Ally Bank 2012 Annual Report Download - page 32

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environment. Additionally, we discontinued certain nonstrategic operations, mainly in our international businesses. Within our Automotive
Finance operations, we exited certain underperforming dealer relationships. Within our Mortgage operations, we have taken action with the
intent to significantly reduce or eliminate our mortgage-related activities with respect to the origination of conforming mortgage loans with
the intent to sell into GSE-sponsored securitizations, the retention of mortgage servicing rights, and the extension of credit to third-party
mortgage originators (warehouse lending). We intend to continue to originate a modest level of high-quality non-conforming mortgages that
exceed GSE limits (jumbo mortgages) for retention as mortgage loans held for investment.
During the year ended December 31, 2012, the credit performance of our portfolios remained strong overall as our asset quality trends
within our automotive and mortgage portfolios were stable. Nonperforming loans continued to decline, benefiting from the deconsolidation of
ResCap. Charge-offs also declined primarily due to recoveries in the commercial portfolio. Our provision for loan losses increased to $329
million in 2012 from $188 million in 2011 due to higher asset levels in the consumer and commercial automotive portfolios and our prudent
expansion of underwriting strategy to originate volumes across a broader credit spectrum, which was significantly narrowed during the
recession.
We continue to see signs of economic stabilization in the housing and vehicle markets, although our total credit portfolio will continue to
be affected by sustained levels of high unemployment and continued uncertainty in the housing market.
Bank Holding Company and Treasury's Investments
During 2008, and continuing into 2009, the credit, capital, and mortgage markets became increasingly disrupted. This disruption led to
severe reductions in liquidity and adversely affected our capital position. As a result, Ally sought approval to become a bank holding company
to obtain access to capital at a lower cost to remain competitive in our markets. On December 24, 2008, Ally and IB Finance Holding
Company, LLC, the holding company of Ally Bank, were each approved as bank holding companies under the Bank Holding Company Act of
1956. At the same time, Ally Bank converted from a Utah-chartered industrial bank into a Utah-chartered commercial nonmember bank. Ally
Bank as an FDIC-insured depository institution, is subject to the supervision and examination of the Federal Deposit Insurance Corporation
(FDIC) and the Utah Department of Financial Institutions (UDFI). Ally Financial Inc. is subject to the supervision and examination of the
Board of Governors of the Federal Reserve System (FRB). We are required to comply with regulatory risk-based and leverage capital
requirements, as well as various safety and soundness standards established by the FRB, and are subject to certain statutory restrictions
concerning the types of assets or securities that we may own and the activities in which we may engage.
As one of the conditions to becoming a bank holding company, the FRB required several actions of Ally, including meeting a minimum
amount of regulatory capital. In order to meet this requirement, Ally took several actions, the most significant of which were the execution of
private debt exchanges and cash tender offers to purchase and/or exchange certain of our and our subsidiaries outstanding notes held by
eligible holders for a combination of cash, newly issued notes of Ally, and in the case of certain of the offers, preferred stock. The transactions
resulted in an extinguishment of all notes tendered or exchanged into the offers and the new notes and stock were recorded at fair value on the
issue date. This resulted in a pretax gain on extinguishment of debt of $11.5 billion in 2008 and a corresponding increase to our capital levels.
The gain included a $5.4 billion original issue discount representing the difference between the face value and the fair value of the new notes
and is being amortized as interest expense over the term of the new notes. In addition, the U.S. Department of Treasury (Treasury) made an
initial investment in Ally on December 29, 2008, pursuant to the Troubled Asset Relief Program (TARP) with a $5.0 billion purchase of Ally
perpetual preferred stock with a total liquidation preference of $5.25 billion (Perpetual Preferred Stock).
On May 21, 2009, Treasury made a second investment of $7.5 billion in exchange for Ally's mandatorily convertible preferred stock with
a total liquidation preference of approximately $7.9 billion (Old MCP), which included a $4 billion investment to support our agreement with
Chrysler to provide automotive financing to Chrysler dealers and customers and a $3.5 billion investment related to the FRB's Supervisory
Capital Assessment Program requirements. Shortly after this second investment, on May 29, 2009, Treasury acquired 35.36% of Ally
common stock when it exercised its right to acquire 190,921 shares of Ally common stock from GM as repayment for an $884 million loan
that Treasury had previously provided to GM.
On December 30, 2009, we entered into another series of transactions with Treasury under TARP, pursuant to which Treasury
(i) converted 60 million shares of Old MCP (with a total liquidation preference of $3.0 billion) into 259,200 shares of additional Ally common
stock; (ii) invested $1.25 billion in new Ally mandatorily convertible preferred stock with a total liquidation preference of approximately $1.3
billion (the New MCP); and (iii) invested $2.54 billion in new trust preferred securities with a total liquidation preference of approximately
$2.7 billion (Trust Preferred Securities). At this time, Treasury also exchanged all of its Perpetual Preferred Stock and remaining Old MCP
(following the conversion of Old MCP described above) into additional New MCP.
On December 30, 2010, Treasury converted 110 million shares of New MCP (with a total liquidation preference of approximately $5.5
billion) into 531,850 shares of additional Ally common stock. The conversion reduces dividends by approximately $500 million per year,
assists with capital preservation, and is expected to improve profitability with a lower cost of funds.
On March 1, 2011, the Declaration of Trust and certain other documents related to the Trust Preferred Securities were amended, and all
of the outstanding Trust Preferred Securities held by Treasury were designated 8.125% Fixed Rate/Floating Rate Trust Preferred Securities,
Series 2. On March 7, 2011, Treasury sold 100% of the Series 2 Trust Preferred Securities in an offering registered with the SEC. Ally did not
receive any proceeds from the sale.
Table of Contents
Management's Discussion and Analysis
Ally Financial Inc. • Form 10-K