10-Q 1 ally201733110-q.htm FORM 10-Q Document

UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
þ
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2017, 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)
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 þ                    No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for a shorter period that the registrant was required to submit and post such files).
Yes þ                    No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, 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 þ
  
Accelerated filer o
  
Non-accelerated filer o
 
Smaller reporting company o
 
  
(Do not check if a smaller reporting company)
 
Emerging growth company o

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.  o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes ¨                    No þ
At May 2, 2017, the number of shares outstanding of the Registrant’s common stock was 459,193,676 shares.



INDEX
Ally Financial Inc. Ÿ Form 10-Q

 
 
Page
 
Item 1.
 
 
 
 
 
Item 2.
Item 3.
Item 4.
Item 1.
Item 1A.
Item 2.
Item 3.
Item 4.
Item 5.
Item 6.



 
PART I — FINANCIAL INFORMATION
 
 
 
Item 1. Financial Statements
Condensed Consolidated Statement of Comprehensive Income (unaudited)
Ally Financial Inc. • Form 10-Q



 
 
Three months ended March 31,
($ in millions)
 
2017
 
2016
Financing revenue and other interest income
 
 
 
 
Interest and fees on finance receivables and loans
 
$
1,368

 
$
1,235

Interest and dividends on investment securities and other earning assets
 
134

 
102

Interest on cash and cash equivalents
 
5

 
3

Operating leases
 
543

 
769

Total financing revenue and other interest income
 
2,050

 
2,109

Interest expense
 
 
 
 
Interest on deposits
 
231

 
193

Interest on short-term borrowings
 
27

 
13

Interest on long-term debt
 
424

 
442

Total interest expense
 
682

 
648

Net depreciation expense on operating lease assets
 
389

 
510

Net financing revenue and other interest income
 
979

 
951

Other revenue
 
 
 
 
Insurance premiums and service revenue earned
 
241

 
230

Gain on mortgage and automotive loans, net
 
14

 
1

Loss on extinguishment of debt
 
(1
)
 
(4
)
Other gain on investments, net
 
27

 
54

Other income, net of losses
 
115

 
95

Total other revenue
 
396


376

Total net revenue
 
1,375

 
1,327

Provision for loan losses
 
271

 
220

Noninterest expense
 
 
 
 
Compensation and benefits expense
 
285

 
252

Insurance losses and loss adjustment expenses
 
88

 
73

Other operating expenses
 
405

 
385

Total noninterest expense
 
778

 
710

Income from continuing operations before income tax expense
 
326

 
397

Income tax expense from continuing operations
 
113

 
150

Net income from continuing operations
 
213

 
247

Income from discontinued operations, net of tax
 
1

 
3

Net income
 
214

 
250

Other comprehensive income, net of tax
 
20

 
146

Comprehensive income
 
$
234


$
396

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 March 31,
(in dollars) (a)
 
2017
 
2016
Basic earnings per common share
 
 
 
 
Net income from continuing operations
 
$
0.46

 
$
0.48

Income from discontinued operations, net of tax
 

 
0.01

Net income
 
$
0.46

 
$
0.49

Diluted earnings per common share
 
 
 
 
Net income from continuing operations
 
$
0.46

 
$
0.48

Income from discontinued operations, net of tax
 

 
0.01

Net income
 
$
0.46

 
$
0.49

Cash dividends per common share
 
$
0.08

 
$

(a)
Figures in the table may not recalculate exactly due to rounding. Earnings per share is calculated based on unrounded numbers.
Refer to Note 17 for additional earnings per share information. The Notes to the Condensed Consolidated Financial Statements (unaudited) are an integral part of these statements.

4

Condensed Consolidated Balance Sheet (unaudited)
Ally Financial Inc. • Form 10-Q

($ in millions, except share data)
 
March 31, 2017
 
December 31, 2016
Assets
 
 
 
 
Cash and cash equivalents
 
 
 
 
Noninterest-bearing
 
$
1,513

 
$
1,547

Interest-bearing
 
2,789

 
4,387

Total cash and cash equivalents
 
4,302

 
5,934

Available-for-sale securities (refer to Note 7 for discussion of investment securities pledged as collateral)
 
20,308

 
18,926

Held-to-maturity securities (fair value of $1,063 and $789)
 
1,104

 
839

Loans held-for-sale, net
 
1

 

Finance receivables and loans, net
 
 
 
 
Finance receivables and loans, net of unearned income
 
119,002

 
118,944

Allowance for loan losses
 
(1,155
)
 
(1,144
)
Total finance receivables and loans, net
 
117,847

 
117,800

Investment in operating leases, net
 
10,461

 
11,470

Premiums receivable and other insurance assets
 
1,944

 
1,905

Other assets
 
6,134

 
6,854

Total assets
 
$
162,101

 
$
163,728

Liabilities
 
 
 
 
Deposit liabilities
 
 
 
 
Noninterest-bearing
 
$
102

 
$
84

Interest-bearing
 
84,384


78,938

Total deposit liabilities
 
84,486

 
79,022

Short-term borrowings
 
8,371

 
12,673

Long-term debt
 
51,061

 
54,128

Interest payable
 
382

 
351

Unearned insurance premiums and service revenue
 
2,514

 
2,500

Accrued expenses and other liabilities
 
1,922

 
1,737

Total liabilities
 
148,736

 
150,411

Contingencies (refer to Note 25)
 
 
 
 
Equity
 
 
 
 
Common stock and paid-in capital ($0.01 par value, shares authorized 1,100,000,000; issued 488,997,931 and 485,707,644; and outstanding 462,193,424 and 467,000,306)
 
21,187

 
21,166

Accumulated deficit
 
(6,975
)
 
(7,151
)
Accumulated other comprehensive loss
 
(321
)
 
(341
)
Treasury stock, at cost (26,804,507 and 18,707,338 shares)
 
(526
)
 
(357
)
Total equity
 
13,365

 
13,317

Total liabilities and equity
 
$
162,101

 
$
163,728

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

5

Condensed Consolidated Balance Sheet (unaudited)
Ally Financial Inc. • Form 10-Q

The assets of consolidated variable interest entities, presented based upon the legal transfer of the underlying assets in order to reflect legal ownership, 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)
 
March 31, 2017
 
December 31, 2016
Assets
 
 
 
 
Finance receivables and loans, net
 
 
 
 
Finance receivables and loans, net of unearned income
 
$
22,550

 
$
24,630

Allowance for loan losses
 
(154
)
 
(173
)
Total finance receivables and loans, net
 
22,396

 
24,457

Investment in operating leases, net
 
1,273

 
1,745

Other assets
 
914

 
1,390

Total assets
 
$
24,583

 
$
27,592

Liabilities
 
 
 
 
Long-term debt
 
$
13,331

 
$
13,259

Accrued expenses and other liabilities
 
12

 
12

Total liabilities
 
$
13,343

 
$
13,271

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

($ in millions)
 
Common stock and paid-in capital
 
Preferred stock
 
Accumulated deficit
 
Accumulated other comprehensive loss
 
Treasury stock
 
Total equity
Balance at January 1, 2016
 
$
21,100

 
$
696

 
$
(8,110
)
 
$
(231
)
 
$
(16
)
 
$
13,439

Net income
 

 

 
250

 


 

 
250

Preferred stock dividends
 

 

 
(15
)
 


 

 
(15
)
Share-based compensation
 
17

 


 

 


 


 
17

Other comprehensive income
 

 


 

 
146

 


 
146

Share repurchases related to employee stock-based compensation awards
 

 


 

 


 
(14
)
 
(14
)
Balance at March 31, 2016
 
$
21,117

 
$
696

 
$
(7,875
)
 
$
(85
)
 
$
(30
)
 
$
13,823

Balance at January 1, 2017
 
$
21,166

 
$

 
$
(7,151
)
 
$
(341
)
 
$
(357
)
 
$
13,317

Net income
 

 

 
214

 


 

 
214

Share-based compensation
 
21

 

 

 

 

 
21

Other comprehensive income
 

 

 

 
20

 

 
20

Common stock repurchases (a)
 

 

 

 

 
(169
)
 
(169
)
Common stock dividends ($0.08 per share)
 

 

 
(38
)
 

 


 
(38
)
Balance at March 31, 2017
 
$
21,187

 
$

 
$
(6,975
)
 
$
(321
)
 
$
(526
)
 
$
13,365

(a)
Includes shares repurchased related to employee stock-based compensation awards.
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

Three months ended March 31, ($ in millions)
 
2017
 
2016
Operating activities




Net income

$
214


$
250

Reconciliation of net income to net cash provided by operating activities

 

 
Depreciation and amortization

534


653

Provision for loan losses

271


220

Gain on mortgage and automotive loans, net

(14
)

(1
)
Other gain on investments, net

(27
)

(54
)
Loss on extinguishment of debt

1


4

Originations and purchases of loans held-for-sale

(21
)

(44
)
Proceeds from sales and repayments of loans originated as held-for-sale

20


104

Net change in

 

 
Deferred income taxes

91


147

Interest payable

31


24

Other assets

60


46

Other liabilities

(20
)

(122
)
Other, net

35


(25
)
Net cash provided by operating activities

1,175


1,202

Investing activities




Purchases of available-for-sale securities

(2,833
)

(4,870
)
Proceeds from sales of available-for-sale securities

1,045


4,175

Proceeds from maturities and repayment of available-for-sale securities

589


409

Purchases of held-to-maturity securities

(215
)

(118
)
Proceeds from maturities and repayments of held-to-maturity securities

5



Purchases of loans held-for-investment

(405
)

(1,402
)
Proceeds from sales of finance receivables and loans originated as held-for-investment

1,164


2,594

Originations and repayments of loans held-for-investment and other, net
 
(1,174
)
 
(684
)
Purchases of operating lease assets

(893
)

(701
)
Disposals of operating lease assets

1,545


1,535

Net change in restricted cash

355


48

Net change in nonmarketable equity investments

213


(315
)
Other, net

(59
)

(20
)
Net cash (used in) provided by investing activities

(663
)

651

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

Three months ended March 31, ($ in millions)
 
2017
 
2016
Financing activities




Net change in short-term borrowings

(4,303
)

(2,739
)
Net increase in deposits

5,451


3,780

Proceeds from issuance of long-term debt

4,488


4,244

Repayments of long-term debt

(7,573
)

(8,490
)
Repurchases of common stock
 
(169
)
 
(14
)
Dividends paid

(38
)

(15
)
Net cash used in financing activities

(2,144
)

(3,234
)
Effect of exchange-rate changes on cash and cash equivalents



2

Net decrease in cash and cash equivalents

(1,632
)

(1,379
)
Cash and cash equivalents at beginning of year

5,934


6,380

Cash and cash equivalents at March 31,

$
4,302


$
5,001

Supplemental disclosures

 
 
 
Cash paid for

 
 
 
Interest

$
648


$
626

Income taxes

2



Noncash items

 
 
 
Held-to-maturity securities received in consideration for loans sold
 
56

 

Finance receivables and loans transferred to loans held-for-sale

1,213


2,599

Other disclosures

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

8


9

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 requires otherwise, Ally, the Company, or we, us, or our) is a leading digital financial services company offering diversified financial products for consumers, businesses, automotive dealers and corporate clients. Our legacy dates back to 1919, and Ally was redesigned in 2009 with a distinctive brand and relentless focus on our customers. We reconverted to a Delaware corporation in 2009 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 banking subsidiary, Ally Bank, is an award-winning online bank, and an indirect, wholly-owned subsidiary of Ally Financial Inc. Collectively, Ally Financial Inc. and its subsidiaries offer a variety of deposit and banking products including CDs, online savings, money market and checking accounts, IRA products, automotive lending products to customers and dealers, corporate finance lending, insurance products and services, a cash back credit card, mortgage lending offerings, and wealth management solutions.
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, legal and regulatory reserves, and the determination of the provision for income taxes.
The Condensed Consolidated Financial Statements at March 31, 2017, and for the three months ended March 31, 2017, and 2016, 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, 2016, as filed on February 27, 2017, with the U.S. Securities and Exchange Commission (SEC).
Significant Accounting Policies
Income Taxes
In calculating the provision for interim income taxes, in accordance with Accounting Standards Codification (ASC) 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 2016 Annual Report on Form 10-K, which describes our annual significant income tax accounting policy and related methodology.
Securitizations and Variable Interest Entities
We securitize, transfer, and service consumer and commercial automotive loans and operating leases. Securitization transactions typically involve the use of variable interest entities (VIEs) and are accounted for either as sales or secured borrowings. We may retain economic interests in securitized and sold assets, which are generally in the form of senior or subordinated interests, other residual interests, and servicing rights.
In order to conclude whether or not a VIE is required to be consolidated, careful consideration and judgment must be given to our continuing involvement with the variable interest entity. In circumstances where we have both the power to direct the activities of the entity that most significantly impact the entity's performance and the obligation to absorb losses or the right to receive benefits of the entity that could be significant, we would conclude that we would consolidate the entity, which would also preclude us from recording an accounting sale on the transaction. In the case of a consolidated VIE, the accounting is consistent with a secured borrowing, (e.g., we continue to carry the loans and we record the related securitized debt on our Condensed Consolidated Balance Sheet).
In transactions where we are not determined to be the primary beneficiary of the VIE, we must determine whether or not we achieve a sale for accounting purposes. In order to achieve a sale for accounting purposes, the assets being transferred must be legally isolated, not be constrained by restrictions from further transfer, and be deemed to be beyond our control. If we were to fail any of the three criteria for sale accounting, the accounting would be consistent with the preceding paragraph (i.e., a secured borrowing). Refer to Note 10 to the Condensed Consolidated Financial Statements for discussion on VIEs.
Gains or losses on off-balance sheet securitizations take into consideration the fair value of any retained interests including the value of certain servicing assets or liabilities, if any, which are initially recorded at fair value at the date of sale. The estimate of the fair value of the retained interests and servicing requires us to exercise significant judgment about the timing and amount of future cash flows from the interests. Refer to Note 21 to the Condensed Consolidated Financial Statements for a discussion of fair value estimates.
Gains or losses on off-balance sheet securitizations and sales are reported in gain on mortgage and automotive loans, net, in our Condensed Consolidated Statement of Comprehensive Income. Retained interests are classified as securities or as other assets depending on their nature. On December 24, 2016, the risk retention rules under the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-

10

Notes to Condensed Consolidated Financial Statements (unaudited)
Ally Financial Inc. • Form 10-Q



Frank Act) of 2010 became effective, requiring us to retain at least five percent of the credit risk of the assets underlying asset-backed securitizations. Our note was updated to address this guidance.
We retain servicing responsibilities for all of our consumer and commercial automotive loan and operating lease securitizations. We may receive servicing fees for off-balance sheet securitizations based on the securitized loan balances and certain ancillary fees, all of which are reported in servicing fees in the Condensed Consolidated Statement of Comprehensive Income. Typically, the fee we are paid for servicing consumer automotive finance receivables represents adequate compensation, and consequently, we do not recognize a servicing asset or liability.
Whether on- or off-balance sheet, the investors in the securitization trusts generally have no recourse to our assets outside of protections afforded through customary market representation and warranty repurchase provisions.
Refer to Note 1 to the Consolidated Financial Statements in our 2016 Annual Report on Form 10-K regarding additional significant accounting policies.
Recently Adopted Accounting Standards
Stock Compensation — Improvements to Employee Share-Based Payment Accounting (ASU 2016-09)
As of December 31, 2016, we adopted Accounting Standards Update (ASU) 2016-09. The amendments in this update include changes to several aspects of share-based payment accounting. The amendments allow for an entity-wide accounting policy election to either account for forfeitures as they occur or estimate the number of awards that are expected to vest. We elected to account for forfeitures as they occur. The amendments modify the tax withholding requirements to allow entities to withhold an amount up to the employee’s maximum individual statutory tax rates without resulting in a liability classification of the award as opposed to limiting the withholding to the minimum statutory tax rates as required under previous accounting guidance. The amendments require that all excess tax benefits and tax deficiencies related to share-based payment awards should be recognized in income tax expense or benefit in the income statement in the period in which they occur. The adoption of these amendments did not have a material impact to the financial statements. The amendments also address the classification and presentation of certain items on the cash flow statement. Specifically, cash flows related to excess tax benefits should be classified as an operating activity instead of a financing activity and cash flows related to cash paid to a tax authority by an employer when withholding shares from an employee’s award for tax withholding purposes should be classified as a financing activity. The adoption of the amendment requiring excess tax benefits to be classified as an operating activity did not have a material impact to our Condensed Consolidated Statement of Cash Flows. The adoption of the amendment requiring amounts paid to a tax authority by an employer when withholding shares from an employee’s award for tax withholding purposes to be classified as a financing activity resulted in the reclassification of cash flows in our Condensed Consolidated Statement of Cash Flows for the three months ended March 31, 2016, of $14 million from operating activities to financing activities.
Recently Issued Accounting Standards
Revenue from Contracts with Customers (ASU 2014-09) and Revenue from Contracts with Customers — Deferral of the Effective Date (ASU 2015-14)
In May 2014, the Financial Accounting Standards Board (FASB) issued ASU 2014-09. The purpose of this guidance is to streamline and consolidate existing revenue recognition principles in GAAP and to converge revenue recognition principles with International Financial Reporting Standards (IFRS). The core principle of the amendments is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled to receive in exchange for those goods or services. The amendments include a five step process for consideration of the main principle, guidance on the accounting treatment for costs associated with a contract, and disclosure requirements related to the revenue process. As originally issued, the amendments in ASU 2014-09 were to be effective beginning on January 1, 2017. However, in August 2015, the FASB issued ASU 2015-14, which deferred the effective date of the guidance until January 1, 2018, and permitted early adoption as of the original effective date in ASU 2014-09. The FASB created a transition resource group to work with stakeholders and clarify the new guidance as necessary. The FASB has issued several additional ASUs to clarify guidance and provide implementation support for ASU 2014-09. The clarifying guidance elaborates on the key concepts within ASU 2014-09 and clarifies how those concepts interact with other GAAP requirements. Management has considered these additional ASUs when assessing the overall impact of ASU 2014-09. The amendments to the revenue recognition principles can be applied on adoption either through a full retrospective application or on a modified basis with a cumulative effect adjustment on the date of initial adoption with certain practical expedients. A majority of our revenue streams are not within the scope of this ASU as they are governed by other accounting standards. Management has determined that certain revenue streams and contractual arrangements are in scope of this guidance, including deposit fees, premiums on certain noninsurance contracts, brokering commissions through our insurance operations, remarketing fee income through SmartAuction, and investment advisory fee income through TradeKing. Management does not expect these amendments to impact current revenue recognition patterns for a majority of the in scope revenue streams and contracts. However, we expect that the application of this guidance to noninsurance contracts within our insurance business will result in the deferral of certain amounts we currently recognize as revenue upon the origination of the contract. We do not expect the impact of the new guidance to these specific contracts to be material to the financial statements. Management continues to evaluate whether we will adopt this guidance using the full retrospective approach or the modified retrospective approach.

11

Notes to Condensed Consolidated Financial Statements (unaudited)
Ally Financial Inc. • Form 10-Q



Financial Instruments — Recognition and Measurement of Financial Assets (ASU 2016-01)
In January 2016, the FASB issued ASU 2016-01. The amendments in this update modify the requirements related to the measurement of certain financial instruments in the statement of financial condition and results of operations. For equity investments (other than investments accounted for using the equity method), entities must measure such instruments at fair value with changes in fair value recognized in net income. Changes in fair value for available-for-sale equity securities will no longer be recognized through other comprehensive income. Reporting entities may continue to elect to measure equity investments that do not have a readily determinable fair value at cost with adjustments for impairment and observable changes in price. In addition, for a liability (other than a derivative liability) that an entity measures at fair value, any change in fair value related to the instrument-specific credit risk, that is the entity’s own-credit, should be presented separately in other comprehensive income and not as a component of net income. The amendments are effective on January 1, 2018, with early adoption permitted solely for the provisions pertaining to instrument-specific credit risk for liabilities measured at fair value. The amendments must be applied on a modified retrospective basis with a cumulative effect adjustment as of the beginning of the fiscal year of initial adoption. The amendment requiring equity investments to be measured at fair value with changes in fair value recognized in net income will create additional volatility in our consolidated results of operations since changes in fair value for available-for-sale securities will be recognized in net income as opposed to other comprehensive income as required under existing accounting guidance. Management continues to evaluate the impact of the other amendments. However, we do not anticipate the other amendments to have a material impact to our financial statements. Management currently plans to adopt these amendments on January 1, 2018, and expects to use the modified retrospective approach as required.
Leases (ASU 2016-02)
In February 2016, the FASB issued ASU 2016-02. The amendments in this update primarily replace the existing accounting requirements for operating leases for lessees. Lessee accounting requirements for finance leases and lessor accounting requirements for both operating leases and sales type and direct financing leases (both of which were previously referred to as capital leases) are largely unchanged. The amendments require the lessee of an operating lease to record a balance sheet gross-up upon lease commencement by recognizing a right-of-use asset and lease liability equal to the present value of the lease payments. The right-of-use 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 change the types of costs that can be capitalized related to a lease agreement for both lessees and lessors for all types of leases. The amendments also require additional disclosures for all lease types for both lessees and lessors. The amendments are effective on January 1, 2019, with early adoption permitted. The amendments must be applied on a modified retrospective basis with a cumulative adjustment to the beginning of the earliest fiscal year presented in the financial statements in the period of adoption. Management is currently evaluating the impact of these amendments. Upon adoption, we expect to record a balance sheet gross up, reflecting our right-of-use asset and lease liability for our operating leases where we are the lessee (for example, our facility leases). We are currently reviewing our operating lease contracts where we are the lessee to determine the impact of the gross up and the changes to capitalizable costs. We are also reviewing our leases where we are the lessor to determine the impact of the changes to capitalizable costs. Management currently plans to adopt these amendments on January 1, 2019, and expects to use the modified retrospective approach as required.
Financial Instruments — Credit Losses (ASU 2016-13)
In June 2016, the FASB issued ASU 2016-13. The amendments in this update introduce a new accounting model to measure credit losses for financial assets measured at amortized cost. 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 measured as they are incurred 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, with early adoption permitted as of January 1, 2019. The amendments 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. The new accounting model for credit losses represents a significant departure from existing GAAP, and will likely materially increase the allowance for credit losses with a resulting negative adjustment to retained earnings. Management created a formal working group to govern the implementation of these amendments consisting of key stakeholders from finance, risk, and accounting and is currently evaluating the impact of the amendments. Management currently plans to adopt these amendments on January 1, 2020, and expects to use the modified retrospective approach as required.
Statement of Cash Flows — Restricted Cash (ASU 2016-18)
In November 2016, the FASB issued ASU 2016-18. The amendments in this update require that amounts classified as restricted cash and restricted cash equivalents be included within the beginning-of-period and end-of-period amounts along with cash and cash equivalents on the statement of cash flows. Prior to this ASU, specific guidance on the presentation of changes in restricted cash and restricted cash equivalents within the statement of cash flows did not exist. The amendments are effective on January 1, 2018, with early adoption permitted. The amendments must be applied retrospectively to all periods presented within the statement of cash flows upon adoption. Management is currently evaluating the impact of these amendments.

12

Notes to Condensed Consolidated Financial Statements (unaudited)
Ally Financial Inc. • Form 10-Q



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. The amendments are effective on January 1, 2019, with early adoption permitted. The amendments 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. Management is currently evaluating the impact of these amendments.
2.    Acquisitions
On June 1, 2016, we acquired 100% of the equity of TradeKing Group, Inc. (TradeKing), a digital wealth management company with an online broker-dealer, digital portfolio management platform, and educational content for $298 million in cash. TradeKing, which is being rebranded as Ally Invest, operates as a wholly-owned subsidiary of Ally. The addition of brokerage and wealth management is a natural extension of our online banking franchise, creating a full suite of financial products for savings and investments. We applied the acquisition method of accounting to this transaction, which generally requires the initial recognition of assets acquired, including identifiable intangible assets, and liabilities assumed at their respective fair value. Goodwill is recognized as the excess of the acquisition price after the recognition of the net assets, including the identifiable intangible assets. Beginning in June 2016, financial information related to TradeKing is included within Corporate and Other.
The following table summarizes the allocation of cash consideration paid for TradeKing and the amounts of the identifiable assets acquired and liabilities assumed recognized at the acquisition date.
($ in millions)
 
Purchase price
 
Cash consideration
$
298

Allocation of purchase price to net assets acquired
 
Intangible assets (a)
82

Cash and short-term investments (b)
50

Other assets
14

Deferred tax asset, net
4

Employee compensation and benefits
(41
)
Other liabilities
(4
)
Goodwill
$
193

(a)
We recorded $3 million of amortization on these intangible assets during the three months ended March 31, 2017.
(b)
Includes $40 million in cash proceeds from the acquisition transaction in order to pay employee compensation and benefits that vested upon acquisition as a result of the change in control.
The goodwill of $193 million arising from the acquisition consists largely of expected growth of the business as we leverage the Ally brand and our marketing capabilities to scale the acquired technology platform and expand the suite of financial products we offer to our existing growing customer base. None of the goodwill recognized is expected to be deductible for income tax purposes. Refer to Note 12 for a reconciliation of the carrying amount of goodwill at the beginning and end of the reporting period.
On August 1, 2016, we acquired assets that constitute a business from Blue Yield, an online automotive lender exchange, as we continue to expand our automotive finance offerings to include a direct-to-consumer option. We completed the acquisition for $28 million of total consideration. As a result of the purchase, we recognized $20 million of goodwill within Automotive Finance operations.
3.    Discontinued Operations
Prior to the adoption of ASU 2014-08, which was prospectively applied only to newly identified disposals that qualify as discontinued operations beginning after January 1, 2015, we have classified operations as discontinued when operations and cash flows will be eliminated from our ongoing operations and we do not expect to retain any significant continuing involvement in their operations after the respective sale or disposal transactions. For all periods presented, the operating results for these discontinued operations have been removed from continuing operations and presented separately as discontinued operations, net of tax, in the Condensed Consolidated Statement of Comprehensive Income. The Notes to the Condensed Consolidated Financial Statements have been adjusted to exclude discontinued operations unless otherwise noted.

13

Notes to Condensed Consolidated Financial Statements (unaudited)
Ally Financial Inc. • Form 10-Q



Our discontinued operations relate to previous discontinued operations in our Automotive Finance operations, Insurance operations, and Corporate Finance operating segments, and other operations for which we continue to have wind-down, legal, and minimal operational costs. Select financial information of discontinued operations is summarized below.
 
Three months ended March 31,
($ in millions)
2017
 
2016
Pretax income
$
1

 
$
4

Tax expense

 
1

4.    Other Income, Net of Losses
Details of other income, net of losses, were as follows.
 
 
Three months ended March 31,
($ in millions)
 
2017
 
2016
Remarketing fees
 
$
29

 
$
28

Late charges and other administrative fees
 
27

 
25

Servicing fees
 
16

 
13

Income from equity-method investments
 

 
6

Other, net
 
43

 
23

Total other income, net of losses
 
$
115


$
95

5.    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)
2017
2016
Total gross reserves for insurance losses and loss adjustment expenses at January 1,
$
149

$
169

Less: Reinsurance recoverable
108

120

Net reserves for insurance losses and loss adjustment expenses at January 1,
41

49

Net insurance losses and loss adjustment expenses incurred related to:
 
 
Current year
89

77

Prior years (a)
(1
)
(4
)
Total net insurance losses and loss adjustment expenses incurred
88

73

Net insurance losses and loss adjustment expenses paid or payable related to:
 
 
Current year
(45
)
(37
)
Prior years
(23
)
(22
)
Total net insurance losses and loss adjustment expenses paid or payable
(68
)
(59
)
Foreign exchange and other
2

3

Net reserves for insurance losses and loss adjustment expenses at March 31,
63

66

Plus: Reinsurance recoverable
112

118

Total gross reserves for insurance losses and loss adjustment expenses at March 31,
$
175

$
184

(a)
There have been no material adverse changes to the reserve for prior years.

14

Notes to Condensed Consolidated Financial Statements (unaudited)
Ally Financial Inc. • Form 10-Q



6.    Other Operating Expenses
Details of other operating expenses were as follows.
 
Three months ended March 31,
($ in millions)
2017
 
2016
Insurance commissions
$
99

 
$
94

Technology and communications
69

 
66

Lease and loan administration
36

 
32

Advertising and marketing
30

 
27

Vehicle remarketing and repossession
28

 
24

Regulatory and licensing fees
27

 
21

Professional services
26

 
24

Premises and equipment depreciation
22

 
21

Occupancy
12

 
13

Non-income taxes
8

 
9

Other
48

 
54

Total other operating expenses
$
405

 
$
385

7.    Investment Securities
Our portfolio of securities includes bonds, equity securities, asset-backed securities, commercial and residential mortgage-backed securities, and other investments. The cost, fair value, and gross unrealized gains and losses on investment securities were as follows.
 
 
March 31, 2017
 
December 31, 2016


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

$
2,276


$
1


$
(52
)

$
2,225


$
1,680


$


$
(60
)

$
1,620

U.S. States and political subdivisions

803


9


(17
)

795


794


7


(19
)

782

Foreign government

143


3




146


157


5




162

Agency mortgage-backed residential

12,054


31


(223
)

11,862


10,473


29


(212
)

10,290

Mortgage-backed residential
 
2,053

 
4

 
(61
)
 
1,996

 
2,162

 
5

 
(70
)
 
2,097

Mortgage-backed commercial

533


2


(1
)

534


537


2


(2
)

537

Asset-backed

1,046


6


(1
)

1,051


1,396


6


(2
)

1,400

Corporate debt

1,262


6


(13
)

1,255


1,452


7


(16
)

1,443

Total debt securities (a) (b)

20,170


62


(368
)

19,864


18,651


61


(381
)

18,331

Equity securities

481


9


(46
)

444


642


7


(54
)

595

Total available-for-sale securities

$
20,651


$
71


$
(414
)

$
20,308


$
19,293


$
68


$
(435
)

$
18,926

Held-to-maturity securities
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Debt securities
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Agency mortgage-backed residential (c)
 
$
1,052

 
$
2

 
$
(43
)
 
$
1,011

 
$
839

 
$

 
$
(50
)
 
$
789

Asset-backed retained notes
 
52

 

 

 
52

 

 

 

 

Total held-to-maturity securities (d)

$
1,104


$
2


$
(43
)

$
1,063


$
839

 
$

 
$
(50
)
 
$
789

(a)
Certain entities related to our Insurance operations are required to deposit securities with state regulatory authorities. These deposited securities totaled $12 million and $14 million at March 31, 2017, and December 31, 2016, respectively.
(b)
Investment securities with a fair value of $3,235 million and $4,881 million at March 31, 2017, and December 31, 2016, respectively, were pledged to secure advances from the Federal Home Loan Bank (FHLB), short-term borrowings or repurchase agreements and for other purposes as required by contractual obligation or law. Under these agreements, Ally has granted the counterparty the right to sell or pledge $1,257 million and $737 million of the underlying investment securities at March 31, 2017, and December 31, 2016, respectively.
(c)
Agency-backed residential mortgage-backed debt securities are held for liquidity purposes.
(d)
Held-to-maturity securities are recorded at amortized cost. Held-to-maturity securities with a fair value of $0 million and $87 million at March 31, 2017, and December 31, 2016, respectively, were pledged to secure advances from the FHLB.

15

Notes to Condensed Consolidated Financial Statements (unaudited)
Ally Financial Inc. • Form 10-Q



The maturity distribution of investment 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
March 31, 2017




















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




















U.S. Treasury

$
2,225


1.8
%

$


%

$
262


1.8
%

$
1,963


1.8
%

$


%
U.S. States and political subdivisions

795


3.1


66


2.4


34


2.5


175


2.9


520


3.3

Foreign government

146


2.5






66


2.7


80


2.4





Agency mortgage-backed residential
 
11,862

 
3.0

 

 

 

 

 
3

 
2.9

 
11,859

 
3.0

Mortgage-backed residential

1,996


2.9














1,996


2.9

Mortgage-backed commercial

534


2.8










3


2.8


531


2.8

Asset-backed

1,051


2.9






829


2.9


59


3.2


163


2.6

Corporate debt

1,255


2.9


99


2.1


642


2.6


468


3.2


46


4.7

Total available-for-sale debt securities

$
19,864


2.8


$
165


2.2


$
1,833


2.6


$
2,751


2.2


$
15,115


3.0

Amortized cost of available-for-sale debt securities

$
20,170




$
165




$
1,826




$
2,806




$
15,373



Amortized cost of held-to-maturity securities
 


 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Agency mortgage-backed residential
 
1,052

 
3.0
%
 

 
%
 

 
%
 

 
%
 
1,052

 
3.0
%
Asset-backed retained notes
 
52

 
1.5

 
10

 
0.8

 
40

 
1.6

 
2

 
2.7

 

 

Total held-to-maturity securities
 
$
1,104

 
2.9

 
$
10

 
0.8

 
$
40

 
1.6

 
$
2

 
2.7

 
$
1,052

 
3.0

December 31, 2016




















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




















U.S. Treasury

$
1,620


1.7
%

$
2


4.6
%

$
60


1.6
%

$
1,558


1.7
%

$


%
U.S. States and political subdivisions

782


3.1


64


1.7


29


2.3


172


2.8


517


3.4

Foreign government

162


2.6






58


2.8


104


2.4





Agency mortgage-backed residential
 
10,290

 
2.9

 

 

 

 

 
29

 
2.6

 
10,261

 
2.9

Mortgage-backed residential

2,097


2.9














2,097


2.9

Mortgage-backed commercial

537


2.6










3


2.8


534


2.6

Asset-backed

1,400


2.8






1,059


2.8


143


3.2


198


2.6

Corporate debt

1,443


2.8


72


2.2


840


2.6


489


3.2


42


4.7

Total available-for-sale debt securities

$
18,331


2.8


$
138


2.0


$
2,046


2.7


$
2,498


2.2


$
13,649


2.9

Amortized cost of available-for-sale debt securities

$
18,651





$
138





$
2,040





$
2,563





$
13,910




Amortized cost of held-to-maturity securities

$
839


2.9
%

$


%

$


%

$


%

$
839


2.9
%
(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 $1.1 billion and $291 million at March 31, 2017, and December 31, 2016, respectively, and were composed primarily of money market accounts and short-term securities, including U.S. Treasury bills.

16

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 March 31,
($ in millions)
2017
 
2016
Taxable interest
$
119


$
94

Taxable dividends
2


4

Interest and dividends exempt from U.S. federal income tax
5


4

Interest and dividends on investment securities
$
126


$
102

Gross gains realized upon the sales of available-for-sale securities were $27 million and $54 million for the three months ended March 31, 2017, and 2016, respectively. There were no gross realized losses or other-than-temporary impairments upon the sales of available-for-sale securities for either period.
The table below summarizes available-for-sale securities in an unrealized loss position in accumulated other comprehensive income. Based on the assessment of whether such losses were deemed to be other-than-temporary, we believe that the unrealized losses are not indicative of an other-than-temporary impairment of these securities. As of March 31, 2017, we did not have the intent to sell the debt securities with an unrealized loss position in accumulated other comprehensive income, it is not more likely than not that we will be required to sell these securities before recovery of their amortized cost basis, and we expect to recover the entire amortized cost basis of the securities. As of March 31, 2017, we had the ability and intent to hold equity securities with an unrealized loss position in accumulated other comprehensive income, and it is not more likely than not that we will be required to sell these securities before recovery of their amortized cost basis. As a result, we believe that the securities with an unrealized loss position in accumulated other comprehensive income are not considered to be other-than-temporarily impaired at March 31, 2017. Refer to Note 1 to the Consolidated Financial Statements in our 2016 Annual Report on Form 10-K for additional information related to investment securities and our methodology for evaluating potential other-than-temporary impairments.
 
 
March 31, 2017
 
December 31, 2016


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

$
2,070


$
(52
)

$


$


$
1,612


$
(60
)

$


$

U.S. States and political subdivisions

435


(16
)

26


(1
)

524


(19
)




Foreign government

13








38







Agency mortgage-backed residential
 
8,874

 
(209
)
 
531

 
(14
)
 
8,052

 
(196
)
 
587

 
(16
)
Mortgage-backed residential

768


(16
)

816


(45
)

813


(17
)

860


(53
)
Mortgage-backed commercial
 
79

 
(1
)
 
77

 

 
47

 
(1
)
 
149

 
(1
)
Asset-backed

175




134


(1
)

375


(2
)

127



Corporate debt

565


(11
)

46


(2
)

744


(14
)

46


(2
)
Total temporarily impaired debt securities

12,979


(305
)

1,630


(63
)

12,205


(309
)

1,769


(72
)
Temporarily impaired equity securities

72


(6
)

162


(40
)

151


(8
)

269


(46
)
Total temporarily impaired available-for-sale securities

$
13,051


$
(311
)

$
1,792


$
(103
)

$
12,356


$
(317
)

$
2,038


$
(118
)

17

Notes to Condensed Consolidated Financial Statements (unaudited)
Ally Financial Inc. • Form 10-Q



8.    Finance Receivables and Loans, Net
The composition of finance receivables and loans reported at gross carrying value was as follows.
($ in millions)
 
March 31, 2017
 
December 31, 2016
Consumer automotive (a)
 
$
65,663

 
$
65,793

Consumer mortgage
 
 
 
 
Mortgage Finance (b)
 
8,331

 
8,294

Mortgage — Legacy (c)
 
2,606

 
2,756

Total consumer mortgage
 
10,937

 
11,050

Total consumer
 
76,600

 
76,843

Commercial
 
 
 
 
Commercial and industrial
 
 
 
 
Automotive
 
34,911

 
35,041

Other
 
3,499

 
3,248

Commercial real estate — Automotive
 
3,992

 
3,812

Total commercial
 
42,402

 
42,101

Total finance receivables and loans (d)
 
$
119,002

 
$
118,944

(a)
Includes $34 million and $43 million of fair value adjustment for loans in hedge accounting relationships at March 31, 2017, and December 31, 2016, respectively. Refer to Note 19 for additional information.
(b)
Includes loans originated as interest-only mortgage loans of $26 million and $30 million at March 31, 2017, and December 31, 2016, respectively, 3% of which are expected to start principal amortization in 2017, none in 2018, 37% in 2019, 42% in 2020, and none thereafter.
(c)
Includes loans originated as interest-only mortgage loans of $653 million and $714 million at March 31, 2017, and December 31, 2016, respectively, 17% of which are expected to start principal amortization in 2017, 2% in 2018, none in 2019, none in 2020, and 1% thereafter.
(d)
Totals include net increases of $393 million and $359 million at March 31, 2017, and December 31, 2016, respectively, for unearned income, unamortized premiums and discounts, and deferred fees and costs.

18

Notes to Condensed Consolidated Financial Statements (unaudited)
Ally Financial Inc. • Form 10-Q



The following tables present an analysis of the activity in the allowance for loan losses on finance receivables and loans.
Three months ended March 31, 2017 ($ in millions)

Consumer automotive

Consumer mortgage

Commercial

Total
Allowance at January 1, 2017

$
932


$
91


$
121


$
1,144

Charge-offs (a)

(341
)

(9
)



(350
)
Recoveries

90


7




97

Net charge-offs

(251
)

(2
)



(253
)
Provision for loan losses

267


(3
)

7


271

Other (b)

(7
)





(7
)
Allowance at March 31, 2017

$
941

 
$
86

 
$
128


$
1,155

Allowance for loan losses at March 31, 2017








Individually evaluated for impairment

$
32


$
33


$
24


$
89

Collectively evaluated for impairment

909


53


104


1,066

Finance receivables and loans at gross carrying value

 
 
 
 
 
 
 
Ending balance

$
65,663


$
10,937


$
42,402


$
119,002

Individually evaluated for impairment

388


249


120


757

Collectively evaluated for impairment

65,275


10,688


42,282


118,245

(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 2016 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.
Three months ended March 31, 2016 ($ in millions)
 
Consumer automotive
 
Consumer mortgage
 
Commercial
 
Total
Allowance at January 1, 2016
 
$
834

 
$
114

 
$
106

 
$
1,054

Charge-offs (a)
 
(253
)
 
(10
)
 

 
(263
)
Recoveries
 
80

 
4

 

 
84

Net charge-offs
 
(173
)
 
(6
)
 

 
(179
)
Provision for loan losses
 
207

 
7

 
6

 
220

Other (b)
 
(18
)
 

 

 
(18
)
Allowance at March 31, 2016
 
$
850

 
$
115

 
$
112

 
$
1,077

Allowance for loan losses at March 31, 2016








Individually evaluated for impairment

$
25


$
43


$
18


$
86

Collectively evaluated for impairment

825


72


94


991

Finance receivables and loans at gross carrying value

 
 
 
 
 



Ending balance

$
63,013


$
10,675


$
37,188


$
110,876

Individually evaluated for impairment

337


261


90


688

Collectively evaluated for impairment

62,676


10,414


37,098


110,188

(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 2016 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.
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.
 
 
Three months ended March 31,
($ in millions)

2017

2016
Consumer automotive

$
1,213


$
2,599

Consumer mortgage

3


2

Total sales and transfers

$
1,216


$
2,601


19

Notes to Condensed Consolidated Financial Statements (unaudited)
Ally Financial Inc. • Form 10-Q



The following table presents information about significant purchases of finance receivables and loans.
 
 
Three months ended March 31,
($ in millions)
 
2017
 
2016
Consumer automotive

$
68


$

Consumer mortgage

327


1,370

Total purchases of finance receivables and loans

$
395

 
$
1,370

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
March 31, 2017
 
 
 
 
 
 
 
 
 
 
 
 
Consumer automotive
 
$
1,346

 
$
308

 
$
263

 
$
1,917

 
$
63,746

 
$
65,663

Consumer mortgage
 
 
 
 
 
 
 
 
 
 
 
 
Mortgage Finance
 
30

 
2

 
7

 
39

 
8,292

 
8,331

Mortgage — Legacy
 
33

 
14

 
57

 
104

 
2,502

 
2,606

Total consumer mortgage
 
63

 
16

 
64

 
143

 
10,794

 
10,937

Total consumer
 
1,409

 
324

 
327

 
2,060

 
74,540

 
76,600

Commercial
 
 
 
 
 
 
 
 
 
 
 
 
Commercial and industrial
 
 
 
 
 
 
 
 
 
 
 
 
Automotive
 

 

 
6

 
6

 
34,905

 
34,911

Other
 

 

 

 

 
3,499

 
3,499

Commercial real estate — Automotive
 

 

 

 

 
3,992

 
3,992

Total commercial
 




6


6


42,396


42,402

Total consumer and commercial
 
$
1,409


$
324


$
333


$
2,066


$
116,936


$
119,002

December 31, 2016
 
 
 
 
 
 
 
 
 
 
 
 
Consumer automotive
 
$
1,850

 
$
428

 
$
302

 
$
2,580

 
$
63,213

 
$
65,793

Consumer mortgage
 
 
 
 
 
 
 
 
 
 
 
 
Mortgage Finance
 
39

 
6

 
4

 
49

 
8,245

 
8,294

Mortgage — Legacy
 
45

 
18

 
57

 
120

 
2,636

 
2,756

Total consumer mortgage
 
84

 
24

 
61

 
169

 
10,881

 
11,050

Total consumer
 
1,934

 
452

 
363

 
2,749

 
74,094

 
76,843

Commercial
 
 
 
 
 
 
 
 
 
 
 
 
Commercial and industrial
 
 
 
 
 
 
 
 
 
 
 
 
Automotive
 
3

 

 
7

 
10

 
35,031

 
35,041

Other
 

 

 

 

 
3,248

 
3,248

Commercial real estate — Automotive
 

 

 

 

 
3,812

 
3,812

Total commercial
 
3




7


10


42,091


42,101

Total consumer and commercial
 
$
1,937


$
452


$
370


$
2,759


$
116,185


$
118,944


20

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)
 
March 31, 2017
 
December 31, 2016
Consumer automotive
 
$
573

 
$
598

Consumer mortgage
 
 
 
 
Mortgage Finance
 
10

 
10

Mortgage — Legacy
 
95

 
89

Total consumer mortgage
 
105

 
99

Total consumer
 
678

 
697

Commercial
 
 
 
 
Commercial and industrial
 
 
 
 
Automotive
 
34

 
33

Other
 
81

 
84

Commercial real estate — Automotive
 
5

 
5

Total commercial
 
120

 
122

Total consumer and commercial finance receivables and loans
 
$
798


$
819

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 when full collection is not expected. Refer to Note 1 to the Consolidated Financial Statements in our 2016 Annual Report on Form 10-K for additional information.
 
 
March 31, 2017
 
December 31, 2016
($ in millions)
 
Performing
 
Nonperforming
 
Total
 
Performing
 
Nonperforming
 
Total
Consumer automotive
 
$
65,090

 
$
573

 
$
65,663

 
$
65,195

 
$
598

 
$
65,793

Consumer mortgage
 
 
 
 
 
 
 
 
 
 
 
 
Mortgage Finance
 
8,321

 
10

 
8,331

 
8,284

 
10

 
8,294

Mortgage — Legacy
 
2,511

 
95

 
2,606

 
2,667

 
89

 
2,756

Total consumer mortgage
 
10,832

 
105

 
10,937

 
10,951

 
99

 
11,050

Total consumer
 
$
75,922

 
$
678

 
$
76,600

 
$
76,146

 
$
697

 
$
76,843

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.
 
 
March 31, 2017
 
December 31, 2016
($ in millions)
 
Pass
 
Criticized (a)
 
Total
 
Pass
 
Criticized (a)
 
Total
Commercial and industrial
 
 
 
 
 
 
 
 
 
 
 
 
Automotive
 
$
32,878

 
$
2,033

 
$
34,911

 
$
33,160

 
$
1,881

 
$
35,041

Other
 
2,814

 
685

 
3,499

 
2,597

 
651

 
3,248

Commercial real estate — Automotive
 
3,816

 
176

 
3,992

 
3,653

 
159

 
3,812

Total commercial
 
$
39,508

 
$
2,894

 
$
42,402


$
39,410

 
$
2,691

 
$
42,101

(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.

21

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 2016 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
March 31, 2017
 
 
 
 
 
 
 
 
 
 
Consumer automotive
 
$
422

 
$
388

 
$
124

 
$
264

 
$
32

Consumer mortgage
 
 
 
 
 
 
 
 
 
 
Mortgage Finance
 
8

 
8

 
4

 
4

 

Mortgage — Legacy
 
245

 
241

 
56

 
185

 
33

Total consumer mortgage
 
253

 
249

 
60

 
189

 
33

Total consumer
 
675

 
637

 
184

 
453

 
65

Commercial
 
 
 
 
 
 
 
 
 
 
Commercial and industrial
 
 
 
 
 
 
 
 
 
 
Automotive
 
34

 
34

 
7

 
27

 
2

Other
 
98

 
81

 
19

 
62

 
21

Commercial real estate — Automotive
 
5

 
5

 

 
5

 
1

Total commercial
 
137

 
120

 
26

 
94

 
24

Total consumer and commercial finance receivables and loans
 
$
812


$
757


$
210


$
547


$
89

December 31, 2016
 
 
 
 
 
 
 
 
 
 
Consumer automotive
 
$
407

 
$
370

 
$
131

 
$
239

 
$
28

Consumer mortgage
 
 
 
 
 
 
 
 
 
 
Mortgage Finance
 
8

 
8

 
3

 
5

 

Mortgage — Legacy
 
243

 
239

 
56

 
183

 
34

Total consumer mortgage
 
251

 
247

 
59

 
188

 
34

Total consumer
 
658

 
617

 
190

 
427

 
62

Commercial
 
 
 
 
 
 
 
 
 
 
Commercial and industrial
 
 
 
 
 
 
 
 
 
 
Automotive
 
33

 
33

 
7

 
26

 
3

Other
 
99

 
84

 

 
84

 
19

Commercial real estate — Automotive
 
5

 
5

 
2

 
3

 
1

Total commercial
 
137

 
122

 
9

 
113

 
23

Total consumer and commercial finance receivables and loans
 
$
795


$
739


$
199


$
540


$
85

(a)
Adjusted for charge-offs.

22

Notes to Condensed Consolidated Financial Statements (unaudited)
Ally Financial Inc. • Form 10-Q



The following table presents average balance and interest income for our impaired finance receivables and loans.
 
 
2017
 
2016
Three months ended March 31, ($ in millions)
 
Average balance
 
Interest income
 
Average balance
 
Interest income
Consumer automotive
 
$
379

 
$
5

 
$
326

 
$
4

Consumer mortgage
 
 
 
 
 
 
 
 
Mortgage Finance
 
8

 

 
9

 

Mortgage — Legacy
 
241

 
2

 
255

 
2

Total consumer mortgage
 
249

 
2

 
264

 
2

Total consumer
 
628

 
7

 
590

 
6

Commercial
 
 
 
 
 
 
 
 
Commercial and industrial
 
 
 
 
 
 
 
 
Automotive
 
33

 

 
23

 

Other
 
83

 

 
49

 
1

Commercial real estate — Automotive
 
5

 

 
6

 

Total commercial
 
121

 

 
78

 
1

Total consumer and commercial finance receivables and loans
 
$
749


$
7


$
668


$
7

Troubled Debt Restructurings
Troubled Debt Restructurings (TDRs) are loan modifications where concessions were granted to borrowers experiencing financial difficulties. For automotive loans, we may offer several types of assistance to aid our customers, including extension of the loan maturity date and rewriting the loan terms. Additionally, for mortgage loans, as part of certain programs, we offer mortgage loan modifications to qualified borrowers. Numerous initiatives 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 $704 million and $663 million at March 31, 2017, and December 31, 2016, respectively. Commercial commitments to lend additional funds to borrowers whose terms had been modified in a TDR were $3 million and $2 million at March 31, 2017, and December 31, 2016, respectively. Refer to Note 1 to the Consolidated Financial Statements in our 2016 Annual Report on Form 10-K for additional information.
The following table presents information related to finance receivables and loans recorded at gross carrying value modified in connection with a TDR during the period.
 
2017
 
2016
Three months ended March 31, ($ 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
6,447

 
$
115

 
$
99

 
5,622

 
$
89

 
$
76

Consumer mortgage
 
 
 
 
 
 
 
 
 
 
 
Mortgage Finance
1

 

 

 
1

 
1

 
1

Mortgage — Legacy
53

 
12

 
12

 
31

 
4

 
4

Total consumer mortgage
54

 
12

 
12

 
32

 
5

 
5

Total consumer
6,501

 
127

 
111

 
5,654

 
94

 
81

Commercial
 
 
 
 
 
 
 
 
 
 
 
Commercial and industrial
 
 
 
 
 
 
 
 
 
 
 
Automotive

 

 

 

 

 

Other
1

 
23

 
23

 

 

 

Commercial real estate — Automotive

 

 

 

 

 

Total commercial
1

 
23

 
23

 

 

 

Total consumer and commercial finance receivables and loans
6,502

 
$
150

 
$
134

 
5,654

 
$
94

 
$
81


23

Notes to Condensed Consolidated Financial Statements (unaudited)
Ally Financial Inc. • Form 10-Q



The following table presents information about finance receivables and loans recorded at gross carrying value that have redefaulted during the reporting period and were within 12 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 2016 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.
 
 
2017
 
2016
Three months ended March 31, ($ in millions)
 
Number of loans
 
Gross carrying  value
 
Charge-off amount
 
Number of loans
 
Gross carrying value
 
Charge-off amount
Consumer automotive
 
1,989

 
$
24

 
$
16

 
1,800

 
$
23

 
$
12

Consumer mortgage
 
 
 
 
 
 
 
 
 
 
 
 
Mortgage Finance
 
1

 
1

 

 

 

 

Mortgage — Legacy
 

 

 

 
1

 

 

Total consumer finance receivables and loans
 
1,990

 
$
25

 
$
16

 
1,801

 
$
23

 
$
12

9.    Investment in Operating Leases, Net
Investments in operating leases were as follows.
($ in millions)
 
March 31, 2017
 
December 31, 2016
Vehicles
 
$
13,240

 
$
14,584

Accumulated depreciation
 
(2,779
)
 
(3,114
)
Investment in operating leases, net
 
$
10,461

 
$
11,470

Depreciation expense on operating lease assets includes remarketing gains and losses recognized on the sale of operating lease assets. The following summarizes the components of depreciation expense on operating lease assets.
 
 
Three months ended March 31,
($ in millions)
 
2017
 
2016
Depreciation expense on operating lease assets (excluding remarketing gains and losses)
 
$
386

 
$
565

Remarketing losses (gains)
 
3

 
(55
)
Net depreciation expense on operating lease assets
 
$
389

 
$
510

10.    Securitizations and Variable Interest Entities
We are involved in several types of securitization and financing transactions that utilize special-purpose entities (SPEs). A SPE is an entity that is designed to fulfill a specified limited need of the sponsor. Our principal use of SPEs is to obtain liquidity by securitizing certain of our financial assets and operating lease assets.
The transaction-specific SPEs involved in our securitization and other financing transactions are often considered VIEs. VIEs are entities that have either a total equity investment at risk that is insufficient to permit the entity to finance its activities without additional subordinated financial support or whose equity investors at risk lack the ability to control the entity's activities.
We provide a wide range of consumer and commercial automotive loans, operating leases, and commercial loans to a diverse customer base. We securitize consumer and commercial automotive loans, and operating leases through private-label securitizations. We often securitize these loans and notes secured by operating leases (collectively referred to as financial assets) through the use of securitization entities, which may or may not be consolidated on our Condensed Consolidated Balance Sheet.
The pretax gain on sales of financial assets into nonconsolidated consumer automotive securitization trusts was $2 million for the three months ended March 31, 2017. There was no pretax gain or loss for the three months ended March 31, 2016.
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 have involvement 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.

24

Notes to Condensed Consolidated Financial Statements (unaudited)
Ally Financial Inc. • Form 10-Q



Refer to Note 11 to the Consolidated Financial Statements included in our 2016 Annual Report on Form 10-K for further description of our securitization activities and our involvement with VIEs.
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
March 31, 2017
 
 
 
 
 
 
 
 
 
On-balance sheet variable interest entities
 
 
 
 
 
 
 
 
 
Consumer automotive
 
$
19,632

(b)
$
8,298

(c)
 
 
 
 
Commercial automotive
 
14,113

 
5,109

 
 
 
 
 
Off-balance sheet variable interest entities
 
 
 
 
 
 
 
 
 
Consumer automotive
 
79

(d)

 
$
3,571

 
$
3,650

(e)
Commercial other
 
505

(f)
205

(g)

 
695

(h)
Total
 
$
34,329

 
$
13,612

 
$
3,571

 
$
4,345

 
December 31, 2016
 
 
 
 
 
 
 
 
 
On-balance sheet variable interest entities
 
 
 
 
 
 
 
 
 
Consumer automotive
 
$
20,869

(b)
$
8,557

(c)
 
 
 
 
Commercial automotive
 
16,278

 
4,764

 
 
 
 
 
Off-balance sheet variable interest entities
 
 
 
 
 
 
 
 
 
Consumer automotive
 
24

(d)

 
$
2,899

 
$
2,923

(e)
Commercial other
 
460

(f)
169

(g)

 
651

(h)
Total
 
$
37,631

 
$
13,490

 
$
2,899

 
$
3,574

 
(a)
Asset values represent the current unpaid principal balance of outstanding consumer finance receivables and loans within the VIEs.
(b)
Includes $9.2 billion and $9.6 billion of assets that are not encumbered by VIE beneficial interests held by third parties at March 31, 2017, and December 31, 2016, respectively. Ally or consolidated affiliates hold the interests in these assets, which eliminate in consolidation.
(c)
Includes $64 million and $50 million of liabilities due to consolidated affiliates at March 31, 2017, and December 31, 2016, respectively. These liabilities are not obligations to third-party beneficial interest holders. These liabilities are secured by a portion of the unencumbered assets and eliminate in consolidation.
(d)
Includes $52 million classified as held-to-maturity securities and $27 million classified as other assets at March 31, 2017. Of the total amount at March 31, 2017, $53 million represents retained notes and certificated residual interests. These assets represent our compliance with the risk retention rules under the Dodd-Frank Act, requiring us to retain at least five percent of the credit risk of the assets underlying asset-backed securitizations, which became effective on December 24, 2016. Amounts at December 31, 2016, are classified as other assets.
(e)
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.
(f)
Amounts are classified as other assets.
(g)
Amounts are classified as accrued expenses and other liabilities.
(h)
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.

25

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 securitization entities and asset-backed financings where the transfer is accounted for as a sale and we have a continuing involvement with the transferred assets (e.g., servicing) that were outstanding during the three months ended March 31, 2017, and 2016. Additionally, this table contains information regarding cash flows received from and paid to nonconsolidated securitization entities that existed during each period.
Three months ended March 31, ($ in millions)
 
Consumer automotive
2017


Cash proceeds from transfers completed during the period

$
1,138

Servicing fees

9

Other cash flows

2

2016


Cash proceeds from transfers completed during the period

$
1,025

Servicing fees

8

Other cash flows
 
2

Delinquencies and Net Credit Losses
The following tables represent on-balance sheet loans held-for-sale and finance receivables and loans, off-balance sheet securitizations, and whole-loan sales where we have continuing involvement. The tables present quantitative information about delinquencies and net credit losses.

 
Total Amount
 
Amount 60 days or more
past due
($ in millions)
 
March 31, 2017
 
December 31, 2016
 
March 31, 2017
 
December 31, 2016
On-balance sheet loans
 
 
 
 
 
 
 
 
Consumer automotive
 
$
65,663

 
$
65,793

 
$
571

 
$
730

Consumer mortgage
 
10,938

 
11,050

 
80

 
85

Commercial automotive
 
38,903

 
38,853

 
6

 
7

Commercial other
 
3,499

 
3,248

 

 

Total on-balance sheet loans
 
119,003

 
118,944

 
657

 
822

Off-balance sheet securitization entities
 
 
 
 
 
 
 
 
Consumer automotive
 
3,067

 
2,392

 
12

 
13

Total off-balance sheet securitization entities
 
3,067

 
2,392

 
12

 
13

Whole-loan sales (a)
 
2,787

 
3,164

 
5

 
6

Total
 
$
124,857

 
$
124,500

 
$
674

 
$
841

(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 March 31,
($ in millions)
 
2017
 
2016
On-balance sheet loans
 
 
 
 
Consumer automotive
 
$
251

 
$
173

Consumer mortgage
 
2

 
6

Total on-balance sheet loans
 
253

 
179

Off-balance sheet securitization entities
 
 
 
 
Consumer automotive
 
3

 
2

Total off-balance sheet securitization entities
 
3

 
2

Whole-loan sales (a)
 
1

 

Total
 
$
257

 
$
181

(a)
Whole-loan sales are not part of a securitization transaction, but represent consumer automotive pools of loans sold to third-party investors.

26

Notes to Condensed Consolidated Financial Statements (unaudited)
Ally Financial Inc. • Form 10-Q



11.    Servicing Activities
Automotive Finance Servicing Activities
We service consumer automotive contracts. Historically, we have sold a portion of our consumer automotive contracts. With respect to contracts we sell, we generally retain the right to service and earn a servicing fee for our servicing function. We have concluded that the fee we are paid for servicing consumer automotive finance receivables represents adequate compensation, and consequently, we do not recognize a servicing asset or liability. We recognized automotive servicing fee income of $16 million and $13 million during the three months ended March 31, 2017, and 2016, respectively.
Automotive Finance Serviced Assets
The current unpaid principal balance and any related unamortized deferred fees and costs of total serviced automotive finance loans and leases outstanding were as follows.
($ in millions)
March 31, 2017
 
December 31, 2016
On-balance sheet automotive finance loans and leases
 
 
 
Consumer automotive
$
65,464

 
$
65,646

Commercial automotive
38,903

 
38,853

Operating leases
10,332

 
11,311

Other
67

 
67

Off-balance sheet automotive finance loans
 
 
 
Securitizations
3,103

 
2,412

Whole-loan
2,824

 
3,191

Total serviced automotive finance loans and leases
$
120,693

 
$
121,480

12.    Other Assets
The components of other assets were as follows.
($ in millions)
 
March 31, 2017
 
December 31, 2016
Property and equipment at cost
 
$
939

 
$
901

Accumulated depreciation
 
(542
)
 
(525
)
Net property and equipment
 
397

 
376

Restricted cash collections for securitization trusts (a)
 
1,359

 
1,694

Net deferred tax assets
 
900

 
994

Nonmarketable equity investments (b)
 
833

 
1,046

Accrued interest and rent receivables
 
457

 
476

Goodwill (c)
 
240

 
240

Other accounts receivable
 
165

 
100

Cash reserve deposits held-for-securitization trusts (d)
 
164

 
184

Cash collateral placed with counterparties
 
119


167

Restricted cash and cash equivalents
 
111

 
111

Fair value of derivative contracts in receivable position (e)
 
80

 
95

Other assets
 
1,309

 
1,371

Total other assets
 
$
6,134

 
$
6,854

(a)
Represents cash collections from customer payments on securitized receivables. These funds are distributed to investors as payments on the related secured debt.
(b)
Includes investments in FHLB stock of $359 million and $577 million at March 31, 2017, and December 31, 2016, respectively; and Federal Reserve Bank (FRB) stock of $435 million at both March 31, 2017, and December 31, 2016.
(c)
Includes goodwill of $27 million at our Insurance operations at both March 31, 2017, and December 31, 2016; $193 million within Corporate and Other at both March 31, 2017, and December 31, 2016; and $20 million within Automotive Finance operations at both March 31, 2017, and December 31, 2016. No changes to the carrying amount of goodwill were recorded during the three months ended March 31, 2017.
(d)
Represents credit enhancement in the form of cash reserves for various securitization transactions.
(e)
For additional information on derivative instruments and hedging activities, refer to Note 19.

27

Notes to Condensed Consolidated Financial Statements (unaudited)
Ally Financial Inc. • Form 10-Q



13.    Deposit Liabilities
Deposit liabilities consisted of the following.
($ in millions)
March 31, 2017
 
December 31, 2016
Noninterest-bearing deposits
$
102

 
$
84

Interest-bearing deposits
 
 
 
Savings and money market checking accounts
51,150

 
46,976

Certificates of deposit
33,148

 
31,795

Dealer deposits
86

 
167

Total deposit liabilities
$
84,486

 
$
79,022

At March 31, 2017, and December 31, 2016, certificates of deposit included $12.2 billion and $12.1 billion, respectively, of certificates of deposit in denominations of $100 thousand or more. At both March 31, 2017, and December 31, 2016, certificates of deposit included $3.5 billion in denominations in excess of $250 thousand federal insurance limits.
14.    Debt
Short-term Borrowings
The following table presents the composition of our short-term borrowings portfolio.
 
 
March 31, 2017
 
December 31, 2016
($ in millions)
 
Unsecured
 
Secured (a)
 
Total
 
Unsecured
 
Secured (a)
 
Total
Demand notes
 
$
3,652

 
$

 
$
3,652

 
$
3,622

 
$

 
$
3,622

Federal Home Loan Bank
 

 
1,850

 
1,850

 

 
7,875

 
7,875

Financial instruments sold under agreements to repurchase
 

 
1,620

 
1,620

 

 
1,176

 
1,176

Other
 
1,249

(b)

 
1,249

 

 

 

Total short-term borrowings
 
$
4,901

 
$
3,470

 
$
8,371

 
$
3,622

 
$
9,051

 
$
12,673

(a)
Refer to the section below titled Long-term Debt for further details on assets restricted as collateral for payment of the related debt.
(b)
Balance represents private unsecured committed credit facility and includes debt issuance costs of $1 million as of March 31, 2017. This debt is scheduled to mature in December 2017.
We periodically enter into term repurchase agreements, short-term borrowing agreements in which we sell financial instruments 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 March 31, 2017, the financial instruments sold under agreement to repurchase consisted of $520 million of mortgage-backed residential securities maturing within the next 30 days, $0 million within 31 to 60 days, and $626 million within 61 to 90 days. For further details refer to Note 7 and Note 22. Additionally, in December 2016, we sold asset-backed automotive financial instruments, which are our retained interests from certain on-balance sheet securitizations, subject to a repurchase agreement set to mature by July 2017 in exchange for $500 million, which was recorded as a short-term secured borrowing. As of March 31, 2017, the balance was $474 million. The asset-backed automotive financial instruments that we sold subject to the repurchase agreement are secured by finance receivables that we have securitized. Refer to Note 10 for additional information on our securitization activities.
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. As of March 31, 2017, we received cash collateral totaling $1 million and we placed cash collateral totaling $5 million with counterparties under these collateral arrangements associated with our repurchase agreements.

28

Notes to Condensed Consolidated Financial Statements (unaudited)
Ally Financial Inc. • Form 10-Q



Long-term Debt
The following table presents the composition of our long-term debt portfolio.
 
 
March 31, 2017
 
December 31, 2016
($ in millions)
 
Unsecured
 
Secured
 
Total
 
Unsecured
 
Secured
 
Total
Long-term debt
 
 
 
 
 
 
 
 
 
 
 
 
Due within one year
 
$
2,329

 
$
9,048

 
$
11,377

 
$
4,274

 
$
10,279

 
$
14,553

Due after one year (a)
 
14,893

 
24,492

 
39,385

 
15,450

 
23,810

 
39,260

Fair value adjustment (b)
 
308

 
(9
)
 
299

 
326

 
(11
)
 
315

Total long-term debt (c)
 
$
17,530

 
$
33,531

 
$
51,061

 
$
20,050

 
$
34,078

 
$
54,128

(a)
Includes $2.6 billion of trust preferred securities at both March 31, 2017, and December 31, 2016.
(b)
Represents the fair value adjustment associated with the application of hedge accounting on certain of our long-term debt positions. Refer to Note 19 for additional information.
(c)
Includes advances from the FHLB of Pittsburgh of $6.1 billion at both March 31, 2017, and December 31, 2016.
The following table presents the scheduled remaining maturity of long-term debt at March 31, 2017, assuming no early redemptions will occur. The actual payment of secured debt may vary based on the payment activity of the related pledged assets.
($ in millions)
 
2017
 
2018
 
2019
 
2020
 
2021
 
2022 and thereafter
 
Fair value adjustment
 
Total
Unsecured
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Long-term debt
 
$
1,811

 
$
3,700

 
$
1,681

 
$
2,236

 
$
638

 
$
8,460

 
$
308

 
$
18,834

Original issue discount
 
(69
)
 
(101
)
 
(39
)
 
(39
)
 
(42
)
 
(1,014
)
 

 
(1,304
)
Total unsecured
 
1,742

 
3,599

 
1,642

 
2,197

 
596

 
7,446

 
308

 
17,530

Secured
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Long-term debt
 
7,575

 
8,534

 
8,080

 
5,175

 
2,558

 
1,618

 
(9
)
 
33,531

Total long-term debt
 
$
9,317

 
$
12,133

 
$
9,722

 
$
7,372

 
$
3,154


$
9,064


$
299


$
51,061

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.
 
 
March 31, 2017
 
December 31, 2016
($ in millions)
 
Total (a)
 
Ally Bank
 
Total (a)
 
Ally Bank
Investment securities (b)
 
$
3,175

 
$
1,978

 
$
4,895

 
$
4,231

Mortgage assets held-for-investment and lending receivables
 
10,847

 
10,847

 
10,954

 
10,954

Consumer automotive finance receivables (b)
 
26,420

 
4,523

 
27,846

 
5,751

Commercial automotive finance receivables
 
17,901

 
17,709

 
19,487

 
19,280

Investment in operating leases, net
 
1,412

 
314

 
2,040

 
913

Total assets restricted as collateral (c) (d)
 
$
59,755

 
$
35,371

 
$
65,222

 
$
41,129

Secured debt
 
$
37,001

(e)
$
15,120

 
$
43,129

(e)
$
22,149

(a)
Ally Bank is a component of the total column.
(b)
A portion of the restricted investment securities and consumer automotive finance receivables are 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 $16.8 billion and $19.0 billion at March 31, 2017, and December 31, 2016, respectively. These assets were composed primarily of consumer mortgage finance receivables and loans and investment securities. Ally Bank has access to the Federal Reserve Bank Discount Window. Ally Bank had assets pledged and restricted as collateral to the Federal Reserve Bank totaling $2.3 billion and $2.4 billion at March 31, 2017, and December 31, 2016, respectively. These assets were composed of consumer automotive finance receivables and loans and operating lease assets. 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 12 for additional information.
(e)
Includes $3.5 billion and $9.1 billion of short-term borrowings at March 31, 2017, and December 31, 2016, respectively.

29

Notes to Condensed Consolidated Financial Statements (unaudited)
Ally Financial Inc. • Form 10-Q



Trust Preferred Securities
At March 31, 2017, we have 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 were payable at an annual rate of 8.125% payable quarterly in arrears, through but excluding February 15, 2016. From and including February 15, 2016, to but excluding February 15, 2040, distributions will be payable at an annual rate equal to three-month London interbank offer rate plus 5.785% payable quarterly in arrears, beginning May 15, 2016. Ally has the right to defer payments of interest for a period not exceeding 20 consecutive quarters. The Series 2 TRUPS have no stated maturity date, but must be redeemed upon the redemption or maturity of the related debentures (Debentures), which mature on February 15, 2040. Ally at any time on or after February 15, 2016, 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.
Funding Facilities
We utilize both committed credit facilities and other collateralized funding vehicles. The debt outstanding under our various funding facilities is included on our Condensed Consolidated Balance Sheet.
As of March 31, 2017, Ally Bank had exclusive access to $2.4 billion of funding capacity from committed credit facilities. Funding programs supported by the Federal Reserve and the FHLB, together with repurchase agreements, complement Ally Bank’s private collateralized funding vehicles.
The total capacity in our committed funding facilities is provided by banks through private transactions. The committed secured funding facilities can be revolving in nature and allow for additional funding during the commitment period, or they can be amortizing and not allow for any further funding after the closing date. At March 31, 2017, $15.6 billion of our $16.4 billion of committed capacity was revolving. Our revolving facilities generally have an original tenor ranging from 364 days to two years. As of March 31, 2017, we had $3.1 billion of committed funding capacity from revolving facilities with a remaining tenor greater than 364 days.
Committed Funding Facilities
 
 
Outstanding
 
Unused capacity (a)
 
Total capacity
($ in millions)
 
March 31, 2017
 
December 31, 2016
 
March 31, 2017
 
December 31, 2016
 
March 31, 2017
 
December 31, 2016
Bank funding
 
 
 
 
 
 
 
 
 
 
 
 
Secured (b)
 
$
2,050

 
$
3,250

 
$
350

 
$
350

 
$
2,400

 
$
3,600

Parent funding
 
 
 
 
 
 
 
 
 
 
 
 
Secured
 
12,123

 
11,550

 
652

 
1,975

 
12,775

 
13,525

Unsecured
 
1,250

 

 

 
1,250

 
1,250

 
1,250

Total committed facilities
 
$
15,423

 
$
14,800

 
$
1,002

 
$
3,575

 
$
16,425

 
$
18,375

(a)
Funding from committed secured facilities is available on request in the event excess collateral resides in certain facilities or is available to the extent incremental collateral is available and contributed to the facilities.
(b)
Excludes off-balance sheet credit facility amounts.

30

Notes to Condensed Consolidated Financial Statements (unaudited)
Ally Financial Inc. • Form 10-Q



15.    Accrued Expenses and Other Liabilities
The components of accrued expenses and other liabilities were as follows.
($ in millions)
 
March 31, 2017
 
December 31, 2016
Accounts payable
 
$
851

 
$
649

Reserves for insurance losses and loss adjustment expenses
 
175

 
149

Employee compensation and benefits
 
156

 
232

Fair value of derivative contracts in payable position (a)
 
81

 
95

Deferred revenue
 
47

 
56

Cash collateral received from counterparties
 
12

 
10

Other liabilities
 
600

 
546

Total accrued expenses and other liabilities
 
$
1,922

 
$
1,737

(a)
For additional information on derivative instruments and hedging activities, refer to Note 19.
16.    Accumulated Other Comprehensive Loss
The following table presents changes, net of tax, in each component of accumulated other comprehensive loss.
($ 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
Balance at December 31, 2015
$
(159
)
 
$
9

 
$
8

 
$
(89
)
 
$
(231
)
2016 net change
142

 
5

 

 
(1
)
 
146

Balance at March 31, 2016
$
(17
)
 
$
14

 
$
8

 
$
(90
)
 
$
(85
)
Balance at December 31, 2016
$
(273
)
 
$
14

 
$
8

 
$
(90
)
 
$
(341
)
2017 net change
21

 

 

 
(1
)
 
20

Balance at March 31, 2017
$
(252
)
 
$
14

 
$
8

 
$
(91
)
 
$
(321
)
(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 19.
The following tables present the before- and after-tax changes in each component of accumulated other comprehensive loss.
Three months ended March 31, 2017 ($ in millions)
Before tax
 
Tax effect
 
After tax
Investment securities
 
 
 
 
 
Net unrealized gains arising during the period
$
51

 
$
(5
)
 
$
46

Less: Net realized gains reclassified to income from continuing operations
27

(a)
(2
)
(b)
25

Net change
24

 
(3
)

21

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
)
Defined benefit pension plans
 
 
 
 
 
Net unrealized losses arising during the period
(1
)
 

 
(1
)
Other comprehensive income
$
23

 
$
(3
)
 
$
20

(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 19.

31

Notes to Condensed Consolidated Financial Statements (unaudited)
Ally Financial Inc. • Form 10-Q



Three months ended March 31, 2016 ($ in millions)
Before tax
 
Tax effect
 
After tax
Investment securities
 
 
 
 
 
Net unrealized gains arising during the period
$
280

 
$
(104
)
 
$
176

Less: Net realized gains reclassified to income from continuing operations
54

(a)
(20
)
(b)
34

Net change
226


(84
)

142

Translation adjustments
 
 
 
 
 
Net unrealized gains arising during the period
13

 
(5
)
 
8

Net investment hedges (c)
 
 
 
 
 
Net unrealized losses arising during the period
(6
)
 
3

 
(3
)
Defined benefit pension plans
 
 
 
 
 
Net unrealized losses arising during the period
(1
)
 

 
(1
)
Other comprehensive income
$
232

 
$
(86
)

$
146

(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 19.
17.    Earnings per Common Share
The following table presents the calculation of basic and diluted earnings per common share.
 
 
Three months ended March 31,
($ in millions, except per share data; shares in thousands) (a)
 
2017
 
2016
Net income from continuing operations
 
$
213

 
$
247

Preferred stock dividends
 

 
(15
)
Net income from continuing operations attributable to common shareholders
 
213

 
232

Income from discontinued operations, net of tax
 
1

 
3

Net income attributable to common shareholders
 
$
214

 
$
235

Basic weighted-average common shares outstanding (b)
 
465,961

 
484,233

Diluted weighted-average common shares outstanding (b)
 
466,829

 
484,654

Basic earnings per common share
 
 
 
 
Net income from continuing operations
 
$
0.46

 
$
0.48

Income from discontinued operations, net of tax
 

 
0.01

Net income
 
$
0.46

 
$
0.49

Diluted earnings per common share
 
 
 
 
Net income from continuing operations
 
$
0.46

 
$
0.48

Income from discontinued operations, net of tax
 

 
0.01

Net income
 
$
0.46

 
$
0.49

(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 for the three months ended March 31, 2017, and 2016, respectively.
18.    Regulatory Capital and Other Regulatory Matters
As a BHC, we and our wholly-owned state-chartered banking subsidiary, 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. A risk-based capital ratio is a ratio of a banking organization’s regulatory capital to its risk-weighted assets. A leverage capital ratio is a ratio of a banking organization’s regulatory capital to a measure of assets or exposures that is not risk-weighted. 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 and certain regulatory capital deductions, will be phased in over several years.
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

32

Notes to Condensed Consolidated Financial Statements (unaudited)
Ally Financial Inc. • Form 10-Q



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 a 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 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 requirements, Ally is also subject to a Common Equity Tier 1 capital conservation buffer of more than 2.5%, subject to a phase-in period from January 1, 2016, through December 31, 2018. Failure to maintain the full amount of the buffer will result in restrictions on Ally’s ability to make capital distributions, including dividend payment and stock repurchases and redemptions, and to pay discretionary bonuses to executive officers. In addition to these new risk-based capital standards, U.S. Basel III subjects all U.S. banking organizations, including Ally, to a minimum Tier 1 leverage ratio of 4%, the denominator of which takes into account only on-balance sheet assets.
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. Subject to certain exceptions (e.g., for certain debt or equity issued to the U.S. government under the Emergency Economic Stabilization Act), trust preferred and other “hybrid” securities are no longer included in 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 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 shares of unconsolidated financial institutions, mortgage servicing rights, and certain deferred tax assets 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 risk-weighted assets by, among other things, modifying certain risk weights and the methods for calculating risk-weighted assets for certain types of assets and exposures.
Ally is subject to the U.S. Basel III standardized approach for credit risk. It is not subject to the U.S. Basel III advanced approaches for credit risk. Ally is currently not subject to the U.S. market risk capital rule, which applies only to banking organizations with significant trading assets and liabilities.
On March 7, 2016, Ally Bank received approval from the Federal Reserve to become a state member bank. Ally Bank is now regulated by the FRB through the Federal Reserve Bank of Chicago, as well as the Utah Department of Financial Institutions (UDFI). In addition, in connection with the application for membership in the Federal Reserve System, Ally Bank made commitments to the FRB relating to capital, liquidity, and business plan requirements. These commitments are consistent with the prior requirements under the now-terminated Capital and Liquidity Maintenance Agreement with the Federal Deposit Insurance Corporation (FDIC), including the requirement to maintain capital at a level such that Ally Bank’s Tier 1 leverage ratio is at least 15%. For this purpose, the Tier 1 leverage ratio is determined in accordance with the FRB's regulations related to capital adequacy. As a requirement of Federal Reserve membership, we held $435 million of FRB stock at March 31, 2017.
Compliance with capital requirements is a strategic priority for Ally. We expect to be in compliance with all applicable requirements within the established timeframes.

33

Notes to Condensed Consolidated Financial Statements (unaudited)
Ally Financial Inc. • Form 10-Q



The following table summarizes our capital ratios under the U.S. Basel III capital framework.
 
March 31, 2017
 
December 31, 2016
 
Required
minimum
 
Well-capitalized
minimum
($ in millions)
Amount
 
Ratio
 
Amount
 
Ratio
 
Capital ratios
 
 
 
 
 
 
 
 
 
 
 
Common Equity Tier 1 (to risk-weighted assets)
 
 
 
 
 
 
 
 
 
 
 
Ally Financial Inc.
$
12,923

 
9.40
%
 
$
12,978

 
9.37
%
 
4.50
%
 
(a)

Ally Bank
18,562

 
17.74

 
17,888

 
16.70

 
4.50

 
6.50
%
Tier 1 (to risk-weighted assets)
 
 
 
 
 
 
 
 
 
 
 
Ally Financial Inc.
$
15,245

 
11.09
%
 
$
15,147

 
10.93
%
 
6.00
%
 
6.00
%
Ally Bank
18,562

 
17.74

 
17,888

 
16.70

 
6.00

 
8.00

Total (to risk-weighted assets)
 
 
 
 
 
 
 
 
 
 
 
Ally Financial Inc.
$
17,459

 
12.70
%
 
$
17,419

 
12.57
%
 
8.00
%
 
10.00
%
Ally Bank
19,167

 
18.32

 
18,458

 
17.24

 
8.00

 
10.00

Tier 1 leverage (to adjusted quarterly average assets) (b)
 
 
 
 
 
 
 
 
 
 
 
Ally Financial Inc.
$
15,245

 
9.51
%
 
$
15,147

 
9.54
%
 
4.00
%
 
(a)

Ally Bank
18,562

 
15.38

 
17,888

 
15.21

 
15.00

(c) 
5.00
%
(a)
Currently, there is no ratio component for determining whether a BHC is "well-capitalized."
(b)
Federal regulatory reporting guidelines require the calculation of adjusted quarterly average assets using a daily average methodology.
(c)
Ally Bank has committed to the FRB to maintain a Tier 1 leverage ratio of at least 15%.
At March 31, 2017, Ally and Ally Bank were “well-capitalized” and met all capital requirements to which each was subject.
Capital Planning and Stress Tests
As a BHC with $50 billion or more of consolidated assets, Ally is required to conduct semi-annual company-run stress tests, is subject to an annual supervisory stress test conducted by the FRB, and must submit an annual capital plan to the FRB.
Ally’s capital plan must include a description of all planned capital actions over a nine-quarter planning horizon. The capital plan must also include a discussion of how Ally will maintain capital above the minimum regulatory capital ratios under baseline, adverse, and severely adverse economic scenarios, and serve as a source of strength to Ally Bank. The FRB must approve Ally's capital plan before Ally may take any capital action. Even with an approved capital plan, Ally must seek the approval of the FRB before making a capital distribution if, among other factors, Ally would not meet its regulatory capital requirements after making the proposed capital distribution.
As part of the 2016 Comprehensive Capital Analysis and Review (CCAR) process, we received approval for capital actions including a quarterly cash dividend of $0.08 per share of our common stock, subject to quarterly approval by the Board of Directors, and the ability to repurchase up to $700 million of our common stock from time to time through the second quarter of 2017. Our first common stock dividend was paid during the third quarter of 2016 and we paid a cash dividend of $0.08 per share on our common stock during each subsequent quarter. On April 14, 2017, the Ally Board of Directors declared a quarterly cash dividend payment of $0.08 per share on all common stock. Refer to Note 26 for further information regarding this common share dividend. Additionally, the Ally Board of Directors authorized a common stock repurchase program of up to $700 million beginning in the third quarter of 2016 and continuing through the second quarter of 2017. Under this program, we have repurchased $495 million, or 25,140,190 shares of common stock, which reduced total shares by approximately 5.2% since inception. At March 31, 2017, we had 462,193,424 shares of common stock outstanding.
Ally submitted its 2017 capital plan on April 5, 2017, with capital actions including distributions to common shareholders through share repurchases and cash dividends. 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 of and non-objection to the actions that we propose each year in our annual capital plan. We expect to receive the FRB’s response (either a non-objection or objection) to the capital plan submitted by June 30, 2017.
In January 2017, the FRB finalized a rule amending the capital planning and stress testing rules, effective for the 2017 cycle. The final rule, among other things, revised the capital plan rule to no longer subject large and noncomplex firms, including Ally, to the provisions of the rule whereby the FRB may object to a capital plan on the basis of qualitative deficiencies in the firm’s capital planning process. Under the final rule, the qualitative assessment of Ally’s capital plan is conducted outside of the CCAR process, through the supervisory review process, and Ally’s reporting requirements have been modified to reduce certain reporting burdens related to capital planning and stress testing. The final rule also decreased the de minimis threshold for the amount of capital that Ally could distribute to shareholders outside of an approved capital plan without seeking prior approval of the FRB.

34

Notes to Condensed Consolidated Financial Statements (unaudited)
Ally Financial Inc. • Form 10-Q



19.    Derivative Instruments and Hedging Activities
We enter into interest rate, foreign-currency, and equity swaps, futures, forwards, options, and swaptions in connection with our market risk management activities. Derivative instruments are used to manage interest rate risk relating to specific groups of assets and liabilities, including automotive loan assets and debt. We use foreign exchange contracts to mitigate foreign-currency risk associated with foreign-currency-denominated debt, foreign exchange transactions, and our net investment in foreign subsidiaries. In addition, we also enter into equity option contracts to manage our exposure to the equity markets. 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 market risks related to our investment portfolio and certain of our executive share-based compensation plans.
Interest Rate Risk
We monitor our mix of fixed- and variable-rate assets and liabilities. We 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 interest rate swaps, forwards, futures, options, and swaptions 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 consist of 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 and pay-fixed swaps designated as fair value hedges of specific portfolios of fixed-rate held-for-investment retail automotive loan assets.
We also execute economic hedges, which consist of interest rate swaps and interest rate caps held to mitigate interest rate risk associated with our debt portfolio. We also use interest rate swaps to economically hedge our net fixed-versus-variable interest rate exposure. We enter into economic hedges in the form of short-dated, exchange-traded Eurodollar futures to hedge the interest rate exposure of our fixed-rate automotive loans, as well as forwards, options, and swaptions to economically hedge our net fixed-versus-variable interest rate exposure.
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 investments 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 loss. We also periodically enter into foreign-currency forwards to economically hedge our foreign-denominated debt, our centralized lending program, and foreign-denominated third-party loans. These forward 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.
Market Risk
We enter into equity options to economically hedge our exposure to the equity markets. We purchase options to assume a long position on certain equities and write options to assume a short position.
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.
To mitigate the risk of counterparty default, we maintain collateral agreements with certain counterparties. The 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. Generally, our collateral arrangements are bilateral such that we and the counterparty post collateral for the value of our total obligation to each other. Contractual terms provide for standard and customary exchange of collateral based on changes in the market value of the outstanding derivatives. The securing party posts additional collateral when their obligation rises or removes collateral when it falls.
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 first quarter of 2017 or 2016.
We placed cash collateral totaling $115 million and securities collateral totaling $59 million at March 31, 2017, and $122 million and $72 million at December 31, 2016, respectively, in accounts maintained by counterparties. This amount primarily relates to collateral posted to support our derivative positions. This amount also excludes cash and securities pledged as collateral under repurchase agreements. At March 31, 2017, and December 31, 2016, we placed cash collateral totaling $5 million and $45 million, respectively, with counterparties

35

Notes to Condensed Consolidated Financial Statements (unaudited)
Ally Financial Inc. • Form 10-Q



under collateral arrangements associated with repurchase agreements. Refer to Note 14 for details on the repurchase agreements. The receivables for cash collateral placed are included in our Condensed Consolidated Balance Sheet in other assets.
We received cash collateral from counterparties totaling $12 million and $10 million at March 31, 2017, and December 31, 2016, respectively, primarily to support these derivative positions. This amount also excludes cash and securities pledged as collateral under repurchase agreements. At March 31, 2017, we received cash collateral totaling $1 million from counterparties under collateral arrangements associated with repurchase agreements. Refer to Note 14 for details on the repurchase agreements. The payables for cash collateral received are included on our Condensed Consolidated Balance Sheet in accrued expenses and other liabilities. In certain circumstances, we receive or post securities as collateral with counterparties. We do not record collateral received on our Condensed Consolidated Balance Sheet unless certain conditions are met. At March 31, 2017, and December 31, 2016, we received noncash collateral of $6 million. 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.

36

Notes to Condensed Consolidated Financial Statements (unaudited)
Ally Financial Inc. • Form 10-Q



Balance Sheet Presentation
The following table summarizes the fair value amounts of derivative instruments reported on our Condensed Consolidated Balance Sheet. The fair value amounts are presented on a gross basis, are segregated by derivatives that are designated and qualifying as hedging instruments or those that are not, and are further segregated by type of contract within those two categories. 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.
 
 
March 31, 2017
 
December 31, 2016
 
 
Derivative contracts in a
 
Notional
amount
 
Derivative contracts in a
 
Notional
amount
($ in millions)
 
receivable
position (a)
 
payable
position (b)
 
receivable
position (a)
 
payable
position (b)
 
Derivatives designated as accounting hedges
 
 
 
 
 
 
 
 
 
 
 
 
Interest rate contracts
 
 
 
 
 
 
 
 
 
 
 
 
Swaps (c) (d) (e)
 
$
18

 
$
17

 
$
3,939

 
$
19

 
$
21

 
$
4,731

Foreign exchange contracts
 
 
 
 
 
 
 
 
 
 
 
 
Forwards
 

 
1

 
150

 
1

 

 
171

Total derivatives designated as accounting hedges
 
18

 
18

 
4,089

 
20

 
21

 
4,902

Derivatives not designated as accounting hedges
 
 
 
 
 
 
 
 
 
 
 
 
Interest rate contracts
 
 
 
 
 
 
 
 
 
 
 
 
Swaps
 

 

 
43

 

 

 
137

Futures and forwards
 

 

 
25

 

 

 

Written options
 

 
62

 
13,432

 

 
73

 
14,518

Purchased options
 
62

 

 
13,407

 
73

 

 
14,517

Total interest rate risk
 
62

 
62

 
26,907

 
73

 
73

 
29,172

Foreign exchange contracts
 
 
 
 
 
 
 
 
 
 
 
 
Futures and forwards
 

 
1

 
94

 
1

 

 
92

Total foreign exchange risk
 

 
1

 
94

 
1

 

 
92

Equity contracts
 
 
 
 
 
 
 
 
 
 
 
 
Written options
 

 

 

 

 
1

 

Purchased options
 

 

 

 
1

 

 

Total equity risk
 

 

 

 
1

 
1

 

Total derivatives not designated as accounting hedges
 
62

 
63

 
27,001

 
75

 
74

 
29,264

Total derivatives
 
$
80

 
$
81

 
$
31,090

 
$
95

 
$
95

 
$
34,166

(a)
Derivative contracts in a receivable position are classified as other assets on the Condensed Consolidated Balance Sheet, and include accrued interest of $3 million and $7 million at March 31, 2017, and December 31, 2016, respectively.
(b)
Derivative contracts in a liability position are classified as accrued expenses and other liabilities on the Condensed Consolidated Balance Sheet, and include accrued interest of $0 million and $1 million at March 31, 2017, and December 31, 2016, respectively.
(c)
Includes fair value hedges consisting of receive-fixed swaps on fixed-rate unsecured debt obligations with $11 million and $8 million in a receivable position, $18 million and $14 million in a payable position, and a $2.6 billion and $1.7 billion notional amount at March 31, 2017, and December 31, 2016, respectively. The hedge notional amount of $2.6 billion at March 31, 2017, is associated with debt maturing in approximately five or more years.
(d)
Includes fair value hedges consisting of receive-fixed swaps on fixed-rate secured debt obligations (FHLB advances) with $0 million and $0 million in a receivable position, $0 million and $7 million in a payable position, and a $0 million and $240 million notional amount at March 31, 2017, and December 31, 2016, respectively.
(e)
Other fair value hedges include pay-fixed swaps on portfolios of held-for-investment automotive loan assets with $7 million and $10 million in a receivable position, $0 million and $1 million in a payable position, and a $1.4 billion and $2.8 billion notional amount at March 31, 2017, and December 31, 2016, respectively.

37

Notes to Condensed Consolidated Financial Statements (unaudited)
Ally Financial Inc. • Form 10-Q



Statement of Comprehensive Income Presentation
The following table summarizes the location and amounts of gains and losses on derivative instruments reported in our Condensed Consolidated Statement of Comprehensive Income.
 
 
Three months ended March 31,
($ in millions)
 
2017
 
2016
Derivatives qualifying for hedge accounting
 
 
 
 
Gain (loss) recognized in earnings on derivatives
 
 
 
 
Interest rate contracts
 
 
 
 
Interest and fees on finance receivables and loans (a)
 
$
2

 
$
(28
)
Interest on long-term debt (b) (c)
 
4

 
191

(Loss) gain recognized in earnings on hedged items
 
 
 
 
Interest rate contracts
 
 
 
 
Interest and fees on finance receivables and loans (d)
 
(4
)
 
28

Interest on long-term debt (e) (f)
 
(3
)
 
(196
)
Total derivatives qualifying for hedge accounting
 
(1
)
 
(5
)
Derivatives not designated as accounting hedges
 
 
 
 
(Loss) gain recognized in earnings on derivatives
 
 
 
 
Interest rate contracts
 
 
 
 
Other income, net of losses
 
(2
)
 
2

Total interest rate contracts
 
(2
)
 
2

Foreign exchange contracts (g)
 
 
 
 
Interest on long-term debt
 

 
(1
)
Other income, net of losses
 
(1
)
 
(4
)
Total foreign exchange contracts
 
(1
)
 
(5
)
Equity contracts
 
 
 
 
Compensation and benefits expense
 

 
(1
)
Total equity contracts
 

 
(1
)
Loss recognized in earnings on derivatives
 
$
(4
)
 
$
(9
)
(a)
Amounts exclude losses related to interest for qualifying accounting hedges of retail automotive loans held-for-investment, which are primarily offset by the fixed coupon payments of the loans. The losses were $1 million and $7 million for the three months ended March 31, 2017, and 2016, respectively.
(b)
Amounts exclude gains related to interest for qualifying accounting hedges of unsecured debt, which are primarily offset by the fixed coupon payment on the long-term debt. The gains were $5 million and $16 million for the three months ended March 31, 2017, and 2016, respectively.
(c)
Amounts exclude gains related to interest for qualifying accounting hedges of secured debt (FHLB advances), which are primarily offset by the fixed coupon payment on the long-term debt. The gains were $0 million and $1 million for the three months ended March 31, 2017, and 2016, respectively.
(d)
Amounts exclude losses related to amortization of deferred loan basis adjustments on the de-designated hedged item of $5 million for both the three months ended March 31, 2017, and 2016.
(e)
Amounts exclude gains related to amortization of deferred debt basis adjustments on the de-designated hedged item of $20 million and $18 million for the three months ended March 31, 2017, and 2016, respectively.
(f)
Amounts exclude losses related to amortization of deferred debt basis adjustments (FHLB advances) on the de-designated hedge item of $1 million and $0 million for the three months ended March 31, 2017, and 2016, respectively.
(g)
Amounts exclude gains and losses related to the revaluation of the related foreign-denominated debt or receivable. Gains of $1 million and $4 million were recognized for the three months ended March 31, 2017, and 2016, respectively.
Losses of $2 million and $6 million were recognized in other comprehensive income for the three months ended March 31, 2017, and 2016, respectively. These amounts represent the effective portion of net investment hedges. There are offsetting amounts recognized in accumulated other comprehensive loss related to the revaluation of the related net investment in foreign operations, including the tax impacts of the hedge and related net investment, as disclosed separately in Note 16. There were gains of $3 million and $11 million for the three months ended March 31, 2017, and 2016, respectively.
20.    Income Taxes
We recognized total income tax expense from continuing operations of $113 million for the three months ended March 31, 2017, compared to income tax expense of $150 million for the same period in 2016. The decrease in income tax expense for the three months ended March 31, 2017, compared to the same period in 2016, was primarily driven by a decrease in pretax earnings and a tax benefit for the current quarter related to stock compensation and associated movements in our share price.

38

Notes to Condensed Consolidated Financial Statements (unaudited)
Ally Financial Inc. • Form 10-Q



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 capital loss carryforwards, certain foreign tax credits, and state net operating loss carryforwards will not be realized. In recognition of this risk, we continue to provide a full valuation allowance on capital loss carryforwards and a partial valuation allowance on the deferred tax assets relating to foreign tax credits and state net operating loss carryforwards.
21.    Fair Value
Fair Value Measurements
For purposes of this disclosure, fair value is defined as the exchange price that would be received to sell an asset or paid to transfer a liability (exit price) in the principal or most advantageous market in an orderly transaction between market participants at the measurement date 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.
GAAP specifies a three-level hierarchy that is used when measuring and disclosing fair value. The fair value hierarchy gives the highest priority to quoted prices available in active markets (i.e., observable inputs) and the lowest priority to data lacking transparency (i.e., unobservable inputs). An instrument’s categorization within the fair value hierarchy is based on the lowest level of significant input to its valuation. The following is a description of the three hierarchy levels.
Level 1
Inputs are quoted prices in active markets for identical assets or liabilities at the measurement date. Additionally, the entity must have the ability to access the active market, and the quoted prices cannot be adjusted by the entity.
Level 2
Inputs are other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. Level 2 inputs include quoted prices in active markets for similar assets or liabilities; quoted prices in inactive markets for identical or similar assets or liabilities; or inputs that are observable or can be corroborated by observable market data by correlation or other means for substantially the full term of the assets or liabilities.
Level 3
Unobservable inputs are supported by little or no market activity. The unobservable inputs represent management's best assumptions of how market participants would price the assets or liabilities. Generally, Level 3 assets and liabilities are valued using pricing models, discounted cash flow methodologies, or similar techniques that require significant judgment or estimation.
Transfers
Transfers into or out of any hierarchy level are recognized at the end of the reporting period in which the transfer occurred. There were no transfers between any levels for the three months ended March 31, 2017.
Following are descriptions of the valuation methodologies used to measure material assets and liabilities at fair value and details of the valuation models, key inputs to those models, and significant assumptions utilized.
Available-for-sale securities — 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 over-the-counter (OTC) and centrally-cleared derivative contracts, such as interest rate swaps, a cross-currency swap, swaptions, foreign-currency denominated forward contracts, prepaid equity forward contracts, caps, floors, and agency to-be-announced securities. For OTC contracts, we utilize third-party-developed valuation models that are widely accepted in the market to value these OTC 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 OTC derivative contracts as Level 2 because all significant inputs into these models were market observable. For centrally-cleared

39

Notes to Condensed Consolidated Financial Statements (unaudited)
Ally Financial Inc. • Form 10-Q



contracts, we utilize unadjusted prices obtained from the clearing house as the basis for valuation, and they are also classified as Level 2. We did not have any derivative instruments classified as Level 3 as of March 31, 2017, or December 31, 2016.
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.
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
March 31, 2017 ($ in millions)
 
Level 1
 
Level 2
 
Level 3
 
Total
Assets
 
 
 
 
 
 
 
 
Investment securities
 
 
 
 
 
 
 

Available-for-sale securities
 
 
 
 
 
 
 

Debt securities
 
 
 
 
 
 
 

U.S. Treasury
 
$
2,225

 
$

 
$

 
$
2,225

U.S. States and political subdivisions
 

 
795

 

 
795

Foreign government
 
9

 
137

 

 
146

Agency mortgage-backed residential
 

 
11,862

 

 
11,862

Mortgage-backed residential
 

 
1,996

 

 
1,996

Mortgage-backed commercial
 

 
534

 

 
534

Asset-backed
 

 
1,051

 

 
1,051

Corporate debt
 

 
1,255

 

 
1,255

Total debt securities
 
2,234

 
17,630

 

 
19,864

Equity securities (a)
 
444

 

 

 
444

Total available-for-sale securities
 
2,678

 
17,630

 

 
20,308

Mortgage loans held-for-sale
 

 

 
1

 
1

Interests retained in financial asset sales
 

 

 
31

 
31

Derivative contracts in a receivable position (b)
 
 
 
 
 
 
 

Interest rate
 

 
80

 

 
80

Total derivative contracts in a receivable position
 

 
80

 

 
80

Total assets
 
$
2,678

 
$
17,710

 
$
32

 
$
20,420

Liabilities
 
 
 
 
 
 
 

Accrued expenses and other liabilities
 
 
 
 
 
 
 

Derivative contracts in a payable position (b)
 
 
 
 
 
 
 

Interest rate
 
$

 
$
(80
)
 
$

 
$
(80
)
Foreign currency
 

 
(1
)
 

 
(1
)
Total derivative contracts in a payable position
 

 
(81
)
 

 
(81
)
Total liabilities
 
$

 
$
(81
)
 
$

 
$
(81
)
(a)
Our investment in any one industry did not exceed 16%.
(b)
For additional information on derivative instruments and hedging activities, refer to Note 19.

40

Notes to Condensed Consolidated Financial Statements (unaudited)
Ally Financial Inc. • Form 10-Q



 
 
Recurring fair value measurements
December 31, 2016 ($ in millions)
 
Level 1
 
Level 2
 
Level 3
 
Total
Assets
 
 
 
 
 
 
 
 
Investment securities
 
 
 
 
 
 
 
 
Available-for-sale securities
 
 
 
 
 
 
 
 
Debt securities
 
 
 
 
 
 
 
 
U.S. Treasury
 
$
1,620

 
$

 
$

 
$
1,620

U.S. States and political subdivisions
 

 
782

 

 
782

Foreign government
 
11

 
151

 

 
162

Agency mortgage-backed residential
 

 
10,290

 

 
10,290

Mortgage-backed residential
 

 
2,097

 

 
2,097

Mortgage-backed commercial
 

 
537

 

 
537

Asset-backed
 

 
1,400

 

 
1,400

Corporate debt
 

 
1,443

 

 
1,443

Total debt securities
 
1,631

 
16,700

 

 
18,331

Equity securities (a)
 
595

 

 

 
595

Total available-for-sale securities
 
2,226

 
16,700

 

 
18,926

Other assets
 
 
 
 
 
 
 

Interests retained in financial asset sales
 

 

 
29

 
29

Derivative contracts in a receivable position (b)
 
 
 
 
 
 
 

Interest rate
 

 
92

 

 
92

Foreign currency
 

 
2

 

 
2

Other
 
1

 

 

 
1

Total derivative contracts in a receivable position
 
1

 
94

 

 
95

Total assets
 
$
2,227


$
16,794


$
29

 
$
19,050

Liabilities
 
 
 
 
 
 
 

Accrued expenses and other liabilities
 
 
 
 
 
 
 

Derivative contracts in a payable position (b)
 
 
 
 
 
 
 

Interest rate
 
$

 
$
(94
)
 
$

 
$
(94
)
Other
 
(1
)
 

 

 
(1
)
Total derivative contracts in a payable position
 
(1
)
 
(94
)
 

 
(95
)
Total liabilities
 
$
(1
)

$
(94
)

$


$
(95
)
(a)
Our investment in any one industry did not exceed 14%.
(b)
For additional information on derivative instruments and hedging activities, refer to Note 19.

41

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. 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
gains
 
 
 
 
Fair value at
March 31, 2017
Net unrealized gains included in earnings
still held at
March 31,
2017
($ in millions)
Fair value at Jan. 1, 2017
included in earnings
 
included in OCI
Purchases
Sales
Issuances
Settlements
Assets
 
 
 
 
 
 
 
 

 
Mortgage loans held-for-sale
$

$

 
$

$
3

$
(2
)
$

$

$
1

$

Other assets
 
 
 
 
 
 
 
 

 
Interests retained in financial asset sales
29


 


4


(2
)
31


Total assets
$
29

$


$

$
3

$
2

$

$
(2
)
$
32

$

 
Level 3 recurring fair value measurements
 
Fair value at Jan. 1, 2016
Net realized/unrealized
gains
Purchases
Sales
Issuances
Settlements
Fair value at
March 31, 2016
Net unrealized gains included in earnings
still held at
March 31,
2016
($ in millions)
included in earnings
 
included in OCI
Assets
 
 
 
 
 
 
 
 
 
 
Other assets
 
 
 
 
 
 
 
 
 
 
Interests retained in financial asset sales
$
40

$
2

(a)
$

$

$
4

$

$
(15
)
$
31

$

Total assets
$
40

$
2

 
$

$

$
4

$

$
(15
)
$
31

$

(a)
Reported as other income, net of losses, in the Condensed Consolidated Statement of Comprehensive Income.

42

Notes to Condensed Consolidated Financial Statements (unaudited)
Ally Financial Inc. • Form 10-Q



Nonrecurring Fair Value
We may be required to measure certain assets and liabilities at fair value from time to time. These periodic fair value measures typically result from the application of lower-of-cost or fair value accounting or certain impairment measures. These items would constitute nonrecurring fair value measures.
The following tables display the assets and liabilities measured at fair value on a nonrecurring basis.
 
 
Nonrecurring
fair value measurements
 
Lower-of-cost or
fair value
or valuation
reserve
allowance
 
Total gain (loss) included in earnings for
the three months ended
 
March 31, 2017 ($ in millions)
 
Level 1
 
Level 2
 
Level 3
 
Total
 
Assets
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial finance receivables and loans, net (a)
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial and industrial
 
 
 
 
 
 
 
 
 
 
 
 
 
Automotive
 
$

 
$

 
$
29

 
$
29

 
$
(3
)
 
n/m
(b)
Other
 

 

 
61

 
61

 
(21
)
 
n/m
(b)
Total commercial finance receivables and loans, net
 

 

 
90

 
90

 
(24
)
 
n/m
(b)
Other assets
 
 
 
 
 
 
 

 
 
 
 
 
Repossessed and foreclosed assets (c)
 

 

 
15

 
15

 
(2
)
 
n/m
(b)
Other
 

 

 
4

 
4

 

 
n/m
(b)
Total assets
 
$

 
$

 
$
109

 
$
109

 
$
(26
)
 
n/m
 
n/m = not meaningful
(a)
Represents the portion of the portfolio specifically impaired during 2017. The related valuation allowance represents the cumulative adjustment to fair value of those specific receivables.
(b)
We consider the applicable valuation or loan loss allowance to be the most relevant indicator of the impact on earnings caused by the fair value measurement. Accordingly, the table above excludes total gains and losses included in earnings for these items. The carrying values are inclusive of the respective valuation or loan loss allowance.
(c)
The allowance provided for repossessed and foreclosed assets represents any cumulative valuation adjustment recognized to adjust the assets to fair value.
 
 
Nonrecurring
fair value measurements
 
Lower-of-cost or
fair value
or valuation
reserve
allowance
 
Total gain (loss) included in earnings for
the three months ended
 
March 31, 2016 ($ in millions)
 
Level 1
 
Level 2
 
Level 3
 
Total
 
Assets
 
 
 
 
 
 
 
 
 
 
 
 
 
Loans held-for-sale, net
 
$

 
$

 
$
39

 
$
39

 
$

 
n/m
(a)
Commercial finance receivables and loans, net (b)
 
 
 
 
 
 
 

 
 
 
 
 
Commercial and industrial
 
 
 
 
 
 
 
 
 
 
 
 
 
Automotive
 

 

 
17

 
17

 
(3
)
 
n/m
(a)
Other
 

 

 
28

 
28

 
(15
)
 
n/m
(a)
Total commercial finance receivables and loans, net
 

 

 
45

 
45

 
(18
)
 
n/m
(a)
Other assets
 
 
 
 
 
 
 

 
 
 
 
 
Repossessed and foreclosed assets (c)
 

 

 
12

 
12

 
(3
)
 
n/m
(a)
Other
 

 

 
6

 
6

 

 
n/m
(a)
Total assets
 
$

 
$

 
$
102

 
$
102

 
$
(21
)
 
n/m
 
n/m = not meaningful
(a)
We consider the applicable valuation or loan loss allowance to be the most relevant indicator of the impact on earnings caused by the fair value measurement. Accordingly, the table above excludes total gains and losses included in earnings for these items. The carrying values are inclusive of the respective valuation or loan loss allowance.
(b)
Represents the portion of the portfolio specifically impaired during 2016. 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.

43

Notes to Condensed Consolidated Financial Statements (unaudited)
Ally Financial Inc. • Form 10-Q



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 hedges. Our intent in electing fair value measurement was to mitigate a divergence between accounting losses and economic exposure for certain assets and liabilities.
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 March 31, 2017, and December 31, 2016.
 
 
 
Estimated fair value
($ in millions)
Carrying value
 
Level 1
 
Level 2
 
Level 3
 
Total
March 31, 2017
 
 
 
 
 
 
 
 
 
Financial assets
 
 
 
 
 
 
 
 
 
Held-to-maturity securities
$
1,104

 
$

 
$
1,063

 
$

 
$
1,063

Finance receivables and loans, net
117,847

 

 

 
119,420

 
119,420

Nonmarketable equity investments
833

 

 
795

 
59

 
854

Financial liabilities
 
 
 
 
 
 
 
 
 
Deposit liabilities
$
84,486

 
$

 
$

 
$
82,715

 
$
82,715

Short-term borrowings
8,371

 

 

 
8,372

 
8,372

Long-term debt
51,061

 

 
19,604

 
33,511

 
53,115

December 31, 2016
 
 
 
 
 
 
 
 
 
Financial assets
 
 
 
 
 
 
 
 
 
Held-to-maturity securities
$
839

 
$

 
$
789

 
$

 
$
789

Finance receivables and loans, net
117,800

 

 

 
118,750

 
118,750

Nonmarketable equity investments
1,046

 

 
1,012

 
55

 
1,067

Financial liabilities
 
 
 
 
 
 
 
 
 
Deposit liabilities
$
79,022

 
$

 
$

 
$
78,469

 
$
78,469

Short-term borrowings
12,673

 

 

 
12,675

 
12,675

Long-term debt
54,128

 

 
22,036

 
34,084

 
56,120

The following describes the methodologies and assumptions used to determine fair value for the significant classes of financial instruments. In addition to the valuation methods discussed below, we also followed guidelines for determining whether a market was not active and a transaction was not distressed. We assumed the price that would be received in an orderly transaction (including a market-based return) and not in forced liquidation or distressed sale.
Cash and cash equivalents — Included in cash and cash equivalents are highly liquid investments that are readily convertible to known amounts of cash and which are subject to an insignificant risk of change in value due to interest rate, quoted price, or penalty on withdrawal. Classified as Level 1 under the fair value hierarchy, cash and cash equivalents generally expose us to limited credit risk and are so near maturity that they present insignificant risk of changes in value because of changes in interest rates. Accordingly, the carrying value approximates the fair value of these instruments.
Held-to-maturity securities — Held-to-maturity securities, which consist of asset-backed retained notes and residential mortgage-backed debt securities issued by government agencies, are carried at amortized cost. For fair value disclosure purposes, held-to-maturity securities are classified as Level 2, with fair value based on observable market prices, when available.
Finance receivables and loans, net — With the exception of mortgage loans held-for-investment, the fair value of finance receivables and loans was based on discounted future cash flows using applicable spreads to approximate current rates applicable to each category of finance receivables and loans (an income approach using Level 3 inputs). The carrying value of commercial receivables in certain markets and certain automotive and other receivables for which interest rates reset on a short-term basis with applicable market indices are assumed to approximate fair value either because of the short-term nature or because of the interest

44

Notes to Condensed Consolidated Financial Statements (unaudited)
Ally Financial Inc. • Form 10-Q



rate adjustment feature. The fair value of commercial receivables in other markets was based on discounted future cash flows using applicable spreads to approximate current rates applicable to similar assets in those markets.
The fair value of mortgage loans held-for-investment was based on a discounted cash flow basis utilizing cash flow projections from models that utilized prepayment, default, and discount rate assumptions. These valuations consider unique attributes of the loans such as geography, delinquency status, product type, and other factors.
Nonmarketable equity investments — Nonmarketable equity investments primarily include investments in FHLB and FRB stock and other equity investments carried at cost. As a member of the FHLB and FRB, Ally Bank is required to hold FHLB and FRB stock. The stock can be sold only to the FHLB and FRB upon termination of membership, or redeemed at the sole discretion of the FHLB and FRB, respectively. The fair value of FHLB and FRB stock is equal to the stock’s par value since the stock is bought, sold, and/or redeemed at par. FHLB and FRB stock is carried at cost, which generally represents the stock’s par value.
Deposit liabilities — Deposit liabilities represent certain consumer and brokered bank deposits, mortgage escrow deposits, and dealer deposits. The fair value of deposits at Level 3 was estimated by discounting projected cash flows based on discount factors derived from the forward interest rate swap curve.
Short-term borrowings and Long-term debt — Level 2 debt was valued using quoted market prices for similar instruments, when available, or other means for substantiation with observable inputs. Debt valued by discounting projected cash flows using internally derived inputs, such as prepayment speeds and discount rates, was classified as Level 3.
Financial instruments for which carrying value approximates fair value — Certain financial instruments that are not carried at fair value on the consolidated balance sheet are carried at amounts that approximate fair value primarily due to their short term nature and limited credit risk. These instruments include restricted cash, cash collateral, accrued interest receivable, accrued interest payable, trade receivables and payables, and other short term receivables and payables.
22.    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 (1) 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 (2) 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 value of our total obligation to each other. Contractual terms provide for standard and customary exchange of collateral based on changes in the market value of the outstanding derivatives. The securing party posts additional collateral when their obligation rises or removes collateral when it falls, 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 March 31, 2017, these instruments are reported as gross assets and gross liabilities on the Condensed Consolidated Balance Sheet.

45

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 in the Condensed Consolidated Balance Sheet
 
Net amounts of assets/(liabilities)
presented in the
Condensed Consolidated Balance Sheet
 
 
 
 
 
 
 
 
 
 
 
Gross amounts not offset in the Condensed Consolidated Balance Sheet
 
 
March 31, 2017 ($ in millions)
 
 
 
 
Financial instruments
 
Collateral
(a) (b) (c)
 
Net amount
Assets
 
 
 
 
 
 
 
 
 
 
 
 
Derivative assets in net asset positions
 
$
78

 
$

 
$
78

 
$
(5
)
 
$
(8
)
 
$
65

Derivative assets in net liability positions
 
2

 

 
2

 
(2
)
 

 

Total assets (d)
 
$
80


$


$
80


$
(7
)

$
(8
)

$
65

Liabilities
 
 
 
 
 
 
 
 
 
 
 
 
Derivative liabilities in net liability positions
 
$
(76
)
 
$

 
$
(76
)
 
$
2

 
$
14

 
$
(60
)
Derivative liabilities in net asset positions
 
(5
)
 

 
(5
)
 
5

 

 

Total derivative liabilities (d)
 
(81
)
 

 
(81
)
 
7

 
14

 
(60
)
Securities sold under agreements to repurchase (e)
 
(1,146
)
 

 
(1,146
)
 

 
1,146

 

Total liabilities
 
$
(1,227
)
 
$

 
$
(1,227
)
 
$
7

 
$
1,160

 
$
(60
)
(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. $6 million of noncash derivative collateral pledged to us was excluded at March 31, 2017. 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 $6 million at March 31, 2017. We have not sold or pledged any of the noncash collateral received under these agreements as of March 31, 2017.
(d)
For additional information on derivative instruments and hedging activities, refer to Note 19.
(e)
For additional information on securities sold under agreements to repurchase, refer to Note 14.

46

Notes to Condensed Consolidated Financial Statements (unaudited)
Ally Financial Inc. • Form 10-Q



 
 
Gross amounts of recognized assets/(liabilities)
 
Gross amounts offset in the Condensed Consolidated Balance Sheet
 
Net amounts of assets/(liabilities)
presented in the
Condensed Consolidated Balance Sheet
 
 
 
 
 
 
 
 
 
 
 
Gross amounts not offset in the Condensed Consolidated Balance Sheet
 
 
December 31, 2016 ($ in millions)
 
 
 
 
Financial instruments
 
Collateral
(a) (b) (c)
 
Net amount
Assets
 
 
 
 
 
 
 
 
 
 
 
 
Derivative assets in net asset positions
 
$
87

 
$

 
$
87

 
$
(4
)
 
$
(9
)
 
$
74

Derivative assets in net liability positions
 
8

 

 
8

 
(8
)
 

 

Total assets (d)
 
$
95

 
$

 
$
95

 
$
(12
)
 
$
(9
)
 
$
74

Liabilities
 
 
 
 
 
 
 
 
 
 
 
 
Derivative liabilities in net liability positions
 
$
(91
)
 
$

 
$
(91
)
 
$
8

 
$
13

 
$
(70
)
Derivative liabilities in net asset positions
 
(4
)
 

 
(4
)
 
4

 

 

Total derivative liabilities (d)
 
(95
)
 

 
(95
)
 
12

 
13

 
(70
)
Securities sold under agreements to repurchase (e)
 
(676
)
 

 
(676
)
 

 
676

 

Total liabilities
 
$
(771
)
 
$

 
$
(771
)
 
$
12

 
$
689

 
$
(70
)
(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. $6 million of noncash derivative collateral pledged to us was excluded at December 31, 2016. 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 $6 million at December 31, 2016. We have not sold or pledged any of the noncash collateral received under these agreements as of December 31, 2016.
(d)
For additional information on derivative instruments and hedging activities, refer to Note 19.
(e)
For additional information on securities sold under agreements to repurchase, refer to Note 14.
23.    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 line-of-business 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 — Provides U.S.-based automotive financing services to consumers and automotive dealers, and automotive and equipment financing services to companies and municipalities. Our automotive finance services include providing retail installment sales contracts, loans and leases, offering term loans to dealers, financing dealer floorplans and other lines of credit to dealers, warehouse lines to companies, fleet financing, providing financing to companies and municipalities for the purchase or lease of vehicles and equipment, and vehicle remarketing services.
Insurance operations — Offers 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 vehicle service contracts, vehicle maintenance contracts, and guaranteed asset protection products. We also underwrite select commercial insurance coverages, which primarily insure dealers' wholesale vehicle inventory.
Mortgage Finance operations — Primarily consists of the management of a held-for-investment consumer mortgage finance loan portfolio, which includes bulk purchases of high-quality jumbo and low-to-moderate income (LMI) mortgage loans originated by third parties. In late 2016, we introduced our direct mortgage offering, named Ally Home, consisting of a variety of jumbo and conforming fixed- and adjustable-rate mortgage products through a third-party fulfillment partner. Under our current arrangement, conforming mortgages are originated as held-for-sale and sold, while jumbo mortgages are originated as held-for-investment. Servicing is performed by a third party and no mortgage servicing rights are created.

47

Notes to Condensed Consolidated Financial Statements (unaudited)
Ally Financial Inc. • Form 10-Q



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.
Corporate and Other primarily consists of activity related to 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, the amortization of the discount associated with new debt issuances and bond exchanges, 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, beginning in June 2016, financial information related to TradeKing is 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 March 31, 
($ in millions)
 
Automotive Finance operations
 
Insurance operations
 
Mortgage Finance operations
 
Corporate Finance operations
 
Corporate and Other
 
Consolidated (a)
2017
 
 
 
 
 
 
 
 
 
 
 
 
Net financing revenue and other interest income
 
$
892

 
$
15

 
$
34

 
$
34

 
$
4

 
$
979

Other revenue
 
101

 
264

 

 
18

 
13

 
396

Total net revenue
 
993

 
279

 
34

 
52

 
17

 
1,375

Provision for loan losses
 
268

 

 
1

 
6

 
(4
)
 
271

Total noninterest expense
 
437

 
239

 
24

 
21

 
57

 
778

Income (loss) from continuing operations before income tax expense
 
$
288

 
$
40

 
$
9

 
$
25

 
$
(36
)
 
$
326

Total assets
 
$
115,154

 
$
7,230

 
$
8,362

 
$
3,438

 
$
27,917

 
$
162,101

2016
 
 
 
 
 
 
 
 
 
 
 

Net financing revenue and other interest income (loss)
 
$
896

 
$
14

 
$
20

 
$
28

 
$
(7
)
 
$
951

Other revenue
 
77

 
254

 

 
6

 
39

 
376

Total net revenue
 
973

 
268

 
20

 
34

 
32

 
1,327

Provision for loan losses
 
209

 

 
3

 
6

 
2

 
220

Total noninterest expense
 
427

 
218

 
15

 
17

 
33

 
710

Income (loss) from continuing operations before income tax expense
 
$
337

 
$
50

 
$
2

 
$
11

 
$
(3
)
 
$
397

Total assets
 
$
112,289

 
$
7,194

 
$
7,493

 
$
2,839

 
$
26,690

 
$
156,505

(a)
Net financing revenue and other interest income after the provision for loan losses totaled $708 million and $731 million for the three months ended March 31, 2017, and 2016, respectively.
24.    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 March 31, 2017, 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) an elimination column for adjustments to arrive at (v) the information for the parent company, the Guarantors, and nonguarantors on a consolidated basis.

48

Notes to Condensed Consolidated Financial Statements (unaudited)
Ally Financial Inc. • Form 10-Q



Investments in subsidiaries are accounted for by the parent company and the Guarantors using the equity-method for this presentation. Results of operations of subsidiaries are therefore classified in the parent company’s and Guarantors’ investment in subsidiaries accounts. The elimination entries set forth in the following condensed consolidating financial statements eliminate distributed and undistributed income of subsidiaries, investments in subsidiaries, and intercompany balances and transactions between the parent, the Guarantors, and nonguarantors.
Condensed Consolidating Statements of Comprehensive Income
Three months ended March 31, 2017 ($ in millions)
 
Parent
 
Guarantors
 
Nonguarantors
 
Consolidating adjustments
 
Ally consolidated
Financing (loss) revenue and other interest income
 
 
 
 
 
 
 
 
 
 
Interest and fees on finance receivables and loans
 
$
(35
)
 
$

 
$
1,403

 
$

 
$
1,368

Interest and fees on finance receivables and loans — intercompany
 
4

 

 
3

 
(7
)
 

Interest and dividends on investment securities and other earning assets
 

 

 
135

 
(1
)
 
134

Interest on cash and cash equivalents
 
2

 

 
3

 

 
5

Interest-bearing cash — intercompany
 

 

 
1

 
(1
)
 

Operating leases
 
3

 

 
540

 

 
543

Total financing (loss) revenue and other interest income
 
(26
)
 

 
2,085

 
(9
)
 
2,050

Interest expense
 
 
 
 
 
 
 
 
 

Interest on deposits
 
1

 

 
230

 

 
231

Interest on short-term borrowings
 
17

 

 
10

 

 
27

Interest on long-term debt
 
281

 

 
143

 

 
424

Interest on intercompany debt
 
4

 

 
4

 
(8
)
 

Total interest expense
 
303

 

 
387

 
(8
)
 
682

Net depreciation expense on operating lease assets
 
2

 

 
387

 

 
389

Net financing revenue
 
(331
)
 

 
1,311

 
(1
)
 
979

Cash dividends from subsidiaries
 
 
 
 
 
 
 
 
 

Nonbank subsidiaries
 
41

 

 

 
(41
)
 

Other revenue
 
 
 
 
 
 
 
 
 

Insurance premiums and service revenue earned
 

 

 
241

 

 
241

(Loss) gain on mortgage and automotive loans, net
 
(2
)
 

 
16

 

 
14

Loss on extinguishment of debt
 

 

 
(1
)
 

 
(1
)
Other gain on investments, net
 

 

 
27

 

 
27

Other income, net of losses
 
268

 

 
224

 
(377
)
 
115

Total other revenue
 
266

 

 
507

 
(377
)
 
396

Total net revenue
 
(24
)
 

 
1,818

 
(419
)
 
1,375

Provision for loan losses
 
107

 

 
164

 

 
271

Noninterest expense
 
 
 
 
 
 
 
 
 

Compensation and benefits expense
 
122

 

 
163

 

 
285

Insurance losses and loss adjustment expenses
 

 

 
88

 

 
88

Other operating expenses
 
288

 

 
494

 
(377
)
 
405

Total noninterest expense
 
410

 

 
745

 
(377
)
 
778

(Loss) income from continuing operations before income tax (benefit) expense and undistributed income (loss) of subsidiaries
 
(541
)



909


(42
)
 
326

Income tax (benefit) expense from continuing operations
 
(134
)
 

 
247

 

 
113

Net (loss) income from continuing operations
 
(407
)
 

 
662

 
(42
)
 
213

Income (loss) from discontinued operations, net of tax
 
2

 

 
(1
)
 

 
1

Undistributed income of subsidiaries
 
 
 
 
 
 
 
 
 

Bank subsidiary
 
389

 
389

 

 
(778
)
 

Nonbank subsidiaries
 
230

 

 

 
(230
)
 

Net income
 
214

 
389

 
661

 
(1,050
)
 
214

Other comprehensive income, net of tax
 
20

 
5

 
19

 
(24
)
 
20

Comprehensive income
 
$
234

 
$
394

 
$
680

 
$
(1,074
)
 
$
234


49

Notes to Condensed Consolidated Financial Statements (unaudited)
Ally Financial Inc. • Form 10-Q



Three months ended March 31, 2016 ($ in millions)
 
Parent
 
Guarantors
 
Nonguarantors
 
Consolidating adjustments
 
Ally consolidated
Financing (loss) revenue and other interest income
 
 
 
 
 
 
 
 
 
 
Interest and fees on finance receivables and loans
 
$
(38
)
 
$

 
$
1,273

 
$

 
$
1,235

Interest and fees on finance receivables and loans — intercompany
 
3

 

 
2

 
(5
)
 

Interest and dividends on investment securities and other earning assets
 

 

 
102

 

 
102

Interest on cash and cash equivalents
 
1

 

 
2

 

 
3

Interest-bearing cash — intercompany
 

 

 
2

 
(2
)
 

Operating leases
 
5

 

 
764

 

 
769

Total financing (loss) revenue and other interest income
 
(29
)
 

 
2,145

 
(7
)
 
2,109

Interest expense
 
 
 
 
 
 
 
 
 

Interest on deposits
 
2

 

 
191

 

 
193

Interest on short-term borrowings
 
10

 

 
3

 

 
13

Interest on long-term debt
 
289

 

 
153

 

 
442

Interest on intercompany debt
 
4

 

 
3

 
(7
)
 

Total interest expense
 
305

 

 
350

 
(7
)
 
648

Net depreciation expense on operating lease assets
 
4

 

 
506

 

 
510

Net financing revenue
 
(338
)
 

 
1,289

 

 
951

Cash dividends from subsidiaries
 
 
 
 
 
 
 
 
 

Nonbank subsidiaries
 
482

 

 

 
(482
)
 

Other revenue
 
 
 
 
 
 
 
 
 

Insurance premiums and service revenue earned
 

 

 
230

 

 
230

(Loss) gain on mortgage and automotive loans, net
 
(3
)
 

 
4

 

 
1

Loss on extinguishment of debt
 
(2
)
 

 
(2
)
 

 
(4
)
Other gain on investments, net
 

 

 
54

 

 
54

Other income, net of losses
 
374

 

 
217

 
(496
)
 
95

Total other revenue
 
369

 

 
503

 
(496
)
 
376

Total net revenue
 
513

 

 
1,792

 
(978
)
 
1,327

Provision for loan losses
 
60

 

 
160

 

 
220

Noninterest expense
 
 
 
 
 
 
 
 
 

Compensation and benefits expense
 
147

 

 
105

 

 
252

Insurance losses and loss adjustment expenses
 

 

 
73

 

 
73

Other operating expenses
 
340

 

 
542

 
(497
)
 
385

Total noninterest expense
 
487

 

 
720

 
(497
)
 
710

(Loss) income from continuing operations before income tax (benefit) expense and undistributed income (loss) of subsidiaries
 
(34
)
 

 
912

 
(481
)
 
397

Income tax (benefit) expense from continuing operations
 
(43
)
 

 
193

 

 
150

Net (loss) income from continuing operations
 
9

 

 
719

 
(481
)
 
247

Income (loss) from discontinued operations, net of tax
 
6

 

 
(3
)
 

 
3

Undistributed income (loss) of subsidiaries
 
 
 
 
 
 
 
 
 

Bank subsidiary
 
270

 
270

 

 
(540
)
 

Nonbank subsidiaries
 
(35
)
 

 

 
35

 

Net income
 
250

 
270

 
716

 
(986
)
 
250

Other comprehensive income, net of tax
 
146

 
84

 
151

 
(235
)
 
146

Comprehensive income
 
$
396

 
$
354

 
$
867

 
$
(1,221
)
 
$
396


50

Notes to Condensed Consolidated Financial Statements (unaudited)
Ally Financial Inc. • Form 10-Q



Condensed Consolidating Balance Sheet
March 31, 2017 ($ in millions)
 
Parent (a)
 
Guarantors
 
Nonguarantors (a)
 
Consolidating adjustments
 
Ally consolidated
Assets
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
 
 
 
 
 
 
 
 
 
 
Noninterest-bearing
 
$
690

 
$

 
$
823

 
$

 
$
1,513

Interest-bearing
 
800

 

 
1,989

 

 
2,789

Interest-bearing — intercompany
 

 

 
641

 
(641
)
 

Total cash and cash equivalents
 
1,490




3,453


(641
)

4,302

Available-for-sale securities
 
6

 

 
20,308

 
(6
)
 
20,308

Held-to-maturity securities
 

 

 
1,155

 
(51
)
 
1,104

Loans held-for-sale, net
 

 

 
1

 

 
1

Finance receivables and loans, net
 
 
 
 
 
 
 
 
 
 
Finance receivables and loans, net
 
4,864

 

 
114,138

 

 
119,002

Intercompany loans to
 
 
 
 
 
 
 
 
 
 
Bank subsidiary
 
425

 

 

 
(425
)
 

Nonbank subsidiaries
 
1,376

 

 
456

 
(1,832
)
 

Allowance for loan losses
 
(121
)
 

 
(1,034
)
 

 
(1,155
)
Total finance receivables and loans, net
 
6,544

 

 
113,560

 
(2,257
)
 
117,847

Investment in operating leases, net
 
35

 

 
10,426

 

 
10,461

Intercompany receivables from
 
 
 
 
 
 
 
 
 
 
Bank subsidiary
 
32

 

 

 
(32
)
 

Nonbank subsidiaries
 
46

 

 
255

 
(301
)
 

Investment in subsidiaries
 
 
 
 
 
 
 
 
 
 
Bank subsidiary
 
18,405

 
18,405

 

 
(36,810
)
 

Nonbank subsidiaries
 
9,680

 

 

 
(9,680
)
 

Premiums receivable and other insurance assets
 

 

 
1,974

 
(30
)
 
1,944

Other assets
 
4,275

 

 
4,764

 
(2,905
)
 
6,134

Total assets
 
$
40,513


$
18,405


$
155,896


$
(52,713
)

$
162,101

Liabilities
 
 
 
 
 
 
 
 
 
 
Deposit liabilities
 
 
 
 
 
 
 
 
 
 
Noninterest-bearing
 
$

 
$

 
$
102

 
$

 
$
102

Interest-bearing
 
85

 

 
84,299

 

 
84,384

Total deposit liabilities
 
85

 

 
84,401

 

 
84,486

Short-term borrowings
 
4,901

 

 
3,470

 

 
8,371

Long-term debt
 
20,156

 

 
30,905

 

 
51,061

Intercompany debt to
 
 
 
 
 
 
 
 
 
 
Bank subsidiary
 
51

 

 

 
(51
)
 

Nonbank subsidiaries
 
1,097

 

 
1,807

 
(2,904
)
 

Intercompany payables to
 
 
 
 
 
 
 
 
 
 
Bank subsidiary
 
127

 

 

 
(127
)
 

Nonbank subsidiaries
 
180

 

 
57

 
(237
)
 

Interest payable
 
231

 

 
151

 

 
382

Unearned insurance premiums and service revenue
 

 

 
2,514

 

 
2,514

Accrued expenses and other liabilities
 
320

 

 
4,506

 
(2,904
)
 
1,922

Total liabilities
 
27,148

 

 
127,811

 
(6,223
)
 
148,736

Total equity
 
13,365

 
18,405

 
28,085

 
(46,490
)
 
13,365

Total liabilities and equity
 
$
40,513

 
$
18,405

 
$
155,896

 
$
(52,713
)
 
$
162,101

(a)
Amounts presented are based upon the legal transfer of the underlying assets to VIEs in order to reflect legal ownership.

51

Notes to Condensed Consolidated Financial Statements (unaudited)
Ally Financial Inc. • Form 10-Q



December 31, 2016 ($ in millions)
 
Parent (a)
 
Guarantors
 
Nonguarantors (a)
 
Consolidating adjustments
 
Ally consolidated
Assets
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
 
 
 
 
 
 
 
 
 
 
Noninterest-bearing
 
$
720

 
$

 
$
827

 
$

 
$
1,547

Interest-bearing
 
100

 

 
4,287

 

 
4,387

Interest-bearing — intercompany
 

 

 
401

 
(401
)
 

Total cash and cash equivalents
 
820

 

 
5,515

 
(401
)
 
5,934

Trading securities
 

 

 
82

 
(82
)
 

Available-for-sale securities
 

 

 
19,253

 
(327
)
 
18,926

Held-to-maturity securities
 

 

 
839

 

 
839

Finance receivables and loans, net
 
 
 
 
 
 
 
 
 
 
Finance receivables and loans, net
 
4,705

 

 
114,239

 

 
118,944

Intercompany loans to
 
 
 
 
 
 
 
 
 
 
Bank subsidiary
 
1,125

 

 

 
(1,125
)
 

Nonbank subsidiaries
 
1,779

 

 
626

 
(2,405
)
 

Allowance for loan losses
 
(115
)
 

 
(1,029
)
 

 
(1,144
)
Total finance receivables and loans, net
 
7,494

 

 
113,836

 
(3,530
)
 
117,800

Investment in operating leases, net
 
42

 

 
11,428

 

 
11,470

Intercompany receivables from
 
 
 
 
 
 
 
 
 
 
Bank subsidiary
 
299

 

 

 
(299
)
 

Nonbank subsidiaries
 
107

 

 
67

 
(174
)
 

Investment in subsidiaries
 
 
 
 
 
 
 
 
 
 
Bank subsidiary
 
17,727

 
17,727

 

 
(35,454
)
 

Nonbank subsidiaries
 
10,318

 

 

 
(10,318
)
 

Premiums receivable and other insurance assets
 

 

 
1,936

 
(31
)
 
1,905

Other assets
 
4,347

 

 
5,085

 
(2,578
)
 
6,854

Total assets
 
$
41,154

 
$
17,727

 
$
158,041

 
$
(53,194
)
 
$
163,728

Liabilities
 
 
 
 
 
 
 
 
 
 
Deposit liabilities
 
 
 
 
 
 
 
 
 
 
Noninterest-bearing
 
$

 
$

 
$
84

 
$

 
$
84

Interest-bearing
 
167

 

 
78,771

 

 
78,938

Total deposit liabilities
 
167

 

 
78,855

 

 
79,022

Short-term borrowings
 
3,622

 

 
9,051

 

 
12,673

Long-term debt
 
21,798

 

 
32,330

 

 
54,128

Intercompany debt to
 
 
 
 
 
 
 
 
 
 
Bank subsidiary
 
330

 

 

 
(330
)
 

Nonbank subsidiaries
 
1,027

 

 
2,903

 
(3,930
)
 

Intercompany payables to
 
 
 
 
 
 
 
 
 
 
Nonbank subsidiaries
 
153

 

 
351

 
(504
)
 

Interest payable
 
253

 

 
98

 

 
351

Unearned insurance premiums and service revenue
 

 

 
2,500

 

 
2,500

Accrued expenses and other liabilities
 
487

 

 
3,911

 
(2,661
)
 
1,737

Total liabilities
 
27,837

 

 
129,999

 
(7,425
)
 
150,411

Total equity
 
13,317

 
17,727

 
28,042

 
(45,769
)
 
13,317

Total liabilities and equity
 
$
41,154

 
$
17,727

 
$
158,041

 
$
(53,194
)
 
$
163,728

(a)
Amounts presented are based upon the legal transfer of the underlying assets to VIEs in order to reflect legal ownership.

52

Notes to Condensed Consolidated Financial Statements (unaudited)
Ally Financial Inc. • Form 10-Q



Condensed Consolidating Statement of Cash Flows
Three months ended March 31, 2017 ($ in millions)
 
Parent
 
Guarantors
 
Nonguarantors
 
Consolidating adjustments
 
Ally consolidated
Operating activities
 
 
 
 
 
 
 
 
 
 
Net cash (used in) provided by operating activities
 
$
(149
)
 
$

 
$
1,284

 
$
40

 
$
1,175

Investing activities
 
 
 
 
 
 
 
 
 


Purchases of available-for-sale securities
 

 

 
(2,833
)
 

 
(2,833
)
Proceeds from sales of available-for-sale securities
 

 

 
1,045

 

 
1,045

Proceeds from maturities and repayments of available-for-sale securities
 

 

 
589

 

 
589

Purchases of held-to-maturity securities
 

 

 
(215
)
 

 
(215
)
Proceeds from maturities and repayments of held-to-maturity securities
 

 

 
5

 

 
5

Net change in investment securities  intercompany
 
1

 

 
261

 
(262
)
 

Purchases of loans held-for-investment
 
(15
)
 

 
(390
)
 

 
(405
)
Proceeds from sales of finance receivables and loans originated as held-for-investment
 

 

 
1,164

 

 
1,164

Originations and repayments of loans held-for-investment and other
 
931

 

 
(1,145
)
 
(960
)
 
(1,174
)
Net change in loans — intercompany
 
1,146

 

 
170

 
(1,316
)
 

Purchases of operating lease assets
 

 

 
(893
)
 

 
(893
)
Disposals of operating lease assets
 
1

 

 
1,544

 

 
1,545

Capital contributions to subsidiaries
 
(83
)
 

 

 
83

 

Returns of contributed capital
 
645

 

 

 
(645
)
 

Net change in restricted cash
 
(27
)
 

 
385

 
(3
)
 
355

Net change in nonmarketable equity investments
 

 

 
213

 

 
213

Other, net
 
(26
)
 

 
58

 
(91
)
 
(59
)
Net cash provided by (used in) investing activities
 
2,573

 

 
(42
)
 
(3,194
)
 
(663
)
Financing activities
 
 
 
 
 
 
 
 
 
 
Net change in short-term borrowings — third party
 
1,278

 

 
(5,581
)
 

 
(4,303
)
Net (decrease) increase in deposits
 
(82
)
 

 
5,533

 

 
5,451

Proceeds from issuance of long-term debt — third party
 
330

 

 
3,196

 
962

 
4,488

Repayments of long-term debt — third party
 
(2,870
)
 

 
(4,703
)
 

 
(7,573
)
Net change in debt — intercompany
 
(203
)
 

 
(1,146
)
 
1,349

 

Repurchase of common stock
 
(169
)
 

 

 

 
(169
)
Dividends paid — third party
 
(38
)
 

 

 

 
(38
)
Dividends paid and returns of contributed capital — intercompany
 

 

 
(686
)
 
686

 

Capital contributions from parent
 

 

 
83

 
(83
)
 

Net cash used in financing activities
 
(1,754
)
 

 
(3,304
)
 
2,914

 
(2,144
)
Effect of exchange-rate changes on cash and cash equivalents
 

 

 

 

 

Net increase (decrease) in cash and cash equivalents
 
670

 

 
(2,062
)
 
(240
)
 
(1,632
)
Cash and cash equivalents at beginning of year
 
820

 

 
5,515

 
(401
)
 
5,934

Cash and cash equivalents at March 31,
 
$
1,490

 
$

 
$
3,453

 
$
(641
)
 
$
4,302


53

Notes to Condensed Consolidated Financial Statements (unaudited)
Ally Financial Inc. • Form 10-Q



Three months ended March 31, 2016 ($ in millions)
 
Parent
 
Guarantors
 
Nonguarantors
 
Consolidating adjustments
 
Ally consolidated
Operating activities
 
 
 
 
 
 
 
 
 
 
Net cash (used in) provided by operating activities
 
$
(24
)
 
$

 
$
1,708

 
$
(482
)
 
$
1,202

Investing activities
 
 
 
 
 
 
 
 
 

Purchases of available-for-sale securities
 

 

 
(4,870
)
 

 
(4,870
)
Proceeds from sales of available-for-sale securities
 

 

 
4,175

 

 
4,175

Proceeds from maturities and repayments of available-for-sale securities
 

 

 
409

 

 
409

Purchases of held-to-maturity securities
 

 

 
(118
)
 

 
(118
)
Purchases of loans held-for-investment
 

 

 
(1,402
)
 

 
(1,402
)
Proceeds from sales of finance receivables and loans originated as held-for-investment
 

 

 
2,594

 

 
2,594

Originations and repayments of loans held-for-investment and other
 
(292
)
 

 
(392
)
 

 
(684
)
Net change in loans — intercompany
 
683

 

 
(44
)
 
(639
)
 

Purchases of operating lease assets
 

 

 
(701
)
 

 
(701
)
Disposals of operating lease assets
 
2

 

 
1,533

 

 
1,535

Capital contributions to subsidiaries
 
(128
)
 

 

 
128

 

Returns of contributed capital
 
223

 

 

 
(223
)
 

Net change in restricted cash
 

 

 
48

 

 
48

Net change in nonmarketable equity investments
 

 

 
(315
)
 

 
(315
)
Other, net
 
(32
)
 

 
12

 

 
(20
)
Net cash provided by investing activities
 
456

 

 
929

 
(734
)
 
651

Financing activities
 
 
 
 
 
 
 
 
 

Net change in short-term borrowings — third party
 
187

 

 
(2,926
)
 

 
(2,739
)
Net (decrease) increase in deposits
 
(10
)
 

 
3,790

 

 
3,780

Proceeds from issuance of long-term debt — third party
 
178

 

 
4,066

 

 
4,244

Repayments of long-term debt — third party
 
(580
)
 

 
(7,910
)
 

 
(8,490
)
Net change in debt — intercompany
 
(68
)
 

 
(684
)
 
752

 

Repurchase of common stock
 
(14
)
 

 

 

 
(14
)
Dividends paid — third party
 
(15
)
 

 

 

 
(15
)
Dividends paid and returns of contributed capital — intercompany
 

 

 
(705
)
 
705

 

Capital contributions from parent
 

 

 
128

 
(128
)
 

Net cash used in financing activities
 
(322
)
 

 
(4,241
)
 
1,329

 
(3,234
)
Effect of exchange-rate changes on cash and cash equivalents
 

 

 
2

 

 
2

Net increase (decrease) in cash and cash equivalents
 
110

 

 
(1,602
)
 
113

 
(1,379
)
Cash and cash equivalents at beginning of year
 
1,635

 

 
5,595

 
(850
)
 
6,380

Cash and cash equivalents at March 31,
 
$
1,745

 
$

 
$
3,993

 
$
(737
)
 
$
5,001

25.    Contingencies and Other Risks
Legal Matters
Ally and its subsidiaries, including Ally Bank, are or may be subject to potential liability in connection with pending or threatened legal proceedings and other matters. These legal matters may be formal or informal and include litigation and arbitration with one or more identified claimants, certified or purported class actions with yet-to-be-identified claimants, and regulatory or other governmental information-gathering requests, examinations, investigations, and enforcement proceedings. Our legal matters exist in varying stages of adjudication, arbitration, negotiation, or investigation and span our lines of business and operations. Claims may be based in law or equity—such as those arising under contracts or in tort and those involving banking, consumer-protection, securities, tax, employment, and other laws—and some can present novel legal theories and allege substantial or indeterminate damages.
We accrue for a legal matter when a loss becomes probable and the amount of loss can be reasonably estimated. Accruals are evaluated each quarter and may be adjusted, upward or downward, based on our best judgment after consultation with counsel. No assurance exists that our accruals will not need to be adjusted in the future.
The course and outcome of legal matters are inherently unpredictable. This is especially so when a matter is still in its early stages, the damages sought are indeterminate or unsupported, significant facts are unclear or disputed, novel questions of law or other meaningful legal

54

Notes to Condensed Consolidated Financial Statements (unaudited)
Ally Financial Inc. • Form 10-Q



uncertainties exist, a request to certify a proceeding as a class action is outstanding or granted, multiple parties are named, or regulatory or other governmental entities are involved. As a result, we cannot state with confidence how or when threatened or pending legal matters will be resolved and what losses may be incurred. Actual losses may be higher or lower than any amounts accrued for those matters, possibly to a significant degree.
On the basis of information currently available, advice of counsel, available insurance coverage, and established reserves, it is the opinion of management that, except as described in the next paragraph, the eventual outcome of our existing legal matters will not have a material adverse effect on our consolidated financial condition, results of operations, or cash flows. It is possible, however, that an unfavorable resolution of legal matters may be material to our consolidated financial condition, results of operations, or cash flows in a particular period.
Descriptions of our material legal matters follow. In each case, the matter could have material adverse consequences for us, including substantial damages or settlements, injunctions, governmental fines or penalties, and reputational or operational risks. We do not believe, however, that an estimate of reasonably possible losses or a range of reasonably possible losses in excess of established reserves—whether in excess of any related accrual or where no accrual exists—can be made for any of these matters.
Securities Litigation
In October 2016, a purported class action—Bucks County Employees Retirement Fund v. Ally Financial Inc. et al.—was filed in the Circuit Court for Wayne County in the State of Michigan. This matter was removed to the U.S. District Court for the Eastern District of Michigan on November 18, 2016, and is currently pending there as Case No. 2:16-CV-14104. The complaint alleges material misstatements and omissions in connection with Ally’s initial public offering in April 2014, including a failure to adequately disclose the severity of rising subprime automotive loan delinquency rates, deficient underwriting measures employed in the origination of subprime automotive loans, and aggressive tactics used with low-income borrowers. The request for relief includes an indeterminate amount of damages, fees, and costs and other remedies. In January 2017, another purported class action—National Shopmen Pension Fund v. Ally Financial Inc. et al.—was filed in the Circuit Court for Oakland County in the State of Michigan. This matter was removed to the U.S. District Court for the Eastern District of Michigan on January 30, 2017, and is currently pending there as Case No. 2:17-CV-10289. In March 2017, a third purported class action—James McIntire v. Ally Financial Inc. et al.—was filed in the Circuit Court for Wayne County in the State of Michigan. This matter was removed to the U.S. District Court for the Eastern District of Michigan on March 15, 2017, and is currently pending there as Case No. 2:17-CV-10833. The allegations and requested relief in the National Shopmen Pension Fund and James McIntire complaints are substantially similar to those included in the complaint filed by Bucks County Employees Retirement Fund. We intend to vigorously defend against each of these actions.
Automotive Subprime Matters
In October 2014, we received a document request from the SEC in connection with its investigation related to subprime automotive finance and related securitization activities. Separately, in December 2014, we received a subpoena from the DOJ requesting similar information. In May 2015 and December 2016, we received information requests from the New York Department of Financial Services requesting similar information. We have cooperated with each of these agencies with respect to these matters.
Indirect Automotive Finance Matters
In December 2013, Ally Financial Inc. and Ally Bank entered into a Consent Order issued by the U.S. Consumer Financial Protection Bureau (CFPB) and a Consent Order jointly submitted with the DOJ and entered by the U.S. District Court for the Eastern District of Michigan (United States v. Ally Financial Inc. and Ally Bank, Civil Action No. 13-15180), in each case, pertaining to allegations of discrimination involving the automotive finance business. The Consent Orders require Ally to create a compliance plan addressing, at a minimum, the communication of Ally’s expectations of Equal Credit Opportunity Act (ECOA) compliance to our automotive dealer clients, maintenance of Ally’s existing limits on dealer finance income for contracts acquired by Ally, and monitoring for potential discrimination both at the dealer level and within our portfolio of contracts acquired across all of our automotive dealer clients. Ally formed a compliance committee consisting of certain Ally Financial Inc. and Ally Bank directors to oversee Ally’s execution of the Consent Orders’ terms. Ally is required to meet certain stipulations under the Consent Orders, including a requirement to make monetary payments when ongoing remediation targets are not attained.
Since 2013, Ally has recognized expenses of approximately $240 million for judgments, fines, and monetary remuneration payments to customers related to the Consent Orders. The Consent Orders terminate, according to their terms, in 2017, and preclude the CFPB and the DOJ from pursuing any potential violations of the ECOA against Ally Financial Inc. or Ally Bank for conduct undertaken pursuant to the Consent Orders during the period of the Consent Orders. If the CFPB or the DOJ were to assert that Ally Financial Inc. or Ally Bank is violating the ECOA after the Consent Orders terminate, further legal proceedings could occur.

55

Notes to Condensed Consolidated Financial Statements (unaudited)
Ally Financial Inc. • Form 10-Q



Other Contingencies
Ally and its subsidiaries, including Ally Bank, are or may be subject to potential liability under various other contingent exposures, including indemnification, tax, self-insurance, and other miscellaneous contingencies. We accrue for a contingent exposure when a loss becomes probable and the amount of loss can be reasonably estimated. Accruals are evaluated each quarter and may be adjusted, upward or downward, based on our best judgment. No assurance exists that our accruals will not need to be adjusted in the future, and actual losses may be higher or lower than any amounts accrued for those exposures, possibly to a significant degree. On the basis of information currently available, available insurance coverage, and established reserves, it is the opinion of management that the eventual outcome of our other contingent exposures will not have a material adverse effect on our consolidated financial condition, results of operations, or cash flows. Refer to Note 1 to the Consolidated Financial Statements included in our 2016 Annual Report on Form 10-K for additional information related to our policy for establishing reserves for legal and regulatory matters.
26.    Subsequent Events
Declaration of Quarterly Dividend Payment
On April 14, 2017, the Ally Board of Directors declared a quarterly cash dividend payment of $0.08 per share on all common stock. The dividend is payable on May 15, 2017, to shareholders of record at the close of business on May 1, 2017.

56

Management's Discussion and Analysis
Ally Financial Inc. • Form 10-Q


Item 2.    Management's Discussion and Analysis of Financial Condition and Results of Operations
Selected Financial Data
The selected historical financial information set forth below should be read in conjunction with Management’s Discussion and Analysis (MD&A) of Financial Condition and Results of Operations, and our Condensed Consolidated Financial Statements and the notes thereto. The historical financial information presented may not be indicative of our future performance.
The following table presents selected Condensed Consolidated Statement of Comprehensive Income and market price data.


Three months ended March 31,
($ in millions, except per share data; shares in thousands)

2017

2016
Total financing revenue and other interest income

$
2,050


$
2,109

Total interest expense

682


648

Net depreciation expense on operating lease assets

389


510

Net financing revenue and other interest income

979


951

Total other revenue

396


376

Total net revenue

1,375


1,327

Provision for loan losses

271


220

Total noninterest expense

778


710

Income from continuing operations before income tax expense

326


397

Income tax expense from continuing operations

113


150

Net income from continuing operations

213


247

Income from discontinued operations, net of tax

1


3

Net income

$
214


$
250

Basic earnings per common share (a):




Net income from continuing operations

$
0.46


$
0.48

Net income

0.46


0.49

Weighted-average common shares outstanding
 
465,961

 
484,233

Diluted earnings per common share (a):
 
 
 
 
Net income from continuing operations
 
$
0.46

 
$
0.48

Net income
 
0.46

 
0.49

Weighted-average common shares outstanding
 
466,829

 
484,654

Market price per common share:
 
 
 
 
High closing
 
$
23.48

 
$
18.88

Low closing
 
19.13

 
15.33

Period-end closing
 
20.33

 
18.72

Cash dividends per common share
 
$
0.08

 
$

Period-end common shares outstanding
 
462,193

 
483,475

(a)
Includes shares related to share-based compensation that vested but were not yet issued for the three months ended March 31, 2017, and 2016, respectively.

57

Management's Discussion and Analysis
Ally Financial Inc. • Form 10-Q


The following table presents selected Condensed Consolidated Balance Sheet and ratio data.
 
 
At and for the
three months ended
March 31,
($ in millions)
 
2017
 
2016
Selected period-end balance sheet data:
 
 
 
 
Total assets
 
$
162,101

 
$
156,505

Total deposit liabilities
 
$
84,486

 
$
70,265

Long-term debt
 
$
51,061

 
$
62,044

Preferred stock
 
$

 
$
696

Total equity
 
$
13,365

 
$
13,823

Financial ratios:
 
 
 
 
Return on average assets (a)
 
0.54
%
 
0.64
%
Return on average equity (a)
 
6.46
%
 
7.38
%
Equity to assets (a)
 
8.35
%
 
8.66
%
Common dividend payout ratio
 
17.39
%
 
%
Net interest spread (a) (b) (c)
 
2.47
%
 
2.48
%
Net yield on interest-earning assets (a) (c) (d)
 
2.60
%
 
2.59
%
(a)
The ratios were based on average assets and average equity using a combination of monthly and daily average methodologies.
(b)
Net interest spread represents the difference between the rate on total interest-earning assets and the rate on total interest-bearing liabilities, excluding discontinued operations for the periods shown.
(c)
Amounts for the three months ended March 31, 2016, were adjusted to include previously excluded equity investments and related income on equity investments. Refer to the section titled Statistical Table for additional information.
(d)
Net yield on interest-earning assets represents net financing revenue and other interest income as a percentage of total interest-earning assets.

58

Management's Discussion and Analysis
Ally Financial Inc. • Form 10-Q


As of January 1, 2015, Ally became subject to the rules implementing the 2010 Basel III capital framework in the United States (U.S. Basel III), which reflect new and higher capital requirements, capital buffers, and new regulatory capital definitions, deductions and adjustments. Certain aspects of U.S. Basel III, including the new capital buffers and regulatory capital deductions, will be phased in over several years. To assess our capital adequacy against the full impact of U.S. Basel III, we also present "fully phased-in" information that reflects regulatory capital rules that will take effect as of January 1, 2019. Refer to Note 18 to the Condensed Consolidated Financial Statements for further information. The following table presents selected regulatory capital data.
 
 
March 31, 2017
 
March 31, 2016
($ in millions)
 
Transitional
 
Fully Phased-in (a)
 
Transitional
 
Fully Phased-in (a)
Common Equity Tier 1 capital ratio
 
9.40
%
 
9.28
%
 
9.47
%
 
9.20
%
Tier 1 capital ratio
 
11.09
%
 
11.05
%
 
11.57
%
 
11.54
%
Total capital ratio
 
12.70
%
 
12.66
%
 
13.00
%
 
12.96
%
Tier 1 leverage ratio (to adjusted quarterly average assets) (b)
 
9.51
%
 
9.50
%
 
9.87
%
 
9.87
%
Total equity
 
$
13,365

 
$
13,365

 
$
13,823

 
$
13,823

Preferred stock
 

 

 
(696
)
 
(696
)
Goodwill and certain other intangibles
 
(281
)
 
(291
)
 
(27
)
 
(27
)
Deferred tax assets arising from net operating loss and tax credit carryforwards (c)
 
(493
)
 
(616
)
 
(496
)
 
(826
)
Other adjustments
 
332

 
332

 
52

 
52

Common Equity Tier 1 capital
 
12,923

 
12,790

 
12,656

 
12,326

Preferred stock
 

 

 
696

 
696

Trust preferred securities
 
2,489

 
2,489

 
2,487

 
2,487

Deferred tax assets arising from net operating loss and tax credit carryforwards
 
(123
)
 

 
(330
)
 

Other adjustments
 
(44
)
 
(44
)
 
(47
)
 
(47
)
Tier 1 capital
 
15,245

 
15,235


15,462


15,462

Qualifying subordinated debt and other instruments qualifying as Tier 2
 
1,103

 
1,103

 
871

 
871

Qualifying allowance for credit losses and other adjustments
 
1,111

 
1,111

 
1,030

 
1,030

Total capital
 
$
17,459

 
$
17,449

 
$
17,363

 
$
17,363

Risk-weighted assets (d)
 
$
137,438

 
$
137,859

 
$
133,586

 
$
134,018

(a)
Our fully phased-in capital ratios are non-GAAP financial measures that management believes are important to the reader of the Condensed Consolidated Financial Statements but should be supplemental to, and not a substitute for, primary GAAP measures. The fully phased-in capital ratios are compared to the transitional capital ratios above. We believe these capital ratios are important because we believe investors, analysts, and banking regulators may assess our capital utilization and adequacy using these ratios. Additionally, presentation of these ratios allows readers to compare certain aspects of our capital utilization and adequacy on the same basis to other companies in the industry.
(b)
Tier 1 leverage ratio equals Tier 1 capital divided by adjusted quarterly average total assets (which reflects adjustments for disallowed goodwill, certain intangible assets, and disallowed deferred tax assets).
(c)
Contains deferred tax assets required to be deducted from capital under U.S. Basel III.
(d)
Risk-weighted assets are defined by regulation and are generally determined by allocating assets and specified off-balance sheet exposures into various risk categories.

59

Management's Discussion and Analysis
Ally Financial Inc. • Form 10-Q


Overview
Ally Financial Inc. (together with its consolidated subsidiaries unless the context requires otherwise, Ally, the Company, or we, us, or our) is a leading digital financial services company offering diversified financial products for consumers, businesses, automotive dealers and corporate clients. Our legacy dates back to 1919, and Ally was redesigned in 2009 with a distinctive brand and relentless focus on our customers. We reconverted to a Delaware corporation in 2009 and are registered as a bank holding company (BHC) under the Bank Holding Company Act of 1956 as amended and a financial holding company under the Gramm-Leach-Bliley Act of 1999 as amended. Our banking subsidiary, Ally Bank, is an award-winning online bank, and an indirect, wholly-owned subsidiary of Ally Financial Inc. Collectively, Ally Financial Inc. and its subsidiaries offer a variety of deposit and banking products including CDs, online savings, money market and checking accounts, IRA products, automotive lending products to customers and dealers, corporate finance lending, insurance products and services, a cash back credit card, mortgage lending offerings, and wealth management solutions.
Discontinued Operations
During 2013 and 2012, certain disposal groups met the criteria to be presented as discontinued operations. The remaining activity relates to previous discontinued operations for which we continue to have wind-down, legal, and minimal operational costs. For all periods presented, the operating results for these operations have been removed from continuing operations. Refer to Note 3 to the Condensed Consolidated Financial Statements for more details. The MD&A has been adjusted to exclude discontinued operations unless otherwise noted.
Primary Lines of Business
Dealer Financial Services, which includes our Automotive Finance and Insurance operations, Mortgage Finance, and Corporate Finance are our primary lines of business. The following table summarizes the operating results excluding discontinued operations of each line of business. Operating results for each of the lines of business are more fully described in the MD&A sections that follow.
Segment results include cost of funds associated with product offerings. For products originated at Ally Bank, the cost of funds is more beneficial than products originated at other entities as Ally Bank is a deposit gathering organization, which helps fund assets at a lower cost. Noninterest costs associated with deposit gathering activities were $65 million and $68 million during the three months ended March 31, 2017, and 2016, respectively, and are allocated to each segment based on their relative balance sheet. Ally Bank's assets and operating results are included within our Automotive Finance, Mortgage Finance, and Corporate Finance segments based on its underlying business activities.
 
 
Three months ended March 31,
($ in millions)
 
2017
 
2016
 
Favorable/(unfavorable) % change
Total net revenue
 
 
 
 
 
 
Dealer Financial Services
 
 
 
 
 
 
Automotive Finance
 
$
993

 
$
973

 
2
Insurance
 
279

 
268

 
4
Mortgage Finance
 
34

 
20

 
70
Corporate Finance
 
52

 
34

 
53
Corporate and Other
 
17

 
32

 
(47)
Total
 
$
1,375

 
$
1,327

 
4
Income (loss) from continuing operations before income tax expense
 
 
 
 
 
 
Dealer Financial Services
 
 
 
 
 
 
Automotive Finance
 
$
288

 
$
337

 
(15)
Insurance
 
40

 
50

 
(20)
Mortgage Finance
 
9

 
2

 
n/m
Corporate Finance
 
25

 
11

 
127
Corporate and Other
 
(36
)
 
(3
)
 
n/m
Total
 
$
326

 
$
397

 
(18)
n/m = not meaningful
Our Dealer Financial Services operations offer a wide range of financial services and insurance products to over 18,000 automotive dealerships and approximately 4.3 million of their customers. Dealer Financial Services consists of two separate reportable segments—Automotive Finance and Insurance operations.
Our automotive finance services include providing retail installment sales contracts, loans and leases, offering term loans to dealers, financing dealer floorplans and other lines of credit to dealers, warehouse lines to companies, fleet financing, providing financing to companies and municipalities for the purchase or lease of vehicles and equipment, and vehicle remarketing services. Our success as an automotive finance provider is driven by the consistent and broad range of products and services we offer to

60

Management's Discussion and Analysis
Ally Financial Inc. • Form 10-Q


dealers who originate loans and leases to their retail customers who are acquiring new and used vehicles. Ally and other automotive finance providers purchase these loans and leases from automotive dealers. As the marketplace evolves, our growth strategy continues to focus on diversifying the franchise by expanding into different products, responding to the growing trends for a more streamlined and digital automotive financing process to serve both dealers and consumers, and continuing to strengthen and expand our network of dealer relationships. In the first quarter of 2017, we built upon the platform acquired from the 2016 purchase of Blue Yield and introduced Clearlane, an online automotive lender exchange, expanding our direct-to-consumer capabilities and providing an end-to-end digital platform for consumers seeking financing and dealers looking to drive online sales.
The Growth channel was established to focus on developing dealer relationships beyond our existing relationships that primarily were developed through our role as a captive finance company historically for the General Motors Company (GM) and Fiat Chrysler Automobiles US LLC (Chrysler) brands, and was recently expanded to include our direct-to-consumer lending offering. We have established relationships with thousands of Growth channel dealers through our customer-centric approach and specialized incentive programs. The success of the Growth channel has been a key enabler to converting our business model from a focused captive finance company to a leading market competitor. In this channel, we currently have over 11,500 dealer relationships, of which approximately 10,500 are franchised dealers from brands such as Ford, Nissan, Kia, Hyundai, Toyota, Honda and others; RV dealers; and used vehicle only retailers, which have a national presence.
Our Insurance operations offer 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 vehicle service contracts (VSCs), vehicle maintenance contracts (VMCs), guaranteed asset protection (GAP) products, and other ancillary products desired by consumers. We also underwrite select commercial insurance coverages, which primarily insure dealers' wholesale vehicle inventory. Ally Premier Protection is our flagship vehicle service contract offering and provides coverage for new and used vehicles of virtually all makes and models.
Our Mortgage Finance operations primarily consist of the management of a held-for-investment consumer mortgage finance loan portfolio, which includes bulk purchases of high-quality jumbo and low-to-moderate income (LMI) mortgage loans originated by third parties. During the three months ended March 31, 2017, we purchased $327 million of mortgage loans that were originated by third parties. In late 2016, we introduced our direct mortgage offering, named Ally Home, consisting of a variety of jumbo and conforming fixed- and adjustable-rate mortgage products through a third-party fulfillment partner. Under our current arrangement, conforming mortgages are originated as held-for-sale and sold, while jumbo mortgages are originated as held-for-investment. Servicing is performed by a third party and no mortgage servicing rights are created. In addition to our core product offerings through Ally Home, in March 2017, we broadened our product suite with the addition of the HomeReady® mortgage loan, a Fannie Mae product designed to serve creditworthy, low- to moderate-income borrowers.
Our Corporate Finance operations primarily provide senior secured leveraged cash flow and asset-based loans to mostly U.S.-based middle market companies. The Corporate Finance portfolio is almost entirely comprised of first lien, first out loans. 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. The portfolio is well diversified across multiple industries including retail, manufacturing, distribution, service companies, and other specialty sectors. These specialty sectors include our Technology Finance and Healthcare verticals. Our Technology Finance vertical provides financing solutions to venture-backed, technology-based companies. The Healthcare vertical provides financing across the healthcare spectrum including services, pharmaceuticals, biotechnology, manufacturing, and medical devices and supplies. In addition, during the first quarter of 2017, we hired an experienced team in the healthcare real estate space in order to continue to make strategic investments in sectors with strong competitive dynamics and attractive returns.
Corporate and Other primarily consists of activity related to 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, the amortization of the discount associated with new debt issuances and bond exchanges, and the residual impacts of our corporate funds-transfer pricing (FTP) and treasury asset liability management (ALM) activities. Corporate and Other also includes activity related to the Ally CashBack Credit Card, certain equity investments which primarily consist of Federal Home Loan Bank (FHLB) and Federal Reserve Bank (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, beginning in June 2016 with the acquisition of TradeKing Group, Inc. (TradeKing), financial information related to TradeKing is included within Corporate and Other.
In addition, we are well positioned as the marketplace continues to evolve and are working to build on our existing foundation of approximately 5.6 million consumer automotive financing and primary deposit customers, strong brand, innovative culture, and leading digital platform to expand our products and services and to create an integrated customer experience. In 2016, we launched our first ever enterprise-wide campaign themed "Do It Right." The campaign introduces a broad audience to our full suite of digital financial services and helps crystallize our culture for consumers.

61

Management's Discussion and Analysis
Ally Financial Inc. • Form 10-Q


Consolidated Results of Operations
The following table summarizes our consolidated operating results excluding discontinued operations for the periods shown. Refer to the operating segment sections of the MD&A that follows for a more complete discussion of operating results by line of business.
 
 
Three months ended March 31,
($ in millions)

2017

2016

Favorable/(unfavorable) % change
Net financing revenue and other interest income






Total financing revenue and other interest income

$
2,050


$
2,109


(3)
Total interest expense

682


648


(5)
Net depreciation expense on operating lease assets

389


510


24
Net financing revenue and other interest income

979


951


3
Other revenue





 
Insurance premiums and service revenue earned

241


230


5
Gain on mortgage and automotive loans, net

14


1


n/m
Loss on extinguishment of debt

(1
)

(4
)

75
Other gain on investments, net

27


54


(50)
Other income, net of losses

115


95


21
Total other revenue

396


376


5
Total net revenue

1,375


1,327


4
Provision for loan losses

271


220


(23)
Noninterest expense





 
Compensation and benefits expense

285


252


(13)
Insurance losses and loss adjustment expenses

88


73


(21)
Other operating expenses

405


385


(5)
Total noninterest expense

778


710


(10)
Income from continuing operations before income tax expense

326


397


(18)
Income tax expense from continuing operations

113


150


25
Net income from continuing operations

$
213


$
247


(14)
n/m = not meaningful
We earned net income from continuing operations of $213 million for the three months ended March 31, 2017, compared to $247 million for the three months ended March 31, 2016. The decrease was driven by higher noninterest expense due to higher weather-related insurance losses, as well as incremental costs related to the roll-out of new product offerings including wealth management, direct-to-consumer automotive (Clearlane), and mortgage lending. While results were unfavorably impacted by lower net operating lease revenue as a result of less favorable lease remarketing activity and runoff of our GM lease portfolio as well as higher provision expense driven by higher charge-offs in our consumer automotive portfolio, these declines were largely offset by growth in the commercial and retail automotive portfolios and our strategic shift to originate a more profitable mix of business with appropriate risk-adjusted returns. Net income from continuing operations was also favorably impacted by lower income tax expense, higher gains on the sale of automotive loans, and higher insurance premiums earned.
Net financing revenue and other interest income increased $28 million for the three months ended March 31, 2017, compared to the three months ended March 31, 2016. Net financing revenue and other interest income at our Automotive Finance operations was favorably impacted by higher consumer financing revenue primarily due to an increase in retail portfolio yields from the execution of our continued strategic focus on expanding risk-adjusted returns, as well as higher commercial financing revenue primarily resulting from an increase in dealer floorplan assets. The increases were offset by a decrease in operating lease revenue, net of depreciation, primarily resulting from the runoff of our GM lease portfolio as well as less favorable remarketing activity for the three months ended March 31, 2017, compared to the same period in 2016 as a result of lower used vehicle prices. Net financing revenue and other interest income at our Mortgage Finance operations was favorably impacted by increased loan balances as a result of bulk purchases of high-quality jumbo and LMI mortgage loans. Net financing revenue and other interest income at our Corporate Finance operations was favorably impacted by continued asset growth across all business segments in line with our growth strategy. Total interest expense increased 5% for the three months ended March 31, 2017, compared to the same period in 2016. While we continue to shift borrowings toward more cost-effective deposit funding and continue to reduce higher-cost unsecured debt, interest expense increased as a result of higher funding costs associated with increased LIBOR rates on secured borrowings and higher borrowing levels to support the business.

62

Management's Discussion and Analysis
Ally Financial Inc. • Form 10-Q


Gain on mortgage and automotive loans increased $13 million for the three months ended March 31, 2017, compared to the three months ended March 31, 2016. We continued to opportunistically utilize whole-loan sales and off-balance sheet securitizations as sources of funding during the three months ended March 31, 2017.
Other gain on investments was $27 million for the three months ended March 31, 2017, compared to $54 million for the three months ended March 31, 2016. The decrease was due primarily to higher sales of investment securities in 2016 resulting from favorable market conditions that did not repeat in the current period.
Other income increased $20 million for the three months ended March 31, 2017, compared to the same period in 2016, primarily due to contributions from operations of TradeKing included in our results subsequent to acquisition in the second quarter of 2016, and an equity investment gain at our Corporate Finance operations.
The provision for loan losses was $271 million for the three months ended March 31, 2017, compared to $220 million for the three months ended March 31, 2016. The increase in provision for loan losses was primarily due to higher net charge-offs in our consumer automotive portfolio as a result of our strategy to originate a more profitable mix of business by focusing on risk-adjusted returns. This was partially offset by lower portfolio growth in our Mortgage Finance portfolio, and lower net charge-offs in our Mortgage Legacy portfolio. Refer to the Risk Management section of this MD&A for further discussion.
Noninterest expense was $778 million for the three months ended March 31, 2017, compared to $710 million for the same period in 2016. The increase was primarily due to an increase in insurance losses and loss adjustment expenses of $15 million for the three months ended March 31, 2017, compared to the three months ended March 31, 2016. The increase was primarily due to severe hailstorms, particularly in late March, which drove higher weather-related insurance losses. Also contributing to the increase to noninterest expense was the addition and integration of TradeKing and Clearlane, as well as the growth of our direct-to-consumer mortgage offering as we continue to enhance our digital wealth management franchise, expand our product suite, and grow digital platforms for consumers and dealers.
We recognized total income tax expense from continuing operations of $113 million for the three months ended March 31, 2017, compared to $150 million for the three months ended March 31, 2016. The decrease in income tax expense for the three months ended March 31, 2017, compared to the same period in 2016, was primarily driven by a decrease in pretax earnings and a tax benefit for the current quarter related to stock compensation and associated movements in our share price.

63

Management's Discussion and Analysis
Ally Financial Inc. • Form 10-Q


Dealer Financial Services
Results for Dealer Financial Services are presented by reportable segment, which includes our Automotive Finance and Insurance operations.
Automotive Finance
Results of Operations
The following table summarizes the operating results of our Automotive Finance operations. The amounts presented are before the elimination of balances and transactions with our other reportable segments.
 
 
Three months ended March 31,
($ in millions)
 
2017
 
2016
 
Favorable/(unfavorable) % change
Net financing revenue and other interest income
 
 
 
 
 
 
Consumer
 
$
924

 
$
866

 
7
Commercial
 
304

 
252

 
21
Operating leases
 
543

 
769

 
(29)
Other interest income
 
2

 
3

 
(33)
Total financing revenue and other interest income
 
1,773

 
1,890

 
(6)
Interest expense
 
492

 
484

 
(2)
Net depreciation expense on operating lease assets
 
389

 
510

 
24
Net financing revenue and other interest income
 
892

 
896

 
Other revenue
 
 
 
 
 
 
Gain on automotive loans, net
 
24

 
5

 
n/m
Other income
 
77

 
72

 
7
Total other revenue
 
101

 
77

 
31
Total net revenue
 
993

 
973

 
2
Provision for loan losses
 
268

 
209

 
(28)
Noninterest expense
 
 
 
 
 
 
Compensation and benefits expense
 
129

 
126

 
(2)
Other operating expenses
 
308

 
301

 
(2)
Total noninterest expense
 
437

 
427

 
(2)
Income from continuing operations before income tax expense
 
$
288

 
$
337

 
(15)
Total assets
 
$
115,154

 
$
112,289

 
3
n/m = not meaningful
Components of net operating lease revenue, included in amounts above, were as follows.
 
 
Three months ended March 31,
($ in millions)
 
2017
 
2016
 
Favorable/(unfavorable) % change
Net operating lease revenue
 
 
 
 
 
 
Operating lease revenue
 
$
543

 
$
769

 
(29)
Depreciation expense
 
 
 
 
 
 
Depreciation expense on operating lease assets (excluding remarketing gains and losses)
 
386

 
565

 
32
Remarketing losses (gains)
 
3

 
(55
)
 
(105)
Net depreciation expense on operating lease assets
 
389

 
510

 
24
Total net operating lease revenue
 
$
154

 
$
259

 
(41)
Investment in operating leases, net
 
$
10,461

 
$
14,958

 
(30)
Our Automotive Finance operations earned income from continuing operations before income tax expense of $288 million for the three months ended March 31, 2017, compared to $337 million for the three months ended March 31, 2016. Results for the three months ended

64

Management's Discussion and Analysis
Ally Financial Inc. • Form 10-Q


March 31, 2017, were unfavorably impacted by a decrease in net operating lease revenue primarily resulting from the runoff of our GM lease portfolio as well as less favorable remarketing activity for the three months ended March 31, 2017, compared to the same period in 2016 as a result of lower used vehicle prices. The decrease was also due to an increase in provision for loan losses primarily resulting from higher net charge-offs driven by the changing composition of our portfolio to a more profitable mix of business consistent with our underwriting strategy. The decrease for the three months ended March 31, 2017, was partially offset by higher consumer financing revenue primarily due to an increase in retail portfolio yields from the execution of our continued strategic focus on expanding risk-adjusted returns, as well as higher commercial financing revenue primarily resulting from an increase in dealer floorplan assets.
Consumer financing revenue increased $58 million for the three months ended March 31, 2017, compared to the same period in 2016. The increase was primarily due to higher average retail asset levels and improved portfolio yields as a result of the execution of our continued strategic focus on expanding risk-adjusted returns.
Commercial financing revenue increased $52 million for the three months ended March 31, 2017, compared to the same period in 2016. The increase was primarily due to an increase in floorplan assets resulting from growing dealer vehicle inventories and higher average vehicle prices. The increase was also due to higher benchmark rates and an increase in non-floorplan dealer loan balances.
We recognized gains from the sale of automotive loans of $24 million for the three months ended March 31, 2017, compared to $5 million for the same period in 2016 as we continued to opportunistically utilize whole-loan sales and off-balance sheet securitizations as sources of funding during the three months ended March 31, 2017. A portion of these gains recognized for both periods was partially offset within Corporate and Other as a result of our FTP methodology.
Total net operating lease revenue decreased 41% for the three months ended March 31, 2017, compared to the same period in 2016. The decrease in net operating lease revenue was due to the runoff of our GM lease portfolio as well as less favorable remarketing activity in 2017 compared to the same period in 2016 as a result of lower used vehicle prices. We recognized remarketing losses of $3 million for the three months ended March 31, 2017, compared to gains of $55 million for the same period in 2016.
The provision for loan losses was $268 million for the three months ended March 31, 2017, compared to $209 million for the same period in 2016. The increase in provision for loan losses was primarily due to higher net charge-offs in our consumer automotive portfolio as a result of our strategy to originate a more profitable mix of business. Refer to the Risk Management section of this MD&A for further discussion.

65

Management's Discussion and Analysis
Ally Financial Inc. • Form 10-Q


Automotive Financing Volume
Consumer Automotive Financing
During the three months ended March 31, 2017, the average buy rate for retail originations increased 32 basis points relative to the three months ended March 31, 2016. We set our buy rates using a granular, risk-based methodology factoring in several variables such as interest costs, projected net average annualized loss rates (NAALR) at the time of origination, anticipated operating costs, and targeted return on equity. The increase in our average buy rate was primarily the result of an increase to interest rates and our strategy to increase our targeted return on equity and more focused deployment of shareholder capital. While we have seen an increase in provision expense and charge-offs in our consumer automotive loan portfolio over the past year in part due to deteriorating credit performance in our lower credit tiers, this increase was also a result of a deliberate shift in origination mix designed to achieve a higher risk-adjusted return. The carrying value of our nonprime consumer automotive loans before allowance for loan losses was $9.0 billion, or approximately 13.7% of our total consumer automotive loans at March 31, 2017, as compared to $9.1 billion, or approximately 13.8% of our total consumer automotive loans at December 31, 2016.
The following tables present retail loan originations by credit tier.
Credit Tier (a)
 
Volume
($ in billions)
 
% Share of volume
 
Average FICO®
Three months ended March 31, 2017
 
 
 
 
 
 
S
 
$
2.6

 
33
 
762

A
 
3.3

 
42
 
666

B
 
1.7

 
22
 
641

C
 
0.3

 
3
 
608

Total retail originations
 
$
7.9

 
100
 
689

Three months ended March 31, 2016
 
 
 
 
 
 
S
 
$
2.5

 
30
 
758

A
 
3.6

 
44
 
667

B
 
1.6

 
20
 
640

C
 
0.5

 
6
 
604

Total retail originations
 
$
8.2

 
100
 
684

(a)
Represents Ally's internal credit score, incorporating numerous borrower and structure attributes including: FICO® Score; severity and aging of delinquency; number of credit inquiries; loan-to-value ratio; and payment-to-income ratio. We originated an insignificant amount of retail loans classified as Tier D and Tier E during the three months ended March 31, 2017, and March 31, 2016, respectively.
Retail originations in Tier S represented 33% of originations during the three months ended March 31, 2017, compared to 30% during the three months ended March 31, 2016, while Tier C declined to 3% from 6% during the same period. Our overall origination mix continues to be in line with our strategy to optimize risk-adjusted returns.
The following table presents the percentage of total retail loan originations, in dollars, by the loan term in months.
Three months ended March 31,
 
2017
 
2016
071
 
20
%
 
19
%
7275
 
67

 
68

76 +
 
13

 
13

Total retail originations (a)
 
100
%
 
100
%
(a)
Excludes RV loans.
As we continue the execution of our targeted underwriting strategy to originate consumer automotive assets across a broad risk spectrum, retail originations with a term of 76 months or more represented 13% of total retail originations for both the three months ended March 31, 2017, and 2016. Substantially all of the loans originated with a term of 76 months or more during the three months ended March 31, 2017, and 2016, were considered to be prime and in credit tiers S, A, or B. We define prime retail automotive loans primarily as those loans with a FICO® Score (or an equivalent score) at origination of 620 or greater.

66

Management's Discussion and Analysis
Ally Financial Inc. • Form 10-Q


The following table presents the percentage of total outstanding retail loans by origination year.
Three months ended March 31,
 
2017
 
2016
Pre-2013
 
3
%
 
10
%
2013
 
6

 
12

2014
 
12

 
21

2015
 
27

 
44

2016
 
40

 
13

2017
 
12

 

Total
 
100
%
 
100
%
The 2017, 2016, and 2015 vintages comprise 79% of the overall retail portfolio for the three months ended March 31, 2017, and have higher average buy rates and expected losses than older vintages. The increases in average buy rate and expected loss were due to the execution of our targeted underwriting strategy to originate consumer automotive assets across a broad risk spectrum, and our continued strategic focus on expanding risk-adjusted returns.
The following tables present the total retail loan and lease origination dollars and percentage mix by product type and by channel.
 
 
Consumer automotive
financing originations
 
% Share of
Ally originations
Three months ended March 31, ($ in millions)
 
2017
 
2016
 
2017
 
2016
New retail standard
 
$
3,693

 
$
4,040

 
42
 
45
Used retail
 
4,211

 
4,092

 
48
 
45
Lease
 
924

 
833

 
10
 
9
New retail subvented
 
37

 
76

 
 
1
Total consumer automotive financing originations (a)
 
$
8,865

 
$
9,041

 
100
 
100
(a)
Includes Commercial Services Group (CSG) originations of $989 million and $835 million for the three months ended March 31, 2017, and 2016, respectively, and RV originations of $130 million and $128 million for the three months ended March 31, 2017, and 2016, respectively.
 
 
Consumer automotive
financing originations
 
% Share of
Ally originations
Three months ended March 31, ($ in millions)
 
2017
 
2016
 
2017
 
2016
Growth (a)
 
$
3,502

 
$
3,367

 
40
 
37
GM
 
2,867

 
3,329

 
32
 
37
Chrysler
 
2,496

 
2,345

 
28
 
26
Total consumer automotive financing originations
 
$
8,865

 
$
9,041

 
100
 
100
(a)
Includes Carvana purchased originations of $68 million for the three months ended March 31, 2017.
During the three months ended March 31, 2017, total consumer originations decreased $176 million compared to the same period in 2016. The decrease was due to lower volume from the GM channel and our continued strategic focus on profitable originations over volume levels. The decrease in GM volume during the three months ended March 31, 2017, was partially offset by higher volume in the Growth and Chrysler channels.
We have included origination metrics by loan term and FICO® Score. However, the proprietary way we evaluate risk is based on multiple inputs as described in the section titled Automotive Financing Volume — Acquisition and Underwriting within the MD&A included in our 2016 Annual Report on Form 10-K.

67

Management's Discussion and Analysis
Ally Financial Inc. • Form 10-Q


The following table presents the percentage of total retail loan and lease originations, in dollars, by FICO® Score.
Three months ended March 31,
 
2017
 
2016
740 +
 
25
%
 
22
%
739660
 
35

 
36

659620
 
24

 
25

619540
 
9

 
11

< 540
 
1

 
1

Unscored (a)
 
6

 
5

Total consumer automotive financing originations
 
100
%
 
100
%
(a)
Unscored are primarily CSG contracts with entities that have no FICO® Score.
Originations with a FICO® Score of less than 620 (considered nonprime) represented 10% and 12% of total consumer originations for the three months ended March 31, 2017, and 2016, respectively. Consumer loans and leases with FICO® Scores of less than 540 continued to comprise only 1% of total originations for the three months ended March 31, 2017. Nonprime applications that are not automatically declined by our proprietary credit-scoring models for risk reasons are manually reviewed and decisioned by an experienced underwriting team. The nonprime portfolio is subject to more stringent underwriting criteria for certain loan attributes (e.g., payment-to-income, mileage, and maximum amount financed) and generally does not include any loans with a term of 76 months or more. For discussion of our credit risk management practices and performance, refer to the section titled Risk Management.
For discussion of manufacturer marketing incentives, refer to our Annual Report on Form 10-K for the year ended December 31, 2016, Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations — Automotive Finance Operations.
Commercial Wholesale Financing Volume
The following table summarizes the average balances of our commercial wholesale floorplan finance receivables of new and used vehicles.
 
 
Average balance
Three months ended March 31, ($ in millions)
 
2017
 
2016
GM new vehicles
 
$
17,455

 
$
14,290

Chrysler new vehicles
 
9,283

 
9,217

Growth new vehicles
 
4,536

 
4,108

Used vehicles
 
4,180

 
3,870

Total commercial wholesale finance receivables
 
$
35,454

 
$
31,485

Commercial wholesale financing average volume increased $4.0 billion during the three months ended March 31, 2017, compared to the same period in 2016, primarily due to higher dealer inventory levels and an increase in trucks and sport utility vehicles, which have higher average prices than cars. Dealer inventory levels are dependent on a number of factors including manufacturer production schedules and vehicle mix, sales incentives, and industry sales—all of which can influence future wholesale balances.
Other Commercial Automotive Financing
We also provide other forms of commercial financing for the automotive industry including automotive dealer term loans and automotive fleet financing. Automotive dealer term loans are loans that we make to dealers to finance other aspects of the dealership business, including acquisitions. These loans are usually secured by real estate and/or other dealership assets, and are typically personally guaranteed by the individual owners of the dealership. Automotive dealer loans, inclusive of our commercial lease portfolio, increased $0.5 billion to an average of $5.6 billion for the three months ended March 31, 2017, compared to an average of $5.1 billion for the three months ended March 31, 2016. Automotive fleet financing credit lines may be obtained by dealers, their affiliates, and other independent companies that are used to purchase vehicles, which they lease or rent to others. In 2016, we began offering collateralized financing to mid-market companies, corporations, and municipalities for the acquisition of transportation assets including tractors and trailers, among other things.

68

Management's Discussion and Analysis
Ally Financial Inc. • Form 10-Q


Insurance
Results of Operations
The following table summarizes the operating results of our Insurance operations. The amounts presented are before the elimination of balances and transactions with our other reportable segments.
 
 
Three months ended March 31,
($ in millions)
 
2017
 
2016
Favorable/
(unfavorable)
% change
Insurance premiums and other income
 
 
 
 
 
Insurance premiums and service revenue earned
 
$
241

 
$
230

5
Investment income, net (a)
 
35

 
34

3
Other income
 
3

 
4

(25)
Total insurance premiums and other income
 
279

 
268

4
Expense
 
 
 
 
 
Insurance losses and loss adjustment expenses
 
88

 
73

(21)
Acquisition and underwriting expense
 
 
 
 
 
Compensation and benefits expense
 
19

 
18

(6)
Insurance commissions expense
 
99

 
94

(5)
Other expenses
 
33

 
33

Total acquisition and underwriting expense
 
151

 
145

(4)
Total expense
 
239

 
218

(10)
Income from continuing operations before income tax expense
 
$
40

 
$
50

(20)
Total assets
 
$
7,230

 
$
7,194

1
Insurance premiums and service revenue written
 
$
240

 
$
222

8
Combined ratio (b)
 
98.1
%
 
94.0
%
 
(a)
Includes realized gains on investments of $21 million and $22 million for the three months ended March 31, 2017, and 2016, respectively; and interest expense of $11 million and $12 million for the three months ended March 31, 2017, and 2016, respectively.
(b)
Management uses a combined ratio as a primary measure of underwriting profitability. Underwriting profitability is indicated by a combined ratio under 100% and is calculated as the sum of all incurred losses and expenses (excluding interest and income tax expense) divided by the total of premiums and service revenues earned and other fee income.
Our Insurance operations earned income from continuing operations before income tax expense of $40 million for the three months ended March 31, 2017, compared to $50 million for the three months ended March 31, 2016. The decrease for the three months ended March 31, 2017, was primarily due to higher weather-related losses driven by severe hailstorms.
Insurance premiums and service revenue earned was $241 million for the three months ended March 31, 2017, compared to $230 million for the three months ended March 31, 2016. The increase for the three months ended March 31, 2017, was primarily due to vehicle inventory insurance rate increases and higher dealer floorplan balances.
Insurance losses and loss adjustment expenses totaled $88 million for the three months ended March 31, 2017, compared to $73 million for the same period in 2016. The increase was due to higher weather-related losses driven by severe hailstorms, particularly in late March. The same higher weather-related losses drove the increase in the combined ratio to 98.1% for the three months ended March 31, 2017, compared to 94.0% for the three months ended March 31, 2016. During the three months ended March 31, 2017, weather losses increased $16 million compared to the prior year and represented the worst performing first quarter for weather losses in over 20 years. Effective in April 2017, we entered into a one-year reinsurance agreement to reduce volatility associated with weather-related losses on vehicle inventory insurance. Management believes that despite the costs associated with such reinsurance coverage, anticipated pricing actions to raise premiums in states most severely impacted by weather losses combined with the purchase of reinsurance should reduce volatility in our results and contribute to profitability.

69

Management's Discussion and Analysis
Ally Financial Inc. • Form 10-Q


The following table shows premium and service revenue written by insurance product.
 
 
Three months ended March 31,
($ in millions)
 
2017
 
2016
Vehicle service contracts




New retail

$
103


$
96

Used retail

113


109

Reinsurance (a)

(49
)

(41
)
Total vehicle service contracts (b)

167


164

Vehicle inventory insurance

52


41

Other finance and insurance (c)

21


17

Total

$
240


$
222

(a)
Reinsurance represents the transfer of premiums and risk from an Ally insurance company to a third-party insurance company.
(b)
VSC revenue is earned over the life of the service contract on a basis proportionate to the anticipated cost pattern.
(c)
Other finance and insurance includes GAP coverage, excess wear and tear, and other ancillary products.
Insurance premiums and service revenue written was $240 million for the three months ended March 31, 2017, compared to $222 million in 2016. The increase was primarily due to vehicle inventory insurance rate increases and higher dealer floorplan balances, partially offset by an increase in dealer reinsurance participation.
Cash and Investments
A significant aspect of our Insurance operations is the investment of proceeds from premiums and other revenue sources. We use these investments to satisfy our obligations related to future claims at the time these claims are settled. Our Insurance operations have an Investment Committee, which develops guidelines and strategies for these investments. The guidelines established by this committee reflect our risk tolerance, liquidity requirements, regulatory requirements, and rating agency considerations, among other factors.
The following table summarizes the composition of our Insurance operations cash and investment portfolio at fair value.
($ in millions)

March 31, 2017
 
December 31, 2016
Cash




Noninterest-bearing cash

$
227


$
273

Interest-bearing cash

970


612

Total cash

1,197


885

Available-for-sale securities




Debt securities

 
 
 
U.S. Treasury

374


299

U.S. States and political subdivisions

762


744

Foreign government

146


162

Agency mortgage-backed residential
 
622

 
633

Mortgage-backed residential

209


227

Mortgage-backed commercial
 
39

 
39

Asset-backed



6

Corporate debt

1,255


1,443

Total debt securities

3,407


3,553

Equity securities

444


595

Total available-for-sale securities

3,851


4,148

Total cash and securities

$
5,048


$
5,033


70

Management's Discussion and Analysis
Ally Financial Inc. • Form 10-Q


Mortgage Finance
Results of Operations
The following table summarizes the activities of our Mortgage Finance operations. The amounts presented are before the elimination of balances and transactions with our reportable segments.
 
 
Three months ended March 31,
($ in millions)
 
2017
 
2016
 
Favorable/(unfavorable) % change
Net financing revenue and other interest income
 
 
 
 
 
 
Total financing revenue and other interest income
 
$
71

 
$
57

 
25
Interest expense
 
37

 
37

 
Net financing revenue and other interest income
 
34

 
20

 
70
Provision for loan losses
 
1

 
3

 
67
Noninterest expense
 
 
 
 
 
 
Compensation and benefits expense
 
5

 
3

 
(67)
Other operating expenses
 
19

 
12

 
(58)
Total noninterest expense
 
24

 
15

 
(60)
Income from continuing operations before income tax expense
 
$
9

 
$
2

 
n/m
Total assets
 
$
8,362

 
$
7,493

 
12
n/m = not meaningful
Our Mortgage Finance operations earned income from continuing operations before income tax expense of $9 million for the three months ended March 31, 2017, compared to $2 million for the three months ended March 31, 2016. The increase was primarily due to an increase in net financing revenue and other interest income driven by increased loan balances as a result of bulk purchases of high-quality jumbo and LMI mortgage loans. In addition, the provision for loan losses was favorable due to lower portfolio growth. The increase in income from continuing operations before income tax expense was partially offset by higher noninterest expense to support our bulk acquisition strategy and the launch of direct mortgage originations.
Net financing revenue and other interest income was $34 million for the three months ended March 31, 2017, compared to $20 million for the three months ended March 31, 2016. The increase in net financing revenue and other interest income was primarily due to increased loan balances as a result of bulk purchases of high-quality jumbo and LMI mortgage loans. During the three months ended March 31, 2017, we purchased $327 million of mortgage loans that were originated by third parties compared to purchases of $1.4 billion in 2016.
The provision for loan losses decreased $2 million for the three months ended March 31, 2017, compared to the same period in 2016. The decrease was primarily due to lower portfolio growth compared to the same period in 2016.
Total noninterest expense was $24 million for the three months ended March 31, 2017, compared to $15 million for the three months ended March 31, 2016. The increase was primarily due to higher noninterest expense to support our bulk acquisition strategy and the launch of direct mortgage originations.

71

Management's Discussion and Analysis
Ally Financial Inc. • Form 10-Q


The following table presents the net unpaid principal balance (UPB), net UPB as a percentage of total, weighted average coupon (WAC), premium net of discounts, loan-to-value (LTV), and FICO® Scores for the products in our Mortgage Finance held-for-investment loan portfolio.
Product
 
Net UPB (a)
($ in millions)
 
% of total net UPB
 
WAC
 
Net premium
($ in millions)
 
Average refreshed LTV (b)
 
Average refreshed FICO® (c)
March 31, 2017
 
 
 
 
 
 
 
 
 
 
 
 
Adjustable-rate
 
$
2,489

 
31
 
3.34
%
 
$
41

 
57.22
%
 
771

Fixed-rate
 
5,669

 
69
 
4.01

 
132

 
59.89

 
770

Total
 
$
8,158

 
100
 
3.81

 
$
173

 
59.08

 
770

December 31, 2016
 
 
 
 
 
 
 
 
 
 
 
 
Adjustable-rate
 
$
2,488

 
31
 
3.34
%
 
$
42

 
57.94
%
 
773

Fixed-rate
 
5,633

 
69
 
4.02

 
131

 
60.47

 
772

Total
 
$
8,121

 
100
 
3.81

 
$
173

 
59.69

 
772

(a)
Represents UPB net of charge-offs.
(b)
Updated home values were derived using a combination of appraisals, broker price opinions, automated valuation models, and metropolitan statistical area level house price indices.
(c)
Updated to reflect changes in credit score since loan origination.

72

Management's Discussion and Analysis
Ally Financial Inc. • Form 10-Q


Corporate Finance
Results of Operations
The following table summarizes the activities of our Corporate Finance operations. The amounts presented are before the elimination of balances and transactions with our reportable segments.
 
 
Three months ended March 31,
($ in millions)
 
2017
 
2016
 
Favorable/(unfavorable) % change
Net financing revenue and other interest income
 
 
 
 
 
 
Interest and fees on finance receivables and loans
 
$
54

 
$
44

 
23
Interest expense
 
20

 
16

 
(25)
Net financing revenue and other interest income
 
34

 
28

 
21
Total other revenue
 
18

 
6

 
n/m
Total net revenue
 
52

 
34

 
53
Provision for loan losses
 
6

 
6

 
Noninterest expense
 


 
 
 
 
Compensation and benefits expense
 
14

 
10

 
(40)
Other operating expenses
 
7

 
7

 
Total noninterest expense
 
21

 
17

 
(24)
Income from continuing operations before income tax expense
 
$
25

 
$
11

 
127
Total assets
 
$
3,438

 
$
2,839

 
21
n/m = not meaningful
Our Corporate Finance operations earned income from continuing operations before income tax expense of $25 million for the three months ended March 31, 2017, compared to $11 million for the three months ended March 31, 2016. The increase was a result of higher net financing revenue and other interest income due primarily to asset growth, and higher other revenue due to a gain on an equity investment. The increase was partially offset by higher compensation and benefits expense to support the growth of the business.
Net financing revenue and other interest income was $34 million for the three months ended March 31, 2017, compared to $28 million for the three months ended March 31, 2016. The increase was primarily due to asset growth across all business segments in line with our growth strategy, which resulted in a 23% increase in the gross carrying value of finance receivables and loans as of March 31, 2017, compared to March 31, 2016.
Other revenue was $18 million for the three months ended March 31, 2017, compared to $6 million for the three months ended March 31, 2016. The increase was primarily driven by an $11 million gain on the sale of an equity investment during the first quarter of 2017.
Total noninterest expense was $21 million for the three months ended March 31, 2017, compared to $17 million for the three months ended March 31, 2016. The increase was due to higher compensation and benefit expenses to support the growth of the business.
Credit Portfolio
The following table presents the gross carrying value of finance receivables and loans outstanding, and unfunded commitments to lend of our Corporate Finance operations.
($ in millions)
 
March 31, 2017
 
December 31, 2016
Finance receivables and loans
 
$
3,432

 
$
3,180

Unfunded lending commitments (a)
 
$
1,485

 
$
1,483

(a)
Includes unused revolving credit line commitments for loans held-for-sale and finance receivables and loans, signed commitment letters, and standby letter of credit facilities, which are issued on behalf of clients and may contingently require us to make payments to a third-party beneficiary should the client fail to fulfill a contractual commitment.

73

Management's Discussion and Analysis
Ally Financial Inc. • Form 10-Q


The following table presents the percentage of total finance receivables and loans of our Corporate Finance operations by industry concentration. The finance receivables and loans are reported at gross carrying value.
 
 
March 31, 2017
 
December 31, 2016
Industry
 
 
 
 
Services
 
28.4
%
 
27.4
%
Automotive and transportation
 
11.7

 
13.5

Health services
 
11.1

 
12.0

Machinery, equipment, and electronics
 
9.0

 
6.6

Wholesale
 
8.7

 
8.9

Other manufactured products
 
8.1

 
8.8

Chemicals and metals
 
5.7

 
5.8

Retail trade
 
4.7

 
5.1

Food and beverages
 
4.0

 
4.2

Paper, printing, and publishing
 
3.0

 
3.2

Other
 
5.6

 
4.5

Total finance receivables and loans
 
100.0
%
 
100.0
%

74

Management's Discussion and Analysis
Ally Financial Inc. • Form 10-Q


Corporate and Other
The following table summarizes the activities of Corporate and Other. Corporate and Other primarily consists of activity related to 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, the amortization of the discount associated with new debt issuances and bond exchanges, and the residual impacts of our corporate FTP and treasury 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, the activity related to TradeKing since acquisition, and reclassifications and eliminations between the reportable operating segments.
 
 
Three months ended March 31,
($ in millions)
 
2017
 
2016
 
Favorable/(unfavorable) % change
Net financing revenue and other interest income
 
 
 
 
 
 
Total financing revenue and other interest income
 
$
126

 
$
92

 
37
Interest expense
 
 
 
 
 
 
Original issue discount amortization
 
21

 
18

 
(17)
Other interest expense
 
101

 
81

 
(25)
Total interest expense
 
122

 
99

 
(23)
Net financing revenue and other interest income (a)
 
4

 
(7
)
 
157
Other revenue
 
 
 
 
 
 
Loss on mortgage and automotive loans, net
 
(10
)
 
(4
)
 
(150)
Loss on extinguishment of debt
 
(1
)
 
(4
)
 
75
Other gain on investments, net
 
6

 
32

 
(81)
Other income, net of losses
 
18

 
15

 
20
Total other revenue
 
13

 
39

 
(67)
Total net revenue
 
17

 
32

 
(47)
Provision for loan losses
 
(4
)
 
2

 
n/m
Total noninterest expense (b)
 
57

 
33

 
(73)
Loss from continuing operations before income tax expense
 
$
(36
)
 
$
(3
)
 
n/m
Total assets
 
$
27,917

 
$
26,690

 
5
n/m = not meaningful
(a)
Refer to the table that follows for further details on the components of net financing revenue and other interest income.
(b)
Includes a reduction of $212 million and $202 million, for the three months ended March 31, 2017, and 2016, respectively, related to the allocation of corporate overhead expenses to other segments. The receiving segments record their allocation of corporate overhead expense within other operating expense.
The following table summarizes the components of net financing revenue and other interest income for Corporate and Other.
 
 
Three months ended March 31,
($ in millions)
 
2017
 
2016
Original issue discount amortization (a)
 
$
(21
)
 
$
(18
)
Net impact of the funds-transfer pricing methodology
 
15

 
3

Other (including legacy mortgage net financing revenue and other interest income)
 
10

 
8

Net financing revenue and other interest income for Corporate and Other
 
$
4

 
$
(7
)
(a)
Amortization is included as interest on long-term debt in the Condensed Consolidated Statement of Comprehensive Income.

75

Management's Discussion and Analysis
Ally Financial Inc. • Form 10-Q


The following table presents the scheduled remaining amortization of the original issue discount at March 31, 2017.
Year ended December 31, ($ in millions)
 
2017
 
2018
 
2019
 
2020
 
2021
 
2022 and thereafter (a)
 
Total
Original issue discount
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Outstanding balance at year end
 
$
1,235

 
$
1,134

 
$
1,095

 
$
1,056

 
$
1,014

 
$

 
 
Total amortization (b)
 
69

 
101

 
39

 
39

 
42

 
1,014

 
$
1,304

(a)
The maximum annual scheduled amortization for any individual year is $153 million in 2030.
(b)
The amortization is included as interest on long-term debt on the Condensed Consolidated Statement of Comprehensive Income.
Loss from continuing operations before income tax expense for Corporate and Other was $36 million for the three months ended March 31, 2017, compared to $3 million for the three months ended March 31, 2016. The increase in loss for the three months ended March 31, 2017, was primarily due to an increase in interest expense driven by increased interest on deposits resulting from deposit growth and increased LIBOR rates on secured borrowings, partially offset by a decrease in unsecured debt as maturities have been refinanced with lower cost funding. Additionally, the increase in loss was driven by lower gains on sales of investment securities. The increase in loss was partially offset by an increase in financing revenue and other interest income driven by increased interest and dividends on investment securities and other earning assets and a decrease in the provision for loan losses resulting from lower net charge-offs as the legacy mortgage portfolio continues to runoff.
Financing revenue and other interest income was $126 million for the three months ended March 31, 2017, compared to $92 million for the three months ended March 31, 2016. The increase was primarily driven by increased interest and dividends on investment securities and other earning assets compared to the same periods in 2016.
Interest expense was $122 million for the three months ended March 31, 2017, compared to $99 million for the three months ended March 31, 2016. The increase was primarily driven by increased interest on deposits resulting from deposit growth and increased LIBOR rates on borrowings. The increase was partially offset by a decrease in borrowings including higher-cost unsecured debt as maturities are refinanced with lower cost funding.
Other gain on investments was $6 million for the three months ended March 31, 2017, compared to $32 million for the three months ended March 31, 2016. The decrease was due primarily to higher sales of investment securities in 2016 resulting from favorable market conditions that did not repeat in the current period.
The provision for loan losses decreased $6 million for the three months ended March 31, 2017, compared to the same period in 2016, as a result of lower net charge-offs as the legacy mortgage portfolio continues to runoff.
Noninterest expense was $57 million for the three months ended March 31, 2017, compared to $33 million for the three months ended March 31, 2016. The increase was primarily due to increased expenses from the TradeKing integration and operations included in our results subsequent to acquisition in the second quarter of 2016.
Total assets were $27.9 billion as of March 31, 2017, compared to $26.7 billion as of March 31, 2016. The increase was primarily the result of growth of our available-for-sale and held-to-maturity securities portfolios as well as the June 1, 2016, acquisition of TradeKing, which had total assets of $285 million as of March 31, 2017. The increase was partially offset by the continued runoff of our legacy mortgage portfolio. At March 31, 2017, the gross carrying value of the legacy mortgage portfolio was $2.6 billion, compared to $3.2 billion at March 31, 2016.

76

Management's Discussion and Analysis
Ally Financial Inc. • Form 10-Q


Cash and Securities
The following table summarizes the composition of the cash and securities portfolio at fair value for Corporate and Other.
($ in millions)
 
March 31, 2017
 
December 31, 2016
Cash
 
 
 
 
Noninterest-bearing cash
 
$
1,261

 
$
1,249

Interest-bearing cash
 
1,814

 
3,770

Total cash
 
3,075

 
5,019

Available-for-sale securities
 
 
 
 
Debt securities
 
 
 
 
U.S. Treasury
 
1,851

 
1,321

U.S. States and political subdivisions
 
33

 
38

Agency mortgage-backed residential
 
11,240

 
9,657

Mortgage-backed residential
 
1,787

 
1,870

Mortgage-backed commercial
 
495

 
498

Asset-backed
 
1,051

 
1,394

Total available-for-sale securities
 
16,457

 
14,778

Held-to-maturity securities
 
 
 
 
Debt securities
 
 
 
 
Agency mortgage-backed residential
 
1,011

 
789

Asset-backed retained notes
 
52

 

Total held-to-maturity securities
 
1,063

 
789

Total cash and securities
 
$
20,595

 
$
20,586

TradeKing
On June 1, 2016, we acquired 100% of the equity of TradeKing a digital wealth management company with an online broker-dealer, digital portfolio management platform, and educational content. The addition of brokerage and wealth management is a natural extension of our online banking franchise, creating a full suite of financial products for savings and investments. The following table presents the trading days and average customer trades per day during each respective quarter and the number of funded accounts, total net customer assets, and total customer cash balances as of the end of each full quarter since acquisition for TradeKing's online broker-dealer.
 
 
1st Quarter 2017
 
4th Quarter 2016
 
3rd Quarter 2016
Trading days (a)
 
62

 
62.5

 
64

Average customer trades per day (in thousands)
 
19

 
18

 
17

Funded accounts (b) (in thousands)
 
251

 
244

 
240

Total net customer assets ($ in millions)
 
$
4,987

 
$
4,771

 
$
4,678

Total customer cash balances ($ in millions)
 
$
1,232

 
$
1,253

 
$
1,177

(a)
Represents the number of days the New York Stock Exchange and other U.S. stock exchange markets are open for trading. A half day represents a day when the U.S. markets close early.
(b)
Represents open and funded brokerage accounts.

77

Management's Discussion and Analysis
Ally Financial Inc. • Form 10-Q


Risk Management
Managing the risk/reward trade-off is a fundamental component of operating our businesses. Our risk management program is overseen by the Ally Board of Directors (the Board), various risk committees, the executive leadership team, and our associates. The Risk and Compliance Committee of the Board (RCC), together with the Board, sets the risk appetite across our company while the risk committees, executive leadership team, and our associates identify and monitor current and emerging risks and ensure those risks are managed to be within our risk appetite. Ally's primary types of risk include credit, lease residual, market, operational, insurance/underwriting, business/strategic, reputation, and liquidity. For more information on our risk management process, refer to the Risk Management MD&A section of our 2016 Annual Report on Form 10-K.
Loan and Lease Exposure
The following table summarizes the exposures from our loan and lease activities.
($ in millions)
 
March 31, 2017
 
December 31, 2016
Finance receivables and loans
 
 
 
 
Automotive Finance
 
$
104,566

 
$
104,646

Mortgage Finance
 
8,331

 
8,294

Corporate Finance
 
3,432

 
3,180

Corporate and Other (a)
 
2,673

 
2,824

Total finance receivables and loans
 
119,002

 
118,944

Loans held-for-sale
 
 
 
 
Mortgage Finance (b)
 
1

 

Total on-balance sheet loans
 
119,003

 
118,944

Off-balance sheet securitized loans
 
 
 
 
Automotive Finance (c)
 
3,067

 
2,392

Whole-loan sales
 
 
 
 
Automotive Finance (c)
 
2,787

 
3,164

Operating lease assets
 
 
 
 
Automotive Finance
 
10,461

 
11,470

Total loan and lease exposure
 
$
135,318

 
$
135,970

Serviced loans and leases
 
 
 
 
Automotive Finance
 
$
120,693

 
$
121,480

Mortgage Finance
 
8,332

 
8,294

Corporate Finance
 
3,231

 
2,991

Corporate and Other
 
2,606

 
2,757

Total serviced loans and leases
 
$
134,862

 
$
135,522

(a)
Includes $2.6 billion and $2.8 billion of consumer mortgage loans in our Mortgage — Legacy portfolio at March 31, 2017, and December 31, 2016, respectively.
(b)
Represents the current balance of conforming mortgages originated directly to the held-for-sale portfolio.
(c)
Represents the current unpaid principal balance of outstanding loans based on our customary representation and warranty provisions.
The risks inherent in our loan and lease exposures are largely driven by changes in the overall economy, used vehicle and housing price levels, unemployment levels, and their impact to our borrowers. The potential financial statement impact of these exposures varies depending on the accounting classification and future expected disposition strategy. We retain the majority of our automotive loans as they complement our core business model, but we do sell loans from time to time on an opportunistic basis. We ultimately manage the associated risks based on the underlying economics of the exposure. Our lease residual risk, which may be more volatile than credit risk in stressed macroeconomic scenarios, has declined with the decrease in the lease portfolio.
Since the end of 2014, we have experienced growth in our consumer retail automotive loan portfolio and a significant reduction in lease assets. This shift in our portfolio mix has contributed to an increase in provision expense for loan losses. Consumer lease residuals are not included in the allowance for loan losses as changes in the expected residual values on consumer leases are included in depreciation expense over the remaining life of the lease. Our risk to future fluctuations in used vehicle values is diminishing as our lease assets have declined materially and will continue to decline as the number of lease terminations continues to outpace lease originations. All leases are exposed to potential reductions in used vehicle values, while only those loans where we take possession of the vehicle are affected by potential reductions in used vehicle values. Operating lease assets, net of accumulated depreciation decreased $1.0 billion to $10.5 billion at March 31, 2017, from $11.5 billion at December 31, 2016.

78

Management's Discussion and Analysis
Ally Financial Inc. • Form 10-Q


Credit Risk Management
Credit risk is defined as the risk of loss arising from an obligor not meeting its contractual obligations to Ally. Therefore, credit risk is a major source of potential economic loss to us. Credit risk is monitored by several groups and functions throughout the organization, including enterprise and line of business committees and the risk management function. Together, they oversee credit decisioning, account servicing activities, and credit risk management processes, and monitor credit risk exposures to ensure they are managed in a safe-and-sound manner and are within our risk appetite. In addition, our Loan Review Group provides an independent assessment of the quality of our credit portfolios and credit risk management practices, and directly reports its findings to the RCC and the Ally Financial Inc. General Auditor on a regular basis.
To mitigate risk, we have implemented specific policies and practices across all lines of business, utilizing both qualitative and quantitative analyses. This reflects our commitment to maintain an independent and ongoing assessment of credit risk and credit quality. Our policies require an objective and timely assessment of the overall quality of the consumer and commercial loan and lease portfolios. This includes the identification of relevant trends that affect the collectability of the portfolios, segments of the portfolios that are potential problem areas, loans and leases with potential credit weaknesses, and the assessment of the adequacy of internal credit risk policies and procedures to ensure and monitor compliance with relevant laws and regulations. Our consumer and commercial loan and lease portfolios are subject to regular stress tests that are based on plausible, but unexpected, economic scenarios to ensure that we can withstand a severe economic downturn. In addition, we establish and maintain underwriting policies and guardrails across our portfolios and higher risk segments (e.g., nonprime) based on our risk appetite.
Another important aspect to managing credit risk involves the need to carefully monitor and manage the performance and pricing of our loan products to ensure that we generate appropriate risk-adjusted returns and are adequately compensated for the risk we are taking. When considering pricing, various granular risk-based factors are considered such as expected loss rates, loss volatility, anticipated operating costs, and targeted returns on equity. We carefully monitor credit losses and trends in credit losses in conjunction with pricing at contract inception. While we have seen an increase in provision expense and charge-offs in our consumer automotive loan portfolio over the past year in part due to deteriorating credit performance in our lower credit tiers, this increase was also a result of a deliberate shift in origination mix designed to achieve a higher risk-adjusted return. We continue to closely monitor our loan performance and profitability performance in light of forecasted economic conditions, and manage credit risk and expectations of losses in the portfolio.
We manage credit risk based on the risk profile of the borrower, the source of repayment, the underlying collateral, and current market conditions. We monitor the credit risk profile of individual borrowers and the aggregate portfolio of borrowers either within a designated geographic region or a particular product or industry segment. We perform quarterly analyses of the consumer automotive, consumer mortgage, and commercial portfolios using a range of indicators to assess the adequacy of the allowance for loan losses based on historical and current trends. Refer to Note 8 to the Condensed Consolidated Financial Statements for additional information.
Additionally, we utilize numerous collection strategies to mitigate loss and provide ongoing support to customers in financial distress. For automotive loans, we work with customers when they become delinquent on their monthly payment. In lieu of repossessing their vehicle, we may offer several types of assistance to aid our customers based on their willingness and ability to repay their loan. Loss mitigation may include extension of the loan maturity date and rewriting the loan terms. For mortgage loans, as part of certain programs, we offer mortgage loan modifications to qualified borrowers. Numerous initiatives 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.
Furthermore, we manage our counterparty credit exposure based on the risk profile of the counterparty. Within our policies, we have established standards and requirements for managing counterparty risk exposures in a safe-and-sound manner. Counterparty credit risk is derived from multiple exposure types, including derivatives, securities trading, securities financing transactions, financial futures, cash balances (e.g., due from depository institutions, restricted accounts, and cash equivalents), and investment in debt securities. For more information on derivative counterparty credit risk, refer to Note 19 to the Condensed Consolidated Financial Statements.
We closely monitor macro-economic trends given the nature of our business and the potential impacts on our exposure to credit risk. During the three months ended March 31, 2017, the U.S. economy continued to modestly expand and consumer confidence remained strong. The labor market remained healthy during the period, with nonfarm payrolls increasing and the annual unemployment rate falling to 4.5% as of March 31, 2017. Within the U.S. automotive market, new light vehicle sales remained at historic highs, but were relatively flat year over year at a Seasonally Adjusted Annual Rate of 17.2 million for the three months ended March 31, 2017. We continue to experience downward pressure on used vehicle values and expect that to continue throughout 2017.
On-balance Sheet Portfolio
Our on-balance sheet portfolio includes both finance receivables and loans and loans held-for-sale. At March 31, 2017, this primarily included $104.6 billion of automotive finance receivables and loans and $10.9 billion of consumer mortgage finance receivables and loans. Our Mortgage Finance operations consist of the management of our held-for-investment mortgage loan portfolio which includes bulk purchases of high-quality jumbo and LMI mortgage loans. In late 2016, we introduced direct mortgage originations consisting of jumbo mortgage loans that are originated as held-for-investment and conforming mortgage loans that are originated as held-for-sale.

79

Management's Discussion and Analysis
Ally Financial Inc. • Form 10-Q


The following table presents our total on-balance sheet consumer and commercial finance receivables and loans.
 
 
Outstanding
 
Nonperforming (a)
 
Accruing past due 90 days or more
($ in millions)
 
March 31, 2017
 
December 31, 2016
 
March 31, 2017
 
December 31, 2016
 
March 31, 2017
 
December 31, 2016
Consumer
 
 
 
 
 
 
 
 
 
 
 
 
Finance receivables and loans
 
 
 
 
 
 
 
 
 
 
 
 
Loans at gross carrying value
 
$
76,600

 
$
76,843

 
$
678

 
$
697

 
$

 
$

Loans held-for-sale
 
1

 

 

 

 

 

Total consumer loans (b)
 
76,601

 
76,843

 
678

 
697

 

 

Commercial
 
 
 
 
 
 
 
 
 
 
 
 
Finance receivables and loans
 
 
 
 
 
 
 
 
 
 
 
 
Loans at gross carrying value
 
42,402

 
42,101

 
120

 
122

 

 

Total commercial loans
 
42,402


42,101


120


122





Total on-balance sheet loans
 
$
119,003

 
$
118,944

 
$
798

 
$
819

 
$

 
$

(a)
Includes nonaccrual TDR loans of $310 million and $286 million at March 31, 2017, and December 31, 2016, respectively.
(b)
Includes outstanding CSG loans of $6.8 billion and $6.7 billion at March 31, 2017, and December 31, 2016, respectively, and RV loans of $1.7 billion at both March 31, 2017, and December 31, 2016.
Total on-balance sheet loans outstanding at March 31, 2017, increased $59 million to $119.0 billion from December 31, 2016, reflecting an increase of $301 million in the commercial portfolio and a decrease of $242 million in the consumer portfolio. The increase in commercial on-balance sheet loans outstanding was primarily due to the growth in our Corporate Finance portfolio in line with our business strategy, as well as the ongoing demand for automotive dealer term loans. The decrease in consumer on-balance sheet loans was primarily due to the completion of $1.2 billion in loan sales and off-balance sheet securitizations of consumer automotive assets, mostly offset by our loan originations that outpaced portfolio runoff during the three months ended March 31, 2017.
Total TDRs outstanding at March 31, 2017, increased $41 million to $704 million from December 31, 2016. Refer to Note 8 to the Condensed Consolidated Financial Statements for additional information.
Total nonperforming loans at March 31, 2017, decreased $21 million to $798 million from December 31, 2016, reflecting a decrease of $19 million of consumer nonperforming loans and a decrease of $2 million of commercial nonperforming loans. The decrease in total nonperforming loans from December 31, 2016, was primarily due to the seasonality of the consumer automotive portfolio. Nonperforming loans include finance receivables and loans on nonaccrual status when the principal or interest has been delinquent for 90 days or when full collection is determined not to be probable. Refer to Note 1 to the Consolidated Financial Statements included in our 2016 Annual Report on Form 10-K for additional information.
The following table includes consumer and commercial net charge-offs from finance receivables and loans at gross carrying value and related ratios.
 
 
Three months ended March 31,
 
 
Net charge-offs (recoveries)
 
Net charge-off ratios (a)
($ in millions)
 
2017
 
2016
 
2017
 
2016
Consumer
 
$
253

 
$
179

 
1.3
%
 
1.0
%
Commercial
 

 

 

 

Total finance receivables and loans at gross carrying value
 
$
253

 
$
179

 
0.9

 
0.6

(a)
Net charge-off ratios are calculated as annualized net charge-offs divided by average outstanding finance receivables and loans excluding loans measured at fair value and loans held-for-sale during the period for each loan category.
Net charge-offs were $253 million for the three months ended March 31, 2017, compared to $179 million for the three months ended March 31, 2016. The increase during the three months ended March 31, 2017, was driven by the seasoning of recent vintages reflecting our underwriting strategy to originate consumer automotive assets across a broad risk spectrum and expand our risk-adjusted returns, as well as lower average sales proceeds on repossessed vehicles.
The following discussions titled Consumer Credit Portfolio and Commercial Credit Portfolio relate to consumer and commercial finance receivables and loans recorded at gross carrying value. Finance receivables and loans recorded at gross carrying value have an associated allowance for loan losses.

80

Management's Discussion and Analysis
Ally Financial Inc. • Form 10-Q


Consumer Credit Portfolio
During the three months ended March 31, 2017, the credit performance of the consumer portfolio reflected both our underwriting strategy to originate consumer automotive assets across a broad risk spectrum, including used, higher LTV, extended term, Growth channel, nonprime, and nonsubvented finance receivables and loans, and our continued bulk purchases of high-quality jumbo and LMI mortgage loans. Within our consumer automotive portfolio, we have observed deteriorating performance in the lower credit tiers of the portfolio versus expectations. The carrying value of our nonprime consumer automotive loans before allowance for loan losses represented approximately 13.7% of our total consumer automotive loans at March 31, 2017, compared to approximately 13.8% at December 31, 2016. For information on our consumer credit risk practices and policies regarding delinquencies, nonperforming status, and charge-offs, refer to Note 1 to the Consolidated Financial Statements included in our 2016 Annual Report on Form 10-K.
The following table includes consumer finance receivables and loans recorded at gross carrying value.
 
 
Outstanding
 
Nonperforming (a)
 
Accruing past due 90 days or more
($ in millions)
 
March 31, 2017
 
December 31, 2016
 
March 31, 2017
 
December 31, 2016
 
March 31, 2017
 
December 31, 2016
Consumer automotive (b) (c)
 
$
65,663

 
$
65,793

 
$
573

 
$
598

 
$

 
$

Consumer mortgage
 
 
 
 
 
 
 
 
 
 
 
 
Mortgage Finance
 
8,331

 
8,294

 
10

 
10

 

 

Mortgage — Legacy
 
2,606

 
2,756

 
95

 
89

 

 

Total consumer finance receivables and loans
 
$
76,600

 
$
76,843

 
$
678

 
$
697

 
$

 
$

(a)
Includes nonaccrual TDR loans of $243 million and $240 million at March 31, 2017, and December 31, 2016, respectively.
(b)
Includes $34 million and $43 million of fair value adjustment for loans in hedge accounting relationships at March 31, 2017, and December 31, 2016, respectively. Refer to Note 19 to the Condensed Consolidated Financial Statements for additional information.
(c)
Includes outstanding CSG loans of $6.8 billion and $6.7 billion at March 31, 2017, and December 31, 2016, respectively, and RV loans of $1.7 billion at both March 31, 2017, and December 31, 2016.
Total consumer outstanding finance receivables and loans decreased $243 million at March 31, 2017, compared with December 31, 2016. The decrease in consumer automotive finance receivables and loans was primarily related to the completion of $1.2 billion in loan sales and off-balance sheet securitizations, which was mostly offset by our loan originations that outpaced portfolio runoff during the three months ended March 31, 2017. The decrease in consumer mortgage finance receivables and loans was primarily due to runoff in the legacy mortgage loan portfolio.
Total consumer nonperforming finance receivables and loans at March 31, 2017, decreased $19 million to $678 million from December 31, 2016, reflecting a decrease of $25 million of consumer automotive finance receivables and loans and an increase of $6 million of consumer mortgage nonperforming finance receivables and loans. The decrease in nonperforming consumer automotive finance receivables and loans was primarily due to seasonality. The increase in nonperforming consumer mortgage finance receivables and loans was primarily due to the increase in TDRs during the period. Refer to Note 8 to the Condensed Consolidated Financial Statements for additional information. Nonperforming consumer finance receivables and loans as a percentage of total outstanding consumer finance receivables and loans were 0.9% at both March 31, 2017, and December 31, 2016.
Consumer automotive loans accruing and past due 30 days or more decreased $608 million to $1.6 billion at March 31, 2017, compared with December 31, 2016, primarily due to seasonality.
The following table includes consumer net charge-offs from finance receivables and loans at gross carrying value and related ratios.
 
 
Three months ended March 31,
 
 
Net charge-offs
 
Net charge-off ratios (a)
($ in millions)
 
2017
 
2016
 
2017
 
2016
Consumer automotive
 
$
251

 
$
173

 
1.5
%
 
1.1
%
Consumer mortgage
 
 
 
 
 
 
 
 
Mortgage Finance
 

 

 

 

Mortgage — Legacy
 
2

 
6

 
0.2

 
0.7

Total consumer finance receivables and loans
 
$
253

 
$
179

 
1.3

 
1.0

(a)
Net charge-off ratios are calculated as annualized net charge-offs divided by average outstanding finance receivables and loans excluding loans measured at fair value and loans held-for-sale during the period for each loan category.
Our net charge-offs from total consumer finance receivables and loans were $253 million for the three months ended March 31, 2017, compared to $179 million for the three months ended March 31, 2016. The increase during the three months ended March 31, 2017, was

81

Management's Discussion and Analysis
Ally Financial Inc. • Form 10-Q


driven by the seasoning of recent vintages reflecting our underwriting strategy to originate consumer automotive assets across a broad risk spectrum and expand our risk-adjusted returns, as well as lower average sales proceeds on repossessed vehicles.
The following table summarizes total consumer loan originations for the periods shown. Total consumer loan originations include loans classified as finance receivables and loans and loans held-for-sale during the period.
 
 
Three months ended March 31,
($ in millions)
 
2017
 
2016
Consumer automotive
 
$
7,941

 
$
8,208

Consumer mortgage (a)
 
3

 
4

Total consumer loan originations
 
$
7,944

 
$
8,212

(a)
Includes $3 million of loans originated as held-for-sale.
Total automotive-originated loans decreased $267 million for the three months ended March 31, 2017, compared to 2016, as we continued to execute our strategic focus of selective originations based on improved risk-adjusted returns.
The following table shows the percentage of total consumer finance receivables and loans recorded at gross carrying value by state concentration. Total consumer automotive loans were $65.7 billion and $65.8 billion at March 31, 2017, and December 31, 2016, respectively. Total mortgage and home equity loans were $10.9 billion and $11.1 billion at March 31, 2017, and December 31, 2016, respectively.


March 31, 2017 (a)

December 31, 2016
 

Consumer automotive

Consumer mortgage

Consumer automotive

Consumer mortgage
Texas

13.5
%

6.6
%

13.6
%

6.6
%
California

7.9


34.4


7.8


34.2

Florida
 
8.2

 
4.4

 
8.2

 
4.4

Pennsylvania

4.7


1.4


4.7


1.5

Illinois

4.3


3.4


4.3


3.4

Georgia

4.3


2.3


4.3


2.2

North Carolina

3.7


1.5


3.6


1.6

Ohio

3.5


0.5


3.5


0.5

New York

3.1


1.9


3.2


1.9

Missouri

2.8


1.2


2.8


1.2

Other United States

44.0


42.4


44.0


42.5

Total consumer loans
 
100.0
%
 
100.0
%
 
100.0
%
 
100.0
%
(a)
Presentation is in descending order as a percentage of total consumer finance receivables and loans at March 31, 2017.
We monitor our consumer loan portfolio for concentration risk across the states in which we lend. The highest concentrations of consumer loans are in Texas and California, which represented an aggregate of 24.3% and 24.2% of our total outstanding consumer finance receivables and loans at March 31, 2017, and December 31, 2016, respectively. Our consumer mortgage loan portfolio concentration within California, which is primarily composed of high-quality jumbo mortgage loans, generally aligns to the California share of jumbo mortgages nationally.
Repossessed and Foreclosed Assets
We classify an asset as repossessed or foreclosed (included in other assets on the Condensed Consolidated Balance Sheet) when physical possession of the collateral is taken. We dispose of the acquired collateral in a timely fashion in accordance with regulatory requirements. For more information on repossessed and foreclosed assets, refer to Note 1 to the Consolidated Financial Statements included in our 2016 Annual Report on Form 10-K.
Repossessed consumer automotive loan assets in our Automotive Finance operations at March 31, 2017, decreased $14 million to $121 million from December 31, 2016. Foreclosed mortgage assets at March 31, 2017, remained flat at $13 million as compared to December 31, 2016.
Commercial Credit Portfolio
During the three months ended March 31, 2017, the credit performance of the commercial portfolio remained strong, as nonperforming finance receivables and loans remained relatively stable and no net charge-offs were realized. For information on our commercial credit risk practices and policies regarding delinquencies, nonperforming status, and charge-offs, refer to Note 1 to the Consolidated Financial Statements included in our 2016 Annual Report on Form 10-K.

82

Management's Discussion and Analysis
Ally Financial Inc. • Form 10-Q


The following table includes total commercial finance receivables and loans reported at gross carrying value.
 
 
Outstanding
 
Nonperforming (a)
 
Accruing past due 90 days or more
($ in millions)
 
March 31, 2017
 
December 31, 2016
 
March 31, 2017
 
December 31, 2016
 
March 31, 2017
 
December 31, 2016
Commercial and industrial
 
 
 
 
 
 
 
 
 
 
 
 
Automotive
 
$
34,911

 
$
35,041

 
$
34


$
33


$


$

Other (b)
 
3,499

 
3,248

 
81


84





Commercial real estate — Automotive
 
3,992

 
3,812

 
5


5





Total commercial finance receivables and loans
 
$
42,402

 
$
42,101

 
$
120

 
$
122

 
$

 
$

(a)
Includes nonaccrual TDR loans of $67 million and $46 million at March 31, 2017, and December 31, 2016, respectively.
(b)
Other commercial primarily includes senior secured commercial lending.
Total commercial finance receivables and loans outstanding increased $301 million from December 31, 2016, to $42.4 billion at March 31, 2017. The increase was primarily due to the growth in our Corporate Finance portfolio in line with our business strategy, as well as the ongoing demand for automotive dealer term loans.
Total commercial nonperforming finance receivables and loans were $120 million at March 31, 2017, reflecting a decrease of $2 million when compared to December 31, 2016. The decrease was primarily due to payments received on loans within the Corporate Finance portfolio. Credit performance within the Corporate Finance portfolio remains strong as impaired loans declined to 2.4% of the portfolio at March 31, 2017, as compared to 2.6% at December 31, 2016. Additionally, there were no net charge-offs within the Corporate Finance portfolio during both the three months ended March 31, 2017, and 2016. Nonperforming commercial finance receivables and loans as a percentage of outstanding commercial finance receivables and loans remained flat at 0.3% at both March 31, 2017, and December 31, 2016.
Our net charge-offs from total commercial finance receivables and loans resulted in no net charge-offs for both the three months ended March 31, 2017, and March 31, 2016.
Commercial Real Estate
The commercial real estate portfolio consists of finance receivables and loans issued primarily to automotive dealers. Commercial real estate finance receivables and loans were $4.0 billion and $3.8 billion at March 31, 2017, and December 31, 2016, respectively.
The following table presents the percentage of total commercial real estate finance receivables and loans by state concentration. These finance receivables and loans are reported at gross carrying value.
 
 
March 31, 2017
 
December 31, 2016
Texas
 
15.7
%
 
16.1
%
Florida
 
10.4

 
10.2

California
 
8.3

 
7.9

Michigan
 
7.6

 
7.6

New Jersey
 
3.9

 
4.2

South Carolina
 
3.9

 
2.7

North Carolina
 
3.6

 
3.6

Georgia
 
3.5

 
3.6

Pennsylvania
 
3.0

 
3.1

Missouri
 
2.6

 
2.5

Other United States
 
37.5

 
38.5

Total commercial real estate finance receivables and loans
 
100.0
%
 
100.0
%
Commercial Criticized Exposure
Finance receivables and loans classified as special mention, substandard, or doubtful are reported as criticized. These classifications are based on regulatory definitions and generally represent finance receivables and loans within our portfolio that have a higher default risk or have already defaulted. These finance receivables and loans require additional monitoring and review including specific actions to mitigate our potential loss.
Total criticized exposures increased $203 million from December 31, 2016, to $2.9 billion at March 31, 2017. The increase was primarily due to the downgrade of one account within the commercial automotive portfolio.

83

Management's Discussion and Analysis
Ally Financial Inc. • Form 10-Q


The following table presents the percentage of total commercial criticized finance receivables and loans by industry concentration. These finance receivables and loans within our automotive and Corporate Finance portfolios are reported at gross carrying value.
 

March 31, 2017
 
December 31, 2016
Industry




Automotive

81.6
%

81.2
%
Services

6.6


6.3

Electronics

2.5


4.2

Other

9.3


8.3

Total commercial criticized finance receivables and loans
 
100.0
%
 
100.0
%
Allowance for Loan Losses
The following tables present an analysis of the activity in the allowance for loan losses on finance receivables and loans.
Three months ended March 31, 2017 ($ in millions)

Consumer automotive

Consumer mortgage

Total consumer

Commercial

Total
Allowance at January 1, 2017

$
932


$
91


$
1,023


$
121


$
1,144

Charge-offs (a)

(341
)

(9
)

(350
)



(350
)
Recoveries

90


7


97




97

Net charge-offs

(251
)

(2
)

(253
)



(253
)
Provision for loan losses

267


(3
)

264


7


271

Other (b)

(7
)



(7
)



(7
)
Allowance at March 31, 2017

$
941


$
86


$
1,027


$
128


$
1,155

Allowance for loan losses to finance receivables and loans outstanding at March 31, 2017 (c)

1.4
%

0.8
%

1.3
%

0.3
%

1.0
%
Net charge-offs to average finance receivables and loans outstanding for the three months ended March 31, 2017

1.5
%

0.1
%

1.3
%

%

0.9
%
Allowance for loan losses to total nonperforming finance receivables and loans at March 31, 2017 (c)

164.3
%

82.2
%

151.6
%

106.2
%

144.8
%
Ratio of allowance for loan losses to net charge-offs at March 31, 2017

0.9


10.2


1.0


n/m


1.1

n/m = not meaningful
(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 included in our 2016 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.
(c)
Coverage percentages are based on the allowance for loan losses related to finance receivables and loans excluding those loans held at fair value as a percentage of the gross carrying value.

84

Management's Discussion and Analysis
Ally Financial Inc. • Form 10-Q


Three months ended March 31, 2016 ($ in millions)

Consumer automotive

Consumer mortgage

Total consumer

Commercial

Total
Allowance at January 1, 2016

$
834


$
114


$
948


$
106


$
1,054

Charge-offs (a)

(253
)

(10
)

(263
)



(263
)
Recoveries

80


4


84




84

Net charge-offs

(173
)

(6
)

(179
)



(179
)
Provision for loan losses

207


7


214


6


220

Other (b)

(18
)



(18
)



(18
)
Allowance at March 31, 2016

$
850


$
115


$
965


$
112


$
1,077

Allowance for loan losses to finance receivables and loans outstanding at March 31, 2016 (c)

1.3
%

1.1
%

1.3
%

0.3
%

1.0
%
Net charge-offs to average finance receivables and loans outstanding for the three months ended March 31, 2016

1.1
%

0.3
%

1.0
%

%

0.6
%
Allowance for loan losses to total nonperforming finance receivables and loans at March 31, 2016 (c)

172.9
%

99.0
%

158.8
%

123.3
%

154.2
%
Ratio of allowance for loan losses to net charge-offs at March 31, 2016

1.2


4.4


1.3


n/m


1.5

n/m = not meaningful
(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 included in our 2016 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.
(c)
Coverage percentages are based on the allowance for loan losses related to finance receivables and loans excluding those loans held at fair value as a percentage of the gross carrying value.
The allowance for consumer loan losses at March 31, 2017, increased $62 million compared to March 31, 2016. The increase was primarily due to higher reserve requirements reflecting the changing composition of the consumer automotive portfolio to a more profitable mix of business consistent with Ally’s underwriting strategy and higher loan balances in our consumer portfolios. This increase was partially offset by lower reserve balances in our consumer mortgage portfolios.
The allowance for commercial loan losses increased $16 million at March 31, 2017, compared to March 31, 2016, driven by higher loan balances within our commercial portfolios.
Allowance for Loan Losses by Type
The following table summarizes the allocation of the allowance for loan losses by product type.


2017

2016
March 31, ($ in millions)

Allowance for loan losses
 
Allowance as a % of loans outstanding
 
Allowance as a % of total allowance for loan losses
 
Allowance for loan losses
 
Allowance as a % of loans outstanding
 
Allowance as a % of total allowance for loan losses
Consumer


















Consumer automotive

$
941


1.4
%

81.5
%

$
850


1.3
%

78.9
%
Consumer mortgage

 
 
 
 
 
 
 
 
 
 
 
Mortgage Finance

11


0.1


1.0


18


0.2


1.7

Mortgage — Legacy

75


2.9


6.4


97


3.0


9.0

Total consumer mortgage

86


0.8


7.4


115


1.1


10.7

Total consumer loans

1,027


1.3


88.9


965


1.3


89.6

Commercial


















Commercial and industrial


















Automotive

33


0.1


2.8


31


0.1


2.9

Other

70


2.0


6.1


57


2.0


5.3

Commercial real estate — Automotive

25


0.6


2.2


24


0.7


2.2

Total commercial loans

128


0.3


11.1


112


0.3


10.4

Total allowance for loan losses

$
1,155


1.0


100.0
%

$
1,077


1.0


100.0
%

85

Management's Discussion and Analysis
Ally Financial Inc. • Form 10-Q


Provision for Loan Losses
The following table summarizes the provision for loan losses by product type.


Three months ended March 31,
($ in millions)

2017

2016
Consumer




Consumer automotive

$
267


$
207

Consumer mortgage




Mortgage Finance

1


3

Mortgage — Legacy

(4
)

4

Total consumer mortgage

(3
)

7

Total consumer loans

264


214

Commercial




Commercial and industrial




Automotive



1

Other

6


4

Commercial real estate — Automotive

1


1

Total commercial loans

7


6

Total provision for loan losses

$
271


$
220

The provision for consumer loan losses increased $50 million for the three months ended March 31, 2017, compared to 2016. The increase during the three months ended March 31, 2017, is primarily due to higher net charge-offs in our consumer automotive portfolio as a result of our strategy to originate a more profitable mix of business consistent with Ally’s underwriting strategy. The increase was partially offset by lower reserve requirements in our consumer automotive portfolio, lower portfolio growth in our Mortgage Finance portfolio, and lower net charge-offs in our legacy mortgage portfolio.
The provision for commercial loan losses was $7 million for the three months ended March 31, 2017, compared to $6 million for the same period in 2016.
Lease Residual Risk Management
We are exposed to residual risk on vehicles in the consumer lease portfolio. This lease residual risk represents the possibility that the actual proceeds realized upon the sale of returned vehicles will be lower than the projection of these values used in establishing the pricing at lease inception. For information on our valuation of automotive lease residuals including periodic revisions through adjustments to depreciation expense based on current and forecasted market conditions, refer to the section titled Critical Accounting EstimatesValuation of Automotive Lease Assets and Residuals within the MD&A included in our 2016 Annual Report on Form 10-K.
Lease Vehicle Terminations and Remarketing
The following table summarizes the volume of lease terminations and average gain or loss per vehicle, as well as our methods of vehicle sales at lease termination, stated as a percentage of total lease vehicle disposals.
 
 
Three months ended March 31,
 
 
2017
 
2016
Off-lease vehicles terminated (in units)

77,761


78,820

Average (loss) gain per vehicle ($ per unit)

$
(45
)

$
700

Method of vehicle sales




Auction




Internet

57
%

57
%
Physical

13


13

Sale to dealer, lessee, and other

30


30

The number of off-lease vehicles remarketed during the three months ended March 31, 2017, decreased slightly compared to the same period in 2016. The residual risk associated with our operating lease portfolio should continue to decline as the number of lease terminations continues to outpace lease originations as a result of the runoff of our GM lease portfolio.

86

Management's Discussion and Analysis
Ally Financial Inc. • Form 10-Q


We recognized an average loss per vehicle of $45 during the three months ended March 31, 2017, due to declining used vehicle values, which were more pronounced in the car market. We expect used vehicle values to continue to decline in the near term, and also expect the mix of trucks and sport utility vehicles in our future lease terminations to increase. For more information on our investment in operating leases, refer to Note 9 to the Condensed Consolidated Financial Statements, and Note 1 to the Consolidated Financial Statements in our 2016 Annual Report on Form 10-K.
Lease Portfolio Mix
We monitor the concentration of our outstanding operating leases. The following table presents the mix of leased vehicles by type, based on volume of units.
March 31,

2017

2016
Car

28
%

37
%
Truck

19


14

Sport utility vehicle

53


49

Market Risk
Our automotive financing, mortgage, and insurance activities give rise to market risk representing the potential loss in the fair value of assets or liabilities and earnings caused by movements in market variables, such as interest rates, foreign-exchange rates, equity prices, market perceptions of credit risk, and other market fluctuations that affect the value of securities, assets held-for-sale, and operating leases. We are exposed to interest rate risk arising from changes in interest rates related to financing, investing, and cash management activities. More specifically, we have entered into contracts to provide financing and to retain various assets related to securitization activities all of which are exposed in varying degrees to changes in value due to movements in interest rates. Interest rate risk arises from the mismatch between assets and the related liabilities used for funding. We enter into various financial instruments, including derivatives, to maintain the desired level of exposure to the risk of interest rate and other fluctuations. Refer to Note 19 to the Condensed Consolidated Financial Statements for further information.
We are also exposed to some foreign-currency risk arising from foreign-currency denominated assets and liabilities, primarily in Canada. We enter into hedges to mitigate foreign exchange risk.
We also have exposure to equity price risk, primarily in our Insurance operations, which invests in equity securities that are subject to price risk influenced by capital market movements. We enter into equity options to economically hedge our exposure to the equity markets. Additionally, we have exposure to equity price risk related to certain share-based compensation programs.
Although the diversity of our activities from our complementary lines of business may partially mitigate market risk, we also actively manage this risk. We maintain risk management control systems to monitor interest rates, foreign-currency exchange rates, equity price risks, and any of their related hedge positions. Positions are monitored using a variety of analytical techniques including market value, sensitivity analysis, and value at risk models.
Net Financing Revenue Sensitivity Analysis
Interest rate risk represents our most significant exposure to market risk. We actively monitor the level of exposure so that movements in interest rates do not adversely affect future earnings. We use net financing revenue sensitivity analysis as our primary metric to measure and manage the interest rate sensitivities of our financial instruments.
We prepare our forward-looking baseline forecasts of net financing revenue taking into consideration anticipated future business growth, asset/liability positioning, and interest rates based on the implied forward curve. During the first quarter of 2017 we implemented a dynamic pass-through modeling assumption on our retail liquid products deposits portfolio, whereby deposit pass-through levels increase as the absolute level of market interest rates rise. As a result, our baseline forecast assumes a medium-term deposit beta of 30% to 50%, steadily increasing to approximately 75% over the longer term. We continually monitor industry and competitive repricing activity along with other market factors when contemplating deposit pricing actions.
Simulations are used to assess changes in net financing revenue in multiple interest rates scenarios relative to the baseline forecast. The changes in net financing revenue relative to the baseline are defined as the sensitivity. Our simulation incorporates contractual cash flows and repricing characteristics for all assets, liabilities and off-balance sheet exposures and incorporates the effects of changing interest rates on the prepayment and attrition rates of certain assets and liabilities. The analysis is highly dependent upon a variety of assumptions including the repricing characteristics of deposits with noncontractual maturities. Our simulation does not assume any specific future actions are taken to mitigate the impacts of changing interest rates. Relative to our baseline forecast, which is based on the implied forward curve, our net financing revenue over the next twelve months would increase by $16 million if interest rates remain unchanged.
The net financing revenue sensitivity tests measure the potential change in our pretax net financing revenue over the following twelve months. A number of alternative rate scenarios are tested, including immediate and gradual parallel shocks to both current spot rates and the market forward curve. We also evaluate nonparallel shocks to interest rates and stresses to certain term points on the yield curve in isolation to capture and monitor a number of risk types.

87

Management's Discussion and Analysis
Ally Financial Inc. • Form 10-Q


Our twelve-month pretax net financing revenue sensitivity based on the market forward-curve was as follows.
 
 
March 31, 2017
 
December 31, 2016
Change in interest rates, ($ in millions)
 
Instantaneous
 
Gradual (a)
 
Instantaneous
 
Gradual (a)
-100 basis points
 
$
3

 
$
(21
)
 
$
46

 
$
(14
)
+100 basis points
 
(52
)
 
(21
)
 
(62
)
 
(2
)
+200 basis points
 
(171
)
 
(67
)
 
(153
)
 
(19
)
(a)
Gradual changes in interest rates are recognized over 12 months.
Implied forward rates have increased since December 31, 2016, and are reflected in our baseline net financing revenue projections. We remain moderately liability-sensitive as of March 31, 2017, in the upward interest rate shock scenarios as our simulation models assume liabilities will initially reprice faster than assets. The shift to a less liability-sensitive position as of March 31, 2017, is primarily due to higher variable-rate commercial loan balances, partially offset by an increase in our net receive-fixed interest rate swaps position.
The exposure in the downward interest rate shock scenario continues to benefit net financing revenue, shifting closer to a neutral position as of March 31, 2017. The impact of a downward shock scenario is less favorable than the prior period primarily due to the impact of variable-rate commercial loans.
The future repricing behavior of retail deposit liabilities, particularly non-maturity deposits, remains a significant driver of interest rate sensitivity. Our upward interest rate shock scenarios assume a longer term liquid products deposit beta of approximately 75%. We continue to believe our deposits may ultimately be less sensitive to interest rate changes, which would reduce our overall exposure to rising interest rate shocks. Assuming a static liquid products retail deposit beta of 50% would result in a consolidated interest rate risk position that is asset sensitive in the upward interest rate shock scenarios.
Our pro-forma rate sensitivity assuming a static 50% deposit pass-through based on the forward-curve was as follows.


March 31, 2017

December 31, 2016
Change in interest rates, ($ in millions)

Instantaneous

Gradual (a)

Instantaneous

Gradual (a)
+100 basis points

$
45


$
22


$
77


$
50

+200 basis points

57


39


119


88

(a)
Gradual changes in interest rates are recognized over 12 months.
Our current liability-sensitive risk position is influenced by the net impact of off balance sheet hedging positions, which continue to generate positive financing revenue in the current interest rate environment. This position includes both receive-fixed interest rate swaps designated as fair value hedges of certain fixed-rate liabilities, including unsecured debt, and pay-fixed interest rate swaps designated as fair value hedges of certain retail automotive assets. The size, maturity and mix of our hedging activities change frequently as we adjust our broader asset and liability management objectives.

88

Management's Discussion and Analysis
Ally Financial Inc. • Form 10-Q


Liquidity Management, Funding, and Regulatory Capital
Overview
The purpose of liquidity management is to ensure our ability to meet loan and lease demand, debt maturities, deposit withdrawals, and other cash commitments under both normal operating conditions as well as periods of economic or financial stress. Our primary objective is to maintain cost-effective, stable and diverse sources of funding capable of sustaining the organization throughout all market cycles. Sources of funding include both retail and brokered deposits and secured and unsecured market-based funding across various maturity, interest rate, and investor profiles. Additional liquidity is available through a pool of unencumbered highly liquid securities, borrowing facilities, repurchase agreements, as well as funding programs supported by the Federal Reserve and the FHLB of Pittsburgh.
We define liquidity risk as the risk that an institution's financial condition or overall safety and soundness is adversely affected by an inability, or perceived inability, to meet its financial obligations, and to withstand unforeseen liquidity stress events. Liquidity risk can arise from a variety of institution specific or market-related events that could have a negative impact on cash flows available to the organization. Effective management of liquidity risk helps ensure an organization's preparedness to meet cash flow obligations caused by unanticipated events. Managing liquidity needs and contingent funding exposures has proven essential to the solvency of financial institutions.
The Asset-Liability Committee (ALCO) is chaired by the Corporate Treasurer and is responsible for overseeing our liquidity, funding strategies and plans, contingency funding plans, and counterparty credit exposure arising from financial transactions. Corporate Treasury is responsible for managing our liquidity positions within prudent operating guidelines and targets approved by ALCO and the Risk and Compliance Committee of the Ally Board of Directors. As part of managing liquidity risk, we prepare periodic forecasts depicting anticipated funding needs and sources of funds with oversight and monitoring by the Liquidity Risk group within Corporate Treasury. Corporate Treasury executes our funding strategies and manages liquidity under baseline economic projections as well as more severely stressed macroeconomic environments.
Funding Strategy
Liquidity and ongoing profitability are largely dependent on the timely and cost-effective access to retail deposits and funding in different segments of the capital markets. Our funding strategy largely focuses on the development of diversified funding sources across a broad base of depositors, lenders, and investors to meet liquidity needs throughout different market cycles, including periods of financial distress. These funding sources include retail and brokered deposits, committed credit facilities, public and private asset-backed securitizations, wholesale and retail unsecured debt, FHLB advances, and whole-loan sales. We also supplement these funding sources with a modest amount of short-term borrowings, including demand notes and repurchase arrangements. The diversity of our funding sources enhances funding flexibility, limits dependence on any one source, and results in a more cost-effective funding strategy over the long term. We evaluate funding markets on an ongoing basis to achieve an appropriate balance of unsecured and secured funding sources and maturity profiles.
We diversify our overall funding in order to reduce reliance on any one source of funding and to achieve a well-balanced funding portfolio across a spectrum of risk, duration, and cost-of-funds characteristics. Optimizing funding at Ally Bank continues to be a key part of our long-term liquidity strategy. We optimize our funding sources at Ally Bank by growing retail deposits, maintaining active public and private securitization programs, managing a prudent maturity profile of our brokered deposit portfolio, utilizing repurchase agreements, and continuing to access funds from the FHLB.
Since becoming a BHC in December 2008, a significant portion of asset originations have been directed to Ally Bank in order to reduce parent company exposures and funding requirements, and to utilize our growing consumer deposit-taking capabilities. This has allowed us to use bank funding for a wider array of our automotive finance assets and to provide a sustainable long-term funding channel for the business, while also improving the cost of funds for the enterprise. On March 7, 2016, Ally Bank received approval from the Federal Reserve to become a state member bank. Ally Bank is now regulated by the FRB through the Federal Reserve Bank of Chicago, as well as the Utah Department of Financial Institutions. In addition, in connection with the application for membership in the Federal Reserve System, Ally Bank made commitments to the FRB relating to capital, liquidity, and business plan requirements. These commitments are consistent with the prior requirements under the now-terminated Capital and Liquidity Maintenance Agreement with the FDIC, including the requirement to maintain capital at a level such that Ally Bank’s Tier 1 leverage ratio is at least 15%. For this purpose, the Tier 1 leverage ratio is determined in accordance with the FRB's regulations related to capital adequacy. Continuation of the Ally Bank Tier 1 leverage ratio requirement could further restrict balance sheet growth within Ally Bank and could unfavorably impact liquidity at AFI. We continue to have ongoing dialogue with our regulators about a more normalized level of capital maintenance.
Liquidity Risk Management
Multiple metrics are used to frame the level of liquidity risk, manage the liquidity position, and identify related trends. These metrics include coverage ratios and stress tests that measure the sufficiency of the liquidity portfolio, stability ratios that measure longer-term structural liquidity, and concentration ratios that ensure prudent funding diversification. In addition, we have established internal management routines designed to review all aspects of liquidity and funding plans, evaluate the adequacy of liquidity buffers, review stress testing results, and assist management in the execution of its funding strategy and risk management accountabilities.

89

Management's Discussion and Analysis
Ally Financial Inc. • Form 10-Q


We maintain available liquidity in the form of cash, unencumbered highly liquid securities, and available committed credit facility capacity that, taken together, would allow us to operate and to meet our contractual and contingent obligations in the event that market-wide disruptions and enterprise-specific events disrupt normal access to funding. The available liquidity is held at various entities and considers regulatory restrictions and tax implications that may limit our ability to transfer funds across entities. The following table summarizes our total available liquidity.
March 31, 2017 ($ in millions)
 
 
Unencumbered highly liquid U.S. federal government and U.S. agency securities
 
$
13,128

Liquid cash and equivalents
 
3,811

Committed funding facilities (a)
 
 
Total capacity
 
16,935

Outstanding
 
15,930

Unused capacity (b)
 
1,005

Total available liquidity
 
$
17,944

(a)
Committed funding facilities include both on- and off-balance sheet facilities.
(b)
Funding from committed secured facilities is available on request in the event excess collateral resides in certain facilities or is available to the extent incremental collateral is available and contributed to the facilities.
As of March 31, 2017, assuming a long-term capital markets stress, we expect that our available liquidity would allow us to continue to fund all planned loan originations and meet all of our financial obligations for more than 36 months, assuming no issuance of unsecured debt or term securitizations.
In addition, our Modified Liquidity Coverage Ratio exceeded 100% at March 31, 2017. Refer to Note 18 to the Condensed Consolidated Financial Statements for further discussion of our liquidity requirements.
Deposits
Ally Bank gathers retail deposits directly from customers through direct banking via the internet, telephone, mobile, and mail channels. These retail deposits provide our Automotive Finance, Mortgage Finance, and Corporate Finance operations with a stable and low-cost funding source. Retail deposit growth is a key driver of optimizing funding costs and reducing reliance on capital markets-based funding. We believe deposits provide a stable, low-cost source of funds that are less sensitive to interest rate changes, market volatility, or changes in credit ratings when compared to other funding sources. We have continued to expand our deposit gathering efforts through both direct and indirect marketing channels. Current retail deposit offerings consist of a variety of products including CDs, savings accounts, money market accounts, IRA deposit products, as well as an interest checking product. In addition, we utilize brokered deposits, which are obtained through third-party intermediaries, including a deposit related to TradeKing customer cash balances.
The following table shows Ally Bank's number of accounts and our deposit balances by type as of the end of each quarter since 2016.
 
1st Quarter 2017
4th Quarter 2016
3rd Quarter 2016
2nd Quarter 2016
1st Quarter 2016
Number of retail bank accounts (in thousands)
2,366

2,269

2,203

2,134

2,062

Deposits ($ in millions)
 
 
 
 
 
Retail
$
69,971

$
66,584

$
63,880

$
61,239

$
58,977

Brokered (a)
14,327

12,187

11,570

11,269

10,979

Other (b)
188

251

294

294

309

Total deposits
$
84,486

$
79,022

$
75,744

$
72,802

$
70,265

(a)
Includes a deposit at Ally Bank related to TradeKing customer cash balances.
(b)
Other deposits include mortgage escrow, dealer, and other deposits.
During the first three months of 2017, our deposit base grew $5.5 billion. The growth in total deposits has been primarily attributable to our retail deposit portfolio, particularly within savings and money market accounts. Strong retention rates and customer acquisition continue to drive growth in retail deposits. Our brokered deposit portfolio has also continued to grow, driven by the addition of TradeKing customer cash and an increase in brokered certificates of deposit. Brokered deposit balances include $1.2 billion and $200 million of customer cash balances related to TradeKing deposited at Ally Bank by a third party at March 31, 2017, and December 31, 2016, respectively. Refer to Note 13 to the Condensed Consolidated Financial Statements for a summary of deposit funding by type.
Secured Financings
In addition to building a larger deposit base, secured funding continues to be a significant source of financing. Securitization has proven to be a reliable and cost-effective funding source, and we continue to remain active in the well-established securitization markets to finance our automotive loan products. During the first three months of 2017, we raised $3.0 billion through the completion of term securitization transactions backed by retail automotive loans and dealer floorplan automotive assets, which includes $1.1 billion through the completion of

90

Management's Discussion and Analysis
Ally Financial Inc. • Form 10-Q


one off-balance sheet securitization transaction backed by retail automotive loans. Additionally, for retail automotive loans and lease notes, the term structure of the transaction locks in funding for a specified pool of loans and leases for the life of the underlying asset, creating an effective tool for managing interest rate and liquidity risk.
We manage secured funding execution risk by maintaining a diverse investor base and available committed credit facility capacity. We have access to private committed funding facilities, the largest of which is a syndicated credit facility of sixteen lenders secured by automotive receivables. This facility can fund automotive retail and dealer floorplan loans, as well as leases. During March 2016, this facility was renewed with $11.0 billion of capacity and the maturity was extended to March 2018. In March 2017, we reduced the capacity of this facility to $10.0 billion. In the event this facility is not renewed at maturity, the outstanding debt will be repaid over time as the underlying collateral amortizes. At March 31, 2017, there was $9.8 billion outstanding under this facility. Our ability to access the unused capacity in the secured facility depends on the availability of eligible assets to collateralize the incremental funding and, in some instances, on the execution of interest rate hedges.
The total capacity in our committed secured funding facilities is provided by banks through private transactions. The committed secured funding facilities can be revolving in nature and allow for additional funding during the commitment period, or they can be amortizing and not allow for any further funding after the closing date. At March 31, 2017, all of our $15.7 billion of secured committed capacity was revolving. Our revolving facilities generally have an original tenor ranging from 364 days to two years. As of March 31, 2017, we had $3.1 billion of committed funding capacity from revolving facilities with a remaining tenor greater than 364 days. In addition to our syndicated revolving credit facility, we also maintain various bilateral and multilateral secured credit facilities that fund our Automotive Finance operations. These are primarily private securitization facilities that fund a specific pool of automotive assets.
We also have access to funding through advances with the FHLB. These advances are primarily secured by consumer mortgage and commercial real estate automotive finance receivables and loans. As of March 31, 2017, we had pledged $16.8 billion of assets and investment securities to the FHLB resulting in $12.1 billion in total funding capacity with $8.0 billion of debt outstanding.
Unsecured Financings
We obtain unsecured funding from the sale of floating-rate demand notes under our Demand Notes program. The holder has the option to require us to redeem these notes at any time without restriction. Demand Notes outstanding were $3.7 billion at March 31, 2017. We also have short-term and long-term unsecured debt outstanding from retail term note programs. These programs generally consist of callable fixed-rate instruments with fixed-maturity dates. There were $450 million of retail term notes outstanding at March 31, 2017. The remainder of our unsecured debt is composed of institutional term debt. Refer to Note 14 to the Condensed Consolidated Financial Statements for additional information about our outstanding short-term borrowings and long-term unsecured debt.
In December 2016, we closed a private unsecured committed funding facility under which we have access to a term facility with a commitment of $850 million, and a revolving facility with a commitment of $400 million. In January 2017, both the revolving facility and term facility were fully drawn.
Other Secured and Unsecured Short-term Borrowings
We have access to repurchase agreements. A repurchase agreement is a transaction in which the firm sells financial instruments to a buyer, typically in exchange for cash, and simultaneously enters into an agreement to repurchase the same or substantially the same financial instruments from the buyer at a stated price plus accrued interest at a future date. The financial instruments sold in repurchase agreements include U.S. government and federal agency obligations, and certificated residual interests related to asset-backed securitizations. As of March 31, 2017, we had $1.6 billion debt outstanding under repurchase agreements.
Additionally, we have access to the Federal Reserve Bank Discount Window and can borrow funds to meet short-term liquidity demands. However, the Federal Reserve Bank is not a primary source of funding for day to day business. Instead, it is a liquidity source that can be accessed in stressed environments or periods of market disruption. We have assets pledged and restricted as collateral to the Federal Reserve Bank totaling $2.3 billion. We had no debt outstanding with the Federal Reserve as of March 31, 2017.
Recent Funding Developments
During the first three months of 2017, we accessed the public and private markets to execute secured funding transactions, whole-loan sales, unsecured funding transactions, and funding facility renewals totaling $4.3 billion. Key funding highlights from January 1, 2017, to date were as follows:
We closed, renewed, increased, and/or extended $1.3 billion in U.S. secured credit facilities during the three months ended March 31, 2017.
We continued to access the public and private term asset-backed securitization markets raising $3.0 billion during the three months ended March 31, 2017. During the quarter, we raised approximately $1.3 billion through securitizations backed by retail automotive loans. We also raised $650 million through a public securitization backed by dealer floorplan automotive assets, which represented our first floorplan securitization since 2015. Additionally, we raised approximately $1.1 billion through an off-balance sheet public securitization backed by retail automotive loans.

91

Management's Discussion and Analysis
Ally Financial Inc. • Form 10-Q


Funding Sources
The following table summarizes our sources of funding and the amount outstanding under each category for the periods shown.
 
 
March 31, 2017
 
December 31, 2016
($ in millions)
 
On-balance sheet funding
 
% Share of funding
 
On-balance sheet funding
 
% Share of funding
Secured financings

$
37,010

 
26
 
$
43,140

 
30
Institutional term debt and unsecured bank funding

18,022

 
12
 
19,276

 
13
Retail debt programs (a)

4,101

 
3
 
4,070

 
3
Total debt (b)

59,133

 
41
 
66,486

 
46
Deposits

84,486

 
59
 
79,022

 
54
Total on-balance sheet funding

$
143,619

 
100
 
$
145,508

 
100
(a)
Includes $450 million and $448 million of retail term notes at March 31, 2017, and December 31, 2016, respectively.
(b)
Excludes fair value adjustment as described in Note 19 to the Condensed Consolidated Financial Statements.
Refer to Note 14 to the Condensed Consolidated Financial Statements for a summary of the scheduled maturity of long-term debt at March 31, 2017.
Cash Flows
The following summarizes the activity reflected on the Condensed Consolidated Statement of Cash Flows. While this information may be helpful to highlight certain macro trends and business strategies, the cash flow analysis may not be as relevant when analyzing changes in our net earnings and net assets. We believe that in addition to the traditional cash flow analysis, the discussion related to liquidity, dividends, and ALM herein may provide more useful context in evaluating our liquidity position and related activity.
Net cash provided by operating activities was $1.2 billion for both the three months ended March 31, 2017, and 2016, respectively. Activity was largely consistent year-over-year, as cash flows from our consumer and commercial lending activities offset declines in our leasing business.
Net cash used in investing activities was $0.7 billion for the three months ended March 31, 2017, compared to net cash provided by investing activities of $0.7 billion for the three months ended March 31, 2016. The change was the result of a decrease in net cash inflows from purchases, sales, originations, and repayments of finance receivables and loans of $0.9 billion as loan originations and purchases outpaced repayments and loan sales during the three months ended March 31, 2017. Also contributing to the decrease was an increase in net cash outflows from purchases, sales, maturities, and repayments of available-for-sale securities of $0.9 billion. This was partially offset by an increase of $0.5 billion in net cash provided by nonmarketable equity investments due primarily to lower holdings in our investment in FHLB stock in 2017, compared to the purchase of FRB stock in 2016.
Net cash used in financing activities for the three months ended March 31, 2017, was $2.1 billion, compared to $3.2 billion for the three months ended March 31, 2016. The reduction in net cash used in financing activities was primarily attributable to lower net repayments of long-term debt of $3.1 billion for the three months ended March 31, 2017, compared to $4.2 billion for the three months ended March 31, 2016. The net increase in cash flows associated with deposit borrowings of approximately $1.7 billion was largely offset by decreases in short-term borrowings of $1.6 billion.
Capital Planning and Stress Tests
As a BHC with $50 billion or more of consolidated assets, Ally is required to conduct semi-annual company-run stress tests, is subject to an annual supervisory stress test conducted by the FRB, and must submit an annual capital plan to the FRB.
Ally’s capital plan must include a description of all planned capital actions over a nine-quarter planning horizon. The capital plan must also include a discussion of how Ally will maintain capital above the minimum regulatory capital ratios under baseline, adverse, and severely adverse economic scenarios, and serve as a source of strength to Ally Bank. The FRB must approve Ally's capital plan before Ally may take any capital action. Even with an approved capital plan, Ally must seek the approval of the FRB before making a capital distribution if, among other factors, Ally would not meet its regulatory capital requirements after making the proposed capital distribution.
As part of the 2016 Comprehensive Capital Analysis and Review (CCAR) process, we received approval for capital actions including a quarterly cash dividend of $0.08 per share of our common stock, subject to quarterly approval by the Board of Directors, and the ability to repurchase up to $700 million of our common stock from time to time through the second quarter of 2017. Our first common stock dividend was paid during the third quarter of 2016 and we paid a cash dividend of $0.08 per share on our common stock during each subsequent quarter. On April 14, 2017, the Ally Board of Directors declared a quarterly cash dividend payment of $0.08 per share on all common stock. Refer to Note 26 to the Condensed Consolidated Financial Statements for further information regarding this common share dividend. Additionally, the Ally Board of Directors authorized a common stock repurchase program of up to $700 million beginning in the third quarter of 2016 and continuing through the second quarter of 2017. Under this program, we have repurchased $495 million, or 25,140,190 shares of common stock, which reduced total shares by approximately 5.2% since inception. At March 31, 2017, we had 462,193,424 shares of common stock outstanding.

92

Management's Discussion and Analysis
Ally Financial Inc. • Form 10-Q


Ally submitted its 2017 capital plan on April 5, 2017, with capital actions including distributions to common shareholders through share repurchases and cash dividends. 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 of and non-objection to the actions that we propose each year in our annual capital plan. We expect to receive the FRB’s response (either a non-objection or objection) to the capital plan submitted by June 30, 2017.
In January 2017, the FRB finalized a rule amending the capital planning and stress testing rules, effective for the 2017 cycle. The final rule, among other things, revised the capital plan rule to no longer subject large and noncomplex firms, including Ally, to the provisions of the rule whereby the FRB may object to a capital plan on the basis of qualitative deficiencies in the firm’s capital planning process. Under the final rule, the qualitative assessment of Ally’s capital plan is conducted outside of the CCAR process, through the supervisory review process, and Ally’s reporting requirements have been modified to reduce certain reporting burdens related to capital planning and stress testing. The final rule also decreased the de minimis threshold for the amount of capital that Ally could distribute to shareholders outside of an approved capital plan without seeking prior approval of the FRB.
Regulatory Capital
Refer to Note 18 to the Condensed Consolidated Financial Statements and the section titled Selected Financial Data within this MD&A.
Credit Ratings
The cost and availability of unsecured financing are influenced by credit ratings, which are intended to be an indicator of the creditworthiness of a particular company, security, or obligation. Lower ratings result in higher borrowing costs and reduced access to capital markets. This is particularly true for certain institutional investors whose investment guidelines require investment-grade ratings on term debt and the two highest rating categories for short-term debt (particularly money market investors).
Nationally recognized statistical rating organizations rate substantially all our debt. The following table summarizes our current ratings and outlook by the respective nationally recognized rating agencies.
Rating agency

Short-term

Senior unsecured debt

Outlook

Date of last action
Fitch

B

BB+

Stable

September 28, 2016 (a)
Moody’s

Not Prime

Ba3

Stable

October 20, 2015 (b)
S&P

B

BB+

Stable

October 12, 2016 (c)
DBRS

R-3

BBB (Low)

Stable

May 3, 2017 (d)
(a)
Fitch affirmed our senior unsecured debt rating of BB+, affirmed our short-term rating of B, and maintained a Stable outlook on September 28, 2016.
(b)
Moody's upgraded our senior unsecured debt rating to Ba3 from B1, affirmed our short-term rating of Not Prime, and changed the outlook to Stable on October 20, 2015. Effective December 1, 2014, we determined to not renew our contractual arrangement with Moody's related to their providing of our corporate family, senior debt, and short-term ratings. Notwithstanding this, Moody's has determined to continue to provide these ratings on a discretionary basis. However, Moody's has no obligation to continue to provide these ratings, and could cease doing so at any time.
(c)
Standard & Poor's affirmed our senior unsecured debt rating of BB+, affirmed our short-term rating of B, and changed the outlook from Positive to Stable on October 12, 2016.
(d)
DBRS affirmed our short-term rating of R-3, affirmed our senior unsecured debt rating of BBB (Low), and maintained a Stable outlook on all ratings on May 3, 2017.
Off-balance Sheet Arrangements
Refer to Note 10 to the Condensed Consolidated Financial Statements.
Critical Accounting Estimates
We identified critical accounting estimates that, as a result of judgments, uncertainties, uniqueness, and complexities of the underlying accounting standards and operations involved could result in material changes to our financial condition, results of operations, or cash flows under different conditions or using different assumptions.
Our most critical accounting estimates are as follows.
Allowance for loan losses
Valuation of automotive lease assets and residuals
Fair value of financial instruments
Legal and regulatory reserves
Determination of provision for income taxes
During 2017, we did not substantively change any material aspect of our overall methodologies and processes used in developing the above estimates from what was described in the Consolidated Financial Statements in our 2016 Annual Report on Form 10-K.

93

Management's Discussion and Analysis
Ally Financial Inc. • Form 10-Q


Refer to Note 1 to the Condensed Consolidated Financial Statements for further discussion regarding the methodology used in calculating the provision for income taxes for interim financial reporting.
Statistical Table
The accompanying supplemental information should be read in conjunction with the more detailed information, including our Condensed Consolidated Financial Statements and the notes thereto, which appears elsewhere in this Quarterly Report.
Net Interest Margin Table
The following table presents an analysis of net yield on interest-earning assets (or net interest margin) excluding discontinued operations for the periods shown.
 
 
2017
 
2016
 
Increase (decrease) due to
Three months ended March 31, ($ in millions)
 
Average
balance (a)
 
Interest income/
Interest expense
 
Yield/rate
 
Average
balance (a)
 
Interest income/
Interest expense
 
Yield/rate
 
Volume
 
Yield/rate
 
Total
Assets
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing cash and cash equivalents
 
$
2,674

 
$
5

 
0.76
%
 
$
2,867

 
$
3

 
0.42
%
 
$

 
$
2

 
$
2

Investment securities (b)
 
20,481

 
126

 
2.49

 
17,594

 
102

 
2.33

 
17

 
7

 
24

Loans held-for-sale, net
 

 

 

 
35

 

 

 

 

 

Finance receivables and loans, net (c) (d)
 
117,974

 
1,368

 
4.70

 
111,525

 
1,235

 
4.45

 
71

 
62

 
133

Investment in operating leases, net (e)
 
10,931

 
154

 
5.71

 
15,638

 
259

 
6.66

 
(78
)
 
(27
)
 
(105
)
Other earning assets
 
817

 
8

 
3.97

 

 

 

 
8

 

 
8

Total interest-earning assets
 
152,877

 
1,661

 
4.41

 
147,659

 
1,599

 
4.36

 


 


 
62

Noninterest-bearing cash and cash equivalents
 
1,100

 
 
 
 
 
1,841

 
 
 
 
 
 
 
 
 
 
Other assets
 
8,013

 
 
 
 
 
8,929

 
 
 
 
 
 
 
 
 
 
Allowance for loan losses
 
(1,145
)
 
 
 
 
 
(1,060
)
 
 
 
 
 
 
 
 
 
 
Total assets
 
$
160,845

 
 
 
 
 
$
157,369

 
 
 
 
 
 
 
 
 
 
Liabilities
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing deposit liabilities
 
$
82,160

 
$
231

 
1.14
%
 
$
68,148

 
$
193

 
1.14
%
 
$
40

 
$
(2
)
 
$
38

Short-term borrowings
 
8,223

 
27

 
1.33

 
5,609

 
13

 
0.93

 
6

 
8

 
14

Long-term debt (d)
 
52,549

 
424

 
3.27

 
64,841

 
442

 
2.74

 
(84
)
 
66

 
(18
)
Total interest-bearing liabilities
 
142,932

 
682

 
1.94

 
138,598

 
648

 
1.88

 


 


 
34

Noninterest-bearing deposit liabilities
 
93

 
 
 
 
 
92

 
 
 
 
 
 
 
 
 
 
Total funding sources
 
143,025

 
682

 
1.93

 
138,690

 
648

 
1.88

 
 
 
 
 
 
Other liabilities
 
4,383

 
 
 
 
 
5,053

 
 
 
 
 
 
 
 
 
 
Total liabilities
 
147,408

 
 
 
 
 
143,743

 
 
 
 
 
 
 
 
 
 
Total equity
 
13,437

 
 
 
 
 
13,626

 
 
 
 
 
 
 
 
 
 
Total liabilities and equity
 
$
160,845

 
 
 
 
 
$
157,369

 
 
 
 
 
 
 
 
 
 
Net financing revenue and other interest income
 
 
 
$
979

 
 
 
 
 
$
951

 
 
 


 


 
$
28

Net interest spread (f)
 
 
 
 
 
2.47
%
 
 
 
 
 
2.48
%
 
 
 
 
 
 
Net yield on interest-earning assets (g)
 
 
 
 
 
2.60
%
 
 
 
 
 
2.59
%
 
 
 
 
 
 
(a)
Average balances are calculated using a combination of monthly and daily average methodologies.
(b)
Amounts for the three months ended March 31, 2016, were adjusted to include previously excluded equity investments with an average balance of $738 million and related income on equity investments of $4 million. Yields on available-for-sale debt securities are based on fair value as opposed to amortized cost. Yields on held-to-maturity securities are based on amortized cost.
(c)
Nonperforming finance receivables and loans are included in the average balances. For information on our accounting policies regarding nonperforming status, refer to Note 1 to the Consolidated Financial Statements in our 2016 Annual Report on Form 10-K.
(d)
Includes the effects of derivative financial instruments designated as hedges.
(e)
Includes loss on sale of $3 million and gain on sale of $55 million for the three months ended March 31, 2017, and 2016, respectively. Excluding these losses or gains on sale, the annualized yield would be 5.82% and 5.25% at March 31, 2017, and 2016, respectively.
(f)
Net interest spread represents the difference between the rate on total interest-earning assets and the rate on total interest-bearing liabilities.
(g)
Net yield on interest-earning assets represents annualized net financing revenue and other interest income as a percentage of total interest-earning assets.

94

Management's Discussion and Analysis
Ally Financial Inc. • Form 10-Q


Recently Issued Accounting Standards
Refer to Note 1 to the Condensed Consolidated Financial Statements.
Cautionary Notice About Forward-Looking Statements and Other Terms
From time to time we have made, and in the future will make, forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements can be identified by the fact that they do not relate strictly to historical or current facts. Forward-looking statements often use words such as “believe,” “expect,” “anticipate,” “intend,” “pursue,” “seek,” “continue,” “estimate,” “project,” “outlook,” “forecast,” “potential,” “target,” “objective,” “trend,” “plan,” “goal,” “initiative,” “priorities,” or other words of comparable meaning or future-tense or conditional verbs such as “may,” “will,” “should,” “would,” or “could.” Forward-looking statements convey our expectations, intentions, or forecasts about future events, circumstances, or results.
This report, including any information incorporated by reference in this report, contains forward-looking statements. We also may make forward-looking statements in other documents that are filed or furnished with the SEC. In addition, we may make forward-looking statements orally or in writing to investors, analysts, members of the media, or others.
All forward-looking statements, by their nature, are subject to assumptions, risks, and uncertainties, which may change over time and many of which are beyond our control. You should not rely on any forward-looking statement as a prediction or guarantee about the future. Actual future objectives, strategies, plans, prospects, performance, conditions, or results may differ materially from those set forth in any forward-looking statement. While no list of assumptions, risks, or uncertainties could be complete, some of the factors that may cause actual results or other future events or circumstances to differ from those in forward-looking statements include:
evolving local, regional, national, or international business, economic, or political conditions, including the residual effects of the recent global economic crisis and responses to that crisis by governments, businesses, and households;
changes in laws or the regulatory or supervisory environment, including as a result of recent financial services legislation, regulation, or policies or changes in government officials or other personnel;
changes in monetary, fiscal, or trade laws or policies, including as a result of actions by government agencies, central banks, or supranational authorities;
changes in accounting standards or policies;
changes in the automotive industry or the markets for new or used vehicles;
disruptions or shifts in investor sentiment or behavior in the securities, capital, or other financial markets, including financial or systemic shocks and volatility or changes in market liquidity, interest or currency rates, or valuations;
changes in business or consumer sentiment, preferences, or behavior, including spending, borrowing, or saving by businesses or households;
changes in our corporate or business strategies, the composition of our assets, or the way in which we fund those assets;
our ability to execute our business strategy for Ally Bank, including its regulatory normalization;
our ability to optimize our automotive finance and insurance businesses and to continue diversifying into and growing other lines of business, including consumer finance, corporate finance, brokerage, and wealth management;
our ability to develop capital plans that will be approved by the FRB and our ability to implement them, including any payment of dividends or share repurchases;
our ability to effectively manage capital or liquidity consistent with evolving business or operational needs, risk management standards, and regulatory or supervisory requirements;
our ability to cost-effectively fund our business and operations, including through deposits and the capital markets;
changes in any credit rating assigned to Ally, including Ally Bank;
adverse publicity or other reputational harm to us;
our ability to develop, maintain, or market our products or services or to absorb unanticipated costs or liabilities associated with those products or services;
our ability to innovate, to anticipate the needs of current or future customers, to successfully compete, to increase or hold market share in changing competitive environments, or to deal with pricing or other competitive pressures;
the continuing profitability and viability of our dealer-centric automotive finance and insurance businesses, especially in the face of competition from captive finance companies and their automotive manufacturing sponsors;

95

Management's Discussion and Analysis
Ally Financial Inc. • Form 10-Q


our ability to appropriately underwrite loans that we originate or purchase and to otherwise manage credit risk;
changes in the credit, liquidity, or other financial condition of our customers, counterparties, service providers, or competitors;
our ability to effectively deal with economic, business, or market slowdowns or disruptions;
judicial, regulatory, or administrative investigations, proceedings, disputes, or rulings that create uncertainty for, or are adverse to, us or the financial services industry;
our ability to address stricter or heightened regulatory or supervisory requirements;
our ability to maintain secure and functional financial, accounting, technology, data processing, or other operating systems or facilities, including our capacity to withstand cyber-attacks;
the adequacy of our corporate governance, risk management framework, compliance programs, or internal controls over financial reporting, including our ability to control lapses or deficiencies in financial reporting or to effectively mitigate or manage operational risk;
the efficacy of our methods or models in assessing business strategies or opportunities or in valuing, measuring, estimating, monitoring, or managing positions or risk;
our ability to keep pace with changes in technology that affect us or our customers, counterparties, service providers, or competitors;
our ability to successfully make and integrate acquisitions;
the adequacy of our succession planning for key executives or other personnel and to attract or retain qualified employees;
natural or man-made disasters, calamities, or conflicts, including terrorist events and pandemics; or
other assumptions, risks, or uncertainties described in the Risk Factors (Part II, Item 1A herein), Management’s Discussion and Analysis of Financial Condition and Results of Operations (Part I, Item 2 herein), or the Notes to the Condensed Consolidated Financial Statements (Part I, Item 1 herein) in this Quarterly Report on Form 10-Q or described in any of the Company’s annual, quarterly or current reports.
Any forward-looking statement made by us or on our behalf speaks only as of the date that it was made. We do not undertake to update any forward-looking statement to reflect the impact of events, circumstances, or results that arise after the date that the statement was made, except as required by applicable securities laws. You, however, should consult further disclosures (including disclosures of a forward-looking nature) that we may make in any subsequent Annual Report on Form 10-K, Quarterly Report on Form 10-Q, or Current Report on Form 8-K.
Our use of the term “loans” describes all of the products associated with our direct and indirect lending activities. The specific products include loans, retail installment sales contracts, lines of credit, leases, and other financing products. The term “lend” or “originate” refers to our direct origination of loans or our purchase or acquisition of loans.
Item 3.    Quantitative and Qualitative Disclosures about Market Risk
Refer to the Market Risk section of Item 2, Management's Discussion and Analysis.

96

Controls and Procedures
Ally Financial Inc. • Form 10-Q

Item 4.    Controls and Procedures
Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures, as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended (the Exchange Act), designed to ensure that information required to be disclosed in reports filed under the Exchange Act is recorded, processed, summarized, and reported within the specified time periods. Our disclosure controls and procedures are also designed to ensure that information required to be disclosed in the reports we file and submit under the Exchange Act is accumulated and communicated to management, including our Chief Executive Officer (Principal Executive Officer) and Chief Financial Officer (Principal Financial Officer), to allow for timely decisions regarding required disclosure. There are inherent limitations to the effectiveness of any system of internal control including the possibility of human error or the circumvention or overriding of controls through individual actions or collusion. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system's objectives will be met.
As of the end of the period covered by this report, our Principal Executive Officer and Principal Financial Officer evaluated, with the participation of our management, the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act) and concluded that our disclosure controls and procedures were effective.
Changes in Internal Control over Financial Reporting
In the normal course of business, we review our controls and procedures and make enhancements or modifications intended to support the quality of our financial reporting. There were no changes in our internal control over financial reporting (as defined in Rule 13a-15(f) of the Exchange Act) that occurred during the quarter ended March 31, 2017, that have materially affected, or were reasonably likely to materially affect, our internal control over financial reporting.

97

PART II — OTHER INFORMATION
Ally Financial Inc. • Form 10-Q



Item 1.    Legal Proceedings
Refer to Note 25 to the Condensed Consolidated Financial Statements (incorporated herein by reference) for a discussion related to our legal proceedings, which supplements the discussion of legal proceedings set forth in Note 30 to the Consolidated Financial Statements in our 2016 Annual Report on Form 10-K.
Item 1A.    Risk Factors
There have been no material changes to the Risk Factors described in our 2016 Annual Report on Form 10-K.
Item 2.    Unregistered Sales of Equity Securities and Use of Proceeds
We did not have any unregistered sales of equity securities during the three months ended March 31, 2017.
Purchases of Equity Securities by the Issuer
The following table presents repurchases of our common stock, by month, for the three months ended March 31, 2017.
Three months ended March 31, 2017
 
Total number
of shares
repurchased (a)
(in thousands)
 
Weighted-average price paid per share (a) (b)
(in dollars)
 
Total number of shares repurchased as part of publicly announced program (a) (c)
(in thousands)
 
Maximum approximate dollar value of shares that may yet be repurchased under the program (a) (b) (c)
($ in millions)
January 2017
 
3,289

 
$
19.68

 
3,289

 
$
309

February 2017
 
1,845

 
22.76

 
1,845

 
267

March 2017
 
2,963

 
21.02

 
2,963

 
205

Total
 
8,097

 
20.87

 
8,097

 
 
(a)
Includes shares of common stock withheld to cover income taxes owed by participants in our share-based incentive plans.
(b)
Excludes brokerage commissions.
(c)
On July 19, 2016, we announced a common stock repurchase program of up to $700 million. The program commenced in the third quarter of 2016 and will expire on June 30, 2017.
Item 3.    Defaults upon Senior Securities
None.
Item 4.    Mine Safety Disclosures
Not applicable.
Item 5.    Other Information
None.
Item 6.    Exhibits
The exhibits listed on the accompanying Index of Exhibits are filed as a part of this report. This Index is incorporated herein by reference.

98

Signatures
Ally Financial Inc. • Form 10-Q

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, this 4th day of May, 2017.
 
 
 
Ally Financial Inc.
(Registrant)
 
 
 
/S/  CHRISTOPHER A. HALMY
 
Christopher A. Halmy
Chief Financial Officer
 
 
 
/S/  DAVID J. DEBRUNNER
 
David J. DeBrunner
Vice President, Chief Accounting Officer, and
Corporate Controller


99


Ally Financial Inc. • Form 10-Q

INDEX OF EXHIBITS
 
 
 
Exhibit
Description
Method of Filing
 
 
 
12
Computation of Ratio of Earnings to Fixed Charges
Filed herewith.
 
 
 
31.1
Certification of Principal Executive Officer pursuant to Rule 13a-14(a)/15d-14(a)
Filed herewith.
 
 
 
31.2
Certification of Principal Financial Officer pursuant to Rule 13a-14(a)/15d-14(a)
Filed herewith.
 
 
 
32
Certification of Principal Executive Officer and Principal Financial Officer pursuant to 18 U.S.C. Section 1350
Filed herewith.
 
 
 
101
Interactive Data File
Filed herewith.

100