (3,088       

Net (increase) decrease in operating lease assets

    (1,738            4,682               2,944   

Capital contributions to subsidiaries

    (187     (62            249          

Returns of contributed capital

    250                      (250       

Proceeds from sale of business units, net

    41               (53            (12

Other, net

    70               1,608               1,678   

 

 

Net cash (used in) provided by investing activities

    (1,438     152        3,417        (2,939     (808

Financing activities

         

Net change in short-term debt — third party

    300        (17     (4,110            (3,827

Net increase in bank deposits

                  2,720               2,720   

Proceeds from issuance of long-term debt — third party

    3,406        40        17,509        41        20,996   

Repayments of long-term debt — third party

    (2,774     (167     (29,366            (32,307

Net change in debt — intercompany

    252        (80     (3,063     2,891          

Dividends paid — third party

    (532                          (532

Dividends paid and returns of contributed capital — intercompany

                  (267     267          

Capital contributions from parent

           50        199        (249       

Other, net

    215               558               773   

 

 

Net cash provided by (used in) financing activities

    867        (174     (15,820     2,950        (12,177

Effect of exchange-rate changes on cash and cash equivalents

                  619               619   

 

 

Net increase (decrease) in cash and cash equivalents

    4        1        (782     (6     (783

Adjustment for change in cash and cash equivalents of operations held-for-sale

                  343               343   

Cash and cash equivalents at beginning of year

    757        5        14,026               14,788   

 

 

Cash and cash equivalents at June 30

  $ 761      $ 6      $ 13,587      $ (6   $ 14,348   

 

 

 

24. Contingencies and Other Risks

Mortgage Foreclosure Matters

Representatives of federal and state governments, including the United States Department of Justice, the Board of Governors of the Federal Reserve System (the FRB), the FDIC, the SEC, and law enforcement authorities in all 50 states, are currently investigating the procedures followed by mortgage servicing companies and banks, including subsidiaries of Ally, in connection with mortgage foreclosure home sales and evictions. While the results of these investigations are uncertain, we expect that Ally or its subsidiaries will become subject to penalties, sanctions, or other adverse actions, including monetary fines, which could be substantial and have a material adverse impact on our results of operations, financial position or cash flows. While we believe that a monetary fine is probable, we are not able to provide an estimate based on information currently available, nor are we able to estimate a range of reasonably possible losses.

 

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As a result of an examination conducted by the FRB and FDIC, on April 13, 2011, each of Ally, Ally Bank, Residential Capital, LLC and GMAC Mortgage, LLC (collectively, the Ally Entities) entered into a Consent Order (the Order) with the FRB and the FDIC. The Order requires the Ally Entities to make improvements to various aspects of Ally’s residential mortgage loan servicing business, including compliance programs, internal audit, communications with borrowers, vendor management, management information systems, employee training, and oversight by the boards of the Ally Entities.

The Order further requires the Ally Entities to retain independent consultants to conduct a risk assessment related to mortgage servicing activities and, separately, to conduct a review of certain past residential mortgage foreclosure actions. We cannot estimate the ultimate impact of any deficiencies that have been or may be identified in our historical foreclosure procedures. 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 remediation and resubmission; claims from investors that hold securities that become adversely impacted by continued delays in the foreclosure process; the reduction in foreclosure proceeds due to delay, or by challenges to completed foreclosure sales to the extent, if any, not covered by title insurance obtained in connection with such sales; actions by courts, state attorneys general, or regulators to delay further the foreclosure process after submission of corrected affidavits, or to facilitate claims by borrowers alleging that they were harmed by our foreclosure practices (by, for example, foreclosing without offering an appropriate range of alternative home preservation options); regulatory fines, sanctions, and other additional costs; and reputational risks. To date we have borne all out-of-pocket costs associated with the remediation rather than passing any such costs through to investors for whom we service the related mortgages, and we expect that we will continue to do so.

At June 30, 2011, we had a liability of approximately $9 million related to potential monetary fines and penalties in connection with existing contractual obligations with certain counterparties, as we have determined that such losses were probable and estimable.

Loan Repurchases and Obligations Related to Loan Sales

Overview

Our Mortgage operations sell loans that take the form of securitizations guaranteed by the GSEs, securitizations to private investors, and to whole-loan investors. In connection with a portion of our private-label securitizations, the monolines insured all or some of the related bonds and guaranteed timely repayment of bond principal and interest when the issuer defaults. In connection with securitizations and loan sales, investors are provided various representations and warranties related to the loans sold. The specific representations and warranties vary among different transactions and investors but typically 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, the ability to deliver required documentation and compliance with applicable laws. In general, the representations and warranties described above may be enforced at any time unless a sunset provision is in place. Upon discovery of a breach of a representation or warranty, the breach is corrected in a manner conforming to the provisions of the sale agreement. This may require us to repurchase the loan, indemnify the investor for incurred losses, or otherwise make the investor whole. We have entered into settlement agreements with both Fannie Mae and Freddie Mac that, subject to certain exclusions, limit our remaining exposure with the GSEs. See “Government-sponsored Enterprises” below. ResCap assumes all of the customary mortgage representation and warranty obligations for loans purchased from Ally Bank and subsequently sold into the secondary market, generally through securitizations guaranteed by the GSEs. In the event ResCap fails to meet these obligations, Ally Financial Inc. has provided Ally Bank a guaranteed coverage of liability.

Originations

We believe our exposure to mortgage representation and warranty claims is most significant for loans originated and sold between 2004 through 2008, specifically the 2006 and 2007 vintages that were originated and sold prior to enhanced underwriting standards and risk-mitigation actions implemented in 2008 and forward. Since 2009, we have focused primarily on originating domestic prime conforming and government-insured mortgages. In addition, we ceased offering interest-only jumbo mortgages in 2010. Our representation and warranty risk-mitigation strategies include, but are not limited to, pursuing settlements with investors where economically beneficial in order to resolve a pipeline of demands in lieu of loan-by-loan assessments that could result in us repurchasing loans, aggressively contesting claims we do not consider valid (rescinding claims), or seeking recourse against correspondent lenders from whom we purchased loans wherever appropriate.

 

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Repurchase Process

After receiving a claim under representation and warranty obligations, we review the claim to determine the appropriate response (e.g. appeal, provide additional information, repurchase the loan, or remit make-whole payment) and take appropriate action. Historically, repurchase demands were related to loans that became delinquent within the first few years following origination and varied by investor. As a result of market developments over the past several years, repurchase demand behavior has changed significantly. GSEs are more likely to submit claims for loans at any point in their life cycle. Investors are more likely to submit claims for loans that become delinquent at any time while a loan is outstanding or when a loan incurs a loss. Representation and warranty claims are generally reviewed on a loan-by-loan basis to validate if there has been a breach requiring a potential repurchase or indemnification payment. We actively contest claims to the extent we do not consider them valid. We are not required to repurchase a loan or provide an indemnification payment where claims are not valid.

We seek to manage the risk of repurchase or indemnification and the associated credit exposure through our underwriting and quality assurance practices and by servicing mortgage loans to meet investor standards. We believe that, in general, the longer a loan performs prior to default the less likely it is that an alleged breach of representation and warranty will be found to have a material and adverse impact on the loan’s performance. When we do repurchase loans, we bear the related credit loss on the loans. Repurchased loans are classified as held-for-sale and initially recorded at fair value.

The following table presents the total number and original unpaid principal balance of loans related to unresolved representation and warranty demands (indemnification claims or repurchase demands). The table includes demands that we have requested be rescinded but which have not been agreed to by the investor.

 

     June 30, 2011      December 31, 2010  
($ in millions)   

Number

of loans

    

Dollar amount

of loans

    

Number

of loans

    

Dollar amount

of loans

 

GSEs

     544       $ 115         833       $ 170 (a) 

Monolines

     11,819         874         8,206         661   

Other

     448         89         392         88   

 

 

Total unpaid principal balance

     12,811       $ 1,078         9,431       $ 919   

 

 
(a) This amount is gross of any loans that would be removed due to the Fannie Mae settlement. At December 31, 2010, $48 million of outstanding claims were covered under the Fannie Mae settlement agreement.

We are currently in litigation with MBIA Insurance Corp. (MBIA) with respect to certain of our private-label securitizations. June 30, 2011 amounts in the table above include unresolved repurchase demands of $437 million of original unpaid principal balance with MBIA, which were received prior to commencement of these proceedings by MBIA. Historically we have requested that most of the repurchase demands presented to us by MBIA be rescinded, consistent with the repurchase process described above. As the litigation progresses, we expect to receive additional repurchase demands from MBIA. We also expect to receive additional repurchase demands from other monolines.

Representation and Warranty Obligation Reserve Methodology

The liability for representation and warranty obligations reflects management’s best estimate of probable lifetime losses. We consider historical 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, historical loan defect experience, historical mortgage insurance rescission experience, and historical 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 or have limited current or historical demand experience with an investor, it is difficult to predict and estimate the level and timing of any potential future demands. In such cases, we may not be able to reasonably estimate losses, 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 and experience with counterparties.

 

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At the time a loan is sold, an estimate of the fair value 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 liability when additional relevant information becomes available. Changes in the liability are recorded as other operating expenses in our Condensed Consolidated Statement of Income. The repurchase reserve at June 30, 2011, relates primarily to non-GSE exposure.

The following tables summarize the changes in our reserve for representation and warranty obligations.

 

Three months ended June 30, ($ in millions)        2011             2010      

Balance at April 1,

   $ 830      $ 890   

Provision for mortgage representation and warranty expenses

    

Loan sales

     5        24   

Change in estimate — continuing operations

     184        97   

 

 

Total additions

     189        121   

Realized losses (a)

     (194     (158

Recoveries

     4        2   

 

 

Balance at June 30,

   $ 829      $ 855   

 

 
(a) Includes principal losses and accrued interest on repurchased loans, indemnification payments, and settlements with counterparties.

 

Six months ended June 30, ($ in millions)        2011             2010      

Balance at January 1,

   $ 830      $ 1,263   

Provision for mortgage representation and warranty expenses

    

Loan sales

     11        25   

Change in estimate — continuing operations

     210        146   

 

 

Total additions

     221        171   

Realized losses (a)

     (228     (583

Recoveries

     6        4   

 

 

Balance at June 30,

   $ 829      $ 855   

 

 
(a) Includes principal losses and accrued interest on repurchased loans, indemnification payments, and settlements with counterparties.

Government-sponsored Enterprises

Between 2004 and 2008, we sold $250.8 billion of loans to the GSEs. Each GSE has specific guidelines and criteria for sellers and servicers of loans underlying their securities. In addition, the risk of credit loss of the loan sold was generally transferred to investors upon sale of the securities into the secondary market. Conventional conforming loans were sold to either Freddie Mac or Fannie Mae, and government-insured loans were securitized with Ginnie Mae. For the six months ended June 30, 2011, we received repurchase claims relating to $250 million of original unpaid principal balance of which $146 million are associated with the 2004 through 2008 vintages. The remaining $104 million in repurchase claims relate to post-2008 vintages. During the six months ended June 30, 2011, we resolved claims with respect to $305 million of original unpaid principal balance, including settlement, repurchase, or indemnification payments related to $211 million of original unpaid principal balance, and rescinded claims related to $94 million of original unpaid principal balance. Our representation and warranty obligation liability with respect to the GSEs considers the existing unresolved claims and our best estimate of future claims we might receive. We consider our experiences with the GSE in evaluating our liability. During 2010, we reached agreements with Freddie Mac and Fannie Mae that, subject to certain exclusions, limits our remaining exposure to each counterparty.

In March 2010, certain of our mortgage subsidiaries 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 most of the mortgage loans sold to Freddie Mac prior to January 1, 2009. This agreement does not release any of our obligations with respect to exposure for private-label mortgage-backed securities in which Freddie Mac had previously invested, loans where Ally Bank is the owner

 

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of the servicing, as well as defects in certain other specified categories of loans. Further, we continue to be responsible for other contractual obligations we have with Freddie Mac, including all indemnification obligations that may arise in connection with the servicing of the mortgages. The total original unpaid principal balance of loans originated prior to January 1, 2009 and where Ally Bank was the owner of the servicing was $10.9 billion. From January 1, 2009 through June 30, 2011, the amount of losses we have taken on loans that we have repurchased relating to defects where Ally Bank was the owner of the servicing was $87 million. From April 1, 2010 through June 30, 2011, the amount of losses we have taken on loans that we have repurchased relating to defects in the other specified categories was $15 million. These other specified categories include (i) loans subject to certain state predatory lending and similar laws; (ii) groups of 25 or more mortgage loans purchased, originated or serviced by one of our mortgage subsidiaries, the purchase, origination, or sale of which all involve a common actor who committed fraud; (iii) “non-loan-level” representations and warranties which refer to representations and warranties that do not relate to specific mortgage loans (examples of such non-loan-level representations and warranties include the requirement that our mortgage subsidiaries meet certain standards to be eligible to sell or service loans for Freddie Mac or our mortgage subsidiaries sold or serviced loans for market participants that were not acceptable to Freddie Mac); and (iv) mortgage loans that are ineligible for purchase by Freddie Mac under its charter and other applicable documents. If, however, a mortgage loan was ineligible under Freddie Mac’s charter solely because mortgage insurance was rescinded (rather than for example, because the mortgage loan is secured by a commercial property), and Freddie Mac required our mortgage subsidiary to repurchase that loan because of the ineligibility, Freddie Mac would pay our mortgage subsidiary any net loss we suffered on any later liquidation of that mortgage loan.

Certain of our mortgage subsidiaries have received subpoenas from the Federal Housing Finance Agency (the FHFA), which is the conservator of Fannie Mae and Freddie Mac. We continue to discuss the terms and circumstances under which documents would be provided under the subpoenas related to Freddie Mac. The FHFA has indicated that documents provided in response to the subpoenas will enable the FHFA to determine whether they believe issuers of private-label mortgage-backed securities are potentially liable to Freddie Mac for losses they might have incurred. Although Freddie Mac has not brought any claims against us with respect to private-label securities subsequent to the settlement, they may well do so in the future.

On December 23, 2010, certain of our mortgage subsidiaries entered into an agreement with Fannie Mae under which we made a one-time payment to Fannie Mae for the release of repurchase obligations related to most of the mortgage loans we sold to Fannie Mae prior to June 30, 2010. The agreement also covers potential exposure for private-label mortgage-backed securities in which Fannie Mae had previously invested. This agreement does not release any of our obligations with respect to loans where Ally Bank is the owner of the servicing, as well as for defects in certain other specified categories of loans. Further, we continue to be responsible for other contractual obligations we have with Fannie Mae, including all indemnification obligations that may arise in connection with the servicing of the mortgages, and we continue to be obligated to indemnify Fannie Mae for litigation or third party claims (including by borrowers) for matters that may amount to breaches of selling representations and warranties. The total original unpaid principal balance of loans originated prior to January 1, 2009 and where Ally Bank was the owner of the servicing was $24.4 billion. From July 1, 2010 through June 30, 2011, the amount of losses we have taken on loans that we have repurchased relating to defects where Ally Bank was the owner of the servicing was $61 million. From January 1, 2011 through June 30, 2011, the amount of losses we have taken on loans that we have repurchased relating to defects in the other specified categories of loans was $4 million. These other specified categories include, among others, (i) those that violate anti-predatory laws or statutes or related regulations or that otherwise violate other applicable laws and regulations; (ii) those that have non-curable defects in title to the secured property, or that have curable title defects, to the extent our mortgage subsidiaries do not cure such defects at our subsidiary’s expense; (iii) any mortgage loan in which title or ownership of the mortgage loan was defective; (iv) groups of 13 or more mortgage loans, the purchase, origination, sale or servicing of which all involve a common actor who committed fraud; and (v) mortgage loans not in compliance with Fannie Mae Charter Act requirements (e.g., mortgage loans on commercial properties or mortgage loans without required mortgage insurance coverage). If a mortgage loan falls out of compliance with Fannie Mae Charter Act requirements because mortgage insurance coverage has been rescinded and not reinstated or replaced, upon the borrower’s default our mortgage subsidiaries would have to pay to Fannie Mae the amount of insurance proceeds that would have been paid by the mortgage insurer with respect to such mortgage loan. If the amount of the loss exceeded the amount of insurance proceeds, Fannie Mae would be responsible for such excess.

 

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Monoline Insurers

Historically, our Mortgage operations securitized loans where the monolines insured all or some of the related bonds and guaranteed the timely repayment of bond principal and interest when the issuer defaults. Typically, any alleged breach requires the insurer to have both the ability to assert a claim as well as evidence that a defect has had a material and adverse effect on the interest of the security holders or the insurer. For the period 2004 through 2007, we sold $42.7 billion of loans into these monoline-wrapped securitizations. During the six months ended June 30, 2011, we received repurchase claims related to $226 million of original unpaid principal balance from the monolines associated with the 2004 through 2007 securitizations. We have resolved repurchase demands through indemnification payments related to $16 million of original unpaid principal balance.

We are currently in litigation with MBIA, and additional litigation with other monolines is likely.

Private-label Securitization

In general, representations and warranties provided as part of our securitization activities are less rigorous than those provided to the GSEs and generally impose higher burdens on investors seeking repurchase. In order to successfully assert a claim, it is our position that an investor must prove a breach of the representations and warranties that materially and adversely affects the interest of the investor in the allegedly defective loan. Securitization documents typically provide the investors with a right to request that the trustee investigate and initiate a repurchase claim. However, a class of investors generally are required to coordinate with other investors in that class comprising not less than 25% of the percentage interest constituting a class of securities of that class issued by the trust to pursue claims for breach of representations and warranties. In addition, our private-label securitizations generally require that the servicer or trustee give notice to the other parties whenever it becomes aware of facts or circumstances that reveal a breach of representation that materially and adversely affects the interest of the certificate holders. If, for example, we as servicer became aware of such facts and circumstances, we would typically be required to initiate a repurchase at that time.

Regarding our securitization activities, we have exposure to potential losses primarily through two avenues. First, investors (or monoline insurers in certain transactions) may request pursuant to applicable agreements that we repurchase loans or make the investor whole for losses incurred if it is determined that we violated representations and warranties made at the time of the sale, provided that such violations materially and adversely impacted the interests of the counterparty. Contractual representations and warranties are different based on the specific deal structure and investor. It is our position that litigation of these matters must proceed on a loan by loan basis. This issue is being disputed in various litigation currently pending. Similarly in dispute as a matter of law is the degree to which claimants will have to prove that the alleged breaches of representations and warranties actually caused the losses they claim to have suffered. Ultimate resolution by courts of these and other legal issues will impact litigation and treatment of non-litigated claims pursuant to similar contractual provisions. Second, investors in securitizations may attempt to achieve rescission of their investments or damages through litigation by claiming that the applicable offering documents were materially deficient. If an investor properly made and proved its allegations, the investor might attempt to claim that damages could include loss of market value on the investment even if there were little or no credit loss in the underlying loans.

Whole-loan Sales

In addition to the settlements with the GSEs noted earlier, we have settled with several whole-loan investors concerning alleged breaches of underwriting standards. For the six months ended June 30, 2011, we have received $38 million of original unpaid principal balance in repurchase claims of which $36 million are associated with the 2004 through 2008 vintages of loans sold to whole-loan investors. We resolved claims related to $37 million of original unpaid principal balance, including settlements, repurchases, or indemnification payments related to $13 million of original unpaid principal balance, and rescinded claims related to $24 million of original unpaid principal balance.

Private Mortgage Insurance

Mortgage insurance is required for certain consumer mortgage loans sold to the GSEs and certain securitization trusts and may have been in place for consumer mortgage loans sold to whole-loan investors. Mortgage insurance is typically required for first-lien consumer mortgage loans having a loan-to-value ratio at origination of greater than 80 percent. Mortgage insurers are, in certain circumstances, permitted to rescind existing mortgage insurance that covers consumer loans

 

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if they demonstrate certain loan underwriting requirements have not been met. Upon receipt of a rescission notice, we assess the notice and if appropriate we refute the notice, or if we cannot refute we attempt to remedy the defect. In the event the mortgage insurance cannot be reinstated, we may be obligated to repurchase the loan or provide an indemnification payment in the event of a loss, subject to contractual limitations. While we make every effort to reinstate the mortgage insurance, we have had limited success and as a result, most of these requests result in rescission of the mortgage insurance. At June 30, 2011, we have approximately $300 million in original unpaid principal balance of outstanding mortgage insurance rescission notices where we have not received a repurchase demand. However, this unpaid principal amount is not representative of expected future losses.

Private-label Mortgage-backed Securities Litigation, Repurchase Obligations, and Related Claims

Private-label Securities Litigation

There are fourteen cases relating to various private-label MBS offerings that are currently pending. Plaintiffs in these cases include Cambridge Place Investment Management Inc. (two cases 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 Boston (case pending in Suffolk County Superior Court, Massachusetts); 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); Massachusetts Mutual Life Ins. Co. (case pending in federal court in the District of Massachusetts); Allstate Insurance Co., et al. (case pending in Hennepin County District Court, Minnesota); New Jersey Carpenters Health Fund, et al. (a putative class action in which certification has been denied, pending in federal court in the Southern District of New York); West Virginia Investment Management Board (case pending in Kanawha County Circuit Court, West Virginia); Thrivent Financial for Lutherans, et al. (case pending in federal court in the District of Minnesota); Union Central Life Insurance et al. (case pending in federal court in the Southern District of New York); National Credit Union Administration Board (case pending in federal court in the District of Kansas); and The Western and Southern Life Insurance Co., et al. (case pending in Hamilton County Court of Common Pleas, Ohio). Each of the above cases includes as defendants certain of our mortgage subsidiaries, and the New Jersey Carpenters, Massachusetts Mutual, Union Central, and Western and Southern cases also include 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.

Private-label Monoline Bond Insurer Litigation

There are two additional cases 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 our 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 also alleges fraud. Additional litigation from other monoline bond insurance companies is likely.

Private-label Securitizations — Other Potential Repurchase Obligations

When we sell mortgage loans through whole-loan sales or securitizations, we are required to make customary representations and warranties about the loans to the purchaser and/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. Breaches of these representations and warranties have resulted in a requirement that we repurchase mortgage loans. As the mortgage 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 occur, resulting in additional future losses.

 

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Potential Losses

We believe it is reasonably possible that losses beyond amounts currently reserved for the litigation matters and potential repurchase obligations and related claims described above could occur, and such losses could have a material adverse impact on our results of operations, financial position or cash flows. However, based on currently available information, we are unable to estimate a range of reasonably possible losses above reserves that have been established.

 

25. Subsequent Events

Declaration of Quarterly Dividend Payments

On July 18, 2011, 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 $134 million, on Fixed Rate Cumulative Mandatorily Convertible Preferred Stock, Series F-2; a cash dividend of $17.31 per share, or a total of $45 million, on Fixed Rate Cumulative Perpetual Preferred Stock, Series G; and a cash dividend of $0.53 per share, or a total of $22 million, on Fixed Rate / Floating Rate Perpetual Preferred Stock, Series A. The dividends are payable on August 15, 2011.

Credit Rating Downgrade of the United States

On August 2, 2011, Moody’s confirmed the U.S. government’s existing sovereign rating, but stated that the rating outlook is negative, and also on August 2, 2011, Fitch affirmed its existing sovereign rating of the U.S. government, but stated that the U.S. government’s rating is under review. On August 5, 2011, Standard & Poor’s Ratings Services lowered its long-term sovereign credit rating on the United States of America to AA+ from AAA, and the outlook on its long-term rating is negative. This downgrade, any future downgrades, as well as the perceived creditworthiness of U.S. government-related obligations, could impact our ability to obtain, and the pricing with respect to, funding that is collateralized by affected instruments and obtained through the secured and unsecured markets.

 

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

Selected Financial Data

The selected historical financial information set forth below should be read in conjunction with Management’s Discussion and Analysis (MD&A) 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.

The following table presents selected statement of income data.

 

     Three months ended
June 30,
     Six months ended
June  30,
 
($ in millions)        2011              2010              2011             2010      

Total financing revenue and other interest income

   $ 2,520       $ 2,898       $ 5,050      $ 6,008   

Interest expense

     1,617         1,663         3,325        3,365   

Depreciation expense on operating lease assets

     192         526         477        1,182   

 

 

Net financing revenue

     711         709         1,248        1,461   

Total other revenue

     1,116         1,388         2,186        2,486   

 

 

Total net revenue

     1,827         2,097         3,434        3,947   

Provision for loan losses

     51         218         164        362   

Total noninterest expense

     1,584         1,444         2,976        2,963   

 

 

Income from continuing operations before income tax expense

     192         435         294        622   

Income tax expense from continuing operations

     82         33         14        69   

 

 

Net income from continuing operations

     110         402         280        553   

 

 

Income (loss) from discontinued operations, net of tax

     3         163         (21     174   

 

 

Net income

   $ 113       $ 565       $ 259      $ 727   

 

 

Non-GAAP financial measures (a):

          

Net income

   $ 113       $ 565       $ 259      $ 727   

Add: Original issue discount amortization expense (b)

     274         292         600        689   

Add: Income tax expense from continuing operations

     82         33         14        69   

Less: Income (loss) from discontinued operations, net of tax

     3         163         (21     174   

 

 

Core pretax income (a)

   $ 466       $ 727       $ 894      $ 1,311   

 

 
(a) Core pretax income is not a financial measure defined by accounting principles generally accepted in the United States of America (GAAP). We define core pretax income as earnings from continuing operations before income taxes, and original issue discount amortization expense primarily associated with our 2008 bond exchange. We believe that the presentation of core pretax income is useful information for the users of our financial statements in understanding the earning from our core businesses. In addition, core pretax income is the primary measure that management uses to assess the performance of our operations. We believe that core pretax income is a useful alternative measure of our ongoing profitability and performance, when viewed in conjunction with GAAP measures. The presentation of this additional information is not a substitute for net income (loss) determined in accordance with GAAP.
(b) Primarily represents original issue discount amortization expense associated with the 2008 bond exchange, including accelerated amortization of $20 million and $50 million for the three months and six months ended June 30, 2011, respectively, and $0 million and $101 million for the three months and six months ended June 30, 2010, respectively, that was reported as a loss on extinguishment of debt in the Condensed Consolidated Statement of Income.

 

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The following table presents selected balance sheet and ratio data.

 

     At and for the
three months ended June 30,
    At and for the
six months ended June 30,
 
($ in millions)        2011             2010             2011             2010      

Selected period-end balance sheet data:

        

Total assets

   $ 178,889      $ 176,802      $ 178,889      $ 176,802   

Long-term debt

   $ 91,723      $ 85,205      $ 91,723      $ 85,205   

Preferred stock

   $ 6,940      $ 12,180      $ 6,940      $ 12,180   

Total equity

   $ 20,423      $ 20,773      $ 20,423      $ 20,773   

Financial ratios

        

Efficiency ratio (a)

     86.70     68.86     86.66     75.07

Core efficiency ratio (a)

     75.39     60.44     73.77     63.91

Return on assets

        

Net income from continuing operations

     0.25     0.91     0.32     0.63

Net income

     0.25     1.27     0.30     0.82

Core pretax income

     1.05     1.64     1.02     1.48

Return on equity

        

Net income from continuing operations

     2.16     7.81     2.77     5.39

Net income

     2.22     10.95     2.55     7.03

Core pretax income

     9.14     14.12     8.82     12.79

Equity to assets

     11.46     11.59     11.59     11.61

Net interest spread (b)

     1.31     1.48     1.06     1.55

Net interest spread excluding original issue discount (b)

     2.12     2.53     1.97     2.61

Net yield on interest-earning assets (c)

     1.82     2.00     1.63     2.07

Net yield on interest-earning assets excluding original issue discount (c)

     2.48     2.82     2.36     2.91

Regulatory capital ratios

        

Tier 1 capital (to risk-weighted assets) (d)

     14.65     15.31     14.65     15.31

Total risk-based capital (to risk-weighted assets) (e)

     15.87     16.84     15.87     16.84

Tier 1 leverage (to adjusted average assets) (f)

     12.47     12.64     12.47     12.64

 

 

Shareholders’ equity

   $ 20,423      $ 20,773      $ 20,423      $ 20,773   

Goodwill and certain other intangibles

     (533     (532     (533     (532

Unrealized gains and other adjustments

     (315     (392     (315     (392

Trust preferred securities

     2,541        2,540        2,541        2,540   

 

 

Tier 1 capital (d)

     22,116        22,389        22,116        22,389   

Preferred equity

     (6,940     (12,180     (6,940     (12,180

Trust preferred securities

     (2,541     (2,540     (2,541     (2,540

 

 

Tier 1 common capital (non-GAAP) (g)

   $ 12,635      $ 7,669      $ 12,635      $ 7,669   

 

 

Risk-weighted assets (h)

   $ 151,000      $ 146,226      $ 151,000      $ 146,226   

 

 

Tier 1 common (to risk-weighted assets) (g)

     8.37     5.24     8.37     5.24

 

 
(a) The efficiency ratio equals total other noninterest expense divided by total net revenue. The core efficiency ratio equals total other noninterest expense divided by total net revenue excluding original issue discount amortization expense.
(b) Net interest spread represents the difference between the rate on total interest-earning assets and the rate on total interest-bearing liabilities, excluding discontinued operations for the periods shown.
(c) Net yield on interest-earning assets represents net financing revenue as a percentage of total interest-earning assets.
(d) Tier 1 capital generally consists of common equity, minority interests, and qualifying preferred stock (including fixed rate cumulative preferred stock issued and sold to U.S. Department of Treasury) less goodwill and other adjustments.
(e) Total risk-based capital is the sum of Tier 1 and Tier 2 capital. 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.
(f) Tier 1 leverage equals Tier 1 capital divided by adjusted average total assets (which reflects 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.
(g) We define Tier 1 common as Tier 1 capital less noncommon elements including qualified perpetual preferred stock, qualifying minority interest in subsidiaries, and qualifying trust preferred securities. Ally considers various measures when evaluating capital utilization and adequacy, including the Tier 1 common equity ratio, in addition to capital ratios defined by banking regulators. This calculation is intended to complement the capital ratios defined by banking regulators for both absolute and comparative purposes. Because GAAP does not include capital ratio measures, Ally believes there are no comparable GAAP financial measures to these ratios. Tier 1 common equity is not formally defined by GAAP or codified in the federal banking regulations and, therefore, is considered to be a non-GAAP financial measure. Ally believes the Tier 1 common equity ratio is important because we believe analysts and banking regulators may assess our capital adequacy using this ratio. Additionally, presentation of this measure allows readers to compare certain aspects of our capital adequacy on the same basis to other companies in the industry.
(h) Risk-weighted assets are defined by regulation and are determined by allocating assets and specified off-balance sheet financial instruments into several broad risk categories.

 

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Overview

Ally Financial Inc. (formerly GMAC Inc.) is a leading, independent, globally diversified, financial services firm. Founded in 1919, we are a leading automotive financial services company with over 90 years experience providing a broad array of financial products and services to automotive dealers and their customers. We are also one of the largest residential mortgage companies in the United States. We became a bank holding company on December 24, 2008, under the Bank Holding Company Act of 1956, as amended. Our banking subsidiary, Ally Bank, is an indirect wholly owned subsidiary of Ally Financial Inc. and a leading franchise in the growing direct (online and telephonic) banking market.

Discontinued Operations

During 2010, we committed to sell certain operations of our International Automotive Finance operations and have classified certain of these operations 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.

Primary Lines of Business

Our primary lines of business are Global Automotive Services and Mortgage operations. The following table summarizes the operating results excluding discontinued operations of each line of business for the three months and six months ended June 30, 2011 and 2010. Operating results for each of the lines of business are more fully described in the MD&A sections that follow.

 

    Three months ended
June 30,
    Six months ended
June 30,
 
($ in millions)   2011     2010     Favorable/
(unfavorable)
% change
    2011     2010     Favorable/
(unfavorable)
% change
 

Total net revenue (loss)

           

Global Automotive Services

           

North American Automotive Finance operations

  $ 992      $ 1,037        (4   $ 1,919      $ 2,112        (9

International Automotive Finance operations

    241        258        (7     487        528        (8

Insurance operations

    516        573        (10     1,036        1,194        (13

Mortgage operations

           

Origination and Servicing operations

    304        441        (31     625        776        (19

Legacy Portfolio and Other operations

    93        244        (62     183        460        (60

Corporate and Other

    (319     (456     30        (816     (1,123     27   

 

     

 

 

   

Total

  $ 1,827      $ 2,097        (13   $ 3,434      $ 3,947        (13

 

     

 

 

   

Income (loss) from continuing operations before income tax expense

           

Global Automotive Services

           

North American Automotive Finance operations

  $ 559      $ 592        (6   $ 1,077      $ 1,204        (11

International Automotive Finance operations

    71        95        (25     111        142        (22

Insurance operations

    73        108        (32     207        291        (29

Mortgage operations

           

Origination and Servicing operations

    47        249        (81     120        320        (63

Legacy Portfolio and Other operations

    (174     (19     n/m        (213     66        n/m   

Corporate and Other

    (384     (590     35        (1,008     (1,401     28   

 

     

 

 

   

Total

  $ 192      $ 435        (56   $ 294      $ 622        (53

 

     

 

 

   

n/m = not meaningful

 

   

Our Global Automotive Services operations offer a wide range of financial services and products to retail automotive consumers and automotive dealerships. Our Global Automotive Services consist of three separate reportable segments — North American Automotive Finance operations, International Automotive Finance

 

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operations, and Insurance operations. Our North American Automotive Finance operations include the automotive activities of Ally Bank and ResMor Trust. Our automotive finance services include acquiring or providing retail installment sales contracts, loans, and leases, offering term loans to dealers, financing dealer floorplans and other lines of credit to dealers, fleet leasing, and vehicle remarketing services.

Our Insurance operations offer vehicle service contracts and commercial insurance primarily covering dealers’ wholesale vehicle inventories in the United States and internationally. We are a leading provider of vehicle service contracts with mechanical breakdown and maintenance 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.

We have significantly streamlined our international presence to focus on strategic operations in five core markets: Germany, the United Kingdom, Brazil, Mexico, and China through our joint venture, GMAC-SAIC Automotive Finance Company Limited (GMAC-SAIC).

On June 9, 2011, we announced that Maserati North America selected Ally as the preferred financing provider for Maserati vehicles in the United States and Canada. We will offer wholesale financing and insurance products for dealers and retail financing and leasing for consumers.

 

   

Our mortgage business is a leading originator and servicer of residential mortgage loans in the United States and Canada. We report our Mortgage operations as two distinct segments: (1) Origination and Servicing operations and (2) Legacy Portfolio and Other operations. These operations are conducted through the mortgage operations of Ally Bank in the United States, ResMor Trust in Canada, and subsidiaries of the Residential Capital, LLC (ResCap) legal entity in the United States.

Our Origination and Servicing operations consists of originating, purchasing, selling, and securitizing conforming and government-insured residential mortgage loans in the United States and high-quality government-insured residential mortgage loans in Canada. We are one of the largest residential mortgage loan servicers in the United States, and we provide collateralized lines of credit to other mortgage originators, which we refer to as warehouse lending. We finance our mortgage loan originations primarily in Ally Bank in the United States and in ResMor Trust in Canada. We sell the conforming mortgages we originate or purchase in sales that take the form of securitizations guaranteed by the Federal National Mortgage Association (Fannie Mae) or the Federal Home Loan Mortgage Corporation (Freddie Mac), and we sell government-insured mortgage loans we originate or purchase in securitizations guaranteed by the Government National Mortgage Association (Ginnie Mae) in the United States and sell the insured mortgages we originate in Canada as National Housing Act Mortgage-Backed Securities (NHA-MBS) issued under the Canada Mortgage and Housing Corporation’s NHA-MBS program or through whole-loan sales. We also selectively originate prime jumbo mortgage loans in the United States.

Our Legacy Portfolio and Other operations primarily consist of loans originated prior to January 1, 2009, and includes noncore business activities including discontinued operations, portfolios in runoff, our mortgage reinsurance business, and cash held in the ResCap legal entity. These activities, all of which we have discontinued, included, among other things: lending to real estate developers and homebuilders in the United States and the United Kingdom; and purchasing, selling, and securitizing nonconforming residential mortgage loans (with the exception of U.S. prime jumbo mortgage loans) in both the United States and internationally.

 

   

Corporate and Other consists of our Commercial Finance Group, certain equity investments, the amortization of the discount associated with new debt issuances and bond exchanges, most notably from the December 2008 bond exchange, as well as 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.

 

    Three months ended
June 30,
    Six months ended
June 30,
 
($ in millions)   2011     2010     Favorable/
(unfavorable)
% change
    2011     2010     Favorable/
(unfavorable)
% change
 

Net financing revenue

           

Total financing revenue and other interest income

  $ 2,520      $ 2,898        (13   $ 5,050      $ 6,008        (16

Interest expense

    1,617        1,663        3        3,325        3,365        1   

Depreciation expense on operating lease assets

    192        526        63        477        1,182        60   

 

     

 

 

   

Net financing revenue

    711        709               1,248        1,461        (15

Other revenue

           

Net servicing income

    248        363        (32     532        615        (13

Insurance premiums and service revenue earned

    433        477        (9     866        945        (8

Gain on mortgage and automotive loans, net

    115        266        (57     207        537        (61

Loss on extinguishment of debt

    (25     (3     n/m        (64     (121     47   

Other gain on investments, net

    92        112        (18     176        255        (31

Other income, net of losses

    253        173        46        469        255        84   

 

     

 

 

   

Total other revenue

    1,116        1,388        (20     2,186        2,486        (12

Total net revenue

    1,827        2,097        (13     3,434        3,947        (13

Provision for loan losses

    51        218        77        164        362        55   

Noninterest expense

           

Compensation and benefits expense

    424        388        (9     858        814        (5

Insurance losses and loss adjustment expenses

    244        224        (9     430        435        1   

Other operating expenses

    916        832        (10     1,688        1,714        2   

 

     

 

 

   

Total noninterest expense

    1,584        1,444        (10     2,976        2,963          

Income from continuing operations before income tax expense

    192        435        (56     294        622        (53

Income tax expense from continuing operations

    82        33        (148     14        69        80   

 

     

 

 

   

Net income from continuing operations

  $ 110      $ 402        (73   $ 280      $ 553        (49

 

 

n/m = not meaningful

We earned net income from continuing operations of $110 million for the three months ended June 30, 2011, compared to $402 million for the three months ended June 30, 2010, and net income of $280 million for the six months ended June 30, 2011, compared to $553 million for the six months ended June 30, 2010. Continuing operations for the three months and six months ended June 30, 2011, were unfavorably impacted by lower gains on the sale of loans related to the expiration of our automotive forward flow agreements during the fourth quarter of 2010, a decrease in net servicing income, a $121 million representation and warranty expense on certain securitized mortgages for which mortgage insurance was rescinded, and lower lease remarketing gains due to lower lease termination volumes. These decreases were partially offset by lower provision for loan losses. Additionally, other income, net of losses was positively impacted by a $121 million gain on the early settlement of a loss holdback provision related to certain historical automotive whole-loan forward flow agreements during the three months ended June 30, 2011.

Total financing revenue and other interest income decreased by 13% and 16% for the three months and six months ended June 30, 2011, respectively, compared to the same periods in 2010. Operating lease revenue (along with the related depreciation expense) at our Automotive Finance operations decreased as a result of a decline in the size of our operating lease portfolio due to our decision in late 2008 to significantly curtail leasing, and lower lease remarketing gains resulting from lower lease termination volumes. The decrease at our Mortgage Legacy Portfolio and Other operations resulted from a decline in average asset levels due to loan sales, the deconsolidation of previously on-balance sheet securitizations, and

 

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portfolio runoff. Partially offsetting the decrease for both periods was an increase in consumer financing revenue at our North American Automotive operations driven primarily by an increase in consumer asset levels related to strong loan origination volume during 2010 and 2011 resulting from the recovery of automotive industry sales.

Net servicing income was $248 million and $532 million for the three months and six months ended June 30, 2011, respectively, compared to $363 million and $615 million for the same periods in 2010. The decrease was impacted by regular MSR valuation adjustments.

Insurance premiums and service revenue earned decreased 9% and 8% for the three months and six months ended June 30, 2011, respectively, compared to the same periods in 2010. The decreases were primarily driven by the sale of certain international insurance operations during the fourth quarter of 2010 and lower earnings from our U.S. extended service contracts due to a decrease in domestic written premiums related to lower vehicle sales volume from 2007 to 2009.

Gain on mortgage and automotive loans decreased 57% and 61% for the three months and six months ended June 30, 2011, respectively, compared to the same periods in 2010. The decreases for both periods were primarily due to the expiration of our automotive forward flow agreements during the fourth quarter of 2010, lower whole-loan mortgage sales and mortgage loan resolutions in 2011, lower margins on mortgage loan sales, and a decrease in mortgage loan production. The decreases were partially offset by favorable market movement on pipeline hedge.

We incurred a loss on extinguishment of debt of $25 million and $64 million for the three months and six months ended June 30, 2011, respectively, compared to $3 million and $121 million for the three months and six months ended June 30, 2010, respectively. The activity in all periods related to the extinguishment of certain Ally debt, which included $20 million and $50 million of accelerated amortization of original issue discount for the three months and six months ended June 30, 2011, compared to none and $101 million for the same periods in 2010.

Other gain on investments decreased 18% and 31% for the three months and six months ended June 30, 2011, compared to the same periods in 2010, primarily due to lower realized investment gains on our Insurance operations investment portfolio.

Other income, net of losses, increased 46% and 84% for the three months and six months ended June 30, 2011, respectively, compared to the same periods in 2010. The increases for both periods were primarily due to the positive impact of a $121 million gain on the early settlement of a loss holdback provision related to certain historical automotive whole-loan forward flow agreements. Additionally, the six months ended June 30, 2011, was favorably impacted by a lower fair value option election adjustment at our Legacy Portfolio and Other operations due to lower assets resulting from deconsolidations and better performance of the remaining asset portfolio.

The provision for loan losses was $51 million and $164 million for the three months and six months ended June 30, 2011, respectively, compared to $218 million and $362 million for the same periods in 2010. The decreases for both periods were primarily due to a reserve release at our Commercial Finance Group, improved credit quality, and the continued runoff and improved loss performance of our Nuvell nonprime automotive financing portfolio.

Compensation and benefits expense increased 9% and 5% for the three months and six months ended June 30, 2011, compared to the same periods in 2010 primarily due to higher incentive compensation.

Insurance losses and loss adjustment expenses increased 9% and decreased 1% for the three months and six months ended June 30, 2011, respectively, compared to the same periods in 2010. The increase during the three months ended June 30, 2011, was primarily due to weather related losses in the United States on our dealer inventory insurance products. The weather related losses were partially offset during the three months ended June 30, 2011, and fully offset during the six months ended June 30, 2011, by lower losses on our U.S. vehicle service contracts and the sale of certain international insurance operations during the fourth quarter of 2010.

Other operating expenses increased 10% and decreased 2% for the three months and six months ended June 30, 2011, respectively, compared to the same periods in 2010. Both the three months and six months ended June 30, 2011, were favorably impacted by lower restructuring expense, lower insurance commissions, lower technology and communications

 

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expense, and lower vehicle remarketing and repossession expense. Fully offsetting these decreases in expense in the three months ended June 30, 2011, and partially offsetting them in the six months ended June 30, 2011, was higher mortgage representation and warranty reserve expense for certain securitized mortgages for which mortgage insurance was rescinded and higher professional services costs.

We recognized consolidated income tax expense from continuing operations of $82 million and $14 million for the three months and six months ended June 30, 2011, respectively, compared to $33 million and $69 million for the same periods in 2010. The increase in income tax expense during the three months ended June 30, 2011, compared to the same period in 2010, was primarily due to increased profitability and related tax expense in non-U.S. subsidiaries. The decrease for the six months ended June 30, 2011, compared to the same period in 2010, was primarily related to the 2011 income tax benefit resulting from a $101 million reversal of valuation allowance in Canada related to modifications to the legal structure of our Canadian operations.

 

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Global Automotive Services

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 and automotive dealerships. Our automotive finance services include acquiring or providing retail installment sales contracts, loans and leases, offering term loans to dealers, financing dealer floorplans and other lines of credit to dealers, fleet leasing, 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.

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. North American Automotive Finance operations consist of automotive financing in the United States and Canada and include the automotive activities of Ally Bank and ResMor Trust. The amounts presented are before the elimination of balances and transactions with our other reportable segments.

 

     Three months ended
June 30,
    Six months ended
June 30,
 
($ in millions)    2011      2010      Favorable/
(unfavorable)
% change
    2011      2010      Favorable/
(unfavorable)
% change
 

Net financing revenue

                

Consumer

   $ 706       $ 567         25      $ 1,374       $ 1,106         24   

Commercial

     329         350         (6     655         686         (5

Loans held-for-sale

             29         (100             98         (100

Operating leases

     594         958         (38     1,245         2,053         (39

Other interest income

     23         39         (41     46         95         (52

 

      

 

 

    

Total financing revenue and other interest income

     1,652         1,943         (15     3,320         4,038         (18

Interest expense

     604         606                1,186         1,222         3   

Depreciation expense on operating lease assets

     170         486         65        438         1,093         60   

 

      

 

 

    

Net financing revenue

     878         851         3        1,696         1,723         (2

Other revenue

                

Servicing fees

     42         55         (24     87         115         (24

Gain on automotive loans, net

     15         66         (77     15         179         (92

Other income

     57         65         (12     121         95         27   

 

      

 

 

    

Total other revenue

     114         186         (39     223         389         (43

Total net revenue

     992         1,037         (4     1,919         2,112         (9

Provision for loan losses

     55         106         48        101         207         51   

Noninterest expense

                

Compensation and benefits expense

     111         93         (19     227         194         (17

Other operating expenses

     267         246         (9     514         507         (1

 

      

 

 

    

Total noninterest expense

     378         339         (12     741         701         (6

Income before income tax expense

   $ 559       $ 592         (6   $ 1,077       $ 1,204         (11

 

      

 

 

    

Total assets

   $ 90,943       $ 74,146         23      $ 90,943       $ 74,146         23   

 

      

 

 

    

Operating data

                

Retail originations

   $ 8,194       $ 8,247         (1   $ 18,334       $ 14,214         29   

Lease originations

     2,070         812         155        4,289         1,523         182   

 

 

 

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Our North American Automotive Finance operations earned income before income tax expense of $559 million and $1.1 billion for the three months and six months ended June 30, 2011, respectively, compared to $592 million and $1.2 billion for the three months and six months ended June 30, 2010, respectively. The decreases in 2011 were primarily driven by less favorable remarketing results in our operating lease portfolio, due primarily to lower lease termination volumes as a result of the declines in the size of the lease portfolio and the absence of gains on the sale of automotive loans due to the expiration of our forward flow agreements during the fourth quarter of 2010. These declines were partially offset by increased consumer financing revenue driven by strong loan origination volume related primarily to the improvement of automotive industry sales, as well as a lower loan loss provision due to an improved credit mix and improved consumer credit performance.

Consumer financing revenue increased 25% and 24% for the three months and six months ended June 30, 2011, respectively, compared to the same periods in 2010, due to an increase in consumer asset levels primarily related to strong loan origination volume during 2010 and 2011 resulting primarily from the recovery of automotive industry sales. Additionally, we increased our origination volumes for used vehicle automotive financing and have also begun to prudently expand our nonprime origination volume. The increase in consumer revenue was partially offset by a change in the consumer asset mix including the runoff of the higher yielding Nuvell nonprime automotive financing portfolio.

Loans held-for-sale financing revenue decreased $29 million and $98 million for the three months and six months ended June 30, 2011, respectively, compared to the same periods in 2010, due to the expiration of our automotive forward flow agreements during the fourth quarter of 2010. Subsequent to the expiration of these agreements, consumer loan originations have largely been retained on-balance sheet utilizing deposit funding from Ally Bank and on-balance sheet securitization transactions. Currently, there are no loans classified as held-for-sale.

Operating lease revenue decreased 38% and 39% for the three months and six months ended June 30, 2011, respectively, compared to the same periods in 2010. Operating lease revenue (along with the related depreciation expense) decreased due to a decline in the size of our operating lease portfolio. In 2008, we significantly curtailed leasing based on credit market dislocation and the significant decline in used vehicle prices that resulted in increasing residual losses and an impairment of our lease portfolio. During the latter half of 2009, we re-entered the leasing market with targeted lease product offerings and have continued to expand lease originations during 2010 and the first half of 2011. Results for the three months and six months ended June 30, 2011 were unfavorably impacted by lower lease remarketing gains. While the market for used vehicles remains strong, our lease termination volume has declined as a result of the reduction on the size of the portfolio, resulting in lower remarketing gains.

Other interest income decreased 41% and 52% for the three months and six months ended June 30, 2011, respectively, compared to the same periods in 2010, primarily due to lower FTP income related to lower rates and a change in funding mix.

Net gain on automotive loans decreased $51 million and $164 million for the three months and six months ended June 30, 2011, respectively, compared to the same periods in 2010 primarily due to the expiration of our forward flow agreements during the fourth quarter of 2010.

Other income decreased 12% for the three months ended June 30, 2011, and increased 27% for the six months ended June 30, 2011, compared to the same periods in 2010. The decrease for the three months ended June 30, 2011, was primarily due to lower remarketing fee income. The increase for the six months ended June 30, 2011, was primarily due to unfavorable swap mark-to-market activity related to the held-for-sale loan portfolio in 2010.

The provision for loan losses was $55 million and $101 million for the three months and six months ended June 30, 2011, respectively, compared to $106 million and $207 million for the same periods in 2010. The decreases for the three months and six months ended June 30, 2011, were primarily due to enhanced credit quality driven by improved loss performance in the consumer loan portfolio, continued runoff of our Nuvell nonprime consumer portfolio, and continued favorable pricing in the used vehicle market, partially offset by continued growth in the consumer loan portfolio.

Noninterest expense increased 12% and 6% for the three months and six months ended June 30, 2011, respectively, compared to the same periods in 2010. The increase for the six months ended June 30, 2011, was primarily driven by an increase in compensation and benefit costs resulting primarily from higher incentive compensation. The increase for the three months ended June 30, 2011, also included a write-down on certain owned properties.

 

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International Automotive Finance Operations

Results of 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.

 

     Three months ended
June 30,
    Six months ended
June 30,
 
($ in millions)    2011      2010      Favorable/
(unfavorable)
% change
    2011      2010      Favorable/
(unfavorable)
% change
 

Net financing revenue

                

Consumer

   $ 314       $ 264         19      $ 601       $ 543         11   

Commercial

     111         92         21        215         194         11   

Loans held-for-sale

             5         (100             9         (100

Operating leases

     26         52         (50     55         118         (53

Other interest income

     24         6         n/m        50         14         n/m   

 

      

 

 

    

Total financing revenue and other interest income

     475         419         13        921         878         5   

Interest expense

     277         207         (34     535         439         (22

Depreciation expense on operating lease assets

     22         39         44        39         88         56   

 

      

 

 

    

Net financing revenue

     176         173         2        347         351         (1

Other revenue

                

Gain on automotive loans, net

             3         (100             10         (100

Other income

     65         82         (21     140         167         (16

 

      

 

 

    

Total other revenue

     65         85         (24     140         177         (21

Total net revenue

     241         258         (7     487         528         (8

Provision for loan losses

     7         9         22        44         30         (47

Noninterest expense

                

Compensation and benefits expense

     45         44         (2     89         88         (1

Other operating expenses

     118         110         (7     243         268         9   

 

      

 

 

    

Total noninterest expense

     163         154         (6     332         356         7   

Income from continuing operations before income tax expense

   $ 71       $ 95         (25   $ 111       $ 142         (22

 

      

 

 

    

Total assets

   $ 16,582       $ 16,596              $ 16,582       $ 16,596           

 

      

 

 

    

Operating data

                

Consumer originations

   $ 2,267       $ 1,640         38      $ 4,165       $ 3,127         33   

 

 

n/m = not meaningful

Our International Automotive Finance operations earned income from continuing operations before income tax expense of $71 million and $111 million during the three months and six months ended June 30, 2011, respectively, compared to income from continuing operations before income tax expense of $95 million and $142 million during the three months and six months ended June 30, 2010, respectively. The decrease for the three months ended June 30, 2011, was primarily due to favorable mark-to-market adjustments on derivatives during the same period in 2010. Results for the six months ended June 30, 2011, were unfavorably impacted by an increase in provision for loan losses, as well as favorable mark-to-market adjustments on derivatives during the same period in 2010.

Total financing revenue and other interest income increased 13% and 5% during the three months and six months ended June 30, 2011, respectively, compared to the same periods in 2010. The increases were primarily due to movements in foreign

 

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currency exchange rates and an increase in FTP income in certain countries, which were partially offset by a decline in operating lease revenue. Operating lease revenue (along with the related depreciation expense) decreased primarily due to the continued runoff of the full-service leasing portfolio.

Interest expense increased 34% and 22% for the three months and six months ended June 30, 2011, respectively, compared to the same periods in 2010. The increases were primarily due to an increase in FTP expense in certain countries and movement in foreign currency exchange rates.

Other income decreased 21% and 16% for the three months and six months ended June 30, 2011, respectively, compared to the same periods in 2010. The decreases were primarily due to favorable mark-to-market adjustments on derivatives during the same periods in 2010 partially offset by higher earnings from the China joint venture in 2011.

The provision for loan losses was $7 million and $44 million for the three months and six months ended June 30, 2011, respectively, compared to $9 million and $30 million for the same periods in 2010. The increase in year-to-date provision is related to actions taken in the first three months of 2011 due to recent concerns regarding specific commercial loans.

Other operating expenses increased 7% for the three months ended June 30, 2011, and decreased 9% for the six months ended June 30, 2011, compared to the same periods in 2010. The decrease in the six months ended June 30, 2011, was primarily due to lower expenses associated with the wind-down of operations in certain countries and our continued focus on cost reduction partially offset by favorable tax rulings in the second quarter of 2010 that did not repeat.

Automotive Financing Volume

Consumer Automotive Financing Volume

The following tables summarize our new and used vehicle consumer financing volume and our share of consumer sales.

 

     Ally consumer  automotive
financing volume
     % Share of
consumer sales
 
Three months ended June 30, (units in thousands)    2011      2010          2011              2010      

GM new vehicles

           

North America

     183         167         35         36   

International (excluding China) (a)

     84         68         25         22   

China (b)

     30         24         11         10   

 

       

Total GM new units financed

     297         259         

 

       

Chrysler new vehicles

           

North America

     78         96         27         45   

 

       

Total Chrysler new units financed

     78         96         

 

       

Other non-GM / Chrysler new vehicles

           

North America

     16         8         

International (excluding China)

     1         1         

China (b)

     25         17         

 

       

Total other non-GM / Chrysler new units financed

     42         26         

 

       

Used vehicles

           

North America

     113         69         

International (excluding China)

     10         6         

 

       

Total used units financed

     123         75         

 

       

Total consumer automotive financing volume

     540         456         

 

 
(a) Excludes financing volume and GM consumer sales of discontinued operations as well as GM consumer sales for other countries in which GM operates and in which we have no financing volume.
(b) Represents vehicles financed through our joint venture GMAC-SAIC. We own 40% of GMAC-SAIC alongside Shanghai Automotive Group Finance Company LTD and Shanghai General Motors Corporation LTD.


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     Ally consumer  automotive
financing volume
     % Share of
consumer sales
 
Six months ended June 30, (units in thousands)    2011      2010          2011              2010      

GM new vehicles

           

North America

     449         292         43         35   

International (excluding China) (a)

     159         130         25         20   

China (b)

     54         46         10         10   

 

       

Total GM new units financed

     662         468         

 

       

Chrysler new vehicles

           

North America

     153         153         29         41   

International (excluding China)

     1                 

 

       

Total Chrysler new units financed

     154         153         

 

       

Other non-GM / Chrysler new vehicles

           

North America

     35         13         

International (excluding China)

     2         2         

China (b)

     46         29         

 

       

Total other non-GM / Chrysler new units financed

     83         44         

 

       

Used vehicles

           

North America

     238         128         

International (excluding China)

     19         12         

 

       

Total used units financed

     257         140         

 

       

Total consumer automotive financing volume

     1,156         805         

 

 
(a) Excludes financing volume and GM consumer sales of discontinued operations as well as GM consumer sales for other countries in which GM operates and in which we have no financing volume.
(b) Represents vehicles financed through our joint venture GMAC-SAIC. We own 40% of GMAC-SAIC alongside Shanghai Automotive Group Finance Company LTD and Shanghai General Motors Corporation LTD.

Growth in consumer automotive financing volume in 2011, compared to 2010, was primarily driven by higher industry sales. Additionally, increases from 2010 results are attributable to continued focus on the used vehicle and diversified markets as well as lease related volume. GM penetration levels in 2011 were above 2010 levels resulting from the expansion of our retail platform. Additional increases in our International Operations were due to increased manufacturer marketing incentive programs offered in various markets, as well as the reintroduction of products and more competitive pricing. The decrease in Chrysler penetration levels for the six months ended June 30, 2011, as compared to the same period in 2010, is related to reductions in manufacturer non-rate incentive programs.

Manufacturer Marketing Incentives

Retail and lease contracts acquired by us that included rate and residual subvention from GM were as follows.

 

     Six months ended June 30,  
      2011     2010  

GM subvented volume in North America

    

As % of GM North American new retail and lease volume acquired by Ally

     49     52

As % of total North American new and used retail and lease volume acquired by Ally

     25     26

GM subvented International (excl. China) volume (a)

    

As % of GM International new retail and lease volume acquired by Ally

     64     49

As % of total International new and used retail and lease volume acquired by Ally

     56     44

GM subvented volume in China (b)

    

As % of GM China new retail and lease volume acquired by Ally

     4     1

As % of total China new and used retail and lease volume acquired by Ally

     2     1

 

 
(a) Represents subvention for continuing operations only.
(b) Through our joint venture GMAC-SAIC. We own 40% of GMAC-SAIC alongside Shanghai Automotive Group Finance Company LTD and Shanghai General Motors Corporation LTD.

 

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The following table shows Chrysler subvented retail and lease volume acquired by Ally.

 

     Six months ended June 30,  
      2011     2010  

Chrysler subvented volume in North America

    

As % of Chrysler North American new retail and lease volume acquired by Ally

     52     58

As % of total North American new and used retail and lease volume acquired by Ally

     9     15

 

 

During the six months ended June 30, 2011, North American retail contracts acquired that included rate subvention from GM and Chrysler decreased as a percentage of total new retail contracts acquired as compared to the same period in 2010 due to reductions in manufacturer marketing incentives. Conversely, International retail contracts acquired that included rate and residual subvention increased as a result of increased GM incentive programs offered in various International markets.

For further discussion of our manufacturing marketing incentives, refer to our Annual Report on Form 10-K for the year ended December 31, 2010, Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations — Automotive Finance Operations.

Commercial Wholesale Financing Volume

The following table summarizes 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.

 

     Average balance      % Share of dealer inventory  
Three months ended June 30, ($ in millions)    2011      2010      2011      2010  

GM new vehicles

           

North America (a)

   $ 16,455       $ 14,731         81         84   

International (excluding China) (b)(c)

     4,041         2,949         80         75   

China (b)(d)

     1,345         1,143         80         80   

 

       

Total GM new vehicles financed

     21,841         18,823         

 

       

Chrysler new vehicles

           

North America (a)

     8,214         5,808         67         71   

International

     22         42         

 

       

Total Chrysler new vehicles financed

     8,236         5,850         

 

       

Other non-GM / Chrysler new vehicles

           

North America

     2,076         1,961         

International (excluding China)

     152         78         

 

       

Total other non-GM / Chrysler new vehicles financed

     2,228         2,039         

 

       

Used vehicles

           

North America

     3,126         3,119         

International (excluding China)

     182         90         

 

       

Total used vehicles financed

     3,308         3,209         

 

       

Total commercial wholesale finance receivables

   $ 35,613       $ 29,921         

 

 
(a) Share of dealer inventory based on end of period dealer inventory (excluding in-transit units).
(b) Share of dealer inventory based on wholesale financing share of GM shipments.
(c) Excludes commercial wholesale finance receivables and dealer inventory of discontinued and wind-down operations as well as dealer inventory for other countries in which GM operates and we had no commercial wholesale finance receivables.
(d) Represents vehicles financed through a joint venture in China in which Ally owns a minority interest.

 

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     Average balance      % Share of dealer inventory  
Six months ended June 30, ($ in millions)        2011              2010          2011      2010  

GM new vehicles

           

North America (a)

   $ 15,962       $ 14,132         82         85   

International (excluding China) (b)(c)

     3,931         2,797         80         74   

China (b)(d)

     1,106         1,045         81         81   

 

       

Total GM new vehicles financed

     20,999         17,974         

 

       

Chrysler new vehicles

           

North America (a)

     7,660         5,492         68         71   

International

     22         43         

 

       

Total Chrysler new vehicles financed

     7,682         5,535         

 

       

Other non-GM / Chrysler new vehicles

           

North America

     2,128         1,928         

International (excluding China)

     140         63         

 

       

Total other non-GM / Chrysler new vehicles financed

     2,268         1,991         

 

       

Used vehicles

           

North America

     3,111         3,035         

International (excluding China)

     157         391         

 

       

Total used vehicles financed

     3,268         3,426         

 

       

Total commercial wholesale finance receivables

   $ 34,217       $ 28,926         

 

 
(a) Share of dealer inventory based on end of period dealer inventory (excluding in-transit units).
(b) Share of dealer inventory based on wholesale financing share of GM shipments.
(c) Excludes commercial wholesale finance receivables and dealer inventory of discontinued and wind-down operations as well as dealer inventory for other countries in which GM operates and we had no commercial wholesale finance receivables.
(d) Includes vehicles financed through a joint venture in China in which Ally owns a minority interest.

Commercial wholesale financing average balance increased for the three months and six months ended June 30, 2011, compared to the same periods in 2010, primarily due to increasing global automotive sales and the corresponding increase in dealer inventories in virtually every market.

 

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Insurance Operations

Results of 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.

 

     Three months ended
June 30,
    Six months ended
June 30,
 
($ in millions)    2011     2010     Favorable/
(unfavorable)
% change
    2011     2010     Favorable/
(unfavorable)
% change
 

Insurance premiums and other income

            

Insurance premiums and service revenue earned

   $ 429      $ 469        (9   $ 856      $ 929        (8

Investment income

     71        86        (17     151        227        (33

Other income

     16        18        (11     29        38        (24

 

     

 

 

   

Total insurance premiums and other income

     516        573        (10     1,036        1,194        (13

Expense

            

Insurance losses and loss adjustment expenses

     237        224        (6     410        420        2   

Acquisition and underwriting expense

            

Compensation and benefits expense

     30        28        (7     63        57        (11

Insurance commissions expense

     130        154        16        259        304        15   

Other expenses

     46        59        22        97        122        20   

 

     

 

 

   

Total acquisition and underwriting expense

     206        241        15        419        483        13   

 

     

 

 

   

Total expense

     443        465        5        829        903        8   

Income from continuing operations before income tax expense

   $ 73      $ 108        (32   $ 207      $ 291        (29

 

     

 

 

   

Total assets

   $ 8,533      $ 8,552             $ 8,533      $ 8,552          

 

     

 

 

   

Insurance premiums and service revenue written

   $ 429      $ 415        3      $ 841      $ 838          

 

     

 

 

   

Combined ratio (a)

     100.7     96.0       94.4     93.8  

 

 
(a) Management uses a combined ratio as a primary measure of underwriting profitability with its components measured using accounting principles generally accepted in the United States of America. Underwriting profitability is indicated by a combined ratio under 100% and is calculated as the sum of all incurred losses and expenses (excluding interest and income tax expense) divided by the total of premiums and service revenues earned and other income.

Our Insurance operations earned income from continuing operations before income tax expense of $73 million and $207 million for the three months and six months ended June 30, 2011, respectively, compared to $108 million and $291 million for the three months and six months ended June 30, 2010, respectively. The decreases were primarily attributable to lower realized investment gains and higher weather related losses in the United States.

Insurance premiums and service revenue earned decreased 9% and 8% for the three months and six months ended June 30, 2011, respectively, compared to the same periods in 2010, primarily due to the sale of certain international insurance operations during the fourth quarter of 2010 and lower earnings from our U.S. extended service contracts due to a decrease in domestic written premiums related to lower vehicle sales volume from 2007 to 2009.

Investment income totaled $71 million and $151 million for the three months and six months ended June 30, 2011, respectively, compared to $86 million and $227 million for the same periods in 2010. The decreases were primarily due to lower realized investment gains. The fair value of the investment portfolio was $4.6 billion and $4.2 billion at June 30, 2011 and 2010, respectively.

Insurance losses and loss adjustment expenses totaled $237 million and $410 million for the three months and six months ended June 30, 2011, respectively, compared to $224 million and $420 million for the three months and six months ended

 

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June 30, 2010, respectively. The increase during the three month period was primarily due to weather related losses in the United States on our dealer inventory insurance products. The weather related losses were partially offset for the three month period and fully offset for the six month period by favorable experience on our U.S. vehicle service contract losses and the sale of certain international insurance operations during the fourth quarter of 2010.

Acquisition and underwriting expense decreased 15% and 13% for the three months and six months ended June 30, 2011, respectively, compared to the same periods in 2010. The decreases were primarily due to the sale of certain international insurance operations during the fourth quarter of 2010 and lower commission expense in our U.S. dealership-related products matching our decrease in earned premiums.

The following table shows premium and service revenue written by insurance product.

 

     Three months ended
June  30,
     Six months ended
June  30,
 
($ in millions)        2011              2010              2011              2010      

Vehicle service contracts

           

New retail

   $ 93       $ 83       $ 183       $ 152   

Used retail

     113         114         217         220   

 

 

Total vehicle service contracts

     206         197         400         372   

Wholesale

     30         20         52         47   

Other finance and insurance (a)

     41         34         71         57   

 

 

North American operations

     277         251         523         476   

International operations (b)

     152         164         318         362   

 

 

Total

   $ 429       $ 415       $ 841       $ 838   

 

 
(a) Other finance and insurance includes Guaranteed Automobile Protection (GAP) coverage, excess wear and tear, and other ancillary products.
(b) International operations for the three months and six months ended June 30, 2010, included $23 million and $63 million, respectively, of written premium from certain international insurance operations that were sold during the fourth quarter of 2010.

Insurance premiums and service revenue written was $429 million and $841 million for the three months and six months ended June 30, 2011, respectively, compared to $415 million and $838 million for the same periods in 2010. 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 six months ended June 30, 2011, will be recognized as income in future periods. The increase of insurance premiums and service revenue written was partially offset by the sale of certain international insurance operations during the fourth quarter of 2010.

Cash and Investments

A significant aspect of our Insurance operations is the investment of proceeds from premiums and other revenue sources. We use these investments to satisfy our obligations related to future claims at the time these claims are settled. Our Insurance operations have an Investment Committee, which develops guidelines and strategies for these investments. The guidelines established by this committee reflect our risk tolerance, liquidity requirements, regulatory requirements, and rating agency considerations, among other factors.

 

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The following table summarizes the composition of our Insurance operations cash and investment portfolio at fair value.

 

($ in millions)    June 30, 2011      December 31, 2010  

Cash

     

Noninterest-bearing cash

   $ 37       $ 28   

Interest-bearing cash

     1,091         1,168   

 

 

Total cash

     1,128         1,196   

 

 

Available-for-sale securities

     

Debt securities

     

U.S. Treasury and federal agencies

     79         219   

Foreign government

     811         744   

Mortgage-backed

     886         826   

Asset-backed

     61         11   

Corporate debt

     1,553         1,559   

 

 

Total debt securities

     3,390         3,359   

Equity securities

     1,170         796   

 

 

Total available-for-sale securities

     4,560         4,155   

 

 

Total cash and securities

   $ 5,688       $ 5,351   

 

 

 

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Mortgage Operations

Our Mortgage operations include the ResCap legal entity, the mortgage operations of Ally Bank, and the Canadian mortgage operations of ResMor Trust. Results for our Mortgage operations are presented by reportable segment, which includes our Origination and Servicing operations and our Legacy Portfolio and Other operations.

Origination and Servicing Operations

Results of Operations

The following table summarizes the operating results for our Origination and Servicing operations for the periods shown. Our Origination and Servicing operations principal activities include originating, purchasing, selling, and securitizing conforming and government-insured residential mortgage loans in the United States and Canada; servicing residential mortgage loans for ourselves and others; and providing collateralized lines of credit to other mortgage originators, which we refer to as warehouse lending. We also originate high-quality prime jumbo mortgage loans in the United States. We finance our mortgage loan originations primarily in Ally Bank in the United States and in our trust company, ResMor Trust, in Canada.

 

    Three months ended
June 30,
    Six months ended
June 30,
 
($ in millions)   2011     2010     Favorable/
(unfavorable)
% change
    2011     2010     Favorable/
(unfavorable)
% change
 

Net financing loss

           

Total financing revenue and other interest income

  $ 97      $ 95        2      $ 205      $ 195        5   

Interest expense

    115        113        (2     253        224        (13

 

     

 

 

   

Net financing loss

    (18     (18            (48     (29     (66

Servicing fees

    313        331        (5     640        657        (3

Servicing asset valuation and hedge activities, net

    (105     (21     n/m        (192     (154     (25

 

     

 

 

   

Total servicing income, net

    208        310        (33     448        503        (11

Gain on mortgage loans, net

    62        102        (39     136        188        (28

Other income, net of losses

    52        47        11        89        114        (22

 

     

 

 

   

Total other revenue

    322        459        (30     673        805        (16

Total net revenue

    304        441        (31     625        776        (19

Provision for loan losses

           (35     (100     2        (34     (106

Noninterest expense

           

Compensation and benefits expense

    70        62        (13     139        137        (1

Representation and warranty expense

           21        100        (2     41        105   

Other operating expenses

    187        144        (30     366        312        (17

 

     

 

 

   

Total noninterest expense

    257        227        (13     503        490        (3

Income before income tax expense

  $ 47      $ 249        (81   $ 120      $ 320        (63

 

     

 

 

   

Total assets

  $ 20,010      $ 20,014             $ 20,010      $ 20,014          

 

 

n/m = not meaningful

Our Origination and Servicing operations earned income before income tax expense of $47 million and $120 million for the three months and six months ended June 30, 2011, respectively, compared to $249 million and $320 million for the three months and six months ended June 30, 2010, respectively. The decreases were primarily driven by unfavorable servicing asset valuation, net of hedge, lower net gains on the sale of mortgage loans, and the release of provision in 2010 that did not repeat in 2011.

Net financing losses were $18 million and $48 million for the three months and six months ended June 30, 2011, compared to $18 million and $29 million for the same periods in 2010. Net financing loss for the six months ended June 30, 2011, was unfavorably impacted by higher FTP as a result of larger asset balances and slightly unfavorable interest expense on Ginnie Mae repurchases.

Net servicing income was $208 million and $448 million for the three months and six months ended June 30, 2011, respectively, compared to $310 million and $503 million for the same periods in 2010. The decrease was impacted by regular MSR valuation adjustments.

 

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The net gain on mortgage loans decreased 39% and 28% for the three months and six months ended June 30, 2011, respectively, compared to the same periods in 2010. The decreases during 2011 were primarily due to lower margins and production, partially offset by favorable market movement on pipeline hedge.

Other income, net of losses, was $52 million and $89 million for the three months and six months ended June 30, 2011, respectively, compared to $47 million and $114 million for the same periods in 2010. The decrease in other income during the six months ended June 30, 2011, was primarily related to the write-down of retained interests and lower mortgage processing fee income resulting from lower origination volume due to lower industry volume.

The provision for loan losses decreased $35 million and $36 million for the three months and six months ended June 30, 2011, respectively, compared to the same periods in 2010. The decrease in the provision from the three months ended June 30, 2011, to the three months ended June 30, 2010, is primarily driven by a release of provision during the second quarter of 2010 resulting from a change in the reserving methodology on the post-January 1, 2009 Origination and Servicing portfolio to better reflect the performance of the underlying collateral. The decrease for the six months ended June 30, 2011, as compared to the six months ended June 30, 2010, was attributable to the change in reserving methodology described above, as well as the release of reserves in 2010 on the commercial warehouse lending portfolio.

Total noninterest expense increased 13% and 3% for the three months and six months ended June 30, 2011, respectively, compared to the same periods in 2010, primarily due to a favorable reversal of a contingent liability during the three months ended June 30, 2010. The increase was partially offset by lower representation and warranty reserve expense in 2011 related to expected repurchases.

 

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Legacy Portfolio and Other Operations

Results of Operations

The following table summarizes the operating results for our Legacy Portfolio and Other operations excluding discontinued operations for the periods shown. Our Legacy Portfolio and Other operations primarily consists of loans originated prior to January 1, 2009, and includes noncore business activities, portfolios in runoff, our mortgage reinsurance business, and cash held in the ResCap legal entity. These activities, all of which we have discontinued, included, among other things: lending to real estate developers and homebuilders in the United States and United Kingdom; and purchasing, selling, and securitizing nonconforming residential mortgage loans (with the exception of U.S. prime jumbo mortgage loans) in both the United States and internationally.

 

    Three months ended
June  30,
    Six months ended
June 30,
 
($ in millions)   2011     2010     Favorable/
(unfavorable)
% change
    2011     2010     Favorable/
(unfavorable)
% change
 

Net financing revenue

           

Total financing revenue and other interest income

  $ 210      $ 361        (42   $ 428      $ 743        (42

Interest expense

    132        189        30        272        378        28   

 

     

 

 

   

Net financing revenue

    78        172        (55     156        365        (57

Servicing fees

    (1     (3     67        (3     (5     40   

Servicing asset valuation and hedge activities, net

                                         

 

     

 

 

   

Total servicing income, net

    (1     (3     67        (3     (5     40   

Gain on mortgage loans, net

    34        95        (64     52        160        (68

Other income, net of losses

    (18     (20     10        (22     (60     63   

 

     

 

 

   

Total other revenue

    15        72        (79     27        95        (72

Total net revenue

    93        244        (62     183        460        (60

Provision for loan losses

    38        127        70        83        133        38   

Noninterest expense

           

Compensation and benefits expense

    32        21        (52     68        42        (62

Representation and warranty expense

    184        76        (142     212        104        (104

Other operating expenses

    13        39        67        33        115        71   

 

     

 

 

   

Total noninterest expense

    229        136        (68     313        261        (20

(Loss) income from continuing operations before income tax expense

  $ (174   $ (19     n/m      $ (213   $ 66        n/m   

 

     

 

 

   

Total assets

  $ 11,313      $ 26,029        (57   $ 11,313      $ 26,029        (57

 

 

n/m = not meaningful

Our Legacy Portfolio and Other operations incurred losses from continuing operations before income tax expense of $174 million and $213 million for the three months and six months ended June 30, 2011, respectively, compared to a loss from continuing operations before income tax expense of $19 million and income from continuing operations before income tax expense of $66 million for the three months and six months ended June 30, 2010, respectively. The losses in 2011 were higher primarily due to a $121 million representation and warranty expense related to rescinded mortgage insurance on certain securitized mortgage loans, lower financing revenue related to a decrease in asset levels, and a lower net gain on the sale of mortgage loans.

Net financing revenue was $78 million and $156 million for the three months and six months ended June 30, 2011, respectively, compared to $172 million and $365 million for the same periods in 2010. The decreases were driven by lower financing revenue and other interest income due primarily to a decline in average asset levels due to loan sales, the deconsolidation of previously on-balance sheet securitizations, and portfolio runoff. The decreases were partially offset by lower interest expense related to a reduction in average borrowings commensurate with a smaller asset base.

The net gain on mortgage loans was $34 million and $52 million for the three months and six months ended June 30, 2011, respectively, compared to $95 million and $160 million for the same periods in 2010. The decreases during 2011 were primarily due to lower whole-loan sales and mortgage loan resolutions.

 

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Other income, net of losses, was a loss of $18 million and $22 million for the three months and six months ended June 30, 2011, respectively, compared to a loss of $20 million and $60 million for the same periods in 2010. The improvement for the six months ended June 30, 2011, compared to the same period in 2010, was primarily due to a lower fair value adjustment and better performance of the remaining asset portfolio. This favorability was partially offset by lower gains on real estate owned properties.

The provision for loan losses was $38 million and $83 million for the three months and six months ended June 30, 2011, respectively, compared to $127 million and $133 million for the same periods in 2010. The provision for both periods ended June 30, 2011, was the result of positive trends in credit performance and continued portfolio seasoning, which benefited from 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.

Total noninterest expense increased 68% and 20% for the three months and six months ended June 30, 2011, respectively, compared to the same periods in 2010. The increases were primarily driven by a $121 million representation and warranty expense for certain securitized mortgages for which mortgage insurance was rescinded. The increase for both periods was partially offset by lower real estate owned expense due to fewer foreclosures, lower real estate owned balances, favorable average real estate owned values, and lower taxes and expense related to real estate owned properties.

Mortgage Loan Production and Servicing

Mortgage loan production for our Origination and Servicing operations was $12.6 billion and $24.8 billion for the three months and six months ended June 30, 2011, respectively, compared to $13.5 billion and $26.8 billion for the same periods in 2010. Domestic loan production decreased $816 million, or 6%, and $1.9 billion, or 7%, for the three months and six months ended June 30, 2011, respectively, compared to the same periods in 2010. International loan production decreased $63 million, or 18%, and $41 million, or 6%, for the three months and six months ended June 30, 2011, compared to the same periods in 2010. International mortgage loan production represents high-quality government-insured residential mortgages in Canada.

The following tables summarize consumer mortgage loan production for our Origination and Servicing operations.

 

     2011      2010  
Three months ended June 30, ($ in millions)    Number
of loans
     Dollar amount
of loans
     Number
of loans
     Dollar amount
of loans
 

Production by product type

           

Prime conforming

     46,641       $ 10,587         39,849       $ 9,061   

Prime nonconforming

     335         291         550         462   

Prime second-lien

                               

Government

     7,703         1,466         18,311         3,637   

Nonprime

                               

 

 

Total U.S. production

     54,679         12,344         58,710         13,160   

International production

     1,374         283         1,835         346   

 

 

Total production by product type

     56,053       $ 12,627         60,545       $ 13,506   

 

 

U.S. production by channel

           

Correspondent lender and secondary market purchases

     44,702       $ 10,218         51,494       $ 11,661   

Direct lending

     7,775         1,461         7,073         1,466   

Mortgage brokers

     2,202         665         143         33   

 

 

Total U.S. production by channel

     54,679       $ 12,344         58,710       $ 13,160   

 

 

 

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     2011      2010  
Six months ended June 30, ($ in millions)    Number
of loans
     Dollar amount
of loans
     Number
of loans
     Dollar amount
of loans
 

Production by product type

           

Prime conforming

     92,072       $ 20,513         80,783       $ 18,537   

Prime nonconforming

     790         675         996         832   

Prime second-lien

                               

Government

     15,240         3,003         34,245         6,759   

Nonprime

                               

 

 

Total U.S. production

     108,102         24,191         116,024         26,128   

International production

     2,838         595         3,379         636   

 

 

Total production by product type

     110,940       $ 24,786         119,403       $ 26,764   

 

 

U.S. production by channel

           

Correspondent lender and secondary market purchases

     90,245       $ 20,488         99,279       $ 22,644   

Direct lending

     14,789         2,830         16,523         3,428   

Mortgage brokers

     3,068         873         222         56   

 

 

Total U.S. production by channel

     108,102       $ 24,191         116,024       $ 26,128   

 

 

The following table summarizes the primary mortgage loan-servicing portfolio.

 

($ in millions)    June 30, 2011      December 31, 2010  

U.S. primary servicing portfolio

     

Prime conforming

   $ 227,034       $ 220,762   

Prime nonconforming

     48,754         52,643   

Prime second-lien

     7,573         10,851   

Government

     48,975         48,550   

Nonprime

     21,948         22,874   

International primary servicing portfolio

     6,170         5,087   

 

 

Total primary servicing portfolio (a)

   $ 360,454       $ 360,767   

 

 
(a) Excludes loans for which we acted as a subservicer. Subserviced loans totaled $23.7 billion and $24.2 billion at June 30, 2011, and December 31, 2010, respectively.

For more information regarding our serviced mortgage assets, refer to Note 11 to the Condensed Consolidated Financial Statements.

Loans Outstanding

Consumer mortgage loans held-for-sale for our Origination and Servicing operations were as follows.

 

($ in millions)    June 30, 2011     December 31, 2010  

Prime conforming

   $ 2,064      $ 5,585   

Prime nonconforming

              

Prime second-lien

              

Government (a)

     3,005        3,434   

Nonprime

              

International

     196        351   

 

 

Total

     5,265        9,370   

Net premiums

     58        135   

Fair value option election adjustment

     30        (61

Lower-of-cost or fair value adjustment

     (3     (2

 

 

Total, net

   $ 5,350      $ 9,442   

 

 
(a) Includes loans subject to conditional repurchase options of $2.3 billion and $2.3 billion sold to Ginnie Mae guaranteed securitizations at June 30, 2011, and December 31, 2010, respectively. The corresponding liability is recorded in accrued expenses and other liabilities on the Condensed Consolidated Balance Sheet.

 

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Consumer mortgage loans held-for-investment for our Origination and Servicing operations were as follows.

 

($ in millions)    June 30, 2011     December 31, 2010  

Prime conforming

   $      $   

Prime nonconforming

     2,448        2,068   

Prime second-lien

              

Government

              

Nonprime

              

International

     257        289   

 

 

Total

     2,705        2,357   

Net premiums

     11        11   

Fair value option election adjustment

              

Allowance for loan losses

     (14     (14

 

 

Total, net

   $ 2,702      $ 2,354   

 

 

Consumer mortgage loans held-for-sale for our Legacy Portfolio and Other operations were as follows.

 

($ in millions)    June 30, 2011     December 31, 2010  

Prime conforming

   $ 329      $ 336   

Prime nonconforming

     641        674   

Prime second-lien

     563        634   

Government

     18        18   

Nonprime

     609        637   

International

     33        13   

 

 

Total (a)

     2,193        2,312   

Net discounts

     (304     (296

Fair value option election adjustment

     (17     (1

Lower-of-cost or fair value adjustment

     (54     (46

 

 

Total, net (b)

   $ 1,818      $ 1,969   

 

 
(a) Includes unpaid principal write-down of $1.7 billion and $1.8 billion at June 30, 2011, and December 31, 2010, respectively. The amounts are write-downs taken upon the transfer of mortgage loans from held-for-investment to held-for-sale during the fourth quarter of 2009 and charge-offs taken in accordance with our charge-off policy.
(b) Includes loans subject to conditional repurchase options of $122 million and $146 million sold to off-balance sheet private-label securitizations at June 30, 2011, and December 31, 2010, respectively. The corresponding liability is recorded in accrued expenses and other liabilities on the Condensed Consolidated Balance Sheet.

Consumer mortgage loans held-for-investment for our Legacy Portfolio and Other operations were as follows.

 

($ in millions)    June 30, 2011     December 31, 2010  

Prime conforming

   $ 298      $ 323   

Prime nonconforming

     5,628        6,059   

Prime second-lien

     2,406        2,642   

Government

              

Nonprime

     1,458        1,583   

International

     506        573   

 

 

Total

     10,296        11,180   

Net premiums

     22        26   

Fair value option election adjustment

     (1,752     (1,890

Allowance for loan losses

     (521     (542

 

 

Total, net (a)

   $ 8,045      $ 8,774   

 

 
(a) At June 30, 2011, and December 31, 2010, the carrying value of mortgage loans held-for-investment relating to securitization transactions accounted for as on-balance sheet securitizations and pledged as collateral totaled $946 million and $1.0 billion, respectively. The investors in these on-balance sheet securitizations have no recourse to our other assets beyond the loans pledged as collateral other than market customary representation and warranty provisions.

Mortgage Foreclosure Matters

Refer to Note 24 to the Condensed Consolidated Financial Statements for information related to these matters.

 

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Corporate and Other

The following table summarizes the activities of Corporate and Other excluding discontinued operations for the periods shown. Corporate and Other includes our Commercial Finance Group, certain equity investments, the amortization of the discount associated with new debt issuances and bond exchanges, most notably from the December 2008 bond exchange, as well as the residual impacts of our corporate FTP and treasury ALM activities, noninterest expenses associated with deposit gathering activities, and reclassifications and eliminations between the reportable operating segments.

 

     Three months ended
June 30,
    Six months ended
June 30,
 
($ in millions)    2011     2010     Favorable/
(unfavorable)
% change
    2011     2010     Favorable/
(unfavorable)
% change
 

Net financing loss

            

Total financing revenue and other interest income

   $ 41      $ 40        3      $ 88      $ 71        24   

Interest expense

            

Original issue discount amortization

     257        293        12        556        589        6   

Other interest expense

     210        239        12        480        484        1   

 

     

 

 

   

Total interest expense

     467        532        12        1,036        1,073        3   

 

     

 

 

   

Net financing loss

     (426     (492     13        (948     (1,002     5   

Other revenue

            

Loss on extinguishment of debt

     (25     (3     n/m        (64     (121     47   

Other gain on investments, net

     40        47        (15     65        79        (18

Other income, net of losses

     92        (8     n/m        131        (79     n/m   

 

     

 

 

   

Total other revenue (expense)

     107        36        197        132        (121     n/m   

Total net expense

     (319     (456     30        (816     (1,123     27   

Provision for loan losses

     (49     11        n/m        (66     26        n/m   

Noninterest expense

            

Compensation and benefits expense

     136        140        3        272        296        8   

Other operating expense

     (22     (17     29        (14     (44     (68

 

     

 

 

   

Total noninterest expense

     114        123        7        258        252        (2

Loss from continuing operations before income tax expense

   $ (384   $ (590     35      $ (1,008   $ (1,401     28   

 

     

 

 

   

Total assets

   $ 31,508      $ 31,465             $ 31,508      $ 31,465          

 

 

n/m = not meaningful

The following table summarizes the components of net financing losses for Corporate and Other.

 

     Three months ended
June  30,
    Six months ended
June  30,
 
($ in millions)        2011             2010             2011             2010      

Original issue discount amortization (a)

   $ (257   $ (293   $ (556   $ (589

Net impact of the FTP methodology

        

Cost of carry on the cash and investment portfolio

     (140     (127     (299     (245

ALM/FTP cost of funds mismatch

     (70     (42     (176     (113

Net other unallocated interest income (costs)

     15        (51     27        (99

 

 

Total net impact of the FTP methodology

     (195     (220     (448     (457

Commercial Finance Group net financing revenue and other

     26        21        56        44   

 

 

Total net financing losses for Corporate and Other

   $ (426   $ (492   $ (948   $ (1,002

 

 
(a) The original issue discount associated with our 2008 bond exchange and cash tender offers in 2008 was $248 million and $534 million during the three months and six months ended June 30, 2011, respectively, compared to $282 million and $568 million during the same periods in 2010. The remaining amount is attributable to new debt issuance discount amortization.

 

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The following table presents the scheduled remaining amortization of the original issue discount at June 30, 2011.

 

Year ended December 31, ($ in millions)    2011 (a)      2012      2013      2014      2015      2016 and
thereafter (b)
     Total  

Original issue discount

                    

Outstanding balance

   $ 2,195       $ 1,844       $ 1,580       $ 1,390       $ 1,334       $      

Total amortization (c)

     369         351         264         190         56         1,334       $ 2,564   

2008 bond exchange amortization (d)

     352         320         241         166         43         1,178         2,300   

 

 
(a) Represents the remaining future original issue discount amortization expense to be taken during 2011.
(b) The maximum annual scheduled amortization for any individual year is $158 million in 2030 of which $152 million is related to 2008 bond exchange amortization.
(c) Amortization is included as interest on long-term debt on the Condensed Consolidated Statement of Income.
(d) 2008 bond exchange amortization is included in total amortization.

Loss from continuing operations before income tax expense for Corporate and Other was $384 million and $1.0 billion for the three months and six months ended June 30, 2011, respectively, compared to $590 million and $1.4 billion for the three months and six months ended June 30, 2010, respectively. Corporate and Other’s loss from continuing operations before income tax expense for both periods is primarily due to net financing losses, which primarily represents original issue discount amortization expense and 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 improvements in the loss from continuing operations before income tax expense for the three months and six months ended June 30, 2011, were primarily due to the positive impact of a $121 million gain on the early settlement of a loss holdback provision related to certain historical automotive whole-loan forward flow agreements. Additionally, the three months ended June 30, 2011, was favorably impacted by a decrease in interest expense primarily due to lower debt commitment and facility fees, partially offset by a higher loss on the extinguishment of certain Ally debt (which included $20 million of accelerated amortization of original issue discount during the three months ended June 30, 2011). The six months ended June 30, 2011, was favorably impacted by a lower loss on the extinguishment of certain Ally debt (which included accelerated amortization of original issue discount of $50 million for the six months ended June 30, 2011, compared to $101 million for the six months ended June 30, 2010), partially offset by unfavorable net derivative activity.

Corporate and Other also includes the results of our Commercial Finance Group. Our Commercial Finance Group earned income from continuing operations before income tax expense of $82 million and $133 million for the three months and six months ended June 30, 2011, respectively, compared to $26 million and $39 million for the three months and six months ended June 30, 2010, respectively. The increases were primarily related to a lower provision for loan losses due to a specific reserve release and a decrease in non-specific loss reserves driven by a decline in the size of the loan portfolio.

 

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Cash and Securities

The following table summarizes the composition of the cash and securities portfolio held at fair value by Corporate and Other.

 

($ in millions)    June 30, 2011      December 31, 2010  

Cash

     

Noninterest-bearing cash

   $ 1,940       $ 1,637   

Interest-bearing cash

     10,980         7,964   

 

 

Total cash

     12,920         9,601   

 

 

Trading securities

     

U.S. Treasury

             75   

Mortgage-backed

     272         25   

Asset-backed

             93   

 

 

Total trading securities

     272         193   

 

 

Available-for-sale securities

     

Debt securities

     

U.S. Treasury and federal agencies

     1,089         3,097   

States and political subdivisions

     2         2   

Foreign government

     510         499   

Mortgage-backed

     6,936         4,973   

Asset-backed

     2,160         1,936   

Other debt (a)

     674         151   

 

 

Total debt securities

     11,371         10,658   

 

 

Total available-for-sale securities

     11,371         10,658   

 

 

Total cash and securities

   $ 24,563       $ 20,452   

 

 
(a) Includes intersegment eliminations.

 

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Risk Management

Managing the risk to reward trade-off is a fundamental component of operating our business. Our risk management process is overseen by the Ally Board of Directors (the Board), various risk committees, and the executive leadership team. The Board sets the risk appetite across our company while the risk committees and executive leadership team identify and 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 2010 Annual Report on Form 10-K.

Loan and Lease Exposure

The following table summarizes the exposures from our loan and lease activities.

 

($ in millions)    June 30, 2011      December 31, 2010  

Finance receivables and loans

     

Global Automotive Services

   $ 96,452       $ 86,888   

Mortgage operations

     12,612         13,423   

Corporate and Other

     1,661         2,102   

 

 

Total finance receivables and loans

     110,725         102,413   

Held-for-sale loans

     

Global Automotive Services

               

Mortgage operations

     7,168         11,411   

Corporate and Other

               

 

 

Total held-for-sale loans

     7,168         11,411   

 

 

Total on-balance sheet loans

   $ 117,893       $ 113,824   

 

 

Off-balance sheet securitized loans

     

Global Automotive Services

   $       $   

Mortgage operations

     330,276         326,830   

Corporate and Other

               

 

 

Total off-balance sheet securitized loans

   $ 330,276       $ 326,830   

 

 

Operating lease assets

     

Global Automotive Services

   $ 9,015       $ 9,128   

Mortgage operations

               

Corporate and Other

               

 

 

Total operating lease assets

   $ 9,015       $ 9,128   

 

 

Serviced loans and leases

     

Global Automotive Services

   $ 121,624       $ 115,358   

Mortgage operations (a)

     360,454         360,767   

Corporate and Other

     2,340         2,448   

 

 

Total serviced loans and leases

   $ 484,418       $ 478,573   

 

 
(a) Includes primary mortgage loan-servicing portfolio only.

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 automobile 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 originate or purchase. Loans that we do not intend to retain are sold to investors, primarily securitizations guaranteed by Fannie Mae, Freddie Mac, and Ginnie Mae (collectively the Government-Sponsored Enterprises or GSEs). 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.

 

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Credit Risk Management

During the first half of 2011, the U.S. economy continued to expand, but at a below-trend pace. Within the automotive markets, demand and pricing have been strong for used vehicles; however, limited supply and reduced incentives in the new vehicle market have led to lower sales in the second quarter of 2011. We continue to be cautious due to higher average gasoline prices and their effect on automotive sales, the recent slow down in the labor market recovery, the ongoing correction in the housing market, and uncertainty emanating from the debt issues of developed economies. As a result, this underlying uncertainty may continue to affect our loan portfolio through the upcoming periods.

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 loan portfolios. This includes the identification of relevant trends that affect the collectability of the portfolios, segments of the portfolios that are potential problem areas, loans and leases with potential credit weaknesses, and assessment of the adequacy of internal credit risk policies and procedures to monitor compliance with relevant laws and regulations. In addition, we maintain limits and underwriting guidelines that reflect our risk appetite.

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 primarily focused on consumer automobile loans and leases and mortgage loans in addition to automobile-related commercial lending. We classify these loans as either consumer or commercial and analyze credit risk in each. 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 and syndications.

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 in 2009. During 2010, 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 nonprime automotive financing volume through Nuvell, which commenced in 2002 and primarily focused on non-GM dealers.

Additionally, we have implemented numerous initiatives in an effort to mitigate loss and provide ongoing support to customers in financial distress. For automobile loans, we offer several types of assistance to aid our customers. Loss mitigation includes changing the due date, extending payments, and rewriting the loan terms. We have implemented these actions with the intent to provide the borrower with additional options in lieu of repossessing their vehicle.

For mortgage loans, as part of our participation in certain governmental programs, we may offer mortgage loan modifications 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 2010 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.

On-balance Sheet Portfolio

Our on-balance sheet portfolio includes both finance receivables and loans and held-for-sale loans. At June 30, 2011, this primarily included $96.4 billion of automobile finance receivables and loans and $19.8 billion of mortgage finance receivables and loans. Within our on-balance sheet portfolio, we have elected to account for certain mortgage 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 six months ended June 30, 2011, we further executed on our strategy of discontinuing and selling or liquidating nonstrategic operations. Refer to Note 2 to the Condensed Consolidated Financial Statements for additional information.

 

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The following table presents our total on-balance sheet consumer and commercial finance receivables and loans reported at carrying value before allowance for loan losses.

 

     Outstanding      Nonperforming (a)      Accruing past due
90 days or more (b)
 
($ in millions)    June 30,
2011
     December 31,
2010
     June 30,
2011
     December 31,
2010
     June 30,
2011
     December 31,
2010
 

Consumer

                 

Finance receivables and loans

                 

Loans at historical cost

   $ 69,147       $ 62,002       $ 582       $ 768       $ 5       $ 6   

Loans at fair value

     946         1,015         242         260                   

 

 

Total finance receivables and loans

     70,093         63,017         824         1,028         5         6   

Loans held-for-sale

     7,168         11,411         2,931         3,273         35         25   

 

 

Total consumer loans

     77,261         74,428         3,755         4,301         40         31   

 

 

Commercial

                 

Finance receivables and loans

                 

Loans at historical cost

     40,632         39,396         609         740                   

Loans at fair value

                                               

 

 

Total finance receivables and loans

     40,632         39,396         609         740                   

Loans held-for-sale

                                               

 

 

Total commercial loans

     40,632         39,396         609         740                   

 

 

Total on-balance sheet loans

   $ 117,893       $ 113,824       $ 4,364       $ 5,041       $ 40       $ 31   

 

 
(a) Includes nonaccrual troubled debt restructured loans of $716 million and $684 million at June 30, 2011, and December 31, 2010, respectively.
(b) Includes troubled debt restructured loans classified as 90 days past due and still accruing of $26 million and $13 million at June 30, 2011, and December 31, 2010, respectively.

Total on-balance sheet loans outstanding at June 30, 2011, increased $4.1 billion to $117.9 billion from December 31, 2010, reflecting an increase of $2.8 billion in the consumer portfolio and an increase of $1.2 billion in the commercial portfolio. The increase in total on-balance sheet loans outstanding from December 31, 2010, was the result of increased automobile originations, which outpaced portfolio runoff, due to strong industry sales and automotive manufacturer penetration. The increase was partially offset by a decrease in mortgage originations in our consumer mortgage business and lower line utilization in our commercial mortgage business driven in part by lower industry volume.

The total TDRs outstanding at June 30, 2011, increased $197 million to $1.7 billion from December 31, 2010. 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 the Home Affordable Modification Program (HAMP), as well as internally developed modification programs.

Total nonperforming loans at June 30, 2011, decreased $677 million to $4.4 billion from December 31, 2010, reflecting a decrease of $546 million of consumer nonperforming loans and a decrease of $131 million of commercial nonperforming loans. The decrease in total nonperforming loans from December 31, 2010, was largely due to improvement within our consumer mortgage portfolio and the continued wind-down of non-core commercial assets.

 

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The following table includes consumer and commercial net charge-offs from finance receivables and loans at historical cost and related ratios reported at carrying value before allowance for loan losses.

 

     Three months ended June 30,     Six months ended June 30,  
     Net
charge-offs
     Net charge-off
ratios  (a)
    Net
charge-offs
     Net charge-off
ratios  (a)
 
($ in millions)    2011      2010      2011     2010     2011      2010      2011     2010  

Consumer

                    

Finance receivables and loans at historical cost

   $ 104       $ 181         0.6     1.4   $ 273       $ 436         0.8     1.7

Commercial

                    

Finance receivables and loans at historical cost

     17         126         0.2        1.4        37         187         0.2        1.0   

 

        

 

 

      

Total finance receivables and loans at historical cost

   $ 121       $ 307         0.4        1.4      $ 310       $ 623         0.6        1.4   

 

 
(a) Net charge-off ratios are calculated as annualized net charge-offs divided by average outstanding finance receivables and loans excluding loans measured at fair value and loans held-for-sale during the year for each loan category.

Our net charge-offs were $121 million and $310 million for the three months and six months ended June 30, 2011, respectively, compared to $307 million and $623 million for the three months and six months ended June 30, 2010, respectively. The decreases in net charge-offs were primarily driven by improvement within our consumer automotive and mortgage portfolios and the workout of certain commercial real estate and resort finance assets in prior periods. 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 finance receivables and loans recorded at historical cost. Finance receivables and loans recorded at historical cost have an associated allowance for loan losses. Finance receivables and loans measured at fair value were excluded from these discussions since those exposures do not carry an allowance.

Consumer Credit Portfolio

During the three months and six months ended June 30, 2011, the credit performance of the consumer portfolio continued to improve overall as our nonperforming finance receivables and loans and charge-offs declined. 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 2010 Annual Report on Form 10-K.

The following table includes consumer finance receivables and loans recorded at historical cost reported at carrying value before allowance for loan losses.

 

     Outstanding      Nonperforming (a)      Accruing past due
90 days or more (b)
 
($ in millions)    June 30,
2011
     December 31,
2010
     June 30,
2011
     December 31,
2010
     June 30,
2011
     December 31,
2010
 

Domestic

                 

Consumer automobile

   $ 41,495       $ 34,604       $ 103       $ 129       $       $   

Consumer mortgage

                 

1st Mortgage

     6,857         6,917         300         388         1         1   

Home equity

     3,269         3,441         54         61                   

 

 

Total domestic

     51,621         44,962         457         578         1         1   

 

 

Foreign

                 

Consumer automobile

     17,240         16,650         81         78         4         5   

Consumer mortgage

                 

1st Mortgage

     286         390         44         112                   

Home equity

                                               

 

 

Total foreign

     17,526         17,040         125         190         4         5   

 

 

Total consumer finance receivables and loans

   $ 69,147       $ 62,002       $ 582       $ 768       $ 5       $ 6   

 

 
(a) Includes nonaccrual troubled debt restructured loans of $164 million and $204 million at June 30, 2011, and December 31, 2010, respectively.
(b) There were no troubled debt restructured loans classified as 90 days past due and still accruing at June 30, 2011, and December 31, 2010.

 

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Total consumer outstanding finance receivables and loans increased $7.1 billion at June 30, 2011, compared with December 31, 2010. This increase was primarily driven by domestic automobile originations, which outpaced portfolio run-off, due to strong industry sales and automotive manufacturer penetration.

Total consumer nonperforming finance receivables and loans at June 30, 2011, decreased $186 million to $582 million from December 31, 2010, reflecting a decrease of $163 million of consumer mortgage nonperforming finance receivables and loans and a decrease of $23 million of consumer automotive nonperforming finance receivables and loans. Nonperforming consumer mortgage finance receivables and loans decreased primarily due to the continued run-off of lower quality legacy loans. Nonperforming consumer automotive finance receivables and loans decreased primarily due to increased quality of newer vintages. Nonperforming consumer finance receivables and loans as a percentage of total outstanding consumer finance receivables and loans were 0.8% and 1.2% at June 30, 2011, and December 31, 2010, respectively.

Consumer domestic automotive loans accruing and past due 30 days or more decreased $135 million to $667 million at June 30, 2011, compared with December 31, 2010, primarily due to increased quality of newer vintages.

The following table includes consumer net charge-offs from finance receivables and loans at historical cost and related ratios reported at carrying value before allowance for loans losses.

 

     Three months ended June 30,     Six months ended June 30,  
     Net charge-offs     Net charge-off
ratios (a)
    Net charge-offs      Net charge-off
ratios (a)
 
($ in millions)      2011          2010         2011         2010         2011          2010          2011         2010    

Domestic

                   

Consumer automobile

   $ 44       $ 77        0.4     1.3   $ 133       $ 260         0.7     2.3

Consumer mortgage

                   

1st Mortgage

     25         46        1.5        2.6        61         63         1.8        1.8   

Home equity

     17         27        2.1        2.9        38         38         2.3        2.0   

 

       

 

 

      

Total domestic

     86         150        0.7        1.7        232         361         0.9        2.2   

 

       

 

 

      

Foreign

                   

Consumer automobile

     16         32        0.4        0.8        39         74         0.5        0.9   

Consumer mortgage

                   

1st Mortgage

     2         (1     2.9        (0.9     2         1         1.2        0.7   

Home equity

                                                           

 

       

 

 

      

Total foreign

     18         31        0.4        0.8        41         75         0.5        0.9   

 

       

 

 

      

Total consumer finance receivables and loans

   $ 104       $ 181        0.6        1.4      $ 273       $ 436         0.8        1.7   

 

 
(a) Net charge-off ratios are calculated as annualized net charge-offs divided by average outstanding finance receivables and loans excluding loans measured at fair value and loans held-for-sale during the year for each loan category.

Our net charge-offs from total consumer automobile finance receivables and loans decreased $49 million and $162 million for the three months and six months ended June 30, 2011, respectively, compared to the same periods in 2010. The decreases in net charge-offs were primarily due to lower loss frequency, improvements in loss severity as a result of improved pricing in the used vehicle market, and continued strong customer recoveries.

Our net charge-offs from total consumer mortgage receivables and loans were $44 million and $101 million for the three months and six months ended June 30, 2011, respectively, compared to $72 million and $102 million for the same periods in 2010. The decreases were driven by reduced net charge-offs within our consumer legacy mortgage portfolio reflecting the continued run-off of lower quality legacy loans.

 

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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 finance receivables and loans and loans held-for-sale during the period.

 

     Three months ended
June 30,
     Six months ended
June  30,
 
($ in millions)    2011      2010      2011      2010  

Domestic

           

Consumer automobile

   $ 7,384       $ 7,174       $ 16,768       $ 12,470   

Consumer mortgage

           

1st Mortgage

     12,344         13,160         24,191         26,128   

Home equity

                               

 

 

Total domestic

     19,728         20,334         40,959         38,598   

 

 

Foreign

           

Consumer automobile

     2,358         2,206         4,422         3,908   

Consumer mortgage

           

1st Mortgage

     283         346         595         638   

Home equity

                               

 

 

Total foreign

     2,641         2,552         5,017         4,546   

 

 

Total consumer loan originations

   $ 22,369       $ 22,886       $ 45,976       $ 43,144   

 

 

Total domestic automobile-originated loans increased $210 million and $4.3 billion for the three months and six months ended June 30, 2011, respectively, compared to the same periods in 2010, primarily due to strong industry sales and automotive manufacturer penetration.

Total domestic mortgage-originated loans decreased $816 million and $1.9 billion for the three months and six months ended June 30, 2011, respectively. The decreases for the three months and six months ended June 30, 2011, were in part, the result of lower industry volume and a change in our product mix with less government-insured residential mortgage loans.

Consumer loan originations retained on-balance sheet as held-for-investment were $10.0 billion and $21.9 billion for the three months and six months ended June 30, 2011, respectively, and $8.8 billion and $14.6 billion for the three months and six months ended June 30, 2010, respectively. The increases were primarily due to strong automotive industry sales and automotive manufacturer penetration in addition to increased balance sheet retention.

 

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The following table shows the percentage of total consumer finance receivables and loans recorded at historical cost reported at carrying value before allowance for loan losses by state and foreign concentration. Total automobile loans were $58.7 billion and $51.3 billion at June 30, 2011, and December 31, 2010, respectively. Total mortgage and home equity loans were $10.4 billion and $10.7 billion at June 30, 2011, and December 31, 2010, respectively.

 

     June 30, 2011 (a)     December 31, 2010  
      Automobile     1st Mortgage
and home equity
    Automobile     1st Mortgage
and home equity
 

Texas

     9.3     5.0     9.2     4.4

California

     4.6        24.9        4.6        24.5   

Florida

     4.5        4.0        4.4        4.1   

Michigan

     3.9        4.8        3.7        5.0   

Illinois

     3.0        4.9        2.8        4.7   

New York

     3.4        2.3        3.4        2.4   

Pennsylvania

     3.3        1.7        3.2        1.7   

Ohio

     2.8        1.0        2.5        1.0   

Georgia

     2.3        1.8        2.2        1.8   

North Carolina

     2.1        2.1        2.0        2.0   

Other United States

     31.4        44.7        29.4        44.7   

Canada

     12.7        2.7        14.2        3.6   

Brazil

     5.3               5.2          

Germany

     5.0               5.7          

Other foreign

     6.4        0.1        7.5        0.1   

 

 

Total consumer loans

     100.0     100.0     100.0     100.0

 

 
(a) Presentation is in descending order as a percentage of total consumer finance receivables and loans at June 30, 2011.

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 Texas and California, which represented an aggregate of 16.3% of our total outstanding consumer finance receivables and loans at June 30, 2011.

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.

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. For more information on repossessed and foreclosed assets, refer to Note 1 to the Consolidated Financial Statements in our 2010 Annual Report on Form 10-K.

Repossessed assets in our Automotive Finance operations at June 30, 2011, increased $2 million to $48 million from December 31, 2010. Foreclosed mortgage assets at June 30, 2011, decreased $37 million to $101 million from December 31, 2010.

Higher Risk Mortgage Loans

During the three months and six months ended June 30, 2011, we primarily focused our origination efforts on prime conforming and government guaranteed mortgages in the United States and high-quality insured mortgages in Canada. However, we continued to hold mortgage loans originated in prior years 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

 

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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 at unpaid principal balance for the periods shown. These higher-risk mortgage loans are classified as finance receivables and loans and are recorded at historical cost.

 

     Three months ended
June  30,
     Six months ended
June  30,
 
($ in millions)        2011              2010              2011              2010      

High original loan-to-value (greater than 100%) mortgage loans

   $       $       $       $   

Payment-option adjustable-rate mortgage loans

                               

Interest-only mortgage loans (a)

             87                 190   

Below-market rate (teaser) mortgages

                               

 

 

Total higher-risk mortgage loan production

   $       $ 87       $       $ 190   

 

 
(a) As of June 2010, this product was no longer offered.

The following table summarizes mortgage finance receivables and loans by higher-risk loan type. These finance receivables and loans are recorded at historical cost and reported at carrying value before allowance for loan losses.

 

     Outstanding      Nonperforming      Accruing past due
90 days or more
 
($ in millions)    June 30,
2011
     December 31,
2010
     June 30,
2011
     December 31,
2010
     June 30,
2011
     December 31,
2010
 

High original loan-to-value (greater than 100%) mortgage loans

   $ 5       $ 5       $ 1       $       $       $   

Payment-option adjustable-rate mortgage loans

     4         5         1         1                   

Interest-only mortgage loans (a)

     3,284         3,681         163         207                   

Below-market rate (teaser) mortgages

     266         284         4         4                   

 

 

Total higher-risk mortgage loans

   $ 3,559       $ 3,975       $ 169       $ 212       $       $   

 

 
(a) The majority of the interest-only mortgage loans are expected to start principal amortization in 2015 or beyond.

The allowance for loan losses was $236 million or 6.6% of total higher-risk held-for-investment mortgage loans recorded at historical cost based on carrying value outstanding before allowance for loans losses at June 30, 2011.

 

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The following table includes our five largest state concentrations based on our higher-risk finance receivables and loans recorded at historical cost and reported at carrying value before allowance for loan losses.

 

($ in millions)    High original
loan-to-value
(greater than 100%)
mortgage loans
     Payment-option
adjustable-rate
mortgage loans
     Interest-only
mortgage loans
     Below-market
rate (teaser)
mortgages
     All higher-risk
loans
 

June 30, 2011

              

California

   $       $ 1       $ 861       $ 84       $ 946   

Virginia

                     297         11         308   

Maryland

                     237         7         244   

Michigan

                     207         9         216   

Illinois

                     178         8         186   

All other domestic and foreign

     5         3         1,504         147         1,659   

 

 

Total higher-risk mortgage loans

   $ 5       $ 4       $ 3,284       $ 266       $ 3,559   

 

 

December 31, 2010

              

California

   $       $ 1       $ 993       $ 89       $ 1,083   

Virginia

                     330         12         342   

Maryland

                     256         7         263   

Michigan

                     225         10         235   

Illinois

                     197         8         205   

All other domestic and foreign

     5         4         1,680         158         1,847   

 

 

Total higher-risk mortgage loans

   $ 5       $ 5       $ 3,681       $ 284       $ 3,975   

 

 

Commercial Credit Portfolio

During the three months and six months ended June 30, 2011, the credit performance of the commercial portfolio improved as nonperforming finance receivables and loans and net charge-offs declined. 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 2010 Annual Report on Form 10-K.

 

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The following table includes total commercial finance receivables and loans reported at carrying value before allowance for loan losses.

 

    Outstanding     Nonperforming (a)     Accruing past due
90 days or more (b)
 
($ in millions)   June 30,
2011
    December 31,
2010
    June 30,
2011
    December 31,
2010
    June 30,
2011
    December 31,
2010
 

Domestic

           

Commercial and industrial

           

Automobile

  $ 26,125      $ 24,944      $ 214      $ 261      $      $   

Mortgage

    1,185        1,540        1                        

Other (c)

    1,432        1,795        40        37                 

Commercial real estate

           

Automobile

    2,129        2,071        110        193                 

Mortgage

           1               1                 

 

 

Total domestic

    30,871        30,351        365        492                 

 

 

Foreign

           

Commercial and industrial

           

Automobile

    9,250        8,398        146        35                 

Mortgage

    28        41        28        40                 

Other (c)

    234        312        15        97                 

Commercial real estate

           

Automobile

    208        216        17        6                 

Mortgage

    41        78        38        70                 

 

 

Total foreign

    9,761        9,045        244        248                 

 

 

Total commercial finance receivables and loans

  $ 40,632      $ 39,396      $ 609      $ 740      $      $   

 

 
(a) Includes nonaccrual troubled debt restructured loans of $33 million and $9 million at June 30, 2011, and December 31, 2010, respectively.
(b) There were no troubled debt restructured loans classified as 90 days past due and still accruing at June 30, 2011, and December 31, 2010.
(c) Other commercial primarily includes senior secured commercial lending.

Total commercial finance receivables and loans outstanding increased $1.2 billion to $40.6 billion at June 30, 2011, from December 31, 2010. Foreign commercial and industrial outstandings increased primarily due to growth in our Canadian automobile portfolio, partially offset by dealer exits and continued portfolio runoff within exited countries. Domestic commercial and industrial outstandings increased due to strong automotive industry sales, partially offset by mortgage warehouse lending declines in line utilization due in part to lower industry volume.

Total commercial nonperforming finance receivables and loans were $609 million, a decrease of $131 million compared to December 31, 2010, primarily due to the continued wind-down of non-core commercial assets and improvement in dealer performance. Total nonperforming commercial finance receivables and loans as a percentage of outstanding commercial finance receivables and loans were 1.5% and 1.9% at June 30, 2011, and December 31, 2010, respectively.

 

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The following table includes total commercial net charge-offs from finance receivables and loans at historical cost and related ratios reported at carrying value before allowance for loan losses.

 

     Three months ended June 30,     Six months ended June 30,  
     Net charge-offs     Net charge-off
ratios (a)
    Net charge-offs     Net charge-off
ratios (a)
 
($ in millions)      2011         2010         2011         2010       2011     2010       2011         2010    

Domestic

                

Commercial and industrial

                

Automobile

   $ 3      $ 5        0.1     0.1   $ 5      $ 6            0.1

Mortgage

            (1     (0.1     (0.3     2        (2     0.3        (0.3

Other

     (1     67        (0.2     10.6        (3     69        (0.4     5.3   

Commercial real estate

                

Automobile

     4        17        0.8        3.2        3        29        0.3        2.8   

Mortgage

            (2            (28.6     (1     41        n/m        145.5   

 

       

 

 

     

Total domestic

     6        86        0.1        1.2        6        143               1.1   

 

       

 

 

     

Foreign

                

Commercial and industrial

                

Automobile

     1        1                      3        3        0.1        0.1   

Mortgage

     7               76.6               8               41.8          

Other

     1        29        0.7        36.0        4        29        2.6        16.3   

Commercial real estate

                

Automobile

                                        2               2.0   

Mortgage

     2        10        19.9        30.5        16        10        54.9        14.0   

 

       

 

 

     

Total foreign

     11        40        0.4        1.7        31        44        0.6        1.0   

 

       

 

 

     

Total commercial finance receivables and loans

   $ 17      $ 126        0.2        1.4      $ 37      $ 187        0.2        1.0   

 

 

n/m = not meaningful

(a) Net charge-off ratios are calculated as annualized net charge-offs divided by average outstanding finance receivables and loans excluding loans measured at fair value and loans held-for-sale during the year for each loan category.

Our net charge-offs from commercial finance receivables and loans totaled $17 million and $37 million for the three months and six months ended June 30, 2011, respectively, compared to $126 million and $187 million for the same periods in 2010. 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 and resort finance assets in prior periods.

Commercial Real Estate

The commercial real estate portfolio consists of finance receivables and loans issued primarily to automotive dealers and related real estate firms. Commercial real estate finance receivables and loans remained flat at $2.4 billion at June 30, 2011, and December 31, 2010.

 

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The following table shows the percentage of total commercial real estate finance receivables and loans by geographic region and property type. These finance receivables and loans are reported at carrying value before allowance for loan losses.

 

      June 30, 2011     December 31, 2010  

Geographic region

    

Texas

     12.7     10.5

Florida

     10.4        10.3   

Michigan

     10.2        10.1   

California

     9.4        9.6   

Virginia

     4.4        4.4   

New York

     3.7        3.8   

Pennsylvania

     3.5        3.7   

Oregon

     3.5        3.1   

Georgia

     2.5        2.7   

Alabama

     2.5        2.4   

Other United States

     26.7        26.9   

Canada

     4.8        4.4   

United Kingdom

     3.4        5.0   

Mexico

     1.8        2.4   

Other foreign

     0.5        0.7   

 

 

Total commercial real estate finance receivables and loans

     100.0     100.0

 

 

Property type

    

Automobile dealerships

     98.3     91.8

Residential

     1.3        2.5   

Land and land development

     0.4        0.8   

Other

            4.9   

 

 

Total commercial real estate finance receivables and loans

     100.0     100.0

 

 

Commercial Criticized Exposure

Exposures deemed criticized are finance receivables and loans classified as special mention, substandard, or doubtful. These classifications are based on regulatory definitions and generally represent finance receivables and loans within our portfolio that have a higher default risk or have already defaulted. These finance receivables and loans require additional monitoring and review including specific actions to mitigate our potential economic loss.

The following table shows the percentage of total commercial criticized finance receivables and loans by industry concentrations. These finance receivables and loans are reported at carrying value before allowance for loan losses.

 

      June 30, 2011     December 31, 2010  

Industry

    

Automotive

     78.6     66.5

Real estate

     8.6        12.1   

Manufacturing

     2.8        3.5   

Services

     1.8        1.9   

Retail

     1.7        1.5   

Bank and finance companies

     1.4        1.0   

Electronics

     1.1        1.2   

Food

     0.9        0.4   

All other

     3.1        11.9   

 

 

Total commercial criticized finance receivables and loans

     100.0     100.0

 

 

 

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Total criticized exposures were $3.6 billion at both June 30, 2011, and December 31, 2010, as automotive criticized exposure increased due to risk rating process enhancements was offset by health/medical (within All other) and real estate improvements.

Allowance for Loan Losses

The following tables present an analysis of the activity in the allowance for loan losses on finance receivables and loans.

 

Three months ended June 30, 2011 ($ in millions)   

Consumer

automobile

   

Consumer

mortgage

   

Total

consumer

    Commercial     Total  

Balance at April 1, 2011

   $ 916      $ 563      $ 1,479      $ 327      $ 1,806   

Charge-offs

          

Domestic

     (95     (48     (143     (12     (155

Foreign

     (33     (2     (35     (17     (52

 

 

Total charge-offs

     (128     (50     (178     (29     (207

 

 

Recoveries

          

Domestic

     51        6        57        6        63   

Foreign

     17               17        6        23   

 

 

Total recoveries

     68        6        74        12        86   

 

 

Net charge-offs

     (60     (44     (104     (17     (121

Provision for loan losses

     51        39        90        (39     51   

Other

     4               4        (1     3   

 

 

Balance at June 30, 2011

   $ 911      $ 558      $ 1,469      $ 270      $ 1,739   

 

 

Allowance for loan losses to finance receivables and loans outstanding at June 30, 2011 (a)

     1.6     5.4     2.1     0.7     1.6

Net charge-offs to average finance receivables and loans outstanding at June 30, 2011 (a)

     0.4     1.7     0.6     0.2     0.4

Allowance for loan losses to total nonperforming finance receivables and loans at June 30, 2011 (a)

     496.4     140.1     252.6     44.4     146.0

Ratio of allowance for loans losses to net charge-offs at June 30, 2011

     3.8        3.1        3.5        4.0        3.6   

 

 
(a) Coverage percentages are based on the allowance for loan losses related to finance receivables and loans excluding those loans held at fair value as a percentage of the unpaid principal balance, net of premiums and discounts.

 

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Three months ended June 30, 2010 ($ in millions)   

Consumer

automobile

   

Consumer

mortgage

   

Total

consumer

    Commercial     Total  

Balance at April 1, 2010

   $ 1,120      $ 634      $ 1,754      $ 726      $ 2,480   

Charge-offs

          

Domestic

     (151     (77     (228     (91     (319

Foreign

     (50            (50     (49     (99

 

 

Total charge-offs

     (201     (77     (278     (140     (418

 

 

Recoveries

          

Domestic

     74        4        78        5        83   

Foreign

     18        1        19        9        28   

 

 

Total recoveries

     92        5        97        14        111   

 

 

Net charge-offs

     (109     (72     (181     (126     (307

Provision for loan losses

     117        97        214        4        218   

Discontinued operations

     2        1        3        (2     1   

Other

     (10     (1     (11     (4     (15

 

 

Balance at June 30, 2010

   $ 1,120      $ 659      $ 1,779      $ 598      $ 2,377   

 

 

Allowance for loan losses to finance receivables and loans outstanding at June 30, 2010 (a)

     2.7     5.8     3.4     1.6     2.6

Net charge-offs to average finance receivables and loans outstanding at June 30, 2010 (a)

     1.1     2.6     1.4     1.4     1.4

Allowance for loan losses to total nonperforming finance receivables and loans at June 30, 2010 (a)

     543.0     105.5     213.9     40.9     103.6

Ratio of allowance for loans losses to net charge-offs at June 30, 2010

     2.6        2.3        2.5        1.2        1.9   

 

 
(a) Coverage percentages are based on the allowance for loan losses related to finance receivables and loans excluding those loans held at fair value as a percentage of the unpaid principal balance, net of premiums and discounts.

 

Six months ended June 30, 2011 ($ in millions)   

Consumer

automobile

   

Consumer

mortgage

   

Total

consumer

    Commercial     Total  

Balance at January 1, 2011

   $ 970      $ 580      $ 1,550      $ 323      $ 1,873   

Charge-offs

          

Domestic

     (234     (108     (342     (18     (360

Foreign

     (75     (2     (77     (48     (125

 

 

Total charge-offs

     (309     (110     (419     (66     (485

 

 

Recoveries

          

Domestic

     101        9        110        12        122   

Foreign

     36               36        17        53   

 

 

Total recoveries

     137        9        146        29        175   

 

 

Net charge-offs

     (172     (101     (273     (37     (310

Provision for loan losses

     104        79        183        (19     164   

Other

     9               9        3        12   

 

 

Balance at June 30, 2011

   $ 911      $ 558      $ 1,469      $ 270      $ 1,739   

 

 

Allowance for loan losses to finance receivables and loans outstanding at June 30, 2011 (a)

     1.6     5.4     2.1     0.7     1.6

Net charge-offs to average finance receivables and loans outstanding at June 30, 2011 (a)

     0.6     1.9     0.8     0.2     0.6

Allowance for loan losses to total nonperforming finance receivables and loans at June 30, 2011 (a)

     496.4     140.1     252.6     44.4     146.0

Ratio of allowance for loans losses to net charge-offs at June 30, 2011

     2.7        2.8        2.7        3.6        2.8   

 

 
(a) Coverage percentages are based on the allowance for loan losses related to finance receivables and loans excluding those loans held at fair value as a percentage of the unpaid principal balance, net of premiums and discounts.

 

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Six months ended June 30, 2010 ($ in millions)   

Consumer

automobile

   

Consumer

mortgage

   

Total

consumer

    Commercial     Total  

Balance at January 1, 2010

   $ 1,024      $ 640      $ 1,664      $ 781      $ 2,445   

Cumulative effect of change in accounting principles (a)

     222               222               222   

Charge-offs

          

Domestic

     (437     (109     (546     (152     (698

Foreign

     (109     (2     (111     (53     (164

 

 

Total charge-offs

     (546     (111     (657     (205     (862

 

 

Recoveries

          

Domestic

     177        8        185        9        194   

Foreign

     35        1        36        9        45   

 

 

Total recoveries

     212        9        221        18        239   

 

 

Net charge-offs

     (334     (102     (436     (187     (623

Provision for loan losses

     225        115        340        22        362   

Discontinued operations

     5               5        (3     2   

Other

     (22     6        (16     (15     (31

 

 

Balance at June 30, 2010

   $ 1,120      $ 659      $ 1,779      $ 598      $ 2,377   

 

 

Allowance for loan losses to finance receivables and loans outstanding at June 30, 2010 (b)

     2.7     5.8     3.4     1.6     2.6

Net charge-offs to average finance receivables and loans outstanding at June 30, 2010 (b)

     1.7     1.8     1.7     1.0     1.4

Allowance for loan losses to total nonperforming finance receivables and loans at June 30, 2010 (b)

     543.0     105.5     213.9     40.9     103.6

Ratio of allowance for loans losses to net charge-offs at June 30, 2010

     1.7        3.2        2.0        1.6        1.9   

 

 
(a) Includes adjustment to the allowance due to adoption of ASU 2009-17, Improvements to Financial Reporting by Enterprises Involved with Variable Interest Entities.
(b) Coverage percentages are based on the allowance for loan losses related to finance receivables and loans excluding those loans held at fair value as a percentage of the unpaid principal balance, net of premiums and discounts.

The allowance for consumer loan losses at June 30, 2011, declined $310 million compared to June 30, 2010, reflecting the continued improved asset mix with higher quality recent vintages, the runoff of Nuvell and other liquidating portfolios, as well as improved loss performance.

The allowance for commercial loan losses declined $328 million at June 30, 2011, compared to June 30, 2010, primarily related to the sale of the resort finance portfolio and improved portfolio credit quality.

 

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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.

 

    2011     2010  
June 30, ($ in millions)   Allowance for
loan losses
   

Allowance
as a % of

loans
outstanding

    Allowance as
a % of
allowance for
loan losses
    Allowance for
loan losses
   

Allowance as
a % of

loans
outstanding

    Allowance as
a % of
allowance for
loan losses
 

Consumer

           

Domestic

           

Consumer automobile

  $ 723        1.7        41.6      $ 910        3.4        38.3   

Consumer mortgage

           

1st Mortgage

    295        4.3        17.0        403        5.6        17.0   

Home equity

    261        8.0        15.0        255        6.9        10.7   

 

     

 

 

     

 

 

 

Total domestic

    1,279        2.5        73.6        1,568        4.2        66.0   

 

     

 

 

     

 

 

 

Foreign

           

Consumer automobile

    188        1.1        10.8        210        1.4        8.8   

Consumer mortgage

           

1st Mortgage

    2        0.6        0.1        1        0.3          

Home equity

                                         

 

     

 

 

     

 

 

 

Total foreign

    190        1.1        10.9        211        1.3        8.8   

 

     

 

 

     

 

 

 

Total consumer loans

    1,469        2.1        84.5        1,779        3.4        74.8   

 

     

 

 

     

 

 

 

Commercial

           

Domestic

           

Commercial and industrial

           

Automobile

    78        0.3        4.5        79        0.4        3.3   

Mortgage

    1                      3        0.2        0.1   

Other

    68        4.8        3.9        282        11.7        11.9   

Commercial real estate

           

Automobile

    44        2.1        2.6        56        2.7        2.4   

Mortgage

                         4        75.0        0.2   

 

     

 

 

     

 

 

 

Total domestic

    191        0.6        11.0        424        1.5        17.9   

 

     

 

 

     

 

 

 

Foreign

           

Commercial and industrial

           

Automobile

    68        0.7        3.9        42        0.5        1.7   

Mortgage

    6        19.8        0.3        21        27.9        0.9   

Other

    1        0.6        0.1        67        16.6        2.8   

Commercial real estate

           

Automobile

    2        0.8        0.1        2        1.2        0.1   

Mortgage

    2        5.5        0.1        42        35.4        1.8   

 

     

 

 

     

 

 

 

Total foreign

    79        0.8        4.5        174        1.9        7.3   

 

     

 

 

     

 

 

 

Total commercial loans

    270        0.7        15.5        598        1.6        25.2   

 

     

 

 

     

 

 

 

Total allowance for loan losses

  $ 1,739        1.6        100.0      $ 2,377        2.6        100.0   

 

 

 

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Provision for Loan Losses

The following table summarizes the provision for loan losses by product type.

 

     Three months ended
June  30,
    Six months ended
June  30,
 
($ in millions)        2011             2010             2011             2010      

Consumer

        

Domestic

        

Consumer automobile

   $ 40      $ 91      $ 86      $ 175   

Consumer mortgage

        

1st Mortgage

     17        48        34        72   

Home equity

     19        49        42        41   

 

 

Total domestic

     76        188        162        288   

 

 

Foreign

        

Consumer automobile

     11        26        18        50   

Consumer mortgage

        

1st Mortgage

     3               3        2   

Home equity

                            

 

 

Total foreign

     14        26        21        52   

 

 

Total consumer loans

     90        214        183        340   

 

 

Commercial

        

Domestic

        

Commercial and industrial

        

Automobile

     11        5        11        13   

Mortgage

            (2     1        (9

Other

     (23     12        (31     31   

Commercial real estate

        

Automobile

     (6            (7       

Mortgage

            (3            (9

 

 

Total domestic

     (18     12        (26     26   

 

 

Foreign

        

Commercial and industrial

        

Automobile

     6        (7     37        (2

Mortgage

     (2            (1     2   

Other

     (26     (1     (35     (4

Commercial real estate

        

Automobile

                            

Mortgage

     1               6          

 

 

Total foreign

     (21     (8     7        (4

 

 

Total commercial loans

     (39     4        (19     22   

 

 

Total provision for loans losses

   $ 51      $ 218      $ 164      $ 362   

 

 

 

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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 may enter into various financial instruments, including derivatives, to maintain the desired level of exposure to the risk of interest rate fluctuations. Refer to Note 19 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. We may enter into hedges to mitigate foreign exchange risk.

We also have exposure 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 may enter into equity options to economically hedge our exposure to the equity markets.

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, 2010, 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, 2010, 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

Overview

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 borrowing 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.

The Asset-Liability Committee (ALCO) 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 business 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 is responsible for assisting senior leadership in the execution of its structured funding strategy and risk management accountabilities.

We maintain available liquidity 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 available 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. At June 30, 2011, we maintained $24.7 billion of total available parent company liquidity and $12.2 billion of total available liquidity at Ally Bank. To optimize cash and secured facility capacity between entities, the parent company lends cash to Ally Bank from time to time under an intercompany loan agreement. At June 30, 2011, $2.3 billion was outstanding under the intercompany loan agreement. Amounts outstanding are repayable to the parent company upon demand, subject to five days notice. As a result, this amount is included in the parent company available liquidity and excluded from the available liquidity at Ally Bank in the above amounts. For this purpose, parent company includes our consolidated operations less our Insurance operations, ResCap, and Ally Bank.

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 largely focuses on the development of diversified funding sources across a global investor base to meet all our liquidity needs throughout different market cycles, including periods of financial distress. These funding sources include unsecured debt capital markets, asset-backed securitizations, both public and private, whole-loan asset sales, domestic and international committed and uncommitted credit facilities, 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. The diversity of our funding sources enhances funding flexibility, limits dependence on any one source, and results in a more cost-effective strategy over the long term. We evaluate

 

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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.

In addition, the FDIC has indicated that it expects us to diversify Ally Bank’s overall funding in order to reduce reliance on any one source of funding and to achieve a well-balanced funding portfolio across a spectrum of risk, duration, and cost of funds characteristics. Over the past few years, we have been focused on diversifying Ally Bank’s funding base by expanding its securitization programs, both public and through private committed credit facilities, extending the maturity profile of our brokered deposit portfolio while not exceeding a $10 billion portfolio, establishing repurchase agreements, and continuing to access funds from the Federal Home Loan Banks.

Since 2009, we have been directing new bank-eligible assets in the United States to Ally Bank in order to reduce and minimize our nonbanking exposures and funding requirements and utilize our growing consumer deposit-taking capabilities. This has allowed 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, while also improving the cost of funds for the enterprise.

Ally Bank

Ally Bank raises deposits directly from customers through the direct banking channel via the internet and over the telephone. Ally Bank provides our automotive finance and mortgage loan operations with a stable and low-cost funding source. At June 30, 2011, Ally Bank had $36.9 billion of total external deposits, including $24.6 billion of retail deposits. We expect that our cost of funds will continue to improve over time as our deposit base grows.

At June 30, 2011, Ally Bank maintained cash liquidity of $3.6 billion and highly liquid U.S. federal government and U.S. agency securities of $5.8 billion, excluding certain securities that were encumbered at June 30, 2011. In addition, at June 30, 2011, Ally Bank had unused capacity in committed secured funding facilities of $5.1 billion, including an equal allocation of shared unused capacity of $4.0 billion from a 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 continues to be a key part 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 in December 2008. 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, money market accounts, IRA deposit products, as well as an online checking product. In addition, we have brokered deposits, which are obtained through third-party intermediaries. In the first six months of 2011, the deposit base at Ally Bank grew $3.0 billion, ending the quarter at $36.9 billion from $33.9 billion at December 31, 2010. At June 30, 2011, deposit liabilities constituted 30% of our total funding, as compared to 14% as of December 31, 2008. The growth in deposits has been primarily attributable to our retail deposit portfolio. Strong retention rates continue to materially contribute to our growth in retail deposits. In the second quarter of 2011, we retained 88% of CD balances up for renewal during the same period. In addition to retail and brokered deposits, Ally Bank had access to funding through a variety of other sources including FHLB advances, the Federal Reserve’s Discount Window, public securitizations, and private secured funding arrangements. At June 30, 2011, debt outstanding from the FHLB totaled $4.5 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. Repurchase agreements are generally short-term and often occur overnight. Funding from repurchase agreements are accounted for as debt on our Condensed Consolidated Balance Sheet. At June 30, 2011, and December 31, 2010, Ally Bank had no debt outstanding under repurchase agreements.

Refer to Note 13 to the Condensed Consolidated Financial Statements for a summary of deposit funding by type.

 

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The following table shows Ally Bank’s number of accounts and deposit balances by type as of the end of each quarter since 2009.

 

($ in millions)  

2nd
Quarter

2011

   

1st
Quarter

2011

   

4th
Quarter

2010

   

3rd
Quarter

2010

   

2nd
Quarter

2010

   

1st
Quarter

2010

   

4th
Quarter

2009

   

3rd
Quarter

2009

   

2nd
Quarter

2009

   

1st
Quarter

2009

 

Number of accounts

    851,991        798,622        726,104        676,419        616,665        573,388        535,301        506,313        461,229        362,776   

Deposits

                   

Retail

  $ 24,562      $ 23,469      $ 21,817      $ 20,504      $ 18,690      $ 17,672      $ 16,926      $ 15,901      $ 14,464      $ 11,026   

Brokered

    9,903        9,836        9,992        9,978        9,858        9,757        10,149        9,151        8,141        9,072   

Other (a)

    2,405        2,064        2,108        2,538        2,267        1,914        1,767        2,331        2,194        1,950   

 

 

Total deposits

  $ 36,870      $ 35,369      $ 33,917      $ 33,020      $ 30,815      $ 29,343      $ 28,842      $ 27,383      $ 24,799      $ 22,048   

 

 
(a) Other deposits include mortgage escrow and other deposits (excluding intercompany deposits).

In addition to building a larger deposit base, we continue to remain active in the securitization markets to finance our Ally Bank automotive loan portfolios. During the second quarter of 2011, Ally Bank completed three transactions and raised $2.5 billion of secured funding backed by retail and dealer floorplan automotive loans. In the first half of 2011, Ally Bank has completed seven transactions and raised $5.9 billion of secured funding backed by retail and dealer floorplan automotive loans, as well as consumer leases. While deposits provide for a more stable funding base, our efficiencies in securitization and improving capital market conditions have resulted in a reduction in the cost of funds achieved through secured funding transactions, making them a very attractive source of funding. For retail automotive loans and leases, the primary reason why securitizations are an attractive funding source is that the term structure locks in funding for a specified pool of loans and leases for the life of the underlying asset. Once a pool of retail automotive loans are selected and placed into a securitization, the underlying assets will have no bearing on any incremental liquidity risk. We manage the execution risk arising from secured funding by maintaining a diverse investor base and maintaining capacity in our committed secured facilities. At June 30, 2011, Ally Bank had exclusive access to $9.5 billion of funding capacity from committed credit facilities, an increase of $750 million from March 31, 2011. Ally Bank also had access to a $4.1 billion committed facility that is shared with the parent company.

Nonbank Funding

At June 30, 2011, the parent company maintained cash liquidity of $9.5 billion and unused capacity in committed credit facilities of $12.0 billion, including an equal allocation of shared unused capacity of $4.0 billion from a facility 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. 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.

We continue to access the unsecured debt markets to further strengthen the parent company liquidity position. In the second quarter, we completed a $1.5 billion offering, which included both fixed and floating rate notes with a tenor of approximately three years. In the first half of 2011, we have completed a total of $3.75 billion in funding through the debt capital markets. In addition, we offer short-term and long-term unsecured debt through a retail debt program known as SmartNotes. 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 were $9.6 billion and $9.8 billion of SmartNotes outstanding at June 30, 2011, and December 31, 2010, 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 $2.4 billion at June 30, 2011, compared to $2.0 billion at December 31, 2010. Unsecured short-term bank loans also provide short-term funding. At June 30, 2011, we had $4.3 billion in short-term unsecured debt outstanding, an increase of $0.1 billion from December 31, 2010. Refer to Note 14 and Note 15 to the Condensed Consolidated Financial Statements for additional information about our outstanding short-term borrowings and long-term unsecured debt, respectively.

Secured funding is also a significant source of financing at the parent company. In the United States, we completed a private securitization transaction and a whole loan sale that raised a total of $4.4 billion of funding in the second quarter.

 

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Internationally, we still remain active in both the public and private securitization markets. In the second quarter, we completed our second Canadian public term securitization transaction for the year backed by retail automotive loans that resulted in $541 million of funding. We also continue to maintain significant credit capacity at the parent company to fund automotive-related assets, including a $7.5 billion syndicated facility that can fund U.S. and Canadian automotive retail and commercial loans, as well as leases. In addition to this facility, there are a variety of others that provide funding in various countries. At June 30, 2011, there was a total of $22.3 billion of committed capacity available exclusively for the parent company in various facilities around the globe.

Recent Funding Developments

During the first six months of 2011, we have completed funding transactions totaling over $19 billion, and renewed key existing funding facilities as we realized ready access to both the public and private markets. Key funding highlights from the first six months of 2011 were as follows:

 

   

We issued $3.8 billion of public term unsecured debt.

 

   

We raised $10.9 billion from the sale of asset-backed securities publicly and privately in multiple jurisdictions and sold $1.3 billion of U.S. retail automotive loans on a whole loan basis.

 

   

We created $3.4 billion of new funding capacity from the completion of new facilities and increases to existing facilities.

 

   

We renewed approximately $18.8 billion of key funding facilities that fund our Automotive Finance and Mortgage operations.

 

   

In March, we completed a key first step in our plan to repay the U.S. taxpayer. The U.S. Department of Treasury (Treasury) was repaid $2.7 billion from the sale of all the Trust Preferred Securities that Treasury held with Ally. This represented the full value of Treasury’s investment in these securities. Ally did not receive any proceeds from the offering of the Trust Preferred Securities.

 

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Funding Sources

The following table summarizes debt and other sources of funding and the amount outstanding under each category for the periods shown.

As a result of our funding strategy to maximize funding sources at Ally Bank and grow our retail deposit base, the percentage of funding sources from Ally Bank has increased in 2011 from 2010 levels. In addition, deposits represent a larger portion of the overall funding mix.

 

($ in millions)    Bank      Nonbank      Total      %  

June 30, 2011

           

Secured financings

   $ 23,882       $ 24,239       $ 48,121         34   

Institutional term debt

             26,153         26,153         19   

Retail debt programs (a)

             14,442         14,442         10   

Temporary Liquidity Guarantee Program (TLGP)

             7,400         7,400         5   

Bank loans and other

     1         2,293         2,294         2   

 

 

Total debt (b)

     23,883         74,527         98,410         70   

Deposits (c)

     36,870         5,392         42,262         30   

 

 

Total on-balance sheet funding

   $ 60,753       $ 79,919       $ 140,672         100   

 

 

Off-balance sheet securitizations

           

Mortgage loans

   $       $ 65,682       $ 65,682      

 

    

Total off-balance sheet securitizations

   $       $ 65,682       $ 65,682      

 

 

December 31, 2010

           

Secured financings

   $ 20,199       $ 22,193       $ 42,392         32   

Institutional term debt

             27,257         27,257         21   

Retail debt programs (a)

             14,249         14,249         10   

Temporary Liquidity Guarantee Program (TLGP)

             7,400         7,400         6   

Bank loans and other

     1         2,374         2,375         2   

 

 

Total debt (b)

     20,200         73,473         93,673         71   

Deposits (c)

     33,917         5,131         39,048         29   

 

 

Total on-balance sheet funding

   $ 54,117       $ 78,604       $ 132,721         100   

 

 

Off-balance sheet securitizations

           

Mortgage loans

   $       $ 69,356       $ 69,356      

 

    

Total off-balance sheet securitizations

   $       $ 69,356       $ 69,356      

 

 
(a) Primarily includes $9,564 million and $9,784 million of Ally SmartNotes at June 30, 2011, and December 31, 2010, respectively.
(b) Excludes fair value adjustment as described in Note 15 to the Condensed Consolidated Financial Statements.
(c) Bank deposits include retail, brokered, mortgage escrow, and other deposits. Nonbank deposits include dealer wholesale deposits and deposits at ResMor Trust. Intercompany deposits are not included.

Refer to Note 15 to the Condensed Consolidated Financial Statements for a summary of the scheduled maturity of long-term debt at June 30, 2011.

Funding Facilities

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.

The total capacity in our committed funding facilities is provided by banks and other financial institutions through private transactions. The committed secured funding facilities can be revolving in nature and allow for additional funding during the commitment period, or they can be amortizing and do not allow for any further funding after the closing date. At June 30, 2011, $31.3 billion of our $37.5 billion of committed capacity was revolving. Our revolving facilities generally have an original tenor ranging from 364 days to two years. As of June 30, 2011, we had $12.3 billion of committed funding capacity with a remaining tenor greater than 364 days, which is an increase of $2.9 billion from March 31, 2011.

 

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Committed Funding Facilities

 

     Outstanding      Unused capacity (a)      Total capacity  
($ in billions)   

Jun. 30,

2011

    

Dec. 31,

2010

    

Jun. 30,

2011

    

Dec. 31,

2010

    

Jun. 30,

2011

    

Dec. 31,

2010

 

Bank funding

                 

Secured

   $ 6.4       $ 6.4       $ 3.1       $ 1.9       $ 9.5       $ 8.3   

Nonbank funding

                 

Unsecured

                 

Automotive Finance operations

     0.3         0.8         0.5                 0.8         0.8   

Secured

                 

Automotive Finance operations

     12.0         8.3         9.5         9.1         21.5         17.4   

Mortgage operations

     1.0         1.0         0.6         0.6         1.6         1.6   

 

 

Total nonbank funding

     13.3         10.1         10.6         9.7         23.9         19.8   

Shared capacity (b)

     0.1         0.2         4.0         3.9         4.1         4.1   

 

 

Total committed facilities

   $ 19.8       $ 16.7       $ 17.7       $ 15.5       $ 37.5       $ 32.2   

 

 
(a) Funding from committed secured facilities is available on request in the event excess collateral resides in certain facilities or is available to the extent incremental collateral is available and contributed to the facilities.
(b) Funding is generally available for assets originated by Ally Bank or the parent company, Ally Financial Inc.

Uncommitted Funding Facilities

 

     Outstanding      Unused capacity      Total capacity  
($ in billions)   

Jun. 30,

2011

    

Dec. 31,

2010

    

Jun. 30,

2011

    

Dec. 31,

2010

    

Jun. 30,

2011

    

Dec. 31,

2010

 

Bank funding

                 

Secured

                 

Federal Reserve funding programs

   $       $       $ 3.9       $ 4.0       $ 3.9       $ 4.0   

FHLB advances

     4.5         5.3         1.4         0.2         5.9         5.5   

 

 

Total bank funding

     4.5         5.3         5.3         4.2         9.8         9.5   

 

 

Nonbank funding

                 

Unsecured

                 

Automotive Finance operations

     1.7         1.4         0.6         0.6         2.3         2.0   

Secured

                 

Automotive Finance operations

     0.1         0.1         0.1                 0.2         0.1   

Mortgage operations

                     0.1         0.1         0.1         0.1   

 

 

Total nonbank funding

     1.8         1.5         0.8         0.7         2.6         2.2   

 

 

Total uncommitted facilities

   $ 6.3       $ 6.8       $ 6.1       $ 4.9       $ 12.4       $ 11.7   

 

 

Bank Funding Facilities

Facilities for Automotive Finance Operations — Secured

Ally Bank’s largest facility is a $7.5 billion revolving syndicated credit facility secured by automotive receivables. At June 30, 2011, the amount outstanding under this facility was $4.9 billion. In the second quarter of 2011, Ally Bank successfully renewed $1.5 billion of committed credit capacity and extended the revolving period to two years. At June 30, 2011, Ally Bank had exclusive access to $9.5 billion of funding capacity from committed credit facilities, an increase of $750 million from March 31, 2011. Ally Bank also had access to a $4.1 billion committed facility that is shared with the parent company. In the event these facilities are not renewed, the outstanding debt will be repaid over time as the underlying collateral amortizes.

 

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Nonbank Funding Facilities

Facilities for Automotive Finance Operations — Unsecured

Revolving credit facilities — At June 30, 2011, we maintained $486 million of commitments in our U.S. unsecured revolving credit facility maturing June 2012. We also maintained $281 million of committed unsecured bank facilities in Canada and $50 million in Europe. The Canadian facilities expire in June 2012 and the European facility expires in March 2012.

Facilities for Automotive Finance Operations — Secured

The parent company’s largest facility is a $7.5 billion revolving syndicated credit facility secured by U.S. and Canadian automotive receivables. In the event this facility is not renewed at maturity, the outstanding debt will be repaid over time as the underlying collateral amortizes. At June 30, 2011, there was $768 million outstanding under this facility.

In addition to our syndicated revolving credit facility, we also maintain various bilateral and multilateral secured credit facilities in multiple countries that fund our Automotive Finance operations. These are primarily private securitization facilities that fund a specific pool of automotive assets. Many of the facilities have revolving commitments and allow for the funding of additional assets during the commitment period. At June 30, 2011, the parent company maintained exclusive access to $21.5 billion of committed secured credit facilities to fund automotive assets and also had access to a $4.1 billion committed facility that is shared with Ally Bank.

Facilities for Mortgage Operations — Secured

At June 30, 2011, we had capacity of $500 million to fund eligible mortgage servicing rights and capacity of $475 million to fund mortgage servicer advances. We also maintained an additional $594 million of committed capacity to fund mortgage loans.

Cash Flows

Net cash provided by operating activities was $4.4 billion for the six months ended June 30, 2011, compared to $11.6 billion for the same period in 2010. During the six months ended June 30, 2011, the net cash inflow from sales and repayment of mortgage and automotive loans held-for-sale exceeded cash outflow from new originations and purchases of such loans by $3.3 billion. During the six months ended June 30, 2010, this activity resulted in a net cash inflow of $8.0 billion.

Net cash used in investing activities was $6.8 billion for the six months ended June 30, 2011, compared to $808 million for the same period in 2010. Net cash flows from finance receivables and loans decreased $1.5 billion for the six months ended June 30, 2011, compared to the same period in 2010. The cash outflow to purchase operating lease assets exceeded cash inflows from disposals of such assets by $196 million for the six months ended June 30, 2011. These activities resulted in a net cash inflow of $2.9 billion for the six months ended June 30, 2010. The shift in net cash flow attributable to leasing activities compared to the prior year was primarily due to a year over year increase in lease origination activity. Cash received from sales and maturities of available-for-sale investment securities, net of purchases, decreased $568 million during the six months ended June 30, 2011, compared to the same period in 2010.

Net cash provided by financing activities for the six months ended June 30, 2011, totaled $5.7 billion, compared to net cash used of $12.2 billion in the same period in 2010. Cash generated from long-term debt issuances exceeded cash used to repay such debt by $3.3 billion for the six months ended June 30, 2011. For the comparable period in 2010, cash repayments exceeded proceeds from new issuances of long-term debt by $11.3 billion. Also contributing to the increase in cash inflow was an increase in short-term debt obligations of $3.6 billion for the six months ended June 30, 2011, compared to the same period in 2010.

Comprehensive Capital Analysis and Review

The Comprehensive Capital Analysis and Review (CCAR) involves the Board of Governors of the Federal Reserve System (the FRB) forward-looking evaluation of the internal capital planning processes of large, complex bank holding companies and their proposals to undertake capital actions in 2011, such as increasing dividend payments or repurchasing or redeeming stock. In November 2010, the FRB issued guidelines to provide a common, conservative approach to ensure that

 

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bank holding companies hold adequate capital to maintain ready access to funding, continue operations, and meet their obligations to creditors and counterparties, and continue to serve as credit intermediaries, even under adverse conditions. As a large bank holding company, we submitted a comprehensive capital plan and additional supervisory information to the FRB during the first quarter of 2011 in conjunction with CCAR. At this time, our capital plan is still under review by the FRB.

Regulatory Capital

Refer to Note 18 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.

 

Rating agency    Commercial paper    Senior debt    Outlook    Date of last action

Fitch

   B    BB    Stable    February 2, 2011 (a)

Moody’s

   Not-Prime    B1    Stable    February 7, 2011 (b)

S&P

   C    B+    Stable    May 4, 2011 (c)

DBRS

   R-4    BB-Low    Positive    February 4, 2011 (d)

 

(a) Fitch upgraded our senior debt rating to BB from B, affirmed the commercial paper rating of B, and changed the outlook to Stable on February 2, 2011.
(b) Moody’s upgraded our senior debt rating to B1 from B3, affirmed the commercial paper rating of Not-Prime, and affirmed the outlook of Stable on February 7, 2011.
(c) Standard & Poor’s upgraded our senior debt rating to B+ from B, affirmed the commercial paper rating of C, and affirmed the outlook of Stable on May 4, 2011.
(d) DBRS affirmed our senior debt rating of BB-Low, affirmed the commercial paper rating of R-4, and changed the outlook to Positive on February 4, 2011.

Off-balance Sheet Arrangements

Refer to Note 10 to the Condensed Consolidated Financial Statements.

Purchase Obligations

Loan Repurchases and Obligations Related to Loan Sales

Overview — Our Mortgage operations sell loans that take the form of securitizations guaranteed by the GSEs, securitizations to private investors, and to whole-loan investors. In connection with a portion of our private-label securitizations, the monolines insured all or some of the related bonds and guaranteed timely repayment of bond principal and interest when the issuer defaults. In connection with securitizations and loan sales, investors are provided various representations and warranties related to the loans sold. The specific representations and warranties vary among different transactions and investors but typically 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, the ability to deliver required documentation and compliance with applicable laws. In general, the representations and warranties described above may be enforced at any time unless a sunset provision is in place. Upon discovery of a breach of a representation or warranty, the breach is corrected in a manner conforming to the provisions of the sale agreement. This may require us to repurchase the loan, indemnify the investor for incurred losses, or otherwise make the investor whole. We have entered into settlement agreements with both Fannie Mae and Freddie Mac that, subject to certain exclusions, limit our remaining exposure with the GSEs. See Government-sponsored Enterprises below. ResCap assumes all of the customary mortgage representation and warranty obligations for loans

 

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purchased from Ally Bank and subsequently sold into the secondary market, generally through securitizations guaranteed by the GSEs. In the event ResCap fails to meet these obligations, Ally Financial Inc. has provided Ally Bank a guaranteed coverage of liability.

Originations — We believe our exposure to mortgage representation and warranty claims is most significant for loans originated and sold between 2004 through 2008, specifically the 2006 and 2007 vintages that were originated and sold prior to enhanced underwriting standards and risk-mitigation actions implemented in 2008 and forward. Since 2009, we have focused primarily on originating domestic prime conforming and government-insured mortgages. In addition, we ceased offering interest-only jumbo mortgages in 2010. Our representation and warranty risk-mitigation strategies include, but are not limited to, pursuing settlements with investors where economically beneficial in order to resolve a pipeline of demands in lieu of loan-by-loan assessments that could result in us repurchasing loans, aggressively contesting claims we do not consider valid (rescinding claims), or seeking recourse against correspondent lenders from whom we purchased loans wherever appropriate.

The following table summarizes domestic mortgage loans sold with contractual representation and warranty obligations by the type of investor (original unpaid principal balance).

 

     Six months ended
June 30,
     Year ended December 31,  
($ in billions)    2011      2010      2009      2008      2007      2006      2005      2004  

GSEs

                       

Fannie Mae

   $ 16.0       $ 35.3       $ 21.2       $ 24.9       $ 31.6       $ 33.5       $ 31.8       $ 30.5   

Freddie Mac

     7.8         15.7         8.7         12.3         15.5         12.6         16.1         13.7   

Ginnie Mae

     3.9         16.2         24.9         12.5         3.2         3.6         4.2         4.8   

Private-label securitizations

                       

Insured (monolines)

                                     6.5         10.7         10.4         15.1   

Uninsured

             0.3                         29.1         63.6         53.5         35.9   

Whole-loan

     0.1         1.6         0.1         2.2         8.2         23.9         17.4         10.9   

 

 

Total sales

   $ 27.8       $ 69.1       $ 54.9       $ 51.9       $ 94.1       $ 147.9       $ 133.4       $ 110.9   

 

 

Repurchase Process — After receiving a claim under representation and warranty obligations, we review the claim to determine the appropriate response (e.g. appeal, provide additional information, repurchase the loan, or remit make-whole payment) and take appropriate action. Historically, repurchase demands were related to loans that became delinquent within the first few years following origination and varied by investor. As a result of market developments over the past several years, repurchase demand behavior has changed significantly. GSEs are more likely to submit claims for loans at any point in their life cycle. Investors are more likely to submit claims for loans that become delinquent at any time while a loan is outstanding or when a loan incurs a loss. Refer to Note 24 to the Condensed Consolidated Financial Statements for additional information related to pending litigation. Representation and warranty claims are generally reviewed on a loan-by-loan basis to validate if there has been a breach requiring a potential repurchase or indemnification payment. We actively contest claims to the extent we do not consider them valid. We are not required to repurchase a loan or provide an indemnification payment where claims are not valid.

 

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During the six months ended June 30, 2011, we experienced a decrease in new claims compared to 2010, in part due to settlements with key counterparties. However, we experienced an increase in new claims during the three months ended June 30, 2011, which was due to a $180 million repurchase request from a monoline bond insurance company, which is still under review. The following table presents new claims by vintage (original unpaid principal balance). We expect that MBIA and other monolines will make additional claims in the future.

 

     Three months ended
June  30,
     Six months ended
June  30,
 
($ in millions)        2011              2010              2011              2010      

2004 and prior period

   $ 16       $ 11       $ 23       $ 24   

2005

     14         9         21         26   

2006

     222         47         237         133   

2007

     33         96         57         255   

2008

     45         56         70         164   

Post 2008

     52         5         105         14   

Unspecified

                     2           

 

 

Total claims

   $ 382       $ 224       $ 515       $ 616   

 

 

We seek to manage the risk of repurchase or indemnification and the associated credit exposure through our underwriting and quality assurance practices and by servicing mortgage loans to meet investor standards. We believe that, in general, the longer a loan performs prior to default the less likely it is that an alleged breach of representation and warranty will be found to have a material and adverse impact on the loan’s performance. When we do repurchase loans, we bear the related credit loss on the loans. Repurchased loans are classified as held-for-sale and initially recorded at fair value.

Refer to Note 24 to the Condensed Consolidated Financial Statements for additional information related to our representation and warranty obligations.

The following table summarizes the unpaid principal balance on mortgage loans repurchased in connection with our representation and warranty obligations.

 

     Three months ended
June 30,
     Six months ended
June  30,
 
($ in millions)        2011              2010              2011              2010      

GSEs

   $ 57       $ 101       $ 100       $ 248   

Private-label securitizations

           

Insured (monolines)

             4                 5   

Uninsured

     28                 28           

Other

     3         20         8         48   

 

 

Total loan repurchases

   $ 88       $ 125       $ 136       $ 301   

 

 

The following table summarizes indemnification payments made in connection with our representation and warranty obligations.

 

     Three months ended
June 30,
     Six months ended
June 30,
 
($ in millions)        2011              2010              2011              2010      

GSEs

   $ 13       $ 67       $ 28       $ 140   

Private-label securitizations

           

Insured (monolines)

     8         6         10         8   

Uninsured

     123                 123           

Other

     11         4         12         8   

 

 

Total indemnification payments

   $ 155       $ 77       $ 173       $ 156   

 

 

 

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The following table presents the total number and original unpaid principal balance of loans related to unresolved representation and warranty demands (indemnification claims or repurchase demands). The table includes demands that we have requested be rescinded but which have not been agreed to by the investor.

 

     June 30, 2011      December 31, 2010  
($ in millions)    Number
of loans
    

Dollar amount

of loans

    

Number

of loans

    

Dollar amount

of loans

 

GSEs

     544       $ 115         833       $ 170 (a) 

Monolines

     11,819         874         8,206         661   

Other

     448         89         392         88   

 

 

Total unpaid principal balance

     12,811       $ 1,078         9,431       $ 919   

 

 
(a) This amount is gross of any loans that would be removed due to the Fannie Mae settlement. At December 31, 2010, $48 million of outstanding claims were covered under the Fannie Mae settlement agreement.

We are currently in litigation with MBIA Insurance Corp. (MBIA) with respect to certain of our private-label securitizations. June 30, 2011 amounts in the table above include unresolved repurchase demands of $437 million of original unpaid principal balance with MBIA, which were received prior to commencement of these proceedings by MBIA. Historically we have requested that most of the repurchase demands presented to us by MBIA be rescinded, consistent with the repurchase process described above. As the litigation progresses, we expect to receive additional repurchase demands from MBIA. We also expect to receive additional repurchase demands from other monolines.

Representation and Warranty Obligation Reserve Methodology — The liability for representation and warranty obligations reflects management’s best estimate of probable lifetime losses. We consider historical 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, historical loan defect experience, historical mortgage insurance rescission experience, and historical 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 or have limited current or historical demand experience with an investor, it is difficult to predict and estimate the level and timing of any potential future demands. In such cases, we may not be able to reasonably estimate losses, 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 and experience with counterparties.

At the time a loan is sold, an estimate of the fair value 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 liability when additional relevant information becomes available. Changes in the liability are recorded as other operating expenses in our Condensed Consolidated Statement of Income. The repurchase reserve at June 30, 2011, relates primarily to non-GSE exposure.

Government-sponsored Enterprises — Between 2004 and 2008, we sold $250.8 billion of loans to the GSEs. Each GSE has specific guidelines and criteria for sellers and servicers of loans underlying their securities. In addition, the risk of credit loss of the loan sold was generally transferred to investors upon sale of the securities into the secondary market. Conventional conforming loans were sold to either Freddie Mac or Fannie Mae, and government-insured loans were securitized with Ginnie Mae. For the six months ended June 30, 2011, we received repurchase claims relating to $250 million of original unpaid principal balance of which $146 million are associated with the 2004 through 2008 vintages. The remaining $104 million in repurchase claims relate to post-2008 vintages. During the six months ended June 30, 2011, we resolved claims with respect to $305 million of original unpaid principal balance, including settlement, repurchase, or indemnification payments related to $211 million of original unpaid principal balance, and rescinded claims related to $94 million of original unpaid principal balance. Our representation and warranty obligation liability with respect to the GSEs considers the existing unresolved claims and our best estimate of future claims we might receive. We consider our experiences with the GSE in evaluating our liability. During 2010, we reached agreements with Freddie Mac and Fannie Mae that, subject to certain exclusions, limits our remaining exposure to each counterparty.

 

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In March 2010, certain of our mortgage subsidiaries 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 most of the mortgage loans sold to Freddie Mac prior to January 1, 2009. This agreement does not release any of our obligations with respect to exposure for private-label mortgage-backed securities in which Freddie Mac had previously invested, loans where Ally Bank is the owner of the servicing, as well as defects in certain other specified categories of loans. Further, we continue to be responsible for other contractual obligations we have with Freddie Mac, including all indemnification obligations that may arise in connection with the servicing of the mortgages. The total original unpaid principal balance of loans originated prior to January 1, 2009 and where Ally Bank was the owner of the servicing was $10.9 billion. From January 1, 2009 through June 30, 2011, the amount of losses we have taken on loans that we have repurchased relating to defects where Ally Bank was the owner of the servicing was $87 million. From April 1, 2010 through June 30, 2011, the amount of losses we have taken on loans that we have repurchased relating to defects in the other specified categories was $15 million. These other specified categories include (i) loans subject to certain state predatory lending and similar laws; (ii) groups of 25 or more mortgage loans purchased, originated, or serviced by one of our mortgage subsidiaries, the purchase, origination, or sale of which all involve a common actor who committed fraud; (iii) “non-loan-level” representations and warranties which refer to representations and warranties that do not relate to specific mortgage loans (examples of such non-loan-level representations and warranties include the requirement that our mortgage subsidiaries meet certain standards to be eligible to sell or service loans for Freddie Mac or our mortgage subsidiaries sold or serviced loans for market participants that were not acceptable to Freddie Mac); and (iv) mortgage loans that are ineligible for purchase by Freddie Mac under its charter and other applicable documents. If, however, a mortgage loan was ineligible under Freddie Mac’s charter solely because mortgage insurance was rescinded (rather than for example, because the mortgage loan is secured by a commercial property), and Freddie Mac required our mortgage subsidiary to repurchase that loan because of the ineligibility, Freddie Mac would pay our mortgage subsidiary any net loss we suffered on any later liquidation of that mortgage loan.

Certain of our mortgage subsidiaries have received subpoenas from the Federal Housing Finance Agency (the FHFA), which is the conservator of Fannie Mae and Freddie Mac. We continue to discuss the terms and circumstances under which documents would be provided under the subpoenas related to Freddie Mac. The FHFA has indicated that documents provided in response to the subpoenas will enable the FHFA to determine whether they believe issuers of private-label mortgage-backed securities are potentially liable to Freddie Mac for losses they might have incurred. Although Freddie Mac has not brought any claims against us with respect to private-label securities subsequent to the settlement, they may well do so in the future.

On December 23, 2010, certain of our mortgage subsidiaries entered into an agreement with Fannie Mae under which we made a one-time payment to Fannie Mae for the release of repurchase obligations related to most of the mortgage loans we sold to Fannie Mae prior to June 30, 2010. The agreement also covers potential exposure for private-label mortgage-backed securities in which Fannie Mae had previously invested. This agreement does not release any of our obligations with respect to loans where Ally Bank is the owner of the servicing, as well as for defects in certain other specified categories of loans. Further, we continue to be responsible for other contractual obligations we have with Fannie Mae, including all indemnification obligations that may arise in connection with the servicing of the mortgages, and we continue to be obligated to indemnify Fannie Mae for litigation or third party claims (including by borrowers) for matters that may amount to breaches of selling representations and warranties. The total original unpaid principal balance of loans originated prior to January 1, 2009 and where Ally Bank was the owner of the servicing was $24.4 billion. From July 1, 2010 through June 30, 2011, the amount of losses we have taken on loans that we have repurchased relating to defects where Ally Bank was the owner of the servicing was $61 million. From January 1, 2011 through June 30, 2011, the amount of losses we have taken on loans that we have repurchased relating to defects in the other specified categories of loans was $4 million. These other specified categories include, among others, (i) those that violate anti-predatory laws or statutes or related regulations or that otherwise violate other applicable laws and regulations; (ii) those that have non-curable defects in title to the secured property, or that have curable title defects, to the extent our mortgage subsidiaries do not cure such defects at our subsidiary’s expense; (iii) any mortgage loan in which title or ownership of the mortgage loan was defective; (iv) groups of 13 or more mortgage loans, the purchase, origination, sale or servicing of which all involve a common actor who committed fraud; and (v) mortgage loans not in compliance with Fannie Mae Charter Act requirements (e.g., mortgage loans on commercial properties or mortgage loans without required mortgage insurance coverage). If a mortgage loan falls out of compliance with Fannie Mae Charter Act requirements because mortgage insurance coverage has been rescinded and not reinstated or replaced, upon the borrower’s default our mortgage subsidiaries would have to pay to Fannie Mae the amount of insurance proceeds that would have been paid by the mortgage insurer with respect to such mortgage loan. If the amount of the loss exceeded the amount of insurance proceeds, Fannie Mae would be responsible for such excess.

 

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The following tables summarize the changes in the original unpaid principal balance related to unresolved repurchase demands with respect to our GSE exposure.

 

Three months ended June 30, ($ in millions)        2011             2010      

Balance at April 1,

   $ 98      $ 230   

New claims

     148        198   

Realized losses (a)

     (78     (184

Rescinded claims/other

     (53     (54

 

 

Balance at June 30,

   $ 115      $ 190   

 

 
(a) Losses include settlements, repurchases, and indemnification payments.

 

Six months ended June 30, ($ in millions)        2011             2010      

Balance at January 1,

   $ 170      $ 296   

New claims

     250        522   

Realized losses (a)

     (211     (510

Rescinded claims/other

     (94     (118

 

 

Balance at June 30,

   $ 115      $ 190   

 

 
(a) Losses include settlements, repurchases, and indemnification payments.

Monoline Insurers — Historically, our Mortgage operations securitized loans where the monolines insured all or some of the related bonds and guaranteed the timely repayment of bond principal and interest when the issuer defaults. Typically, any alleged breach requires the insurer to have both the ability to assert a claim as well as evidence that a defect has had a material and adverse effect on the interest of the security holders or the insurer. For the period 2004 through 2007, we sold $42.7 billion of loans into these monoline wrapped securitizations. During the six months ended June 30, 2011, we received repurchase claims related to $226 million of original unpaid principal balance from the monolines associated with the 2004 through 2007 securitizations. We have resolved repurchase demands through indemnification payments related to $16 million of original unpaid principal balance.

We are currently in litigation with MBIA, and additional litigation with other monolines is likely. Refer to Note 24 to the Condensed Consolidated Financial Statements for information with respect to pending litigation.

The following tables summarize the changes in our original unpaid principal balance related to unresolved repurchase demands with respect to our monoline exposure.

 

Three months ended June 30, ($ in millions)        2011             2010      

Balance at April 1,

   $ 667      $ 595   

New claims

     212        16   

Realized losses (a)

     (8     (7

Rescinded claims/other

     3        (3

 

 

Balance at June 30,

   $ 874      $ 601   

 

 
(a) Losses include settlements, repurchases, and indemnification payments.

 

Six months ended June 30, ($ in millions)        2011             2010      

Balance at January 1,

   $ 661      $ 553   

New claims

     226        71   

Realized losses (a)

     (16     (18

Rescinded claims/other

     3        (5

 

 

Balance at June 30,

   $ 874      $ 601   

 

 
(a) Losses include settlements, repurchases, and indemnification payments.

Private-label Securitization — Historically, our Mortgage operations were very active in the securitization market selling whole loans into special-purpose entities and selling these private-label mortgage-backed securities to investors.

 

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The following table summarizes the original unpaid principal balance of our domestic uninsured private-label securitization activity issued from various shelf registration statements of our subsidiaries and its corresponding majority product type and current unpaid principal balance for securitizations completed during 2004 through 2007.

 

($ in billions)    Original UPB    

Current UPB

at June 30, 2011

    

UPB

at December 31, 2010

 

RFMSI (Prime)

   $ 21.8      $ 9.0       $ 10.0   

RALI (Alt-A and Option ARM)

     66.7        27.9         30.7   

RAMP (Subprime and other)

     55.9 (a)      13.7         15.0   

RASC (Subprime)

     36.8        8.4         9.0   

RFMSII (HELOC)

     0.9        0.3         0.3   

 

 

Total

   $ 182.1      $ 59.3       $ 65.0   

 

 
(a) RAMP consisted of the following product types: subprime ($37.7 billion), prime ($8.8 billion), and other ($9.4 billion).

The following table summarizes the original unpaid principal balance of our domestic monoline insured private-label securitization activity issued from various shelf registration statements of our subsidiaries and its corresponding majority product type and current unpaid principal balance for securitizations completed during 2004 through 2007.

 

($ in billions)    Original UPB     

Current UPB

at June 30, 2011

    

UPB

at December 31, 2010

 

RFMSI (Prime)

   $ 1.7       $ 0.5       $ 0.6   

RALI (Option ARM and Alt-A)

     1.4         0.6         0.7   

RAMP (HELOC and Subprime)

     26.5         6.7         7.3   

RASC (Subprime)

     3.6         0.7         0.7   

RFMSII (HELOC)

     9.5         2.3         2.6   

 

 

Total

   $ 42.7       $ 10.8       $ 11.9   

 

 

In general, representations and warranties provided as part of our securitization activities are less rigorous than those provided to the GSEs and generally impose higher burdens on investors seeking repurchase. In order to successfully assert a claim, it is our position that an investor must prove a breach of the representations and warranties that materially and adversely affects the interest of the investor in the allegedly defective loan. Securitization documents typically provide the investors with a right to request that the trustee investigate and initiate a repurchase claim. However, a class of investors generally are required to coordinate with other investors in that class comprising not less than 25% of the percentage interest constituting a class of securities of that class issued by the trust to pursue claims for breach of representations and warranties. In addition, our private-label securitizations generally require that the servicer or trustee give notice to the other parties whenever it becomes aware of facts or circumstances that reveal a breach of representation that materially and adversely affects the interest of the certificate holders. If, for example, we as servicer became aware of such facts and circumstances, we would typically be required to initiate a repurchase at that time.

Regarding our securitization activities, we have exposure to potential losses primarily through two avenues. First, investors (or monoline insurers in certain transactions) may request pursuant to applicable agreements that we repurchase loans or make the investor whole for losses incurred if it is determined that we violated representations and warranties made at the time of the sale, provided that such violations materially and adversely impacted the interests of the counterparty. Contractual representations and warranties are different based on the specific deal structure and investor. It is our position that litigation of these matters must proceed on a loan by loan basis. This issue is being disputed in various litigation currently pending. Similarly in dispute as a matter of law is the degree to which claimants will have to prove that the alleged breaches of representations and warranties actually caused the losses they claim to have suffered. Ultimate resolution by courts of these and other legal issues will impact litigation and treatment of non-litigated claims pursuant to similar contractual provisions. Second, investors in securitizations may attempt to achieve rescission of their investments or damages through litigation by claiming that the applicable offering documents were materially deficient. If an investor properly made and proved its allegations, the investor might attempt to claim that damages could include loss of market value on the investment even if there were little or no credit loss in the underlying loans.

 

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Whole-loan Sales — In addition to the settlements with the GSEs noted earlier, we have settled with several whole-loan investors concerning alleged breaches of underwriting standards. For the six months ended June 30, 2011, we have received $38 million of original unpaid principal balance in repurchase claims of which $36 million are associated with the 2004 through 2008 vintages of loans sold to whole-loan investors. We resolved claims related to $37 million of original unpaid principal balance, including settlements, repurchases, or indemnification payments related to $13 million of original unpaid principal balance, and rescinded claims related to $24 million of original unpaid principal balance.

The following tables summarize the changes in the original unpaid principal balance related to unresolved repurchase demands with respect to our whole-loan sales exposure.

 

Three months ended June 30, ($ in millions)        2011             2010      

Balance at April 1,

   $ 73      $ 39   

New claims

     22        11   

Realized losses (a)

     (6     (7

Rescinded claims/other

            (6

 

 

Balance at June 30,

   $ 89      $ 37   

 

 
(a) Losses include settlements, repurchases, and indemnification payments.

 

Six months ended June 30, ($ in millions)        2011             2010      

Balance at January 1,

   $ 88      $ 70   

New claims

     38        24   

Realized losses (a)

     (13     (18

Rescinded claims/other

     (24     (39

 

 

Balance at June 30,

   $ 89      $ 37   

 

 
(a) Losses include settlements, repurchases, and indemnification payments.

Private Mortgage Insurance

Mortgage insurance is required for certain consumer mortgage loans sold to the GSEs and certain securitization trusts and may have been in place for consumer mortgage loans sold to whole-loan investors. Mortgage insurance is typically required for first-lien consumer mortgage loans having a loan-to-value ratio at origination of greater than 80 percent. Mortgage insurers are, in certain circumstances, permitted to rescind existing mortgage insurance that covers consumer loans if they demonstrate certain loan underwriting requirements have not been met. Upon receipt of a rescission notice, we assess the notice and if appropriate we refute the notice, or if we cannot refute we attempt to remedy the defect. In the event the mortgage insurance cannot be reinstated, we may be obligated to repurchase the loan or provide an indemnification payment in the event of a loss, subject to contractual limitations. While we make every effort to reinstate the mortgage insurance, we have had limited success and as a result, most of these requests result in rescission of the mortgage insurance. At June 30, 2011, we have approximately $300 million in original unpaid principal balance of outstanding mortgage insurance rescission notices where we have not received a repurchase demand. However, this unpaid principal amount is not representative of expected future losses.

Private-label Mortgage-backed Securities Litigation, Repurchase Obligations, and Related Claims

We believe it is reasonably possible that losses beyond amounts currently reserved for the litigation matters described in Note 24 and potential repurchase obligations and related claims discussed above could occur, and such losses could have a material adverse impact on our results of operations, financial position, or cash flows. However, based on currently available information, we are unable to estimate a range of reasonably possible losses above reserves that have been established.

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.

 

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Our most critical accounting estimates are as follows.

 

   

Fair value measurements

 

   

Allowance for loan losses

 

   

Valuation of automobile lease assets, residuals, and allowance for lease losses

 

   

Valuation of mortgage servicing rights

 

   

Goodwill

 

   

Determination of reserves for insurance losses and loss adjustment expenses

 

   

Loan repurchase and obligations related to loan sales

 

   

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 2010 Annual Report on Form 10-K.

Fair Value of Financial Instruments

We use fair value measurements to record fair value adjustments to certain instruments and to determine fair value disclosures. Refer to Note 21 to the Condensed Consolidated Financial Statements for description 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. We follow the fair value hierarchy set forth in Note 21 to the Condensed Consolidated Financial Statements in order to prioritize the inputs utilized 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.

The following table summarizes assets and liabilities measured at fair value and the amounts measured using Level 3 inputs. The table includes recurring and nonrecurring measurements.

 

($ in millions)   

June 30,

    2011    

   

December 31,

    2010    

 

Assets at fair value

   $ 29,552      $ 33,001   

As a percentage of total assets

     17     19

Liabilities at fair value

   $ 4,949      $ 4,832   

As a percentage of total liabilities

     3     3

Assets at fair value using Level 3 inputs

   $ 6,611      $ 6,969   

As a percentage of assets at fair value

     22     21

Liabilities at fair value using Level 3 inputs

   $ 969      $ 1,090   

As a percentage of liabilities at fair value

     20     23

 

 

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 are 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

 

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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 will also be benchmarked to market indices when appropriate and available. We have scheduled 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 Table

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 appears 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.

 

    2011     2010     Increase (decrease)
due to (a)
 

Three months ended June 30,

($ in millions)

 

Average

balance (b)

   

Interest
income/

interest
expense

   

Yield/

rate

   

Average

balance (b)

   

Interest
income/

interest
expense

   

Yield/

rate

    Volume    

Yield/

rate

    Total  

Assets

                 

Interest-bearing cash and cash equivalents

  $ 11,910      $ 15        0.51   $ 15,498      $ 18        0.47   $ (4   $ 1      $ (3

Trading securities

    146        3        8.24        177        6        13.60        (1     (2     (3

Investment securities (c)

    14,311        102        2.86        10,793        86        3.20        26        (10     16   

Loans held-for-sale, net

    8,320        98        4.72        12,671        156        4.94        (52     (6     (58

Finance receivables and loans, net (d)

    111,543        1,676        6.03        89,502        1,617        7.25        358        (299     59   

Investment in operating leases, net (e)

    9,004        428        19.07        12,937        485        15.04        (168     111        (57

 

     

 

 

     

 

 

 

Total interest-earning assets

    155,234        2,322        6.00        141,578        2,368        6.71        159        (205     (46

Noninterest-bearing cash and cash equivalents

    1,020            85             

Other assets

    23,966            38,899             

Allowance for loan losses

    (1,816         (2,496          

 

       

 

 

           

Total assets

  $ 178,404          $ 178,066             

 

 

Liabilities

                 

Interest-bearing deposit liabilities

  $ 40,386      $ 175        1.74   $ 32,309      $ 155        1.92   $ 36      $ (16   $ 20   

Short-term borrowings

    7,280        108        5.95        7,375        99        5.38        (1     10        9   

Long-term debt (f)(g)(h)

    90,606        1,334        5.91        87,964        1,409        6.42        41        (116     (75

 

     

 

 

     

 

 

 

Total interest-bearing liabilities (g)(i)

    138,272        1,617        4.69        127,648        1,663        5.23        76        (122     (46

Noninterest-bearing deposit liabilities

    2,170            2,033             

 

     

 

 

         

Total funding sources (g)(j)

    140,442        1,617        4.62        129,681        1,663        5.14         

Other liabilities

    17,517            27,739             

 

       

 

 

           

Total liabilities

    157,959            157,420             

Total equity

    20,445            20,646             

 

       

 

 

           

Total liabilities and equity

  $ 178,404          $ 178,066             

 

 

Net financing revenue

    $ 705          $ 705        $ 83      $ (83   $   

Net interest spread (k)

        1.31         1.48      

Net interest spread excluding original issue discount (k)

        2.12            2.53         

Net interest spread excluding original issue discount and including noninterest bearing deposit liabilities (k)

        2.18            2.59         

Net yield on interest-earning assets (l)

        1.82            2.00         

Net yield on interest-earning assets excluding original issue discount (l)

        2.48            2.82         

 

 
(a) Changes in interest not solely due to volume or yield/rate are allocated in proportion to the absolute dollar amount of change in volume and yield/rate.
(b) Average balances are calculated using a combination of monthly and daily average methodologies.
(c) Excludes income on equity investments of $6 million and $4 million at June 30, 2011 and 2010, respectively. Yields on available-for-sale debt securities are based on fair value as opposed to historical cost.
(d) Nonperforming finance receivables and loans are included in the average balances. For information on our accounting policies regarding nonperforming status refer to Note 1 to the Consolidated Financial Statements in our 2010 Annual Report on Form 10-K.
(e) Includes gains on sale of $164 million and $199 million during the three months ended June 30, 2011 and 2010, respectively. Excluding these gains on sale, the annualized yield would be 11.76% and 8.87% at June 30, 2011 and 2010, respectively.
(f) Includes the effects of derivative financial instruments designated as hedges.
(g) Average balance includes $2,609 million and $3,876 million related to original issue discount at June 30, 2011 and 2010, respectively. Interest expense includes original issue discount amortization of $254 million and $292 million during the three months ended June 30, 2011 and 2010, respectively.
(h) Excluding original issue discount the rate on long-term debt was 4.65% and 4.88% at June 30, 2011 and 2010, respectively.
(i) Excluding original issue discount the rate on total interest-bearing liabilities was 3.88% and 4.18% at June 30, 2011 and 2010, respectively.
(j) Excluding original issue discount the rate on total funding sources was 3.82% and 4.12% at June 30, 2011 and 2010, respectively.
(k) Net interest spread represents the difference between the rate on total interest-earning assets and the rate on total interest-bearing liabilities.
(l) Net yield on interest-earning assets represents net financing revenue as a percentage of total interest-earning assets.

 

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    2011     2010     Increase (decrease)
due to (a)
 

Six months ended June 30,

($ in millions)

 

Average

balance (b)

    Interest
income/
interest
expense
   

Yield/

rate

   

Average

balance (b)

    Interest
income/
interest
expense
   

Yield/

rate

    Volume    

Yield/

rate

    Total  

Assets

                 

Interest-bearing cash and cash equivalents

  $ 12,473      $ 27        0.44   $ 14,004      $ 32        0.46   $ (3   $ (2   $ (5

Trading securities

    231        6        5.24        253        7        5.58        (1            (1

Investment securities (c)

    14,450        201        2.81        11,232        181        3.25        47        (27     20   

Loans held-for-sale, net

    8,597        206        4.83        14,755        371        5.07        (148     (17     (165

Finance receivables and loans, net (d)

    107,984        3,299        6.16        87,394        3,235        7.46        686        (622     64   

Investment in operating leases, net (e)

    8,976        823        18.49        13,905        992        14.39        (407     238        (169

 

     

 

 

     

 

 

 

Total interest-earning assets

    152,711        4,562        6.02        141,543        4,818        6.86        174        (430     (256

Noninterest-bearing cash and cash equivalents

    1,026            467             

Other assets

    24,430            38,623             

Allowance for loan losses

    (1,840         (2,528          

 

       

 

 

           

Total assets

  $ 176,327          $ 178,105             

 

 

Liabilities

                 

Interest-bearing deposit liabilities

  $ 39,270      $ 347        1.78   $ 31,385      $ 313        2.01   $ 72      $ (38   $ 34   

Short-term borrowings

    7,186        234        6.57        7,557        210        5.60        (11     35        24   

Long-term debt (f)(g)(h)

    88,843        2,744        6.23        88,907        2,842        6.45        (2     (96     (98

 

     

 

 

     

 

 

 

Total interest-bearing liabilities (g)(i)

    135,299        3,325        4.96        127,849        3,365        5.31        59        (99     (40

Noninterest-bearing deposit liabilities

    2,098            1,897             

 

     

 

 

         

Total funding sources (g)(j)

    137,397        3,325        4.88        129,746        3,365        5.23         

Other liabilities

    18,498            27,682             

 

       

 

 

           

Total liabilities

    155,895            157,428             

Total equity

    20,432            20,677             

 

       

 

 

           

Total liabilities and equity

  $ 176,327          $ 178,105             

 

 

Net financing revenue

    $ 1,237          $ 1,453        $ 115      $ (331   $ (216

Net interest spread (k)

        1.06         1.55      

Net interest spread excluding original issue discount (k)

        1.97            2.61         

Net interest spread excluding original issue discount and including noninterest bearing deposit liabilities (k)

        2.03            2.67         

Net yield on interest-earning assets (l)

        1.63            2.07         

Net yield on interest-earning assets excluding original issue discount (l)

        2.36            2.91         

 

 
(a) Changes in interest not solely due to volume or yield/rate are allocated in proportion to the absolute dollar amount of change in volume and yield/rate.
(b) Average balances are calculated using a combination of monthly and daily average methodologies.
(c) Excludes income on equity investments of $11 million and $8 million at June 30, 2011 and 2010, respectively. Yields on available-for-sale debt securities are based on fair value as opposed to historical cost.
(d) Nonperforming finance receivables and loans are included in the average balances. For information on our accounting policies regarding nonperforming status refer to Note 1 to the Consolidated Financial Statements in our 2010 Annual Report on Form 10-K.
(e) Includes gains on sale of $282 million and $383 million during the six months ended June 30, 2011 and 2010, respectively. Excluding these gains on sale, the annualized yield would be 12.15% and 8.83% at June 30, 2011 and 2010, respectively.
(f) Includes the effects of derivative financial instruments designated as hedges.
(g) Average balance includes $2,761 million and $4,048 million related to original issue discount at June 30, 2011 and 2010, respectively. Interest expense includes original issue discount amortization of $550 million and $588 million during the six months ended June 30, 2011 and 2010, respectively.
(h) Excluding original issue discount the rate on long-term debt was 4.83% and 4.89% at June 30, 2011 and 2010, respectively.
(i) Excluding original issue discount the rate on total interest-bearing liabilities was 4.05% and 4.25% at June 30, 2011 and 2010, respectively.
(j) Excluding original issue discount the rate on total funding sources was 3.99% and 4.19% at June 30, 2011 and 2010, respectively.
(k) Net interest spread represents the difference between the rate on total interest-earning assets and the rate on total interest-bearing liabilities.
(l) Net yield on interest-earning assets represents net financing revenue as a percentage of total interest-earning assets.

 

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Recently Issued Accounting Standards

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: maintaining the mutually beneficial relationship between Ally and General Motors (GM), and Ally and Chrysler; the profitability and financial condition of GM and Chrysler; securing low cost funding for us and Residential Capital, LLC (ResCap); our ability to realize the anticipated benefits associated with being a bank holding company, and the increased regulation and restrictions that we are now subject to; any impact resulting from delayed foreclosure sales or related matters; the potential for legal liability resulting from claims related to the sale of private-label mortgage-backed securities; 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; continued challenges in the residential mortgage markets; the continuing negative impact on ResCap and our mortgage business generally due to the recent decline in the U.S. housing market; uncertainty of our ability to enter into transactions or execute strategic alternatives to realize the value of our ResCap operations; the potential for deterioration in the residual value of off-lease vehicles; disruptions in the market in which we fund our 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 Ally, ResCap, 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 Dodd-Frank Act).

Use of the term “loans” describes products associated with direct and indirect lending activities of Ally’s global operations. The specific products include retail installment sales contracts, loans, lines of credit, leases or other financing products. The term “originate” refers to Ally’s purchase, acquisition, or direct origination of various “loan” products.

 

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Item 3. Quantitative and Qualitative Disclosures about Market Risk

Refer to the Market Risk section of Item 2, Management’s Discussion and Analysis.

 

Item 4. Controls and Procedures

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. Our disclosure controls and procedures are also designed to ensure that information required to be disclosed in the reports we file and submit under the Exchange Act is accumulated and communicated to management, including our Chief Executive Officer (Principal Executive Officer) and Senior Executive Vice President of Finance and Corporate Planning (Principal Financial Officer), to allow timely decisions regarding required disclosure.

As of the end of the period covered by this report, our Principal Executive Officer and Principal Financial Officer evaluated, with the participation of our management, the effectiveness of our disclosure controls and procedures and concluded that our disclosure controls and procedures were effective.

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 Principal Executive Officer and Principal 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

 

Item 1. Legal Proceedings

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. 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

Private-label Securities Litigation

There are fourteen cases relating to various private-label mortgage-backed securities (MBS) offerings that are currently pending. Plaintiffs in these cases include Cambridge Place Investment Management Inc. (two cases pending in Suffolk County Superior Court, Massachusetts, filed on July 9, 2010, and February 11, 2011, respectively); The Charles Schwab Corporation (case pending in San Francisco County Superior Court, California, filed on August 2, 2010); Federal Home Loan Bank of Boston (case pending in Suffolk County Superior Court, Massachusetts, filed on April 20, 2011); Federal Home Loan Bank of Chicago (case pending in Cook County Circuit Court, Illinois, filed on October 15, 2010); Federal Home Loan Bank of Indianapolis (case pending in Marion County Superior Court, Indiana, on October 15, 2010, and removed to the Southern District of Indiana); Massachusetts Mutual Life Ins. Co. (case pending in federal court in the District of Massachusetts, filed on February 9, 2011); Allstate Insurance Co., et al. (case pending in Hennepin County District Court, Minnesota, filed on February 18, 2011); New Jersey Carpenters Health Fund, et al. (a putative class action, filed on September 22, 2008, in which certification has been denied, pending in federal court in the Southern District of New York); West Virginia Investment Management Board (case pending in Kanawha County Circuit Court, West Virginia, filed on March 4, 2010); Thrivent Financial for Lutherans, et al. (case pending in federal court in the District of Minnesota, filed on March 28, 2011); Union Central Life Insurance et al. (case pending in federal court in the Southern District of New York, filed on April 28, 2011); National Credit Union Administration Board (case pending in federal court in the District of Kansas, filed on June 20, 2011); and The Western and Southern Life Insurance Co., et al. (case pending in Hamilton County Court of Common Pleas, Ohio, filed on June 29, 2011). Each of the above cases includes as defendants certain of our mortgage subsidiaries, and the New Jersey Carpenters, Massachusetts Mutual, Union Central, and Western and Southern cases also include 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.

Private-label Monoline Bond Insurer Claims

There are two additional cases (filed on December 4, 2008, and April 1, 2010) 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 our 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 also alleges fraud. Additional litigation from other monoline bond insurance companies is likely.

All of the matters described above are at various procedural stages of litigation.

Item 1A. Risk Factors

Other than with respect to the risk factors provided below, there have been no material changes to the Risk Factors described in our 2010 Annual Report on Form 10-K and subsequent quarterly report on Form 10-Q for the three months ended March 31, 2011.

 

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Risks Related to Regulation

Our ability to engage in certain activities may be adversely affected by our status as a bank holding company.

As a bank holding company, Ally’s activities are generally limited to banking or to managing or controlling banks or other companies engaged in activities deemed closely related to banking or otherwise permissible under the Bank Holding Company Act of 1956, as amended (the BHC Act) and related regulations. Likewise, Ally generally may not hold more than 5% of any class of voting shares of any company unless that company’s activities conform to the above requirements. Upon our bank holding company approval, we were permitted an initial two-year grace period to bring our activities and investments into conformity with these restrictions. This initial grace period expired in December 2010; however, the Board of Governors of the Federal Reserve System (FRB) has granted a one-year extension that expires in December 2011. We will be permitted to apply to the FRB for up to two additional one-year extensions. Certain of Ally’s existing activities and investments, including most of our insurance activities and our SmartAuction vehicle remarketing services, are deemed impermissible under the BHC Act and must be terminated or disposed of by the expiration of this extension and any additional extensions. While some of these activities may be continued if Ally is able to convert to a financial holding company under the BHC Act, Ally may be unable to satisfy the requirements to enable it to convert to a financial holding company prior to that time, and activities, businesses, or investments that would be permissible for a financial holding company will need to be terminated or disposed of. The FRB may also decline to grant any additional requested extensions, and Ally may be obligated to terminate or dispose of any impermissible activities, businesses, or investments more quickly than anticipated or under terms less advantageous to Ally than expected. Either situation could have a material adverse effect on our business, results of operations, and financial position.

As a bank holding company, our ability to expand into new business activities requires us to obtain the prior approval of the relevant banking supervisors. There can be no assurance that any required approval will be obtained or that we will be able to execute on these plans in a timely manner or at all. If we are unable to obtain approval to expand into new business activities, our business, results of operations, and financial position may be materially adversely affected.

Our business and financial condition could be adversely affected as a result of issues relating to mortgage foreclosures, home sales, and evictions in certain states and our entry into a related consent order.

Representatives of federal and state governments, including the United States Department of Justice, the FRB, the Federal Deposit Insurance Corporation (FDIC), the U.S. Securities and Exchange Commission (SEC), and law enforcement authorities in all 50 states, are currently investigating the procedures followed by mortgage servicing companies and banks, including subsidiaries of Ally, in connection with mortgage foreclosure home sales and evictions. While the results of these investigations are uncertain, we expect that Ally or its subsidiaries will become subject to penalties, sanctions, or other adverse actions, including monetary fines which could be substantial and have a material adverse impact on our results of operations, financial position or cash flows. While we believe that a monetary fine is probable, we are not able to provide an estimate based on information currently available, nor are we able to estimate a range of reasonably possible losses.

As a result of an examination conducted by the FRB and FDIC, on April 13, 2011, each of Ally, Ally Bank, Residential Capital, LLC and GMAC Mortgage, LLC (collectively, the Ally Entities) entered into a Consent Order (the Order) with the FRB and the FDIC. The Order requires the Ally Entities to make improvements to various aspects of Ally’s residential mortgage loan servicing business, including compliance programs, internal audit, communications with borrowers, vendor management, management information systems, employee training, and oversight by the boards of the Ally Entities. We estimate that incremental costs for implementation and ongoing compliance with the Order to be approximately $30-40 million annually during 2011 through 2013, but these amounts could be higher. The majority of these incremental annual costs are for additional servicing, vendor management, legal, compliance, and internal audit personnel.

The Order further requires the Ally Entities to retain independent consultants to conduct a risk assessment related to mortgage servicing activities and, separately, to conduct a review of certain past residential mortgage foreclosure actions.

We cannot estimate the ultimate impact of any deficiencies that have been or may be identified in our historical foreclosure procedures. There are potential risks related to these matters that extend beyond potential liability on individual

 

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foreclosure actions. Specific risks could include, for example, claims and litigation related to foreclosure remediation and resubmission; claims from investors that hold securities that become adversely impacted by continued delays in the foreclosure process, the reduction in foreclosure proceeds due to delay, or by challenges to completed foreclosure sales to the extent, if any, not covered by title insurance obtained in connection with such sales; actions by courts, state attorneys general, or regulators to delay further the foreclosure process after submission of corrected affidavits, or to facilitate claims by borrowers alleging that they were harmed by our foreclosure practices (by, for example, foreclosing without offering an appropriate range of alternative home preservation options); regulatory fines, sanctions, and other additional costs; and reputational risks. To date we have borne all out-of-pocket costs associated with the remediation rather than passing any such costs through to investors for whom we service the related mortgages, and we expect that we will continue to do so.

Our ability to rely on deposits as a part of our funding strategy may be limited.

Ally Bank continues to be a key part of our funding strategy, and we have increased our reliance on deposits as an alternative source of funding through Ally Bank. Ally Bank does not have a retail branch network and it obtains its deposits through direct banking and brokered deposits (which, at December 31, 2010, included $10 billion of brokered certificates of deposit that may be more price sensitive than other types of deposits and may become less available if alternative investments offer higher interest rates). Our ability to maintain our current level of deposits or grow our deposit base could be affected by regulatory restrictions including the possible imposition of prior approval requirements, restrictions on deposit growth or restrictions on our rates offered. In addition, perceptions of our financial strength, rates offered by third parties, and other competitive factors beyond our control, including returns on alternative investments, will also impact our ability to grow our deposit base. As we have established the Ally Bank brand and increased our retail deposit base over the past two years, we have reduced offered rates on new retail deposits. However, a strategy of continuing to offer reduced rates in the future could limit our ability to further grow or maintain deposits. Even if we are able to grow the deposit base of Ally Bank, our regulators may impose restrictions on our ability to use Ally Bank deposits as a source of funding for certain business activities potentially raising the cost of funding those activities without the use of Ally Bank deposits.

The FDIC has indicated that it expects Ally to diversify Ally Bank’s overall funding and to focus on reducing Ally Bank’s overall funding costs including the interest rates paid on Ally Bank deposits. Refer to Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity Management, Funding and Regulatory Capital—Funding Strategy for additional information about these diversification activities. As stated above, over the past few years, we have reduced rates on retail deposits, resulting in lower cost of funds for deposits. However, it is possible that such further reductions of rates on retail deposits could limit Ally Bank’s ability to grow or maintain deposits, which could have a material adverse impact on the funding and capital position of Ally.

Ally and its subsidiaries are or may become involved from time to time in information-gathering requests, investigations and proceedings by government and self-regulatory agencies which may lead to adverse consequences.

Ally and its subsidiaries, including Ally Bank, are or may become involved from time to time in information-gathering requests, reviews, investigations, and proceedings (both formal and informal) by government and self-regulatory agencies, including the FRB, FDIC, Utah Department of Financial Institutions (Utah DFI), SEC, and the Federal Trade Commission regarding their respective operations. Such requests include subpoenas from each of the SEC and the U.S. Department of Justice, served on Ally Financial Inc. and GMACM, respectively, which we received in June 2011 and include requests for documentation related to certain mortgage activities. The subpoenas received from the SEC include broad requests for documentation related to various aspects of the securitizations we have participated in, including agreements we entered into with mortgage originators or mortgage sellers whereby we received value in lieu of such mortgage originator or mortgage seller repurchasing a loan from us, and our activities as master servicer and sponsor with respect to certain securitizations. The subpoena received from the U.S. Department of Justice includes a broad request for documentation and other information in connection with its investigation of potential fraud related to the origination and/or underwriting of mortgage loans. These subpoenas, or any other investigation or information-gathering request, may result in material adverse consequences including without limitation, adverse judgments, settlements, fines, penalties, injunctions, or other actions.

 

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Risks Related to Our Business

The worldwide financial services industry is highly competitive. If we are unable to compete successfully or if there is increased competition in the automotive financing, mortgage, and/or insurance markets or generally in the markets for securitizations or asset sales, our business could be negatively affected.

The markets for automotive and mortgage financing, banking, and insurance are highly competitive. The market for automotive financing has recently grown increasingly more competitive as more consumers are financing their vehicle purchases and as more competitors continue to enter this market as a result of how well automotive finance assets generally performed relative to other asset classes during the recent economic downturn. For example, on April 1, 2011, TD Bank Group announced the closing of its acquisition of Chrysler Financial, which could enhance Chrysler Financial’s ability to expand its product offerings and may result in increased competition. Our mortgage business and Ally Bank face significant competition from commercial banks, savings institutions, mortgage companies, and other financial institutions. Our insurance business faces significant competition from insurance carriers, reinsurers, third-party administrators, brokers, and other insurance-related companies. Many of our competitors have substantial positions nationally or in the markets in which they operate. Some of our competitors have lower cost structures, substantially lower costs of capital, and are much less reliant on securitization activities, unsecured debt, and other public markets. We face significant competition in most areas including product offerings, rates, pricing and fees, and customer service. If we are unable to compete effectively in the markets in which we operate, our profitability and financial condition could be negatively affected.

The markets for asset and mortgage securitizations and whole-loan sales are competitive, and other issuers and originators could increase the amount of their issuances and sales. In addition, lenders and other investors within those markets often establish limits on their credit exposure to particular issuers, originators, and asset classes, or they may require higher returns to increase the amount of their exposure. Increased issuance by other participants in the market or decisions by investors to limit their credit exposure to (or to require a higher yield for) us or to automotive or mortgage securitizations or whole-loans could negatively affect our ability and that of our subsidiaries to price our securitizations and whole loan sales at attractive rates. The result would be lower proceeds from these activities and lower profits for our subsidiaries and us.

Certain of our mortgage subsidiaries have been, and will likely continue to be, required to repurchase mortgage loans for losses, indemnify the investor for incurred losses, or make the investor whole related to breaches of representations and warranties made in connection with the sale of loans, and face potential legal liability resulting from claims related to the sale of MBS.

When we sell mortgage loans through whole-loan sales or securitizations, we are required to make customary representations and warranties about the loans to the purchaser and/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. In general, the representations and warranties described above may be enforced at any time unless a sunset provision is in place. Breaches of these representations and warranties have resulted in a requirement that we repurchase mortgage loans, indemnify the investor for incurred losses, or make the investor whole. As the mortgage industry continues to experience higher repurchase demands and additional parties begin to attempt to put back loans, a significant increase in activity beyond that experienced today could occur, resulting in additional future losses. At June 30, 2011, our reserve for representation and warranty obligations was $829 million. It is difficult to determine the accuracy of our estimates and assumptions used to determine such reserve. For example, if the law were to develop that disagrees with our interpretation that a claimant must prove that the alleged breach of representations and warranties was causally related to the alleged adverse effect on the interest of the claimant, it could significantly impact our determination of the reserve. In addition, if recent court rulings related to monoline litigation that have allowed sampling of loan files instead of a loan-by-loan review to determine if a representations and warranties breach has occurred are followed generally by the courts, private-label securitization investors may view litigation as a more attractive alternative to a loan-by-loan review. As a result of these and other developments, our actual experience may differ materially from these estimates and assumptions. Refer to Note 24 to the Condensed Consolidated Financial Statements for further details.

Further, claims related to private-label MBS have been brought under federal and state securities laws and contract laws (among other theories), and additional similar claims are likely to be brought in the future. Several securities law cases have been brought by various third-party investors relating to MBS, where such investors have alleged misstatements and omissions in registration statements, prospectuses, prospectus supplements, and other documents related to MBS offerings. In

 

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addition, there are two cases pending where MBIA Insurance Corp. (MBIA), a monoline bond insurance company, has alleged, among other things, 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 our subsidiaries failed to follow certain remedy procedures set forth in the contracts and improperly serviced the mortgage loans. Along with claims of breach of contract, MBIA also alleges fraud. We also expect to receive additional repurchase demands from MBIA, the amount of which could be substantial. In addition, litigation from other monoline bond insurance companies are likely. Third party investors may also bring contractual representations and warranties claims against us. Refer to Note 24 to the Condensed Consolidated Financial Statements for further details with respect to existing litigation.

Certain of our mortgage subsidiaries have received subpoenas from the Federal Housing Finance Agency (the FHFA), which is the conservator of the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac). We continue to discuss the terms and circumstances under which documents would be provided under the subpoenas related to Freddie Mac. The FHFA has indicated that documents provided in response to the subpoenas will enable the FHFA to determine whether they believe issuers of private-label MBS are potentially liable to Freddie Mac for losses they might have incurred. Although Freddie Mac has not brought any claims against us with respect to private-label securities subsequent to the settlement, they may well do so in the future.

We believe it is reasonably possible that losses beyond amounts currently reserved for the matters described above could occur, and such losses could have a material adverse impact on our results of operations, financial position or cash flows. However, based on currently available information, we are unable to estimate a range of reasonably possible losses above reserves that have been established.

We are exposed to consumer credit risk, which could adversely affect our profitability and financial condition.

We are subject to credit risk resulting from defaults in payment or performance by customers for our contracts and loans, as well as contracts and loans that are securitized and in which we retain a residual interest. For example, the continued decline in the domestic housing market and the increase in unemployment rates resulted in an increase in delinquency rates related to mortgage loans that ResCap and Ally Bank either hold or retain an interest in. Furthermore, a weak economic environment, high unemployment rates, and the continued deterioration of the housing market could exert pressure on our consumer automotive finance customers resulting in higher delinquencies, repossessions, and losses. There can be no assurances that our monitoring of our credit risk as it affects the value of these assets and our efforts to mitigate credit risk through our risk-based pricing, appropriate underwriting policies, and loss-mitigation strategies are, or will be, sufficient to prevent a further adverse effect on our profitability and financial condition. In addition, we have begun to increase our used automobile and nonprime automobile financing (nonprime automobile financing). We define nonprime consumer automobile loans as those loans with a FICO score (or an equivalent score) at origination of less than 620. At June 30, 2011, the carrying value of our North American Automotive Finance Operations (NAO) nonprime consumer automobile loans before allowance for loan losses was $3.4 billion, or approximately 7.0% of our total NAO consumer automobile loans. Of these loans, $38 million were considered nonperforming as they had been placed on nonaccrual status in accordance with internal loan policies. Refer to the Nonaccrual Loans section of Note 1 to the Consolidated Financial Statements in our 2010 Annual Report on Form 10-K for additional information. Our International Automotive Finance Operations (IO) also has exposure to loans of higher credit risk with similar characteristics to those of the nonprime loans held by NAO. However, the lack of a consistent external third-party provider of consumer credit score information (like FICO in the United States and Canada) across the international geographies where we operate requires us to use our own internally-developed credit scoring approach to create a similar international comparative. Based on this internal analysis we believe nonprime loans represent less than 10% of our total IO consumer automobile loans and of these loans, less than 5% were considered nonperforming. As we grow our automotive asset portfolio in nonprime automobile financing loans over time, our credit risk may increase. As part of the underwriting process, we rely heavily upon information supplied by third parties. If any of this information is intentionally or negligently misrepresented and the misrepresentation is not detected before completing the transaction, the credit risk associated with the transaction may be increased.

Our earnings may decrease because of increases or decreases in interest rates.

Changes in interest rates could have an adverse impact on our business. For example:

 

   

rising interest rates will increase our cost of funds;

 

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rising interest rates may reduce our consumer automotive financing volume by influencing customers to pay cash for, as opposed to financing, vehicle purchases or not to buy new vehicles;

 

   

rising interest rates may negatively impact our ability to remarket off-lease vehicles;

 

   

rising interest rates generally reduce our residential mortgage loan production as borrowers become less likely to refinance and the costs associated with acquiring a new home become more expensive; and

 

   

rising interest rates will generally reduce the value of mortgage and automotive financing loans and contracts and retained interests and fixed income securities held in our investment portfolio.

We are also subject to risks from decreasing interest rates. For example, a significant decrease in interest rates could increase the rate at which mortgages are prepaid, which could require us to write down the value of our retained interests and mortgage servicing rights (MSRs). Moreover, if prepayments are greater than expected, the cash we receive over the life of our held-for-investment mortgage loans and our retained interests would be reduced. Higher-than-expected prepayments could also reduce the value of our MSRs and, to the extent the borrower does not refinance with us, the size of our servicing portfolio. Therefore, any such changes in interest rates could harm our revenues, profitability, and financial condition.

Throughout 2009 and 2010 the credit risk embedded in the balance sheet was reduced as a result of asset sales, asset markdowns, and a change in the mix of our loan assets as the legacy portfolios were replaced with assets underwritten to tighter credit standards. This reduction in risk has resulted in a mix of assets outstanding on the balance sheet as of June 30, 2011, with a lower yielding profile than the prior-year period. During this same period of time we experienced a significant decline in our consumer automotive operating lease portfolio that was realizing higher yields from remarketing gains due to historically high used vehicle prices. The combination of the above factors resulted in a decline in asset yields more than the decline in liability rates, and therefore the decline in the net interest spread on the balance sheet throughout 2010 and into 2011.

The recent downgrade of the U.S. government’s sovereign credit rating by Standard & Poor’s Ratings Services, and any future rating agency action with respect to the U.S. government’s sovereign credit rating, could have a material adverse impact on us. Further, the current debt crisis in Europe, and the risk that certain countries may default on their sovereign debt, and the resulting impact on the financial markets, could have a material adverse impact on our business, results of operations and financial position.

On August 2, 2011, Moody’s confirmed the U.S. government’s existing sovereign rating, but stated that the rating outlook is negative, and also on August 2, 2011, Fitch affirmed its existing sovereign rating of the U.S. government, but stated that the U.S. government’s rating is under review. On August 5, 2011, Standard & Poor’s Ratings Services lowered its long-term sovereign credit rating on the United States of America to AA+ from AAA, and the outlook on its long-term rating is negative. This downgrade, any future downgrades, as well as the perceived creditworthiness of U.S. government-related obligations, could impact our ability to obtain, and the pricing with respect to, funding that is collateralized by affected instruments and obtained through the secured and unsecured markets. We cannot predict how this or any further downgrades to the U.S. government’s sovereign credit rating, or its perceived creditworthiness, will impact economic or capital markets conditions generally. It is possible that any such impact could have a material adverse effect on our business, results of operation, and financial position.

In addition, the current crisis in Europe has created uncertainty with respect to the ability of certain European Union countries to continue to service their sovereign debt obligations. These conditions have adversely impacted financial markets and have created substantial volatility and uncertainty, and will likely continue to do so. Risks related to this have had, and are likely to continue to have, a negative impact on global economic activity and the financial markets. As these conditions persist, our business, results of operation, and financial position could be materially adversely affected.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

None.

 

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Item 3. Defaults upon Senior Securities

Not applicable.

Item 4. (Removed and Reserved)

Item 5. Other Information

None.

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 9th day of August 2011.

 

Ally Financial Inc.

(Registrant)

/s/    JEFFREY J. BROWN

Jeffrey J. Brown

Senior Executive Vice President of

Finance and Corporate Planning

 

/s/    DAVID J. DEBRUNNER

David J. DeBrunner

Vice President, Chief Accounting Officer, and

Corporate Controller

 

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INDEX OF EXHIBITS

Exhibit    Description    Method of Filing
12      Computation of Ratio of Earnings to Fixed Charges    Filed herewith.
31.1    Certification of Principal Executive Officer pursuant to Rule 13a-14(a)/15d-14(a)    Filed herewith.
31.2    Certification of Principal Financial Officer pursuant to Rule 13a-14(a)/15d-14(a)    Filed herewith.
32    Certification of Principal Executive Officer and Principal Financial Officer pursuant to 18 U.S.C. Section 1350    Filed herewith.
101    Interactive Data File    Filed herewith.

 

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