Ally Financial Inc. - Quarter Report: 2019 September (Form 10-Q)
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
☑ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 2019, 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.) |
Ally Detroit Center
500 Woodward Ave.
Floor 10, Detroit, Michigan
48226
(Address of principal executive offices)
(Zip Code)
(866) 710-4623
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act (all listed on the New York Stock Exchange):
Title of each class | Trading symbols |
Common Stock, par value $0.01 per share | ALLY |
8.125% Fixed Rate/Floating Rate Trust Preferred Securities, Series 2 of GMAC Capital Trust I | ALLY PRA |
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 (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☑ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☑ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer | ☑ | Accelerated filer | ☐ | Non-accelerated filer | ☐ | Smaller reporting company | ☐ | |||
Emerging growth company | ☐ | |||||||||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐ |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes ☐ No ☑
At November 1, 2019, the number of shares outstanding of the Registrant’s common stock was 380,068,995 shares.
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PART I — FINANCIAL INFORMATION |
Item 1. Financial Statements
Condensed Consolidated Statement of Comprehensive Income (unaudited)
Ally Financial Inc. • Form 10-Q
Three months ended September 30, | Nine months ended September 30, | |||||||||||||||
($ in millions) | 2019 | 2018 | 2019 | 2018 | ||||||||||||
Financing revenue and other interest income | ||||||||||||||||
Interest and fees on finance receivables and loans | $ | 1,859 | $ | 1,708 | $ | 5,526 | $ | 4,898 | ||||||||
Interest on loans held-for-sale | 8 | 4 | 13 | 10 | ||||||||||||
Interest and dividends on investment securities and other earning assets | 237 | 198 | 721 | 562 | ||||||||||||
Interest on cash and cash equivalents | 19 | 18 | 63 | 50 | ||||||||||||
Operating leases | 368 | 368 | 1,092 | 1,124 | ||||||||||||
Total financing revenue and other interest income | 2,491 | 2,296 | 7,415 | 6,644 | ||||||||||||
Interest expense | ||||||||||||||||
Interest on deposits | 658 | 462 | 1,901 | 1,212 | ||||||||||||
Interest on short-term borrowings | 33 | 29 | 114 | 101 | ||||||||||||
Interest on long-term debt | 378 | 451 | 1,204 | 1,296 | ||||||||||||
Total interest expense | 1,069 | 942 | 3,219 | 2,609 | ||||||||||||
Net depreciation expense on operating lease assets | 234 | 247 | 719 | 785 | ||||||||||||
Net financing revenue and other interest income | 1,188 | 1,107 | 3,477 | 3,250 | ||||||||||||
Other revenue | ||||||||||||||||
Insurance premiums and service revenue earned | 280 | 258 | 802 | 753 | ||||||||||||
Gain on mortgage and automotive loans, net | 10 | 17 | 22 | 19 | ||||||||||||
Other gain on investments, net | 27 | 22 | 174 | 37 | ||||||||||||
Other income, net of losses | 96 | 101 | 276 | 307 | ||||||||||||
Total other revenue | 413 | 398 | 1,274 | 1,116 | ||||||||||||
Total net revenue | 1,601 | 1,505 | 4,751 | 4,366 | ||||||||||||
Provision for loan losses | 263 | 233 | 722 | 652 | ||||||||||||
Noninterest expense | ||||||||||||||||
Compensation and benefits expense | 296 | 274 | 910 | 872 | ||||||||||||
Insurance losses and loss adjustment expenses | 74 | 77 | 260 | 241 | ||||||||||||
Other operating expenses | 468 | 456 | 1,379 | 1,347 | ||||||||||||
Total noninterest expense | 838 | 807 | 2,549 | 2,460 | ||||||||||||
Income from continuing operations before income tax expense | 500 | 465 | 1,480 | 1,254 | ||||||||||||
Income tax expense from continuing operations | 119 | 91 | 140 | 280 | ||||||||||||
Net income from continuing operations | 381 | 374 | 1,340 | 974 | ||||||||||||
Loss from discontinued operations, net of tax | — | — | (3 | ) | (1 | ) | ||||||||||
Net income | 381 | 374 | 1,337 | 973 | ||||||||||||
Other comprehensive income (loss), net of tax | 106 | (133 | ) | 721 | (531 | ) | ||||||||||
Comprehensive income | $ | 487 | $ | 241 | $ | 2,058 | $ | 442 |
Statement continues on the next page.
The Notes to the Condensed Consolidated Financial Statements (unaudited) are an integral part of these statements.
3
Condensed Consolidated Statement of Comprehensive Income (unaudited)
Ally Financial Inc. • Form 10-Q
Three months ended September 30, | Nine months ended September 30, | |||||||||||||||
(in dollars) (a) | 2019 | 2018 | 2019 | 2018 | ||||||||||||
Basic earnings per common share | ||||||||||||||||
Net income from continuing operations | $ | 0.98 | $ | 0.89 | $ | 3.37 | $ | 2.27 | ||||||||
Loss from discontinued operations, net of tax | — | — | (0.01 | ) | — | |||||||||||
Net income | $ | 0.97 | $ | 0.89 | $ | 3.36 | $ | 2.26 | ||||||||
Diluted earnings per common share | ||||||||||||||||
Net income from continuing operations | $ | 0.97 | $ | 0.88 | $ | 3.35 | $ | 2.25 | ||||||||
Loss from discontinued operations, net of tax | — | — | (0.01 | ) | — | |||||||||||
Net income | $ | 0.97 | $ | 0.88 | $ | 3.35 | $ | 2.25 | ||||||||
Cash dividends declared per common share | $ | 0.17 | $ | 0.15 | $ | 0.51 | $ | 0.41 |
(a) | Figures in the table may not recalculate exactly due to rounding. Earnings per share is calculated based on unrounded numbers. |
Refer to Note 15 for additional earnings per share information. The Notes to the Condensed Consolidated Financial Statements (unaudited) are an integral part of these statements.
4
($ in millions, except share data) | September 30, 2019 | December 31, 2018 | ||||||
Assets | ||||||||
Cash and cash equivalents | ||||||||
Noninterest-bearing | $ | 723 | $ | 810 | ||||
Interest-bearing | 2,894 | 3,727 | ||||||
Total cash and cash equivalents | 3,617 | 4,537 | ||||||
Equity securities | 570 | 773 | ||||||
Available-for-sale securities (refer to Note 6 for discussion of investment securities pledged as collateral) | 29,384 | 25,303 | ||||||
Held-to-maturity securities (fair value of $2,687 and $2,307) | 2,618 | 2,362 | ||||||
Loans held-for-sale, net | 1,000 | 314 | ||||||
Finance receivables and loans, net | ||||||||
Finance receivables and loans, net of unearned income | 128,609 | 129,926 | ||||||
Allowance for loan losses | (1,277 | ) | (1,242 | ) | ||||
Total finance receivables and loans, net | 127,332 | 128,684 | ||||||
Investment in operating leases, net | 8,653 | 8,417 | ||||||
Premiums receivable and other insurance assets | 2,521 | 2,326 | ||||||
Other assets | 5,790 | 6,153 | ||||||
Total assets | $ | 181,485 | $ | 178,869 | ||||
Liabilities | ||||||||
Deposit liabilities | ||||||||
Noninterest-bearing | $ | 156 | $ | 142 | ||||
Interest-bearing | 119,074 | 106,036 | ||||||
Total deposit liabilities | 119,230 | 106,178 | ||||||
Short-term borrowings | 5,335 | 9,987 | ||||||
Long-term debt | 35,730 | 44,193 | ||||||
Interest payable | 894 | 523 | ||||||
Unearned insurance premiums and service revenue | 3,246 | 3,044 | ||||||
Accrued expenses and other liabilities | 2,600 | 1,676 | ||||||
Total liabilities | 167,035 | 165,601 | ||||||
Contingencies (refer to Note 23) | ||||||||
Equity | ||||||||
Common stock and paid-in capital ($0.01 par value, shares authorized 1,100,000,000; issued 496,595,277 and 492,797,409; and outstanding 383,523,357 and 404,899,599) | 21,417 | 21,345 | ||||||
Accumulated deficit | (4,368 | ) | (5,489 | ) | ||||
Accumulated other comprehensive income (loss) | 190 | (539 | ) | |||||
Treasury stock, at cost (113,071,920 and 87,897,810 shares) | (2,789 | ) | (2,049 | ) | ||||
Total equity | 14,450 | 13,268 | ||||||
Total liabilities and equity | $ | 181,485 | $ | 178,869 |
The Notes to the Condensed Consolidated Financial Statements (unaudited) are an integral part of these statements.
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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) | September 30, 2019 | December 31, 2018 | ||||||
Assets | ||||||||
Finance receivables and loans, net | ||||||||
Finance receivables and loans, net of unearned income | $ | 17,816 | $ | 18,086 | ||||
Allowance for loan losses | (129 | ) | (114 | ) | ||||
Total finance receivables and loans, net | 17,687 | 17,972 | ||||||
Investment in operating leases, net | 63 | 164 | ||||||
Other assets | 713 | 767 | ||||||
Total assets | $ | 18,463 | $ | 18,903 | ||||
Liabilities | ||||||||
Long-term debt | $ | 8,906 | $ | 10,482 | ||||
Accrued expenses and other liabilities | 13 | 12 | ||||||
Total liabilities | $ | 8,919 | $ | 10,494 |
The Notes to the Condensed Consolidated Financial Statements (unaudited) are an integral part of these statements.
6
Condensed Consolidated Statement of Changes in Equity (unaudited)
Ally Financial Inc. • Form 10-Q
Three months ended September 30, | ||||||||||||||||||||
($ in millions) | Common stock and paid-in capital | Accumulated deficit | Accumulated other comprehensive (loss) income | Treasury stock | Total equity | |||||||||||||||
Balance at July 1, 2018 | $ | 21,303 | $ | (6,026 | ) | $ | (648 | ) | $ | (1,490 | ) | $ | 13,139 | |||||||
Net income | 374 | 374 | ||||||||||||||||||
Share-based compensation | 19 | 19 | ||||||||||||||||||
Other comprehensive loss | (133 | ) | (133 | ) | ||||||||||||||||
Common stock repurchases | (250 | ) | (250 | ) | ||||||||||||||||
Common stock dividends ($0.15 per share) | (64 | ) | (64 | ) | ||||||||||||||||
Balance at September 30, 2018 | $ | 21,322 | $ | (5,716 | ) | $ | (781 | ) | $ | (1,740 | ) | $ | 13,085 | |||||||
Balance at July 1, 2019 | $ | 21,403 | $ | (4,682 | ) | $ | 84 | $ | (2,489 | ) | $ | 14,316 | ||||||||
Net income | 381 | 381 | ||||||||||||||||||
Share-based compensation | 14 | 14 | ||||||||||||||||||
Other comprehensive income | 106 | 106 | ||||||||||||||||||
Common stock repurchases | (300 | ) | (300 | ) | ||||||||||||||||
Common stock dividends ($0.17 per share) | (67 | ) | (67 | ) | ||||||||||||||||
Balance at September 30, 2019 | $ | 21,417 | $ | (4,368 | ) | $ | 190 | $ | (2,789 | ) | $ | 14,450 |
Nine months ended September 30, | ||||||||||||||||||||
($ in millions) | Common stock and paid-in capital | Accumulated deficit | Accumulated other comprehensive (loss) income | Treasury stock | Total equity | |||||||||||||||
Balance at December 31, 2017 | $ | 21,245 | $ | (6,406 | ) | $ | (235 | ) | $ | (1,110 | ) | $ | 13,494 | |||||||
Cumulative effect of changes in accounting principles, net of tax | ||||||||||||||||||||
Adoption of Accounting Standards Update 2014-09 | (126 | ) | (126 | ) | ||||||||||||||||
Adoption of Accounting Standards Update 2016-01 | (20 | ) | 27 | 7 | ||||||||||||||||
Adoption of Accounting Standards Update 2018-02 | 42 | (42 | ) | — | ||||||||||||||||
Balance at January 1, 2018 | $ | 21,245 | $ | (6,510 | ) | $ | (250 | ) | $ | (1,110 | ) | $ | 13,375 | |||||||
Net income | 973 | 973 | ||||||||||||||||||
Share-based compensation | 77 | 77 | ||||||||||||||||||
Other comprehensive loss | (531 | ) | (531 | ) | ||||||||||||||||
Common stock repurchases | (630 | ) | (630 | ) | ||||||||||||||||
Common stock dividends ($0.41 per share) | (179 | ) | (179 | ) | ||||||||||||||||
Balance at September 30, 2018 | $ | 21,322 | $ | (5,716 | ) | $ | (781 | ) | $ | (1,740 | ) | $ | 13,085 | |||||||
Balance at December 31, 2018 | $ | 21,345 | $ | (5,489 | ) | $ | (539 | ) | $ | (2,049 | ) | $ | 13,268 | |||||||
Cumulative effect of changes in accounting principles, net of tax (a) | ||||||||||||||||||||
Adoption of Accounting Standards Update 2017-08 | (10 | ) | 8 | (2 | ) | |||||||||||||||
Balance at January 1, 2019 | $ | 21,345 | $ | (5,499 | ) | $ | (531 | ) | $ | (2,049 | ) | $ | 13,266 | |||||||
Net income | 1,337 | 1,337 | ||||||||||||||||||
Share-based compensation | 72 | 72 | ||||||||||||||||||
Other comprehensive income | 721 | 721 | ||||||||||||||||||
Common stock repurchases | (740 | ) | (740 | ) | ||||||||||||||||
Common stock dividends ($0.51 per share) | (206 | ) | (206 | ) | ||||||||||||||||
Balance at September 30, 2019 | $ | 21,417 | $ | (4,368 | ) | $ | 190 | $ | (2,789 | ) | $ | 14,450 |
(a) | Refer to the section titled Recently Adopted Accounting Standards in Note 1 for additional information. |
The Notes to the Condensed Consolidated Financial Statements (unaudited) are an integral part of these statements.
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Condensed Consolidated Statement of Cash Flows (unaudited)
Ally Financial Inc. • Form 10-Q
Nine months ended September 30, ($ in millions) | 2019 | 2018 | ||||||
Operating activities | ||||||||
Net income | $ | 1,337 | $ | 973 | ||||
Reconciliation of net income to net cash provided by operating activities | ||||||||
Depreciation and amortization | 1,136 | 1,280 | ||||||
Provision for loan losses | 722 | 652 | ||||||
Gain on mortgage and automotive loans, net | (22 | ) | (19 | ) | ||||
Other gain on investments, net | (174 | ) | (37 | ) | ||||
Originations and purchases of loans held-for-sale | (952 | ) | (889 | ) | ||||
Proceeds from sales and repayments of loans held-for-sale | 788 | 830 | ||||||
Net change in | ||||||||
Deferred income taxes | 86 | 272 | ||||||
Interest payable | 371 | 338 | ||||||
Other assets | (25 | ) | (136 | ) | ||||
Other liabilities | (98 | ) | (9 | ) | ||||
Other, net | (36 | ) | 89 | |||||
Net cash provided by operating activities | 3,133 | 3,344 | ||||||
Investing activities | ||||||||
Purchases of equity securities | (301 | ) | (652 | ) | ||||
Proceeds from sales of equity securities | 615 | 715 | ||||||
Purchases of available-for-sale securities | (11,214 | ) | (5,669 | ) | ||||
Proceeds from sales of available-for-sale securities | 5,699 | 637 | ||||||
Proceeds from repayments of available-for-sale securities | 3,246 | 2,509 | ||||||
Purchases of held-to-maturity securities | (514 | ) | (436 | ) | ||||
Proceeds from repayments of held-to-maturity securities | 195 | 107 | ||||||
Purchases of finance receivables and loans held-for-investment | (3,322 | ) | (4,778 | ) | ||||
Proceeds from sales of finance receivables and loans initially held-for-investment | 427 | 53 | ||||||
Originations and repayments of finance receivables and loans held-for-investment and other, net | 3,069 | (558 | ) | |||||
Purchases of operating lease assets | (2,937 | ) | (2,991 | ) | ||||
Disposals of operating lease assets | 2,016 | 2,461 | ||||||
Net change in nonmarketable equity investments | 179 | (3 | ) | |||||
Other, net | (306 | ) | (241 | ) | ||||
Net cash used in investing activities | (3,148 | ) | (8,846 | ) |
Statement continues on the next page.
The Notes to the Condensed Consolidated Financial Statements (unaudited) are an integral part of these statements.
8
Condensed Consolidated Statement of Cash Flows (unaudited)
Ally Financial Inc. • Form 10-Q
Nine months ended September 30, ($ in millions) | 2019 | 2018 | ||||||
Financing activities | ||||||||
Net change in short-term borrowings | (4,652 | ) | (4,074 | ) | ||||
Net increase in deposits | 13,032 | 8,063 | ||||||
Proceeds from issuance of long-term debt | 5,438 | 14,756 | ||||||
Repayments of long-term debt | (14,114 | ) | (12,994 | ) | ||||
Repurchase of common stock | (740 | ) | (630 | ) | ||||
Dividends paid | (206 | ) | (179 | ) | ||||
Net cash (used in) provided by financing activities | (1,242 | ) | 4,942 | |||||
Effect of exchange-rate changes on cash and cash equivalents and restricted cash | 2 | (2 | ) | |||||
Net decrease in cash and cash equivalents and restricted cash | (1,255 | ) | (562 | ) | ||||
Cash and cash equivalents and restricted cash at beginning of year | 5,626 | 5,269 | ||||||
Cash and cash equivalents and restricted cash at September 30, | $ | 4,371 | $ | 4,707 | ||||
Supplemental disclosures | ||||||||
Cash paid for | ||||||||
Interest | $ | 2,781 | $ | 2,242 | ||||
Income taxes | 31 | 21 | ||||||
Noncash items | ||||||||
Held-to-maturity securities received in consideration for loans sold | — | 26 | ||||||
Loans held-for-sale transferred to finance receivables and loans held-for-investment | 125 | — | ||||||
Finance receivables and loans held-for-investment transferred to loans held-for-sale | 964 | 815 |
The following table provides a reconciliation of cash and cash equivalents and restricted cash from the Condensed Consolidated Balance Sheet to the Condensed Consolidated Statement of Cash Flows.
September 30, ($ in millions) | 2019 | 2018 | ||||||
Cash and cash equivalents on the Condensed Consolidated Balance Sheet | $ | 3,617 | $ | 3,772 | ||||
Restricted cash included in other assets on the Condensed Consolidated Balance Sheet (a) | 754 | 935 | ||||||
Total cash and cash equivalents and restricted cash in the Condensed Consolidated Statement of Cash Flows | $ | 4,371 | $ | 4,707 |
(a) | Restricted cash balances relate primarily to Ally securitization arrangements. Refer to Note 10 for additional details describing the nature of restricted cash balances. |
The Notes to the Condensed Consolidated Financial Statements (unaudited) are an integral part of these statements.
9
Notes to Condensed Consolidated Financial Statements (unaudited)
Ally Financial Inc. • Form 10-Q
1. Description of Business, Basis of Presentation, and Changes in Significant Accounting Policies
Ally Financial Inc. (together with its consolidated subsidiaries unless the context otherwise requires, Ally, the Company, or we, us, or our) is a leading digital financial-services company. As a customer-centric company with passionate customer service and innovative financial solutions, we are relentlessly focused on “Doing It Right” and being a trusted financial-services provider to our consumer, commercial, and corporate customers. We are one of the largest full-service automotive finance operations in the country and offer a wide range of financial services and insurance products to dealerships and consumers. Our award-winning online bank (Ally Bank, Member Federal Deposit Insurance Corporation and Equal Housing Lender) offers mortgage-lending services and a variety of deposit and other banking products, including savings, money-market, and checking accounts, certificates of deposit (CDs), and individual retirement accounts (IRAs). Additionally, we offer securities-brokerage and investment-advisory services through Ally Invest. Our robust corporate finance business offers capital for equity sponsors and middle-market companies. We are a Delaware corporation and are registered as a bank holding company (BHC) under the Bank Holding Company Act of 1956, as amended, and a financial holding company (FHC) under the Gramm-Leach-Bliley Act of 1999, as amended.
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 and disclosure of contingent assets and liabilities at the date of the financial statements and that affect income and expenses during the reporting period and related disclosures. 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. Our most significant estimates pertain to the allowance for loan losses, valuations of automotive lease assets and residuals, fair value of financial instruments, and the determination of the provision for income taxes.
The Condensed Consolidated Financial Statements at September 30, 2019, and for the three months and nine months ended September 30, 2019, and 2018, 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, 2018, as filed on February 20, 2019, with the U.S. Securities and Exchange Commission (SEC).
Significant Accounting Policies
Lease Accounting
At contract inception, we determine whether the contract is or contains a lease based on the terms and conditions of the contract. Lease contracts are recognized on our Condensed Consolidated Balance Sheet as right-of-use (ROU) assets and lease liabilities; however, we have elected not to recognize ROU assets and lease liabilities on real estate leases with terms of one year or less. Lease liabilities and their corresponding ROU assets are recorded based on the present value of the future lease payments over the expected lease term. As the interest rate implicit in the lease contract is typically not readily determinable, we utilize our incremental borrowing rate, which is the rate we would incur to borrow on a collateralized basis over a similar term on an amount equal to the lease payments in a similar economic environment. The ROU asset also includes initial direct costs paid less lease incentives received from the lessor. Our lease contracts are generally classified as operating and, as a result, we recognize a single lease cost within other operating expenses on the income statement on a straight-line basis over the lease term. This update to our accounting policy resulted from our adoption of Accounting Standards Update (ASU) 2016-02 on January 1, 2019, as further described within the section below titled Recently Adopted Accounting Standards.
Investments
Premiums on debt securities that have noncontingent call features that are callable at fixed prices on preset dates are amortized to the earliest call date as an adjustment to investment yield. All other premiums and discounts on debt securities are amortized over the stated maturity of the security as an adjustment to investment yield. This method of amortization differs from that described in Note 1 to the Consolidated Financial Statements in our 2018 Annual Report on Form 10-K, which describes our full accounting policy for Investments. This update to our amortization methodology resulted from the adoption of ASU 2017-08 on January 1, 2019, as further described within the section below titled Recently Adopted Accounting Standards.
Income Taxes
In calculating the provision for interim income taxes, in accordance with Accounting Standards Codification (ASC) Topic 740, Income Taxes, we apply an estimated annual effective tax rate to year-to-date ordinary income. At the end of each interim period, we estimate the effective tax rate expected to be applicable for the full fiscal year. This method differs from that described in Note 1 to the Consolidated Financial Statements in our 2018 Annual Report on Form 10-K, which describes our annual significant income tax accounting policy and related methodology.
Refer to Note 1 to the Consolidated Financial Statements in our 2018 Annual Report on Form 10-K regarding additional significant accounting policies.
10
Notes to Condensed Consolidated Financial Statements (unaudited)
Ally Financial Inc. • Form 10-Q
Recently Adopted Accounting Standards
Leases (ASU 2016-02)
In February 2016, the Financial Accounting Standards Board (FASB) issued ASU 2016-02. The amendments in this update primarily replaced the existing accounting requirements for operating leases for lessees. Lessee accounting requirements for finance leases (previously referred to as capital leases) and lessor accounting requirements for operating leases and sales type and direct financing leases were largely unchanged. The amendments require the lessee of an operating lease to record a balance sheet gross-up upon lease commencement by recognizing a ROU asset and lease liability equal to the present value of the lease payments. The ROU asset and lease liability should be derecognized in a manner that effectively yields a straight line lease expense over the lease term. In addition to the changes to the lessee operating lease accounting requirements, the amendments also changed the types of costs that can be capitalized related to a lease agreement for both lessees and lessors. The amendments also require additional disclosures for all lease types for both lessees and lessors. The FASB issued additional ASUs to clarify the guidance and provide certain practical expedients and an additional transition option. We adopted ASU 2016-02 and the subsequent ASUs that modified ASU 2016-02 (collectively, the amendments) on January 1, 2019. This includes the early adoption of ASU 2019-01, which was issued in March 2019 to amend certain provisions included in ASU 2016-02.
We adopted this guidance using the modified retrospective approach on January 1, 2019, and have not adjusted prior period comparative information and will continue to disclose prior period financial information in accordance with the previous lease accounting guidance. We have elected certain practical expedients permitted within the amendments that allowed us to not reassess (i) current lease classifications, (ii) whether existing contracts meet the definition of a lease under the amendments to the lease guidance, and (iii) whether current initial direct costs meet the new criteria for capitalization, for all existing leases as of the adoption date. We made an accounting policy election to calculate the impact of adoption using the remaining minimum lease payments and remaining lease term for each contract that was identified as a lease, discounted at our incremental borrowing rate as of the adoption date. The adoption of the amendments resulted in a ROU asset of approximately $161 million from operating leases for our various corporate facilities, a $29 million reduction to accrued expenses and other liabilities for accrued rent and unamortized tenant improvement allowances, and a lease liability of approximately $190 million. The adoption did not change our previously reported Condensed Consolidated Statements of Comprehensive Income and did not result in a cumulative catch-up adjustment to opening retained earnings.
Receivables—Nonrefundable Fees and Other Costs: Premium Amortization on Purchased Callable Debt Securities (ASU 2017-08)
In March 2017, the FASB issued ASU 2017-08. The amendments in this update require premiums on purchased callable debt securities to be amortized to the security’s earliest call date. Prior to this ASU, premiums and discounts on purchased callable debt securities were generally required to be amortized to the security’s maturity date. The amendments do not require an accounting change for securities held at a discount. We adopted the amendments on January 1, 2019, on a modified retrospective basis, which resulted in an increase to our accumulated deficit of $10 million, net of income taxes, partially offset by an $8 million decrease to accumulated other comprehensive loss, net of income taxes.
Recently Issued Accounting Standards
Financial Instruments—Credit Losses (ASU 2016-13)
In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses (CECL). The amendments in this update introduce a new accounting model to measure credit losses for financial assets measured at amortized cost. The FASB has also issued additional ASUs to clarify the scope and provide additional guidance for ASU 2016-13. Credit losses for financial assets measured at amortized cost should be determined based on the total current expected credit losses over the life of the financial asset or group of financial assets. In effect, the financial asset or group of financial assets should be presented at the net amount expected to be collected. Credit losses will no longer be recorded under the current incurred loss model for financial assets measured at amortized cost. The amendments also modify the accounting for available-for-sale debt securities whereby credit losses will be recorded through an allowance for credit losses rather than a write-down to the security’s cost basis, which allows for reversals of credit losses when estimated credit losses decline. Credit losses for available-for-sale debt securities should be measured in a manner similar to current GAAP. The amendments are effective on January 1, 2020, and must be applied using a modified retrospective approach with a cumulative-effect adjustment through retained earnings as of the beginning of the fiscal year upon adoption as required. While the standard modifies the measurement of the allowance for credit losses, it does not alter the credit risk of our loan portfolios.
Management has continued to utilize a cross-functional working group to govern the implementation of these amendments, including consideration of model development, data integrity, technology, reporting and disclosure requirements, key accounting interpretations, control environment, and corporate governance. We are in the process of finalizing the allowance for credit loss models, implementing changes to our internal processes and internal control structure, and updating our policies and documentation related to the allowance for credit losses. During the third quarter of 2019, we performed parallel testing, which included enhanced analytics, continued refinement of our qualitative allowance framework, and the execution of parallel processes for governance and documentation, and we expect to complete our implementation efforts by December 31, 2019. Based on forecasted economic conditions and portfolio balances as of September 30, 2019, preliminary assessments indicate that the adoption of CECL could result in an overall increase to our allowance for loan losses on finance receivables and loans of between 105% to 115%. The increase is driven by our consumer automotive loan portfolio and is primarily related to the difference between loss emergence periods currently utilized, as compared to estimating lifetime credit losses as required by the CECL standard. Additionally, there was no material impact to the allowance for loan losses from our other loan portfolios. Our estimation techniques
11
Notes to Condensed Consolidated Financial Statements (unaudited)
Ally Financial Inc. • Form 10-Q
under CECL are impacted by forecasted economic conditions. Our modeling processes utilize a 12 month reasonable and supportable forecast period for all portfolio segments. After the forecast period, we revert to a longer term historical mean over a 24 month period. Additionally, the adoption of CECL is not expected to result in a material impact to our held-to-maturity securities portfolio, which is primarily composed of agency-backed mortgage securities, and is also not expected to have a material impact on our available-for-sale debt securities portfolio.
The actual impact of adopting this standard will depend upon a number of factors at the adoption date, including the composition and credit quality of our financing receivables and loan portfolios and investment securities portfolios, economic conditions and forecasts, the allowance for credit loss models that are used, the data that is included in the models, the associated qualitative allowance framework, and our estimation techniques. Additionally, under CECL, changes in these factors after the adoption date may lead to increased volatility in our future provisions for loan losses. The impact of the adoption will be reflected as an adjustment to beginning retained earnings, net of income taxes. Additionally, we currently expect to phase in the day-one impact of CECL into regulatory capital as prescribed by regulatory capital rules which permit us to phase in 25 percent of the capital impact of CECL in 2020 and an additional 25 percent each subsequent year until fully-phased in by the first quarter of 2023.
2. Revenue from Contracts with Customers
Our primary revenue sources, which include financing revenue and other interest income, are addressed by other GAAP and are not in the scope of ASC Topic 606, Revenue from Contracts with Customers. As part of our Insurance operations, we recognize revenue from insurance contracts, which are addressed by other GAAP and are not included in the scope of this standard. Certain noninsurance contracts within our Insurance operations, including vehicle service contracts (VSCs), guaranteed asset protection (GAP) contracts, and vehicle maintenance contracts (VMCs), are included in the scope of this standard. All revenue associated with noninsurance contracts is recognized over the contract term on a basis proportionate to the anticipated cost emergence. Further, commissions and sales expense incurred to obtain these contracts are amortized over the terms of the related policies and service contracts on the same basis as premiums and service revenue are earned, and all advertising costs are recognized as expense when incurred.
12
Notes to Condensed Consolidated Financial Statements (unaudited)
Ally Financial Inc. • Form 10-Q
The following tables present a disaggregated view of our revenue from contracts with customers included in other revenue that falls within the scope of the revenue recognition principles of ASC Topic 606, Revenue from Contracts with Customers. For further information regarding our revenue recognition policies and details about the nature of our respective revenue streams, refer to Note 1 and Note 3 to the Consolidated Financial Statements in our 2018 Annual Report on Form 10-K.
Three months ended September 30, ($ in millions) | Automotive Finance operations | Insurance operations | Mortgage Finance operations | Corporate Finance operations | Corporate and Other | Consolidated | ||||||||||||||||||
2019 | ||||||||||||||||||||||||
Revenue from contracts with customers | ||||||||||||||||||||||||
Noninsurance contracts (a) (b) (c) | $ | — | $ | 138 | $ | — | $ | — | $ | — | $ | 138 | ||||||||||||
Remarketing fee income | 19 | — | — | — | — | 19 | ||||||||||||||||||
Brokerage commissions and other revenue | — | — | — | — | 16 | 16 | ||||||||||||||||||
Deposit account and other banking fees | — | — | — | — | 3 | 3 | ||||||||||||||||||
Brokered/agent commissions | — | 3 | — | — | — | 3 | ||||||||||||||||||
Other | 5 | — | — | — | — | 5 | ||||||||||||||||||
Total revenue from contracts with customers | 24 | 141 | — | — | 19 | 184 | ||||||||||||||||||
All other revenue | 35 | 148 | 10 | 9 | 27 | 229 | ||||||||||||||||||
Total other revenue (d) | $ | 59 | $ | 289 | $ | 10 | $ | 9 | $ | 46 | $ | 413 | ||||||||||||
2018 | ||||||||||||||||||||||||
Revenue from contracts with customers | ||||||||||||||||||||||||
Noninsurance contracts (a) (b) (c) | $ | — | $ | 129 | $ | — | $ | — | $ | — | $ | 129 | ||||||||||||
Remarketing fee income | 19 | — | — | — | — | 19 | ||||||||||||||||||
Brokerage commissions and other revenue | — | — | — | — | 15 | 15 | ||||||||||||||||||
Brokered/agent commissions | — | 3 | — | — | — | 3 | ||||||||||||||||||
Deposit account and other banking fees | — | — | — | — | 3 | 3 | ||||||||||||||||||
Other | 4 | — | — | — | — | 4 | ||||||||||||||||||
Total revenue from contracts with customers | 23 | 132 | — | — | 18 | 173 | ||||||||||||||||||
All other revenue | 57 | 150 | 2 | 14 | 2 | 225 | ||||||||||||||||||
Total other revenue (d) | $ | 80 | $ | 282 | $ | 2 | $ | 14 | $ | 20 | $ | 398 |
(a) | We had opening balances of $2.8 billion and $2.6 billion in unearned revenue associated with outstanding contracts at July 1, 2019, and July 1, 2018, respectively, and $206 million and $199 million of these balances were recognized as insurance premiums and service revenue earned in our Condensed Consolidated Statement of Comprehensive Income during the three months ended September 30, 2019, and September 30, 2018. |
(b) | At September 30, 2019, we had unearned revenue of $2.8 billion associated with outstanding contracts, and with respect to this balance we expect to recognize revenue of $197 million during the remainder of 2019, $737 million in 2020, $646 million in 2021, $523 million in 2022, and $720 million thereafter. At September 30, 2018, we had unearned revenue of $2.6 billion associated with outstanding contracts. |
(c) | We had deferred insurance assets of $1.6 billion and $1.7 billion at July 1, 2019, and September 30, 2019, respectively, and recognized $119 million of expense during the three months ended September 30, 2019. We had deferred insurance assets of $1.5 billion at both July 1, 2018, and September 30, 2018, respectively, and recognized $108 million of expense during the three months ended September 30, 2018. |
(d) | Represents a component of total net revenue. Refer to Note 21 for further information on our reportable operating segments. |
13
Notes to Condensed Consolidated Financial Statements (unaudited)
Ally Financial Inc. • Form 10-Q
Nine months ended September 30, ($ in millions) | Automotive Finance operations | Insurance operations | Mortgage Finance operations | Corporate Finance operations | Corporate and Other | Consolidated | ||||||||||||||||||
2019 | ||||||||||||||||||||||||
Revenue from contracts with customers | ||||||||||||||||||||||||
Noninsurance contracts (a) (b) | $ | — | $ | 403 | $ | — | $ | — | $ | — | $ | 403 | ||||||||||||
Remarketing fee income | 56 | — | — | — | — | 56 | ||||||||||||||||||
Brokerage commissions and other revenue | — | — | — | — | 50 | 50 | ||||||||||||||||||
Deposit account and other banking fees | — | — | — | — | 12 | 12 | ||||||||||||||||||
Brokered/agent commissions | — | 10 | — | — | — | 10 | ||||||||||||||||||
Other | 15 | — | — | — | — | 15 | ||||||||||||||||||
Total revenue from contracts with customers | 71 | 413 | — | — | 62 | 546 | ||||||||||||||||||
All other revenue | 117 | 522 | 16 | 30 | 43 | 728 | ||||||||||||||||||
Total other revenue (c) | $ | 188 | $ | 935 | $ | 16 | $ | 30 | $ | 105 | $ | 1,274 | ||||||||||||
2018 | ||||||||||||||||||||||||
Revenue from contracts with customers | ||||||||||||||||||||||||
Noninsurance contracts (a) (b) | $ | — | $ | 377 | $ | — | $ | — | $ | — | $ | 377 | ||||||||||||
Remarketing fee income | 63 | — | — | — | — | 63 | ||||||||||||||||||
Brokerage commissions and other revenue | — | — | — | — | 46 | 46 | ||||||||||||||||||
Brokered/agent commissions | — | 11 | — | — | — | 11 | ||||||||||||||||||
Deposit account and other banking fees | — | — | — | — | 9 | 9 | ||||||||||||||||||
Other | 10 | 1 | — | — | — | 11 | ||||||||||||||||||
Total revenue from contracts with customers | 73 | 389 | — | — | 55 | 517 | ||||||||||||||||||
All other revenue | 136 | 405 | 5 | 36 | 17 | 599 | ||||||||||||||||||
Total other revenue (c) | $ | 209 | $ | 794 | $ | 5 | $ | 36 | $ | 72 | $ | 1,116 |
(a) | We had opening balances of $2.6 billion and $2.5 billion in unearned revenue associated with outstanding contracts at January 1, 2019, and January 1, 2018, respectively, and $607 million and $588 million of these balances were recognized as insurance premiums and service revenue earned in our Condensed Consolidated Statement of Comprehensive Income during the nine months ended September 30, 2019, and September 30, 2018. |
(b) | We had deferred insurance assets of $1.5 billion and $1.7 billion at January 1, 2019, and September 30, 2019, respectively, and recognized $344 million of expense during the nine months ended September 30, 2019. We had deferred insurance assets of $1.4 billion and $1.5 billion at January 1, 2018, and September 30, 2018, respectively, and recognized $317 million of expense during the nine months ended September 30, 2018. |
(c) | Represents a component of total net revenue. Refer to Note 21 for further information on our reportable operating segments. |
In addition to the components of other revenue presented above, as part of our Automotive Finance operations, we recognized net remarketing gains of $28 million and $66 million for the three months and nine months ended September 30, 2019, respectively, and $27 million and $61 million for the three months and nine months ended September 30, 2018, on the sale of off-lease vehicles. These gains are included in depreciation expense on operating lease assets in our Condensed Consolidated Statement of Comprehensive Income.
3. Other Income, Net of Losses
Details of other income, net of losses, were as follows.
Three months ended September 30, | Nine months ended September 30, | |||||||||||||||
($ in millions) | 2019 | 2018 | 2019 | 2018 | ||||||||||||
Late charges and other administrative fees | $ | 28 | $ | 29 | $ | 85 | $ | 83 | ||||||||
Remarketing fees | 19 | 19 | 56 | 63 | ||||||||||||
Income from equity-method investments | 7 | 5 | 19 | 18 | ||||||||||||
Servicing fees | 4 | 5 | 14 | 21 | ||||||||||||
Other, net | 38 | 43 | 102 | 122 | ||||||||||||
Total other income, net of losses | $ | 96 | $ | 101 | $ | 276 | $ | 307 |
14
Notes to Condensed Consolidated Financial Statements (unaudited)
Ally Financial Inc. • Form 10-Q
4. Reserves for Insurance Losses and Loss Adjustment Expenses
The following table shows a rollforward of our reserves for insurance losses and loss adjustment expenses.
($ in millions) | 2019 | 2018 | ||||||
Total gross reserves for insurance losses and loss adjustment expenses at January 1, | $ | 134 | $ | 140 | ||||
Less: Reinsurance recoverable | 96 | 108 | ||||||
Net reserves for insurance losses and loss adjustment expenses at January 1, | 38 | 32 | ||||||
Net insurance losses and loss adjustment expenses incurred related to: | ||||||||
Current year | 259 | 235 | ||||||
Prior years (a) | 1 | 6 | ||||||
Total net insurance losses and loss adjustment expenses incurred | 260 | 241 | ||||||
Net insurance losses and loss adjustment expenses paid or payable related to: | ||||||||
Current year | (227 | ) | (205 | ) | ||||
Prior years | (29 | ) | (27 | ) | ||||
Total net insurance losses and loss adjustment expenses paid or payable | (256 | ) | (232 | ) | ||||
Net reserves for insurance losses and loss adjustment expenses at September 30, | 42 | 41 | ||||||
Plus: Reinsurance recoverable | 93 | 98 | ||||||
Total gross reserves for insurance losses and loss adjustment expenses at September 30, | $ | 135 | $ | 139 |
(a) | There have been no material adverse changes to the reserve for prior years. |
5. Other Operating Expenses
Details of other operating expenses were as follows.
Three months ended September 30, | Nine months ended September 30, | ||||||||||||||
($ in millions) | 2019 | 2018 | 2019 | 2018 | |||||||||||
Insurance commissions | $ | 120 | $ | 113 | $ | 351 | $ | 332 | |||||||
Technology and communications | 77 | 75 | 227 | 220 | |||||||||||
Advertising and marketing | 46 | 38 | 129 | 106 | |||||||||||
Lease and loan administration | 40 | 42 | 122 | 124 | |||||||||||
Professional services | 32 | 33 | 91 | 100 | |||||||||||
Regulatory and licensing fees | 29 | 33 | 85 | 98 | |||||||||||
Vehicle remarketing and repossession | 26 | 27 | 78 | 85 | |||||||||||
Premises and equipment depreciation | 25 | 22 | 72 | 64 | |||||||||||
Occupancy | 14 | 11 | 43 | 33 | |||||||||||
Non-income taxes | 9 | 10 | 29 | 24 | |||||||||||
Amortization of intangible assets | 2 | 2 | 8 | 8 | |||||||||||
Other | 48 | 50 | 144 | 153 | |||||||||||
Total other operating expenses | $ | 468 | $ | 456 | $ | 1,379 | $ | 1,347 |
15
Notes to Condensed Consolidated Financial Statements (unaudited)
Ally Financial Inc. • Form 10-Q
6. Investment Securities
Our investment portfolio includes various debt and equity securities. Our debt securities, which are classified as available-for-sale or held-to-maturity, include government securities, corporate bonds, asset-backed securities, and mortgage-backed securities. The cost, fair value, and gross unrealized gains and losses on available-for-sale and held-to-maturity debt securities were as follows.
September 30, 2019 | December 31, 2018 | |||||||||||||||||||||||||||||||
Amortized cost | Gross unrealized | Fair value | Amortized cost | Gross unrealized | Fair value | |||||||||||||||||||||||||||
($ in millions) | gains | losses | gains | losses | ||||||||||||||||||||||||||||
Available-for-sale securities | ||||||||||||||||||||||||||||||||
Debt securities | ||||||||||||||||||||||||||||||||
U.S. Treasury and federal agencies | $ | 2,389 | $ | 8 | $ | (15 | ) | $ | 2,382 | $ | 1,911 | $ | — | $ | (60 | ) | $ | 1,851 | ||||||||||||||
U.S. States and political subdivisions | 612 | 19 | (1 | ) | 630 | 816 | 3 | (17 | ) | 802 | ||||||||||||||||||||||
Foreign government | 152 | 3 | — | 155 | 145 | 1 | (1 | ) | 145 | |||||||||||||||||||||||
Agency mortgage-backed residential | 19,887 | 244 | (23 | ) | 20,108 | 17,486 | 47 | (395 | ) | 17,138 | ||||||||||||||||||||||
Mortgage-backed residential | 2,799 | 22 | (9 | ) | 2,812 | 2,796 | 1 | (111 | ) | 2,686 | ||||||||||||||||||||||
Agency mortgage-backed commercial | 1,341 | 72 | — | 1,413 | 3 | — | — | 3 | ||||||||||||||||||||||||
Mortgage-backed commercial | 112 | 1 | — | 113 | 715 | 1 | (2 | ) | 714 | |||||||||||||||||||||||
Asset-backed | 413 | 4 | — | 417 | 723 | 2 | (2 | ) | 723 | |||||||||||||||||||||||
Corporate debt | 1,321 | 35 | (2 | ) | 1,354 | 1,286 | 1 | (46 | ) | 1,241 | ||||||||||||||||||||||
Total available-for-sale securities (a) (b) (c) | $ | 29,026 | $ | 408 | $ | (50 | ) | $ | 29,384 | $ | 25,881 | $ | 56 | $ | (634 | ) | $ | 25,303 | ||||||||||||||
Held-to-maturity securities | ||||||||||||||||||||||||||||||||
Debt securities | ||||||||||||||||||||||||||||||||
Agency mortgage-backed residential (d) | $ | 2,593 | $ | 70 | $ | (1 | ) | $ | 2,662 | $ | 2,319 | $ | 6 | $ | (61 | ) | $ | 2,264 | ||||||||||||||
Asset-backed retained notes | 25 | — | — | 25 | 43 | — | — | 43 | ||||||||||||||||||||||||
Total held-to-maturity securities | $ | 2,618 | $ | 70 | $ | (1 | ) | $ | 2,687 | $ | 2,362 | $ | 6 | $ | (61 | ) | $ | 2,307 |
(a) | Certain entities related to our Insurance operations are required to deposit securities with state regulatory authorities. These deposited securities totaled $12 million at both September 30, 2019, and December 31, 2018, respectively. |
(b) | Certain available-for-sale securities are included in fair value hedging relationships. Refer to Note 17 for additional information. |
(c) | Available-for-sale securities with a fair value of $2.5 billion and $9.2 billion at September 30, 2019, and December 31, 2018, respectively, were pledged to secure advances from the Federal Home Loan Bank (FHLB), short-term borrowings or repurchase agreements, or for other purposes as required by contractual obligation or law. Under these agreements, we have granted the counterparty the right to sell or pledge $594 million and $821 million of the underlying investment securities at September 30, 2019, and December 31, 2018, respectively. |
(d) | Held-to-maturity securities with a fair value of $972 million and $1.2 billion at September 30, 2019, and December 31, 2018, respectively, were pledged to secure advances from the FHLB. |
16
Notes to Condensed Consolidated Financial Statements (unaudited)
Ally Financial Inc. • Form 10-Q
The maturity distribution of debt securities outstanding is summarized in the following tables. Call or prepayment options may cause actual maturities to differ from contractual maturities.
Total | Due in one year or less | Due after one year through five years | Due after five years through ten years | Due after ten years | |||||||||||||||||||||||||||||||
($ in millions) | Amount | Yield | Amount | Yield | Amount | Yield | Amount | Yield | Amount | Yield | |||||||||||||||||||||||||
September 30, 2019 | |||||||||||||||||||||||||||||||||||
Fair value of available-for-sale securities (a) | |||||||||||||||||||||||||||||||||||
U.S. Treasury and federal agencies | $ | 2,382 | 1.5 | % | $ | 65 | 2.1 | % | $ | 1,742 | 1.5 | % | $ | 575 | 1.6 | % | $ | — | — | % | |||||||||||||||
U.S. States and political subdivisions | 630 | 3.1 | 21 | 2.2 | 61 | 2.2 | 169 | 2.8 | 379 | 3.4 | |||||||||||||||||||||||||
Foreign government | 155 | 2.3 | 4 | 1.4 | 65 | 2.3 | 86 | 2.3 | — | — | |||||||||||||||||||||||||
Agency mortgage-backed residential | 20,108 | 3.3 | — | — | — | — | 49 | 2.0 | 20,059 | 3.3 | |||||||||||||||||||||||||
Mortgage-backed residential | 2,812 | 3.3 | — | — | — | — | — | — | 2,812 | 3.3 | |||||||||||||||||||||||||
Agency mortgage-backed commercial | 1,413 | 2.9 | — | — | 3 | 3.2 | 1,089 | 3.0 | 321 | 2.6 | |||||||||||||||||||||||||
Mortgage-backed commercial | 113 | 3.5 | — | — | — | — | — | — | 113 | 3.5 | |||||||||||||||||||||||||
Asset-backed | 417 | 3.5 | — | — | 310 | 3.5 | 53 | 3.9 | 54 | 3.0 | |||||||||||||||||||||||||
Corporate debt | 1,354 | 3.2 | 125 | 2.8 | 571 | 3.0 | 643 | 3.4 | 15 | 5.5 | |||||||||||||||||||||||||
Total available-for-sale securities | $ | 29,384 | 3.1 | $ | 215 | 2.5 | $ | 2,752 | 2.0 | $ | 2,664 | 2.8 | $ | 23,753 | 3.3 | ||||||||||||||||||||
Amortized cost of available-for-sale securities | $ | 29,026 | $ | 215 | $ | 2,745 | $ | 2,568 | $ | 23,498 | |||||||||||||||||||||||||
Amortized cost of held-to-maturity securities | |||||||||||||||||||||||||||||||||||
Agency mortgage-backed residential | $ | 2,593 | 3.2 | % | $ | — | — | % | $ | — | — | % | $ | — | — | % | $ | 2,593 | 3.2 | % | |||||||||||||||
Asset-backed retained notes | 25 | 2.2 | — | — | 25 | 2.2 | — | — | — | — | |||||||||||||||||||||||||
Total held-to-maturity securities | $ | 2,618 | 3.2 | $ | — | — | $ | 25 | 2.2 | $ | — | — | $ | 2,593 | 3.2 | ||||||||||||||||||||
December 31, 2018 | |||||||||||||||||||||||||||||||||||
Fair value of available-for-sale securities (a) | |||||||||||||||||||||||||||||||||||
U.S. Treasury and federal agencies | $ | 1,851 | 1.9 | % | $ | 12 | 1.0 | % | $ | 1,277 | 1.8 | % | $ | 562 | 2.0 | % | $ | — | — | % | |||||||||||||||
U.S. States and political subdivisions | 802 | 3.0 | 49 | 1.9 | 43 | 2.3 | 252 | 2.6 | 458 | 3.4 | |||||||||||||||||||||||||
Foreign government | 145 | 2.4 | 18 | 3.1 | 60 | 2.3 | 67 | 2.4 | — | — | |||||||||||||||||||||||||
Agency mortgage-backed residential | 17,138 | 3.3 | — | — | — | — | 54 | 1.9 | 17,084 | 3.3 | |||||||||||||||||||||||||
Mortgage-backed residential | 2,686 | 3.3 | — | — | — | — | — | — | 2,686 | 3.3 | |||||||||||||||||||||||||
Agency mortgage-backed commercial | 3 | 3.1 | — | — | 3 | 3.1 | — | — | — | — | |||||||||||||||||||||||||
Mortgage-backed commercial | 714 | 3.8 | — | — | — | — | 46 | 3.9 | 668 | 3.8 | |||||||||||||||||||||||||
Asset-backed | 723 | 3.5 | — | — | 478 | 3.4 | 121 | 4.0 | 124 | 3.3 | |||||||||||||||||||||||||
Corporate debt | 1,241 | 3.1 | 144 | 2.8 | 496 | 2.9 | 581 | 3.3 | 20 | 5.5 | |||||||||||||||||||||||||
Total available-for-sale securities | $ | 25,303 | 3.2 | $ | 223 | 2.6 | $ | 2,357 | 2.4 | $ | 1,683 | 2.8 | $ | 21,040 | 3.3 | ||||||||||||||||||||
Amortized cost of available-for-sale securities | $ | 25,881 | $ | 224 | $ | 2,405 | $ | 1,743 | $ | 21,509 | |||||||||||||||||||||||||
Amortized cost of held-to-maturity securities | |||||||||||||||||||||||||||||||||||
Agency mortgage-backed residential | $ | 2,319 | 3.2 | % | $ | — | — | % | $ | — | — | % | $ | — | — | % | $ | 2,319 | 3.2 | % | |||||||||||||||
Asset-backed retained notes | 43 | 2.0 | — | — | 42 | 2.0 | 1 | 3.3 | — | — | |||||||||||||||||||||||||
Total held-to-maturity securities | $ | 2,362 | 3.2 | $ | — | — | $ | 42 | 2.0 | $ | 1 | 3.3 | $ | 2,319 | 3.2 |
(a) | Yield is calculated using the effective yield of each security at the end of the period, weighted based on the market value. The effective yield considers the contractual coupon and amortized cost, and excludes expected capital gains and losses. |
The balances of cash equivalents were $124 million and $35 million at September 30, 2019, and December 31, 2018, respectively, and were composed primarily of money-market accounts and short-term securities, including U.S. Treasury bills.
17
Notes to Condensed Consolidated Financial Statements (unaudited)
Ally Financial Inc. • Form 10-Q
The following table presents interest and dividends on investment securities.
Three months ended September 30, | Nine months ended September 30, | ||||||||||||||
($ in millions) | 2019 | 2018 | 2019 | 2018 | |||||||||||
Taxable interest | $ | 214 | $ | 172 | $ | 648 | $ | 490 | |||||||
Taxable dividends | 4 | 4 | 10 | 10 | |||||||||||
Interest and dividends exempt from U.S. federal income tax | 3 | 6 | 12 | 18 | |||||||||||
Interest and dividends on investment securities | $ | 221 | $ | 182 | $ | 670 | $ | 518 |
The following table presents gross gains and losses realized upon the sales of available-for-sale securities, and net gains or losses on equity securities held during the period. There were no other-than-temporary impairments of available-for-sale securities for the periods presented.
Three months ended September 30, | Nine months ended September 30, | ||||||||||||||
($ in millions) | 2019 | 2018 | 2019 | 2018 | |||||||||||
Available-for-sale securities | |||||||||||||||
Gross realized gains | $ | 30 | $ | 1 | $ | 64 | $ | 8 | |||||||
Gross realized losses (a) | (3 | ) | — | (4 | ) | — | |||||||||
Net realized gains on available-for-sale securities | 27 | 1 | 60 | 8 | |||||||||||
Net realized gain on equity securities | 12 | 15 | 51 | 55 | |||||||||||
Net unrealized (loss) gain on equity securities | (12 | ) | 6 | 63 | (26 | ) | |||||||||
Other gain on investments, net | $ | 27 | $ | 22 | $ | 174 | $ | 37 |
(a) | Certain available-for-sale securities were sold at a loss during the three months and nine months ended September 30, 2019, and September 30, 2018, as a result of identifiable market or credit events, or a loss was realized based on corporate actions outside of our control (such as a call by the issuer). Any such sales were made in accordance with our risk-management policies and practices. |
18
Notes to Condensed Consolidated Financial Statements (unaudited)
Ally Financial Inc. • Form 10-Q
The table below summarizes available-for-sale and held-to-maturity securities in an unrealized loss position, which we evaluated for other than temporary impairment. For additional information on our methodology, refer to Note 1 to the Consolidated Financial Statements in our 2018 Annual Report on Form 10-K. As of September 30, 2019, we did not have the intent to sell the available-for-sale or held-to-maturity securities with an unrealized loss position and we do not believe it is more likely than not that we will be required to sell these securities before recovery of their amortized cost basis. As a result of this evaluation, we believe that the securities with an unrealized loss position are not considered to be other-than-temporarily impaired at September 30, 2019.
September 30, 2019 | December 31, 2018 | |||||||||||||||||||||||||||||||
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 | $ | 1,131 | $ | (8 | ) | $ | 279 | $ | (7 | ) | $ | 31 | $ | — | $ | 1,758 | $ | (60 | ) | |||||||||||||
U.S. States and political subdivisions | 63 | (1 | ) | 9 | — | 259 | (3 | ) | 317 | (14 | ) | |||||||||||||||||||||
Foreign government | 11 | — | 4 | — | 6 | — | 74 | (1 | ) | |||||||||||||||||||||||
Agency mortgage-backed residential | 2,722 | (8 | ) | 1,317 | (15 | ) | 5,537 | (94 | ) | 7,808 | (301 | ) | ||||||||||||||||||||
Mortgage-backed residential | 647 | (2 | ) | 221 | (7 | ) | 1,024 | (20 | ) | 1,360 | (91 | ) | ||||||||||||||||||||
Mortgage-backed commercial | 43 | — | — | — | 347 | (1 | ) | 36 | (1 | ) | ||||||||||||||||||||||
Asset-backed | 17 | — | 13 | — | 294 | (1 | ) | 124 | (1 | ) | ||||||||||||||||||||||
Corporate debt | 104 | — | 57 | (2 | ) | 576 | (19 | ) | 569 | (27 | ) | |||||||||||||||||||||
Total temporarily impaired available-for-sale securities | $ | 4,738 | $ | (19 | ) | $ | 1,900 | $ | (31 | ) | $ | 8,074 | $ | (138 | ) | $ | 12,046 | $ | (496 | ) | ||||||||||||
Held-to-maturity securities | ||||||||||||||||||||||||||||||||
Debt securities | ||||||||||||||||||||||||||||||||
Agency mortgage-backed residential | $ | 142 | $ | (1 | ) | $ | 87 | $ | — | $ | 457 | $ | (6 | ) | $ | 1,376 | $ | (55 | ) | |||||||||||||
Asset-backed retained notes | — | — | 9 | — | 16 | — | 19 | — | ||||||||||||||||||||||||
Total held-to-maturity debt securities | $ | 142 | $ | (1 | ) | $ | 96 | $ | — | $ | 473 | $ | (6 | ) | $ | 1,395 | $ | (55 | ) |
19
Notes to Condensed Consolidated Financial Statements (unaudited)
Ally Financial Inc. • Form 10-Q
7. Finance Receivables and Loans, Net
The composition of finance receivables and loans reported at gross carrying value was as follows.
($ in millions) | September 30, 2019 | December 31, 2018 | ||||||
Consumer automotive (a) | $ | 73,071 | $ | 70,539 | ||||
Consumer mortgage | ||||||||
Mortgage Finance (b) | 15,782 | 15,155 | ||||||
Mortgage — Legacy (c) | 1,228 | 1,546 | ||||||
Total consumer mortgage | 17,010 | 16,701 | ||||||
Total consumer | 90,081 | 87,240 | ||||||
Commercial | ||||||||
Commercial and industrial | ||||||||
Automotive | 29,122 | 33,672 | ||||||
Other | 4,377 | 4,205 | ||||||
Commercial real estate | 5,029 | 4,809 | ||||||
Total commercial | 38,528 | 42,686 | ||||||
Total finance receivables and loans (d) | $ | 128,609 | $ | 129,926 |
(a) | Certain finance receivables and loans are included in fair value hedging relationships. Refer to Note 17 for additional information. |
(b) | Includes loans originated as interest-only mortgage loans of $11 million and $18 million at September 30, 2019, and December 31, 2018, respectively, 14% of which are expected to start principal amortization in 2019, and 44% in 2020. The remainder of these loans have exited the interest-only period. |
(c) | Includes loans originated as interest-only mortgage loans of $234 million and $341 million at September 30, 2019, and December 31, 2018, respectively, of which 99% have exited the interest-only period. |
(d) | Totals include net unearned income, unamortized premiums and discounts, and deferred fees and costs of $547 million and $587 million at September 30, 2019, and December 31, 2018, respectively. |
The following tables present an analysis of the activity in the allowance for loan losses on finance receivables and loans.
Three months ended September 30, 2019 ($ in millions) | Consumer automotive | Consumer mortgage | Commercial | Total | ||||||||||||
Allowance at July 1, 2019 | $ | 1,078 | $ | 49 | $ | 155 | $ | 1,282 | ||||||||
Charge-offs (a) | (374 | ) | (3 | ) | (16 | ) | (393 | ) | ||||||||
Recoveries | 121 | 5 | — | 126 | ||||||||||||
Net charge-offs | (253 | ) | 2 | (16 | ) | (267 | ) | |||||||||
Provision for loan losses | 264 | (5 | ) | 4 | 263 | |||||||||||
Other | 1 | (2 | ) | — | (1 | ) | ||||||||||
Allowance at September 30, 2019 | $ | 1,090 | $ | 44 | $ | 143 | $ | 1,277 |
(a) | Represents the amount of the gross carrying value directly written off. For consumer and commercial loans, the loss from a charge-off is measured as the difference between the gross carrying value of a loan and the fair value of the collateral, less costs to sell. Refer to Note 1 to the Consolidated Financial Statements in our 2018 Annual Report on Form 10-K for more information regarding our charge-off policies. |
Three months ended September 30, 2018 ($ in millions) | Consumer automotive | Consumer mortgage | Commercial | Total | ||||||||||||
Allowance at July 1, 2018 | $ | 1,053 | $ | 66 | $ | 138 | $ | 1,257 | ||||||||
Charge-offs (a) | (343 | ) | (7 | ) | (3 | ) | (353 | ) | ||||||||
Recoveries | 110 | 8 | — | 118 | ||||||||||||
Net charge-offs | (233 | ) | 1 | (3 | ) | (235 | ) | |||||||||
Provision for loan losses | 229 | (4 | ) | 8 | 233 | |||||||||||
Other (b) | (6 | ) | 1 | (2 | ) | (7 | ) | |||||||||
Allowance at September 30, 2018 | $ | 1,043 | $ | 64 | $ | 141 | $ | 1,248 |
(a) | Represents the amount of the gross carrying value directly written off. For consumer and commercial loans, the loss from a charge-off is measured as the difference between the gross carrying value of a loan and the fair value of the collateral, less costs to sell. Refer to Note 1 to the Consolidated Financial Statements in our 2018 Annual Report on Form 10-K for more information regarding our charge-off policies. |
(b) | Primarily related to the transfer of finance receivables and loans from held-for-investment to held-for-sale. |
20
Notes to Condensed Consolidated Financial Statements (unaudited)
Ally Financial Inc. • Form 10-Q
Nine months ended September 30, 2019 ($ in millions) | Consumer automotive | Consumer mortgage | Commercial | Total | ||||||||||||
Allowance at January 1, 2019 | $ | 1,048 | $ | 53 | $ | 141 | $ | 1,242 | ||||||||
Charge-offs (a) | (1,027 | ) | (11 | ) | (33 | ) | (1,071 | ) | ||||||||
Recoveries | 368 | 17 | — | 385 | ||||||||||||
Net charge-offs | (659 | ) | 6 | (33 | ) | (686 | ) | |||||||||
Provision for loan losses | 701 | (13 | ) | 34 | 722 | |||||||||||
Other | — | (2 | ) | 1 | (1 | ) | ||||||||||
Allowance at September 30, 2019 | $ | 1,090 | $ | 44 | $ | 143 | $ | 1,277 | ||||||||
Allowance for loan losses at September 30, 2019 | ||||||||||||||||
Individually evaluated for impairment | $ | 37 | $ | 18 | $ | 32 | $ | 87 | ||||||||
Collectively evaluated for impairment | 1,053 | 26 | 111 | 1,190 | ||||||||||||
Finance receivables and loans at gross carrying value | ||||||||||||||||
Ending balance | $ | 73,071 | $ | 17,010 | $ | 38,528 | $ | 128,609 | ||||||||
Individually evaluated for impairment | 514 | 213 | 179 | 906 | ||||||||||||
Collectively evaluated for impairment | 72,557 | 16,797 | 38,349 | 127,703 |
(a) | Represents the amount of the gross carrying value directly written off. For consumer and commercial loans, the loss from a charge-off is measured as the difference between the gross carrying value of a loan and the fair value of the collateral, less costs to sell. Refer to Note 1 to the Consolidated Financial Statements in our 2018 Annual Report on Form 10-K for more information regarding our charge-off policies. |
Nine months ended September 30, 2018 ($ in millions) | Consumer automotive | Consumer mortgage | Commercial | Total | ||||||||||||
Allowance at January 1, 2018 | $ | 1,066 | $ | 79 | $ | 131 | $ | 1,276 | ||||||||
Charge-offs (a) | (1,004 | ) | (27 | ) | (5 | ) | (1,036 | ) | ||||||||
Recoveries | 336 | 20 | 6 | 362 | ||||||||||||
Net charge-offs | (668 | ) | (7 | ) | 1 | (674 | ) | |||||||||
Provision for loan losses | 650 | (7 | ) | 9 | 652 | |||||||||||
Other (b) | (5 | ) | (1 | ) | — | (6 | ) | |||||||||
Allowance at September 30, 2018 | $ | 1,043 | $ | 64 | $ | 141 | $ | 1,248 | ||||||||
Allowance for loan losses at September 30, 2018 | ||||||||||||||||
Individually evaluated for impairment | $ | 43 | $ | 24 | $ | 35 | $ | 102 | ||||||||
Collectively evaluated for impairment | 1,000 | 40 | 106 | 1,146 | ||||||||||||
Finance receivables and loans at gross carrying value | ||||||||||||||||
Ending balance | $ | 69,995 | $ | 16,506 | $ | 40,104 | $ | 126,605 | ||||||||
Individually evaluated for impairment | 483 | 231 | 184 | 898 | ||||||||||||
Collectively evaluated for impairment | 69,512 | 16,275 | 39,920 | 125,707 |
(a) | Represents the amount of the gross carrying value directly written off. For consumer and commercial loans, the loss from a charge-off is measured as the difference between the gross carrying value of a loan and the fair value of the collateral, less costs to sell. Refer to Note 1 to the Consolidated Financial Statements in our 2018 Annual Report on Form 10-K for more information regarding our charge-off policies. |
(b) | Primarily related to the transfer of finance receivables and loans from held-for-investment to held-for-sale. |
21
Notes to Condensed Consolidated Financial Statements (unaudited)
Ally Financial Inc. • Form 10-Q
The following table presents information about significant sales of finance receivables and loans and transfers of finance receivables and loans from held-for-investment to held-for-sale based on net carrying value.
Three months ended September 30, | Nine months ended September 30, | |||||||||||||||
($ in millions) | 2019 | 2018 | 2019 | 2018 | ||||||||||||
Consumer automotive | $ | — | $ | 578 | $ | 20 | $ | 578 | ||||||||
Consumer mortgage | 940 | — | 940 | 5 | ||||||||||||
Commercial | — | 238 | — | 238 | ||||||||||||
Total sales and transfers (a) | $ | 940 | $ | 816 | $ | 960 | $ | 821 |
(a) | During the nine months ended September 30, 2019, we also sold $131 million of loans held-for-sale that were initially classified as finance receivables and loans held-for-investment, and transferred $79 million of finance receivables from held-for-sale to held-for-investment, both relating to equipment finance receivables from our commercial automotive business. |
The following table presents information about significant purchases of finance receivables and loans based on unpaid principal balance at the time of purchase.
Three months ended September 30, | Nine months ended September 30, | |||||||||||||||
($ in millions) | 2019 | 2018 | 2019 | 2018 | ||||||||||||
Consumer automotive | $ | 92 | $ | 251 | $ | 409 | $ | 652 | ||||||||
Consumer mortgage | 811 | 1,743 | 2,724 | 3,890 | ||||||||||||
Commercial | 13 | 14 | 16 | 14 | ||||||||||||
Total purchases of finance receivables and loans | $ | 916 | $ | 2,008 | $ | 3,149 | $ | 4,556 |
22
Notes to Condensed Consolidated Financial Statements (unaudited)
Ally Financial Inc. • Form 10-Q
The following table presents an analysis of our past-due finance receivables and loans recorded at gross carrying value.
($ 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 | ||||||||||||||||||
September 30, 2019 | ||||||||||||||||||||||||
Consumer automotive | $ | 2,053 | $ | 521 | $ | 316 | $ | 2,890 | $ | 70,181 | $ | 73,071 | ||||||||||||
Consumer mortgage | ||||||||||||||||||||||||
Mortgage Finance | 107 | 6 | 10 | 123 | 15,659 | 15,782 | ||||||||||||||||||
Mortgage — Legacy | 28 | 8 | 28 | 64 | 1,164 | 1,228 | ||||||||||||||||||
Total consumer mortgage | 135 | 14 | 38 | 187 | 16,823 | 17,010 | ||||||||||||||||||
Total consumer | 2,188 | 535 | 354 | 3,077 | 87,004 | 90,081 | ||||||||||||||||||
Commercial | ||||||||||||||||||||||||
Commercial and industrial | ||||||||||||||||||||||||
Automotive | 1 | — | 45 | 46 | 29,076 | 29,122 | ||||||||||||||||||
Other | — | — | 18 | 18 | 4,359 | 4,377 | ||||||||||||||||||
Commercial real estate | 2 | — | 1 | 3 | 5,026 | 5,029 | ||||||||||||||||||
Total commercial | 3 | — | 64 | 67 | 38,461 | 38,528 | ||||||||||||||||||
Total consumer and commercial | $ | 2,191 | $ | 535 | $ | 418 | $ | 3,144 | $ | 125,465 | $ | 128,609 | ||||||||||||
December 31, 2018 | ||||||||||||||||||||||||
Consumer automotive | $ | 2,107 | $ | 537 | $ | 296 | $ | 2,940 | $ | 67,599 | $ | 70,539 | ||||||||||||
Consumer mortgage | ||||||||||||||||||||||||
Mortgage Finance | 67 | 5 | 4 | 76 | 15,079 | 15,155 | ||||||||||||||||||
Mortgage — Legacy | 30 | 10 | 42 | 82 | 1,464 | 1,546 | ||||||||||||||||||
Total consumer mortgage | 97 | 15 | 46 | 158 | 16,543 | 16,701 | ||||||||||||||||||
Total consumer | 2,204 | 552 | 342 | 3,098 | 84,142 | 87,240 | ||||||||||||||||||
Commercial | ||||||||||||||||||||||||
Commercial and industrial | ||||||||||||||||||||||||
Automotive | — | 1 | 31 | 32 | 33,640 | 33,672 | ||||||||||||||||||
Other | — | 4 | 16 | 20 | 4,185 | 4,205 | ||||||||||||||||||
Commercial real estate | — | — | 1 | 1 | 4,808 | 4,809 | ||||||||||||||||||
Total commercial | — | 5 | 48 | 53 | 42,633 | 42,686 | ||||||||||||||||||
Total consumer and commercial | $ | 2,204 | $ | 557 | $ | 390 | $ | 3,151 | $ | 126,775 | $ | 129,926 |
23
Notes to Condensed Consolidated Financial Statements (unaudited)
Ally Financial Inc. • Form 10-Q
The following table presents the gross carrying value of our finance receivables and loans on nonaccrual status.
($ in millions) | September 30, 2019 | December 31, 2018 | ||||||
Consumer automotive | $ | 692 | $ | 664 | ||||
Consumer mortgage | ||||||||
Mortgage Finance | 15 | 9 | ||||||
Mortgage — Legacy | 43 | 70 | ||||||
Total consumer mortgage | 58 | 79 | ||||||
Total consumer | 750 | 743 | ||||||
Commercial | ||||||||
Commercial and industrial | ||||||||
Automotive | 64 | 203 | ||||||
Other | 111 | 142 | ||||||
Commercial real estate | 4 | 4 | ||||||
Total commercial | 179 | 349 | ||||||
Total consumer and commercial finance receivables and loans | $ | 929 | $ | 1,092 |
Management performs a quarterly analysis of the consumer automotive, consumer mortgage, and commercial portfolios using a range of credit quality indicators to assess the adequacy of the allowance for loan losses based on historical and current trends. The following tables present the population of loans by quality indicators for our consumer automotive, 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 recorded at gross carrying value. Nonperforming loans include finance receivables and loans on nonaccrual status when the principal or interest has been delinquent for 90 days or more, or when full collection is not expected. Refer to Note 1 to the Consolidated Financial Statements in our 2018 Annual Report on Form 10-K for additional information.
September 30, 2019 | December 31, 2018 | |||||||||||||||||||||||
($ in millions) | Performing | Nonperforming | Total | Performing | Nonperforming | Total | ||||||||||||||||||
Consumer automotive | $ | 72,379 | $ | 692 | $ | 73,071 | $ | 69,875 | $ | 664 | $ | 70,539 | ||||||||||||
Consumer mortgage | ||||||||||||||||||||||||
Mortgage Finance | 15,767 | 15 | 15,782 | 15,146 | 9 | 15,155 | ||||||||||||||||||
Mortgage — Legacy | 1,185 | 43 | 1,228 | 1,476 | 70 | 1,546 | ||||||||||||||||||
Total consumer mortgage | 16,952 | 58 | 17,010 | 16,622 | 79 | 16,701 | ||||||||||||||||||
Total consumer | $ | 89,331 | $ | 750 | $ | 90,081 | $ | 86,497 | $ | 743 | $ | 87,240 |
The following table presents pass and criticized credit quality indicators based on regulatory definitions for our commercial finance receivables and loans recorded at gross carrying value.
September 30, 2019 | December 31, 2018 | |||||||||||||||||||||||
($ in millions) | Pass | Criticized (a) | Total | Pass | Criticized (a) | Total | ||||||||||||||||||
Commercial and industrial | ||||||||||||||||||||||||
Automotive | $ | 26,393 | $ | 2,729 | $ | 29,122 | $ | 30,799 | $ | 2,873 | $ | 33,672 | ||||||||||||
Other | 3,545 | 832 | 4,377 | 3,373 | 832 | 4,205 | ||||||||||||||||||
Commercial real estate | 4,764 | 265 | 5,029 | 4,538 | 271 | 4,809 | ||||||||||||||||||
Total commercial | $ | 34,702 | $ | 3,826 | $ | 38,528 | $ | 38,710 | $ | 3,976 | $ | 42,686 |
(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. |
24
Notes to Condensed Consolidated Financial Statements (unaudited)
Ally Financial Inc. • Form 10-Q
Impaired Loans and Troubled Debt Restructurings
Impaired Loans
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. For more information on our impaired finance receivables and loans, refer to Note 1 to the Consolidated Financial Statements in our 2018 Annual Report on Form 10-K.
The following table presents information about our impaired finance receivables and loans.
($ in millions) | Unpaid principal balance (a) | Gross carrying value | Impaired with no allowance | Impaired with an allowance | Allowance for impaired loans | |||||||||||||||
September 30, 2019 | ||||||||||||||||||||
Consumer automotive | $ | 527 | $ | 514 | $ | 107 | $ | 407 | $ | 37 | ||||||||||
Consumer mortgage | ||||||||||||||||||||
Mortgage Finance | 13 | 14 | 6 | 8 | — | |||||||||||||||
Mortgage — Legacy | 204 | 199 | 65 | 134 | 18 | |||||||||||||||
Total consumer mortgage | 217 | 213 | 71 | 142 | 18 | |||||||||||||||
Total consumer | 744 | 727 | 178 | 549 | 55 | |||||||||||||||
Commercial | ||||||||||||||||||||
Commercial and industrial | ||||||||||||||||||||
Automotive | 64 | 64 | 1 | 63 | 18 | |||||||||||||||
Other | 149 | 111 | 80 | 31 | 14 | |||||||||||||||
Commercial real estate | 4 | 4 | 4 | — | — | |||||||||||||||
Total commercial | 217 | 179 | 85 | 94 | 32 | |||||||||||||||
Total consumer and commercial finance receivables and loans | $ | 961 | $ | 906 | $ | 263 | $ | 643 | $ | 87 | ||||||||||
December 31, 2018 | ||||||||||||||||||||
Consumer automotive | $ | 503 | $ | 495 | $ | 105 | $ | 390 | $ | 44 | ||||||||||
Consumer mortgage | ||||||||||||||||||||
Mortgage Finance | 15 | 15 | 6 | 9 | 1 | |||||||||||||||
Mortgage — Legacy | 221 | 216 | 65 | 151 | 22 | |||||||||||||||
Total consumer mortgage | 236 | 231 | 71 | 160 | 23 | |||||||||||||||
Total consumer | 739 | 726 | 176 | 550 | 67 | |||||||||||||||
Commercial | ||||||||||||||||||||
Commercial and industrial | ||||||||||||||||||||
Automotive | 203 | 203 | 112 | 91 | 10 | |||||||||||||||
Other | 159 | 142 | 40 | 102 | 46 | |||||||||||||||
Commercial real estate | 4 | 4 | 4 | — | — | |||||||||||||||
Total commercial | 366 | 349 | 156 | 193 | 56 | |||||||||||||||
Total consumer and commercial finance receivables and loans | $ | 1,105 | $ | 1,075 | $ | 332 | $ | 743 | $ | 123 |
(a) | Adjusted for charge-offs. |
25
Notes to Condensed Consolidated Financial Statements (unaudited)
Ally Financial Inc. • Form 10-Q
The following tables present average balance and interest income for our impaired finance receivables and loans.
2019 | 2018 | |||||||||||||||
Three months ended September 30, ($ in millions) | Average balance | Interest income | Average balance | Interest income | ||||||||||||
Consumer automotive | $ | 505 | $ | 9 | $ | 485 | $ | 7 | ||||||||
Consumer mortgage | ||||||||||||||||
Mortgage Finance | 14 | — | 12 | 1 | ||||||||||||
Mortgage — Legacy | 203 | 2 | 217 | 2 | ||||||||||||
Total consumer mortgage | 217 | 2 | 229 | 3 | ||||||||||||
Total consumer | 722 | 11 | 714 | 10 | ||||||||||||
Commercial | ||||||||||||||||
Commercial and industrial | ||||||||||||||||
Automotive | 76 | — | 83 | — | ||||||||||||
Other | 115 | — | 101 | — | ||||||||||||
Commercial real estate | 5 | — | 7 | — | ||||||||||||
Total commercial | 196 | — | 191 | — | ||||||||||||
Total consumer and commercial finance receivables and loans | $ | 918 | $ | 11 | $ | 905 | $ | 10 |
2019 | 2018 | |||||||||||||||
Nine months ended September 30, ($ in millions) | Average balance | Interest income | Average balance | Interest income | ||||||||||||
Consumer automotive | $ | 502 | $ | 26 | $ | 477 | $ | 21 | ||||||||
Consumer mortgage | ||||||||||||||||
Mortgage Finance | 15 | — | 10 | 1 | ||||||||||||
Mortgage — Legacy | 208 | 7 | 219 | 7 | ||||||||||||
Total consumer mortgage | 223 | 7 | 229 | 8 | ||||||||||||
Total consumer | 725 | 33 | 706 | 29 | ||||||||||||
Commercial | ||||||||||||||||
Commercial and industrial | ||||||||||||||||
Automotive | 124 | 1 | 65 | 2 | ||||||||||||
Other | 118 | — | 76 | — | ||||||||||||
Commercial real estate | 5 | — | 5 | — | ||||||||||||
Total commercial | 247 | 1 | 146 | 2 | ||||||||||||
Total consumer and commercial finance receivables and loans | $ | 972 | $ | 34 | $ | 852 | $ | 31 |
Troubled Debt Restructurings
Troubled Debt Restructurings (TDRs) are loan modifications where concessions were granted to borrowers experiencing financial difficulties. For consumer automotive loans, we may offer several types of assistance to aid our customers, including payment extensions and rewrites of the loan terms. Additionally, for mortgage loans, as part of certain programs, we offer mortgage loan modifications to qualified borrowers. These programs are in place to provide support to our mortgage customers in financial distress, including principal forgiveness, maturity extensions, delinquent interest capitalization, and changes to contractual interest rates. Total TDRs recorded at gross carrying value were $838 million and $812 million at September 30, 2019, and December 31, 2018, respectively.
Total commitments to lend additional funds to borrowers whose terms had been modified in a TDR were $18 million and $4 million at September 30, 2019, and December 31, 2018, respectively. Refer to Note 1 to the Consolidated Financial Statements in our 2018 Annual Report on Form 10-K for additional information.
26
Notes to Condensed Consolidated Financial Statements (unaudited)
Ally Financial Inc. • Form 10-Q
The following tables present information related to finance receivables and loans recorded at gross carrying value modified in connection with a TDR during the period.
2019 | 2018 | |||||||||||||||||||||
Three months ended September 30, ($ in millions) | Number of loans | Pre-modification gross carrying value | Post-modification gross carrying value | Number of loans | Pre-modification gross carrying value | Post-modification gross carrying value | ||||||||||||||||
Consumer automotive | 7,197 | $ | 124 | $ | 107 | 6,759 | $ | 67 | $ | 67 | ||||||||||||
Consumer mortgage | ||||||||||||||||||||||
Mortgage Finance | 1 | — | — | 10 | 4 | 4 | ||||||||||||||||
Mortgage — Legacy | 8 | 1 | 1 | 65 | 8 | 6 | ||||||||||||||||
Total consumer mortgage | 9 | 1 | 1 | 75 | 12 | 10 | ||||||||||||||||
Total consumer | 7,206 | 125 | 108 | 6,834 | 79 | 77 | ||||||||||||||||
Commercial | ||||||||||||||||||||||
Commercial and industrial | ||||||||||||||||||||||
Automotive | 1 | 5 | 5 | — | — | — | ||||||||||||||||
Other | 1 | 25 | 25 | — | — | — | ||||||||||||||||
Total commercial | 2 | 30 | 30 | — | — | — | ||||||||||||||||
Total consumer and commercial finance receivables and loans | 7,208 | $ | 155 | $ | 138 | 6,834 | $ | 79 | $ | 77 |
2019 | 2018 | |||||||||||||||||||||
Nine months ended September 30, ($ in millions) | Number of loans | Pre-modification gross carrying value | Post-modification gross carrying value | Number of loans | Pre-modification gross carrying value | Post-modification gross carrying value | ||||||||||||||||
Consumer automotive | 20,222 | $ | 349 | $ | 303 | 19,699 | $ | 302 | $ | 270 | ||||||||||||
Consumer mortgage | ||||||||||||||||||||||
Mortgage Finance | 4 | — | — | 18 | 7 | 7 | ||||||||||||||||
Mortgage — Legacy | 46 | 7 | 7 | 154 | 24 | 22 | ||||||||||||||||
Total consumer mortgage | 50 | 7 | 7 | 172 | 31 | 29 | ||||||||||||||||
Total consumer | 20,272 | 356 | 310 | 19,871 | 333 | 299 | ||||||||||||||||
Commercial | ||||||||||||||||||||||
Commercial and industrial | ||||||||||||||||||||||
Automotive | 7 | 46 | 46 | 3 | 4 | 4 | ||||||||||||||||
Other | 2 | 47 | 31 | 2 | 55 | 51 | ||||||||||||||||
Total commercial | 9 | 93 | 77 | 5 | 59 | 55 | ||||||||||||||||
Total consumer and commercial finance receivables and loans | 20,281 | $ | 449 | $ | 387 | 19,876 | $ | 392 | $ | 354 |
The following tables present information about finance receivables and loans recorded at gross carrying value that have redefaulted during the reporting period and were within twelve months or less of being modified as a TDR. Redefault is when finance receivables and loans meet the requirements for evaluation under our charge-off policy (refer to Note 1 to the Consolidated Financial Statements in our 2018 Annual Report on Form 10-K for additional information) except for commercial finance receivables and loans, where redefault is defined as 90 days past due.
2019 | 2018 | |||||||||||||||||||||
Three months ended September 30, ($ in millions) | Number of loans | Gross carrying value | Charge-off amount | Number of loans | Gross carrying value | Charge-off amount | ||||||||||||||||
Consumer automotive | 1,713 | $ | 18 | $ | 13 | 2,466 | $ | 27 | $ | 19 | ||||||||||||
Total consumer finance receivables and loans | 1,713 | $ | 18 | $ | 13 | 2,466 | $ | 27 | $ | 19 |
27
Notes to Condensed Consolidated Financial Statements (unaudited)
Ally Financial Inc. • Form 10-Q
2019 | 2018 | |||||||||||||||||||||
Nine months ended September 30, ($ in millions) | Number of loans | Gross carrying value | Charge-off amount | Number of loans | Gross carrying value | Charge-off amount | ||||||||||||||||
Consumer automotive | 5,674 | $ | 64 | $ | 41 | 7,217 | $ | 84 | $ | 54 | ||||||||||||
Consumer mortgage | ||||||||||||||||||||||
Mortgage — Legacy | — | — | — | 1 | — | — | ||||||||||||||||
Total consumer finance receivables and loans | 5,674 | $ | 64 | $ | 41 | 7,218 | $ | 84 | $ | 54 |
8. Leasing
On January 1, 2019, we adopted the amendments to the lease accounting principles. Refer to the section titled Recently Adopted Accounting Standards in Note 1 for additional information.
Ally as the Lessee
We have operating leases for our corporate facilities, which have remaining lease terms of 1 month to 13 years. Most of the property leases have fixed payment terms with annual fixed-escalation clauses and include options to extend the leases for periods that range from 1 to 15 years. Some of those lease agreements also include options to terminate the leases in periods that range from 2 to 6 years after the commencement of the leases. We have not included any of these term extensions or termination provisions in our estimates of the lease term, as we do not consider it reasonably certain that the options will be exercised. Our property-lease agreements contain a lease component, which includes the right to use the real estate, and non-lease components, which include utilities and common area maintenance services. Lease components are accounted for under the ASC Topic on Leases, while non-lease components are accounted for under other GAAP Topics. We elected the practical expedient to account for the lease and non-lease components for property leases as a single lease component. Additional variable-rent payments made during the lease term are not based on a rate or index and are excluded from the calculations of ROU assets and lease liabilities and recognized as a component of variable lease expense as incurred.
We also have operating leases for a fleet of vehicles that is used by our sales force for business purposes, with noncancellable lease terms of 367 days. Thereafter, the leases are month-to-month, up to a maximum of 48 months from inception. In addition to lease costs related to the vehicles, the lease contracts include non-lease components such as maintenance, fuel, and administrative services. We elected to account for the lease and non-lease components separately. As a result, the non-lease components are excluded from the calculation of the ROU asset and lease liability and are recognized as other operating expenses as incurred.
The following table details our total investment in operating leases.
($ in millions) | September 30, 2019 | January 1, 2019 (a) | ||||||
Assets | ||||||||
Operating lease right-of-use assets (b) | $ | 168 | $ | 161 | ||||
Liabilities | ||||||||
Operating lease liabilities (c) | $ | 195 | $ | 190 |
(a) | Date of adoption. |
(b) | Included in other assets on our Condensed Consolidated Balance Sheet. |
(c) | Included in accrued expenses and other liabilities on our Condensed Consolidated Balance Sheet. |
During the three months and nine months ended September 30, 2019, we paid $12 million and $37 million, respectively, in cash for amounts included in the measurement of lease liabilities at September 30, 2019. This amount is included in net cash provided by operating activities in the Condensed Consolidated Statement of Cash Flows. During the nine months ended September 30, 2019, we obtained $41 million of ROU assets in exchange for new operating lease liabilities. As of September 30, 2019, the weighted-average remaining lease term of our operating lease portfolio was 7 years, and the weighted-average discount rate was 2.93%.
28
Notes to Condensed Consolidated Financial Statements (unaudited)
Ally Financial Inc. • Form 10-Q
The following table presents future minimum rental payments we are required to make under operating leases that have commenced as of September 30, 2019, and that have noncancellable lease terms expiring after September 30, 2019.
($ in millions) | ||||
2019 | $ | 12 | ||
2020 | 49 | |||
2021 | 38 | |||
2022 | 26 | |||
2023 | 17 | |||
2024 and thereafter | 75 | |||
Total undiscounted cash flows | 217 | |||
Difference between undiscounted cash flows and discounted cash flows | (22 | ) | ||
Total lease liability | $ | 195 |
In addition to the above, we entered into a forward-starting lease agreement in September 2017, for a new corporate facility in Charlotte, North Carolina, where we plan to consolidate several existing facilities into that location. The lessor and their agents are currently constructing the facilities at this location, with the lease scheduled to commence in April 2021 after construction is completed. The lease agreement will have a total of $290 million in undiscounted future lease payments over the 15 year term of the lease.
Future minimum rental payments required under operating leases as of December 31, 2018, prior to the date of adoption and as defined by the previous lease accounting guidance, with noncancellable lease terms expiring after December 31, 2018, were as follows.
Year ended December 31, ($ in millions) | ||||
2019 | $ | 48 | ||
2020 | 47 | |||
2021 | 46 | |||
2022 | 37 | |||
2023 | 31 | |||
2024 and thereafter | 294 | |||
Total minimum payments required | $ | 503 |
The following table details the components of total net operating lease expense.
Three months ended September 30, | Nine months ended September 30, | |||||||||||||||
($ in millions) | 2019 | 2018 | 2019 | 2018 | ||||||||||||
Operating lease expense | $ | 11 | $ | 11 | $ | 34 | $ | 32 | ||||||||
Variable lease expense | 2 | 2 | 6 | 5 | ||||||||||||
Total lease expense, net (a) | $ | 13 | $ | 13 | $ | 40 | $ | 37 |
(a) Included in other operating expenses in our Condensed Consolidated Statement of Comprehensive Income
Ally as the Lessor
Investment in Operating Leases
We purchase consumer operating lease contracts and the associated vehicles from dealerships after those contracts are executed by the dealers and the consumers. The amount we pay a dealer for an operating lease contract is based on the negotiated price for the vehicle less vehicle trade-in, down payment from the consumer, and available automotive manufacturer incentives. Under the operating lease, the consumer is obligated to make payments in amounts equal to the amount by which the negotiated purchase price of the vehicle (less any trade-in value, down payment, or available manufacturer incentives) exceeds the contract residual value (including residual support) of the vehicle at lease termination, plus operating lease rental charges. The customer can terminate the lease at any point after commencement, subject to additional charges and fees. Both the consumer and the dealership have the option to purchase the vehicle at the end of the lease term, which can range from 24 to 60 months, at the residual value of the vehicle, however it is not reasonably certain this option will be exercised and as such our consumer leases are classified as operating leases. We have made an accounting policy election to exclude the sales taxes we collect from consideration in the lease contract and from variable lease payments not included in contract consideration. In addition to the charges described above, the consumer is generally responsible for certain charges related to excess mileage or excessive wear and tear on the vehicle. These charges are deemed variable lease payments and, as these payments are not based on a rate or index, they are recognized as net depreciation expense on operating lease assets in our Condensed Consolidated Statement of Comprehensive Income as incurred.
29
Notes to Condensed Consolidated Financial Statements (unaudited)
Ally Financial Inc. • Form 10-Q
When we acquire a consumer operating lease, we assume ownership of the vehicle from the dealer. We require that property damage, bodily injury, collision, and comprehensive insurance be obtained by the lessee on all consumer operating leases. Neither the consumer nor the dealer is responsible for the value of the vehicle at the time of lease termination. When vehicles are not purchased by customers or the receiving dealer at scheduled lease termination, the vehicle is returned to us for remarketing. We generally bear the risk of loss to the extent the value of a leased vehicle upon remarketing is below the expected residual value. At contract inception, we determine pricing based on the projected residual value of the leased vehicle. This evaluation is primarily based on a proprietary model, which includes variables such as age, expected mileage, seasonality, segment factors, vehicle type, economic indicators, production cycle, automotive manufacturer incentives, and shifts in used-vehicle supply. This internally-generated data is compared against third-party, independent data for reasonableness. Periodically, we revise the projected value of the leased vehicle at termination based on current market conditions and adjust depreciation expense if necessary over the remaining life of the contract. At termination, our actual sales proceeds from remarketing the vehicle may be higher or lower than the estimated residual value resulting in a gain or loss on remarketing, which is included in net depreciation expense on operating lease assets in our Condensed Consolidated Statement of Comprehensive Income. Excessive mileage or excessive wear and tear on the vehicle during the lease may impact the sales proceeds received upon remarketing. As of September 30, 2019, consumer operating leases with a carrying value, net of accumulated depreciation, of $354 million were covered by a residual value guarantee of 15% of the manufacturer’s suggested retail price.
The following table details our investment in operating leases.
($ in millions) | September 30, 2019 | December 31, 2018 | ||||||
Vehicles | $ | 10,197 | $ | 9,995 | ||||
Accumulated depreciation | (1,544 | ) | (1,578 | ) | ||||
Investment in operating leases, net | $ | 8,653 | $ | 8,417 |
The following table presents future minimum rental payments we have the right to receive under operating leases with noncancellable lease terms expiring after September 30, 2019.
($ in millions) | ||||
2019 | $ | 387 | ||
2020 | 1,211 | |||
2021 | 696 | |||
2022 | 251 | |||
2023 | 44 | |||
2024 and thereafter | 3 | |||
Total lease payments from operating leases | $ | 2,592 |
We recognized $368 million and $1.1 billion in operating lease revenue for both the three months and nine months ended September 30, 2019, and 2018, respectively. Depreciation expense on operating lease assets includes remarketing gains and losses recognized on the sale of operating lease assets. The following table summarizes the components of depreciation expense on operating lease assets.
Three months ended September 30, | Nine months ended September 30, | |||||||||||||||
($ in millions) | 2019 | 2018 | 2019 | 2018 | ||||||||||||
Depreciation expense on operating lease assets (excluding remarketing gains) (a) | $ | 262 | $ | 274 | $ | 785 | $ | 846 | ||||||||
Remarketing gains, net | (28 | ) | (27 | ) | (66 | ) | (61 | ) | ||||||||
Net depreciation expense on operating lease assets | $ | 234 | $ | 247 | $ | 719 | $ | 785 |
(a) Includes variable lease payments related to excess mileage and excessive wear and tear on vehicles of $5 million and $14 million during the three months and nine months ended September 30, 2019, respectively, and $6 million and $19 million during the three months and nine months ended September 30, 2018.
30
Notes to Condensed Consolidated Financial Statements (unaudited)
Ally Financial Inc. • Form 10-Q
Finance Leases
Our total gross investment in finance leases, which is included in finance receivables and loans, net, on our Condensed Consolidated Balance Sheet was $494 million and $439 million as of September 30, 2019, and December 31, 2018, respectively. This includes lease payment receivables of $481 million and $425 million at September 30, 2019, and December 31, 2018, respectively, and unguaranteed residual assets of $13 million and $14 million at September 30, 2019, and December 31, 2018, respectively. Interest income on finance lease receivables was $7 million and $19 million for the three months and nine months ended September 30, 2019, respectively, and $5 million and $16 million for the three months and nine months ended September 30, 2018, and is included in interest and fees on finance receivables and loans in our Condensed Consolidated Statement of Comprehensive Income.
The following table presents future minimum rental payments we have the right to receive under finance leases with noncancellable lease terms expiring after September 30, 2019.
($ in millions) | ||||
2019 | $ | 43 | ||
2020 | 168 | |||
2021 | 144 | |||
2022 | 87 | |||
2023 | 53 | |||
2024 and thereafter | 41 | |||
Total undiscounted cash flows | 536 | |||
Difference between undiscounted cash flows and discounted cash flows | (55 | ) | ||
Present value of lease payments recorded as lease receivable | $ | 481 |
9. Securitizations and Variable Interest Entities
We securitize, transfer, and service consumer and commercial automotive loans, and operating leases. We often securitize these loans and notes secured by operating leases (collectively referred to as financial assets) using special purpose entities (SPEs). An SPE is a legal entity that is designed to fulfill a specified limited need of the sponsor. Our principal use of SPEs is to obtain liquidity by securitizing certain of our financial assets. SPEs are often variable interest entities (VIEs) and may or may not be included on our Condensed Consolidated Balance Sheet.
VIEs are legal entities that either have an insufficient amount of equity at risk for the entity to finance its activities without additional subordinated financial support or, as a group, the holders of the equity investment at risk lack the ability to control the entity’s activities that most significantly impact economic performance through voting or similar rights, or do not have the obligation to absorb the expected losses or the right to receive expected residual returns of the entity.
The VIEs included on the Condensed Consolidated Balance Sheet represent SPEs where we are deemed to be the primary beneficiary, primarily due to our servicing activities and our beneficial interests in the VIE that could be potentially significant.
The nature, purpose, and activities of nonconsolidated SPEs are similar to those of our consolidated SPEs with the primary difference being the nature and extent of our continuing involvement. For nonconsolidated SPEs, 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 or retained interests (if applicable). Liabilities incurred as part of these securitizations, 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. With respect to our ongoing right to service the assets we sell, the servicing fee we receive represents adequate compensation, and consequently, we do not recognize a servicing asset or liability.
There were no sales of financial assets into nonconsolidated VIEs for both the three months and nine months ended September 30, 2019. We had a pretax gain on sales of financial assets into nonconsolidated VIEs of $1 million for both the three months and nine months ended September 30, 2018.
We provide long-term guarantee contracts to investors in certain nonconsolidated affordable housing entities and have extended a line of credit to provide liquidity. Since we do not have control over the entities or the power to make decisions, we do not consolidate the entities and our involvement is limited to the guarantee and the line of credit.
We are involved with various other nonconsolidated equity investments, including affordable housing entities and venture capital funds and loan funds. We do not consolidate these entities and our involvement is limited to our outstanding investment, additional capital committed to these funds plus any previously recognized low income housing tax credits that are subject to recapture.
Refer to Note 1 and Note 11 to the Consolidated Financial Statements in our 2018 Annual Report on Form 10-K for further description of our securitization activities and our involvement with VIEs.
31
Notes to Condensed Consolidated Financial Statements (unaudited)
Ally Financial Inc. • Form 10-Q
The following table presents our involvement in consolidated and nonconsolidated VIEs in which we hold variable interests. For additional detail related to the assets and liabilities of consolidated variable interest entities refer to the Condensed Consolidated Balance Sheet.
($ in millions) | Carrying value of total assets | Carrying value of total liabilities | Assets sold to nonconsolidated VIEs (a) | Maximum exposure to loss in nonconsolidated VIEs | |||||||||||||
September 30, 2019 | |||||||||||||||||
On-balance sheet variable interest entities | |||||||||||||||||
Consumer automotive (b) | $ | 18,374 | (c) | $ | 5,892 | (d) | |||||||||||
Commercial automotive | 8,846 | 3,048 | |||||||||||||||
Off-balance sheet variable interest entities | |||||||||||||||||
Consumer automotive (b) | 27 | (e) | — | $ | 561 | $ | 588 | (f) | |||||||||
Commercial other | 993 | (g) | 356 | (h) | — | 1,259 | (i) | ||||||||||
Total | $ | 28,240 | $ | 9,296 | $ | 561 | $ | 1,847 | |||||||||
December 31, 2018 | |||||||||||||||||
On-balance sheet variable interest entities | |||||||||||||||||
Consumer automotive | $ | 16,255 | (c) | $ | 6,573 | (d) | |||||||||||
Commercial automotive | 11,089 | 3,946 | |||||||||||||||
Off-balance sheet variable interest entities | |||||||||||||||||
Consumer automotive | 45 | (e) | — | $ | 1,235 | $ | 1,280 | (f) | |||||||||
Commercial other | 806 | (g) | 326 | (h) | — | 1,054 | (i) | ||||||||||
Total | $ | 28,195 | $ | 10,845 | $ | 1,235 | $ | 2,334 |
(a) | Asset values represent the current unpaid principal balance of outstanding consumer finance receivables and loans within the VIEs. |
(b) | During the three months ended September 30, 2019, we indicated our intent to exercise clean-up call options related to a nonconsolidated securitization-related VIE. The option enables us to repurchase the remaining transferred financial assets at our discretion once the asset pool declines to a predefined level and redeem the related outstanding debt. As a result of this event, we became the primary beneficiary of the VIE, which included $96 million of consumer automotive loans and $93 million of related debt, and the VIE was consolidated on our Condensed Consolidated Balance Sheet. The related amounts were removed from assets sold to nonconsolidated VIEs and maximum exposure to loss in nonconsolidated VIEs. |
(c) | Includes $8.8 billion and $8.4 billion of assets that were not encumbered by VIE beneficial interests held by third parties at September 30, 2019, and December 31, 2018, respectively. Ally or consolidated affiliates hold the interests in these assets. |
(d) | Includes $21 million and $25 million of liabilities that were not obligations to third-party beneficial interest holders at September 30, 2019, and December 31, 2018, respectively. |
(e) | Represents retained notes and certificated residual interests, of which $25 million and $43 million were classified as held-to-maturity securities at September 30, 2019, and December 31, 2018, respectively, and $2 million were classified as other assets at both September 30, 2019, and December 31, 2018. These assets represent our five percent interest in the credit risk of the assets underlying asset-backed securitizations. |
(f) | Maximum exposure to loss represents the current unpaid principal balance of outstanding loans, retained notes, certificated residual interests, as well as certain noncertificated interests retained from the sale of automotive finance receivables. This measure is based on the very unlikely event that all of our sold loans have defects that would trigger a representation and warranty provision and the underlying collateral supporting the loans becomes worthless. This required disclosure is not an indication of our expected loss. |
(g) | Amounts are classified as other assets. |
(h) | Amounts are classified as accrued expenses and other liabilities. |
(i) | For certain nonconsolidated affordable housing entities, maximum exposure to loss represents the yield we guaranteed investors through long-term guarantee contracts. The amount disclosed is based on the unlikely event that the underlying properties cease generating yield to investors and the yield delivered to investors in the form of low income tax housing credits is recaptured. For nonconsolidated equity investments, maximum exposure to loss represents our outstanding investment, additional committed capital, and low income housing tax credits subject to recapture. The amount disclosed is based on the unlikely event that our committed capital is funded, our investments become worthless, and the tax credits previously delivered to us are recaptured. This required disclosure is not an indication of our expected loss. |
32
Notes to Condensed Consolidated Financial Statements (unaudited)
Ally Financial Inc. • Form 10-Q
Cash Flows with Off-balance Sheet Securitization Entities
The following table summarizes cash flows received and paid related to SPEs and asset-backed financings where the transfer is accounted for as a sale and we have a continuing involvement with the transferred consumer automotive assets (e.g., servicing) that were outstanding during the nine months ended September 30, 2019, and 2018. Additionally, this table contains information regarding cash flows received from and paid to nonconsolidated SPEs that existed during each period.
Nine months ended September 30, ($ in millions) | Consumer automotive | Consumer mortgage | ||||||
2019 | ||||||||
Cash flows received on retained interests in securitization entities | $ | 18 | $ | — | ||||
Servicing fees | 8 | — | ||||||
Cash disbursements for repurchases during the period | (2 | ) | — | |||||
2018 | ||||||||
Cash proceeds from transfers completed during the period | $ | 24 | $ | — | ||||
Cash flows received on retained interests in securitization entities | 13 | — | ||||||
Servicing fees | 14 | — | ||||||
Cash disbursements for repurchases during the period | (3 | ) | — | |||||
Representations and warranty recoveries | — | 2 |
Delinquencies and Net Credit Losses
The following tables present quantitative information about delinquencies and net credit losses for off-balance sheet securitizations and whole-loan sales where we have continuing involvement.
Total amount | Amount 60 days or more past due | ||||||||||||||
($ in millions) | September 30, 2019 | December 31, 2018 | September 30, 2019 | December 31, 2018 | |||||||||||
Off-balance sheet securitization entities | |||||||||||||||
Consumer automotive | $ | 561 | $ | 1,235 | $ | 7 | $ | 13 | |||||||
Whole-loan sales (a) | |||||||||||||||
Consumer automotive | 297 | 634 | 2 | 3 | |||||||||||
Total | $ | 858 | $ | 1,869 | $ | 9 | $ | 16 |
(a) | Whole-loan sales are not part of a securitization transaction, but represent consumer automotive pools of loans sold to third-party investors. |
Net credit losses | ||||||||||||||||
Three months ended September 30, | Nine months ended September 30, | |||||||||||||||
($ in millions) | 2019 | 2018 | 2019 | 2018 | ||||||||||||
Off-balance sheet securitization entities | ||||||||||||||||
Consumer automotive | $ | 1 | $ | 2 | $ | 5 | $ | 7 | ||||||||
Whole-loan sales (a) | ||||||||||||||||
Consumer automotive | — | 1 | 1 | 2 | ||||||||||||
Total | $ | 1 | $ | 3 | $ | 6 | $ | 9 |
(a) | Whole-loan sales are not part of a securitization transaction, but represent consumer automotive pools of loans sold to third-party investors. |
33
Notes to Condensed Consolidated Financial Statements (unaudited)
Ally Financial Inc. • Form 10-Q
10. Other Assets
The components of other assets were as follows.
($ in millions) | September 30, 2019 | December 31, 2018 | ||||||
Property and equipment at cost | $ | 1,294 | $ | 1,250 | ||||
Accumulated depreciation | (662 | ) | (686 | ) | ||||
Net property and equipment | 632 | 564 | ||||||
Nonmarketable equity investments (a) | 1,243 | 1,410 | ||||||
Investment in qualified affordable housing projects (b) | 784 | 649 | ||||||
Restricted cash held for securitization trusts (c) | 666 | 965 | ||||||
Accrued interest, fees, and rent receivables | 594 | 599 | ||||||
Equity-method investments (d) | 322 | 262 | ||||||
Goodwill (e) | 240 | 240 | ||||||
Other accounts receivable | 118 | 203 | ||||||
Fair value of derivative contracts in receivable position (f) | 94 | 41 | ||||||
Restricted cash and cash equivalents (g) | 88 | 124 | ||||||
Net deferred tax assets | 75 | 317 | ||||||
Cash collateral placed with counterparties | 6 | 26 | ||||||
Other assets | 928 | 753 | ||||||
Total other assets | $ | 5,790 | $ | 6,153 |
(a) | Includes investments in FHLB stock of $711 million and $903 million at September 30, 2019, and December 31, 2018, respectively; Federal Reserve Bank (FRB) stock of $449 million and $448 million at September 30, 2019, and December 31, 2018, respectively; and equity securities without a readily determinable fair value of $83 million and $59 million at September 30, 2019, and December 31, 2018, respectively, measured at cost with adjustments for impairment and observable changes in price. During the three months and nine months ended September 30, 2019, we recorded $2 million and $9 million, respectively, of upward adjustments related to equity securities without a readily determinable fair value. Through September 30, 2019, we recorded $9 million of cumulative upward adjustments and $3 million of cumulative impairments and downward adjustments related to equity securities without a readily determinable fair value. |
(b) | Investment in qualified affordable housing projects are accounted for using the proportional amortization method of accounting and include $350 million and $319 million of unfunded commitments to provide additional capital contributions to investees at September 30, 2019, and December 31, 2018, respectively. Substantially all of the unfunded commitments at September 30, 2019, are expected to be paid out over the next five years. |
(c) | Includes restricted cash collected from customer payments on securitized receivables, which are distributed by us to investors as payments on the related secured debt, and cash reserve deposits utilized as a form of credit enhancement for various securitization transactions. |
(d) | Primarily relates to investments made in connection with our Community Reinvestment Act (CRA) program. |
(e) | Includes goodwill of $27 million within our Insurance operations at both September 30, 2019, and December 31, 2018; $193 million within Corporate and Other at both September 30, 2019, and December 31, 2018; and $20 million within Automotive Finance operations at both September 30, 2019, and December 31, 2018. No changes to the carrying amount of goodwill were recorded during the nine months ended September 30, 2019. |
(f) | For additional information on derivative instruments and hedging activities, refer to Note 17. |
(g) | Primarily represents a number of arrangements with third parties where certain restrictions are placed on balances we hold due to collateral agreements associated with operational processes with a third-party bank, or letter of credit arrangements and corresponding collateral requirements. |
11. Deposit Liabilities
Deposit liabilities consisted of the following.
($ in millions) | September 30, 2019 | December 31, 2018 | ||||||
Noninterest-bearing deposits | $ | 156 | $ | 142 | ||||
Interest-bearing deposits | ||||||||
Savings and money-market checking accounts | 61,285 | 56,050 | ||||||
Certificates of deposit | 57,788 | 49,985 | ||||||
Other deposits | 1 | 1 | ||||||
Total deposit liabilities | $ | 119,230 | $ | 106,178 |
At September 30, 2019, and December 31, 2018, certificates of deposit included $24.8 billion and $21.0 billion, respectively, of those in denominations of $100 thousand or more. At September 30, 2019, and December 31, 2018, certificates of deposit included $7.5 billion and $6.1 billion, respectively, of those in denominations in excess of $250 thousand federal insurance limits.
34
Notes to Condensed Consolidated Financial Statements (unaudited)
Ally Financial Inc. • Form 10-Q
12. Debt
Short-term Borrowings
The following table presents the composition of our short-term borrowings portfolio.
September 30, 2019 | December 31, 2018 | |||||||||||||||||||||||
($ in millions) | Unsecured | Secured (a) | Total | Unsecured | Secured (a) | Total | ||||||||||||||||||
Demand notes | $ | 2,501 | $ | — | $ | 2,501 | $ | 2,477 | $ | — | $ | 2,477 | ||||||||||||
Federal Home Loan Bank | — | 2,375 | 2,375 | — | 6,825 | 6,825 | ||||||||||||||||||
Securities sold under agreements to repurchase | — | 459 | 459 | — | 685 | 685 | ||||||||||||||||||
Total short-term borrowings | $ | 2,501 | $ | 2,834 | $ | 5,335 | $ | 2,477 | $ | 7,510 | $ | 9,987 |
(a) | Refer to the section below titled Long-term Debt for further details on assets restricted as collateral for payment of the related debt. |
We periodically enter into term repurchase agreements—short-term borrowing agreements in which we sell securities to one or more investors while simultaneously committing to repurchase them at a specified future date, at the stated price plus accrued interest. As of September 30, 2019, the securities sold under agreements to repurchase consisted of $459 million of agency mortgage-backed residential debt securities set to mature as follows: $145 million within 30 days, $170 million within 31 to 60 days, and $144 million within 61 to 90 days. Refer to Note 6 and Note 20 for further details.
The primary risk associated with these repurchase agreements is that the counterparty will be unable to perform under the terms of the contract. As the borrower, we are exposed to the excess market value of the securities pledged over the amount borrowed. Daily mark-to-market collateral management is designed to limit this risk to the initial margin. However, should a counterparty declare bankruptcy or become insolvent, we may incur additional delays and costs. In some instances, we may place or receive cash collateral with counterparties under collateral arrangements associated with our repurchase agreements. At September 30, 2019, we placed cash collateral totaling $6 million and did not receive cash or noncash collateral. At December 31, 2018, we did not place any collateral, and we received cash collateral totaling $8 million and noncash collateral totaling $4 million.
Long-term Debt
The following table presents the composition of our long-term debt portfolio.
September 30, 2019 | December 31, 2018 | |||||||||||||||||||||||
($ in millions) | Unsecured | Secured | Total | Unsecured | Secured | Total | ||||||||||||||||||
Long-term debt (a) | ||||||||||||||||||||||||
Due within one year | $ | 3,044 | $ | 6,876 | $ | 9,920 | $ | 1,663 | $ | 7,313 | $ | 8,976 | ||||||||||||
Due after one year | 9,049 | 16,761 | 25,810 | 10,444 | 24,773 | 35,217 | ||||||||||||||||||
Total long-term debt (b) (c) | $ | 12,093 | $ | 23,637 | $ | 35,730 | $ | 12,107 | $ | 32,086 | $ | 44,193 |
(a) | Includes basis adjustments related to the application of hedge accounting. |
(b) | Includes $2.6 billion of trust preferred securities at both September 30, 2019, and December 31, 2018. |
(c) | Includes advances net of hedge basis adjustment from the FHLB of Pittsburgh of $14.0 billion and $14.9 billion at September 30, 2019, and December 31, 2018, respectively. |
The following table presents the scheduled remaining maturity of long-term debt at September 30, 2019, assuming no early redemptions will occur. The amounts below include adjustments to the carrying value resulting from the application of hedge accounting. The actual payment of secured debt may vary based on the payment activity of the related pledged assets.
($ in millions) | 2019 | 2020 | 2021 | 2022 | 2023 | 2024 and thereafter | Total | |||||||||||||||||||||
Unsecured | ||||||||||||||||||||||||||||
Long-term debt | $ | 834 | $ | 2,258 | $ | 699 | $ | 1,095 | $ | 15 | $ | 8,303 | $ | 13,204 | ||||||||||||||
Original issue discount | (11 | ) | (43 | ) | (48 | ) | (52 | ) | (59 | ) | (898 | ) | (1,111 | ) | ||||||||||||||
Total unsecured | 823 | 2,215 | 651 | 1,043 | (44 | ) | 7,405 | 12,093 | ||||||||||||||||||||
Secured | ||||||||||||||||||||||||||||
Long-term debt | 1,486 | 6,695 | 9,342 | 5,417 | 539 | 158 | 23,637 | |||||||||||||||||||||
Total long-term debt | $ | 2,309 | $ | 8,910 | $ | 9,993 | $ | 6,460 | $ | 495 | $ | 7,563 | $ | 35,730 |
35
Notes to Condensed Consolidated Financial Statements (unaudited)
Ally Financial Inc. • Form 10-Q
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.
September 30, 2019 | December 31, 2018 | |||||||||||||||
($ in millions) | Total (a) | Ally Bank | Total (a) | Ally Bank | ||||||||||||
Investment securities (b) | $ | 3,386 | $ | 3,386 | $ | 10,280 | $ | 9,564 | ||||||||
Mortgage assets held-for-investment and lending receivables | 16,820 | 16,820 | 16,498 | 16,498 | ||||||||||||
Consumer automotive finance receivables | 12,130 | 9,516 | 17,015 | 9,715 | ||||||||||||
Commercial automotive finance receivables | 13,759 | 13,759 | 15,563 | 15,563 | ||||||||||||
Operating leases | 67 | — | 170 | — | ||||||||||||
Total assets restricted as collateral (c) (d) | $ | 46,162 | $ | 43,481 | $ | 59,526 | $ | 51,340 | ||||||||
Secured debt | $ | 26,471 | (e) | $ | 24,138 | $ | 39,596 | (e) | $ | 32,072 |
(a) | Ally Bank is a component of the total column. |
(b) | A portion of the restricted investment securities at September 30, 2019, and December 31, 2018, were restricted under repurchase agreements. Refer to the section above titled Short-term Borrowings for information on the repurchase agreements. |
(c) | Ally Bank has an advance agreement with the FHLB, and had assets pledged to secure borrowings that were restricted as collateral to the FHLB totaling $24.7 billion and $30.8 billion at September 30, 2019, and December 31, 2018, respectively. These assets were composed primarily of consumer mortgage finance receivables and loans and investment securities. Ally Bank has access to the FRB Discount Window and had assets pledged and restricted as collateral to the FRB totaling $2.4 billion at both September 30, 2019, and December 31, 2018. These assets were composed of consumer automotive finance receivables and loans. Availability under these programs is only for the operations of Ally Bank and cannot be used to fund the operations or liabilities of Ally or its subsidiaries. |
(d) | Excludes restricted cash and cash reserves for securitization trusts recorded within other assets on the Condensed Consolidated Balance Sheet. Refer to Note 10 for additional information. |
(e) | Includes $2.8 billion and $7.5 billion of short-term borrowings at September 30, 2019, and December 31, 2018, respectively. |
Trust Preferred Securities
At both September 30, 2019, and December 31, 2018, we had issued and outstanding approximately $2.6 billion in aggregate liquidation preference of 8.125% Fixed Rate/Floating Rate Trust Preferred Securities, Series 2 (Series 2 TRUPS). 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 equal to three-month London interbank offered rate plus 5.785% payable quarterly in arrears. 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. Ally at any time may redeem the Series 2 TRUPS at a redemption price equal to 100% of the principal amount being redeemed, plus accrued and unpaid interest through the date of redemption. 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. The Series 2 TRUPS were issued prior to October 4, 2010, under the Emergency Economic Stabilization Act of 2008 and are not subject to phase-out from additional Tier 1 capital into Tier 2 capital. The amount of Series 2 TRUPS included in Ally’s Tier 1 capital was $2.5 billion at September 30, 2019. The amount represents the carrying amount of the Series 2 TRUPS less our common stock investment in the trust.
Funding Facilities
We utilize both committed secured credit facilities and other collateralized funding vehicles. The debt outstanding under our various funding facilities is included on our Condensed Consolidated Balance Sheet.
The total capacity in our credit facilities is provided by banks through private transactions. The facilities can be revolving in nature, generally having an original tenor ranging from 364 days to two years, and allow for additional funding during the commitment period, or they can be amortizing and not allow for any further funding after the commitment period. At September 30, 2019, all of our $2.7 billion of capacity was revolving and of this balance, $1.7 billion was from facilities with a remaining tenor greater than 364 days.
36
Notes to Condensed Consolidated Financial Statements (unaudited)
Ally Financial Inc. • Form 10-Q
Committed Secured Credit Facilities
Outstanding | Unused capacity (a) | Total capacity | ||||||||||||||||||||||
($ in millions) | September 30, 2019 | December 31, 2018 | September 30, 2019 | December 31, 2018 | September 30, 2019 | December 31, 2018 | ||||||||||||||||||
Bank funding | ||||||||||||||||||||||||
Secured | $ | — | $ | 3,500 | $ | — | $ | 1,300 | $ | — | $ | 4,800 | ||||||||||||
Parent funding | ||||||||||||||||||||||||
Secured | 700 | 3,165 | 1,950 | 635 | 2,650 | 3,800 | ||||||||||||||||||
Total committed secured credit facilities | $ | 700 | $ | 6,665 | $ | 1,950 | $ | 1,935 | $ | 2,650 | $ | 8,600 |
(a) | Funding from committed secured credit facilities is available on request in the event excess collateral resides in certain facilities or the extent incremental collateral is available and contributed to the facilities. |
13. Accrued Expenses and Other Liabilities
The components of accrued expenses and other liabilities were as follows.
($ in millions) | September 30, 2019 | December 31, 2018 | ||||||
Accounts payable | $ | 1,231 | $ | 516 | ||||
Unfunded commitments for investment in qualified affordable housing projects | 350 | 319 | ||||||
Employee compensation and benefits | 255 | 255 | ||||||
Reserves for insurance losses and loss adjustment expenses | 135 | 134 | ||||||
Cash collateral received from counterparties | 61 | 41 | ||||||
Deferred revenue | 26 | 27 | ||||||
Fair value of derivative contracts in payable position (a) | 3 | 37 | ||||||
Other liabilities | 539 | 347 | ||||||
Total accrued expenses and other liabilities | $ | 2,600 | $ | 1,676 |
(a) | For additional information on derivative instruments and hedging activities, refer to Note 17. |
37
Notes to Condensed Consolidated Financial Statements (unaudited)
Ally Financial Inc. • Form 10-Q
14. Accumulated Other Comprehensive (Loss) Income
The following table presents changes, net of tax, in each component of accumulated other comprehensive (loss) income.
Three months ended September 30, | |||||||||||||||||||
($ in millions) | Unrealized (losses) gains on investment securities (a) | Translation adjustments and net investment hedges (b) | Cash flow hedges (b) | Defined benefit pension plans | Accumulated other comprehensive (loss) income | ||||||||||||||
Balance at July 1, 2018 | $ | (598 | ) | $ | 19 | $ | 28 | $ | (97 | ) | $ | (648 | ) | ||||||
Net change | (133 | ) | — | — | — | (133 | ) | ||||||||||||
Balance at September 30, 2018 | $ | (731 | ) | $ | 19 | $ | 28 | $ | (97 | ) | $ | (781 | ) | ||||||
Balance at July 1, 2019 | $ | 133 | $ | 19 | $ | 28 | $ | (96 | ) | $ | 84 | ||||||||
Net change | 105 | — | 1 | — | 106 | ||||||||||||||
Balance at September 30, 2019 | $ | 238 | $ | 19 | $ | 29 | $ | (96 | ) | $ | 190 |
Nine months ended September 30, | |||||||||||||||||||
($ in millions) | Unrealized (losses) gains on investment securities (a) | Translation adjustments and net investment hedges (b) | Cash flow hedges (b) | Defined benefit pension plans | Accumulated other comprehensive (loss) income | ||||||||||||||
Balance at December 31, 2017 | $ | (173 | ) | $ | 16 | $ | 11 | $ | (89 | ) | $ | (235 | ) | ||||||
Cumulative effect of changes in accounting principles, net of tax | |||||||||||||||||||
Adoption of Accounting Standards Update 2016-01 | 27 | — | — | — | 27 | ||||||||||||||
Adoption of Accounting Standards Update 2018-02 | (40 | ) | 4 | — | (6 | ) | (42 | ) | |||||||||||
Balance at January 1, 2018 | (186 | ) | 20 | 11 | (95 | ) | (250 | ) | |||||||||||
Net change | (545 | ) | (1 | ) | 17 | (2 | ) | (531 | ) | ||||||||||
Balance at September 30, 2018 | $ | (731 | ) | $ | 19 | $ | 28 | $ | (97 | ) | $ | (781 | ) | ||||||
Balance at December 31, 2018 | $ | (481 | ) | $ | 18 | $ | 19 | $ | (95 | ) | $ | (539 | ) | ||||||
Cumulative effect of changes in accounting principles, net of tax (c) | |||||||||||||||||||
Adoption of Accounting Standards Update 2017-08 | 8 | — | — | — | 8 | ||||||||||||||
Balance at January 1, 2019 | (473 | ) | 18 | 19 | (95 | ) | (531 | ) | |||||||||||
Net change | 711 | 1 | 10 | (1 | ) | 721 | |||||||||||||
Balance at September 30, 2019 | $ | 238 | $ | 19 | $ | 29 | $ | (96 | ) | $ | 190 |
(a) | Represents the after-tax difference between the fair value and amortized cost of our available-for-sale securities portfolio. |
(b) | For additional information on derivative instruments and hedging activities, refer to Note 17. |
(c) | Refer to the section titled Recently Adopted Accounting Standards in Note 1 for additional information. |
38
Notes to Condensed Consolidated Financial Statements (unaudited)
Ally Financial Inc. • Form 10-Q
The following tables present the before- and after-tax changes in each component of accumulated other comprehensive income (loss).
Three months ended September 30, 2019 ($ in millions) | Before tax | Tax effect | After tax | ||||||||
Investment securities | |||||||||||
Net unrealized gains arising during the period | $ | 165 | $ | (39 | ) | $ | 126 | ||||
Less: Net realized gains reclassified to income from continuing operations | 27 | (a) | (6 | ) | (b) | 21 | |||||
Net change | 138 | (33 | ) | 105 | |||||||
Translation adjustments | |||||||||||
Net unrealized losses arising during the period | (2 | ) | 1 | (1 | ) | ||||||
Net investment hedges (c) | |||||||||||
Net unrealized gains arising during the period | 2 | (1 | ) | 1 | |||||||
Cash flow hedges (c) | |||||||||||
Net unrealized gains arising during the period | 5 | (1 | ) | 4 | |||||||
Less: Net realized gains reclassified to income from continuing operations | 3 | — | 3 | ||||||||
Net change | 2 | (1 | ) | 1 | |||||||
Other comprehensive income | $ | 140 | $ | (34 | ) | $ | 106 |
(a) | Includes gains reclassified to other gain on investments, net in our Condensed Consolidated Statement of Comprehensive Income. |
(b) | Includes amounts reclassified to income tax expense from continuing operations in our Condensed Consolidated Statement of Comprehensive Income. |
(c) | For additional information on derivative instruments and hedging activities, refer to Note 17. |
Three months ended September 30, 2018 ($ in millions) | Before tax | Tax effect | After tax | ||||||||
Investment securities | |||||||||||
Net unrealized losses arising during the period | $ | (174 | ) | $ | 41 | $ | (133 | ) | |||
Less: Net realized gains reclassified to income from continuing operations | 1 | (a) | (1 | ) | (b) | — | |||||
Net change | (175 | ) | 42 | (133 | ) | ||||||
Translation adjustments | |||||||||||
Net unrealized gains arising during the period | 2 | (1 | ) | 1 | |||||||
Net investment hedges (c) | |||||||||||
Net unrealized losses arising during the period | (2 | ) | 1 | (1 | ) | ||||||
Cash flow hedges (c) | |||||||||||
Net unrealized losses arising during the period | (1 | ) | 1 | — | |||||||
Other comprehensive loss | $ | (176 | ) | $ | 43 | $ | (133 | ) |
(a) | Includes gains reclassified to other gain on investments, net in our Condensed Consolidated Statement of Comprehensive Income. |
(b) | Includes amounts reclassified to income tax expense from continuing operations in our Condensed Consolidated Statement of Comprehensive Income. |
(c) | For additional information on derivative instruments and hedging activities, refer to Note 17. |
39
Notes to Condensed Consolidated Financial Statements (unaudited)
Ally Financial Inc. • Form 10-Q
Nine months ended September 30, 2019 ($ in millions) | Before tax | Tax effect | After tax | ||||||||
Investment securities | |||||||||||
Net unrealized gains arising during the period | $ | 990 | $ | (233 | ) | $ | 757 | ||||
Less: Net realized gains reclassified to income from continuing operations | 60 | (a) | (14 | ) | (b) | 46 | |||||
Net change | 930 | (219 | ) | 711 | |||||||
Translation adjustments | |||||||||||
Net unrealized gains arising during the period | 4 | (1 | ) | 3 | |||||||
Net investment hedges (c) | |||||||||||
Net unrealized losses arising during the period | (3 | ) | 1 | (2 | ) | ||||||
Cash flow hedges (c) | |||||||||||
Net unrealized gains arising during the period | 26 | (6 | ) | 20 | |||||||
Less: Net realized gains reclassified to income from continuing operations | 12 | (2 | ) | 10 | |||||||
Net change | 14 | (4 | ) | 10 | |||||||
Defined benefit pension plans | |||||||||||
Net unrealized losses arising during the period | (1 | ) | — | (1 | ) | ||||||
Other comprehensive income | $ | 944 | $ | (223 | ) | $ | 721 |
(a) | Includes gains reclassified to other gain on investments, net in our Condensed Consolidated Statement of Comprehensive Income. |
(b) | Includes amounts reclassified to income tax expense from continuing operations in our Condensed Consolidated Statement of Comprehensive Income. |
(c) | For additional information on derivative instruments and hedging activities, refer to Note 17. |
Nine months ended September 30, 2018 ($ in millions) | Before tax | Tax effect | After tax | ||||||||
Investment securities | |||||||||||
Net unrealized losses arising during the period | $ | (705 | ) | $ | 166 | $ | (539 | ) | |||
Less: Net realized gains reclassified to income from continuing operations | 8 | (a) | (2 | ) | (b) | 6 | |||||
Net change | (713 | ) | 168 | (545 | ) | ||||||
Translation adjustments | |||||||||||
Net unrealized losses arising during the period | (6 | ) | 1 | (5 | ) | ||||||
Net investment hedges (c) | |||||||||||
Net unrealized gains arising during the period | 5 | (1 | ) | 4 | |||||||
Cash flow hedges (c) | |||||||||||
Net unrealized gains arising during the period | 22 | (5 | ) | 17 | |||||||
Defined benefit pension plans | |||||||||||
Net unrealized losses arising during the period | (2 | ) | — | (2 | ) | ||||||
Other comprehensive loss | $ | (694 | ) | $ | 163 | $ | (531 | ) |
(a) | Includes gains reclassified to other gain on investments, net in our Condensed Consolidated Statement of Comprehensive Income. |
(b) | Includes amounts reclassified to income tax expense from continuing operations in our Condensed Consolidated Statement of Comprehensive Income. |
(c) | For additional information on derivative instruments and hedging activities, refer to Note 17. |
40
Notes to Condensed Consolidated Financial Statements (unaudited)
Ally Financial Inc. • Form 10-Q
15. Earnings per Common Share
The following table presents the calculation of basic and diluted earnings per common share.
Three months ended September 30, | Nine months ended September 30, | |||||||||||||||
($ in millions, except per share data; shares in thousands) (a) | 2019 | 2018 | 2019 | 2018 | ||||||||||||
Net income from continuing operations attributable to common stockholders | $ | 381 | $ | 374 | $ | 1,340 | $ | 974 | ||||||||
Loss from discontinued operations, net of tax | — | — | (3 | ) | (1 | ) | ||||||||||
Net income attributable to common stockholders | $ | 381 | $ | 374 | $ | 1,337 | $ | 973 | ||||||||
Basic weighted-average common shares outstanding (b) | 390,205 | 422,187 | 397,427 | 429,625 | ||||||||||||
Diluted weighted-average common shares outstanding (b) | 392,604 | 424,784 | 399,442 | 432,038 | ||||||||||||
Basic earnings per common share | ||||||||||||||||
Net income from continuing operations | $ | 0.98 | $ | 0.89 | $ | 3.37 | $ | 2.27 | ||||||||
Loss from discontinued operations, net of tax | — | — | (0.01 | ) | — | |||||||||||
Net income | $ | 0.97 | $ | 0.89 | $ | 3.36 | $ | 2.26 | ||||||||
Diluted earnings per common share | ||||||||||||||||
Net income from continuing operations | $ | 0.97 | $ | 0.88 | $ | 3.35 | $ | 2.25 | ||||||||
Loss from discontinued operations, net of tax | — | — | (0.01 | ) | — | |||||||||||
Net income | $ | 0.97 | $ | 0.88 | $ | 3.35 | $ | 2.25 |
(a) | Figures in the table may not recalculate exactly due to rounding. Earnings per share is calculated based on unrounded numbers. |
(b) | Includes shares related to share-based compensation that vested but were not yet issued. |
16. Regulatory Capital and Other Regulatory Matters
Basel Capital Framework
The FRB and other U.S. banking agencies have adopted risk-based and leverage capital standards that establish minimum capital-to-asset ratios for BHCs, like Ally, and depository institutions, like Ally Bank. The risk-based capital ratios are based on a banking organization’s risk-weighted assets (RWAs), which are generally determined under the standardized approach applicable to Ally and Ally Bank by (1) assigning on-balance sheet exposures to broad risk-weight categories according to the counterparty or, if relevant, the guarantor or collateral (with higher risk weights assigned to categories of exposures perceived as representing greater risk), and (2) multiplying off-balance sheet exposures by specified credit conversion factors to calculate credit equivalent amounts and assigning those credit equivalent amounts to the relevant risk-weight categories. The leverage ratio, in contrast, is based on an institution’s average unweighted on-balance sheet exposures.
Ally and Ally Bank are subject to capital requirements issued by U.S. banking regulators that require us to maintain risk-based and leverage capital ratios above minimum levels. As of January 1, 2015, Ally and Ally Bank became subject to the rules implementing the 2010 Basel III capital framework in the United States (U.S. Basel III), which generally reflects higher capital requirements, capital buffers, and changes to regulatory capital definitions, deductions, and adjustments, relative to the predecessor requirements implementing the Basel I capital framework in the United States. Certain aspects of U.S. Basel III, including the capital buffers, were subject to a phase-in period through December 31, 2018.
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 Condensed 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 and Ally Bank must meet specific capital guidelines that involve quantitative measures of capital, assets, and certain off-balance sheet items. These measures and related classifications, which are used in the calculation of our risk-based and leverage capital ratios and those of Ally Bank, are also subject to qualitative judgments by the regulators about the components of capital, the risk weightings of assets and other exposures, and other factors. The FRB also uses these ratios and guidelines as part of the capital planning and stress testing processes. In addition, in order for Ally to maintain its status as an FHC, Ally and its bank subsidiary, Ally Bank, must remain well capitalized and well managed, as defined under applicable laws. The well capitalized standard for insured depository institutions, such as Ally Bank, reflects the capital requirements under U.S. Basel III.
Under U.S. Basel III, Ally and Ally Bank must maintain a minimum Common Equity Tier 1 risk-based capital ratio of 4.5%, a minimum Tier 1 risk-based capital ratio of 6%, and a minimum total risk-based capital ratio of 8%. In addition to these minimum risk-based capital ratios, Ally and Ally Bank are subject to a capital conservation buffer of more than 2.5%. Failure to maintain the full amount of the buffer would result in restrictions on the ability of Ally and Ally Bank to make capital distributions, including dividend payments and stock repurchases and redemptions, and to pay discretionary bonuses to executive officers. U.S. Basel III also subjects Ally and Ally Bank to a minimum Tier 1 leverage ratio of 4%.
41
Notes to Condensed Consolidated Financial Statements (unaudited)
Ally Financial Inc. • Form 10-Q
U.S. Basel III also revised the eligibility criteria for regulatory capital instruments and provides for the phase-out of instruments that had previously been recognized as capital but that do not satisfy these criteria. For example, subject to certain exceptions (e.g., certain debt or equity issued to the U.S. government under the Emergency Economic Stabilization Act), trust preferred and other hybrid securities were excluded from a BHC’s Tier 1 capital as of January 1, 2016. Also, subject to a phase-in schedule, certain items are deducted from Common Equity Tier 1 capital under U.S. Basel III that had not previously been deducted from regulatory capital, and certain other deductions from regulatory capital have been modified. Among other things, U.S. Basel III requires significant investments in the common stock of unconsolidated financial institutions, mortgage servicing assets (MSAs), and certain deferred tax assets (DTAs) that exceed specified individual and aggregate thresholds to be deducted from Common Equity Tier 1 capital. U.S. Basel III also revised the standardized approach for calculating RWAs by, among other things, modifying certain risk weights and the methods for calculating RWAs for certain types of assets and exposures.
Ally and Ally Bank are subject to the U.S. Basel III standardized approach for counterparty credit risk, but not to the U.S. Basel III advanced approaches for credit risk or operational risk. Ally is also not subject to the U.S. market risk capital rule, which applies only to banking organizations with significant trading assets and liabilities.
The following table summarizes our capital ratios under the U.S. Basel III capital framework.
September 30, 2019 | December 31, 2018 | Required minimum (a) | Well-capitalized minimum | |||||||||||||||||
($ in millions) | Amount | Ratio | Amount | Ratio | ||||||||||||||||
Capital ratios | ||||||||||||||||||||
Common Equity Tier 1 (to risk-weighted assets) | ||||||||||||||||||||
Ally Financial Inc. | $ | 13,961 | 9.56 | % | $ | 13,397 | 9.14 | % | 4.50 | % | (b) | |||||||||
Ally Bank | 16,774 | 12.40 | 16,552 | 12.61 | 4.50 | 6.50 | % | |||||||||||||
Tier 1 (to risk-weighted assets) | ||||||||||||||||||||
Ally Financial Inc. | $ | 16,394 | 11.22 | % | $ | 15,831 | 10.80 | % | 6.00 | % | 6.00 | % | ||||||||
Ally Bank | 16,774 | 12.40 | 16,552 | 12.61 | 6.00 | 8.00 | ||||||||||||||
Total (to risk-weighted assets) | ||||||||||||||||||||
Ally Financial Inc. | $ | 18,643 | 12.76 | % | $ | 18,046 | 12.31 | % | 8.00 | % | 10.00 | % | ||||||||
Ally Bank | 17,995 | 13.30 | 17,620 | 13.42 | 8.00 | 10.00 | ||||||||||||||
Tier 1 leverage (to adjusted quarterly average assets) (c) | ||||||||||||||||||||
Ally Financial Inc. | $ | 16,394 | 9.12 | % | $ | 15,831 | 9.00 | % | 4.00 | % | (b) | |||||||||
Ally Bank | 16,774 | 10.20 | 16,552 | 10.69 | 4.00 | 5.00 | % |
(a) | In addition to the minimum risk-based capital requirements for the Common Equity Tier 1 capital, Tier 1 capital, and total capital ratios, Ally and Ally Bank were required to maintain a minimum capital conservation buffer of 2.5% and 1.875% at September 30, 2019, and December 31, 2018, respectively. |
(b) | Currently, there is no ratio component for determining whether a BHC is “well-capitalized.” |
(c) | Federal regulatory reporting guidelines require the calculation of adjusted quarterly average assets using a daily average methodology. |
At September 30, 2019, Ally and Ally Bank were “well-capitalized” and met all applicable capital requirements to which each was subject.
Recent Regulatory Developments
In October 2019, the FRB and other U.S. banking agencies issued final rules implementing targeted amendments to the Dodd-Frank Act and other financial-services laws that had been enacted in May 2018 through the Economic Growth, Regulatory Relief, and Consumer Protection Act (EGRRCP Act). The final rules establish four risk-based categories of prudential standards and capital and liquidity requirements for banking organizations with $100 billion or more in total consolidated assets. The most stringent standards and requirements apply to U.S. global systemically important bank holding companies, which are assigned to Category I. The assignment of other banking organizations to the remaining three categories is based on measures of size and four other risk-based indicators: cross-jurisdictional activity, weighted short-term wholesale funding, nonbank assets, and off-balance sheet exposure. Under the final rules, Ally is designated as a Category IV firm and, as such, will be (1) made subject to supervisory stress testing on a two-year cycle rather than the current one-year cycle, (2) required to continue submitting an annual capital plan to the FRB, (3) allowed to continue excluding accumulated other comprehensive income from regulatory capital, (4) required to continue maintaining a buffer of unencumbered highly liquid assets to meet projected net cash outflows for 30 days, (5) required to conduct liquidity stress tests on a quarterly basis rather than the current monthly basis, (6) allowed to engage in more tailored liquidity risk management, including monthly rather than weekly calculations of collateral positions, the elimination of limits for activities that are not relevant to the firm, and fewer required elements of monitoring of intraday liquidity exposures, (7) exempted from company-run stress testing, the modified liquidity coverage ratio (LCR) provided weighted short-term wholesale funding remains under $50 billion, and the proposed modified net stable funding ratio, (8) allowed to remain exempted from the supplementary leverage ratio, the countercyclical capital buffer, and single counterparty credit limits, and (9) exempted from resolution planning for Ally Financial. The final rules will be effective on December 31, 2019. Relatedly, in April 2019, the Federal Deposit Insurance
42
Notes to Condensed Consolidated Financial Statements (unaudited)
Ally Financial Inc. • Form 10-Q
Corporation (FDIC) extended the date by which all covered insured depository institutions (CIDIs), including Ally Bank, must submit their next resolution plans to the date or dates specified by the FDIC in the future in connection with its final determination on amendments to the rule governing CIDI resolution planning.
In July 2019, the FRB and other U.S. banking agencies issued a final rule to simplify the capital treatment for MSAs, certain DTAs, and investments in the capital instruments of unconsolidated financial institutions (collectively, threshold items). Under the current capital rule, a banking organization must deduct from capital amounts of threshold items that individually exceed 10% of Common Equity Tier 1 capital. The aggregate amount of threshold items not deducted under the 10% threshold deduction but that nonetheless exceeds 15% of Common Equity Tier 1 capital minus certain deductions from and adjustments to Common Equity Tier 1 capital must also be deducted. Any amount of these MSAs and certain DTAs not deducted from Common Equity Tier 1 capital are currently risk weighted at 100%. The final rule removes the individual and aggregate deduction thresholds for threshold items and adopts a single 25% Common Equity Tier 1 capital deduction threshold for each item individually, and requires that any of the threshold items not deducted be risk weighted at 250%. The final rule also simplifies the calculation methodology for minority interests. These provisions take effect on April 1, 2020, with early adoption permitted on January 1, 2020. We do not expect these provisions to have a material impact to our capital position.
In December 2018, the FRB and other U.S. banking agencies approved a final rule to address the impact of CECL on regulatory capital by allowing BHCs and banks, including Ally, the option to phase in the day-one impact of CECL. For regulatory capital purposes, this permits us to phase in 25 percent of the capital impact of CECL in 2020 and an additional 25 percent each subsequent year until fully phased-in by the first quarter of 2023. In addition, the FRB announced that although BHCs subject to company-run stress tests as part of its Comprehensive Capital Analysis and Review (CCAR) must incorporate CECL beginning in the 2020 cycle, in order to reduce uncertainty, the FRB will maintain its current modeling framework for the allowance for loan losses in supervisory stress tests through the 2021 cycle.
In April 2018, the FRB issued a proposal to more closely align forward-looking stress testing results with the FRB’s non-stress regulatory capital requirements for banking organizations with $50 billion or more in total consolidated assets. The proposal would introduce a stress capital buffer based on firm-specific stress test performance, which would effectively replace the non-stress capital conservation buffer. The proposal would also make several changes to the CCAR process, such as eliminating the CCAR quantitative objection, narrowing the set of planned capital actions assumed to occur in the stress scenario, and eliminating the 30% dividend payout ratio as a criterion for heightened scrutiny of a firm’s capital plan. In December 2017, the Basel Committee approved revisions to the global Basel III capital framework (commonly known as Basel IV), many of which—if adopted in the United States—could heighten regulatory capital standards. At this time, how the FRB proposal and the Basel Committee revisions will be harmonized and finalized in the United States is not clear or predictable, and we continue to evaluate the impacts these proposals and revisions may have on us.
Compliance with capital requirements is a strategic priority for Ally. We expect to be in compliance with all applicable requirements within the established timeframes.
Capital Planning and Stress Tests
Under the final rules implementing the EGRRCP Act, Ally will be (1) subject to supervisory stress testing on a two-year cycle rather than the current one-year cycle, (2) required to continue submitting an annual capital plan to the FRB, (3) allowed to continue excluding accumulated other comprehensive income from regulatory capital, (4) exempted from company-run stress testing, and (5) allowed to remain exempted from the supplementary leverage ratio and the countercyclical capital buffer.
Ally’s annual capital plan must include an assessment of our expected uses and sources of capital and a description of all planned capital actions over a nine-quarter planning horizon, including any issuance of a debt or equity capital instrument, any dividend or other capital distribution, and any similar action that the FRB determines could have an impact on Ally’s capital. The proposed capital plan must also include a discussion of how Ally, under expected and stressful conditions, will maintain capital commensurate with its risks and above the minimum regulatory capital ratios, and will serve as a source of strength to Ally Bank. The FRB will either object to Ally’s proposed capital plan, in whole or in part, or provide a notice of non-objection. If the FRB objects to the proposed capital plan, or if certain material events occur after approval of the plan, Ally must submit a revised capital plan within 30 days. Even if the FRB does not object to our capital plan, Ally may be precluded from or limited in paying dividends or other capital distributions without the FRB’s approval under certain circumstances—for example, when we would not meet minimum regulatory capital ratios and capital buffers after giving effect to the distributions.
In October 2019, the FRB noted its intent to propose changes to the capital-plan rule, including for the purpose of providing Category IV firms like Ally with additional flexibility in developing their annual capital plans. At this time, the impacts that such a potential future proposal may have on us are not clear.
43
Notes to Condensed Consolidated Financial Statements (unaudited)
Ally Financial Inc. • Form 10-Q
The following table presents information related to our common stock and distributions to our common stockholders over the last seven quarters.
Common stock repurchased during period (a) | Number of common shares outstanding | Cash dividends declared per common share (b) | |||||||||||||||
($ in millions, except per share data; shares in thousands) | Approximate dollar value | Number of shares | Beginning of period | End of period | |||||||||||||
2018 | |||||||||||||||||
First quarter | $ | 185 | 6,473 | 437,054 | 432,691 | $ | 0.13 | ||||||||||
Second quarter | 195 | 7,280 | 432,691 | 425,752 | 0.13 | ||||||||||||
Third quarter | 250 | 9,194 | 425,752 | 416,591 | 0.15 | ||||||||||||
Fourth quarter | 309 | 12,121 | 416,591 | 404,900 | 0.15 | ||||||||||||
2019 | |||||||||||||||||
First quarter | $ | 211 | 8,113 | 404,900 | 399,761 | $ | 0.17 | ||||||||||
Second quarter | 229 | 7,775 | 399,761 | 392,775 | 0.17 | ||||||||||||
Third quarter | 300 | 9,287 | 392,775 | 383,523 | 0.17 |
(a) | Includes shares of common stock withheld to cover income taxes owed by participants in our share-based incentive plans. |
(b) | On October 7, 2019, the Ally Board of Directors (the Board) declared a quarterly cash dividend of $0.17 per share on all common stock, payable on November 15, 2019. Refer to Note 24 for further information regarding this common stock dividend. |
Ally submitted its 2018 capital plan and company-run stress test results to the FRB on April 5, 2018. On June 21, 2018, we publicly disclosed summary results of the stress test under the severely adverse scenario in accordance with applicable regulatory requirements. On June 28, 2018, we received from the FRB a non-objection to our capital plan, which included increases in both our stock-repurchase program and our planned dividends. Consistent with the capital plan, the Board authorized increases in our stock-repurchase program, permitting us to repurchase up to $1.0 billion of our common stock from time to time from the third quarter of 2018 through the second quarter of 2019. On October 5, 2018, we submitted to the FRB the results of our company-run mid-cycle stress test and publicly disclosed summary results under the severely adverse scenario in accordance with applicable regulatory requirements.
Ally was not required to submit a capital plan to the FRB, participate in the supervisory stress test or CCAR, or conduct company-run stress tests during the 2019 cycle. Instead, our capital actions during this cycle are largely based on the results from our 2018 supervisory stress test. On April 1, 2019, the Board authorized an increase in our stock-repurchase program, permitting us to repurchase up to $1.25 billion of our common stock from time to time from the third quarter of 2019 through the second quarter of 2020, representing a 25% increase over our previously announced program. Additionally, on October 7, 2019, the Board declared a quarterly cash dividend of $0.17 per share of our common stock. Refer to Note 24 for further information on the most recent dividend.
Our ability to make capital distributions, including our ability to pay dividends or repurchase shares of our common stock, will continue to be subject to the FRB’s review and approval by the Board. The amount and size of any future dividends and share repurchases also will be subject to various factors, including Ally’s capital and liquidity positions, regulatory considerations, any accounting standards that affect capital or liquidity (including CECL), financial and operational performance, alternative uses of capital, common-stock price, and general market conditions, and may be suspended at any time.
17. Derivative Instruments and Hedging Activities
We enter into derivative instruments, which may include interest rate, foreign-currency, and equity swaps, futures, forwards, and options in connection with our risk-management activities. Our primary objective for utilizing derivative financial instruments is to manage interest rate risk associated with our fixed- and variable-rate assets and liabilities, foreign exchange risks related to our foreign-currency denominated assets and liabilities, and other market risks related to our investment portfolio.
Interest Rate Risk
We monitor our mix of fixed- and variable-rate assets and liabilities and may enter into interest rate swaps, forwards, futures, options, and swaptions to achieve our desired mix of fixed- and variable-rate assets and liabilities. We execute these trades 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 use a mix of both derivatives that qualify for hedge accounting treatment and economic hedges.
Derivatives qualifying for hedge accounting can include receive-fixed swaps designated as fair value hedges of specific fixed-rate unsecured debt obligations, receive-fixed swaps designated as fair value hedges of specific fixed-rate FHLB advances, pay-fixed swaps designated as fair value hedges of securities within our available-for-sale portfolio, and pay-fixed swaps designated as fair value hedges of closed portfolios of fixed-rate held-for-investment consumer automotive loan assets in which the hedged item is the last layer expected to be remaining at the end of the hedging relationship. Other derivatives qualifying for hedge accounting consist of pay-fixed swaps designated as cash flow hedges of the expected future cash flows in the form of interest payments on certain variable-rate borrowings and deposit liabilities, receive-fixed swaps designated as cash flow hedges of the expected future cash flows in the form of interest receipts on certain securities
44
Notes to Condensed Consolidated Financial Statements (unaudited)
Ally Financial Inc. • Form 10-Q
within our available-for-sale portfolio, as well as interest rate floor contracts designated as cash flow hedges of the expected future cash flows in the form of interest receipts on a portion of our dealer floorplan commercial loans.
We execute economic hedges, which may consist of interest rate swaps, interest rate caps, forwards, futures, options, and swaptions to mitigate interest rate risk.
We also enter into interest rate lock commitments and forward-sale commitments that are executed as part of our mortgage business that meet the accounting definition of a derivative.
Foreign Exchange Risk
We enter into derivative financial instrument contracts to mitigate the risk associated with variability in cash flows related to our various foreign-currency exposures.
We enter into foreign-currency forwards with external counterparties as net investment hedges of foreign exchange exposure on our investment in foreign subsidiaries. Our equity is impacted by the cumulative translation adjustments resulting from the translation of foreign subsidiary results; this impact is reflected in our accumulated other comprehensive income (loss). We also periodically enter into foreign-currency forwards to economically hedge any foreign-denominated debt, centralized lending, and foreign-denominated third-party loans. These foreign-currency forwards that are used as economic hedges are recorded at fair value with changes recorded as income offsetting the gains and losses on the associated foreign-currency transactions.
Investment Risk
We enter into equity options to economically hedge our exposure to the equity markets.
Counterparty 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.
We manage our risk to financial counterparties through internal credit analysis, limits, and monitoring. Additionally, derivatives and repurchase agreements are entered into with approved counterparties using industry standard agreements.
We execute certain over-the-counter (OTC) derivatives such as interest rate caps and floors using bilateral agreements with financial counterparties. Bilateral agreements generally require both parties to post collateral in the event the fair values of the derivative financial instruments meet posting thresholds established under the agreements. In the event that either party defaults on the obligation, the secured party may seize the collateral. Payments related to the exchange of collateral for OTC derivatives are recognized as collateral.
We also execute certain derivatives such as interest rate swaps with clearinghouses, which requires us to post and receive collateral. For these clearinghouse derivatives, these payments are recognized as settlements rather than 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. No such specified credit-risk-related events occurred during the three months and nine months ended September 30, 2019, or 2018.
We placed noncash collateral totaling $119 million supporting our derivative positions at September 30, 2019, compared to $26 million and $105 million of cash and noncash collateral, respectively, at December 31, 2018, in accounts maintained by counterparties. These amounts include collateral placed at clearinghouses and exclude cash and noncash collateral pledged under repurchase agreements. Refer to Note 12 for details on the repurchase agreements. The receivables for cash collateral placed are included on our Condensed Consolidated Balance Sheet in other assets.
We received cash and noncash collateral from counterparties totaling $53 million and $38 million, respectively, in accounts maintained by counterparties at September 30, 2019, compared to $30 million and $3 million of cash and noncash collateral at December 31, 2018. These amounts include collateral received from clearinghouses and exclude cash and noncash collateral pledged under repurchase agreements. Refer to Note 12 for details on repurchase agreements. The payables for cash collateral received are included on our Condensed Consolidated Balance Sheet in accrued expenses and other liabilities. Included in these amounts is noncash collateral where we have been granted the right to sell or pledge the underlying assets. We have not sold or pledged any of the noncash collateral received under these agreements.
45
Notes to Condensed Consolidated Financial Statements (unaudited)
Ally Financial Inc. • Form 10-Q
Balance Sheet Presentation
The following table summarizes the amounts of derivative instruments reported on our Condensed Consolidated Balance Sheet. The 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.
Derivative contracts in a receivable and payable position exclude open trade equity on derivatives cleared through central clearing counterparties. Any associated collateral exchanged with our central clearing counterparties are treated as settlements of the derivative exposure, rather than collateral. Such payments are recognized as settlements of the derivatives contracts in a receivable and payable position on our Condensed Consolidated Balance Sheet.
Notional amounts are reference amounts from which contractual obligations are derived and are not recorded on the balance sheet. In our view, derivative notional is not an accurate measure of our derivative exposure when viewed in isolation from other factors, such as market rate fluctuations and counterparty credit risk.
September 30, 2019 | December 31, 2018 | |||||||||||||||||||||||
Derivative contracts in a | Notional amount | Derivative contracts in a | Notional amount | |||||||||||||||||||||
($ in millions) | receivable position | payable position | receivable position | payable position | ||||||||||||||||||||
Derivatives designated as accounting hedges | ||||||||||||||||||||||||
Interest rate contracts | ||||||||||||||||||||||||
Swaps | $ | — | $ | — | $ | 15,451 | $ | — | $ | — | $ | 24,203 | ||||||||||||
Purchased options | 87 | — | 11,100 | — | — | — | ||||||||||||||||||
Foreign exchange contracts | ||||||||||||||||||||||||
Forwards | — | — | 141 | 1 | — | 136 | ||||||||||||||||||
Total derivatives designated as accounting hedges | 87 | — | 26,692 | 1 | — | 24,339 | ||||||||||||||||||
Derivatives not designated as accounting hedges | ||||||||||||||||||||||||
Interest rate contracts | ||||||||||||||||||||||||
Futures and forwards | — | — | 51 | — | — | 11 | ||||||||||||||||||
Written options | 3 | 2 | 935 | — | 37 | 6,793 | ||||||||||||||||||
Purchased options | 1 | — | 758 | 37 | — | 6,742 | ||||||||||||||||||
Total interest rate risk | 4 | 2 | 1,744 | 37 | 37 | 13,546 | ||||||||||||||||||
Foreign exchange contracts | ||||||||||||||||||||||||
Futures and forwards | — | — | 117 | 3 | — | 181 | ||||||||||||||||||
Total foreign exchange risk | — | — | 117 | 3 | — | 181 | ||||||||||||||||||
Equity contracts | ||||||||||||||||||||||||
Written options | — | 1 | — | — | — | — | ||||||||||||||||||
Purchased options | 3 | — | 1 | — | — | — | ||||||||||||||||||
Total equity risk | 3 | 1 | 1 | — | — | — | ||||||||||||||||||
Total derivatives not designated as accounting hedges | 7 | 3 | 1,862 | 40 | 37 | 13,727 | ||||||||||||||||||
Total derivatives | $ | 94 | $ | 3 | $ | 28,554 | $ | 41 | $ | 37 | $ | 38,066 |
46
Notes to Condensed Consolidated Financial Statements (unaudited)
Ally Financial Inc. • Form 10-Q
The following table presents amounts recorded on our Condensed Consolidated Balance Sheet related to cumulative basis adjustments for fair value hedges.
($ in millions) | Carrying amount of the hedged items | Cumulative amount of fair value hedging adjustment included in the carrying amount of the hedged items | ||||||||||||||||||||||
Total | Discontinued (a) | |||||||||||||||||||||||
September 30, 2019 | December 31, 2018 | September 30, 2019 | December 31, 2018 | September 30, 2019 | December 31, 2018 | |||||||||||||||||||
Assets | ||||||||||||||||||||||||
Available-for-sale securities (b) (c) | $ | 1,645 | $ | 1,485 | $ | 26 | $ | — | $ | 26 | $ | (5 | ) | |||||||||||
Finance receivables and loans, net (d) | 37,533 | 40,850 | 176 | 24 | 51 | 5 | ||||||||||||||||||
Liabilities | ||||||||||||||||||||||||
Long-term debt | $ | 12,879 | $ | 13,001 | $ | 120 | $ | 67 | $ | 127 | $ | 67 |
(a) | Represents the fair value hedging adjustment on qualifying hedges for which the hedging relationship was discontinued. This represents a subset of the amounts reported in the total hedging adjustment. |
(b) | The carrying amount of hedged available-for-sale securities is presented above using amortized cost. Refer to Note 6 for a reconciliation of the amortized cost and fair value of available-for-sale securities. |
(c) | Includes the amortized cost basis of closed portfolios used to designate hedging relationships in which the hedged item is the last layer expected to be remaining at the end of the hedging relationship. The amount identified as the last of layer in the open hedge relationship was $100 million and $28 million at September 30, 2019, and December 31, 2018, respectively. There were no basis adjustments associated with the open last-of-layer relationship at both September 30, 2019, and December 31, 2018. The amount that was identified as the last of layer in the discontinued hedge relationship was $100 million as of September 30, 2019. The basis adjustment associated with the discontinued last-of-layer relationship was a $2 million asset as of September 30, 2019, which was allocated across the entire remaining pool upon termination of the hedge relationship. |
(d) | The hedged item represents the carrying value of the hedged portfolio of assets. The amount identified as the last of layer in the open hedge relationship was $10.2 billion as of September 30, 2019, and $21.4 billion as of December 31, 2018. The basis adjustment associated with the open last-of-layer relationship was a $126 million asset as of September 30, 2019, and a $19 million asset as of December 31, 2018, which would be allocated across the entire remaining closed pool upon termination or maturity of the hedge relationship. The amount that is identified as the last of layer in the discontinued hedge relationship was $12.8 billion at September 30, 2019. The basis adjustment associated with the discontinued last-of-layer relationship was a $50 million asset as of September 30, 2019, which was allocated across the entire remaining pool upon termination of the hedge relationship. |
Statement of Comprehensive Income Presentation
The following table summarizes the location and amounts of gains and losses on derivative instruments not designated as accounting hedges reported in our Condensed Consolidated Statement of Comprehensive Income.
Three months ended September 30, | Nine months ended September 30, | |||||||||||||||
($ in millions) | 2019 | 2018 | 2019 | 2018 | ||||||||||||
Gain (loss) recognized in earnings | ||||||||||||||||
Interest rate contracts | ||||||||||||||||
Gain on mortgage and automotive loans, net | $ | — | $ | — | $ | 1 | $ | — | ||||||||
Other income, net of losses | — | — | (7 | ) | — | |||||||||||
Total interest rate contracts | — | — | (6 | ) | — | |||||||||||
Foreign exchange contracts | ||||||||||||||||
Other income, net of losses | 1 | (1 | ) | (2 | ) | 5 | ||||||||||
Total foreign exchange contracts | 1 | (1 | ) | (2 | ) | 5 | ||||||||||
Gain (loss) recognized in earnings | $ | 1 | $ | (1 | ) | $ | (8 | ) | $ | 5 |
47
Notes to Condensed Consolidated Financial Statements (unaudited)
Ally Financial Inc. • Form 10-Q
The following tables summarize the location and amounts of gains and losses on derivative instruments designated as fair value and cash flow hedges reported in our Condensed Consolidated Statement of Comprehensive Income.
Interest and fees on finance receivables and loans | Interest and dividends on investment securities and other earning assets | Interest on deposits | Interest on long-term debt | ||||||||||||||||||||||||
Three months ended September 30, ($ in millions) | 2019 | 2018 | 2019 | 2018 | 2019 | 2018 | 2019 | 2018 | |||||||||||||||||||
(Loss) gain on fair value hedging relationships | |||||||||||||||||||||||||||
Interest rate contracts | |||||||||||||||||||||||||||
Hedged fixed-rate unsecured debt | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | (36 | ) | $ | 20 | ||||||||||
Derivatives designated as hedging instruments on fixed-rate unsecured debt | — | — | — | — | — | — | 36 | (20 | ) | ||||||||||||||||||
Hedged fixed-rate FHLB advances | — | — | — | — | — | — | — | 10 | |||||||||||||||||||
Derivatives designated as hedging instruments on fixed-rate FHLB advances | — | — | — | — | — | — | — | (10 | ) | ||||||||||||||||||
Hedged available-for-sale securities | — | — | 17 | (2 | ) | — | — | — | — | ||||||||||||||||||
Derivatives designated as hedging instruments on available-for-sale securities | — | — | (17 | ) | 2 | — | — | — | — | ||||||||||||||||||
Hedged fixed-rate consumer automotive loans | 32 | (9 | ) | — | — | — | — | — | — | ||||||||||||||||||
Derivatives designated as hedging instruments on fixed-rate consumer automotive loans | (32 | ) | 9 | — | — | — | — | — | — | ||||||||||||||||||
Total gain on fair value hedging relationships | — | — | — | — | — | — | — | — | |||||||||||||||||||
(Loss) gain on cash flow hedging relationships | |||||||||||||||||||||||||||
Interest rate contracts | |||||||||||||||||||||||||||
Hedged deposit liabilities | |||||||||||||||||||||||||||
Reclassified from accumulated other comprehensive income into income (loss) | — | — | — | — | (2 | ) | — | — | — | ||||||||||||||||||
Hedged variable-rate borrowings | |||||||||||||||||||||||||||
Reclassified from accumulated other comprehensive income into income (loss) | — | — | — | — | — | — | 4 | — | |||||||||||||||||||
Total (loss) gain on cash flow hedging relationships | $ | — | $ | — | $ | — | $ | — | $ | (2 | ) | $ | — | $ | 4 | $ | — | ||||||||||
Total amounts presented in the Condensed Consolidated Statement of Comprehensive Income | $ | 1,859 | $ | 1,708 | $ | 237 | $ | 198 | $ | 658 | $ | 462 | $ | 378 | $ | 451 |
48
Notes to Condensed Consolidated Financial Statements (unaudited)
Ally Financial Inc. • Form 10-Q
Interest and fees on finance receivables and loans | Interest and dividends on investment securities and other earning assets | Interest on deposits | Interest on long-term debt | ||||||||||||||||||||||||
Nine months ended September 30, ($ in millions) | 2019 | 2018 | 2019 | 2018 | 2019 | 2018 | 2019 | 2018 | |||||||||||||||||||
(Loss) gain on fair value hedging relationships | |||||||||||||||||||||||||||
Interest rate contracts | |||||||||||||||||||||||||||
Hedged fixed-rate unsecured debt | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | (55 | ) | $ | 64 | ||||||||||
Derivatives designated as hedging instruments on fixed-rate unsecured debt | — | — | — | — | — | — | 55 | (63 | ) | ||||||||||||||||||
Hedged fixed-rate FHLB advances | — | — | — | — | — | — | — | 53 | |||||||||||||||||||
Derivatives designated as hedging instruments on fixed-rate FHLB advances | — | — | — | — | — | — | — | (53 | ) | ||||||||||||||||||
Hedged available-for-sale securities | — | — | 29 | (7 | ) | — | — | — | — | ||||||||||||||||||
Derivatives designated as hedging instruments on available-for-sale securities | — | — | (29 | ) | 7 | — | — | — | — | ||||||||||||||||||
Hedged fixed-rate consumer automotive loans | 173 | (60 | ) | — | — | — | — | — | — | ||||||||||||||||||
Derivatives designated as hedging instruments on fixed-rate consumer automotive loans | (173 | ) | 60 | — | — | — | — | — | — | ||||||||||||||||||
Total gain on fair value hedging relationships | — | — | — | — | — | — | — | 1 | |||||||||||||||||||
(Loss) gain on cash flow hedging relationships | |||||||||||||||||||||||||||
Interest rate contracts | |||||||||||||||||||||||||||
Hedged deposit liabilities | |||||||||||||||||||||||||||
Reclassified from accumulated other comprehensive income into income | — | — | — | — | (1 | ) | — | — | — | ||||||||||||||||||
Hedged variable-rate borrowings | |||||||||||||||||||||||||||
Reclassified from accumulated other comprehensive income into income | — | — | — | — | — | — | 12 | — | |||||||||||||||||||
Total (loss) gain on cash flow hedging relationships | $ | — | $ | — | $ | — | $ | — | $ | (1 | ) | $ | — | $ | 12 | $ | — | ||||||||||
Total amounts presented in the Condensed Consolidated Statement of Comprehensive Income | $ | 5,526 | $ | 4,898 | $ | 721 | $ | 562 | $ | 1,901 | $ | 1,212 | $ | 1,204 | $ | 1,296 |
During the next twelve months, we estimate $5 million of losses will be reclassified into pretax earnings from derivatives designated as cash flow hedges.
49
Notes to Condensed Consolidated Financial Statements (unaudited)
Ally Financial Inc. • Form 10-Q
The following tables summarize the location and amounts of gains and losses related to interest and amortization on derivative instruments designated as fair value and cash flow hedges reported in our Condensed Consolidated Statement of Comprehensive Income.
Interest and fees on finance receivables and loans | Interest and dividends on investment securities and other earning assets | Interest on deposits | Interest on long-term debt | ||||||||||||||||||||||||
Three months ended September 30, ($ in millions) | 2019 | 2018 | 2019 | 2018 | 2019 | 2018 | 2019 | 2018 | |||||||||||||||||||
Gain (loss) on fair value hedging relationships | |||||||||||||||||||||||||||
Interest rate contracts | |||||||||||||||||||||||||||
Amortization of deferred unsecured debt basis adjustments | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | 6 | $ | 13 | |||||||||||
Interest for qualifying accounting hedges of unsecured debt | — | — | — | — | — | — | — | 3 | |||||||||||||||||||
Amortization of deferred secured debt basis adjustments (FHLB advances) | — | — | — | — | — | — | (6 | ) | (6 | ) | |||||||||||||||||
Interest for qualifying accounting hedges of secured debt (FHLB advances) | — | — | — | — | — | — | — | 2 | |||||||||||||||||||
Amortization of deferred basis adjustments of available-for-sale securities | — | — | (1 | ) | — | — | — | — | — | ||||||||||||||||||
Interest for qualifying accounting hedges of available-for-sale securities | — | — | 2 | — | — | — | — | — | |||||||||||||||||||
Amortization of deferred loan basis adjustments | (8 | ) | (3 | ) | — | — | — | — | — | ||||||||||||||||||
Interest for qualifying accounting hedges of consumer automotive loans held-for-investment | 10 | 7 | — | — | — | — | — | — | |||||||||||||||||||
Total gain on fair value hedging relationships | 2 | 4 | 1 | — | — | — | — | 12 | |||||||||||||||||||
Gain on cash flow hedging relationships | |||||||||||||||||||||||||||
Interest rate contracts | |||||||||||||||||||||||||||
Interest for qualifying accounting hedges of variable-rate borrowings | — | — | — | — | — | — | — | 3 | |||||||||||||||||||
Interest for qualifying accounting hedges of deposit liabilities | — | — | — | — | — | 2 | — | — | |||||||||||||||||||
Total gain on cash flow hedging relationships | $ | — | $ | — | $ | — | $ | — | $ | — | $ | 2 | $ | — | $ | 3 |
50
Notes to Condensed Consolidated Financial Statements (unaudited)
Ally Financial Inc. • Form 10-Q
Interest and fees on finance receivables and loans | Interest and dividends on investment securities and other earning assets | Interest on deposits | Interest on long-term debt | ||||||||||||||||||||||||
Nine months ended September 30, ($ in millions) | 2019 | 2018 | 2019 | 2018 | 2019 | 2018 | 2019 | 2018 | |||||||||||||||||||
Gain (loss) on fair value hedging relationships | |||||||||||||||||||||||||||
Interest rate contracts | |||||||||||||||||||||||||||
Amortization of deferred unsecured debt basis adjustments | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | 18 | $ | 42 | |||||||||||
Interest for qualifying accounting hedges of unsecured debt | — | — | — | — | — | — | — | 7 | |||||||||||||||||||
Amortization of deferred secured debt basis adjustments (FHLB advances) | — | — | — | — | — | — | (17 | ) | (12 | ) | |||||||||||||||||
Interest for qualifying accounting hedges of secured debt (FHLB advances) | — | — | — | — | — | — | — | 6 | |||||||||||||||||||
Amortization of deferred basis adjustments of available-for-sale securities | — | — | (2 | ) | — | — | — | — | — | ||||||||||||||||||
Interest for qualifying accounting hedges of available-for-sale securities | — | — | 2 | (1 | ) | — | — | — | — | ||||||||||||||||||
Amortization of deferred loan basis adjustments | (21 | ) | (11 | ) | — | — | — | — | — | — | |||||||||||||||||
Interest for qualifying accounting hedges of consumer automotive loans held-for-investment | 27 | 5 | — | — | — | — | — | — | |||||||||||||||||||
Total gain (loss) on fair value hedging relationships | 6 | (6 | ) | — | (1 | ) | — | — | 1 | 43 | |||||||||||||||||
Gain on cash flow hedging relationships | |||||||||||||||||||||||||||
Interest rate contracts | |||||||||||||||||||||||||||
Interest for qualifying accounting hedges of variable-rate borrowings | — | — | — | — | — | — | — | 6 | |||||||||||||||||||
Interest for qualifying accounting hedges of deposit liabilities | — | — | — | — | — | 2 | — | — | |||||||||||||||||||
Total gain on cash flow hedging relationships | $ | — | $ | — | $ | — | $ | — | $ | — | $ | 2 | $ | — | $ | 6 |
The following table summarizes the effect of cash flow hedges on accumulated other comprehensive income (loss).
Three months ended September 30, | Nine months ended September 30, | ||||||||||||||
($ in millions) | 2019 | 2018 | 2019 | 2018 | |||||||||||
Interest rate contracts | |||||||||||||||
Gain (loss) recognized in other comprehensive income (loss) | $ | 2 | $ | (1 | ) | $ | 14 | $ | 22 |
51
Notes to Condensed Consolidated Financial Statements (unaudited)
Ally Financial Inc. • Form 10-Q
The following table summarizes the effect of net investment hedges on accumulated other comprehensive income (loss) and the Condensed Consolidated Statement of Comprehensive Income.
Three months ended September 30, | Nine months ended September 30, | ||||||||||||||
($ in millions) | 2019 | 2018 | 2019 | 2018 | |||||||||||
Foreign exchange contracts (a) (b) | |||||||||||||||
Gain (loss) recognized in other comprehensive income (loss) | $ | 2 | $ | (2 | ) | $ | (3 | ) | $ | 5 |
(a) | There were no amounts excluded from effectiveness testing for the three months and nine months ended September 30, 2019, or 2018. |
(b) | Gains and losses reclassified from accumulated other comprehensive income (loss) are reported as other income, net of losses, in the Condensed Consolidated Statement of Comprehensive Income. There were no amounts reclassified for the three months and nine months ended September 30, 2019, or 2018. |
18. Income Taxes
We recognized income tax expense from continuing operations of $119 million and $140 million for the three months and nine months ended September 30, 2019, respectively, compared to $91 million and $280 million for the same periods in 2018.
The increase in income tax expense for the three months ended September 30, 2019, compared to the same period in 2018, was primarily due to a nonrecurring tax benefit from the release of valuation allowance against state net operating loss carryforwards as a result of a state tax law enactment in the third quarter of 2018 and the tax effects of an increase in pretax earnings. The decrease in income tax expense for the nine months ended September 30, 2019, compared to the same period in 2018, was primarily due to a release of valuation allowance on foreign tax credit carryforwards during the second quarter of 2019. The valuation allowance release was primarily driven by our current capacity to engage in certain securitization transactions and the market demand from investors related to these transactions, coupled with the anticipated timing of the forecasted expiration of certain tax credit carryforwards. This release of valuation allowance resulted in a significant variation in the customary relationship between pretax income and income tax expense. Additionally, the decrease in income tax expense for the nine months ended September 30, 2019, compared to the same period in 2018, was partially offset by the tax effects of an increase in pretax earnings and a nonrecurring tax benefit from the release of valuation allowance against state net operating loss carryforwards as a result of a state tax law enactment in the third quarter of 2018.
As of each reporting date, we consider existing evidence, both positive and negative, that could impact our view with regard to future realization of deferred tax assets. We continue to believe it is more likely than not that the benefit for certain foreign tax credit carryforwards and state net operating loss carryforwards will not be realized. In recognition of this risk, we continue to provide a partial valuation allowance on the deferred tax assets relating to these carryforwards and it is reasonably possible that the valuation allowance may change in the next twelve months.
19. 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 under current market conditions. Fair value is based on the assumptions we believe 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.
Judgment is used 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 and amounts that could be realized.
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 |
52
Notes to Condensed Consolidated Financial Statements (unaudited)
Ally Financial Inc. • Form 10-Q
valued using pricing models, discounted cash flow methodologies, or similar techniques that require significant judgment or estimation.
The 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.
• | Equity Securities — Includes various marketable equity securities measured at fair value with changes in fair value recognized in net income. Measurements based on observable market prices are classified as Level 1. |
• | Available-for-sale securities — All classes of available-for-sale securities are carried at fair value based on observable market prices, when available. 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). |
• | Interests retained in financial asset sales — Includes certain noncertificated interests retained from the sale of automotive finance receivables. 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, options of Eurodollar futures, and equity options. To determine the fair value of these instruments, we utilize the quoted market prices for the particular derivative contracts; therefore, we classified these contracts as Level 1. |
We also execute OTC and centrally-cleared derivative contracts, such as interest rate swaps, swaptions, foreign-currency denominated forward contracts, caps, floors, and agency to-be-announced securities. We utilize third-party-developed valuation models that are widely accepted in the market to value these derivative contracts. The specific terms of the contract and market observable inputs (such as interest rate forward curves, interpolated volatility assumptions, or equity pricing) are used in the model. We classified these derivative contracts as Level 2 because all significant inputs into these models were market observable.
We also enter into interest rate lock commitments and forward-sale commitments that are executed as part of our mortgage business, certain of which meet the accounting definition of a derivative and therefore are recorded as derivatives on our Condensed Consolidated Balance Sheet. Because these derivatives are valued using internal pricing models with unobservable inputs, they are classified 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), if warranted. The CVA calculation utilizes the credit default swap spreads of the counterparty.
53
Notes to Condensed Consolidated Financial Statements (unaudited)
Ally Financial Inc. • Form 10-Q
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 | ||||||||||||||||
September 30, 2019 ($ in millions) | Level 1 | Level 2 | Level 3 | Total | ||||||||||||
Assets | ||||||||||||||||
Investment securities | ||||||||||||||||
Equity securities (a) | $ | 562 | $ | — | $ | 8 | $ | 570 | ||||||||
Available-for-sale securities | ||||||||||||||||
Debt securities | ||||||||||||||||
U.S. Treasury and federal agencies | 2,381 | 1 | — | 2,382 | ||||||||||||
U.S. States and political subdivisions | — | 630 | — | 630 | ||||||||||||
Foreign government | 15 | 140 | — | 155 | ||||||||||||
Agency mortgage-backed residential | — | 20,108 | — | 20,108 | ||||||||||||
Mortgage-backed residential | — | 2,812 | — | 2,812 | ||||||||||||
Agency mortgage-backed commercial | — | 1,413 | — | 1,413 | ||||||||||||
Mortgage-backed commercial | — | 113 | — | 113 | ||||||||||||
Asset-backed | — | 417 | — | 417 | ||||||||||||
Corporate debt | — | 1,354 | — | 1,354 | ||||||||||||
Total available-for-sale securities | 2,396 | 26,988 | — | 29,384 | ||||||||||||
Mortgage loans held-for-sale (b) | — | — | 38 | 38 | ||||||||||||
Interests retained in financial asset sales | — | — | 3 | 3 | ||||||||||||
Derivative contracts in a receivable position | ||||||||||||||||
Interest rate | — | 88 | 3 | 91 | ||||||||||||
Other | 3 | — | — | 3 | ||||||||||||
Total derivative contracts in a receivable position | 3 | 88 | 3 | 94 | ||||||||||||
Total assets | $ | 2,961 | $ | 27,076 | $ | 52 | $ | 30,089 | ||||||||
Liabilities | ||||||||||||||||
Accrued expenses and other liabilities | ||||||||||||||||
Derivative contracts in a payable position | ||||||||||||||||
Interest rate | $ | — | $ | 1 | $ | 1 | $ | 2 | ||||||||
Other | 1 | — | — | 1 | ||||||||||||
Total derivative contracts in a payable position | 1 | 1 | 1 | 3 | ||||||||||||
Total liabilities | $ | 1 | $ | 1 | $ | 1 | $ | 3 |
(a) | Our investment in any one industry did not exceed 14%. |
(b) | Carried at fair value due to fair value option elections. |
54
Notes to Condensed Consolidated Financial Statements (unaudited)
Ally Financial Inc. • Form 10-Q
Recurring fair value measurements | ||||||||||||||||
December 31, 2018 ($ in millions) | Level 1 | Level 2 | Level 3 | Total | ||||||||||||
Assets | ||||||||||||||||
Investment securities | ||||||||||||||||
Equity securities (a) | $ | 766 | $ | — | $ | 7 | $ | 773 | ||||||||
Available-for-sale securities | ||||||||||||||||
Debt securities | ||||||||||||||||
U.S. Treasury and federal agencies | 1,850 | 1 | — | 1,851 | ||||||||||||
U.S. States and political subdivisions | — | 802 | — | 802 | ||||||||||||
Foreign government | 7 | 138 | — | 145 | ||||||||||||
Agency mortgage-backed residential | — | 17,138 | — | 17,138 | ||||||||||||
Mortgage-backed residential | — | 2,686 | — | 2,686 | ||||||||||||
Agency mortgage-backed commercial | — | 3 | — | 3 | ||||||||||||
Mortgage-backed commercial | — | 714 | — | 714 | ||||||||||||
Asset-backed | — | 723 | — | 723 | ||||||||||||
Corporate debt | — | 1,241 | — | 1,241 | ||||||||||||
Total available-for-sale securities | 1,857 | 23,446 | — | 25,303 | ||||||||||||
Mortgage loans held-for-sale (b) | — | — | 8 | 8 | ||||||||||||
Interests retained in financial asset sales | — | — | 4 | 4 | ||||||||||||
Derivative contracts in a receivable position | ||||||||||||||||
Interest rate | — | 37 | — | 37 | ||||||||||||
Foreign currency | — | 4 | — | 4 | ||||||||||||
Total derivative contracts in a receivable position | — | 41 | — | 41 | ||||||||||||
Total assets | $ | 2,623 | $ | 23,487 | $ | 19 | $ | 26,129 | ||||||||
Liabilities | ||||||||||||||||
Accrued expenses and other liabilities | ||||||||||||||||
Derivative contracts in a payable position | ||||||||||||||||
Interest rate | $ | — | $ | 37 | $ | — | $ | 37 | ||||||||
Total derivative contracts in a payable position | — | 37 | — | 37 | ||||||||||||
Total liabilities | $ | — | $ | 37 | $ | — | $ | 37 |
(a) | Our investment in any one industry did not exceed 9%. |
(b) | Carried at fair value due to fair value option elections. |
55
Notes to Condensed Consolidated Financial Statements (unaudited)
Ally Financial Inc. • Form 10-Q
The following tables present the reconciliation for all Level 3 assets and liabilities measured at fair value on a recurring basis. There were no transfers into or out of Level 3 in the periods presented. 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 | |||||||||||||||||||||||||||||||
Net realized/unrealized (losses) gains | Fair value at September 30, 2019 | Net unrealized gains still held at September 30, 2019 | |||||||||||||||||||||||||||||
($ in millions) | Fair value at July 1, 2019 | included in earnings | included in OCI | Purchases | Sales | Issuances | Settlements | included in earnings | included in OCI | ||||||||||||||||||||||
Assets | |||||||||||||||||||||||||||||||
Equity securities | $ | 9 | $ | (1 | ) | (a) | $ | — | $ | — | $ | — | $ | — | $ | — | $ | 8 | $ | (1 | ) | $ | — | ||||||||
Mortgage loans held-for-sale (b) | 22 | 3 | (c) | — | 222 | (209 | ) | — | — | 38 | — | — | |||||||||||||||||||
Other assets | |||||||||||||||||||||||||||||||
Interests retained in financial asset sales | 3 | — | — | — | — | — | — | 3 | — | — | |||||||||||||||||||||
Derivative assets, net of derivative liabilities | 2 | — | — | — | — | — | — | 2 | — | — | |||||||||||||||||||||
Total assets | $ | 36 | $ | 2 | $ | — | $ | 222 | $ | (209 | ) | $ | — | $ | — | $ | 51 | $ | (1 | ) | $ | — |
(a) | Reported as other gain on investments, net, in the Condensed Consolidated Statement of Comprehensive Income. |
(b) | Carried at fair value due to fair value option elections. |
(c) | Reported as gain on mortgage and automotive loans, net, in the Condensed Consolidated Statement of Comprehensive Income. |
Level 3 recurring fair value measurements | ||||||||||||||||||||||||||||
Fair value at July 1, 2018 | Net realized/unrealized gains | Purchases | Sales | Issuances | Settlements | Fair value at September 30, 2018 | Net unrealized losses included in earnings still held at September 30, 2018 | |||||||||||||||||||||
($ in millions) | included in earnings | included in OCI | ||||||||||||||||||||||||||
Assets | ||||||||||||||||||||||||||||
Equity securities | $ | 12 | $ | — | $ | — | $ | — | $ | — | $ | — | $ | (1 | ) | $ | 11 | $ | (1 | ) | ||||||||
Mortgage loans held-for-sale (a) | 13 | 2 | (b) | — | 86 | (88 | ) | — | — | 13 | — | |||||||||||||||||
Other assets | ||||||||||||||||||||||||||||
Interests retained in financial asset sales | 4 | — | — | — | — | — | — | 4 | — | |||||||||||||||||||
Derivative assets | 1 | — | — | — | — | — | — | 1 | — | |||||||||||||||||||
Total assets | $ | 30 | $ | 2 | $ | — | $ | 86 | $ | (88 | ) | $ | — | $ | (1 | ) | $ | 29 | $ | (1 | ) |
(a) | Carried at fair value due to fair value option elections. |
(b) | Reported as gain on mortgage and automotive loans, net, in the Condensed Consolidated Statement of Comprehensive Income. |
Level 3 recurring fair value measurements | |||||||||||||||||||||||||||||||
Net realized/unrealized gains | Fair value at September 30, 2019 | Net unrealized gains still held at September 30, 2019 | |||||||||||||||||||||||||||||
($ in millions) | Fair value at Jan. 1, 2019 | included in earnings | included in OCI | Purchases | Sales | Issuances | Settlements | included in earnings | included in OCI | ||||||||||||||||||||||
Assets | |||||||||||||||||||||||||||||||
Equity securities | $ | 7 | $ | 5 | (a) | $ | — | $ | — | $ | — | $ | — | $ | (4 | ) | $ | 8 | $ | 5 | $ | — | |||||||||
Mortgage loans held-for-sale (b) | 8 | 7 | (c) | — | 468 | (445 | ) | — | — | 38 | — | — | |||||||||||||||||||
Other assets | |||||||||||||||||||||||||||||||
Interests retained in financial asset sales | 4 | — | — | — | — | — | (1 | ) | 3 | — | — | ||||||||||||||||||||
Derivative assets, net of derivative liabilities | — | 2 | (c) | — | — | — | — | — | 2 | 2 | — | ||||||||||||||||||||
Total assets | $ | 19 | $ | 14 | $ | — | $ | 468 | $ | (445 | ) | $ | — | $ | (5 | ) | $ | 51 | $ | 7 | $ | — |
(a) | Reported as other gain on investments, net, in the Condensed Consolidated Statement of Comprehensive Income. |
(b) | Carried at fair value due to fair value option elections. |
(c) | Reported as gain on mortgage and automotive loans, net, in the Condensed Consolidated Statement of Comprehensive Income. |
56
Notes to Condensed Consolidated Financial Statements (unaudited)
Ally Financial Inc. • Form 10-Q
Level 3 recurring fair value measurements | ||||||||||||||||||||||||||||
Fair value at Jan. 1, 2018 | Net realized/unrealized (losses) gains | Purchases | Sales | Issuances | Settlements | Fair value at September 30, 2018 | Net unrealized losses included in earnings still held at September 30, 2018 | |||||||||||||||||||||
($ in millions) | included in earnings | included in OCI | ||||||||||||||||||||||||||
Assets | ||||||||||||||||||||||||||||
Equity securities | $ | 19 | $ | (4 | ) | (a) | $ | — | $ | — | $ | — | $ | — | $ | (4 | ) | $ | 11 | $ | (6 | ) | ||||||
Mortgage loans held-for-sale (b) | 13 | 4 | (c) | — | 218 | (222 | ) | — | — | 13 | — | |||||||||||||||||
Other assets | ||||||||||||||||||||||||||||
Interests retained in financial asset sales | 5 | — | — | — | — | — | (1 | ) | 4 | — | ||||||||||||||||||
Derivative assets | 1 | — | — | — | — | — | — | 1 | — | |||||||||||||||||||
Total assets | $ | 38 | $ | — | $ | — | $ | 218 | $ | (222 | ) | $ | — | $ | (5 | ) | $ | 29 | $ | (6 | ) |
(a) | Reported as other loss on investments, net, in the Condensed Consolidated Statement of Comprehensive Income. |
(b) | Carried at fair value due to fair value option elections. |
(c) | Reported as gain on mortgage and automotive loans, net, in the Condensed Consolidated Statement of Comprehensive Income. |
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 assets and liabilities measured at fair value on a nonrecurring basis and still held at September 30, 2019, and December 31, 2018, respectively. The amounts are as of the end of each period presented, which approximate the fair value measurements that occurred during each period.
Nonrecurring fair value measurements | Lower-of-cost or fair value reserve, valuation reserve, or cumulative adjustments | Total gain (loss) included in earnings | |||||||||||||||||||||
September 30, 2019 ($ in millions) | Level 1 | Level 2 | Level 3 | Total | |||||||||||||||||||
Assets | |||||||||||||||||||||||
Loans held-for-sale, net | $ | — | $ | — | $ | 307 | $ | 307 | $ | — | n/m | (a) | |||||||||||
Commercial finance receivables and loans, net (b) | |||||||||||||||||||||||
Automotive | — | — | 48 | 48 | (18 | ) | n/m | (a) | |||||||||||||||
Other | — | — | 17 | 17 | (14 | ) | n/m | (a) | |||||||||||||||
Total commercial finance receivables and loans, net | — | — | 65 | 65 | (32 | ) | n/m | (a) | |||||||||||||||
Other assets | |||||||||||||||||||||||
Nonmarketable equity investments | — | 4 | 10 | 14 | 2 | n/m | (a) | ||||||||||||||||
Equity-method investments | — | — | 2 | 2 | (6 | ) | n/m | (a) | |||||||||||||||
Repossessed and foreclosed assets (c) | — | — | 14 | 14 | (1 | ) | n/m | (a) | |||||||||||||||
Total assets | $ | — | $ | 4 | $ | 398 | $ | 402 | $ | (37 | ) | n/m |
n/m = not meaningful
(a) | We consider the applicable valuation allowance, loan loss allowance, or cumulative impairment 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 allowance, loan loss allowance, or cumulative impairment. |
(b) | Represents the portion of the portfolio specifically impaired during 2019. The related valuation allowance represents the cumulative adjustment to fair value of those specific receivables. |
(c) | The allowance provided for repossessed and foreclosed assets represents any cumulative valuation adjustment recognized to adjust the assets to fair value. |
57
Notes to Condensed Consolidated Financial Statements (unaudited)
Ally Financial Inc. • Form 10-Q
Nonrecurring fair value measurements | Lower-of-cost or fair value reserve, valuation reserve, or cumulative adjustments | Total gain (loss) included in earnings | |||||||||||||||||||||
December 31, 2018 ($ in millions) | Level 1 | Level 2 | Level 3 | Total | |||||||||||||||||||
Assets | |||||||||||||||||||||||
Loans held-for-sale, net | |||||||||||||||||||||||
Automotive (a) | $ | — | $ | — | $ | 210 | $ | 210 | $ | (2 | ) | n/m | (b) | ||||||||||
Other | — | — | 96 | 96 | — | n/m | (b) | ||||||||||||||||
Total loans held-for-sale, net | — | — | 306 | 306 | (2 | ) | n/m | (b) | |||||||||||||||
Commercial finance receivables and loans, net (c) | |||||||||||||||||||||||
Automotive | — | — | 84 | 84 | (10 | ) | n/m | (b) | |||||||||||||||
Other | — | — | 55 | 55 | (46 | ) | n/m | (b) | |||||||||||||||
Total commercial finance receivables and loans, net | — | — | 139 | 139 | (56 | ) | n/m | (b) | |||||||||||||||
Other assets | |||||||||||||||||||||||
Nonmarketable equity investments | — | — | 1 | 1 | (1 | ) | n/m | (b) | |||||||||||||||
Equity-method investments | — | — | 3 | 3 | — | n/m | (b) | ||||||||||||||||
Repossessed and foreclosed assets (d) | — | — | 13 | 13 | (1 | ) | n/m | (b) | |||||||||||||||
Total assets | $ | — | $ | — | $ | 462 | $ | 462 | $ | (60 | ) | n/m |
n/m = not meaningful
(a) | Represents loans within our commercial automotive portfolio. Of this amount, $104 million was valued based upon a sales price for a transaction that closed in January 2019, and $106 million was valued using a discounted cash flow analysis, with a spread over forward interest rates as a significant unobservable input utilizing a range of 0.08–1.09% and weighted average of 0.72%. |
(b) | We consider the applicable valuation allowance, loan loss allowance, or cumulative impairment 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 allowance, loan loss allowance, or cumulative impairment. |
(c) | Represents the portion of the portfolio specifically impaired during 2018. The related valuation allowance represents the cumulative adjustment to fair value of those specific receivables. |
(d) | 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
We elected the fair value option for an insignificant amount of conforming mortgage loans held-for-sale. We elected the fair value option to mitigate earnings volatility by better matching the accounting for the assets with the related derivatives. Our intent in electing fair value measurement was to mitigate a divergence between accounting gains or losses and economic exposure for certain assets and liabilities.
58
Notes to Condensed Consolidated Financial Statements (unaudited)
Ally Financial Inc. • Form 10-Q
Fair Value of Financial Instruments
The following table presents the carrying and estimated fair value of financial instruments, except for those recorded at fair value on a recurring basis presented in the previous section of this note titled Recurring Fair Value. 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 current market data to develop the market assumptions and inputs necessary to estimate fair value. As such, the actual amount received to sell an asset or the amount paid to settle a liability could differ from our estimates. Fair value information presented herein was based on information available at September 30, 2019, and December 31, 2018.
Estimated fair value | |||||||||||||||||||
($ in millions) | Carrying value | Level 1 | Level 2 | Level 3 | Total | ||||||||||||||
September 30, 2019 | |||||||||||||||||||
Financial assets | |||||||||||||||||||
Held-to-maturity securities | $ | 2,618 | $ | — | $ | 2,687 | $ | — | $ | 2,687 | |||||||||
Loans held-for-sale, net | 962 | — | — | 963 | 963 | ||||||||||||||
Finance receivables and loans, net | 127,332 | — | — | 131,154 | 131,154 | ||||||||||||||
FHLB/FRB stock (a) | 1,160 | — | 1,160 | — | 1,160 | ||||||||||||||
Financial liabilities | |||||||||||||||||||
Deposit liabilities | $ | 59,788 | $ | — | $ | — | $ | 60,364 | $ | 60,364 | |||||||||
Short-term borrowings | 5,335 | — | — | 5,336 | 5,336 | ||||||||||||||
Long-term debt | 35,730 | — | 23,336 | 15,221 | 38,557 | ||||||||||||||
December 31, 2018 | |||||||||||||||||||
Financial assets | |||||||||||||||||||
Held-to-maturity securities | $ | 2,362 | $ | — | $ | 2,307 | $ | — | $ | 2,307 | |||||||||
Loans held-for-sale, net | 306 | — | — | 306 | 306 | ||||||||||||||
Finance receivables and loans, net | 128,684 | — | — | 130,878 | 130,878 | ||||||||||||||
FHLB/FRB stock (a) | 1,351 | — | 1,351 | — | 1,351 | ||||||||||||||
Financial liabilities | |||||||||||||||||||
Deposit liabilities | $ | 51,985 | $ | — | $ | — | $ | 51,997 | $ | 51,997 | |||||||||
Short-term borrowings | 9,987 | — | — | 9,992 | 9,992 | ||||||||||||||
Long-term debt | 44,193 | — | 23,846 | 21,800 | 45,646 |
(a) | Included in other assets on our Condensed Consolidated Balance Sheet. |
20. Offsetting Assets and Liabilities
Our derivative contracts and repurchase/reverse repurchase transactions are supported by qualifying master netting and master repurchase agreements. These agreements are legally enforceable bilateral agreements that (i) create a single legal obligation for all individual transactions covered by the agreement to the nondefaulting entity upon an event of default of the counterparty, including bankruptcy, insolvency, or similar proceeding, and (ii) provide the nondefaulting entity the right to accelerate, terminate, and close-out on a net basis all transactions under the agreement and to liquidate or set off collateral promptly upon an event of default of the counterparty.
To further mitigate the risk of counterparty default related to derivative instruments, 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 obligation. Contractual terms provide for standard and customary exchange of collateral based on changes in the market value of the outstanding derivatives. A party posts additional collateral when their obligation rises or removes collateral when it falls, such that the net replacement cost of the nondefaulting party is covered in the event of counterparty default.
In certain instances as it relates to our derivative instruments, we have the option to report derivative assets and liabilities as well as assets and liabilities associated with cash collateral received or delivered that is governed by a master netting agreement on a net basis as long as certain qualifying criteria are met. Similarly, for our repurchase/reverse repurchase transactions, we have the option to report recognized assets and liabilities subject to a master netting agreement on a net basis if certain qualifying criteria are met. At September 30, 2019, these instruments are reported as gross assets and gross liabilities on the Condensed Consolidated Balance Sheet.
59
Notes to Condensed Consolidated Financial Statements (unaudited)
Ally Financial Inc. • Form 10-Q
The composition of offsetting derivative instruments, financial assets, and financial liabilities was as follows.
Gross amounts of recognized assets/liabilities | Gross amounts offset on the Condensed Consolidated Balance Sheet | Net amounts of assets/liabilities presented on the Condensed Consolidated Balance Sheet | ||||||||||||||||||||||
Gross amounts not offset on the Condensed Consolidated Balance Sheet | ||||||||||||||||||||||||
September 30, 2019 ($ in millions) | Financial instruments | Collateral (a) (b) (c) | Net amount | |||||||||||||||||||||
Assets | ||||||||||||||||||||||||
Derivative assets in net asset positions (d) | $ | 91 | $ | — | $ | 91 | $ | (2 | ) | $ | (86 | ) | $ | 3 | ||||||||||
Derivative assets with no offsetting arrangements | 3 | — | 3 | — | — | 3 | ||||||||||||||||||
Total assets | $ | 94 | $ | — | $ | 94 | $ | (2 | ) | $ | (86 | ) | $ | 6 | ||||||||||
Liabilities | ||||||||||||||||||||||||
Derivative liabilities in net liability positions (d) | $ | 1 | $ | — | $ | 1 | $ | — | $ | (1 | ) | $ | — | |||||||||||
Derivative liabilities in net asset positions | 1 | — | 1 | (1 | ) | — | — | |||||||||||||||||
Derivative liabilities with no offsetting arrangements | 1 | — | 1 | — | — | 1 | ||||||||||||||||||
Total derivative liabilities (d) | 3 | — | 3 | (1 | ) | (1 | ) | 1 | ||||||||||||||||
Securities sold under agreements to repurchase (e) | 459 | — | 459 | — | (459 | ) | — | |||||||||||||||||
Total liabilities | $ | 462 | $ | — | $ | 462 | $ | (1 | ) | $ | (460 | ) | $ | 1 |
(a) | Financial collateral received/pledged shown as a balance based on the sum of all net asset and liability positions between Ally and each individual derivative counterparty. |
(b) | Amounts disclosed are limited to the financial asset or liability balance and, accordingly, exclude excess collateral received or pledged and noncash collateral received. There was $38 million of noncash derivative collateral pledged to us that was excluded at September 30, 2019. We do not record such collateral received on our Condensed Consolidated Balance Sheet unless certain conditions are met. |
(c) | Certain agreements grant us the right to sell or pledge the noncash assets we receive as collateral. Noncash collateral pledged to us where the agreement grants us the right to sell or pledge the underlying assets had a fair value of $38 million at September 30, 2019. We have not sold or pledged any of the noncash collateral received under these agreements as of September 30, 2019. |
(d) | For additional information on derivative instruments and hedging activities, refer to Note 17. |
(e) | For additional information on securities sold under agreements to repurchase, refer to Note 12. |
60
Notes to Condensed Consolidated Financial Statements (unaudited)
Ally Financial Inc. • Form 10-Q
Gross amounts of recognized assets/liabilities | Gross amounts offset on the Condensed Consolidated Balance Sheet | Net amounts of assets/liabilities presented on the Condensed Consolidated Balance Sheet | ||||||||||||||||||||||
Gross amounts not offset on the Condensed Consolidated Balance Sheet | ||||||||||||||||||||||||
December 31, 2018 ($ in millions) | Financial instruments | Collateral (a) (b) (c) | Net amount | |||||||||||||||||||||
Assets | ||||||||||||||||||||||||
Derivative assets in net asset positions | $ | 41 | $ | — | $ | 41 | $ | — | $ | (4 | ) | $ | 37 | |||||||||||
Total assets (d) | $ | 41 | $ | — | $ | 41 | $ | — | $ | (4 | ) | $ | 37 | |||||||||||
Liabilities | ||||||||||||||||||||||||
Derivative liabilities in net liability positions (d) | $ | 37 | $ | — | $ | 37 | $ | — | $ | — | $ | 37 | ||||||||||||
Securities sold under agreements to repurchase (e) | 685 | — | 685 | — | (685 | ) | — | |||||||||||||||||
Total liabilities | $ | 722 | $ | — | $ | 722 | $ | — | $ | (685 | ) | $ | 37 |
(a) | Financial collateral received/pledged shown as a balance based on the sum of all net asset and liability positions between Ally and each individual derivative counterparty. |
(b) | Amounts disclosed are limited to the financial asset or liability balance and, accordingly, exclude excess collateral received or pledged and noncash collateral received. There was $3 million of noncash derivative collateral, and $4 million of noncash collateral associated with our repurchase agreements, pledged to us that was excluded at December 31, 2018. We do not record such collateral received on our Condensed Consolidated Balance Sheet unless certain conditions are met. |
(c) | Certain agreements grant us the right to sell or pledge the noncash assets we receive as collateral. Noncash collateral pledged to us where the agreement grants us the right to sell or pledge the underlying assets had a fair value of $7 million at December 31, 2018. We have not sold or pledged any of the noncash collateral received under these agreements as of December 31, 2018. |
(d) | For additional information on derivative instruments and hedging activities, refer to Note 17. |
(e) | For additional information on securities sold under agreements to repurchase, refer to Note 12. |
21. Segment 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.
We report our results of operations on a business-line basis through four operating segments: Automotive Finance operations, Insurance operations, Mortgage Finance operations, and Corporate Finance operations, with the remaining activity reported in Corporate and Other. The operating segments are determined based on the products and services offered, 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.
Automotive Finance operations — One of the largest full service automotive finance operations in the United States providing automotive financing services to consumers, automotive dealers, companies, and municipalities. Our automotive finance services include providing retail installment sales contracts, loans and operating leases, offering term loans to dealers, financing dealer floorplans and other lines of credit to dealers, warehouse lines to automotive retailers, fleet financing, providing financing to companies and municipalities for the purchase or lease of vehicles, and vehicle-remarketing services.
Insurance operations — A complementary automotive-focused business offering both consumer finance protection and insurance products sold primarily through the automotive dealer channel, and commercial insurance products sold directly to dealers. As part of our focus on offering dealers a broad range of consumer financial and insurance products, we provide VSCs, VMCs, and GAP products. We also underwrite select commercial insurance coverages, which primarily insure dealers’ vehicle inventory.
Mortgage Finance operations — Consists of the management of held-for-investment and held-for sale consumer mortgage loan portfolios. Our held-for-investment loan portfolio includes bulk purchases of high-quality jumbo and low-to-moderate income (LMI) mortgage loans originated by third parties. Our direct-to-consumer mortgage offering, named Ally Home, consists of a variety of jumbo and conforming fixed- and adjustable-rate mortgage products with the assistance of a third-party fulfillment provider. Jumbo mortgage loans are generally held on our balance sheet and are accounted for as held-for-investment. Conforming mortgage loans are generally originated as held-for-sale and then sold to the fulfillment provider, and we retain no mortgage servicing rights associated with those loans that are sold.
Corporate Finance operations — Primarily provides senior secured leveraged cash flow and asset-based loans to mostly U.S.-based middle-market companies. Our primary focus is on businesses owned by private equity sponsors with loans typically used for leveraged buyouts, mergers and acquisitions, debt refinancing, restructurings, and working capital. We also offer a commercial real estate product to serve companies in the healthcare industry.
61
Notes to Condensed Consolidated Financial Statements (unaudited)
Ally Financial Inc. • Form 10-Q
Corporate and Other primarily consists of centralized corporate treasury activities such as management of the cash and corporate investment securities and loan portfolios, short- and long-term debt, retail and brokered deposit liabilities, derivative instruments, original issue discount, and the residual impacts of our corporate funds-transfer pricing (FTP) and treasury asset liability management (ALM) activities. Corporate and Other also includes certain equity investments, which primarily consist of FHLB and FRB stock, the management of our legacy mortgage portfolio, which primarily consists of loans originated prior to January 1, 2009, and reclassifications and eliminations between the reportable operating segments. Additionally, financial results related to Ally Invest are currently included within Corporate and Other.
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 benchmark rate 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 is based in part on internal allocations, which involve management judgment.
Financial information for our reportable operating segments is summarized as follows.
Three months ended September 30, ($ in millions) | Automotive Finance operations | Insurance operations | Mortgage Finance operations | Corporate Finance operations | Corporate and Other | Consolidated (a) | ||||||||||||||||||
2019 | ||||||||||||||||||||||||
Net financing revenue (loss) and other interest income | $ | 1,078 | $ | 14 | $ | 39 | $ | 60 | $ | (3 | ) | $ | 1,188 | |||||||||||
Other revenue | 59 | 289 | 10 | 9 | 46 | 413 | ||||||||||||||||||
Total net revenue | 1,137 | 303 | 49 | 69 | 43 | 1,601 | ||||||||||||||||||
Provision for loan losses | 265 | — | — | 3 | (5 | ) | 263 | |||||||||||||||||
Total noninterest expense | 443 | 247 | 38 | 22 | 88 | 838 | ||||||||||||||||||
Income (loss) from continuing operations before income tax expense | $ | 429 | $ | 56 | $ | 11 | $ | 44 | $ | (40 | ) | $ | 500 | |||||||||||
Total assets | $ | 115,096 | $ | 8,478 | $ | 16,583 | $ | 5,275 | $ | 36,053 | $ | 181,485 | ||||||||||||
2018 | ||||||||||||||||||||||||
Net financing revenue and other interest income | $ | 956 | $ | 14 | $ | 44 | $ | 50 | $ | 43 | $ | 1,107 | ||||||||||||
Other revenue | 80 | 282 | 2 | 14 | 20 | 398 | ||||||||||||||||||
Total net revenue | 1,036 | 296 | 46 | 64 | 63 | 1,505 | ||||||||||||||||||
Provision for loan losses | 229 | — | 2 | 8 | (6 | ) | 233 | |||||||||||||||||
Total noninterest expense | 424 | 241 | 36 | 20 | 86 | 807 | ||||||||||||||||||
Income (loss) from continuing operations before income tax expense | $ | 383 | $ | 55 | $ | 8 | $ | 36 | $ | (17 | ) | $ | 465 | |||||||||||
Total assets | $ | 114,675 | $ | 7,776 | $ | 14,896 | $ | 4,459 | $ | 31,295 | $ | 173,101 |
(a) | Net financing revenue and other interest income after the provision for loan losses totaled $925 million and $874 million for the three months ended September 30, 2019, and 2018, respectively. |
62
Notes to Condensed Consolidated Financial Statements (unaudited)
Ally Financial Inc. • Form 10-Q
Nine months ended September 30, ($ in millions) | Automotive Finance operations | Insurance operations | Mortgage Finance operations | Corporate Finance operations | Corporate and Other | Consolidated (a) | ||||||||||||||||||
2019 | ||||||||||||||||||||||||
Net financing revenue and other interest income | $ | 3,080 | $ | 41 | $ | 135 | $ | 175 | $ | 46 | $ | 3,477 | ||||||||||||
Other revenue | 188 | 935 | 16 | 30 | 105 | 1,274 | ||||||||||||||||||
Total net revenue | 3,268 | 976 | 151 | 205 | 151 | 4,751 | ||||||||||||||||||
Provision for loan losses | 707 | — | 2 | 29 | (16 | ) | 722 | |||||||||||||||||
Total noninterest expense | 1,344 | 775 | 111 | 73 | 246 | 2,549 | ||||||||||||||||||
Income (loss) from continuing operations before income tax expense | $ | 1,217 | $ | 201 | $ | 38 | $ | 103 | $ | (79 | ) | $ | 1,480 | |||||||||||
Total assets | $ | 115,096 | $ | 8,478 | $ | 16,583 | $ | 5,275 | $ | 36,053 | $ | 181,485 | ||||||||||||
2018 | ||||||||||||||||||||||||
Net financing revenue and other interest income | $ | 2,790 | $ | 39 | $ | 131 | $ | 153 | $ | 137 | $ | 3,250 | ||||||||||||
Other revenue | 209 | 794 | 5 | 36 | 72 | 1,116 | ||||||||||||||||||
Total net revenue | 2,999 | 833 | 136 | 189 | 209 | 4,366 | ||||||||||||||||||
Provision for loan losses | 658 | — | 4 | 2 | (12 | ) | 652 | |||||||||||||||||
Total noninterest expense | 1,308 | 740 | 102 | 64 | 246 | 2,460 | ||||||||||||||||||
Income (loss) from continuing operations before income tax expense | $ | 1,033 | $ | 93 | $ | 30 | $ | 123 | $ | (25 | ) | $ | 1,254 | |||||||||||
Total assets | $ | 114,675 | $ | 7,776 | $ | 14,896 | $ | 4,459 | $ | 31,295 | $ | 173,101 |
(a) | Net financing revenue and other interest income after the provision for loan losses totaled $2.8 billion and $2.6 billion for the nine months ended September 30, 2019, and 2018, respectively. |
22. Parent and Guarantor Condensed Consolidating Financial Statements
Certain of our senior notes issued by the parent are guaranteed by 100% directly owned subsidiaries of Ally (the Guarantors). As of September 30, 2019, the Guarantors include Ally US LLC and IB Finance Holding Company, LLC (IB Finance), each of which fully and unconditionally guarantee the senior notes on a joint and several basis.
The following financial statements present condensed consolidating financial data for (i) Ally Financial Inc. (on a parent company-only basis); (ii) the Guarantors; (iii) the nonguarantor subsidiaries (all other subsidiaries); and (iv) a column for adjustments to arrive at (v) the information for the parent company, the Guarantors, and nonguarantors on a consolidated basis.
Investment in subsidiaries is accounted for by the parent company and the Guarantors using the equity method for this presentation. Results of operations of subsidiaries are therefore classified in the parent company’s and Guarantors’ investment in subsidiaries accounts. The elimination entries set forth in the following condensed consolidating financial statements eliminate distributed and undistributed income of subsidiaries, investment in subsidiaries, and intercompany balances and transactions between the parent, the Guarantors, and nonguarantors.
63
Notes to Condensed Consolidated Financial Statements (unaudited)
Ally Financial Inc. • Form 10-Q
Condensed Consolidating Statements of Comprehensive Income
Three months ended September 30, 2019 ($ in millions) | Parent | Guarantors | Nonguarantors | Consolidating adjustments | Ally consolidated | |||||||||||||||
Financing revenue and other interest income | ||||||||||||||||||||
Interest and fees on finance receivables and loans | $ | (52 | ) | $ | — | $ | 1,914 | $ | (3 | ) | $ | 1,859 | ||||||||
Interest and fees on finance receivables and loans — intercompany | 4 | — | 1 | (5 | ) | — | ||||||||||||||
Interest on loans held-for-sale | — | — | 8 | — | 8 | |||||||||||||||
Interest and dividends on investment securities and other earning assets | — | — | 237 | — | 237 | |||||||||||||||
Interest on cash and cash equivalents | 2 | — | 17 | — | 19 | |||||||||||||||
Interest on cash and cash equivalents — intercompany | 3 | — | 5 | (8 | ) | — | ||||||||||||||
Operating leases | — | — | 368 | — | 368 | |||||||||||||||
Total financing (loss) revenue and other interest income | (43 | ) | — | 2,550 | (16 | ) | 2,491 | |||||||||||||
Interest expense | ||||||||||||||||||||
Interest on deposits | — | — | 658 | — | 658 | |||||||||||||||
Interest on short-term borrowings | 15 | — | 18 | — | 33 | |||||||||||||||
Interest on long-term debt | 215 | — | 163 | — | 378 | |||||||||||||||
Interest on intercompany debt | 6 | — | 7 | (13 | ) | — | ||||||||||||||
Total interest expense | 236 | — | 846 | (13 | ) | 1,069 | ||||||||||||||
Net depreciation expense on operating lease assets | 1 | — | 233 | — | 234 | |||||||||||||||
Net financing (loss) revenue | (280 | ) | — | 1,471 | (3 | ) | 1,188 | |||||||||||||
Cash dividends from subsidiaries | ||||||||||||||||||||
Bank subsidiary | 550 | 550 | — | (1,100 | ) | — | ||||||||||||||
Nonbank subsidiaries | 52 | — | (1 | ) | (51 | ) | — | |||||||||||||
Other revenue | ||||||||||||||||||||
Insurance premiums and service revenue earned | — | — | 280 | — | 280 | |||||||||||||||
Gain on mortgage and automotive loans, net | 1 | — | 9 | — | 10 | |||||||||||||||
Other gain on investments, net | 2 | — | 25 | — | 27 | |||||||||||||||
Other income, net of losses | 72 | — | 143 | (119 | ) | 96 | ||||||||||||||
Total other revenue | 75 | — | 457 | (119 | ) | 413 | ||||||||||||||
Total net revenue | 397 | 550 | 1,927 | (1,273 | ) | 1,601 | ||||||||||||||
Provision for loan losses | 3 | — | 259 | 1 | 263 | |||||||||||||||
Noninterest expense | ||||||||||||||||||||
Compensation and benefits expense | 9 | — | 287 | — | 296 | |||||||||||||||
Insurance losses and loss adjustment expenses | — | — | 74 | — | 74 | |||||||||||||||
Other operating expenses | 124 | — | 463 | (119 | ) | 468 | ||||||||||||||
Total noninterest expense | 133 | — | 824 | (119 | ) | 838 | ||||||||||||||
Income from continuing operations before income tax expense and undistributed income (loss) of subsidiaries | 261 | 550 | 844 | (1,155 | ) | 500 | ||||||||||||||
Income tax (benefit) expense from continuing operations | (117 | ) | — | 236 | — | 119 | ||||||||||||||
Net income from continuing operations | 378 | 550 | 608 | (1,155 | ) | 381 | ||||||||||||||
Income (loss) from discontinued operations, net of tax | 1 | — | (1 | ) | — | — | ||||||||||||||
Undistributed income (loss) of subsidiaries | ||||||||||||||||||||
Bank subsidiary | 17 | 17 | — | (34 | ) | — | ||||||||||||||
Nonbank subsidiaries | (15 | ) | — | — | 15 | — | ||||||||||||||
Net income | 381 | 567 | 607 | (1,174 | ) | 381 | ||||||||||||||
Other comprehensive income, net of tax | 106 | 80 | 109 | (189 | ) | 106 | ||||||||||||||
Comprehensive income | $ | 487 | $ | 647 | $ | 716 | $ | (1,363 | ) | $ | 487 |
64
Notes to Condensed Consolidated Financial Statements (unaudited)
Ally Financial Inc. • Form 10-Q
Three months ended September 30, 2018 ($ in millions) | Parent | Guarantors | Nonguarantors | Consolidating adjustments | Ally consolidated | |||||||||||||||
Financing revenue and other interest income | ||||||||||||||||||||
Interest and fees on finance receivables and loans | $ | (4 | ) | $ | — | $ | 1,712 | $ | — | $ | 1,708 | |||||||||
Interest and fees on finance receivables and loans — intercompany | 3 | — | 2 | (5 | ) | — | ||||||||||||||
Interest on loans held-for-sale | — | — | 4 | — | 4 | |||||||||||||||
Interest and dividends on investment securities and other earning assets | — | — | 198 | — | 198 | |||||||||||||||
Interest on cash and cash equivalents | 2 | — | 16 | — | 18 | |||||||||||||||
Interest on cash and cash equivalents — intercompany | 1 | — | 3 | (4 | ) | — | ||||||||||||||
Operating leases | 1 | — | 367 | — | 368 | |||||||||||||||
Total financing revenue and other interest income | 3 | — | 2,302 | (9 | ) | 2,296 | ||||||||||||||
Interest expense | ||||||||||||||||||||
Interest on deposits | — | — | 462 | — | 462 | |||||||||||||||
Interest on short-term borrowings | 12 | — | 17 | — | 29 | |||||||||||||||
Interest on long-term debt | 250 | — | 201 | — | 451 | |||||||||||||||
Interest on intercompany debt | 5 | — | 4 | (9 | ) | — | ||||||||||||||
Total interest expense | 267 | — | 684 | (9 | ) | 942 | ||||||||||||||
Net depreciation expense on operating lease assets | 2 | — | 245 | — | 247 | |||||||||||||||
Net financing (loss) revenue | (266 | ) | — | 1,373 | — | 1,107 | ||||||||||||||
Cash dividends from subsidiaries | ||||||||||||||||||||
Bank subsidiary | 550 | 550 | — | (1,100 | ) | — | ||||||||||||||
Nonbank subsidiaries | 88 | — | — | (88 | ) | — | ||||||||||||||
Other revenue | ||||||||||||||||||||
Insurance premiums and service revenue earned | — | — | 258 | — | 258 | |||||||||||||||
Gain on mortgage and automotive loans, net | 16 | — | 1 | — | 17 | |||||||||||||||
Other gain on investments, net | — | — | 22 | — | 22 | |||||||||||||||
Other income, net of losses | 105 | — | 187 | (191 | ) | 101 | ||||||||||||||
Total other revenue | 121 | — | 468 | (191 | ) | 398 | ||||||||||||||
Total net revenue | 493 | 550 | 1,841 | (1,379 | ) | 1,505 | ||||||||||||||
Provision for loan losses | 30 | — | 203 | — | 233 | |||||||||||||||
Noninterest expense | ||||||||||||||||||||
Compensation and benefits expense | 19 | — | 255 | — | 274 | |||||||||||||||
Insurance losses and loss adjustment expenses | — | — | 77 | — | 77 | |||||||||||||||
Other operating expenses | 175 | — | 472 | (191 | ) | 456 | ||||||||||||||
Total noninterest expense | 194 | — | 804 | (191 | ) | 807 | ||||||||||||||
Income from continuing operations before income tax expense and undistributed (loss) income of subsidiaries | 269 | 550 | 834 | (1,188 | ) | 465 | ||||||||||||||
Income tax (benefit) expense from continuing operations | (88 | ) | — | 179 | — | 91 | ||||||||||||||
Net income from continuing operations | 357 | 550 | 655 | (1,188 | ) | 374 | ||||||||||||||
Income from discontinued operations, net of tax | — | — | — | — | — | |||||||||||||||
Undistributed (loss) income of subsidiaries | ||||||||||||||||||||
Bank subsidiary | (31 | ) | (31 | ) | — | 62 | — | |||||||||||||
Nonbank subsidiaries | 48 | — | — | (48 | ) | — | ||||||||||||||
Net income | 374 | 519 | 655 | (1,174 | ) | 374 | ||||||||||||||
Other comprehensive loss, net of tax | (133 | ) | (104 | ) | (133 | ) | 237 | (133 | ) | |||||||||||
Comprehensive income | $ | 241 | $ | 415 | $ | 522 | $ | (937 | ) | $ | 241 |
65
Notes to Condensed Consolidated Financial Statements (unaudited)
Ally Financial Inc. • Form 10-Q
Nine months ended September 30, 2019 ($ in millions) | Parent | Guarantors | Nonguarantors | Consolidating adjustments | Ally consolidated | |||||||||||||||
Financing revenue and other interest income | ||||||||||||||||||||
Interest and fees on finance receivables and loans | $ | (172 | ) | $ | — | $ | 5,704 | $ | (6 | ) | $ | 5,526 | ||||||||
Interest and fees on finance receivables and loans — intercompany | 10 | — | 4 | (14 | ) | — | ||||||||||||||
Interest on loans held-for-sale | — | — | 13 | — | 13 | |||||||||||||||
Interest and dividends on investment securities and other earning assets | — | — | 721 | — | 721 | |||||||||||||||
Interest on cash and cash equivalents | 8 | — | 55 | — | 63 | |||||||||||||||
Interest on cash and cash equivalents — intercompany | 8 | — | 13 | (21 | ) | — | ||||||||||||||
Operating leases | 1 | — | 1,091 | — | 1,092 | |||||||||||||||
Total financing (loss) revenue and other interest income | (145 | ) | — | 7,601 | (41 | ) | 7,415 | |||||||||||||
Interest expense | ||||||||||||||||||||
Interest on deposits | — | — | 1,901 | — | 1,901 | |||||||||||||||
Interest on short-term borrowing |