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.
5
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.
7
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</ | ||||||||||||||||