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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.

 

 

 

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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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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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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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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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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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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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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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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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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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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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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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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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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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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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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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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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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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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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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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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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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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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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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 Marc