Document

September 30,

Sport utility vehicle

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q



☑	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2019, or



☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission file number: 1-3754

ALLY FINANCIAL INC.

(Exact name of registrant as specified in its charter)



Delaware		38-0572512
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

Ally Detroit Center

500 Woodward Ave.

Floor 10, Detroit, Michigan

48226

(Address of principal executive offices)

(Zip Code)

(866) 710-4623

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act (all listed on the New York Stock Exchange):



Title of each class	Trading symbols
Common Stock, par value $0.01 per share	ALLY
8.125% Fixed Rate/Floating Rate Trust Preferred Securities, Series 2 of GMAC Capital Trust I	ALLY PRA

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☑ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☑ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.



Large accelerated filer	☑	Accelerated filer	☐	Non-accelerated filer	☐	Smaller reporting company	☐
						Emerging growth company	☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes ☐ No ☑

At November 1, 2019, the number of shares outstanding of the Registrant’s common stock was 380,068,995 shares.

Table of Contents

INDEX

Ally Financial Inc. • Form 10-Q



		Page
Part I — Financial Information
Item 1.	Financial Statements	3
	Condensed Consolidated Statement of Comprehensive Income (unaudited) for the Three and Nine Months Ended September 30, 2019, and 2018	3
	Condensed Consolidated Balance Sheet (unaudited) at September 30, 2019, and December 31, 2018	5
	Condensed Consolidated Statement of Changes in Equity (unaudited) for the Three and Nine Months Ended September 30, 2019, and 2018	7
	Condensed Consolidated Statement of Cash Flows (unaudited) for the Nine Months Ended September 30, 2019, and 2018	8
	Notes to Condensed Consolidated Financial Statements (unaudited)	10
	Note 1. Description of Business, Basis of Presentation, and Changes in Significant Accounting Policies	10
	Note 2. Revenue from Contracts with Customers	12
	Note 3. Other Income, Net of Losses	14
	Note 4. Reserves for Insurance Losses and Loss Adjustment Expenses	15
	Note 5. Other Operating Expenses	15
	Note 6. Investment Securities	16
	Note 7. Finance Receivables and Loans, Net	20
	Note 8. Leasing	28
	Note 9. Securitizations and Variable Interest Entities	31
	Note 10. Other Assets	34
	Note 11. Deposit Liabilities	34
	Note 12. Debt	35
	Note 13. Accrued Expenses and Other Liabilities	37
	Note 14. Accumulated Other Comprehensive (Loss) Income	38
	Note 15. Earnings per Common Share	41
	Note 16. Regulatory Capital and Other Regulatory Matters	41
	Note 17. Derivative Instruments and Hedging Activities	44
	Note 18. Income Taxes	52
	Note 19. Fair Value	52
	Note 20. Offsetting Assets and Liabilities	59
	Note 21. Segment Information	61
	Note 22. Parent and Guarantor Condensed Consolidating Financial Statements	63
	Note 23. Contingencies and Other Risks	72
	Note 24. Subsequent Events	72
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	73
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	121
Item 4.	Controls and Procedures	122
Part II — Other Information		123
Item 1.	Legal Proceedings	123
Item 1A.	Risk Factors	123
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	123
Item 3.	Defaults Upon Senior Securities	123
Item 4.	Mine Safety Disclosures	123
Item 5.	Other Information	123
Item 6.	Exhibits	124
Signatures		125



Table of Contents		PART I — FINANCIAL INFORMATION

Item 1. Financial Statements

Condensed Consolidated Statement of Comprehensive Income (unaudited)

Ally Financial Inc. • Form 10-Q



	Three months ended September 30,					Nine months ended September 30,
($ in millions)	2019		2018			2019			2018
Financing revenue and other interest income
Interest and fees on finance receivables and loans	$	1,859	$	1,708		$	5,526		$	4,898
Interest on loans held-for-sale	8		4			13			10
Interest and dividends on investment securities and other earning assets	237		198			721			562
Interest on cash and cash equivalents	19		18			63			50
Operating leases	368		368			1,092			1,124
Total financing revenue and other interest income	2,491		2,296			7,415			6,644
Interest expense
Interest on deposits	658		462			1,901			1,212
Interest on short-term borrowings	33		29			114			101
Interest on long-term debt	378		451			1,204			1,296
Total interest expense	1,069		942			3,219			2,609
Net depreciation expense on operating lease assets	234		247			719			785
Net financing revenue and other interest income	1,188		1,107			3,477			3,250
Other revenue
Insurance premiums and service revenue earned	280		258			802			753
Gain on mortgage and automotive loans, net	10		17			22			19
Other gain on investments, net	27		22			174			37
Other income, net of losses	96		101			276			307
Total other revenue	413		398			1,274			1,116
Total net revenue	1,601		1,505			4,751			4,366
Provision for loan losses	263		233			722			652
Noninterest expense
Compensation and benefits expense	296		274			910			872
Insurance losses and loss adjustment expenses	74		77			260			241
Other operating expenses	468		456			1,379			1,347
Total noninterest expense	838		807			2,549			2,460
Income from continuing operations before income tax expense	500		465			1,480			1,254
Income tax expense from continuing operations	119		91			140			280
Net income from continuing operations	381		374			1,340			974
Loss from discontinued operations, net of tax	—		—			(3		)	(1		)
Net income	381		374			1,337			973
Other comprehensive income (loss), net of tax	106		(133		)	721			(531		)
Comprehensive income	$	487	$	241		$	2,058		$	442

Statement continues on the next page.

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

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Condensed Consolidated Statement of Comprehensive Income (unaudited)

Ally Financial Inc. • Form 10-Q



	Three months ended September 30,				Nine months ended September 30,
(in dollars) (a)	2019		2018		2019			2018
Basic earnings per common share
Net income from continuing operations	$	0.98	$	0.89	$	3.37		$	2.27
Loss from discontinued operations, net of tax	—		—		(0.01		)	—
Net income	$	0.97	$	0.89	$	3.36		$	2.26
Diluted earnings per common share
Net income from continuing operations	$	0.97	$	0.88	$	3.35		$	2.25
Loss from discontinued operations, net of tax	—		—		(0.01		)	—
Net income	$	0.97	$	0.88	$	3.35		$	2.25
Cash dividends declared per common share	$	0.17	$	0.15	$	0.51		$	0.41


(a)	Figures in the table may not recalculate exactly due to rounding. Earnings per share is calculated based on unrounded numbers.

Refer to Note 15 for additional earnings per share information. The Notes to the Condensed Consolidated Financial Statements (unaudited) are an integral part of these statements.

Table of Contents

Condensed Consolidated Balance Sheet (unaudited)

Ally Financial Inc. • Form 10-Q



($ in millions, except share data)	September 30, 2019			December 31, 2018
Assets
Cash and cash equivalents
Noninterest-bearing	$	723		$	810
Interest-bearing	2,894			3,727
Total cash and cash equivalents	3,617			4,537
Equity securities	570			773
Available-for-sale securities (refer to Note 6 for discussion of investment securities pledged as collateral)	29,384			25,303
Held-to-maturity securities (fair value of $2,687 and $2,307)	2,618			2,362
Loans held-for-sale, net	1,000			314
Finance receivables and loans, net
Finance receivables and loans, net of unearned income	128,609			129,926
Allowance for loan losses	(1,277		)	(1,242		)
Total finance receivables and loans, net	127,332			128,684
Investment in operating leases, net	8,653			8,417
Premiums receivable and other insurance assets	2,521			2,326
Other assets	5,790			6,153
Total assets	$	181,485		$	178,869
Liabilities
Deposit liabilities
Noninterest-bearing	$	156		$	142
Interest-bearing	119,074			106,036
Total deposit liabilities	119,230			106,178
Short-term borrowings	5,335			9,987
Long-term debt	35,730			44,193
Interest payable	894			523
Unearned insurance premiums and service revenue	3,246			3,044
Accrued expenses and other liabilities	2,600			1,676
Total liabilities	167,035			165,601
Contingencies (refer to Note 23)
Equity
Common stock and paid-in capital ($0.01 par value, shares authorized 1,100,000,000; issued 496,595,277 and 492,797,409; and outstanding 383,523,357 and 404,899,599)	21,417			21,345
Accumulated deficit	(4,368		)	(5,489		)
Accumulated other comprehensive income (loss)	190			(539		)
Treasury stock, at cost (113,071,920 and 87,897,810 shares)	(2,789		)	(2,049		)
Total equity	14,450			13,268
Total liabilities and equity	$	181,485		$	178,869

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

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Condensed Consolidated Balance Sheet (unaudited)

Ally Financial Inc. • Form 10-Q

The assets of consolidated variable interest entities that can be used only to settle obligations of the consolidated variable interest entities and the liabilities of these entities for which creditors (or beneficial interest holders) do not have recourse to our general credit were as follows.



($ in millions)	September 30, 2019			December 31, 2018
Assets
Finance receivables and loans, net
Finance receivables and loans, net of unearned income	$	17,816		$	18,086
Allowance for loan losses	(129		)	(114		)
Total finance receivables and loans, net	17,687			17,972
Investment in operating leases, net	63			164
Other assets	713			767
Total assets	$	18,463		$	18,903
Liabilities
Long-term debt	$	8,906		$	10,482
Accrued expenses and other liabilities	13			12
Total liabilities	$	8,919		$	10,494

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

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Condensed Consolidated Statement of Changes in Equity (unaudited)

Ally Financial Inc. • Form 10-Q



	Three months ended September 30,
($ in millions)	Common stock and paid-in capital		Accumulated deficit			Accumulated other comprehensive (loss) income			Treasury stock			Total equity
Balance at July 1, 2018	$	21,303	$	(6,026	)	$	(648	)	$	(1,490	)	$	13,139
Net income			374									374
Share-based compensation	19											19
Other comprehensive loss						(133		)				(133		)
Common stock repurchases									(250		)	(250		)
Common stock dividends ($0.15 per share)			(64		)							(64		)
Balance at September 30, 2018	$	21,322	$	(5,716	)	$	(781	)	$	(1,740	)	$	13,085
Balance at July 1, 2019	$	21,403	$	(4,682	)	$	84		$	(2,489	)	$	14,316
Net income			381									381
Share-based compensation	14											14
Other comprehensive income						106						106
Common stock repurchases									(300		)	(300		)
Common stock dividends ($0.17 per share)			(67		)							(67		)
Balance at September 30, 2019	$	21,417	$	(4,368	)	$	190		$	(2,789	)	$	14,450



	Nine months ended September 30,
($ in millions)	Common stock and paid-in capital		Accumulated deficit			Accumulated other comprehensive (loss) income			Treasury stock			Total equity
Balance at December 31, 2017	$	21,245	$	(6,406	)	$	(235	)	$	(1,110	)	$	13,494
Cumulative effect of changes in accounting principles, net of tax
Adoption of Accounting Standards Update 2014-09			(126		)							(126		)
Adoption of Accounting Standards Update 2016-01			(20		)	27						7
Adoption of Accounting Standards Update 2018-02			42			(42		)				—
Balance at January 1, 2018	$	21,245	$	(6,510	)	$	(250	)	$	(1,110	)	$	13,375
Net income			973									973
Share-based compensation	77											77
Other comprehensive loss						(531		)				(531		)
Common stock repurchases									(630		)	(630		)
Common stock dividends ($0.41 per share)			(179		)							(179		)
Balance at September 30, 2018	$	21,322	$	(5,716	)	$	(781	)	$	(1,740	)	$	13,085
Balance at December 31, 2018	$	21,345	$	(5,489	)	$	(539	)	$	(2,049	)	$	13,268
Cumulative effect of changes in accounting principles, net of tax (a)
Adoption of Accounting Standards Update 2017-08			(10		)	8						(2		)
Balance at January 1, 2019	$	21,345	$	(5,499	)	$	(531	)	$	(2,049	)	$	13,266
Net income			1,337									1,337
Share-based compensation	72											72
Other comprehensive income						721						721
Common stock repurchases									(740		)	(740		)
Common stock dividends ($0.51 per share)			(206		)							(206		)
Balance at September 30, 2019	$	21,417	$	(4,368	)	$	190		$	(2,789	)	$	14,450


(a)	Refer to the section titled Recently Adopted Accounting Standards in Note 1 for additional information.

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

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Condensed Consolidated Statement of Cash Flows (unaudited)

Ally Financial Inc. • Form 10-Q



Nine months ended September 30, ($ in millions)	2019			2018
Operating activities
Net income	$	1,337		$	973
Reconciliation of net income to net cash provided by operating activities
Depreciation and amortization	1,136			1,280
Provision for loan losses	722			652
Gain on mortgage and automotive loans, net	(22		)	(19		)
Other gain on investments, net	(174		)	(37		)
Originations and purchases of loans held-for-sale	(952		)	(889		)
Proceeds from sales and repayments of loans held-for-sale	788			830
Net change in
Deferred income taxes	86			272
Interest payable	371			338
Other assets	(25		)	(136		)
Other liabilities	(98		)	(9		)
Other, net	(36		)	89
Net cash provided by operating activities	3,133			3,344
Investing activities
Purchases of equity securities	(301		)	(652		)
Proceeds from sales of equity securities	615			715
Purchases of available-for-sale securities	(11,214		)	(5,669		)
Proceeds from sales of available-for-sale securities	5,699			637
Proceeds from repayments of available-for-sale securities	3,246			2,509
Purchases of held-to-maturity securities	(514		)	(436		)
Proceeds from repayments of held-to-maturity securities	195			107
Purchases of finance receivables and loans held-for-investment	(3,322		)	(4,778		)
Proceeds from sales of finance receivables and loans initially held-for-investment	427			53
Originations and repayments of finance receivables and loans held-for-investment and other, net	3,069			(558		)
Purchases of operating lease assets	(2,937		)	(2,991		)
Disposals of operating lease assets	2,016			2,461
Net change in nonmarketable equity investments	179			(3		)
Other, net	(306		)	(241		)
Net cash used in investing activities	(3,148		)	(8,846		)

Statement continues on the next page.

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

Table of Contents

Condensed Consolidated Statement of Cash Flows (unaudited)

Ally Financial Inc. • Form 10-Q



Nine months ended September 30, ($ in millions)	2019			2018
Financing activities
Net change in short-term borrowings	(4,652		)	(4,074		)
Net increase in deposits	13,032			8,063
Proceeds from issuance of long-term debt	5,438			14,756
Repayments of long-term debt	(14,114		)	(12,994		)
Repurchase of common stock	(740		)	(630		)
Dividends paid	(206		)	(179		)
Net cash (used in) provided by financing activities	(1,242		)	4,942
Effect of exchange-rate changes on cash and cash equivalents and restricted cash	2			(2		)
Net decrease in cash and cash equivalents and restricted cash	(1,255		)	(562		)
Cash and cash equivalents and restricted cash at beginning of year	5,626			5,269
Cash and cash equivalents and restricted cash at September 30,	$	4,371		$	4,707
Supplemental disclosures
Cash paid for
Interest	$	2,781		$	2,242
Income taxes	31			21
Noncash items
Held-to-maturity securities received in consideration for loans sold	—			26
Loans held-for-sale transferred to finance receivables and loans held-for-investment	125			—
Finance receivables and loans held-for-investment transferred to loans held-for-sale	964			815

The following table provides a reconciliation of cash and cash equivalents and restricted cash from the Condensed Consolidated Balance Sheet to the Condensed Consolidated Statement of Cash Flows.



September 30, ($ in millions)	2019		2018
Cash and cash equivalents on the Condensed Consolidated Balance Sheet	$	3,617	$	3,772
Restricted cash included in other assets on the Condensed Consolidated Balance Sheet (a)	754		935
Total cash and cash equivalents and restricted cash in the Condensed Consolidated Statement of Cash Flows	$	4,371	$	4,707


(a)	Restricted cash balances relate primarily to Ally securitization arrangements. Refer to Note 10 for additional details describing the nature of restricted cash balances.

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

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Notes to Condensed Consolidated Financial Statements (unaudited)

Ally Financial Inc. • Form 10-Q

1. Description of Business, Basis of Presentation, and Changes in Significant Accounting Policies

Ally Financial Inc. (together with its consolidated subsidiaries unless the context otherwise requires, Ally, the Company, or we, us, or our) is a leading digital financial-services company. As a customer-centric company with passionate customer service and innovative financial solutions, we are relentlessly focused on “Doing It Right” and being a trusted financial-services provider to our consumer, commercial, and corporate customers. We are one of the largest full-service automotive finance operations in the country and offer a wide range of financial services and insurance products to dealerships and consumers. Our award-winning online bank (Ally Bank, Member Federal Deposit Insurance Corporation and Equal Housing Lender) offers mortgage-lending services and a variety of deposit and other banking products, including savings, money-market, and checking accounts, certificates of deposit (CDs), and individual retirement accounts (IRAs). Additionally, we offer securities-brokerage and investment-advisory services through Ally Invest. Our robust corporate finance business offers capital for equity sponsors and middle-market companies. We are a Delaware corporation and are registered as a bank holding company (BHC) under the Bank Holding Company Act of 1956, as amended, and a financial holding company (FHC) under the Gramm-Leach-Bliley Act of 1999, as amended.

Our accounting and reporting policies conform to accounting principles generally accepted in the United States of America (GAAP). Additionally, where applicable, the policies conform to the accounting and reporting guidelines prescribed by bank regulatory authorities. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and that affect income and expenses during the reporting period and related disclosures. In developing the estimates and assumptions, management uses all available evidence; however, actual results could differ because of uncertainties associated with estimating the amounts, timing, and likelihood of possible outcomes. Our most significant estimates pertain to the allowance for loan losses, valuations of automotive lease assets and residuals, fair value of financial instruments, and the determination of the provision for income taxes.

The Condensed Consolidated Financial Statements at September 30, 2019, and for the three months and nine months ended September 30, 2019, and 2018, are unaudited but reflect all adjustments that are, in management’s opinion, necessary for the fair presentation of the results for the interim periods presented. All such adjustments are of a normal recurring nature. These unaudited Condensed Consolidated Financial Statements should be read in conjunction with the audited Consolidated Financial Statements (and the related Notes) included in our Annual Report on Form 10-K for the year ended December 31, 2018, as filed on February 20, 2019, with the U.S. Securities and Exchange Commission (SEC).

Significant Accounting Policies

Lease Accounting

At contract inception, we determine whether the contract is or contains a lease based on the terms and conditions of the contract. Lease contracts are recognized on our Condensed Consolidated Balance Sheet as right-of-use (ROU) assets and lease liabilities; however, we have elected not to recognize ROU assets and lease liabilities on real estate leases with terms of one year or less. Lease liabilities and their corresponding ROU assets are recorded based on the present value of the future lease payments over the expected lease term. As the interest rate implicit in the lease contract is typically not readily determinable, we utilize our incremental borrowing rate, which is the rate we would incur to borrow on a collateralized basis over a similar term on an amount equal to the lease payments in a similar economic environment. The ROU asset also includes initial direct costs paid less lease incentives received from the lessor. Our lease contracts are generally classified as operating and, as a result, we recognize a single lease cost within other operating expenses on the income statement on a straight-line basis over the lease term. This update to our accounting policy resulted from our adoption of Accounting Standards Update (ASU) 2016-02 on January 1, 2019, as further described within the section below titled Recently Adopted Accounting Standards.

Investments

Premiums on debt securities that have noncontingent call features that are callable at fixed prices on preset dates are amortized to the earliest call date as an adjustment to investment yield. All other premiums and discounts on debt securities are amortized over the stated maturity of the security as an adjustment to investment yield. This method of amortization differs from that described in Note 1 to the Consolidated Financial Statements in our 2018 Annual Report on Form 10-K, which describes our full accounting policy for Investments. This update to our amortization methodology resulted from the adoption of ASU 2017-08 on January 1, 2019, as further described within the section below titled Recently Adopted Accounting Standards.

Income Taxes

In calculating the provision for interim income taxes, in accordance with Accounting Standards Codification (ASC) Topic 740, Income Taxes, we apply an estimated annual effective tax rate to year-to-date ordinary income. At the end of each interim period, we estimate the effective tax rate expected to be applicable for the full fiscal year. This method differs from that described in Note 1 to the Consolidated Financial Statements in our 2018 Annual Report on Form 10-K, which describes our annual significant income tax accounting policy and related methodology.

Refer to Note 1 to the Consolidated Financial Statements in our 2018 Annual Report on Form 10-K regarding additional significant accounting policies.

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Notes to Condensed Consolidated Financial Statements (unaudited)

Ally Financial Inc. • Form 10-Q

Recently Adopted Accounting Standards

Leases (ASU 2016-02)

In February 2016, the Financial Accounting Standards Board (FASB) issued ASU 2016-02. The amendments in this update primarily replaced the existing accounting requirements for operating leases for lessees. Lessee accounting requirements for finance leases (previously referred to as capital leases) and lessor accounting requirements for operating leases and sales type and direct financing leases were largely unchanged. The amendments require the lessee of an operating lease to record a balance sheet gross-up upon lease commencement by recognizing a ROU asset and lease liability equal to the present value of the lease payments. The ROU asset and lease liability should be derecognized in a manner that effectively yields a straight line lease expense over the lease term. In addition to the changes to the lessee operating lease accounting requirements, the amendments also changed the types of costs that can be capitalized related to a lease agreement for both lessees and lessors. The amendments also require additional disclosures for all lease types for both lessees and lessors. The FASB issued additional ASUs to clarify the guidance and provide certain practical expedients and an additional transition option. We adopted ASU 2016-02 and the subsequent ASUs that modified ASU 2016-02 (collectively, the amendments) on January 1, 2019. This includes the early adoption of ASU 2019-01, which was issued in March 2019 to amend certain provisions included in ASU 2016-02.

We adopted this guidance using the modified retrospective approach on January 1, 2019, and have not adjusted prior period comparative information and will continue to disclose prior period financial information in accordance with the previous lease accounting guidance. We have elected certain practical expedients permitted within the amendments that allowed us to not reassess (i) current lease classifications, (ii) whether existing contracts meet the definition of a lease under the amendments to the lease guidance, and (iii) whether current initial direct costs meet the new criteria for capitalization, for all existing leases as of the adoption date. We made an accounting policy election to calculate the impact of adoption using the remaining minimum lease payments and remaining lease term for each contract that was identified as a lease, discounted at our incremental borrowing rate as of the adoption date. The adoption of the amendments resulted in a ROU asset of approximately $161 million from operating leases for our various corporate facilities, a $29 million reduction to accrued expenses and other liabilities for accrued rent and unamortized tenant improvement allowances, and a lease liability of approximately $190 million. The adoption did not change our previously reported Condensed Consolidated Statements of Comprehensive Income and did not result in a cumulative catch-up adjustment to opening retained earnings.

Receivables—Nonrefundable Fees and Other Costs: Premium Amortization on Purchased Callable Debt Securities (ASU 2017-08)

In March 2017, the FASB issued ASU 2017-08. The amendments in this update require premiums on purchased callable debt securities to be amortized to the security’s earliest call date. Prior to this ASU, premiums and discounts on purchased callable debt securities were generally required to be amortized to the security’s maturity date. The amendments do not require an accounting change for securities held at a discount. We adopted the amendments on January 1, 2019, on a modified retrospective basis, which resulted in an increase to our accumulated deficit of $10 million, net of income taxes, partially offset by an $8 million decrease to accumulated other comprehensive loss, net of income taxes.

Recently Issued Accounting Standards

Financial Instruments—Credit Losses (ASU 2016-13)

In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses (CECL). The amendments in this update introduce a new accounting model to measure credit losses for financial assets measured at amortized cost. The FASB has also issued additional ASUs to clarify the scope and provide additional guidance for ASU 2016-13. Credit losses for financial assets measured at amortized cost should be determined based on the total current expected credit losses over the life of the financial asset or group of financial assets. In effect, the financial asset or group of financial assets should be presented at the net amount expected to be collected. Credit losses will no longer be recorded under the current incurred loss model for financial assets measured at amortized cost. The amendments also modify the accounting for available-for-sale debt securities whereby credit losses will be recorded through an allowance for credit losses rather than a write-down to the security’s cost basis, which allows for reversals of credit losses when estimated credit losses decline. Credit losses for available-for-sale debt securities should be measured in a manner similar to current GAAP. The amendments are effective on January 1, 2020, and must be applied using a modified retrospective approach with a cumulative-effect adjustment through retained earnings as of the beginning of the fiscal year upon adoption as required. While the standard modifies the measurement of the allowance for credit losses, it does not alter the credit risk of our loan portfolios.

Management has continued to utilize a cross-functional working group to govern the implementation of these amendments, including consideration of model development, data integrity, technology, reporting and disclosure requirements, key accounting interpretations, control environment, and corporate governance. We are in the process of finalizing the allowance for credit loss models, implementing changes to our internal processes and internal control structure, and updating our policies and documentation related to the allowance for credit losses. During the third quarter of 2019, we performed parallel testing, which included enhanced analytics, continued refinement of our qualitative allowance framework, and the execution of parallel processes for governance and documentation, and we expect to complete our implementation efforts by December 31, 2019. Based on forecasted economic conditions and portfolio balances as of September 30, 2019, preliminary assessments indicate that the adoption of CECL could result in an overall increase to our allowance for loan losses on finance receivables and loans of between 105% to 115%. The increase is driven by our consumer automotive loan portfolio and is primarily related to the difference between loss emergence periods currently utilized, as compared to estimating lifetime credit losses as required by the CECL standard. Additionally, there was no material impact to the allowance for loan losses from our other loan portfolios. Our estimation techniques

Table of Contents

Notes to Condensed Consolidated Financial Statements (unaudited)

Ally Financial Inc. • Form 10-Q

under CECL are impacted by forecasted economic conditions. Our modeling processes utilize a 12 month reasonable and supportable forecast period for all portfolio segments. After the forecast period, we revert to a longer term historical mean over a 24 month period. Additionally, the adoption of CECL is not expected to result in a material impact to our held-to-maturity securities portfolio, which is primarily composed of agency-backed mortgage securities, and is also not expected to have a material impact on our available-for-sale debt securities portfolio.

The actual impact of adopting this standard will depend upon a number of factors at the adoption date, including the composition and credit quality of our financing receivables and loan portfolios and investment securities portfolios, economic conditions and forecasts, the allowance for credit loss models that are used, the data that is included in the models, the associated qualitative allowance framework, and our estimation techniques. Additionally, under CECL, changes in these factors after the adoption date may lead to increased volatility in our future provisions for loan losses. The impact of the adoption will be reflected as an adjustment to beginning retained earnings, net of income taxes. Additionally, we currently expect to phase in the day-one impact of CECL into regulatory capital as prescribed by regulatory capital rules which permit us to phase in 25 percent of the capital impact of CECL in 2020 and an additional 25 percent each subsequent year until fully-phased in by the first quarter of 2023.

2. Revenue from Contracts with Customers

Our primary revenue sources, which include financing revenue and other interest income, are addressed by other GAAP and are not in the scope of ASC Topic 606, Revenue from Contracts with Customers. As part of our Insurance operations, we recognize revenue from insurance contracts, which are addressed by other GAAP and are not included in the scope of this standard. Certain noninsurance contracts within our Insurance operations, including vehicle service contracts (VSCs), guaranteed asset protection (GAP) contracts, and vehicle maintenance contracts (VMCs), are included in the scope of this standard. All revenue associated with noninsurance contracts is recognized over the contract term on a basis proportionate to the anticipated cost emergence. Further, commissions and sales expense incurred to obtain these contracts are amortized over the terms of the related policies and service contracts on the same basis as premiums and service revenue are earned, and all advertising costs are recognized as expense when incurred.

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Notes to Condensed Consolidated Financial Statements (unaudited)

Ally Financial Inc. • Form 10-Q

The following tables present a disaggregated view of our revenue from contracts with customers included in other revenue that falls within the scope of the revenue recognition principles of ASC Topic 606, Revenue from Contracts with Customers. For further information regarding our revenue recognition policies and details about the nature of our respective revenue streams, refer to Note 1 and Note 3 to the Consolidated Financial Statements in our 2018 Annual Report on Form 10-K.



Three months ended September 30, ($ in millions)	Automotive Finance operations		Insurance operations		Mortgage Finance operations		Corporate Finance operations		Corporate and Other		Consolidated
2019
Revenue from contracts with customers
Noninsurance contracts (a) (b) (c)	$	—	$	138	$	—	$	—	$	—	$	138
Remarketing fee income	19		—		—		—		—		19
Brokerage commissions and other revenue	—		—		—		—		16		16
Deposit account and other banking fees	—		—		—		—		3		3
Brokered/agent commissions	—		3		—		—		—		3
Other	5		—		—		—		—		5
Total revenue from contracts with customers	24		141		—		—		19		184
All other revenue	35		148		10		9		27		229
Total other revenue (d)	$	59	$	289	$	10	$	9	$	46	$	413
2018
Revenue from contracts with customers
Noninsurance contracts (a) (b) (c)	$	—	$	129	$	—	$	—	$	—	$	129
Remarketing fee income	19		—		—		—		—		19
Brokerage commissions and other revenue	—		—		—		—		15		15
Brokered/agent commissions	—		3		—		—		—		3
Deposit account and other banking fees	—		—		—		—		3		3
Other	4		—		—		—		—		4
Total revenue from contracts with customers	23		132		—		—		18		173
All other revenue	57		150		2		14		2		225
Total other revenue (d)	$	80	$	282	$	2	$	14	$	20	$	398

(a)

We had opening balances of $2.8 billion and $2.6 billion in unearned revenue associated with outstanding contracts at July 1, 2019, and July 1, 2018, respectively, and $206 million and $199 million of these balances were recognized as insurance premiums and service revenue earned in our Condensed Consolidated Statement of Comprehensive Income during the three months ended September 30, 2019, and September 30, 2018.

(b)

At September 30, 2019, we had unearned revenue of $2.8 billion associated with outstanding contracts, and with respect to this balance we expect to recognize revenue of $197 million during the remainder of 2019, $737 million in 2020, $646 million in 2021, $523 million in 2022, and $720 million thereafter. At September 30, 2018, we had unearned revenue of $2.6 billion associated with outstanding contracts.

(c)

We had deferred insurance assets of $1.6 billion and $1.7 billion at July 1, 2019, and September 30, 2019, respectively, and recognized $119 million of expense during the three months ended September 30, 2019. We had deferred insurance assets of $1.5 billion at both July 1, 2018, and September 30, 2018, respectively, and recognized $108 million of expense during the three months ended September 30, 2018.


(d)	Represents a component of total net revenue. Refer to Note 21 for further information on our reportable operating segments.

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Notes to Condensed Consolidated Financial Statements (unaudited)

Ally Financial Inc. • Form 10-Q



Nine months ended September 30, ($ in millions)	Automotive Finance operations		Insurance operations		Mortgage Finance operations		Corporate Finance operations		Corporate and Other		Consolidated
2019
Revenue from contracts with customers
Noninsurance contracts (a) (b)	$	—	$	403	$	—	$	—	$	—	$	403
Remarketing fee income	56		—		—		—		—		56
Brokerage commissions and other revenue	—		—		—		—		50		50
Deposit account and other banking fees	—		—		—		—		12		12
Brokered/agent commissions	—		10		—		—		—		10
Other	15		—		—		—		—		15
Total revenue from contracts with customers	71		413		—		—		62		546
All other revenue	117		522		16		30		43		728
Total other revenue (c)	$	188	$	935	$	16	$	30	$	105	$	1,274
2018
Revenue from contracts with customers
Noninsurance contracts (a) (b)	$	—	$	377	$	—	$	—	$	—	$	377
Remarketing fee income	63		—		—		—		—		63
Brokerage commissions and other revenue	—		—		—		—		46		46
Brokered/agent commissions	—		11		—		—		—		11
Deposit account and other banking fees	—		—		—		—		9		9
Other	10		1		—		—		—		11
Total revenue from contracts with customers	73		389		—		—		55		517
All other revenue	136		405		5		36		17		599
Total other revenue (c)	$	209	$	794	$	5	$	36	$	72	$	1,116

(a)

We had opening balances of $2.6 billion and $2.5 billion in unearned revenue associated with outstanding contracts at January 1, 2019, and January 1, 2018, respectively, and $607 million and $588 million of these balances were recognized as insurance premiums and service revenue earned in our Condensed Consolidated Statement of Comprehensive Income during the nine months ended September 30, 2019, and September 30, 2018.

(b)

We had deferred insurance assets of $1.5 billion and $1.7 billion at January 1, 2019, and September 30, 2019, respectively, and recognized $344 million of expense during the nine months ended September 30, 2019. We had deferred insurance assets of $1.4 billion and $1.5 billion at January 1, 2018, and September 30, 2018, respectively, and recognized $317 million of expense during the nine months ended September 30, 2018.


(c)	Represents a component of total net revenue. Refer to Note 21 for further information on our reportable operating segments.

In addition to the components of other revenue presented above, as part of our Automotive Finance operations, we recognized net remarketing gains of $28 million and $66 million for the three months and nine months ended September 30, 2019, respectively, and $27 million and $61 million for the three months and nine months ended September 30, 2018, on the sale of off-lease vehicles. These gains are included in depreciation expense on operating lease assets in our Condensed Consolidated Statement of Comprehensive Income.

3. Other Income, Net of Losses

Details of other income, net of losses, were as follows.



	Three months ended September 30,				Nine months ended September 30,
($ in millions)	2019		2018		2019		2018
Late charges and other administrative fees	$	28	$	29	$	85	$	83
Remarketing fees	19		19		56		63
Income from equity-method investments	7		5		19		18
Servicing fees	4		5		14		21
Other, net	38		43		102		122
Total other income, net of losses	$	96	$	101	$	276	$	307

Table of Contents

Notes to Condensed Consolidated Financial Statements (unaudited)

Ally Financial Inc. • Form 10-Q

4. Reserves for Insurance Losses and Loss Adjustment Expenses

The following table shows a rollforward of our reserves for insurance losses and loss adjustment expenses.



($ in millions)	2019			2018
Total gross reserves for insurance losses and loss adjustment expenses at January 1,	$	134		$	140
Less: Reinsurance recoverable	96			108
Net reserves for insurance losses and loss adjustment expenses at January 1,	38			32
Net insurance losses and loss adjustment expenses incurred related to:
Current year	259			235
Prior years (a)	1			6
Total net insurance losses and loss adjustment expenses incurred	260			241
Net insurance losses and loss adjustment expenses paid or payable related to:
Current year	(227		)	(205		)
Prior years	(29		)	(27		)
Total net insurance losses and loss adjustment expenses paid or payable	(256		)	(232		)
Net reserves for insurance losses and loss adjustment expenses at September 30,	42			41
Plus: Reinsurance recoverable	93			98
Total gross reserves for insurance losses and loss adjustment expenses at September 30,	$	135		$	139


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

5. Other Operating Expenses

Details of other operating expenses were as follows.



	Three months ended September 30,				Nine months ended September 30,
($ in millions)	2019		2018		2019		2018
Insurance commissions	$	120	$	113	$	351	$	332
Technology and communications	77		75		227		220
Advertising and marketing	46		38		129		106
Lease and loan administration	40		42		122		124
Professional services	32		33		91		100
Regulatory and licensing fees	29		33		85		98
Vehicle remarketing and repossession	26		27		78		85
Premises and equipment depreciation	25		22		72		64
Occupancy	14		11		43		33
Non-income taxes	9		10		29		24
Amortization of intangible assets	2		2		8		8
Other	48		50		144		153
Total other operating expenses	$	468	$	456	$	1,379	$	1,347

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Notes to Condensed Consolidated Financial Statements (unaudited)

Ally Financial Inc. • Form 10-Q

6. Investment Securities

Our investment portfolio includes various debt and equity securities. Our debt securities, which are classified as available-for-sale or held-to-maturity, include government securities, corporate bonds, asset-backed securities, and mortgage-backed securities. The cost, fair value, and gross unrealized gains and losses on available-for-sale and held-to-maturity debt securities were as follows.



	September 30, 2019									December 31, 2018
	Amortized cost		Gross unrealized					Fair value		Amortized cost		Gross unrealized					Fair value
($ in millions)	Amortized cost		gains		losses			Fair value		Amortized cost		gains		losses			Fair value
Available-for-sale securities
Debt securities
U.S. Treasury and federal agencies	$	2,389	$	8	$	(15	)	$	2,382	$	1,911	$	—	$	(60	)	$	1,851
U.S. States and political subdivisions	612		19		(1		)	630		816		3		(17		)	802
Foreign government	152		3		—			155		145		1		(1		)	145
Agency mortgage-backed residential	19,887		244		(23		)	20,108		17,486		47		(395		)	17,138
Mortgage-backed residential	2,799		22		(9		)	2,812		2,796		1		(111		)	2,686
Agency mortgage-backed commercial	1,341		72		—			1,413		3		—		—			3
Mortgage-backed commercial	112		1		—			113		715		1		(2		)	714
Asset-backed	413		4		—			417		723		2		(2		)	723
Corporate debt	1,321		35		(2		)	1,354		1,286		1		(46		)	1,241
Total available-for-sale securities (a) (b) (c)	$	29,026	$	408	$	(50	)	$	29,384	$	25,881	$	56	$	(634	)	$	25,303
Held-to-maturity securities
Debt securities
Agency mortgage-backed residential (d)	$	2,593	$	70	$	(1	)	$	2,662	$	2,319	$	6	$	(61	)	$	2,264
Asset-backed retained notes	25		—		—			25		43		—		—			43
Total held-to-maturity securities	$	2,618	$	70	$	(1	)	$	2,687	$	2,362	$	6	$	(61	)	$	2,307


(a)	Certain entities related to our Insurance operations are required to deposit securities with state regulatory authorities. These deposited securities totaled $12 million at both September 30, 2019, and December 31, 2018, respectively.


(b)	Certain available-for-sale securities are included in fair value hedging relationships. Refer to Note 17 for additional information.

(c)

Available-for-sale securities with a fair value of $2.5 billion and $9.2 billion at September 30, 2019, and December 31, 2018, respectively, were pledged to secure advances from the Federal Home Loan Bank (FHLB), short-term borrowings or repurchase agreements, or for other purposes as required by contractual obligation or law. Under these agreements, we have granted the counterparty the right to sell or pledge $594 million and $821 million of the underlying investment securities at September 30, 2019, and December 31, 2018, respectively.


(d)	Held-to-maturity securities with a fair value of $972 million and $1.2 billion at September 30, 2019, and December 31, 2018, respectively, were pledged to secure advances from the FHLB.

Table of Contents

Notes to Condensed Consolidated Financial Statements (unaudited)

Ally Financial Inc. • Form 10-Q

The maturity distribution of debt securities outstanding is summarized in the following tables. Call or prepayment options may cause actual maturities to differ from contractual maturities.



	Total				Due in one year or less				Due after one year through five years				Due after five years through ten years				Due after ten years
($ in millions)	Amount		Yield		Amount		Yield		Amount		Yield		Amount		Yield		Amount		Yield
September 30, 2019
Fair value of available-for-sale securities (a)
U.S. Treasury and federal agencies	$	2,382	1.5	%	$	65	2.1	%	$	1,742	1.5	%	$	575	1.6	%	$	—	—	%
U.S. States and political subdivisions	630		3.1		21		2.2		61		2.2		169		2.8		379		3.4
Foreign government	155		2.3		4		1.4		65		2.3		86		2.3		—		—
Agency mortgage-backed residential	20,108		3.3		—		—		—		—		49		2.0		20,059		3.3
Mortgage-backed residential	2,812		3.3		—		—		—		—		—		—		2,812		3.3
Agency mortgage-backed commercial	1,413		2.9		—		—		3		3.2		1,089		3.0		321		2.6
Mortgage-backed commercial	113		3.5		—		—		—		—		—		—		113		3.5
Asset-backed	417		3.5		—		—		310		3.5		53		3.9		54		3.0
Corporate debt	1,354		3.2		125		2.8		571		3.0		643		3.4		15		5.5
Total available-for-sale securities	$	29,384	3.1		$	215	2.5		$	2,752	2.0		$	2,664	2.8		$	23,753	3.3
Amortized cost of available-for-sale securities	$	29,026			$	215			$	2,745			$	2,568			$	23,498
Amortized cost of held-to-maturity securities
Agency mortgage-backed residential	$	2,593	3.2	%	$	—	—	%	$	—	—	%	$	—	—	%	$	2,593	3.2	%
Asset-backed retained notes	25		2.2		—		—		25		2.2		—		—		—		—
Total held-to-maturity securities	$	2,618	3.2		$	—	—		$	25	2.2		$	—	—		$	2,593	3.2
December 31, 2018
Fair value of available-for-sale securities (a)
U.S. Treasury and federal agencies	$	1,851	1.9	%	$	12	1.0	%	$	1,277	1.8	%	$	562	2.0	%	$	—	—	%
U.S. States and political subdivisions	802		3.0		49		1.9		43		2.3		252		2.6		458		3.4
Foreign government	145		2.4		18		3.1		60		2.3		67		2.4		—		—
Agency mortgage-backed residential	17,138		3.3		—		—		—		—		54		1.9		17,084		3.3
Mortgage-backed residential	2,686		3.3		—		—		—		—		—		—		2,686		3.3
Agency mortgage-backed commercial	3		3.1		—		—		3		3.1		—		—		—		—
Mortgage-backed commercial	714		3.8		—		—		—		—		46		3.9		668		3.8
Asset-backed	723		3.5		—		—		478		3.4		121		4.0		124		3.3
Corporate debt	1,241		3.1		144		2.8		496		2.9		581		3.3		20		5.5
Total available-for-sale securities	$	25,303	3.2		$	223	2.6		$	2,357	2.4		$	1,683	2.8		$	21,040	3.3
Amortized cost of available-for-sale securities	$	25,881			$	224			$	2,405			$	1,743			$	21,509
Amortized cost of held-to-maturity securities
Agency mortgage-backed residential	$	2,319	3.2	%	$	—	—	%	$	—	—	%	$	—	—	%	$	2,319	3.2	%
Asset-backed retained notes	43		2.0		—		—		42		2.0		1		3.3		—		—
Total held-to-maturity securities	$	2,362	3.2		$	—	—		$	42	2.0		$	1	3.3		$	2,319	3.2


(a)	Yield is calculated using the effective yield of each security at the end of the period, weighted based on the market value. The effective yield considers the contractual coupon and amortized cost, and excludes expected capital gains and losses.

The balances of cash equivalents were $124 million and $35 million at September 30, 2019, and December 31, 2018, respectively, and were composed primarily of money-market accounts and short-term securities, including U.S. Treasury bills.

Table of Contents

Notes to Condensed Consolidated Financial Statements (unaudited)

Ally Financial Inc. • Form 10-Q

The following table presents interest and dividends on investment securities.



	Three months ended September 30,				Nine months ended September 30,
($ in millions)	2019		2018		2019		2018
Taxable interest	$	214	$	172	$	648	$	490
Taxable dividends	4		4		10		10
Interest and dividends exempt from U.S. federal income tax	3		6		12		18
Interest and dividends on investment securities	$	221	$	182	$	670	$	518

The following table presents gross gains and losses realized upon the sales of available-for-sale securities, and net gains or losses on equity securities held during the period. There were no other-than-temporary impairments of available-for-sale securities for the periods presented.



	Three months ended September 30,					Nine months ended September 30,
($ in millions)	2019			2018		2019			2018
Available-for-sale securities
Gross realized gains	$	30		$	1	$	64		$	8
Gross realized losses (a)	(3		)	—		(4		)	—
Net realized gains on available-for-sale securities	27			1		60			8
Net realized gain on equity securities	12			15		51			55
Net unrealized (loss) gain on equity securities	(12		)	6		63			(26		)
Other gain on investments, net	$	27		$	22	$	174		$	37


(a)	Certain available-for-sale securities were sold at a loss during the three months and nine months ended September 30, 2019, and September 30, 2018, as a result of identifiable market or credit events, or a loss was realized based on corporate actions outside of our control (such as a call by the issuer). Any such sales were made in accordance with our risk-management policies and practices.

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Notes to Condensed Consolidated Financial Statements (unaudited)

Ally Financial Inc. • Form 10-Q

The table below summarizes available-for-sale and held-to-maturity securities in an unrealized loss position, which we evaluated for other than temporary impairment. For additional information on our methodology, refer to Note 1 to the Consolidated Financial Statements in our 2018 Annual Report on Form 10-K. As of September 30, 2019, we did not have the intent to sell the available-for-sale or held-to-maturity securities with an unrealized loss position and we do not believe it is more likely than not that we will be required to sell these securities before recovery of their amortized cost basis. As a result of this evaluation, we believe that the securities with an unrealized loss position are not considered to be other-than-temporarily impaired at September 30, 2019.



	September 30, 2019										December 31, 2018
	Less than 12 months					12 months or longer					Less than 12 months					12 months or longer
($ in millions)	Fair value		Unrealized loss			Fair value		Unrealized loss			Fair value		Unrealized loss			Fair value		Unrealized loss
Available-for-sale securities
Debt securities
U.S. Treasury and federal agencies	$	1,131	$	(8	)	$	279	$	(7	)	$	31	$	—		$	1,758	$	(60	)
U.S. States and political subdivisions	63		(1		)	9		—			259		(3		)	317		(14		)
Foreign government	11		—			4		—			6		—			74		(1		)
Agency mortgage-backed residential	2,722		(8		)	1,317		(15		)	5,537		(94		)	7,808		(301		)
Mortgage-backed residential	647		(2		)	221		(7		)	1,024		(20		)	1,360		(91		)
Mortgage-backed commercial	43		—			—		—			347		(1		)	36		(1		)
Asset-backed	17		—			13		—			294		(1		)	124		(1		)
Corporate debt	104		—			57		(2		)	576		(19		)	569		(27		)
Total temporarily impaired available-for-sale securities	$	4,738	$	(19	)	$	1,900	$	(31	)	$	8,074	$	(138	)	$	12,046	$	(496	)
Held-to-maturity securities
Debt securities
Agency mortgage-backed residential	$	142	$	(1	)	$	87	$	—		$	457	$	(6	)	$	1,376	$	(55	)
Asset-backed retained notes	—		—			9		—			16		—			19		—
Total held-to-maturity debt securities	$	142	$	(1	)	$	96	$	—		$	473	$	(6	)	$	1,395	$	(55	)

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Notes to Condensed Consolidated Financial Statements (unaudited)

Ally Financial Inc. • Form 10-Q

7. Finance Receivables and Loans, Net

The composition of finance receivables and loans reported at gross carrying value was as follows.



($ in millions)	September 30, 2019		December 31, 2018
Consumer automotive (a)	$	73,071	$	70,539
Consumer mortgage
Mortgage Finance (b)	15,782		15,155
Mortgage — Legacy (c)	1,228		1,546
Total consumer mortgage	17,010		16,701
Total consumer	90,081		87,240
Commercial
Commercial and industrial
Automotive	29,122		33,672
Other	4,377		4,205
Commercial real estate	5,029		4,809
Total commercial	38,528		42,686
Total finance receivables and loans (d)	$	128,609	$	129,926


(a)	Certain finance receivables and loans are included in fair value hedging relationships. Refer to Note 17 for additional information.


(b)	Includes loans originated as interest-only mortgage loans of $11 million and $18 million at September 30, 2019, and December 31, 2018, respectively, 14% of which are expected to start principal amortization in 2019, and 44% in 2020. The remainder of these loans have exited the interest-only period.


(c)	Includes loans originated as interest-only mortgage loans of $234 million and $341 million at September 30, 2019, and December 31, 2018, respectively, of which 99% have exited the interest-only period.


(d)	Totals include net unearned income, unamortized premiums and discounts, and deferred fees and costs of $547 million and $587 million at September 30, 2019, and December 31, 2018, respectively.

The following tables present an analysis of the activity in the allowance for loan losses on finance receivables and loans.



Three months ended September 30, 2019 ($ in millions)	Consumer automotive			Consumer mortgage			Commercial			Total
Allowance at July 1, 2019	$	1,078		$	49		$	155		$	1,282
Charge-offs (a)	(374		)	(3		)	(16		)	(393		)
Recoveries	121			5			—			126
Net charge-offs	(253		)	2			(16		)	(267		)
Provision for loan losses	264			(5		)	4			263
Other	1			(2		)	—			(1		)
Allowance at September 30, 2019	$	1,090		$	44		$	143		$	1,277

(a)

Represents the amount of the gross carrying value directly written off. For consumer and commercial loans, the loss from a charge-off is measured as the difference between the gross carrying value of a loan and the fair value of the collateral, less costs to sell. Refer to Note 1 to the Consolidated Financial Statements in our 2018 Annual Report on Form 10-K for more information regarding our charge-off policies.



Three months ended September 30, 2018 ($ in millions)	Consumer automotive			Consumer mortgage			Commercial			Total
Allowance at July 1, 2018	$	1,053		$	66		$	138		$	1,257
Charge-offs (a)	(343		)	(7		)	(3		)	(353		)
Recoveries	110			8			—			118
Net charge-offs	(233		)	1			(3		)	(235		)
Provision for loan losses	229			(4		)	8			233
Other (b)	(6		)	1			(2		)	(7		)
Allowance at September 30, 2018	$	1,043		$	64		$	141		$	1,248

(a)


(b)	Primarily related to the transfer of finance receivables and loans from held-for-investment to held-for-sale.

Table of Contents

Notes to Condensed Consolidated Financial Statements (unaudited)

Ally Financial Inc. • Form 10-Q



Nine months ended September 30, 2019 ($ in millions)	Consumer automotive			Consumer mortgage			Commercial			Total
Allowance at January 1, 2019	$	1,048		$	53		$	141		$	1,242
Charge-offs (a)	(1,027		)	(11		)	(33		)	(1,071		)
Recoveries	368			17			—			385
Net charge-offs	(659		)	6			(33		)	(686		)
Provision for loan losses	701			(13		)	34			722
Other	—			(2		)	1			(1		)
Allowance at September 30, 2019	$	1,090		$	44		$	143		$	1,277
Allowance for loan losses at September 30, 2019
Individually evaluated for impairment	$	37		$	18		$	32		$	87
Collectively evaluated for impairment	1,053			26			111			1,190
Finance receivables and loans at gross carrying value
Ending balance	$	73,071		$	17,010		$	38,528		$	128,609
Individually evaluated for impairment	514			213			179			906
Collectively evaluated for impairment	72,557			16,797			38,349			127,703

(a)



Nine months ended September 30, 2018 ($ in millions)	Consumer automotive			Consumer mortgage			Commercial			Total
Allowance at January 1, 2018	$	1,066		$	79		$	131		$	1,276
Charge-offs (a)	(1,004		)	(27		)	(5		)	(1,036		)
Recoveries	336			20			6			362
Net charge-offs	(668		)	(7		)	1			(674		)
Provision for loan losses	650			(7		)	9			652
Other (b)	(5		)	(1		)	—			(6		)
Allowance at September 30, 2018	$	1,043		$	64		$	141		$	1,248
Allowance for loan losses at September 30, 2018
Individually evaluated for impairment	$	43		$	24		$	35		$	102
Collectively evaluated for impairment	1,000			40			106			1,146
Finance receivables and loans at gross carrying value
Ending balance	$	69,995		$	16,506		$	40,104		$	126,605
Individually evaluated for impairment	483			231			184			898
Collectively evaluated for impairment	69,512			16,275			39,920			125,707

(a)


(b)	Primarily related to the transfer of finance receivables and loans from held-for-investment to held-for-sale.

Table of Contents

Notes to Condensed Consolidated Financial Statements (unaudited)

Ally Financial Inc. • Form 10-Q

The following table presents information about significant sales of finance receivables and loans and transfers of finance receivables and loans from held-for-investment to held-for-sale based on net carrying value.



	Three months ended September 30,				Nine months ended September 30,
($ in millions)	2019		2018		2019		2018
Consumer automotive	$	—	$	578	$	20	$	578
Consumer mortgage	940		—		940		5
Commercial	—		238		—		238
Total sales and transfers (a)	$	940	$	816	$	960	$	821


(a)	During the nine months ended September 30, 2019, we also sold $131 million of loans held-for-sale that were initially classified as finance receivables and loans held-for-investment, and transferred $79 million of finance receivables from held-for-sale to held-for-investment, both relating to equipment finance receivables from our commercial automotive business.

The following table presents information about significant purchases of finance receivables and loans based on unpaid principal balance at the time of purchase.



	Three months ended September 30,				Nine months ended September 30,
($ in millions)	2019		2018		2019		2018
Consumer automotive	$	92	$	251	$	409	$	652
Consumer mortgage	811		1,743		2,724		3,890
Commercial	13		14		16		14
Total purchases of finance receivables and loans	$	916	$	2,008	$	3,149	$	4,556

Table of Contents

Notes to Condensed Consolidated Financial Statements (unaudited)

Ally Financial Inc. • Form 10-Q

The following table presents an analysis of our past-due finance receivables and loans recorded at gross carrying value.



($ in millions)	30–59 days past due		60–89 days past due		90 days or more past due		Total past due		Current		Total finance receivables and loans
September 30, 2019
Consumer automotive	$	2,053	$	521	$	316	$	2,890	$	70,181	$	73,071
Consumer mortgage
Mortgage Finance	107		6		10		123		15,659		15,782
Mortgage — Legacy	28		8		28		64		1,164		1,228
Total consumer mortgage	135		14		38		187		16,823		17,010
Total consumer	2,188		535		354		3,077		87,004		90,081
Commercial
Commercial and industrial
Automotive	1		—		45		46		29,076		29,122
Other	—		—		18		18		4,359		4,377
Commercial real estate	2		—		1		3		5,026		5,029
Total commercial	3		—		64		67		38,461		38,528
Total consumer and commercial	$	2,191	$	535	$	418	$	3,144	$	125,465	$	128,609
December 31, 2018
Consumer automotive	$	2,107	$	537	$	296	$	2,940	$	67,599	$	70,539
Consumer mortgage
Mortgage Finance	67		5		4		76		15,079		15,155
Mortgage — Legacy	30		10		42		82		1,464		1,546
Total consumer mortgage	97		15		46		158		16,543		16,701
Total consumer	2,204		552		342		3,098		84,142		87,240
Commercial
Commercial and industrial
Automotive	—		1		31		32		33,640		33,672
Other	—		4		16		20		4,185		4,205
Commercial real estate	—		—		1		1		4,808		4,809
Total commercial	—		5		48		53		42,633		42,686
Total consumer and commercial	$	2,204	$	557	$	390	$	3,151	$	126,775	$	129,926

Table of Contents

Notes to Condensed Consolidated Financial Statements (unaudited)

Ally Financial Inc. • Form 10-Q

The following table presents the gross carrying value of our finance receivables and loans on nonaccrual status.



($ in millions)	September 30, 2019		December 31, 2018
Consumer automotive	$	692	$	664
Consumer mortgage
Mortgage Finance	15		9
Mortgage — Legacy	43		70
Total consumer mortgage	58		79
Total consumer	750		743
Commercial
Commercial and industrial
Automotive	64		203
Other	111		142
Commercial real estate	4		4
Total commercial	179		349
Total consumer and commercial finance receivables and loans	$	929	$	1,092

Management performs a quarterly analysis of the consumer automotive, consumer mortgage, and commercial portfolios using a range of credit quality indicators to assess the adequacy of the allowance for loan losses based on historical and current trends. The following tables present the population of loans by quality indicators for our consumer automotive, consumer mortgage, and commercial portfolios.

The following table presents performing and nonperforming credit quality indicators in accordance with our internal accounting policies for our consumer finance receivables and loans recorded at gross carrying value. Nonperforming loans include finance receivables and loans on nonaccrual status when the principal or interest has been delinquent for 90 days or more, or when full collection is not expected. Refer to Note 1 to the Consolidated Financial Statements in our 2018 Annual Report on Form 10-K for additional information.



	September 30, 2019						December 31, 2018
($ in millions)	Performing		Nonperforming		Total		Performing		Nonperforming		Total
Consumer automotive	$	72,379	$	692	$	73,071	$	69,875	$	664	$	70,539
Consumer mortgage
Mortgage Finance	15,767		15		15,782		15,146		9		15,155
Mortgage — Legacy	1,185		43		1,228		1,476		70		1,546
Total consumer mortgage	16,952		58		17,010		16,622		79		16,701
Total consumer	$	89,331	$	750	$	90,081	$	86,497	$	743	$	87,240

The following table presents pass and criticized credit quality indicators based on regulatory definitions for our commercial finance receivables and loans recorded at gross carrying value.



	September 30, 2019						December 31, 2018
($ in millions)	Pass		Criticized (a)		Total		Pass		Criticized (a)		Total
Commercial and industrial
Automotive	$	26,393	$	2,729	$	29,122	$	30,799	$	2,873	$	33,672
Other	3,545		832		4,377		3,373		832		4,205
Commercial real estate	4,764		265		5,029		4,538		271		4,809
Total commercial	$	34,702	$	3,826	$	38,528	$	38,710	$	3,976	$	42,686


(a)	Includes loans classified as special mention, substandard, or doubtful. These classifications are based on regulatory definitions and generally represent loans within our portfolio that have a higher default risk or have already defaulted.

Table of Contents

Notes to Condensed Consolidated Financial Statements (unaudited)

Ally Financial Inc. • Form 10-Q

Impaired Loans and Troubled Debt Restructurings

Impaired Loans

Loans are considered impaired when we determine it is probable that we will be unable to collect all amounts due according to the terms of the loan agreement. For more information on our impaired finance receivables and loans, refer to Note 1 to the Consolidated Financial Statements in our 2018 Annual Report on Form 10-K.

The following table presents information about our impaired finance receivables and loans.



($ in millions)	Unpaid principal balance (a)		Gross carrying value		Impaired with no allowance		Impaired with an allowance		Allowance for impaired loans
September 30, 2019
Consumer automotive	$	527	$	514	$	107	$	407	$	37
Consumer mortgage
Mortgage Finance	13		14		6		8		—
Mortgage — Legacy	204		199		65		134		18
Total consumer mortgage	217		213		71		142		18
Total consumer	744		727		178		549		55
Commercial
Commercial and industrial
Automotive	64		64		1		63		18
Other	149		111		80		31		14
Commercial real estate	4		4		4		—		—
Total commercial	217		179		85		94		32
Total consumer and commercial finance receivables and loans	$	961	$	906	$	263	$	643	$	87
December 31, 2018
Consumer automotive	$	503	$	495	$	105	$	390	$	44
Consumer mortgage
Mortgage Finance	15		15		6		9		1
Mortgage — Legacy	221		216		65		151		22
Total consumer mortgage	236		231		71		160		23
Total consumer	739		726		176		550		67
Commercial
Commercial and industrial
Automotive	203		203		112		91		10
Other	159		142		40		102		46
Commercial real estate	4		4		4		—		—
Total commercial	366		349		156		193		56
Total consumer and commercial finance receivables and loans	$	1,105	$	1,075	$	332	$	743	$	123


(a)	Adjusted for charge-offs.

Table of Contents

Notes to Condensed Consolidated Financial Statements (unaudited)

Ally Financial Inc. • Form 10-Q

The following tables present average balance and interest income for our impaired finance receivables and loans.



	2019				2018
Three months ended September 30, ($ in millions)	Average balance		Interest income		Average balance		Interest income
Consumer automotive	$	505	$	9	$	485	$	7
Consumer mortgage
Mortgage Finance	14		—		12		1
Mortgage — Legacy	203		2		217		2
Total consumer mortgage	217		2		229		3
Total consumer	722		11		714		10
Commercial
Commercial and industrial
Automotive	76		—		83		—
Other	115		—		101		—
Commercial real estate	5		—		7		—
Total commercial	196		—		191		—
Total consumer and commercial finance receivables and loans	$	918	$	11	$	905	$	10



	2019				2018
Nine months ended September 30, ($ in millions)	Average balance		Interest income		Average balance		Interest income
Consumer automotive	$	502	$	26	$	477	$	21
Consumer mortgage
Mortgage Finance	15		—		10		1
Mortgage — Legacy	208		7		219		7
Total consumer mortgage	223		7		229		8
Total consumer	725		33		706		29
Commercial
Commercial and industrial
Automotive	124		1		65		2
Other	118		—		76		—
Commercial real estate	5		—		5		—
Total commercial	247		1		146		2
Total consumer and commercial finance receivables and loans	$	972	$	34	$	852	$	31

Troubled Debt Restructurings

Troubled Debt Restructurings (TDRs) are loan modifications where concessions were granted to borrowers experiencing financial difficulties. For consumer automotive loans, we may offer several types of assistance to aid our customers, including payment extensions and rewrites of the loan terms. Additionally, for mortgage loans, as part of certain programs, we offer mortgage loan modifications to qualified borrowers. These programs are in place to provide support to our mortgage customers in financial distress, including principal forgiveness, maturity extensions, delinquent interest capitalization, and changes to contractual interest rates. Total TDRs recorded at gross carrying value were $838 million and $812 million at September 30, 2019, and December 31, 2018, respectively.

Total commitments to lend additional funds to borrowers whose terms had been modified in a TDR were $18 million and $4 million at September 30, 2019, and December 31, 2018, respectively. Refer to Note 1 to the Consolidated Financial Statements in our 2018 Annual Report on Form 10-K for additional information.

Table of Contents

Notes to Condensed Consolidated Financial Statements (unaudited)

Ally Financial Inc. • Form 10-Q

The following tables present information related to finance receivables and loans recorded at gross carrying value modified in connection with a TDR during the period.



	2019					2018
Three months ended September 30, ($ in millions)	Number of loans	Pre-modification gross carrying value		Post-modification gross carrying value		Number of loans	Pre-modification gross carrying value		Post-modification gross carrying value
Consumer automotive	7,197	$	124	$	107	6,759	$	67	$	67
Consumer mortgage
Mortgage Finance	1	—		—		10	4		4
Mortgage — Legacy	8	1		1		65	8		6
Total consumer mortgage	9	1		1		75	12		10
Total consumer	7,206	125		108		6,834	79		77
Commercial
Commercial and industrial
Automotive	1	5		5		—	—		—
Other	1	25		25		—	—		—
Total commercial	2	30		30		—	—		—
Total consumer and commercial finance receivables and loans	7,208	$	155	$	138	6,834	$	79	$	77



	2019					2018
Nine months ended September 30, ($ in millions)	Number of loans	Pre-modification gross carrying value		Post-modification gross carrying value		Number of loans	Pre-modification gross carrying value		Post-modification gross carrying value
Consumer automotive	20,222	$	349	$	303	19,699	$	302	$	270
Consumer mortgage
Mortgage Finance	4	—		—		18	7		7
Mortgage — Legacy	46	7		7		154	24		22
Total consumer mortgage	50	7		7		172	31		29
Total consumer	20,272	356		310		19,871	333		299
Commercial
Commercial and industrial
Automotive	7	46		46		3	4		4
Other	2	47		31		2	55		51
Total commercial	9	93		77		5	59		55
Total consumer and commercial finance receivables and loans	20,281	$	449	$	387	19,876	$	392	$	354

The following tables present information about finance receivables and loans recorded at gross carrying value that have redefaulted during the reporting period and were within twelve months or less of being modified as a TDR. Redefault is when finance receivables and loans meet the requirements for evaluation under our charge-off policy (refer to Note 1 to the Consolidated Financial Statements in our 2018 Annual Report on Form 10-K for additional information) except for commercial finance receivables and loans, where redefault is defined as 90 days past due.



	2019					2018
Three months ended September 30, ($ in millions)	Number of loans	Gross carrying value		Charge-off amount		Number of loans	Gross carrying value		Charge-off amount
Consumer automotive	1,713	$	18	$	13	2,466	$	27	$	19
Total consumer finance receivables and loans	1,713	$	18	$	13	2,466	$	27	$	19

Table of Contents

Notes to Condensed Consolidated Financial Statements (unaudited)

Ally Financial Inc. • Form 10-Q



	2019					2018
Nine months ended September 30, ($ in millions)	Number of loans	Gross carrying value		Charge-off amount		Number of loans	Gross carrying value		Charge-off amount
Consumer automotive	5,674	$	64	$	41	7,217	$	84	$	54
Consumer mortgage
Mortgage — Legacy	—	—		—		1	—		—
Total consumer finance receivables and loans	5,674	$	64	$	41	7,218	$	84	$	54

8. Leasing

On January 1, 2019, we adopted the amendments to the lease accounting principles. Refer to the section titled Recently Adopted Accounting Standards in Note 1 for additional information.

Ally as the Lessee

We have operating leases for our corporate facilities, which have remaining lease terms of 1 month to 13 years. Most of the property leases have fixed payment terms with annual fixed-escalation clauses and include options to extend the leases for periods that range from 1 to 15 years. Some of those lease agreements also include options to terminate the leases in periods that range from 2 to 6 years after the commencement of the leases. We have not included any of these term extensions or termination provisions in our estimates of the lease term, as we do not consider it reasonably certain that the options will be exercised. Our property-lease agreements contain a lease component, which includes the right to use the real estate, and non-lease components, which include utilities and common area maintenance services. Lease components are accounted for under the ASC Topic on Leases, while non-lease components are accounted for under other GAAP Topics. We elected the practical expedient to account for the lease and non-lease components for property leases as a single lease component. Additional variable-rent payments made during the lease term are not based on a rate or index and are excluded from the calculations of ROU assets and lease liabilities and recognized as a component of variable lease expense as incurred.

We also have operating leases for a fleet of vehicles that is used by our sales force for business purposes, with noncancellable lease terms of 367 days. Thereafter, the leases are month-to-month, up to a maximum of 48 months from inception. In addition to lease costs related to the vehicles, the lease contracts include non-lease components such as maintenance, fuel, and administrative services. We elected to account for the lease and non-lease components separately. As a result, the non-lease components are excluded from the calculation of the ROU asset and lease liability and are recognized as other operating expenses as incurred.

The following table details our total investment in operating leases.



($ in millions)	September 30, 2019		January 1, 2019 (a)
Assets
Operating lease right-of-use assets (b)	$	168	$	161
Liabilities
Operating lease liabilities (c)	$	195	$	190


(a)	Date of adoption.


(b)	Included in other assets on our Condensed Consolidated Balance Sheet.


(c)	Included in accrued expenses and other liabilities on our Condensed Consolidated Balance Sheet.

During the three months and nine months ended September 30, 2019, we paid $12 million and $37 million, respectively, in cash for amounts included in the measurement of lease liabilities at September 30, 2019. This amount is included in net cash provided by operating activities in the Condensed Consolidated Statement of Cash Flows. During the nine months ended September 30, 2019, we obtained $41 million of ROU assets in exchange for new operating lease liabilities. As of September 30, 2019, the weighted-average remaining lease term of our operating lease portfolio was 7 years, and the weighted-average discount rate was 2.93%.

Table of Contents

Notes to Condensed Consolidated Financial Statements (unaudited)

Ally Financial Inc. • Form 10-Q

The following table presents future minimum rental payments we are required to make under operating leases that have commenced as of September 30, 2019, and that have noncancellable lease terms expiring after September 30, 2019.



($ in millions)
2019	$	12
2020	49
2021	38
2022	26
2023	17
2024 and thereafter	75
Total undiscounted cash flows	217
Difference between undiscounted cash flows and discounted cash flows	(22		)
Total lease liability	$	195

In addition to the above, we entered into a forward-starting lease agreement in September 2017, for a new corporate facility in Charlotte, North Carolina, where we plan to consolidate several existing facilities into that location. The lessor and their agents are currently constructing the facilities at this location, with the lease scheduled to commence in April 2021 after construction is completed. The lease agreement will have a total of $290 million in undiscounted future lease payments over the 15 year term of the lease.

Future minimum rental payments required under operating leases as of December 31, 2018, prior to the date of adoption and as defined by the previous lease accounting guidance, with noncancellable lease terms expiring after December 31, 2018, were as follows.



Year ended December 31, ($ in millions)
2019	$	48
2020	47
2021	46
2022	37
2023	31
2024 and thereafter	294
Total minimum payments required	$	503

The following table details the components of total net operating lease expense.



	Three months ended September 30,				Nine months ended September 30,
($ in millions)	2019		2018		2019		2018
Operating lease expense	$	11	$	11	$	34	$	32
Variable lease expense	2		2		6		5
Total lease expense, net (a)	$	13	$	13	$	40	$	37

(a) Included in other operating expenses in our Condensed Consolidated Statement of Comprehensive Income

Ally as the Lessor

Investment in Operating Leases

We purchase consumer operating lease contracts and the associated vehicles from dealerships after those contracts are executed by the dealers and the consumers. The amount we pay a dealer for an operating lease contract is based on the negotiated price for the vehicle less vehicle trade-in, down payment from the consumer, and available automotive manufacturer incentives. Under the operating lease, the consumer is obligated to make payments in amounts equal to the amount by which the negotiated purchase price of the vehicle (less any trade-in value, down payment, or available manufacturer incentives) exceeds the contract residual value (including residual support) of the vehicle at lease termination, plus operating lease rental charges. The customer can terminate the lease at any point after commencement, subject to additional charges and fees. Both the consumer and the dealership have the option to purchase the vehicle at the end of the lease term, which can range from 24 to 60 months, at the residual value of the vehicle, however it is not reasonably certain this option will be exercised and as such our consumer leases are classified as operating leases. We have made an accounting policy election to exclude the sales taxes we collect from consideration in the lease contract and from variable lease payments not included in contract consideration. In addition to the charges described above, the consumer is generally responsible for certain charges related to excess mileage or excessive wear and tear on the vehicle. These charges are deemed variable lease payments and, as these payments are not based on a rate or index, they are recognized as net depreciation expense on operating lease assets in our Condensed Consolidated Statement of Comprehensive Income as incurred.

Table of Contents

Notes to Condensed Consolidated Financial Statements (unaudited)

Ally Financial Inc. • Form 10-Q

When we acquire a consumer operating lease, we assume ownership of the vehicle from the dealer. We require that property damage, bodily injury, collision, and comprehensive insurance be obtained by the lessee on all consumer operating leases. Neither the consumer nor the dealer is responsible for the value of the vehicle at the time of lease termination. When vehicles are not purchased by customers or the receiving dealer at scheduled lease termination, the vehicle is returned to us for remarketing. We generally bear the risk of loss to the extent the value of a leased vehicle upon remarketing is below the expected residual value. At contract inception, we determine pricing based on the projected residual value of the leased vehicle. This evaluation is primarily based on a proprietary model, which includes variables such as age, expected mileage, seasonality, segment factors, vehicle type, economic indicators, production cycle, automotive manufacturer incentives, and shifts in used-vehicle supply. This internally-generated data is compared against third-party, independent data for reasonableness. Periodically, we revise the projected value of the leased vehicle at termination based on current market conditions and adjust depreciation expense if necessary over the remaining life of the contract. At termination, our actual sales proceeds from remarketing the vehicle may be higher or lower than the estimated residual value resulting in a gain or loss on remarketing, which is included in net depreciation expense on operating lease assets in our Condensed Consolidated Statement of Comprehensive Income. Excessive mileage or excessive wear and tear on the vehicle during the lease may impact the sales proceeds received upon remarketing. As of September 30, 2019, consumer operating leases with a carrying value, net of accumulated depreciation, of $354 million were covered by a residual value guarantee of 15% of the manufacturer’s suggested retail price.

The following table details our investment in operating leases.



($ in millions)	September 30, 2019			December 31, 2018
Vehicles	$	10,197		$	9,995
Accumulated depreciation	(1,544		)	(1,578		)
Investment in operating leases, net	$	8,653		$	8,417

The following table presents future minimum rental payments we have the right to receive under operating leases with noncancellable lease terms expiring after September 30, 2019.



($ in millions)
2019	$	387
2020	1,211
2021	696
2022	251
2023	44
2024 and thereafter	3
Total lease payments from operating leases	$	2,592

We recognized $368 million and $1.1 billion in operating lease revenue for both the three months and nine months ended September 30, 2019, and 2018, respectively. Depreciation expense on operating lease assets includes remarketing gains and losses recognized on the sale of operating lease assets. The following table summarizes the components of depreciation expense on operating lease assets.



	Three months ended September 30,						Nine months ended September 30,
($ in millions)	2019			2018			2019			2018
Depreciation expense on operating lease assets (excluding remarketing gains) (a)	$	262		$	274		$	785		$	846
Remarketing gains, net	(28		)	(27		)	(66		)	(61		)
Net depreciation expense on operating lease assets	$	234		$	247		$	719		$	785

(a) Includes variable lease payments related to excess mileage and excessive wear and tear on vehicles of $5 million and $14 million during the three months and nine months ended September 30, 2019, respectively, and $6 million and $19 million during the three months and nine months ended September 30, 2018.

Table of Contents

Notes to Condensed Consolidated Financial Statements (unaudited)

Ally Financial Inc. • Form 10-Q

Finance Leases

Our total gross investment in finance leases, which is included in finance receivables and loans, net, on our Condensed Consolidated Balance Sheet was $494 million and $439 million as of September 30, 2019, and December 31, 2018, respectively. This includes lease payment receivables of $481 million and $425 million at September 30, 2019, and December 31, 2018, respectively, and unguaranteed residual assets of $13 million and $14 million at September 30, 2019, and December 31, 2018, respectively. Interest income on finance lease receivables was $7 million and $19 million for the three months and nine months ended September 30, 2019, respectively, and $5 million and $16 million for the three months and nine months ended September 30, 2018, and is included in interest and fees on finance receivables and loans in our Condensed Consolidated Statement of Comprehensive Income.

The following table presents future minimum rental payments we have the right to receive under finance leases with noncancellable lease terms expiring after September 30, 2019.



($ in millions)
2019	$	43
2020	168
2021	144
2022	87
2023	53
2024 and thereafter	41
Total undiscounted cash flows	536
Difference between undiscounted cash flows and discounted cash flows	(55		)
Present value of lease payments recorded as lease receivable	$	481

9. Securitizations and Variable Interest Entities

We securitize, transfer, and service consumer and commercial automotive loans, and operating leases. We often securitize these loans and notes secured by operating leases (collectively referred to as financial assets) using special purpose entities (SPEs). An SPE is a legal entity that is designed to fulfill a specified limited need of the sponsor. Our principal use of SPEs is to obtain liquidity by securitizing certain of our financial assets. SPEs are often variable interest entities (VIEs) and may or may not be included on our Condensed Consolidated Balance Sheet.

VIEs are legal entities that either have an insufficient amount of equity at risk for the entity to finance its activities without additional subordinated financial support or, as a group, the holders of the equity investment at risk lack the ability to control the entity’s activities that most significantly impact economic performance through voting or similar rights, or do not have the obligation to absorb the expected losses or the right to receive expected residual returns of the entity.

The VIEs included on the Condensed Consolidated Balance Sheet represent SPEs where we are deemed to be the primary beneficiary, primarily due to our servicing activities and our beneficial interests in the VIE that could be potentially significant.

The nature, purpose, and activities of nonconsolidated SPEs are similar to those of our consolidated SPEs with the primary difference being the nature and extent of our continuing involvement. For nonconsolidated SPEs, the transferred financial assets are removed from our balance sheet provided the conditions for sale accounting are met. The financial assets obtained from the securitization are primarily reported as cash or retained interests (if applicable). Liabilities incurred as part of these securitizations, are recorded at fair value at the time of sale and are reported as accrued expenses and other liabilities on our Condensed Consolidated Balance Sheet. Upon the sale of the loans, we recognize a gain or loss on sale for the difference between the assets recognized, the assets derecognized, and the liabilities recognized as part of the transaction. With respect to our ongoing right to service the assets we sell, the servicing fee we receive represents adequate compensation, and consequently, we do not recognize a servicing asset or liability.

There were no sales of financial assets into nonconsolidated VIEs for both the three months and nine months ended September 30, 2019. We had a pretax gain on sales of financial assets into nonconsolidated VIEs of $1 million for both the three months and nine months ended September 30, 2018.

We provide long-term guarantee contracts to investors in certain nonconsolidated affordable housing entities and have extended a line of credit to provide liquidity. Since we do not have control over the entities or the power to make decisions, we do not consolidate the entities and our involvement is limited to the guarantee and the line of credit.

We are involved with various other nonconsolidated equity investments, including affordable housing entities and venture capital funds and loan funds. We do not consolidate these entities and our involvement is limited to our outstanding investment, additional capital committed to these funds plus any previously recognized low income housing tax credits that are subject to recapture.

Refer to Note 1 and Note 11 to the Consolidated Financial Statements in our 2018 Annual Report on Form 10-K for further description of our securitization activities and our involvement with VIEs.

Table of Contents

Notes to Condensed Consolidated Financial Statements (unaudited)

Ally Financial Inc. • Form 10-Q

The following table presents our involvement in consolidated and nonconsolidated VIEs in which we hold variable interests. For additional detail related to the assets and liabilities of consolidated variable interest entities refer to the Condensed Consolidated Balance Sheet.



($ in millions)	Carrying value of total assets			Carrying value of total liabilities			Assets sold to nonconsolidated VIEs (a)		Maximum exposure to loss in nonconsolidated VIEs
September 30, 2019
On-balance sheet variable interest entities
Consumer automotive (b)	$	18,374	(c)	$	5,892	(d)
Commercial automotive	8,846			3,048
Off-balance sheet variable interest entities
Consumer automotive (b)	27		(e)	—			$	561	$	588	(f)
Commercial other	993		(g)	356		(h)	—		1,259		(i)
Total	$	28,240		$	9,296		$	561	$	1,847
December 31, 2018
On-balance sheet variable interest entities
Consumer automotive	$	16,255	(c)	$	6,573	(d)
Commercial automotive	11,089			3,946
Off-balance sheet variable interest entities
Consumer automotive	45		(e)	—			$	1,235	$	1,280	(f)
Commercial other	806		(g)	326		(h)	—		1,054		(i)
Total	$	28,195		$	10,845		$	1,235	$	2,334


(a)	Asset values represent the current unpaid principal balance of outstanding consumer finance receivables and loans within the VIEs.

(b)

During the three months ended September 30, 2019, we indicated our intent to exercise clean-up call options related to a nonconsolidated securitization-related VIE. The option enables us to repurchase the remaining transferred financial assets at our discretion once the asset pool declines to a predefined level and redeem the related outstanding debt. As a result of this event, we became the primary beneficiary of the VIE, which included $96 million of consumer automotive loans and $93 million of related debt, and the VIE was consolidated on our Condensed Consolidated Balance Sheet. The related amounts were removed from assets sold to nonconsolidated VIEs and maximum exposure to loss in nonconsolidated VIEs.


(c)	Includes $8.8 billion and $8.4 billion of assets that were not encumbered by VIE beneficial interests held by third parties at September 30, 2019, and December 31, 2018, respectively. Ally or consolidated affiliates hold the interests in these assets.


(d)	Includes $21 million and $25 million of liabilities that were not obligations to third-party beneficial interest holders at September 30, 2019, and December 31, 2018, respectively.

(e)

Represents retained notes and certificated residual interests, of which $25 million and $43 million were classified as held-to-maturity securities at September 30, 2019, and December 31, 2018, respectively, and $2 million were classified as other assets at both September 30, 2019, and December 31, 2018. These assets represent our five percent interest in the credit risk of the assets underlying asset-backed securitizations.

(f)

Maximum exposure to loss represents the current unpaid principal balance of outstanding loans, retained notes, certificated residual interests, as well as certain noncertificated interests retained from the sale of automotive finance receivables. This measure is based on the very unlikely event that all of our sold loans have defects that would trigger a representation and warranty provision and the underlying collateral supporting the loans becomes worthless. This required disclosure is not an indication of our expected loss.


(g)	Amounts are classified as other assets.


(h)	Amounts are classified as accrued expenses and other liabilities.

(i)

For certain nonconsolidated affordable housing entities, maximum exposure to loss represents the yield we guaranteed investors through long-term guarantee contracts. The amount disclosed is based on the unlikely event that the underlying properties cease generating yield to investors and the yield delivered to investors in the form of low income tax housing credits is recaptured. For nonconsolidated equity investments, maximum exposure to loss represents our outstanding investment, additional committed capital, and low income housing tax credits subject to recapture. The amount disclosed is based on the unlikely event that our committed capital is funded, our investments become worthless, and the tax credits previously delivered to us are recaptured. This required disclosure is not an indication of our expected loss.

Table of Contents

Notes to Condensed Consolidated Financial Statements (unaudited)

Ally Financial Inc. • Form 10-Q

Cash Flows with Off-balance Sheet Securitization Entities

The following table summarizes cash flows received and paid related to SPEs and asset-backed financings where the transfer is accounted for as a sale and we have a continuing involvement with the transferred consumer automotive assets (e.g., servicing) that were outstanding during the nine months ended September 30, 2019, and 2018. Additionally, this table contains information regarding cash flows received from and paid to nonconsolidated SPEs that existed during each period.



Nine months ended September 30, ($ in millions)	Consumer automotive			Consumer mortgage
2019
Cash flows received on retained interests in securitization entities	$	18		$	—
Servicing fees	8			—
Cash disbursements for repurchases during the period	(2		)	—
2018
Cash proceeds from transfers completed during the period	$	24		$	—
Cash flows received on retained interests in securitization entities	13			—
Servicing fees	14			—
Cash disbursements for repurchases during the period	(3		)	—
Representations and warranty recoveries	—			2

Delinquencies and Net Credit Losses

The following tables present quantitative information about delinquencies and net credit losses for off-balance sheet securitizations and whole-loan sales where we have continuing involvement.



	Total amount				Amount 60 days or more past due
($ in millions)	September 30, 2019		December 31, 2018		September 30, 2019		December 31, 2018
Off-balance sheet securitization entities
Consumer automotive	$	561	$	1,235	$	7	$	13
Whole-loan sales (a)
Consumer automotive	297		634		2		3
Total	$	858	$	1,869	$	9	$	16


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



	Net credit losses
	Three months ended September 30,				Nine months ended September 30,
($ in millions)	2019		2018		2019		2018
Off-balance sheet securitization entities
Consumer automotive	$	1	$	2	$	5	$	7
Whole-loan sales (a)
Consumer automotive	—		1		1		2
Total	$	1	$	3	$	6	$	9


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

Table of Contents

Notes to Condensed Consolidated Financial Statements (unaudited)

Ally Financial Inc. • Form 10-Q

10. Other Assets

The components of other assets were as follows.



($ in millions)	September 30, 2019			December 31, 2018
Property and equipment at cost	$	1,294		$	1,250
Accumulated depreciation	(662		)	(686		)
Net property and equipment	632			564
Nonmarketable equity investments (a)	1,243			1,410
Investment in qualified affordable housing projects (b)	784			649
Restricted cash held for securitization trusts (c)	666			965
Accrued interest, fees, and rent receivables	594			599
Equity-method investments (d)	322			262
Goodwill (e)	240			240
Other accounts receivable	118			203
Fair value of derivative contracts in receivable position (f)	94			41
Restricted cash and cash equivalents (g)	88			124
Net deferred tax assets	75			317
Cash collateral placed with counterparties	6			26
Other assets	928			753
Total other assets	$	5,790		$	6,153

(a)

Includes investments in FHLB stock of $711 million and $903 million at September 30, 2019, and December 31, 2018, respectively; Federal Reserve Bank (FRB) stock of $449 million and $448 million at September 30, 2019, and December 31, 2018, respectively; and equity securities without a readily determinable fair value of $83 million and $59 million at September 30, 2019, and December 31, 2018, respectively, measured at cost with adjustments for impairment and observable changes in price. During the three months and nine months ended September 30, 2019, we recorded $2 million and $9 million, respectively, of upward adjustments related to equity securities without a readily determinable fair value. Through September 30, 2019, we recorded $9 million of cumulative upward adjustments and $3 million of cumulative impairments and downward adjustments related to equity securities without a readily determinable fair value.

(b)

Investment in qualified affordable housing projects are accounted for using the proportional amortization method of accounting and include $350 million and $319 million of unfunded commitments to provide additional capital contributions to investees at September 30, 2019, and December 31, 2018, respectively. Substantially all of the unfunded commitments at September 30, 2019, are expected to be paid out over the next five years.


(c)	Includes restricted cash collected from customer payments on securitized receivables, which are distributed by us to investors as payments on the related secured debt, and cash reserve deposits utilized as a form of credit enhancement for various securitization transactions.


(d)	Primarily relates to investments made in connection with our Community Reinvestment Act (CRA) program.

(e)

Includes goodwill of $27 million within our Insurance operations at both September 30, 2019, and December 31, 2018; $193 million within Corporate and Other at both September 30, 2019, and December 31, 2018; and $20 million within Automotive Finance operations at both September 30, 2019, and December 31, 2018. No changes to the carrying amount of goodwill were recorded during the nine months ended September 30, 2019.


(f)	For additional information on derivative instruments and hedging activities, refer to Note 17.


(g)	Primarily represents a number of arrangements with third parties where certain restrictions are placed on balances we hold due to collateral agreements associated with operational processes with a third-party bank, or letter of credit arrangements and corresponding collateral requirements.

11. Deposit Liabilities

Deposit liabilities consisted of the following.



($ in millions)	September 30, 2019		December 31, 2018
Noninterest-bearing deposits	$	156	$	142
Interest-bearing deposits
Savings and money-market checking accounts	61,285		56,050
Certificates of deposit	57,788		49,985
Other deposits	1		1
Total deposit liabilities	$	119,230	$	106,178

At September 30, 2019, and December 31, 2018, certificates of deposit included $24.8 billion and $21.0 billion, respectively, of those in denominations of $100 thousand or more. At September 30, 2019, and December 31, 2018, certificates of deposit included $7.5 billion and $6.1 billion, respectively, of those in denominations in excess of $250 thousand federal insurance limits.

Table of Contents

Notes to Condensed Consolidated Financial Statements (unaudited)

Ally Financial Inc. • Form 10-Q

12. Debt

Short-term Borrowings

The following table presents the composition of our short-term borrowings portfolio.



	September 30, 2019						December 31, 2018
($ in millions)	Unsecured		Secured (a)		Total		Unsecured		Secured (a)		Total
Demand notes	$	2,501	$	—	$	2,501	$	2,477	$	—	$	2,477
Federal Home Loan Bank	—		2,375		2,375		—		6,825		6,825
Securities sold under agreements to repurchase	—		459		459		—		685		685
Total short-term borrowings	$	2,501	$	2,834	$	5,335	$	2,477	$	7,510	$	9,987


(a)	Refer to the section below titled Long-term Debt for further details on assets restricted as collateral for payment of the related debt.

We periodically enter into term repurchase agreements—short-term borrowing agreements in which we sell securities to one or more investors while simultaneously committing to repurchase them at a specified future date, at the stated price plus accrued interest. As of September 30, 2019, the securities sold under agreements to repurchase consisted of $459 million of agency mortgage-backed residential debt securities set to mature as follows: $145 million within 30 days, $170 million within 31 to 60 days, and $144 million within 61 to 90 days. Refer to Note 6 and Note 20 for further details.

The primary risk associated with these repurchase agreements is that the counterparty will be unable to perform under the terms of the contract. As the borrower, we are exposed to the excess market value of the securities pledged over the amount borrowed. Daily mark-to-market collateral management is designed to limit this risk to the initial margin. However, should a counterparty declare bankruptcy or become insolvent, we may incur additional delays and costs. In some instances, we may place or receive cash collateral with counterparties under collateral arrangements associated with our repurchase agreements. At September 30, 2019, we placed cash collateral totaling $6 million and did not receive cash or noncash collateral. At December 31, 2018, we did not place any collateral, and we received cash collateral totaling $8 million and noncash collateral totaling $4 million.

Long-term Debt

The following table presents the composition of our long-term debt portfolio.



	September 30, 2019						December 31, 2018
($ in millions)	Unsecured		Secured		Total		Unsecured		Secured		Total
Long-term debt (a)
Due within one year	$	3,044	$	6,876	$	9,920	$	1,663	$	7,313	$	8,976
Due after one year	9,049		16,761		25,810		10,444		24,773		35,217
Total long-term debt (b) (c)	$	12,093	$	23,637	$	35,730	$	12,107	$	32,086	$	44,193


(a)	Includes basis adjustments related to the application of hedge accounting.


(b)	Includes $2.6 billion of trust preferred securities at both September 30, 2019, and December 31, 2018.


(c)	Includes advances net of hedge basis adjustment from the FHLB of Pittsburgh of $14.0 billion and $14.9 billion at September 30, 2019, and December 31, 2018, respectively.

The following table presents the scheduled remaining maturity of long-term debt at September 30, 2019, assuming no early redemptions will occur. The amounts below include adjustments to the carrying value resulting from the application of hedge accounting. The actual payment of secured debt may vary based on the payment activity of the related pledged assets.



($ in millions)	2019			2020			2021			2022			2023			2024 and thereafter			Total
Unsecured
Long-term debt	$	834		$	2,258		$	699		$	1,095		$	15		$	8,303		$	13,204
Original issue discount	(11		)	(43		)	(48		)	(52		)	(59		)	(898		)	(1,111		)
Total unsecured	823			2,215			651			1,043			(44		)	7,405			12,093
Secured
Long-term debt	1,486			6,695			9,342			5,417			539			158			23,637
Total long-term debt	$	2,309		$	8,910		$	9,993		$	6,460		$	495		$	7,563		$	35,730

Table of Contents

Notes to Condensed Consolidated Financial Statements (unaudited)

Ally Financial Inc. • Form 10-Q

The following summarizes assets restricted as collateral for the payment of the related debt obligation, primarily arising from securitization transactions accounted for as secured borrowings and repurchase agreements.



	September 30, 2019					December 31, 2018
($ in millions)	Total (a)			Ally Bank		Total (a)			Ally Bank
Investment securities (b)	$	3,386		$	3,386	$	10,280		$	9,564
Mortgage assets held-for-investment and lending receivables	16,820			16,820		16,498			16,498
Consumer automotive finance receivables	12,130			9,516		17,015			9,715
Commercial automotive finance receivables	13,759			13,759		15,563			15,563
Operating leases	67			—		170			—
Total assets restricted as collateral (c) (d)	$	46,162		$	43,481	$	59,526		$	51,340
Secured debt	$	26,471	(e)	$	24,138	$	39,596	(e)	$	32,072


(a)	Ally Bank is a component of the total column.


(b)	A portion of the restricted investment securities at September 30, 2019, and December 31, 2018, were restricted under repurchase agreements. Refer to the section above titled Short-term Borrowings for information on the repurchase agreements.

(c)

Ally Bank has an advance agreement with the FHLB, and had assets pledged to secure borrowings that were restricted as collateral to the FHLB totaling $24.7 billion and $30.8 billion at September 30, 2019, and December 31, 2018, respectively. These assets were composed primarily of consumer mortgage finance receivables and loans and investment securities. Ally Bank has access to the FRB Discount Window and had assets pledged and restricted as collateral to the FRB totaling $2.4 billion at both September 30, 2019, and December 31, 2018. These assets were composed of consumer automotive finance receivables and loans. Availability under these programs is only for the operations of Ally Bank and cannot be used to fund the operations or liabilities of Ally or its subsidiaries.


(d)	Excludes restricted cash and cash reserves for securitization trusts recorded within other assets on the Condensed Consolidated Balance Sheet. Refer to Note 10 for additional information.


(e)	Includes $2.8 billion and $7.5 billion of short-term borrowings at September 30, 2019, and December 31, 2018, respectively.

Trust Preferred Securities

At both September 30, 2019, and December 31, 2018, we had issued and outstanding approximately $2.6 billion in aggregate liquidation preference of 8.125% Fixed Rate/Floating Rate Trust Preferred Securities, Series 2 (Series 2 TRUPS). Each Series 2 TRUPS security has a liquidation amount of $25. Distributions are cumulative and are payable until redemption at the applicable coupon rate. Distributions are payable at an annual rate equal to three-month London interbank offered rate plus 5.785% payable quarterly in arrears. Ally has the right to defer payments of interest for a period not exceeding 20 consecutive quarters. The Series 2 TRUPS have no stated maturity date, but must be redeemed upon the redemption or maturity of the related debentures (Debentures), which mature on February 15, 2040. Ally at any time may redeem the Series 2 TRUPS at a redemption price equal to 100% of the principal amount being redeemed, plus accrued and unpaid interest through the date of redemption. The Series 2 TRUPS are generally nonvoting, other than with respect to certain limited matters. During any period in which any Series 2 TRUPS remain outstanding but in which distributions on the Series 2 TRUPS have not been fully paid, none of Ally or its subsidiaries will be permitted to (i) declare or pay dividends on, make any distributions with respect to, or redeem, purchase, acquire or otherwise make a liquidation payment with respect to, any of Ally’s capital stock or make any guarantee payment with respect thereto; or (ii) make any payments of principal, interest, or premium on, or repay, repurchase or redeem, any debt securities or guarantees that rank on a parity with or junior in interest to the Debentures with certain specified exceptions in each case. The Series 2 TRUPS were issued prior to October 4, 2010, under the Emergency Economic Stabilization Act of 2008 and are not subject to phase-out from additional Tier 1 capital into Tier 2 capital. The amount of Series 2 TRUPS included in Ally’s Tier 1 capital was $2.5 billion at September 30, 2019. The amount represents the carrying amount of the Series 2 TRUPS less our common stock investment in the trust.

Funding Facilities

We utilize both committed secured credit facilities and other collateralized funding vehicles. The debt outstanding under our various funding facilities is included on our Condensed Consolidated Balance Sheet.

The total capacity in our credit facilities is provided by banks through private transactions. The facilities can be revolving in nature, generally having an original tenor ranging from 364 days to two years, and allow for additional funding during the commitment period, or they can be amortizing and not allow for any further funding after the commitment period. At September 30, 2019, all of our $2.7 billion of capacity was revolving and of this balance, $1.7 billion was from facilities with a remaining tenor greater than 364 days.

Table of Contents

Notes to Condensed Consolidated Financial Statements (unaudited)

Ally Financial Inc. • Form 10-Q

Committed Secured Credit Facilities



	Outstanding				Unused capacity (a)				Total capacity
($ in millions)	September 30, 2019		December 31, 2018		September 30, 2019		December 31, 2018		September 30, 2019		December 31, 2018
Bank funding
Secured	$	—	$	3,500	$	—	$	1,300	$	—	$	4,800
Parent funding
Secured	700		3,165		1,950		635		2,650		3,800
Total committed secured credit facilities	$	700	$	6,665	$	1,950	$	1,935	$	2,650	$	8,600


(a)	Funding from committed secured credit facilities is available on request in the event excess collateral resides in certain facilities or the extent incremental collateral is available and contributed to the facilities.

13. Accrued Expenses and Other Liabilities

The components of accrued expenses and other liabilities were as follows.



($ in millions)	September 30, 2019		December 31, 2018
Accounts payable	$	1,231	$	516
Unfunded commitments for investment in qualified affordable housing projects	350		319
Employee compensation and benefits	255		255
Reserves for insurance losses and loss adjustment expenses	135		134
Cash collateral received from counterparties	61		41
Deferred revenue	26		27
Fair value of derivative contracts in payable position (a)	3		37
Other liabilities	539		347
Total accrued expenses and other liabilities	$	2,600	$	1,676


(a)	For additional information on derivative instruments and hedging activities, refer to Note 17.

Table of Contents

Notes to Condensed Consolidated Financial Statements (unaudited)

Ally Financial Inc. • Form 10-Q

14. Accumulated Other Comprehensive (Loss) Income

The following table presents changes, net of tax, in each component of accumulated other comprehensive (loss) income.



	Three months ended September 30,
($ in millions)	Unrealized (losses) gains on investment securities (a)			Translation adjustments and net investment hedges (b)		Cash flow hedges (b)		Defined benefit pension plans			Accumulated other comprehensive (loss) income
Balance at July 1, 2018	$	(598	)	$	19	$	28	$	(97	)	$	(648	)
Net change	(133		)	—		—		—			(133		)
Balance at September 30, 2018	$	(731	)	$	19	$	28	$	(97	)	$	(781	)
Balance at July 1, 2019	$	133		$	19	$	28	$	(96	)	$	84
Net change	105			—		1		—			106
Balance at September 30, 2019	$	238		$	19	$	29	$	(96	)	$	190



	Nine months ended September 30,
($ in millions)	Unrealized (losses) gains on investment securities (a)			Translation adjustments and net investment hedges (b)			Cash flow hedges (b)		Defined benefit pension plans			Accumulated other comprehensive (loss) income
Balance at December 31, 2017	$	(173	)	$	16		$	11	$	(89	)	$	(235	)
Cumulative effect of changes in accounting principles, net of tax
Adoption of Accounting Standards Update 2016-01	27			—			—		—			27
Adoption of Accounting Standards Update 2018-02	(40		)	4			—		(6		)	(42		)
Balance at January 1, 2018	(186		)	20			11		(95		)	(250		)
Net change	(545		)	(1		)	17		(2		)	(531		)
Balance at September 30, 2018	$	(731	)	$	19		$	28	$	(97	)	$	(781	)
Balance at December 31, 2018	$	(481	)	$	18		$	19	$	(95	)	$	(539	)
Cumulative effect of changes in accounting principles, net of tax (c)
Adoption of Accounting Standards Update 2017-08	8			—			—		—			8
Balance at January 1, 2019	(473		)	18			19		(95		)	(531		)
Net change	711			1			10		(1		)	721
Balance at September 30, 2019	$	238		$	19		$	29	$	(96	)	$	190


(a)	Represents the after-tax difference between the fair value and amortized cost of our available-for-sale securities portfolio.


(b)	For additional information on derivative instruments and hedging activities, refer to Note 17.


(c)	Refer to the section titled Recently Adopted Accounting Standards in Note 1 for additional information.

Table of Contents

Notes to Condensed Consolidated Financial Statements (unaudited)

Ally Financial Inc. • Form 10-Q

The following tables present the before- and after-tax changes in each component of accumulated other comprehensive income (loss).



Three months ended September 30, 2019 ($ in millions)	Before tax				Tax effect				After tax
Investment securities
Net unrealized gains arising during the period	$	165			$	(39	)		$	126
Less: Net realized gains reclassified to income from continuing operations	27			(a)	(6		)	(b)	21
Net change	138				(33		)		105
Translation adjustments
Net unrealized losses arising during the period	(2		)		1				(1		)
Net investment hedges (c)
Net unrealized gains arising during the period	2				(1		)		1
Cash flow hedges (c)
Net unrealized gains arising during the period	5				(1		)		4
Less: Net realized gains reclassified to income from continuing operations	3				—				3
Net change	2				(1		)		1
Other comprehensive income	$	140			$	(34	)		$	106


(a)	Includes gains reclassified to other gain on investments, net in our Condensed Consolidated Statement of Comprehensive Income.


(b)	Includes amounts reclassified to income tax expense from continuing operations in our Condensed Consolidated Statement of Comprehensive Income.


(c)	For additional information on derivative instruments and hedging activities, refer to Note 17.



Three months ended September 30, 2018 ($ in millions)	Before tax				Tax effect				After tax
Investment securities
Net unrealized losses arising during the period	$	(174	)		$	41			$	(133	)
Less: Net realized gains reclassified to income from continuing operations	1			(a)	(1		)	(b)	—
Net change	(175		)		42				(133		)
Translation adjustments
Net unrealized gains arising during the period	2				(1		)		1
Net investment hedges (c)
Net unrealized losses arising during the period	(2		)		1				(1		)
Cash flow hedges (c)
Net unrealized losses arising during the period	(1		)		1				—
Other comprehensive loss	$	(176	)		$	43			$	(133	)


(a)	Includes gains reclassified to other gain on investments, net in our Condensed Consolidated Statement of Comprehensive Income.


(b)	Includes amounts reclassified to income tax expense from continuing operations in our Condensed Consolidated Statement of Comprehensive Income.


(c)	For additional information on derivative instruments and hedging activities, refer to Note 17.

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Notes to Condensed Consolidated Financial Statements (unaudited)

Ally Financial Inc. • Form 10-Q



Nine months ended September 30, 2019 ($ in millions)	Before tax				Tax effect				After tax
Investment securities
Net unrealized gains arising during the period	$	990			$	(233	)		$	757
Less: Net realized gains reclassified to income from continuing operations	60			(a)	(14		)	(b)	46
Net change	930				(219		)		711
Translation adjustments
Net unrealized gains arising during the period	4				(1		)		3
Net investment hedges (c)
Net unrealized losses arising during the period	(3		)		1				(2		)
Cash flow hedges (c)
Net unrealized gains arising during the period	26				(6		)		20
Less: Net realized gains reclassified to income from continuing operations	12				(2		)		10
Net change	14				(4		)		10
Defined benefit pension plans
Net unrealized losses arising during the period	(1		)		—				(1		)
Other comprehensive income	$	944			$	(223	)		$	721


(a)	Includes gains reclassified to other gain on investments, net in our Condensed Consolidated Statement of Comprehensive Income.


(b)	Includes amounts reclassified to income tax expense from continuing operations in our Condensed Consolidated Statement of Comprehensive Income.


(c)	For additional information on derivative instruments and hedging activities, refer to Note 17.



Nine months ended September 30, 2018 ($ in millions)	Before tax				Tax effect				After tax
Investment securities
Net unrealized losses arising during the period	$	(705	)		$	166			$	(539	)
Less: Net realized gains reclassified to income from continuing operations	8			(a)	(2		)	(b)	6
Net change	(713		)		168				(545		)
Translation adjustments
Net unrealized losses arising during the period	(6		)		1				(5		)
Net investment hedges (c)
Net unrealized gains arising during the period	5				(1		)		4
Cash flow hedges (c)
Net unrealized gains arising during the period	22				(5		)		17
Defined benefit pension plans
Net unrealized losses arising during the period	(2		)		—				(2		)
Other comprehensive loss	$	(694	)		$	163			$	(531	)


(a)	Includes gains reclassified to other gain on investments, net in our Condensed Consolidated Statement of Comprehensive Income.


(b)	Includes amounts reclassified to income tax expense from continuing operations in our Condensed Consolidated Statement of Comprehensive Income.


(c)	For additional information on derivative instruments and hedging activities, refer to Note 17.

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Notes to Condensed Consolidated Financial Statements (unaudited)

Ally Financial Inc. • Form 10-Q

15. Earnings per Common Share

The following table presents the calculation of basic and diluted earnings per common share.



	Three months ended September 30,				Nine months ended September 30,
($ in millions, except per share data; shares in thousands) (a)	2019		2018		2019			2018
Net income from continuing operations attributable to common stockholders	$	381	$	374	$	1,340		$	974
Loss from discontinued operations, net of tax	—		—		(3		)	(1		)
Net income attributable to common stockholders	$	381	$	374	$	1,337		$	973
Basic weighted-average common shares outstanding (b)	390,205		422,187		397,427			429,625
Diluted weighted-average common shares outstanding (b)	392,604		424,784		399,442			432,038
Basic earnings per common share
Net income from continuing operations	$	0.98	$	0.89	$	3.37		$	2.27
Loss from discontinued operations, net of tax	—		—		(0.01		)	—
Net income	$	0.97	$	0.89	$	3.36		$	2.26
Diluted earnings per common share
Net income from continuing operations	$	0.97	$	0.88	$	3.35		$	2.25
Loss from discontinued operations, net of tax	—		—		(0.01		)	—
Net income	$	0.97	$	0.88	$	3.35		$	2.25


(a)	Figures in the table may not recalculate exactly due to rounding. Earnings per share is calculated based on unrounded numbers.


(b)	Includes shares related to share-based compensation that vested but were not yet issued.

16. Regulatory Capital and Other Regulatory Matters

Basel Capital Framework

The FRB and other U.S. banking agencies have adopted risk-based and leverage capital standards that establish minimum capital-to-asset ratios for BHCs, like Ally, and depository institutions, like Ally Bank. The risk-based capital ratios are based on a banking organization’s risk-weighted assets (RWAs), which are generally determined under the standardized approach applicable to Ally and Ally Bank by (1) assigning on-balance sheet exposures to broad risk-weight categories according to the counterparty or, if relevant, the guarantor or collateral (with higher risk weights assigned to categories of exposures perceived as representing greater risk), and (2) multiplying off-balance sheet exposures by specified credit conversion factors to calculate credit equivalent amounts and assigning those credit equivalent amounts to the relevant risk-weight categories. The leverage ratio, in contrast, is based on an institution’s average unweighted on-balance sheet exposures.

Ally and Ally Bank are subject to capital requirements issued by U.S. banking regulators that require us to maintain risk-based and leverage capital ratios above minimum levels. As of January 1, 2015, Ally and Ally Bank became subject to the rules implementing the 2010 Basel III capital framework in the United States (U.S. Basel III), which generally reflects higher capital requirements, capital buffers, and changes to regulatory capital definitions, deductions, and adjustments, relative to the predecessor requirements implementing the Basel I capital framework in the United States. Certain aspects of U.S. Basel III, including the capital buffers, were subject to a phase-in period through December 31, 2018.

Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary action by regulators that, if undertaken, could have a direct material effect on the Condensed Consolidated Financial Statements or the results of operations and financial condition of Ally and Ally Bank. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, we and Ally Bank must meet specific capital guidelines that involve quantitative measures of capital, assets, and certain off-balance sheet items. These measures and related classifications, which are used in the calculation of our risk-based and leverage capital ratios and those of Ally Bank, are also subject to qualitative judgments by the regulators about the components of capital, the risk weightings of assets and other exposures, and other factors. The FRB also uses these ratios and guidelines as part of the capital planning and stress testing processes. In addition, in order for Ally to maintain its status as an FHC, Ally and its bank subsidiary, Ally Bank, must remain well capitalized and well managed, as defined under applicable laws. The well capitalized standard for insured depository institutions, such as Ally Bank, reflects the capital requirements under U.S. Basel III.

Under U.S. Basel III, Ally and Ally Bank must maintain a minimum Common Equity Tier 1 risk-based capital ratio of 4.5%, a minimum Tier 1 risk-based capital ratio of 6%, and a minimum total risk-based capital ratio of 8%. In addition to these minimum risk-based capital ratios, Ally and Ally Bank are subject to a capital conservation buffer of more than 2.5%. Failure to maintain the full amount of the buffer would result in restrictions on the ability of Ally and Ally Bank to make capital distributions, including dividend payments and stock repurchases and redemptions, and to pay discretionary bonuses to executive officers. U.S. Basel III also subjects Ally and Ally Bank to a minimum Tier 1 leverage ratio of 4%.

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Notes to Condensed Consolidated Financial Statements (unaudited)

Ally Financial Inc. • Form 10-Q

U.S. Basel III also revised the eligibility criteria for regulatory capital instruments and provides for the phase-out of instruments that had previously been recognized as capital but that do not satisfy these criteria. For example, subject to certain exceptions (e.g., certain debt or equity issued to the U.S. government under the Emergency Economic Stabilization Act), trust preferred and other hybrid securities were excluded from a BHC’s Tier 1 capital as of January 1, 2016. Also, subject to a phase-in schedule, certain items are deducted from Common Equity Tier 1 capital under U.S. Basel III that had not previously been deducted from regulatory capital, and certain other deductions from regulatory capital have been modified. Among other things, U.S. Basel III requires significant investments in the common stock of unconsolidated financial institutions, mortgage servicing assets (MSAs), and certain deferred tax assets (DTAs) that exceed specified individual and aggregate thresholds to be deducted from Common Equity Tier 1 capital. U.S. Basel III also revised the standardized approach for calculating RWAs by, among other things, modifying certain risk weights and the methods for calculating RWAs for certain types of assets and exposures.

Ally and Ally Bank are subject to the U.S. Basel III standardized approach for counterparty credit risk, but not to the U.S. Basel III advanced approaches for credit risk or operational risk. Ally is also not subject to the U.S. market risk capital rule, which applies only to banking organizations with significant trading assets and liabilities.

The following table summarizes our capital ratios under the U.S. Basel III capital framework.



	September 30, 2019				December 31, 2018				Required minimum (a)		Well-capitalized minimum
($ in millions)	Amount		Ratio		Amount		Ratio		Required minimum (a)		Well-capitalized minimum
Capital ratios
Common Equity Tier 1 (to risk-weighted assets)
Ally Financial Inc.	$	13,961	9.56	%	$	13,397	9.14	%	4.50	%	(b)
Ally Bank	16,774		12.40		16,552		12.61		4.50		6.50	%
Tier 1 (to risk-weighted assets)
Ally Financial Inc.	$	16,394	11.22	%	$	15,831	10.80	%	6.00	%	6.00	%
Ally Bank	16,774		12.40		16,552		12.61		6.00		8.00
Total (to risk-weighted assets)
Ally Financial Inc.	$	18,643	12.76	%	$	18,046	12.31	%	8.00	%	10.00	%
Ally Bank	17,995		13.30		17,620		13.42		8.00		10.00
Tier 1 leverage (to adjusted quarterly average assets) (c)
Ally Financial Inc.	$	16,394	9.12	%	$	15,831	9.00	%	4.00	%	(b)
Ally Bank	16,774		10.20		16,552		10.69		4.00		5.00	%


(a)	In addition to the minimum risk-based capital requirements for the Common Equity Tier 1 capital, Tier 1 capital, and total capital ratios, Ally and Ally Bank were required to maintain a minimum capital conservation buffer of 2.5% and 1.875% at September 30, 2019, and December 31, 2018, respectively.


(b)	Currently, there is no ratio component for determining whether a BHC is “well-capitalized.”


(c)	Federal regulatory reporting guidelines require the calculation of adjusted quarterly average assets using a daily average methodology.

At September 30, 2019, Ally and Ally Bank were “well-capitalized” and met all applicable capital requirements to which each was subject.

Recent Regulatory Developments

In October 2019, the FRB and other U.S. banking agencies issued final rules implementing targeted amendments to the Dodd-Frank Act and other financial-services laws that had been enacted in May 2018 through the Economic Growth, Regulatory Relief, and Consumer Protection Act (EGRRCP Act). The final rules establish four risk-based categories of prudential standards and capital and liquidity requirements for banking organizations with $100 billion or more in total consolidated assets. The most stringent standards and requirements apply to U.S. global systemically important bank holding companies, which are assigned to Category I. The assignment of other banking organizations to the remaining three categories is based on measures of size and four other risk-based indicators: cross-jurisdictional activity, weighted short-term wholesale funding, nonbank assets, and off-balance sheet exposure. Under the final rules, Ally is designated as a Category IV firm and, as such, will be (1) made subject to supervisory stress testing on a two-year cycle rather than the current one-year cycle, (2) required to continue submitting an annual capital plan to the FRB, (3) allowed to continue excluding accumulated other comprehensive income from regulatory capital, (4) required to continue maintaining a buffer of unencumbered highly liquid assets to meet projected net cash outflows for 30 days, (5) required to conduct liquidity stress tests on a quarterly basis rather than the current monthly basis, (6) allowed to engage in more tailored liquidity risk management, including monthly rather than weekly calculations of collateral positions, the elimination of limits for activities that are not relevant to the firm, and fewer required elements of monitoring of intraday liquidity exposures, (7) exempted from company-run stress testing, the modified liquidity coverage ratio (LCR) provided weighted short-term wholesale funding remains under $50 billion, and the proposed modified net stable funding ratio, (8) allowed to remain exempted from the supplementary leverage ratio, the countercyclical capital buffer, and single counterparty credit limits, and (9) exempted from resolution planning for Ally Financial. The final rules will be effective on December 31, 2019. Relatedly, in April 2019, the Federal Deposit Insurance

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Notes to Condensed Consolidated Financial Statements (unaudited)

Ally Financial Inc. • Form 10-Q

Corporation (FDIC) extended the date by which all covered insured depository institutions (CIDIs), including Ally Bank, must submit their next resolution plans to the date or dates specified by the FDIC in the future in connection with its final determination on amendments to the rule governing CIDI resolution planning.

In July 2019, the FRB and other U.S. banking agencies issued a final rule to simplify the capital treatment for MSAs, certain DTAs, and investments in the capital instruments of unconsolidated financial institutions (collectively, threshold items). Under the current capital rule, a banking organization must deduct from capital amounts of threshold items that individually exceed 10% of Common Equity Tier 1 capital. The aggregate amount of threshold items not deducted under the 10% threshold deduction but that nonetheless exceeds 15% of Common Equity Tier 1 capital minus certain deductions from and adjustments to Common Equity Tier 1 capital must also be deducted. Any amount of these MSAs and certain DTAs not deducted from Common Equity Tier 1 capital are currently risk weighted at 100%. The final rule removes the individual and aggregate deduction thresholds for threshold items and adopts a single 25% Common Equity Tier 1 capital deduction threshold for each item individually, and requires that any of the threshold items not deducted be risk weighted at 250%. The final rule also simplifies the calculation methodology for minority interests. These provisions take effect on April 1, 2020, with early adoption permitted on January 1, 2020. We do not expect these provisions to have a material impact to our capital position.

In December 2018, the FRB and other U.S. banking agencies approved a final rule to address the impact of CECL on regulatory capital by allowing BHCs and banks, including Ally, the option to phase in the day-one impact of CECL. For regulatory capital purposes, this permits us to phase in 25 percent of the capital impact of CECL in 2020 and an additional 25 percent each subsequent year until fully phased-in by the first quarter of 2023. In addition, the FRB announced that although BHCs subject to company-run stress tests as part of its Comprehensive Capital Analysis and Review (CCAR) must incorporate CECL beginning in the 2020 cycle, in order to reduce uncertainty, the FRB will maintain its current modeling framework for the allowance for loan losses in supervisory stress tests through the 2021 cycle.

In April 2018, the FRB issued a proposal to more closely align forward-looking stress testing results with the FRB’s non-stress regulatory capital requirements for banking organizations with $50 billion or more in total consolidated assets. The proposal would introduce a stress capital buffer based on firm-specific stress test performance, which would effectively replace the non-stress capital conservation buffer. The proposal would also make several changes to the CCAR process, such as eliminating the CCAR quantitative objection, narrowing the set of planned capital actions assumed to occur in the stress scenario, and eliminating the 30% dividend payout ratio as a criterion for heightened scrutiny of a firm’s capital plan. In December 2017, the Basel Committee approved revisions to the global Basel III capital framework (commonly known as Basel IV), many of which—if adopted in the United States—could heighten regulatory capital standards. At this time, how the FRB proposal and the Basel Committee revisions will be harmonized and finalized in the United States is not clear or predictable, and we continue to evaluate the impacts these proposals and revisions may have on us.

Compliance with capital requirements is a strategic priority for Ally. We expect to be in compliance with all applicable requirements within the established timeframes.

Capital Planning and Stress Tests

Under the final rules implementing the EGRRCP Act, Ally will be (1) subject to supervisory stress testing on a two-year cycle rather than the current one-year cycle, (2) required to continue submitting an annual capital plan to the FRB, (3) allowed to continue excluding accumulated other comprehensive income from regulatory capital, (4) exempted from company-run stress testing, and (5) allowed to remain exempted from the supplementary leverage ratio and the countercyclical capital buffer.

Ally’s annual capital plan must include an assessment of our expected uses and sources of capital and a description of all planned capital actions over a nine-quarter planning horizon, including any issuance of a debt or equity capital instrument, any dividend or other capital distribution, and any similar action that the FRB determines could have an impact on Ally’s capital. The proposed capital plan must also include a discussion of how Ally, under expected and stressful conditions, will maintain capital commensurate with its risks and above the minimum regulatory capital ratios, and will serve as a source of strength to Ally Bank. The FRB will either object to Ally’s proposed capital plan, in whole or in part, or provide a notice of non-objection. If the FRB objects to the proposed capital plan, or if certain material events occur after approval of the plan, Ally must submit a revised capital plan within 30 days. Even if the FRB does not object to our capital plan, Ally may be precluded from or limited in paying dividends or other capital distributions without the FRB’s approval under certain circumstances—for example, when we would not meet minimum regulatory capital ratios and capital buffers after giving effect to the distributions.

In October 2019, the FRB noted its intent to propose changes to the capital-plan rule, including for the purpose of providing Category IV firms like Ally with additional flexibility in developing their annual capital plans. At this time, the impacts that such a potential future proposal may have on us are not clear.

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Notes to Condensed Consolidated Financial Statements (unaudited)

Ally Financial Inc. • Form 10-Q

The following table presents information related to our common stock and distributions to our common stockholders over the last seven quarters.



	Common stock repurchased during period (a)			Number of common shares outstanding		Cash dividends declared per common share (b)
($ in millions, except per share data; shares in thousands)	Approximate dollar value		Number of shares	Beginning of period	End of period	Cash dividends declared per common share (b)
2018
First quarter	$	185	6,473	437,054	432,691	$	0.13
Second quarter	195		7,280	432,691	425,752	0.13
Third quarter	250		9,194	425,752	416,591	0.15
Fourth quarter	309		12,121	416,591	404,900	0.15
2019
First quarter	$	211	8,113	404,900	399,761	$	0.17
Second quarter	229		7,775	399,761	392,775	0.17
Third quarter	300		9,287	392,775	383,523	0.17


(a)	Includes shares of common stock withheld to cover income taxes owed by participants in our share-based incentive plans.


(b)	On October 7, 2019, the Ally Board of Directors (the Board) declared a quarterly cash dividend of $0.17 per share on all common stock, payable on November 15, 2019. Refer to Note 24 for further information regarding this common stock dividend.

Ally submitted its 2018 capital plan and company-run stress test results to the FRB on April 5, 2018. On June 21, 2018, we publicly disclosed summary results of the stress test under the severely adverse scenario in accordance with applicable regulatory requirements. On June 28, 2018, we received from the FRB a non-objection to our capital plan, which included increases in both our stock-repurchase program and our planned dividends. Consistent with the capital plan, the Board authorized increases in our stock-repurchase program, permitting us to repurchase up to $1.0 billion of our common stock from time to time from the third quarter of 2018 through the second quarter of 2019. On October 5, 2018, we submitted to the FRB the results of our company-run mid-cycle stress test and publicly disclosed summary results under the severely adverse scenario in accordance with applicable regulatory requirements.

Ally was not required to submit a capital plan to the FRB, participate in the supervisory stress test or CCAR, or conduct company-run stress tests during the 2019 cycle. Instead, our capital actions during this cycle are largely based on the results from our 2018 supervisory stress test. On April 1, 2019, the Board authorized an increase in our stock-repurchase program, permitting us to repurchase up to $1.25 billion of our common stock from time to time from the third quarter of 2019 through the second quarter of 2020, representing a 25% increase over our previously announced program. Additionally, on October 7, 2019, the Board declared a quarterly cash dividend of $0.17 per share of our common stock. Refer to Note 24 for further information on the most recent dividend.

Our ability to make capital distributions, including our ability to pay dividends or repurchase shares of our common stock, will continue to be subject to the FRB’s review and approval by the Board. The amount and size of any future dividends and share repurchases also will be subject to various factors, including Ally’s capital and liquidity positions, regulatory considerations, any accounting standards that affect capital or liquidity (including CECL), financial and operational performance, alternative uses of capital, common-stock price, and general market conditions, and may be suspended at any time.

17. Derivative Instruments and Hedging Activities

We enter into derivative instruments, which may include interest rate, foreign-currency, and equity swaps, futures, forwards, and options in connection with our risk-management activities. Our primary objective for utilizing derivative financial instruments is to manage interest rate risk associated with our fixed- and variable-rate assets and liabilities, foreign exchange risks related to our foreign-currency denominated assets and liabilities, and other market risks related to our investment portfolio.

Interest Rate Risk

We monitor our mix of fixed- and variable-rate assets and liabilities and may enter into interest rate swaps, forwards, futures, options, and swaptions to achieve our desired mix of fixed- and variable-rate assets and liabilities. We execute these trades to modify our exposure to interest rate risk by converting certain fixed-rate instruments to a variable-rate and certain variable-rate instruments to a fixed-rate. We use a mix of both derivatives that qualify for hedge accounting treatment and economic hedges.

Derivatives qualifying for hedge accounting can include receive-fixed swaps designated as fair value hedges of specific fixed-rate unsecured debt obligations, receive-fixed swaps designated as fair value hedges of specific fixed-rate FHLB advances, pay-fixed swaps designated as fair value hedges of securities within our available-for-sale portfolio, and pay-fixed swaps designated as fair value hedges of closed portfolios of fixed-rate held-for-investment consumer automotive loan assets in which the hedged item is the last layer expected to be remaining at the end of the hedging relationship. Other derivatives qualifying for hedge accounting consist of pay-fixed swaps designated as cash flow hedges of the expected future cash flows in the form of interest payments on certain variable-rate borrowings and deposit liabilities, receive-fixed swaps designated as cash flow hedges of the expected future cash flows in the form of interest receipts on certain securities

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Notes to Condensed Consolidated Financial Statements (unaudited)

Ally Financial Inc. • Form 10-Q

within our available-for-sale portfolio, as well as interest rate floor contracts designated as cash flow hedges of the expected future cash flows in the form of interest receipts on a portion of our dealer floorplan commercial loans.

We execute economic hedges, which may consist of interest rate swaps, interest rate caps, forwards, futures, options, and swaptions to mitigate interest rate risk.

We also enter into interest rate lock commitments and forward-sale commitments that are executed as part of our mortgage business that meet the accounting definition of a derivative.

Foreign Exchange Risk

We enter into derivative financial instrument contracts to mitigate the risk associated with variability in cash flows related to our various foreign-currency exposures.

We enter into foreign-currency forwards with external counterparties as net investment hedges of foreign exchange exposure on our investment in foreign subsidiaries. Our equity is impacted by the cumulative translation adjustments resulting from the translation of foreign subsidiary results; this impact is reflected in our accumulated other comprehensive income (loss). We also periodically enter into foreign-currency forwards to economically hedge any foreign-denominated debt, centralized lending, and foreign-denominated third-party loans. These foreign-currency forwards that are used as economic hedges are recorded at fair value with changes recorded as income offsetting the gains and losses on the associated foreign-currency transactions.

Investment Risk

We enter into equity options to economically hedge our exposure to the equity markets.

Counterparty Credit Risk

Derivative financial instruments contain an element of credit risk if counterparties are unable to meet the terms of the agreements. Credit risk associated with derivative financial instruments is measured as the net replacement cost should the counterparties that owe us under the contract completely fail to perform under the terms of those contracts, assuming no recoveries of underlying collateral as measured by the market value of the derivative financial instrument.

We manage our risk to financial counterparties through internal credit analysis, limits, and monitoring. Additionally, derivatives and repurchase agreements are entered into with approved counterparties using industry standard agreements.

We execute certain over-the-counter (OTC) derivatives such as interest rate caps and floors using bilateral agreements with financial counterparties. Bilateral agreements generally require both parties to post collateral in the event the fair values of the derivative financial instruments meet posting thresholds established under the agreements. In the event that either party defaults on the obligation, the secured party may seize the collateral. Payments related to the exchange of collateral for OTC derivatives are recognized as collateral.

We also execute certain derivatives such as interest rate swaps with clearinghouses, which requires us to post and receive collateral. For these clearinghouse derivatives, these payments are recognized as settlements rather than collateral.

Certain derivative instruments contain provisions that require us to either post additional collateral or immediately settle any outstanding liability balances upon the occurrence of a specified credit-risk-related event. No such specified credit-risk-related events occurred during the three months and nine months ended September 30, 2019, or 2018.

We placed noncash collateral totaling $119 million supporting our derivative positions at September 30, 2019, compared to $26 million and $105 million of cash and noncash collateral, respectively, at December 31, 2018, in accounts maintained by counterparties. These amounts include collateral placed at clearinghouses and exclude cash and noncash collateral pledged under repurchase agreements. Refer to Note 12 for details on the repurchase agreements. The receivables for cash collateral placed are included on our Condensed Consolidated Balance Sheet in other assets.

We received cash and noncash collateral from counterparties totaling $53 million and $38 million, respectively, in accounts maintained by counterparties at September 30, 2019, compared to $30 million and $3 million of cash and noncash collateral at December 31, 2018. These amounts include collateral received from clearinghouses and exclude cash and noncash collateral pledged under repurchase agreements. Refer to Note 12 for details on repurchase agreements. The payables for cash collateral received are included on our Condensed Consolidated Balance Sheet in accrued expenses and other liabilities. Included in these amounts is noncash collateral where we have been granted the right to sell or pledge the underlying assets. We have not sold or pledged any of the noncash collateral received under these agreements.

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Notes to Condensed Consolidated Financial Statements (unaudited)

Ally Financial Inc. • Form 10-Q

Balance Sheet Presentation

The following table summarizes the amounts of derivative instruments reported on our Condensed Consolidated Balance Sheet. The amounts are presented on a gross basis, are segregated by derivatives that are designated and qualifying as hedging instruments or those that are not, and are further segregated by type of contract within those two categories.

Derivative contracts in a receivable and payable position exclude open trade equity on derivatives cleared through central clearing counterparties. Any associated collateral exchanged with our central clearing counterparties are treated as settlements of the derivative exposure, rather than collateral. Such payments are recognized as settlements of the derivatives contracts in a receivable and payable position on our Condensed Consolidated Balance Sheet.

Notional amounts are reference amounts from which contractual obligations are derived and are not recorded on the balance sheet. In our view, derivative notional is not an accurate measure of our derivative exposure when viewed in isolation from other factors, such as market rate fluctuations and counterparty credit risk.



	September 30, 2019						December 31, 2018
	Derivative contracts in a				Notional amount		Derivative contracts in a				Notional amount
($ in millions)	receivable position		payable position				receivable position		payable position
Derivatives designated as accounting hedges
Interest rate contracts
Swaps	$	—	$	—	$	15,451	$	—	$	—	$	24,203
Purchased options	87		—		11,100		—		—		—
Foreign exchange contracts
Forwards	—		—		141		1		—		136
Total derivatives designated as accounting hedges	87		—		26,692		1		—		24,339
Derivatives not designated as accounting hedges
Interest rate contracts
Futures and forwards	—		—		51		—		—		11
Written options	3		2		935		—		37		6,793
Purchased options	1		—		758		37		—		6,742
Total interest rate risk	4		2		1,744		37		37		13,546
Foreign exchange contracts
Futures and forwards	—		—		117		3		—		181
Total foreign exchange risk	—		—		117		3		—		181
Equity contracts
Written options	—		1		—		—		—		—
Purchased options	3		—		1		—		—		—
Total equity risk	3		1		1		—		—		—
Total derivatives not designated as accounting hedges	7		3		1,862		40		37		13,727
Total derivatives	$	94	$	3	$	28,554	$	41	$	37	$	38,066

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Notes to Condensed Consolidated Financial Statements (unaudited)

Ally Financial Inc. • Form 10-Q

The following table presents amounts recorded on our Condensed Consolidated Balance Sheet related to cumulative basis adjustments for fair value hedges.



($ in millions)	Carrying amount of the hedged items				Cumulative amount of fair value hedging adjustment included in the carrying amount of the hedged items
	Carrying amount of the hedged items				Total				Discontinued (a)
	September 30, 2019		December 31, 2018		September 30, 2019		December 31, 2018		September 30, 2019		December 31, 2018
Assets
Available-for-sale securities (b) (c)	$	1,645	$	1,485	$	26	$	—	$	26	$	(5	)
Finance receivables and loans, net (d)	37,533		40,850		176		24		51		5
Liabilities
Long-term debt	$	12,879	$	13,001	$	120	$	67	$	127	$	67


(a)	Represents the fair value hedging adjustment on qualifying hedges for which the hedging relationship was discontinued. This represents a subset of the amounts reported in the total hedging adjustment.


(b)	The carrying amount of hedged available-for-sale securities is presented above using amortized cost. Refer to Note 6 for a reconciliation of the amortized cost and fair value of available-for-sale securities.

(c)

Includes the amortized cost basis of closed portfolios used to designate hedging relationships in which the hedged item is the last layer expected to be remaining at the end of the hedging relationship. The amount identified as the last of layer in the open hedge relationship was $100 million and $28 million at September 30, 2019, and December 31, 2018, respectively. There were no basis adjustments associated with the open last-of-layer relationship at both September 30, 2019, and December 31, 2018. The amount that was identified as the last of layer in the discontinued hedge relationship was $100 million as of September 30, 2019. The basis adjustment associated with the discontinued last-of-layer relationship was a $2 million asset as of September 30, 2019, which was allocated across the entire remaining pool upon termination of the hedge relationship.

(d)

The hedged item represents the carrying value of the hedged portfolio of assets. The amount identified as the last of layer in the open hedge relationship was $10.2 billion as of September 30, 2019, and $21.4 billion as of December 31, 2018. The basis adjustment associated with the open last-of-layer relationship was a $126 million asset as of September 30, 2019, and a $19 million asset as of December 31, 2018, which would be allocated across the entire remaining closed pool upon termination or maturity of the hedge relationship. The amount that is identified as the last of layer in the discontinued hedge relationship was $12.8 billion at September 30, 2019. The basis adjustment associated with the discontinued last-of-layer relationship was a $50 million asset as of September 30, 2019, which was allocated across the entire remaining pool upon termination of the hedge relationship.

Statement of Comprehensive Income Presentation

The following table summarizes the location and amounts of gains and losses on derivative instruments not designated as accounting hedges reported in our Condensed Consolidated Statement of Comprehensive Income.



	Three months ended September 30,					Nine months ended September 30,
($ in millions)	2019		2018			2019			2018
Gain (loss) recognized in earnings
Interest rate contracts
Gain on mortgage and automotive loans, net	$	—	$	—		$	1		$	—
Other income, net of losses	—		—			(7		)	—
Total interest rate contracts	—		—			(6		)	—
Foreign exchange contracts
Other income, net of losses	1		(1		)	(2		)	5
Total foreign exchange contracts	1		(1		)	(2		)	5
Gain (loss) recognized in earnings	$	1	$	(1	)	$	(8	)	$	5

Table of Contents

Notes to Condensed Consolidated Financial Statements (unaudited)

Ally Financial Inc. • Form 10-Q

The following tables summarize the location and amounts of gains and losses on derivative instruments designated as fair value and cash flow hedges reported in our Condensed Consolidated Statement of Comprehensive Income.



	Interest and fees on finance receivables and loans						Interest and dividends on investment securities and other earning assets						Interest on deposits					Interest on long-term debt
Three months ended September 30, ($ in millions)	2019			2018			2019			2018			2019			2018		2019			2018
(Loss) gain on fair value hedging relationships
Interest rate contracts
Hedged fixed-rate unsecured debt	$	—		$	—		$	—		$	—		$	—		$	—	$	(36	)	$	20
Derivatives designated as hedging instruments on fixed-rate unsecured debt	—			—			—			—			—			—		36			(20		)
Hedged fixed-rate FHLB advances	—			—			—			—			—			—		—			10
Derivatives designated as hedging instruments on fixed-rate FHLB advances	—			—			—			—			—			—		—			(10		)
Hedged available-for-sale securities	—			—			17			(2		)	—			—		—			—
Derivatives designated as hedging instruments on available-for-sale securities	—			—			(17		)	2			—			—		—			—
Hedged fixed-rate consumer automotive loans	32			(9		)	—			—			—			—		—			—
Derivatives designated as hedging instruments on fixed-rate consumer automotive loans	(32		)	9			—			—			—			—		—			—
Total gain on fair value hedging relationships	—			—			—			—			—			—		—			—
(Loss) gain on cash flow hedging relationships
Interest rate contracts
Hedged deposit liabilities
Reclassified from accumulated other comprehensive income into income (loss)	—			—			—			—			(2		)	—		—			—
Hedged variable-rate borrowings
Reclassified from accumulated other comprehensive income into income (loss)	—			—			—			—			—			—		4			—
Total (loss) gain on cash flow hedging relationships	$	—		$	—		$	—		$	—		$	(2	)	$	—	$	4		$	—
Total amounts presented in the Condensed Consolidated Statement of Comprehensive Income	$	1,859		$	1,708		$	237		$	198		$	658		$	462	$	378		$	451

Table of Contents

Notes to Condensed Consolidated Financial Statements (unaudited)

Ally Financial Inc. • Form 10-Q



	Interest and fees on finance receivables and loans						Interest and dividends on investment securities and other earning assets						Interest on deposits					Interest on long-term debt
Nine months ended September 30, ($ in millions)	2019			2018			2019			2018			2019			2018		2019			2018
(Loss) gain on fair value hedging relationships
Interest rate contracts
Hedged fixed-rate unsecured debt	$	—		$	—		$	—		$	—		$	—		$	—	$	(55	)	$	64
Derivatives designated as hedging instruments on fixed-rate unsecured debt	—			—			—			—			—			—		55			(63		)
Hedged fixed-rate FHLB advances	—			—			—			—			—			—		—			53
Derivatives designated as hedging instruments on fixed-rate FHLB advances	—			—			—			—			—			—		—			(53		)
Hedged available-for-sale securities	—			—			29			(7		)	—			—		—			—
Derivatives designated as hedging instruments on available-for-sale securities	—			—			(29		)	7			—			—		—			—
Hedged fixed-rate consumer automotive loans	173			(60		)	—			—			—			—		—			—
Derivatives designated as hedging instruments on fixed-rate consumer automotive loans	(173		)	60			—			—			—			—		—			—
Total gain on fair value hedging relationships	—			—			—			—			—			—		—			1
(Loss) gain on cash flow hedging relationships
Interest rate contracts
Hedged deposit liabilities
Reclassified from accumulated other comprehensive income into income	—			—			—			—			(1		)	—		—			—
Hedged variable-rate borrowings
Reclassified from accumulated other comprehensive income into income	—			—			—			—			—			—		12			—
Total (loss) gain on cash flow hedging relationships	$	—		$	—		$	—		$	—		$	(1	)	$	—	$	12		$	—
Total amounts presented in the Condensed Consolidated Statement of Comprehensive Income	$	5,526		$	4,898		$	721		$	562		$	1,901		$	1,212	$	1,204		$	1,296

During the next twelve months, we estimate $5 million of losses will be reclassified into pretax earnings from derivatives designated as cash flow hedges.

Table of Contents

Notes to Condensed Consolidated Financial Statements (unaudited)

Ally Financial Inc. • Form 10-Q

The following tables summarize the location and amounts of gains and losses related to interest and amortization on derivative instruments designated as fair value and cash flow hedges reported in our Condensed Consolidated Statement of Comprehensive Income.



	Interest and fees on finance receivables and loans						Interest and dividends on investment securities and other earning assets					Interest on deposits				Interest on long-term debt
Three months ended September 30, ($ in millions)	2019			2018			2019			2018		2019		2018		2019			2018
Gain (loss) on fair value hedging relationships
Interest rate contracts
Amortization of deferred unsecured debt basis adjustments	$	—		$	—		$	—		$	—	$	—	$	—	$	6		$	13
Interest for qualifying accounting hedges of unsecured debt	—			—			—			—		—		—		—			3
Amortization of deferred secured debt basis adjustments (FHLB advances)	—			—			—			—		—		—		(6		)	(6		)
Interest for qualifying accounting hedges of secured debt (FHLB advances)	—			—			—			—		—		—		—			2
Amortization of deferred basis adjustments of available-for-sale securities	—			—			(1		)	—		—		—		—			—
Interest for qualifying accounting hedges of available-for-sale securities	—			—			2			—		—		—		—			—
Amortization of deferred loan basis adjustments	(8		)	(3		)				—		—		—		—			—
Interest for qualifying accounting hedges of consumer automotive loans held-for-investment	10			7			—			—		—		—		—			—
Total gain on fair value hedging relationships	2			4			1			—		—		—		—			12
Gain on cash flow hedging relationships
Interest rate contracts
Interest for qualifying accounting hedges of variable-rate borrowings	—			—			—			—		—		—		—			3
Interest for qualifying accounting hedges of deposit liabilities	—			—			—			—		—		2		—			—
Total gain on cash flow hedging relationships	$	—		$	—		$	—		$	—	$	—	$	2	$	—		$	3

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Notes to Condensed Consolidated Financial Statements (unaudited)

Ally Financial Inc. • Form 10-Q



	Interest and fees on finance receivables and loans						Interest and dividends on investment securities and other earning assets						Interest on deposits				Interest on long-term debt
Nine months ended September 30, ($ in millions)	2019			2018			2019			2018			2019		2018		2019			2018
Gain (loss) on fair value hedging relationships
Interest rate contracts
Amortization of deferred unsecured debt basis adjustments	$	—		$	—		$	—		$	—		$	—	$	—	$	18		$	42
Interest for qualifying accounting hedges of unsecured debt	—			—			—			—			—		—		—			7
Amortization of deferred secured debt basis adjustments (FHLB advances)	—			—			—			—			—		—		(17		)	(12		)
Interest for qualifying accounting hedges of secured debt (FHLB advances)	—			—			—			—			—		—		—			6
Amortization of deferred basis adjustments of available-for-sale securities	—			—			(2		)	—			—		—		—			—
Interest for qualifying accounting hedges of available-for-sale securities	—			—			2			(1		)	—		—		—			—
Amortization of deferred loan basis adjustments	(21		)	(11		)	—			—			—		—		—			—
Interest for qualifying accounting hedges of consumer automotive loans held-for-investment	27			5			—			—			—		—		—			—
Total gain (loss) on fair value hedging relationships	6			(6		)	—			(1		)	—		—		1			43
Gain on cash flow hedging relationships
Interest rate contracts
Interest for qualifying accounting hedges of variable-rate borrowings	—			—			—			—			—		—		—			6
Interest for qualifying accounting hedges of deposit liabilities	—			—			—			—			—		2		—			—
Total gain on cash flow hedging relationships	$	—		$	—		$	—		$	—		$	—	$	2	$	—		$	6

The following table summarizes the effect of cash flow hedges on accumulated other comprehensive income (loss).



	Three months ended September 30,					Nine months ended September 30,
($ in millions)	2019		2018			2019		2018
Interest rate contracts
Gain (loss) recognized in other comprehensive income (loss)	$	2	$	(1	)	$	14	$	22

Table of Contents

Notes to Condensed Consolidated Financial Statements (unaudited)

Ally Financial Inc. • Form 10-Q

The following table summarizes the effect of net investment hedges on accumulated other comprehensive income (loss) and the Condensed Consolidated Statement of Comprehensive Income.



	Three months ended September 30,					Nine months ended September 30,
($ in millions)	2019		2018			2019			2018
Foreign exchange contracts (a) (b)
Gain (loss) recognized in other comprehensive income (loss)	$	2	$	(2	)	$	(3	)	$	5


(a)	There were no amounts excluded from effectiveness testing for the three months and nine months ended September 30, 2019, or 2018.


(b)	Gains and losses reclassified from accumulated other comprehensive income (loss) are reported as other income, net of losses, in the Condensed Consolidated Statement of Comprehensive Income. There were no amounts reclassified for the three months and nine months ended September 30, 2019, or 2018.

18. Income Taxes

We recognized income tax expense from continuing operations of $119 million and $140 million for the three months and nine months ended September 30, 2019, respectively, compared to $91 million and $280 million for the same periods in 2018.

The increase in income tax expense for the three months ended September 30, 2019, compared to the same period in 2018, was primarily due to a nonrecurring tax benefit from the release of valuation allowance against state net operating loss carryforwards as a result of a state tax law enactment in the third quarter of 2018 and the tax effects of an increase in pretax earnings. The decrease in income tax expense for the nine months ended September 30, 2019, compared to the same period in 2018, was primarily due to a release of valuation allowance on foreign tax credit carryforwards during the second quarter of 2019. The valuation allowance release was primarily driven by our current capacity to engage in certain securitization transactions and the market demand from investors related to these transactions, coupled with the anticipated timing of the forecasted expiration of certain tax credit carryforwards. This release of valuation allowance resulted in a significant variation in the customary relationship between pretax income and income tax expense. Additionally, the decrease in income tax expense for the nine months ended September 30, 2019, compared to the same period in 2018, was partially offset by the tax effects of an increase in pretax earnings and a nonrecurring tax benefit from the release of valuation allowance against state net operating loss carryforwards as a result of a state tax law enactment in the third quarter of 2018.

As of each reporting date, we consider existing evidence, both positive and negative, that could impact our view with regard to future realization of deferred tax assets. We continue to believe it is more likely than not that the benefit for certain foreign tax credit carryforwards and state net operating loss carryforwards will not be realized. In recognition of this risk, we continue to provide a partial valuation allowance on the deferred tax assets relating to these carryforwards and it is reasonably possible that the valuation allowance may change in the next twelve months.

19. Fair Value

Fair Value Measurements

For purposes of this disclosure, fair value is defined as the exchange price that would be received to sell an asset or paid to transfer a liability (exit price) in the principal or most advantageous market in an orderly transaction between market participants at the measurement date under current market conditions. Fair value is based on the assumptions we believe market participants would use when pricing an asset or liability. Additionally, entities are required to consider all aspects of nonperformance risk, including the entity’s own credit standing, when measuring the fair value of a liability.

Judgment is used in estimating inputs to our internal valuation models used to estimate our Level 3 fair value measurements. Level 3 inputs such as interest rate movements, prepayment speeds, credit losses, and discount rates are inherently difficult to estimate. Changes to these inputs can have a significant effect on fair value measurements and amounts that could be realized.

GAAP specifies a three-level hierarchy that is used when measuring and disclosing fair value. The fair value hierarchy gives the highest priority to quoted prices available in active markets (i.e., observable inputs) and the lowest priority to data lacking transparency (i.e., unobservable inputs). An instrument’s categorization within the fair value hierarchy is based on the lowest level of significant input to its valuation. The following is a description of the three hierarchy levels.


Level 1	Inputs are quoted prices in active markets for identical assets or liabilities at the measurement date. Additionally, the entity must have the ability to access the active market, and the quoted prices cannot be adjusted by the entity.

Level 2

Inputs are other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. Level 2 inputs include quoted prices in active markets for similar assets or liabilities; quoted prices in inactive markets for identical or similar assets or liabilities; or inputs that are observable or can be corroborated by observable market data by correlation or other means for substantially the full term of the assets or liabilities.


Level 3	Unobservable inputs are supported by little or no market activity. The unobservable inputs represent management’s best assumptions of how market participants would price the assets or liabilities. Generally, Level 3 assets and liabilities are

Table of Contents

Notes to Condensed Consolidated Financial Statements (unaudited)

Ally Financial Inc. • Form 10-Q

valued using pricing models, discounted cash flow methodologies, or similar techniques that require significant judgment or estimation.

The following are descriptions of the valuation methodologies used to measure material assets and liabilities at fair value and details of the valuation models, key inputs to those models, and significant assumptions utilized.


•	Equity Securities — Includes various marketable equity securities measured at fair value with changes in fair value recognized in net income. Measurements based on observable market prices are classified as Level 1.

•

Available-for-sale securities — All classes of available-for-sale securities are carried at fair value based on observable market prices, when available. If observable market prices are not available, our valuations are based on internally developed discounted cash flow models (an income approach) that use a market-based discount rate and consider recent market transactions, experience with similar securities, current business conditions, and analysis of the underlying collateral, as available. To estimate cash flows, we are required to utilize various significant assumptions including market observable inputs (e.g., forward interest rates) and internally developed inputs (including prepayment speeds, delinquency levels, and credit losses).

•

Interests retained in financial asset sales — Includes certain noncertificated interests retained from the sale of automotive finance receivables. Due to inactivity in the market, valuations are based on internally developed discounted cash flow models (an income approach) that use a market-based discount rate; therefore, we classified these assets as Level 3. The valuation considers recent market transactions, experience with similar assets, current business conditions, and analysis of the underlying collateral, as available. To estimate cash flows, we utilize various significant assumptions, including market observable inputs (e.g., forward interest rates) and internally developed inputs (e.g., prepayment speeds, delinquency levels, and credit losses).

•

Derivative instruments — We enter into a variety of derivative financial instruments as part of our risk-management strategies. Certain of these derivatives are exchange traded, such as Eurodollar futures, options of Eurodollar futures, and equity options. To determine the fair value of these instruments, we utilize the quoted market prices for the particular derivative contracts; therefore, we classified these contracts as Level 1.

We also execute OTC and centrally-cleared derivative contracts, such as interest rate swaps, swaptions, foreign-currency denominated forward contracts, caps, floors, and agency to-be-announced securities. We utilize third-party-developed valuation models that are widely accepted in the market to value these derivative contracts. The specific terms of the contract and market observable inputs (such as interest rate forward curves, interpolated volatility assumptions, or equity pricing) are used in the model. We classified these derivative contracts as Level 2 because all significant inputs into these models were market observable.

We also enter into interest rate lock commitments and forward-sale commitments that are executed as part of our mortgage business, certain of which meet the accounting definition of a derivative and therefore are recorded as derivatives on our Condensed Consolidated Balance Sheet. Because these derivatives are valued using internal pricing models with unobservable inputs, they are classified as Level 3.

We are required to consider all aspects of nonperformance risk, including our own credit standing, when measuring fair value of a liability. We reduce credit risk on the majority of our derivatives by entering into legally enforceable agreements that enable the posting and receiving of collateral associated with the fair value of our derivative positions on an ongoing basis. In the event that we do not enter into legally enforceable agreements that enable the posting and receiving of collateral, we will consider our credit risk and the credit risk of our counterparties in the valuation of derivative instruments through a credit valuation adjustment (CVA), if warranted. The CVA calculation utilizes the credit default swap spreads of the counterparty.

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Notes to Condensed Consolidated Financial Statements (unaudited)

Ally Financial Inc. • Form 10-Q

Recurring Fair Value

The following tables display the assets and liabilities measured at fair value on a recurring basis including financial instruments elected for the fair value option. We often economically hedge the fair value change of our assets or liabilities with derivatives and other financial instruments. The tables below display the hedges separately from the hedged items; therefore, they do not directly display the impact of our risk-management activities.



	Recurring fair value measurements
September 30, 2019 ($ in millions)	Level 1		Level 2		Level 3		Total
Assets
Investment securities
Equity securities (a)	$	562	$	—	$	8	$	570
Available-for-sale securities
Debt securities
U.S. Treasury and federal agencies	2,381		1		—		2,382
U.S. States and political subdivisions	—		630		—		630
Foreign government	15		140		—		155
Agency mortgage-backed residential	—		20,108		—		20,108
Mortgage-backed residential	—		2,812		—		2,812
Agency mortgage-backed commercial	—		1,413		—		1,413
Mortgage-backed commercial	—		113		—		113
Asset-backed	—		417		—		417
Corporate debt	—		1,354		—		1,354
Total available-for-sale securities	2,396		26,988		—		29,384
Mortgage loans held-for-sale (b)	—		—		38		38
Interests retained in financial asset sales	—		—		3		3
Derivative contracts in a receivable position
Interest rate	—		88		3		91
Other	3		—		—		3
Total derivative contracts in a receivable position	3		88		3		94
Total assets	$	2,961	$	27,076	$	52	$	30,089
Liabilities
Accrued expenses and other liabilities
Derivative contracts in a payable position
Interest rate	$	—	$	1	$	1	$	2
Other	1		—		—		1
Total derivative contracts in a payable position	1		1		1		3
Total liabilities	$	1	$	1	$	1	$	3


(a)	Our investment in any one industry did not exceed 14%.


(b)	Carried at fair value due to fair value option elections.

Table of Contents

Notes to Condensed Consolidated Financial Statements (unaudited)

Ally Financial Inc. • Form 10-Q



	Recurring fair value measurements
December 31, 2018 ($ in millions)	Level 1		Level 2		Level 3		Total
Assets
Investment securities
Equity securities (a)	$	766	$	—	$	7	$	773
Available-for-sale securities
Debt securities
U.S. Treasury and federal agencies	1,850		1		—		1,851
U.S. States and political subdivisions	—		802		—		802
Foreign government	7		138		—		145
Agency mortgage-backed residential	—		17,138		—		17,138
Mortgage-backed residential	—		2,686		—		2,686
Agency mortgage-backed commercial	—		3		—		3
Mortgage-backed commercial	—		714		—		714
Asset-backed	—		723		—		723
Corporate debt	—		1,241		—		1,241
Total available-for-sale securities	1,857		23,446		—		25,303
Mortgage loans held-for-sale (b)	—		—		8		8
Interests retained in financial asset sales	—		—		4		4
Derivative contracts in a receivable position
Interest rate	—		37		—		37
Foreign currency	—		4		—		4
Total derivative contracts in a receivable position	—		41		—		41
Total assets	$	2,623	$	23,487	$	19	$	26,129
Liabilities
Accrued expenses and other liabilities
Derivative contracts in a payable position
Interest rate	$	—	$	37	$	—	$	37
Total derivative contracts in a payable position	—		37		—		37
Total liabilities	$	—	$	37	$	—	$	37


(a)	Our investment in any one industry did not exceed 9%.


(b)	Carried at fair value due to fair value option elections.

Table of Contents

Notes to Condensed Consolidated Financial Statements (unaudited)

Ally Financial Inc. • Form 10-Q

The following tables present the reconciliation for all Level 3 assets and liabilities measured at fair value on a recurring basis. There were no transfers into or out of Level 3 in the periods presented. We often economically hedge the fair value change of our assets or liabilities with derivatives and other financial instruments. The Level 3 items presented below may be hedged by derivatives and other financial instruments that are classified as Level 1 or Level 2. Thus, the following tables do not fully reflect the impact of our risk-management activities.



	Level 3 recurring fair value measurements
			Net realized/unrealized (losses) gains															Fair value at September 30, 2019		Net unrealized gains still held at September 30, 2019
($ in millions)	Fair value at July 1, 2019		included in earnings				included in OCI		Purchases		Sales			Issuances		Settlements				included in earnings			included in OCI
Assets
Equity securities	$	9	$	(1	)	(a)	$	—	$	—	$	—		$	—	$	—	$	8	$	(1	)	$	—
Mortgage loans held-for-sale (b)	22		3			(c)	—		222		(209		)	—		—		38		—			—
Other assets
Interests retained in financial asset sales	3		—				—		—		—			—		—		3		—			—
Derivative assets, net of derivative liabilities	2		—				—		—		—			—		—		2		—			—
Total assets	$	36	$	2			$	—	$	222	$	(209	)	$	—	$	—	$	51	$	(1	)	$	—


(a)	Reported as other gain on investments, net, in the Condensed Consolidated Statement of Comprehensive Income.


(b)	Carried at fair value due to fair value option elections.


(c)	Reported as gain on mortgage and automotive loans, net, in the Condensed Consolidated Statement of Comprehensive Income.



	Level 3 recurring fair value measurements
	Fair value at July 1, 2018		Net realized/unrealized gains					Purchases		Sales			Issuances		Settlements			Fair value at September 30, 2018		Net unrealized losses included in earnings still held at September 30, 2018
($ in millions)			included in earnings			included in OCI
Assets
Equity securities	$	12	$	—		$	—	$	—	$	—		$	—	$	(1	)	$	11	$	(1	)
Mortgage loans held-for-sale (a)	13		2		(b)	—		86		(88		)	—		—			13		—
Other assets
Interests retained in financial asset sales	4		—			—		—		—			—		—			4		—
Derivative assets	1		—			—		—		—			—		—			1		—
Total assets	$	30	$	2		$	—	$	86	$	(88	)	$	—	$	(1	)	$	29	$	(1	)


(a)	Carried at fair value due to fair value option elections.


(b)	Reported as gain on mortgage and automotive loans, net, in the Condensed Consolidated Statement of Comprehensive Income.



	Level 3 recurring fair value measurements
			Net realized/unrealized gains															Fair value at September 30, 2019		Net unrealized gains still held at September 30, 2019
($ in millions)	Fair value at Jan. 1, 2019		included in earnings			included in OCI		Purchases		Sales			Issuances		Settlements					included in earnings		included in OCI
Assets
Equity securities	$	7	$	5	(a)	$	—	$	—	$	—		$	—	$	(4	)	$	8	$	5	$	—
Mortgage loans held-for-sale (b)	8		7		(c)	—		468		(445		)	—		—			38		—		—
Other assets
Interests retained in financial asset sales	4		—			—		—		—			—		(1		)	3		—		—
Derivative assets, net of derivative liabilities	—		2		(c)	—		—		—			—		—			2		2		—
Total assets	$	19	$	14		$	—	$	468	$	(445	)	$	—	$	(5	)	$	51	$	7	$	—


(a)	Reported as other gain on investments, net, in the Condensed Consolidated Statement of Comprehensive Income.


(b)	Carried at fair value due to fair value option elections.


(c)	Reported as gain on mortgage and automotive loans, net, in the Condensed Consolidated Statement of Comprehensive Income.

Table of Contents

Notes to Condensed Consolidated Financial Statements (unaudited)

Ally Financial Inc. • Form 10-Q



	Level 3 recurring fair value measurements
	Fair value at Jan. 1, 2018		Net realized/unrealized (losses) gains						Purchases		Sales			Issuances		Settlements			Fair value at September 30, 2018		Net unrealized losses included in earnings still held at September 30, 2018
($ in millions)			included in earnings				included in OCI
Assets
Equity securities	$	19	$	(4	)	(a)	$	—	$	—	$	—		$	—	$	(4	)	$	11	$	(6	)
Mortgage loans held-for-sale (b)	13		4			(c)	—		218		(222		)	—		—			13		—
Other assets
Interests retained in financial asset sales	5		—				—		—		—			—		(1		)	4		—
Derivative assets	1		—				—		—		—			—		—			1		—
Total assets	$	38	$	—			$	—	$	218	$	(222	)	$	—	$	(5	)	$	29	$	(6	)


(a)	Reported as other loss on investments, net, in the Condensed Consolidated Statement of Comprehensive Income.


(b)	Carried at fair value due to fair value option elections.


(c)	Reported as gain on mortgage and automotive loans, net, in the Condensed Consolidated Statement of Comprehensive Income.

Nonrecurring Fair Value

We may be required to measure certain assets and liabilities at fair value from time to time. These periodic fair value measures typically result from the application of lower-of-cost or fair value accounting or certain impairment measures. These items would constitute nonrecurring fair value measures.

The following tables display assets and liabilities measured at fair value on a nonrecurring basis and still held at September 30, 2019, and December 31, 2018, respectively. The amounts are as of the end of each period presented, which approximate the fair value measurements that occurred during each period.



	Nonrecurring fair value measurements								Lower-of-cost or fair value reserve, valuation reserve, or cumulative adjustments			Total gain (loss) included in earnings
September 30, 2019 ($ in millions)	Level 1		Level 2		Level 3		Total					Total gain (loss) included in earnings
Assets
Loans held-for-sale, net	$	—	$	—	$	307	$	307	$	—		n/m	(a)
Commercial finance receivables and loans, net (b)
Automotive	—		—		48		48		(18		)	n/m	(a)
Other	—		—		17		17		(14		)	n/m	(a)
Total commercial finance receivables and loans, net	—		—		65		65		(32		)	n/m	(a)
Other assets
Nonmarketable equity investments	—		4		10		14		2			n/m	(a)
Equity-method investments	—		—		2		2		(6		)	n/m	(a)
Repossessed and foreclosed assets (c)	—		—		14		14		(1		)	n/m	(a)
Total assets	$	—	$	4	$	398	$	402	$	(37	)	n/m

n/m = not meaningful

(a)

We consider the applicable valuation allowance, loan loss allowance, or cumulative impairment to be the most relevant indicator of the impact on earnings caused by the fair value measurement. Accordingly, the table above excludes total gains and losses included in earnings for these items. The carrying values are inclusive of the respective valuation allowance, loan loss allowance, or cumulative impairment.


(b)	Represents the portion of the portfolio specifically impaired during 2019. The related valuation allowance represents the cumulative adjustment to fair value of those specific receivables.


(c)	The allowance provided for repossessed and foreclosed assets represents any cumulative valuation adjustment recognized to adjust the assets to fair value.

Table of Contents

Notes to Condensed Consolidated Financial Statements (unaudited)

Ally Financial Inc. • Form 10-Q



	Nonrecurring fair value measurements								Lower-of-cost or fair value reserve, valuation reserve, or cumulative adjustments			Total gain (loss) included in earnings
December 31, 2018 ($ in millions)	Level 1		Level 2		Level 3		Total					Total gain (loss) included in earnings
Assets
Loans held-for-sale, net
Automotive (a)	$	—	$	—	$	210	$	210	$	(2	)	n/m	(b)
Other	—		—		96		96		—			n/m	(b)
Total loans held-for-sale, net	—		—		306		306		(2		)	n/m	(b)
Commercial finance receivables and loans, net (c)
Automotive	—		—		84		84		(10		)	n/m	(b)
Other	—		—		55		55		(46		)	n/m	(b)
Total commercial finance receivables and loans, net	—		—		139		139		(56		)	n/m	(b)
Other assets
Nonmarketable equity investments	—		—		1		1		(1		)	n/m	(b)
Equity-method investments	—		—		3		3		—			n/m	(b)
Repossessed and foreclosed assets (d)	—		—		13		13		(1		)	n/m	(b)
Total assets	$	—	$	—	$	462	$	462	$	(60	)	n/m

n/m = not meaningful


(a)	Represents loans within our commercial automotive portfolio. Of this amount, $104 million was valued based upon a sales price for a transaction that closed in January 2019, and $106 million was valued using a discounted cash flow analysis, with a spread over forward interest rates as a significant unobservable input utilizing a range of 0.08–1.09% and weighted average of 0.72%.

(b)


(c)	Represents the portion of the portfolio specifically impaired during 2018. The related valuation allowance represents the cumulative adjustment to fair value of those specific receivables.


(d)	The allowance provided for repossessed and foreclosed assets represents any cumulative valuation adjustment recognized to adjust the assets to fair value.

Fair Value Option for Financial Assets

We elected the fair value option for an insignificant amount of conforming mortgage loans held-for-sale. We elected the fair value option to mitigate earnings volatility by better matching the accounting for the assets with the related derivatives. Our intent in electing fair value measurement was to mitigate a divergence between accounting gains or losses and economic exposure for certain assets and liabilities.

Table of Contents

Notes to Condensed Consolidated Financial Statements (unaudited)

Ally Financial Inc. • Form 10-Q

Fair Value of Financial Instruments

The following table presents the carrying and estimated fair value of financial instruments, except for those recorded at fair value on a recurring basis presented in the previous section of this note titled Recurring Fair Value. When possible, we use quoted market prices to determine fair value. Where quoted market prices are not available, the fair value is internally derived based on appropriate valuation methodologies with respect to the amount and timing of future cash flows and estimated discount rates. However, considerable judgment is required in interpreting current market data to develop the market assumptions and inputs necessary to estimate fair value. As such, the actual amount received to sell an asset or the amount paid to settle a liability could differ from our estimates. Fair value information presented herein was based on information available at September 30, 2019, and December 31, 2018.



			Estimated fair value
($ in millions)	Carrying value		Level 1		Level 2		Level 3		Total
September 30, 2019
Financial assets
Held-to-maturity securities	$	2,618	$	—	$	2,687	$	—	$	2,687
Loans held-for-sale, net	962		—		—		963		963
Finance receivables and loans, net	127,332		—		—		131,154		131,154
FHLB/FRB stock (a)	1,160		—		1,160		—		1,160
Financial liabilities
Deposit liabilities	$	59,788	$	—	$	—	$	60,364	$	60,364
Short-term borrowings	5,335		—		—		5,336		5,336
Long-term debt	35,730		—		23,336		15,221		38,557
December 31, 2018
Financial assets
Held-to-maturity securities	$	2,362	$	—	$	2,307	$	—	$	2,307
Loans held-for-sale, net	306		—		—		306		306
Finance receivables and loans, net	128,684		—		—		130,878		130,878
FHLB/FRB stock (a)	1,351		—		1,351		—		1,351
Financial liabilities
Deposit liabilities	$	51,985	$	—	$	—	$	51,997	$	51,997
Short-term borrowings	9,987		—		—		9,992		9,992
Long-term debt	44,193		—		23,846		21,800		45,646


(a)	Included in other assets on our Condensed Consolidated Balance Sheet.

20. Offsetting Assets and Liabilities

Our derivative contracts and repurchase/reverse repurchase transactions are supported by qualifying master netting and master repurchase agreements. These agreements are legally enforceable bilateral agreements that (i) create a single legal obligation for all individual transactions covered by the agreement to the nondefaulting entity upon an event of default of the counterparty, including bankruptcy, insolvency, or similar proceeding, and (ii) provide the nondefaulting entity the right to accelerate, terminate, and close-out on a net basis all transactions under the agreement and to liquidate or set off collateral promptly upon an event of default of the counterparty.

To further mitigate the risk of counterparty default related to derivative instruments, we maintain collateral agreements with certain counterparties. The agreements require both parties to maintain collateral in the event the fair values of the derivative financial instruments meet established thresholds. In the event that either party defaults on the obligation, the secured party may seize the collateral. Generally, our collateral arrangements are bilateral such that we and the counterparty post collateral for the obligation. Contractual terms provide for standard and customary exchange of collateral based on changes in the market value of the outstanding derivatives. A party posts additional collateral when their obligation rises or removes collateral when it falls, such that the net replacement cost of the nondefaulting party is covered in the event of counterparty default.

In certain instances as it relates to our derivative instruments, we have the option to report derivative assets and liabilities as well as assets and liabilities associated with cash collateral received or delivered that is governed by a master netting agreement on a net basis as long as certain qualifying criteria are met. Similarly, for our repurchase/reverse repurchase transactions, we have the option to report recognized assets and liabilities subject to a master netting agreement on a net basis if certain qualifying criteria are met. At September 30, 2019, these instruments are reported as gross assets and gross liabilities on the Condensed Consolidated Balance Sheet.

Table of Contents

Notes to Condensed Consolidated Financial Statements (unaudited)

Ally Financial Inc. • Form 10-Q

The composition of offsetting derivative instruments, financial assets, and financial liabilities was as follows.



	Gross amounts of recognized assets/liabilities		Gross amounts offset on the Condensed Consolidated Balance Sheet		Net amounts of assets/liabilities presented on the Condensed Consolidated Balance Sheet
							Gross amounts not offset on the Condensed Consolidated Balance Sheet
September 30, 2019 ($ in millions)							Financial instruments			Collateral (a) (b) (c)			Net amount
Assets
Derivative assets in net asset positions (d)	$	91	$	—	$	91	$	(2	)	$	(86	)	$	3
Derivative assets with no offsetting arrangements	3		—		3		—			—			3
Total assets	$	94	$	—	$	94	$	(2	)	$	(86	)	$	6
Liabilities
Derivative liabilities in net liability positions (d)	$	1	$	—	$	1	$	—		$	(1	)	$	—
Derivative liabilities in net asset positions	1		—		1		(1		)	—			—
Derivative liabilities with no offsetting arrangements	1		—		1		—			—			1
Total derivative liabilities (d)	3		—		3		(1		)	(1		)	1
Securities sold under agreements to repurchase (e)	459		—		459		—			(459		)	—
Total liabilities	$	462	$	—	$	462	$	(1	)	$	(460	)	$	1


(a)	Financial collateral received/pledged shown as a balance based on the sum of all net asset and liability positions between Ally and each individual derivative counterparty.

(b)

Amounts disclosed are limited to the financial asset or liability balance and, accordingly, exclude excess collateral received or pledged and noncash collateral received. There was $38 million of noncash derivative collateral pledged to us that was excluded at September 30, 2019. We do not record such collateral received on our Condensed Consolidated Balance Sheet unless certain conditions are met.


(c)	Certain agreements grant us the right to sell or pledge the noncash assets we receive as collateral. Noncash collateral pledged to us where the agreement grants us the right to sell or pledge the underlying assets had a fair value of $38 million at September 30, 2019. We have not sold or pledged any of the noncash collateral received under these agreements as of September 30, 2019.


(d)	For additional information on derivative instruments and hedging activities, refer to Note 17.


(e)	For additional information on securities sold under agreements to repurchase, refer to Note 12.

Table of Contents

Notes to Condensed Consolidated Financial Statements (unaudited)

Ally Financial Inc. • Form 10-Q



	Gross amounts of recognized assets/liabilities		Gross amounts offset on the Condensed Consolidated Balance Sheet		Net amounts of assets/liabilities presented on the Condensed Consolidated Balance Sheet
							Gross amounts not offset on the Condensed Consolidated Balance Sheet
December 31, 2018 ($ in millions)							Financial instruments		Collateral (a) (b) (c)			Net amount
Assets
Derivative assets in net asset positions	$	41	$	—	$	41	$	—	$	(4	)	$	37
Total assets (d)	$	41	$	—	$	41	$	—	$	(4	)	$	37
Liabilities
Derivative liabilities in net liability positions (d)	$	37	$	—	$	37	$	—	$	—		$	37
Securities sold under agreements to repurchase (e)	685		—		685		—		(685		)	—
Total liabilities	$	722	$	—	$	722	$	—	$	(685	)	$	37


(a)	Financial collateral received/pledged shown as a balance based on the sum of all net asset and liability positions between Ally and each individual derivative counterparty.

(b)

Amounts disclosed are limited to the financial asset or liability balance and, accordingly, exclude excess collateral received or pledged and noncash collateral received. There was $3 million of noncash derivative collateral, and $4 million of noncash collateral associated with our repurchase agreements, pledged to us that was excluded at December 31, 2018. We do not record such collateral received on our Condensed Consolidated Balance Sheet unless certain conditions are met.


(c)	Certain agreements grant us the right to sell or pledge the noncash assets we receive as collateral. Noncash collateral pledged to us where the agreement grants us the right to sell or pledge the underlying assets had a fair value of $7 million at December 31, 2018. We have not sold or pledged any of the noncash collateral received under these agreements as of December 31, 2018.


(d)	For additional information on derivative instruments and hedging activities, refer to Note 17.


(e)	For additional information on securities sold under agreements to repurchase, refer to Note 12.

21. Segment Information

Operating segments are defined as components of an enterprise that engage in business activity from which revenues are earned and expenses incurred for which discrete financial information is available that is evaluated regularly by our chief operating decision maker in deciding how to allocate resources and in assessing performance.

We report our results of operations on a business-line basis through four operating segments: Automotive Finance operations, Insurance operations, Mortgage Finance operations, and Corporate Finance operations, with the remaining activity reported in Corporate and Other. The operating segments are determined based on the products and services offered, and reflect the manner in which financial information is currently evaluated by management. The following is a description of each of our reportable operating segments.

Automotive Finance operations — One of the largest full service automotive finance operations in the United States providing automotive financing services to consumers, automotive dealers, companies, and municipalities. Our automotive finance services include providing retail installment sales contracts, loans and operating leases, offering term loans to dealers, financing dealer floorplans and other lines of credit to dealers, warehouse lines to automotive retailers, fleet financing, providing financing to companies and municipalities for the purchase or lease of vehicles, and vehicle-remarketing services.

Insurance operations — A complementary automotive-focused business offering both consumer finance protection and insurance products sold primarily through the automotive dealer channel, and commercial insurance products sold directly to dealers. As part of our focus on offering dealers a broad range of consumer financial and insurance products, we provide VSCs, VMCs, and GAP products. We also underwrite select commercial insurance coverages, which primarily insure dealers’ vehicle inventory.

Mortgage Finance operations — Consists of the management of held-for-investment and held-for sale consumer mortgage loan portfolios. Our held-for-investment loan portfolio includes bulk purchases of high-quality jumbo and low-to-moderate income (LMI) mortgage loans originated by third parties. Our direct-to-consumer mortgage offering, named Ally Home, consists of a variety of jumbo and conforming fixed- and adjustable-rate mortgage products with the assistance of a third-party fulfillment provider. Jumbo mortgage loans are generally held on our balance sheet and are accounted for as held-for-investment. Conforming mortgage loans are generally originated as held-for-sale and then sold to the fulfillment provider, and we retain no mortgage servicing rights associated with those loans that are sold.

Corporate Finance operations — Primarily provides senior secured leveraged cash flow and asset-based loans to mostly U.S.-based middle-market companies. Our primary focus is on businesses owned by private equity sponsors with loans typically used for leveraged buyouts, mergers and acquisitions, debt refinancing, restructurings, and working capital. We also offer a commercial real estate product to serve companies in the healthcare industry.

Table of Contents

Notes to Condensed Consolidated Financial Statements (unaudited)

Ally Financial Inc. • Form 10-Q

Corporate and Other primarily consists of centralized corporate treasury activities such as management of the cash and corporate investment securities and loan portfolios, short- and long-term debt, retail and brokered deposit liabilities, derivative instruments, original issue discount, and the residual impacts of our corporate funds-transfer pricing (FTP) and treasury asset liability management (ALM) activities. Corporate and Other also includes certain equity investments, which primarily consist of FHLB and FRB stock, the management of our legacy mortgage portfolio, which primarily consists of loans originated prior to January 1, 2009, and reclassifications and eliminations between the reportable operating segments. Additionally, financial results related to Ally Invest are currently included within Corporate and Other.

We utilize an FTP methodology for the majority of our business operations. The FTP methodology assigns charge rates and credit rates to classes of assets and liabilities based on expected duration and the benchmark rate curve plus an assumed credit spread. Matching duration allocates interest income and interest expense to these reportable segments so their respective results are insulated from interest rate risk. This methodology is consistent with our ALM practices, which includes managing interest rate risk centrally at a corporate level. The net residual impact of the FTP methodology is included within the results of Corporate and Other.

The information presented in our reportable operating segments is based in part on internal allocations, which involve management judgment.

Financial information for our reportable operating segments is summarized as follows.



Three months ended September 30, ($ in millions)	Automotive Finance operations		Insurance operations		Mortgage Finance operations		Corporate Finance operations		Corporate and Other			Consolidated (a)
2019
Net financing revenue (loss) and other interest income	$	1,078	$	14	$	39	$	60	$	(3	)	$	1,188
Other revenue	59		289		10		9		46			413
Total net revenue	1,137		303		49		69		43			1,601
Provision for loan losses	265		—		—		3		(5		)	263
Total noninterest expense	443		247		38		22		88			838
Income (loss) from continuing operations before income tax expense	$	429	$	56	$	11	$	44	$	(40	)	$	500
Total assets	$	115,096	$	8,478	$	16,583	$	5,275	$	36,053		$	181,485
2018
Net financing revenue and other interest income	$	956	$	14	$	44	$	50	$	43		$	1,107
Other revenue	80		282		2		14		20			398
Total net revenue	1,036		296		46		64		63			1,505
Provision for loan losses	229		—		2		8		(6		)	233
Total noninterest expense	424		241		36		20		86			807
Income (loss) from continuing operations before income tax expense	$	383	$	55	$	8	$	36	$	(17	)	$	465
Total assets	$	114,675	$	7,776	$	14,896	$	4,459	$	31,295		$	173,101


(a)	Net financing revenue and other interest income after the provision for loan losses totaled $925 million and $874 million for the three months ended September 30, 2019, and 2018, respectively.

Table of Contents

Notes to Condensed Consolidated Financial Statements (unaudited)

Ally Financial Inc. • Form 10-Q



Nine months ended September 30, ($ in millions)	Automotive Finance operations		Insurance operations		Mortgage Finance operations		Corporate Finance operations		Corporate and Other			Consolidated (a)
2019
Net financing revenue and other interest income	$	3,080	$	41	$	135	$	175	$	46		$	3,477
Other revenue	188		935		16		30		105			1,274
Total net revenue	3,268		976		151		205		151			4,751
Provision for loan losses	707		—		2		29		(16		)	722
Total noninterest expense	1,344		775		111		73		246			2,549
Income (loss) from continuing operations before income tax expense	$	1,217	$	201	$	38	$	103	$	(79	)	$	1,480
Total assets	$	115,096	$	8,478	$	16,583	$	5,275	$	36,053		$	181,485
2018
Net financing revenue and other interest income	$	2,790	$	39	$	131	$	153	$	137		$	3,250
Other revenue	209		794		5		36		72			1,116
Total net revenue	2,999		833		136		189		209			4,366
Provision for loan losses	658		—		4		2		(12		)	652
Total noninterest expense	1,308		740		102		64		246			2,460
Income (loss) from continuing operations before income tax expense	$	1,033	$	93	$	30	$	123	$	(25	)	$	1,254
Total assets	$	114,675	$	7,776	$	14,896	$	4,459	$	31,295		$	173,101


(a)	Net financing revenue and other interest income after the provision for loan losses totaled $2.8 billion and $2.6 billion for the nine months ended September 30, 2019, and 2018, respectively.

22. Parent and Guarantor Condensed Consolidating Financial Statements

Certain of our senior notes issued by the parent are guaranteed by 100% directly owned subsidiaries of Ally (the Guarantors). As of September 30, 2019, the Guarantors include Ally US LLC and IB Finance Holding Company, LLC (IB Finance), each of which fully and unconditionally guarantee the senior notes on a joint and several basis.

The following financial statements present condensed consolidating financial data for (i) Ally Financial Inc. (on a parent company-only basis); (ii) the Guarantors; (iii) the nonguarantor subsidiaries (all other subsidiaries); and (iv) a column for adjustments to arrive at (v) the information for the parent company, the Guarantors, and nonguarantors on a consolidated basis.

Investment in subsidiaries is accounted for by the parent company and the Guarantors using the equity method for this presentation. Results of operations of subsidiaries are therefore classified in the parent company’s and Guarantors’ investment in subsidiaries accounts. The elimination entries set forth in the following condensed consolidating financial statements eliminate distributed and undistributed income of subsidiaries, investment in subsidiaries, and intercompany balances and transactions between the parent, the Guarantors, and nonguarantors.

Table of Contents

Notes to Condensed Consolidated Financial Statements (unaudited)

Ally Financial Inc. • Form 10-Q

Condensed Consolidating Statements of Comprehensive Income



Three months ended September 30, 2019 ($ in millions)	Parent			Guarantors		Nonguarantors			Consolidating adjustments			Ally consolidated
Financing revenue and other interest income
Interest and fees on finance receivables and loans	$	(52	)	$	—	$	1,914		$	(3	)	$	1,859
Interest and fees on finance receivables and loans — intercompany	4			—		1			(5		)	—
Interest on loans held-for-sale	—			—		8			—			8
Interest and dividends on investment securities and other earning assets	—			—		237			—			237
Interest on cash and cash equivalents	2			—		17			—			19
Interest on cash and cash equivalents — intercompany	3			—		5			(8		)	—
Operating leases	—			—		368			—			368
Total financing (loss) revenue and other interest income	(43		)	—		2,550			(16		)	2,491
Interest expense
Interest on deposits	—			—		658			—			658
Interest on short-term borrowings	15			—		18			—			33
Interest on long-term debt	215			—		163			—			378
Interest on intercompany debt	6			—		7			(13		)	—
Total interest expense	236			—		846			(13		)	1,069
Net depreciation expense on operating lease assets	1			—		233			—			234
Net financing (loss) revenue	(280		)	—		1,471			(3		)	1,188
Cash dividends from subsidiaries
Bank subsidiary	550			550		—			(1,100		)	—
Nonbank subsidiaries	52			—		(1		)	(51		)	—
Other revenue
Insurance premiums and service revenue earned	—			—		280			—			280
Gain on mortgage and automotive loans, net	1			—		9			—			10
Other gain on investments, net	2			—		25			—			27
Other income, net of losses	72			—		143			(119		)	96
Total other revenue	75			—		457			(119		)	413
Total net revenue	397			550		1,927			(1,273		)	1,601
Provision for loan losses	3			—		259			1			263
Noninterest expense
Compensation and benefits expense	9			—		287			—			296
Insurance losses and loss adjustment expenses	—			—		74			—			74
Other operating expenses	124			—		463			(119		)	468
Total noninterest expense	133			—		824			(119		)	838
Income from continuing operations before income tax expense and undistributed income (loss) of subsidiaries	261			550		844			(1,155		)	500
Income tax (benefit) expense from continuing operations	(117		)	—		236			—			119
Net income from continuing operations	378			550		608			(1,155		)	381
Income (loss) from discontinued operations, net of tax	1			—		(1		)	—			—
Undistributed income (loss) of subsidiaries
Bank subsidiary	17			17		—			(34		)	—
Nonbank subsidiaries	(15		)	—		—			15			—
Net income	381			567		607			(1,174		)	381
Other comprehensive income, net of tax	106			80		109			(189		)	106
Comprehensive income	$	487		$	647	$	716		$	(1,363	)	$	487

Table of Contents

Notes to Condensed Consolidated Financial Statements (unaudited)

Ally Financial Inc. • Form 10-Q



Three months ended September 30, 2018 ($ in millions)	Parent			Guarantors			Nonguarantors			Consolidating adjustments			Ally consolidated
Financing revenue and other interest income
Interest and fees on finance receivables and loans	$	(4	)	$	—		$	1,712		$	—		$	1,708
Interest and fees on finance receivables and loans — intercompany	3			—			2			(5		)	—
Interest on loans held-for-sale	—			—			4			—			4
Interest and dividends on investment securities and other earning assets	—			—			198			—			198
Interest on cash and cash equivalents	2			—			16			—			18
Interest on cash and cash equivalents — intercompany	1			—			3			(4		)	—
Operating leases	1			—			367			—			368
Total financing revenue and other interest income	3			—			2,302			(9		)	2,296
Interest expense
Interest on deposits	—			—			462			—			462
Interest on short-term borrowings	12			—			17			—			29
Interest on long-term debt	250			—			201			—			451
Interest on intercompany debt	5			—			4			(9		)	—
Total interest expense	267			—			684			(9		)	942
Net depreciation expense on operating lease assets	2			—			245			—			247
Net financing (loss) revenue	(266		)	—			1,373			—			1,107
Cash dividends from subsidiaries
Bank subsidiary	550			550			—			(1,100		)	—
Nonbank subsidiaries	88			—			—			(88		)	—
Other revenue
Insurance premiums and service revenue earned	—			—			258			—			258
Gain on mortgage and automotive loans, net	16			—			1			—			17
Other gain on investments, net	—			—			22			—			22
Other income, net of losses	105			—			187			(191		)	101
Total other revenue	121			—			468			(191		)	398
Total net revenue	493			550			1,841			(1,379		)	1,505
Provision for loan losses	30			—			203			—			233
Noninterest expense
Compensation and benefits expense	19			—			255			—			274
Insurance losses and loss adjustment expenses	—			—			77			—			77
Other operating expenses	175			—			472			(191		)	456
Total noninterest expense	194			—			804			(191		)	807
Income from continuing operations before income tax expense and undistributed (loss) income of subsidiaries	269			550			834			(1,188		)	465
Income tax (benefit) expense from continuing operations	(88		)	—			179			—			91
Net income from continuing operations	357			550			655			(1,188		)	374
Income from discontinued operations, net of tax	—			—			—			—			—
Undistributed (loss) income of subsidiaries
Bank subsidiary	(31		)	(31		)	—			62			—
Nonbank subsidiaries	48			—			—			(48		)	—
Net income	374			519			655			(1,174		)	374
Other comprehensive loss, net of tax	(133		)	(104		)	(133		)	237			(133		)
Comprehensive income	$	241		$	415		$	522		$	(937	)	$	241

Table of Contents

Notes to Condensed Consolidated Financial Statements (unaudited)

Ally Financial Inc. • Form 10-Q



Nine months ended September 30, 2019 ($ in millions)	Parent			Guarantors		Nonguarantors			Consolidating adjustments			Ally consolidated
Financing revenue and other interest income
Interest and fees on finance receivables and loans	$	(172	)	$	—	$	5,704		$	(6	)	$	5,526
Interest and fees on finance receivables and loans — intercompany	10			—		4			(14		)	—
Interest on loans held-for-sale	—			—		13			—			13
Interest and dividends on investment securities and other earning assets	—			—		721			—			721
Interest on cash and cash equivalents	8			—		55			—			63
Interest on cash and cash equivalents — intercompany	8			—		13			(21		)	—
Operating leases	1			—		1,091			—			1,092
Total financing (loss) revenue and other interest income	(145		)	—		7,601			(41		)	7,415
Interest expense
Interest on deposits	—			—		1,901			—			1,901
Interest on short-term borrowings	41			—		73			—			114
Interest on long-term debt	638			—		566			—			1,204
Interest on intercompany debt	17			—		18			(35		)	—
Total interest expense	696			—		2,558			(35		)	3,219
Net depreciation expense on operating lease assets	3			—		716			—			719
Net financing (loss) revenue	(844		)	—		4,327			(6		)	3,477
Cash dividends from subsidiaries
Bank subsidiary	1,450			1,450		—			(2,900		)	—
Nonbank subsidiaries	188			—		(1		)	(187		)	—
Other revenue
Insurance premiums and service revenue earned	—			—		802			—			802
Gain on mortgage and automotive loans, net	4			—		18			—			22
Other gain on investments, net	2			—		172			—			174
Other income, net of losses	266			—		432			(422		)	276
Total other revenue	272			—		1,424			(422		)	1,274
Total net revenue	1,066			1,450		5,750			(3,515		)	4,751
Provision for loan losses	35			—		704			(17		)	722
Noninterest expense
Compensation and benefits expense	30			—		880			—			910
Insurance losses and loss adjustment expenses	—			—		260			—			260
Other operating expenses	438			—		1,363			(422		)	1,379
Total noninterest expense	468			—		2,503			(422		)	2,549
Income from continuing operations before income tax expense and undistributed income of subsidiaries	563			1,450		2,543			(3,076		)	1,480
Income tax (benefit) expense from continuing operations	(467		)	—		607			—			140
Net income from continuing operations	1,030			1,450		1,936			(3,076		)	1,340
Loss from discontinued operations, net of tax	(2		)	—		(1		)	—			(3		)
Undistributed income of subsidiaries
Bank subsidiary	184			184		—			(368		)	—
Nonbank subsidiaries	125			—		—			(125		)	—
Net income	1,337			1,634		1,935			(3,569		)	1,337
Other comprehensive income, net of tax	721			546		740			(1,286		)	721
Comprehensive income	$	2,058		$	2,180	$	2,675		$	(4,855	)	$	2,058

Table of Contents

Notes to Condensed Consolidated Financial Statements (unaudited)

Ally Financial Inc. • Form 10-Q



Nine months ended September 30, 2018 ($ in millions)	Parent			Guarantors			Nonguarantors			Consolidating adjustments			Ally consolidated
Financing revenue and other interest income
Interest and fees on finance receivables and loans	$	6		$	—		$	4,892		$	—		$	4,898
Interest and fees on finance receivables and loans — intercompany	9			—			4			(13		)	—
Interest on loans held-for-sale	—			—			10			—			10
Interest and dividends on investment securities and other earning assets	—			—			563			(1		)	562
Interest on cash and cash equivalents	6			—			44			—			50
Interest on cash and cash equivalents — intercompany	5			—			7			(12		)	—
Operating leases	4			—			1,120			—			1,124
Total financing revenue and other interest income	30			—			6,640			(26		)	6,644
Interest expense
Interest on deposits	—			—			1,212			—			1,212
Interest on short-term borrowings	32			—			69			—			101
Interest on long-term debt	765			—			531			—			1,296
Interest on intercompany debt	12			—			14			(26		)	—
Total interest expense	809			—			1,826			(26		)	2,609
Net depreciation expense on operating lease assets	7			—			778			—			785
Net financing (loss) revenue	(786		)	—			4,036			—			3,250
Cash dividends from subsidiaries
Bank subsidiary	2,050			2,050			—			(4,100		)	—
Nonbank subsidiaries	389			—			—			(389		)	—
Other revenue
Insurance premiums and service revenue earned	—			—			753			—			753
Gain on mortgage and automotive loans, net	44			—			3			(28		)	19
Other gain on investments, net	—			—			37			—			37
Other income, net of losses	301			—			593			(587		)	307
Total other revenue	345			—			1,386			(615		)	1,116
Total net revenue	1,998			2,050			5,422			(5,104		)	4,366
Provision for loan losses	143			—			537			(28		)	652
Noninterest expense
Compensation and benefits expense	67			—			805			—			872
Insurance losses and loss adjustment expenses	—			—			241			—			241
Other operating expenses	530			—			1,404			(587		)	1,347
Total noninterest expense	597			—			2,450			(587		)	2,460
Income from continuing operations before income tax expense and undistributed (loss) income of subsidiaries	1,258			2,050			2,435			(4,489		)	1,254
Income tax (benefit) expense from continuing operations	(210		)	—			490			—			280
Net income from continuing operations	1,468			2,050			1,945			(4,489		)	974
(Loss) income from discontinued operations, net of tax	(2		)	—			1			—			(1		)
Undistributed (loss) income of subsidiaries
Bank subsidiary	(576		)	(576		)	—			1,152			—
Nonbank subsidiaries	83			—			—			(83		)	—
Net income	973			1,474			1,946			(3,420		)	973
Other comprehensive loss, net of tax	(531		)	(436		)	(546		)	982			(531		)
Comprehensive income	$	442		$	1,038		$	1,400		$	(2,438	)	$	442

Table of Contents

Notes to Condensed Consolidated Financial Statements (unaudited)

Ally Financial Inc. • Form 10-Q

Condensed Consolidating Balance Sheet



September 30, 2019 ($ in millions)	Parent			Guarantors		Nonguarantors			Consolidating adjustments			Ally consolidated
Assets
Cash and cash equivalents
Noninterest-bearing	$	51		$	—	$	672		$	—		$	723
Interest-bearing	12			—		2,882			—			2,894
Interest-bearing — intercompany	2,004			—		1,044			(3,048		)	—
Total cash and cash equivalents	2,067			—		4,598			(3,048		)	3,617
Equity securities	—			—		570			—			570
Available-for-sale securities	—			—		29,384			—			29,384
Held-to-maturity securities	—			—		2,630			(12		)	2,618
Loans held-for-sale, net	—			—		1,000			—			1,000
Finance receivables and loans, net
Finance receivables and loans, net	2,383			—		126,214			12			128,609
Intercompany loans to
Nonbank subsidiaries	118			—		98			(216		)	—
Allowance for loan losses	(31		)	—		(1,246		)	—			(1,277		)
Total finance receivables and loans, net	2,470			—		125,066			(204		)	127,332
Investment in operating leases, net	1			—		8,652			—			8,653
Intercompany receivables from
Bank subsidiary	255			—		—			(255		)	—
Nonbank subsidiaries	50			—		100			(150		)	—
Investment in subsidiaries
Bank subsidiary	16,981			16,981		—			(33,962		)	—
Nonbank subsidiaries	7,010			—		—			(7,010		)	—
Premiums receivable and other insurance assets	—			—		2,521			—			2,521
Other assets	2,044			—		5,354			(1,608		)	5,790
Total assets	$	30,878		$	16,981	$	179,875		$	(46,249	)	$	181,485
Liabilities and equity
Deposit liabilities
Noninterest-bearing	$	—		$	—	$	156		$	—		$	156
Interest-bearing	1			—		119,073			—			119,074
Interest-bearing — intercompany	—			—		2,004			(2,004		)	—
Total deposit liabilities	1			—		121,233			(2,004		)	119,230
Short-term borrowings	2,501			—		2,834			—			5,335
Long-term debt	12,319			—		23,411			—			35,730
Intercompany debt to
Bank subsidiary	12			—		—			(12		)	—
Nonbank subsidiaries	1,142			—		118			(1,260		)	—
Intercompany payables to
Bank subsidiary	36			—		—			(36		)	—
Nonbank subsidiaries	109			—		277			(386		)	—
Interest payable	182			—		712			—			894
Unearned insurance premiums and service revenue	—			—		3,246			—			3,246
Accrued expenses and other liabilities	126			—		4,065			(1,591		)	2,600
Total liabilities	16,428			—		155,896			(5,289		)	167,035
Total equity	14,450			16,981		23,979			(40,960		)	14,450
Total liabilities and equity	$	30,878		$	16,981	$	179,875		$	(46,249	)	$	181,485

Table of Contents

Notes to Condensed Consolidated Financial Statements (unaudited)

Ally Financial Inc. • Form 10-Q



December 31, 2018 ($ in millions)	Parent			Guarantors		Nonguarantors			Consolidating adjustments			Ally consolidated
Assets
Cash and cash equivalents
Noninterest-bearing	$	55		$	—	$	755		$	—		$	810
Interest-bearing	5			—		3,722			—			3,727
Interest-bearing — intercompany	1,249			—		521			(1,770		)	—
Total cash and cash equivalents	1,309			—		4,998			(1,770		)	4,537
Equity securities	—			—		773			—			773
Available-for-sale securities	—			—		25,303			—			25,303
Held-to-maturity securities	—			—		2,382			(20		)	2,362
Loans held-for-sale, net	—			—		314			—			314
Finance receivables and loans, net
Finance receivables and loans, net	2,349			—		127,577			—			129,926
Intercompany loans to
Nonbank subsidiaries	882			—		397			(1,279		)	—
Allowance for loan losses	(55		)	—		(1,187		)	—			(1,242		)
Total finance receivables and loans, net	3,176			—		126,787			(1,279		)	128,684
Investment in operating leases, net	5			—		8,412			—			8,417
Intercompany receivables from
Bank subsidiary	158			—		—			(158		)	—
Nonbank subsidiaries	45			—		129			(174		)	—
Investment in subsidiaries
Bank subsidiary	16,213			16,213		—			(32,426		)	—
Nonbank subsidiaries	6,928			—		—			(6,928		)	—
Premiums receivable and other insurance assets	—			—		2,326			—			2,326
Other assets	2,226			—		5,453			(1,526		)	6,153
Total assets	$	30,060		$	16,213	$	176,877		$	(44,281	)	$	178,869
Liabilities and equity
Deposit liabilities
Noninterest-bearing	$	—		$	—	$	142		$	—		$	142
Interest-bearing	1			—		106,035			—			106,036
Interest-bearing — intercompany	—			—		1,249			(1,249		)	—
Total deposit liabilities	1			—		107,426			(1,249		)	106,178
Short-term borrowings	2,477			—		7,510			—			9,987
Long-term debt	12,774			—		31,419			—			44,193
Intercompany debt to
Bank subsidiary	20			—		—			(20		)	—
Nonbank subsidiaries	918			—		882			(1,800		)	—
Intercompany payables to
Bank subsidiary	45			—		—			(45		)	—
Nonbank subsidiaries	124			—		129			(253		)	—
Interest payable	159			—		364			—			523
Unearned insurance premiums and service revenue	—			—		3,044			—			3,044
Accrued expenses and other liabilities	274			—		2,962			(1,560		)	1,676
Total liabilities	16,792			—		153,736			(4,927		)	165,601
Total equity	13,268			16,213		23,141			(39,354		)	13,268
Total liabilities and equity	$	30,060		$	16,213	$	176,877		$	(44,281	)	$	178,869

Table of Contents

Notes to Condensed Consolidated Financial Statements (unaudited)

Ally Financial Inc. • Form 10-Q

Condensed Consolidating Statement of Cash Flows



Nine months ended September 30, 2019 ($ in millions)	Parent			Guarantors			Nonguarantors			Consolidating adjustments			Ally consolidated
Operating activities
Net cash provided by operating activities	$	1,157		$	1,450		$	3,598		$	(3,072	)	$	3,133
Investing activities
Purchases of equity securities	—			—			(301		)	—			(301		)
Proceeds from sales of equity securities	—			—			615			—			615
Purchases of available-for-sale securities	—			—			(11,214		)	—			(11,214		)
Proceeds from sales of available-for-sale securities	—			—			5,699			—			5,699
Proceeds from repayments of available-for-sale securities	—			—			3,246			—			3,246
Purchases of held-to-maturity securities	—			—			(514		)	—			(514		)
Proceeds from repayments of held-to-maturity securities	—			—			195			—			195
Net change in investment securities — intercompany	—			—			9			(9		)	—
Purchases of finance receivables and loans held-for-investment	—			—			(3,857		)	535			(3,322		)
Proceeds from sales of finance receivables and loans initially held-for-investment	548			—			414			(535		)	427
Originations and repayments of finance receivables and loans held-for-investment and other, net	(519		)	—			3,582			6			3,069
Net change in loans — intercompany	761			—			296			(1,057		)	—
Purchases of operating lease assets	—			—			(2,937		)	—			(2,937		)
Disposals of operating lease assets	3			—			2,013			—			2,016
Capital contributions to subsidiaries	(1		)	—			—			1			—
Returns of contributed capital	29			—			—			(29		)	—
Net change in nonmarketable equity investments	(12		)	—			191			—			179
Other, net	(2		)	—			(305		)	1			(306		)
Net cash provided by (used in) investing activities	807			—			(2,868		)	(1,087		)	(3,148		)
Financing activities
Net change in short-term borrowings — third party	24			—			(4,676		)	—			(4,652		)
Net increase in deposits	—			—			13,788			(756		)	13,032
Proceeds from issuance of long-term debt — third party	771			—			4,667			—			5,438
Repayments of long-term debt — third party	(1,304		)	—			(12,810		)	—			(14,114		)
Net change in debt — intercompany	219			—			(761		)	542			—
Repurchase of common stock	(740		)	—			—			—			(740		)
Dividends paid — third party	(206		)	—			—			—			(206		)
Dividends paid and returns of contributed capital — intercompany	—			(1,450		)	(1,646		)	3,096			—
Capital contributions from parent	—			—			1			(1		)	—
Net cash used in financing activities	(1,236		)	(1,450		)	(1,437		)	2,881			(1,242		)
Effect of exchange-rate changes on cash and cash equivalents and restricted cash	—			—			2			—			2
Net decrease in cash and cash equivalents and restricted cash	728			—			(705		)	(1,278		)	(1,255		)
Cash and cash equivalents and restricted cash at beginning of year	1,398			—			5,998			(1,770		)	5,626
Cash and cash equivalents and restricted cash at September 30,	$	2,126		$	—		$	5,293		$	(3,048	)	$	4,371

The following table provides a reconciliation of cash and cash equivalents and restricted cash from the Condensed Consolidated Balance Sheet to the Condensed Consolidated Statement of Cash Flows.



September 30, 2019 ($ in millions)	Parent		Guarantors		Nonguarantors		Consolidating adjustments			Ally consolidated
Cash and cash equivalents on the Condensed Consolidated Balance Sheet	$	2,067	$	—	$	4,598	$	(3,048	)	$	3,617
Restricted cash included in other assets on the Condensed Consolidated Balance Sheet (a)	59		—		695		—			754
Total cash and cash equivalents and restricted cash in the Condensed Consolidated Statement of Cash Flows	$	2,126	$	—	$	5,293	$	(3,048	)	$	4,371


(a)	Restricted cash balances relate primarily to Ally securitization arrangements. Refer to Note 10 for additional details describing the nature of restricted cash balances.

Table of Contents

Notes to Condensed Consolidated Financial Statements (unaudited)

Ally Financial Inc. • Form 10-Q



Nine months ended September 30, 2018 ($ in millions)	Parent			Guarantors			Nonguarantors			Consolidating adjustments			Ally consolidated
Operating activities
Net cash provided by operating activities	$	1,417		$	2,050		$	4,366		$	(4,489	)	$	3,344
Investing activities
Purchases of equity securities	—			—			(652		)	—			(652		)
Proceeds from sales of equity securities	—			—			715			—			715
Purchases of available-for-sale securities	—			—			(5,669		)	—			(5,669		)
Proceeds from sales of available-for-sale securities	—			—			637			—			637
Proceeds from repayments of available-for-sale securities	—			—			2,509			—			2,509
Purchases of held-to-maturity securities	—			—			(436		)	—			(436		)
Proceeds from repayments of held-to-maturity securities	—			—			107			—			107
Net change in investment securities — intercompany	—			—			51			(51		)	—
Purchases of finance receivables and loans held-for-investment	(131		)	—			(5,577		)	930			(4,778		)
Proceeds from sales of finance receivables and loans initially held-for-investment	983			—			—			(930		)	53
Originations and repayments of finance receivables and loans held-for-investment and other, net	2,092			—			(2,650		)	—			(558		)
Net change in loans — intercompany	45			—			(6		)	(39		)	—
Purchases of operating lease assets	—			—			(2,991		)	—			(2,991		)
Disposals of operating lease assets	9			—			2,452			—			2,461
Capital contributions to subsidiaries	(58		)	(6		)	—			64			—
Returns of contributed capital	222			—			—			(222		)	—
Net change in nonmarketable equity investments	(14		)	—			11			—			(3		)
Other, net	1			—			(241		)	(1		)	(241		)
Net cash provided by (used in) investing activities	3,149			(6		)	(11,740		)	(249		)	(8,846		)
Financing activities
Net change in short-term borrowings — third party	(596		)	—			(3,478		)	—			(4,074		)
Net (decrease) increase in deposits	(9		)	—			7,846			226			8,063
Proceeds from issuance of long-term debt — third party	51			—			14,705			—			14,756
Repayments of long-term debt — third party	(3,393		)	—			(9,601		)	—			(12,994		)
Net change in debt — intercompany	(143		)	—			(73		)	216			—
Repurchase of common stock	(630		)	—			—			—			(630		)
Dividends paid — third party	(179		)	—			—			—			(179		)
Dividends paid and returns of contributed capital — intercompany	—			(2,050		)	(2,661		)	4,711			—
Capital contributions from parent	—			6			58			(64		)	—
Net cash (used in) provided by financing activities	(4,899		)	(2,044		)	6,796			5,089			4,942
Effect of exchange-rate changes on cash and cash equivalents and restricted cash	—			—			(2		)	—			(2		)
Net decrease in cash and cash equivalents and restricted cash	(333		)	—			(580		)	351			(562		)
Cash and cash equivalents and restricted cash at beginning of year	1,395			—			5,707			(1,833		)	5,269
Cash and cash equivalents and restricted cash at September 30,	$	1,062		$	—		$	5,127		$	(1,482	)	$	4,707

The following table provides a reconciliation of cash and cash equivalents and restricted cash from the Condensed Consolidated Balance Sheet to the Condensed Consolidated Statement of Cash Flows.



September 30, 2018 ($ in millions)	Parent		Guarantors		Nonguarantors		Consolidating adjustments			Ally consolidated
Cash and cash equivalents on the Condensed Consolidated Balance Sheet	$	968	$	—	$	4,286	$	(1,482	)	$	3,772
Restricted cash included in other assets on the Condensed Consolidated Balance Sheet (a)	94		—		841		—			935
Total cash and cash equivalents and restricted cash in the Condensed Consolidated Statement of Cash Flows	$	1,062	$	—	$	5,127	$	(1,482	)	$	4,707


(a)	Restricted cash balances relate primarily to Ally securitization arrangements. Refer to Note 10 for additional details describing the nature of restricted cash balances.

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Notes to Condensed Consolidated Financial Statements (unaudited)

Ally Financial Inc. • Form 10-Q

23. Contingencies and Other Risks

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 business lines 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.

Ally and its subsidiaries, including Ally Bank, also are or may be subject to potential liability under other contingent exposures, including indemnification, tax, self-insurance, and other miscellaneous contingencies.

We accrue for a legal matter or other 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 after consultation with counsel. No assurance exists that our accruals will not need to be adjusted in the future. When a probable or reasonably possible loss on a legal matter or other contingent exposure could be material to our consolidated financial condition, results of operations, or cash flows, we provide disclosure in this note as prescribed by ASC Topic 450, Contingencies. Refer to Note 1 to the Consolidated Financial Statements in our 2018 Annual Report on Form 10-K for additional information related to our policy for establishing accruals.

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 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. Other contingent exposures and their ultimate resolution are similarly unpredictable for reasons that can vary based on the circumstances.

As a result, we often are unable to determine how or when threatened or pending legal matters and other contingent exposures will be resolved and what losses may be incrementally and ultimately incurred. Actual losses may be higher or lower than any amounts accrued or estimated for those matters and other exposures, possibly to a significant degree.

Subject to the foregoing, based on our current knowledge and after consultation with counsel, we do not believe that the ultimate outcomes of currently threatened or pending legal matters and other contingent exposures are likely to be material to our consolidated financial condition after taking into account existing accruals. In light of the uncertainties inherent in these matters and other exposures, however, one or more of them could be material to our results of operations or cash flows during a particular reporting period, depending on factors such as the amount of the loss or liability and the level of our income for that period.

24. Subsequent Events

Health Credit Services Acquisition

On October 1, 2019, we closed on the acquisition of Health Credit Services, a digital point-of-sale payment provider that offers financing to consumers for various healthcare procedures or services, for approximately $190 million. The purchase price includes approximately $170 million in premium to the acquired net assets and is subject to certain purchase price adjustments.

Ally Invest

We conducted our annual impairment testing of goodwill as of August 31, 2019, as further described in Note 1 to the Consolidated Financial Statements in our 2018 Annual Report on Form 10-K. The result of our most recent impairment testing indicated that there was no goodwill impairment for our reporting units. Early in October, several large brokerage firms announced that they would offer commission-free trading to customers. Following these events, on October 4, 2019, Ally Invest announced that it would also offer commission-free trading for its customers, effective October 9, 2019. We are currently evaluating the impact this may have on the projected revenue and earnings in relation to the carrying value of the goodwill of Ally Invest, which was $193 million as of September 30, 2019.

Declaration of Quarterly Dividend

On October 7, 2019, the Board declared a quarterly cash dividend of $0.17 per share on all common stock. The dividend is payable on November 15, 2019, to stockholders of record at the close of business on November 1, 2019.

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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

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;


•	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, including ASU 2016-13, Financial Instruments—Credit Losses;


•	changes in the automotive industry or the markets for new or used vehicles, including the rise of vehicle sharing and ride hailing, the development of autonomous and alternative-energy vehicles, and the impact of demographic shifts on attitudes and behaviors toward vehicle ownership and use;


•	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;


•	uncertainty about the future of the London Interbank Offered Rate (LIBOR) and any negative impacts that could result;


•	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 digital focus;


•	our ability to optimize our automotive finance and insurance businesses and to continue diversifying into and growing other consumer and commercial business lines, including mortgage 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 or our senior officers;


•	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;

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Management’s Discussion and Analysis

Ally Financial Inc. • Form 10-Q


•	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 and challenges to the dealer’s role as intermediary between manufacturers and purchasers;


•	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 and expectations;


•	the performance and availability of third-party service providers on whom we rely in delivering products and services to our customers and otherwise conducting our business and operations;


•	our ability to maintain secure and functional financial, accounting, technology, data processing, or other operating systems or infrastructure, including our capacity to withstand cyberattacks;


•	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 our ability 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.

Unless the context otherwise requires, the following definitions apply. The term “loans” means the following consumer and commercial products associated with our direct and indirect financing activities: loans, retail installment sales contracts, lines of credit, and other financing products excluding operating leases. The term “operating leases” means consumer- and commercial-vehicle lease agreements where Ally is the lessor and the lessee is generally not obligated to acquire ownership of the vehicle at lease-end or compensate Ally for the vehicle’s residual value. The terms “lend,” “finance,” and “originate” mean our direct extension or origination of loans, our purchase or acquisition of loans, or our purchase of operating leases as applicable. The term “consumer” means all consumer products associated with our loan and operating-lease activities and all commercial retail installment sales contracts. The term “commercial” means all commercial products associated with our loan activities, other than commercial retail installment sales contracts.

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Management’s Discussion and Analysis

Ally Financial Inc. • Form 10-Q

Selected Financial Data

The selected historical financial information set forth below should be read in conjunction with Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A), 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 earnings per common share data.



	Three months ended September 30,				Nine months ended September 30,
($ in millions, except per share data; shares in thousands)	2019		2018		2019			2018
Total financing revenue and other interest income	$	2,491	$	2,296	$	7,415		$	6,644
Total interest expense	1,069		942		3,219			2,609
Net depreciation expense on operating lease assets	234		247		719			785
Net financing revenue and other interest income	1,188		1,107		3,477			3,250
Total other revenue	413		398		1,274			1,116
Total net revenue	1,601		1,505		4,751			4,366
Provision for loan losses	263		233		722			652
Total noninterest expense	838		807		2,549			2,460
Income from continuing operations before income tax expense	500		465		1,480			1,254
Income tax expense from continuing operations	119		91		140			280
Net income from continuing operations	381		374		1,340			974
Loss from discontinued operations, net of tax	—		—		(3		)	(1		)
Net income	$	381	$	374	$	1,337		$	973
Basic earnings per common share (a):
Net income from continuing operations	$	0.98	$	0.89	$	3.37		$	2.27
Net income	0.97		0.89		3.36			2.26
Weighted-average common shares outstanding	390,205		422,187		397,427			429,625
Diluted earnings per common share (a):
Net income from continuing operations	$	0.97	$	0.88	$	3.35		$	2.25
Net income	0.97		0.88		3.35			2.25
Weighted-average common shares outstanding	392,604		424,784		399,442			432,038
Common share information:
Cash dividends declared per common share	$	0.17	$	0.15	$	0.51		$	0.41
Period-end common shares outstanding	383,523		416,591		383,523			416,591


(a)	Includes shares related to share-based compensation that vested but were not yet issued.

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Management’s Discussion and Analysis

Ally Financial Inc. • Form 10-Q

The following tables present selected Condensed Consolidated Balance Sheet and ratio data.



September 30, ($ in millions)	2019		2018
Selected period-end balance sheet data:
Total assets	$	181,485	$	173,101
Total deposit liabilities	$	119,230	$	101,379
Long-term debt	$	35,730	$	45,542
Total equity	$	14,450	$	13,085



	Three months ended September 30,				Nine months ended September 30,
	2019		2018		2019		2018
Financial ratios:
Return on average assets (a)	0.84	%	0.87	%	1.00	%	0.77	%
Return on average equity (a)	10.51	%	11.30	%	12.91	%	9.90	%
Equity to assets (a)	7.97	%	7.68	%	7.71	%	7.75	%
Common dividend payout ratio (b)	17.53	%	16.85	%	15.18	%	18.14	%
Net interest spread (a) (c)	2.48	%	2.49	%	2.45	%	2.50	%
Net yield on interest-earning assets (a) (d)	2.70	%	2.67	%	2.68	%	2.67	%


(a)	The ratios were based on average assets and average equity using a combination of monthly and daily average methodologies.


(b)	Common dividend payout ratio was calculated using basic earnings per common share.


(c)	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.


(d)	Net yield on interest-earning assets represents annualized net financing revenue and other interest income as a percentage of total interest-earning assets.

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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 are subject to phase-in periods. 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 at the conclusion of a transition period. Refer to Note 16 to the Condensed Consolidated Financial Statements for further information. The following table presents selected regulatory capital data.



	September 30, 2019						September 30, 2018
($ in millions)	Transitional			Fully phased-in (a)			Transitional			Fully phased-in (a)
Common Equity Tier 1 capital ratio	9.56		%	9.55		%	9.41		%	9.39		%
Tier 1 capital ratio	11.22		%	11.22		%	11.12		%	11.09		%
Total capital ratio	12.76		%	12.76		%	12.68		%	12.65		%
Tier 1 leverage ratio (to adjusted quarterly average assets) (b)	9.12		%	9.12		%	9.23		%	9.23		%
Total equity	$	14,450		$	14,450		$	13,085		$	13,085
Goodwill and certain other intangibles	(279		)	(279		)	(287		)	(287		)
Deferred tax assets arising from net operating loss and tax credit carryforwards (c)	(38		)	(38		)	(221		)	(221		)
Other adjustments	(172		)	(172		)	799			799
Common Equity Tier 1 capital	13,961			13,961			13,376			13,376
Trust preferred securities	2,495			2,495			2,493			2,493
Other adjustments	(62		)	(62		)	(59		)	(59		)
Tier 1 capital	16,394			16,394			15,810			15,810
Qualifying subordinated debt and other instruments qualifying as Tier 2	1,033			1,033			1,030			1,030
Qualifying allowance for credit losses and other adjustments	1,216			1,216			1,189			1,189
Total capital	$	18,643		$	18,643		$	18,029		$	18,029
Risk-weighted assets (d)	$	146,052		$	146,137		$	142,222		$	142,503

(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.

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Management’s Discussion and Analysis

Ally Financial Inc. • Form 10-Q

Overview

Ally Financial Inc. (together with its consolidated subsidiaries unless the context otherwise requires, Ally, the Company, or we, us, or our) is a leading digital financial-services company. As a customer-centric company with passionate customer service and innovative financial solutions, we are relentlessly focused on “Doing It Right” and being a trusted financial-services provider to our consumer, commercial, and corporate customers. We are one of the largest full-service automotive finance operations in the country and offer a wide range of financial services and insurance products to dealerships and consumers. Our award-winning online bank (Ally Bank, Member Federal Deposit Insurance Corporation and Equal Housing Lender) offers mortgage-lending services and a variety of deposit and other banking products, including savings, money-market, and checking accounts, certificates of deposit (CDs), and individual retirement accounts (IRAs). Additionally, we offer securities-brokerage and investment-advisory services through Ally Invest. Our robust corporate finance business offers capital for equity sponsors and middle-market companies. We are a Delaware corporation and are registered as a bank holding company (BHC) under the Bank Holding Company Act of 1956, as amended, and a financial holding company under the Gramm-Leach-Bliley Act of 1999, as amended.

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. The MD&A has been adjusted to exclude discontinued operations unless otherwise noted.

Primary Business Lines

Dealer Financial Services, which includes our Automotive Finance and Insurance operations, Mortgage Finance, and Corporate Finance are our primary business lines. The following table summarizes the operating results excluding discontinued operations of each business line. Operating results for each of the business lines are more fully described in the MD&A sections that follow.



	Three months ended September 30,							Nine months ended September 30,
($ in millions)	2019			2018			Favorable/(unfavorable) % change	2019			2018			Favorable/(unfavorable) % change
Total net revenue
Dealer Financial Services
Automotive Finance	$	1,137		$	1,036		10	$	3,268		$	2,999		9
Insurance	303			296			2	976			833			17
Mortgage Finance	49			46			7	151			136			11
Corporate Finance	69			64			8	205			189			8
Corporate and Other	43			63			(32)	151			209			(28)
Total	$	1,601		$	1,505		6	$	4,751		$	4,366		9
Income (loss) from continuing operations before income tax expense
Dealer Financial Services
Automotive Finance	$	429		$	383		12	$	1,217		$	1,033		18
Insurance	56			55			2	201			93			116
Mortgage Finance	11			8			38	38			30			27
Corporate Finance	44			36			22	103			123			(16)
Corporate and Other	(40		)	(17		)	(135)	(79		)	(25		)	n/m
Total	$	500		$	465		8	$	1,480		$	1,254		18

n/m = not meaningful


•	Our Dealer Financial Services is one of the largest full-service automotive finance operations in the country and offers a wide range of financial services and insurance products to automotive dealerships and customers. Dealer Financial Services consists of two separate reportable segments—Automotive Finance and Insurance operations.

Our automotive finance services include purchasing retail installment sales contracts and operating leases from dealers, extending automotive loans directly to consumers, offering term loans to dealers, financing dealer floorplans and providing other lines of credit to dealers, supplying warehouse lines to automotive retailers, offering automotive-fleet financing, providing financing to companies and municipalities for the purchase or lease of vehicles, and supplying 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 dealers. The automotive marketplace is dynamic and evolving, and we are focused on meeting the needs of both our dealer and consumer customers and continuing to strengthen and expand upon approximately 4.4 million consumer accounts in our portfolio and

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Management’s Discussion and Analysis

Ally Financial Inc. • Form 10-Q

approximately 18,200 dealer relationships we have. Clearlane, our online automotive lender exchange, expands our direct-to-consumer capabilities and provides a digital platform for consumers seeking financing. Additionally, we continue to identify and cultivate relationships with automotive retailers including those with leading eCommerce platforms. We believe these actions will enable us to respond to the growing trends for a more streamlined and digital automotive financing process to serve both dealers and consumers.

The Growth channel was established to focus on developing dealer relationships beyond those relationships that primarily were developed through our role as a captive finance company for General Motors Company (GM) and Fiat Chrysler Automobiles US LLC (Chrysler). The Growth channel was expanded to include direct-to-consumer financing through Clearlane and other channels and our arrangements with online automotive retailers. We have established relationships with thousands of Growth channel dealers through our customer-centric approach and specialized incentive programs designed to drive loyalty amongst dealers to our products and services. 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 88% are franchised dealers (including brands such as Ford, Nissan, Kia, Hyundai, Toyota, Honda, and others), or used vehicle only retailers that 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. We serve approximately 2.4 million end consumers and have active relationships with approximately 4,600 dealerships nationwide across Finance and Insurance (F&I) and Property and Casualty (P&C) products. In addition, we offer F&I products in Canada, where we serve approximately 0.4 million end consumers and have active relationships with approximately 600 dealerships, and are the vehicle service contract (VSC) and protection plan provider for GM Canada. As part of our focus on offering dealers a broad range of consumer financial and insurance products, we offer VSCs, vehicle maintenance contracts (VMCs), guaranteed asset protection (GAP) products, and other ancillary products desired by consumers. We also underwrite selected commercial insurance coverages, which primarily insure dealers’ wholesale vehicle inventory. Ally Premier Protection is our flagship VSC offering, which provides coverage for new and used vehicles of virtually all makes and models. We also offer ClearGuard, on the SmartAuction platform, which is a protection product designed to minimize the risk to dealers from arbitration claims for eligible vehicles sold at auction.


•	Our Mortgage Finance operations consist of the management of held-for-investment and held-for-sale consumer mortgage loan portfolios. Our held-for-investment portfolio includes bulk purchases of high-quality jumbo and low-to-moderate income (LMI) mortgage loans originated by third parties, and a direct-to-consumer mortgage offering under the Ally Home brand.

Through the bulk loan channel, we purchase loans from several qualified sellers including direct originators and large aggregators who have the financial capacity to support strong representations and warranties and the industry knowledge and experience to originate high-quality assets. Bulk purchases are made on a servicing-released basis, allowing us to directly oversee servicing activities and manage prepayments through retention modification or refinancing through our direct-to-consumer channel. During the three months and nine months ended September 30, 2019, we purchased $811 million and $2.7 billion of mortgage loans that were originated by third parties. Our mortgage loan purchases are held-for-investment.

Through our direct-to-consumer channel, which was introduced late in 2016, we offer a variety of competitively-priced jumbo and conforming fixed- and adjustable-rate mortgage products through a third-party fulfillment provider. Under our current arrangement, our direct-to-consumer conforming mortgages are originated as held-for-sale and sold, while jumbo and LMI mortgages are originated as held-for-investment. Loans originated in the direct-to-consumer channel are sourced by existing Ally customer marketing, prospect marketing on third-party websites, and email or direct mail campaigns. In April of 2019, we announced a strategic partnership with Better.com, which delivers an enhanced end-to-end digital mortgage experience for our customers through our direct-to-consumer channel. Through this partnership, Better.com conducts the sales, processing, underwriting, and closing for Ally’s digital mortgage offering in a highly innovative, scalable, and cost-efficient manner, while Ally Home still retains control of all the marketing and advertising strategies and loan pricing. Ally and Better.com launched in 38 states since partnership inception, with a full roll-out expected by early 2020. During the three months and nine months ended September 30, 2019, we originated $776 million and $1.7 billion of mortgage loans through our direct-to-consumer channel.

The combination of our bulk portfolio purchase program and our direct-to-consumer strategy provides the capacity to expand revenue sources and further grow and diversify our finance receivable portfolio with an attractive asset class while also deepening relationships with existing Ally customers.

•

Our Corporate Finance operations primarily provide senior secured leveraged cash flow and asset-based loans to mostly U.S.-based middle-market companies. We believe our growing deposit-based funding model, coupled with our expanded product offerings and deep industry relationships, provide an advantage over our competition, which includes other banks as well as publicly and privately held finance companies. Our Corporate Finance lending portfolio is generally composed of floating rate 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, expansions, restructurings, and working capital. The portfolio is well diversified across multiple industries including manufacturing, distribution, services, and other specialty sectors. These specialty sectors include our Technology Finance, Lender Finance, and Healthcare verticals. In late 2017, we expanded our Healthcare vertical to include a commercial real estate product focused on lending to skilled nursing facilities, senior housing, medical office buildings, and

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Management’s Discussion and Analysis

Ally Financial Inc. • Form 10-Q

hospitals. Additionally, we recently launched a new lender finance product, providing senior secured asset-based lending facilities to non-bank middle-market lenders.

•

Corporate and Other primarily consists of centralized corporate treasury activities such as management of the cash and corporate investment securities and loan portfolios, short- and long-term debt, retail and brokered deposit liabilities, derivative instruments, original issue discount, and the residual impacts of our corporate funds-transfer pricing (FTP) and treasury asset liability management (ALM) activities. Corporate and Other also includes activity related to 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.

In May 2017, we launched Ally Invest, our digital brokerage and wealth management offering, which enables us to complement our competitive deposit products with low-cost and commission-free investing through the platform we acquired from the June 2016 acquisition of TradeKing Group, Inc. (TradeKing). Through Ally Invest, we are able to offer a broader array of personal finance products through a fully integrated digital consumer platform centered around self-directed products and digital advisory services. Ally Invest’s suite of commission-free and low-cost investing options serve both active and passive investors with diverse and evolving financial objectives through a transparent online process. Our digital platform and broad product offerings are enhanced by outstanding client-focused and user-friendly customer service that is accessible twenty-four hours a day, seven days a week, via the phone, web or email—consistent with the Ally brand. Financial results related to our online brokerage operations are currently included within Corporate and Other.

We continue to invest in enhancing the customer experience with integrated features across product lines on our digital platform, build upon our strong brand, and leverage our innovative culture. Upon launching our first ever enterprise-wide campaign themed “Do It Right,” we introduced a broad audience to our full suite of digital financial services, which emphasizes our relentless customer-centric focus and commitment to constantly create and reinvent our product offerings and digital experiences to meet the needs of consumers. Our product offerings and brand continue to gain traction in the marketplace, as demonstrated by industry recognition of our award-winning direct online bank and strong retention rates of our customer base.

Table of Contents

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 business line.



	Three months ended September 30,					Nine months ended September 30,
($ in millions)	2019		2018		Favorable/(unfavorable) % change	2019		2018		Favorable/(unfavorable) % change
Net financing revenue and other interest income
Total financing revenue and other interest income	$	2,491	$	2,296	8	$	7,415	$	6,644	12
Total interest expense	1,069		942		(13)	3,219		2,609		(23)
Net depreciation expense on operating lease assets	234		247		5	719		785		8
Net financing revenue and other interest income	1,188		1,107		7	3,477		3,250		7
Other revenue
Insurance premiums and service revenue earned	280		258		9	802		753		7
Gain on mortgage and automotive loans, net	10		17		(41)	22		19		16
Other gain on investments, net	27		22		23	174		37		n/m
Other income, net of losses	96		101		(5)	276		307		(10)
Total other revenue	413		398		4	1,274		1,116		14
Total net revenue	1,601		1,505		6	4,751		4,366		9
Provision for loan losses	263		233		(13)	722		652		(11)
Noninterest expense
Compensation and benefits expense	296		274		(8)	910		872		(4)
Insurance losses and loss adjustment expenses	74		77		4	260		241		(8)
Other operating expenses	468		456		(3)	1,379		1,347		(2)
Total noninterest expense	838		807		(4)	2,549		2,460		(4)
Income from continuing operations before income tax expense	500		465		8	1,480		1,254		18
Income tax expense from continuing operations	119		91		(31)	140		280		50
Net income from continuing operations	$	381	$	374	2	$	1,340	$	974	38

n/m = not meaningful

We earned net income from continuing operations of $381 million and $1.3 billion for the three months and nine months ended September 30, 2019, respectively, compared to $374 million and $974 million for the three months and nine months ended September 30, 2018. During the three months and nine months ended September 30, 2019, results were favorably impacted by higher net financing revenue, primarily driven by higher yields and growth in earning assets. Results for the nine months ended September 30, 2019, were also favorably impacted by a release of valuation allowance on foreign tax credit carryforwards during the second quarter of 2019, and higher market values of equity investments primarily within our Insurance operations. These items were partially offset by higher provision for loan losses, and higher noninterest expense for both the three months and nine months ended September 30, 2019.

Net financing revenue and other interest income increased $81 million and $227 million for the three months and nine months ended September 30, 2019, respectively, compared to the three months and nine months ended September 30, 2018. Within our Automotive Finance operations, consumer automotive financing revenue benefited from improved portfolio yields as a result of our continued focus on expanding risk-adjusted returns, and higher average retail asset levels resulting from sustained asset growth. During the nine months ended September 30, 2019, commercial automotive net financing revenue also increased due primarily to higher yields resulting from higher average benchmark interest rates. Income from interest and dividends on investment securities and other earning assets, including cash and cash equivalents, increased $40 million and $172 million for the three months and nine months ended September 30, 2019, compared to the same periods in 2018, due to both higher yields and higher balances of investment securities as we continue to utilize this portfolio to manage liquidity and generate a stable source of income. Financing revenue and other interest income within our Corporate Finance operations was favorably impacted by our strategy to prudently grow assets and our product suite within existing verticals while selectively pursuing opportunities to broaden industry and product diversification. The increases to financing revenue and other interest income were partially offset by increases of 13% and 23% in total interest expense for the three months and nine months ended September 30, 2019, respectively, compared to the three months and nine months ended September 30, 2018.

While we continue to shift borrowings toward more cost-effective deposit funding and reduce our dependence on market-based funding through reductions in higher-cost secured and unsecured debt, interest expense increased as a result of higher market rates across all funding

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Management’s Discussion and Analysis

Ally Financial Inc. • Form 10-Q

sources. Additionally, our overall borrowing levels were higher to support the growth in our lending operations. Our total deposit liabilities increased $17.9 billion to $119.2 billion as of September 30, 2019, as compared to September 30, 2018.

Insurance premiums and service revenue earned was $280 million and $802 million for the three months and nine months ended September 30, 2019, respectively, compared to $258 million and $753 million for the same periods in 2018. The increases for the three months and nine months ended September 30, 2019, were primarily due to vehicle inventory insurance portfolio growth and rate increases.

Other gain on investments increased $5 million and $137 million for the three months and nine months ended September 30, 2019, respectively, compared to the three months and nine months ended September 30, 2018, due to favorable market conditions during the nine months ended September 30, 2019. The gain on investments for the nine months ended September 30, 2019, includes $63 million of unrealized gains as a result of changes in the fair value of our portfolio of equity securities, compared to $26 million of unrealized losses in the fair value of our portfolio of equity securities for the nine months ended September 30, 2018.

Other income decreased $5 million and $31 million for the three months and nine months ended September 30, 2019, respectively, compared to the same periods in 2018. The decreases for the three months and nine months ended September 30, 2019, were primarily due to lower syndication and other fee income from our corporate finance business. Additionally, other income decreased during the nine months ended September 30, 2019, due to lower servicing fee income resulting from lower levels of off-balance sheet consumer automotive serviced loans, lower remarketing income related to lower operating lease termination volume and lower income related to certain equity hedges.

The provision for loan losses was $263 million and $722 million for the three months and nine months ended September 30, 2019, respectively, compared to $233 million and $652 million for the same periods in 2018. The increase in provision for loan losses for the three months ended September 30, 2019, was primarily driven by higher net charge-offs and reserve increases associated with continued growth within our retail automotive loan portfolio. For the nine months ended September 30, 2019, the increase in provision for loan losses was primarily driven by reserve reductions during the nine months ended September 30, 2018, associated with hurricane activity experienced during 2017 within our retail automotive loan portfolio. Additionally, for the nine months ended September 30, 2019, provision expense was unfavorably impacted by two specific corporate finance loan exposures which were within separate industries, and a $6 million recovery of a previously charged-off loan in the second quarter of 2018 that did not reoccur. These items were partially offset by lower net charge-offs in our retail automotive loan portfolio, despite continued loan portfolio growth, as we continue to experience strong overall credit performance driven by favorable macroeconomic conditions including low unemployment, as well as continued disciplined underwriting and higher recoveries. Refer to the Risk Management section of this MD&A for further discussion on our provision for loan losses.

Noninterest expense increased $31 million and $89 million for the three months and nine months ended September 30, 2019, as compared to the same periods in 2018. The increases for three months and nine months ended September 30, 2019, were driven by increased expenses to support the growth of our consumer product suite. We continue to make investments in our technology platform to enhance the customer experience and expand our digital capabilities, and in marketing activities to promote brand awareness and drive retail deposit growth. Additionally, the increase for the nine months ended September 30, 2019, was driven by higher weather-related losses due to specific weather events within our Insurance operations.

We recognized total income tax expense from continuing operations of $119 million and income tax expense of $140 million for the three months and nine months ended September 30, 2019, respectively, compared to $91 million and $280 million for the same periods in 2018. The increase in income tax expense for the three months ended September 30, 2019, compared to the same period in 2018, was primarily due to a nonrecurring tax benefit from the release of valuation allowance against state net operating loss carryforwards as a result of a state tax law enactment in the third quarter of 2018 and the tax effects of an increase in pretax earnings. The decrease in income tax expense for the nine months ended September 30, 2019, compared to the same periods in 2018, was primarily due to a release of valuation allowance on foreign tax credit carryforwards during the second quarter of 2019. The valuation allowance release was primarily driven by our current capacity to engage in certain securitization transactions and the market demand from investors related to these transactions, coupled with the anticipated timing of the forecasted expiration of certain tax credit carryforwards. Additionally, the decrease in income tax expense for the nine months ended September 30, 2019, compared to the same period in 2018, was partially offset by the tax effects of an increase in pretax earnings and a nonrecurring tax benefit from the release of valuation allowance against state net operating loss carryforwards as a result of a state tax law enactment in the third quarter of 2018.

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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 September 30,					Nine months ended September 30,
($ in millions)	2019		2018		Favorable/(unfavorable) % change	2019		2018		Favorable/(unfavorable) % change
Net financing revenue and other interest income
Consumer	$	1,227	$	1,097	12	$	3,541	$	3,167	12
Commercial	385		381		1	1,219		1,094		11
Loans held-for-sale	—		1		(100)	1		1		—
Operating leases	368		368		—	1,092		1,124		(3)
Other interest income	3		2		50	7		5		40
Total financing revenue and other interest income	1,983		1,849		7	5,860		5,391		9
Interest expense	671		646		(4)	2,061		1,816		(13)
Net depreciation expense on operating lease assets	234		247		5	719		785		8
Net financing revenue and other interest income	1,078		956		13	3,080		2,790		10
Other revenue
Gain on automotive loans, net	—		18		(100)	8		18		(56)
Other income	59		62		(5)	180		191		(6)
Total other revenue	59		80		(26)	188		209		(10)
Total net revenue	1,137		1,036		10	3,268		2,999		9
Provision for loan losses	265		229		(16)	707		658		(7)
Noninterest expense
Compensation and benefits expense	128		120		(7)	391		381		(3)
Other operating expenses	315		304		(4)	953		927		(3)
Total noninterest expense	443		424		(4)	1,344		1,308		(3)
Income from continuing operations before income tax expense	$	429	$	383	12	$	1,217	$	1,033	18
Total assets	$	115,096	$	114,675	—	$	115,096	$	114,675	—

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Management’s Discussion and Analysis

Ally Financial Inc. • Form 10-Q

Components of net operating lease revenue, included in amounts above, were as follows.



	Three months ended September 30,							Nine months ended September 30,
($ in millions)	2019			2018			Favorable/(unfavorable) % change	2019			2018			Favorable/(unfavorable) % change
Net operating lease revenue
Operating lease revenue	$	368		$	368		—	$	1,092		$	1,124		(3)
Depreciation expense
Depreciation expense on operating lease assets (excluding remarketing gains)	262			274			4	785			846			7
Remarketing gains, net	(28		)	(27		)	4	(66		)	(61		)	8
Net depreciation expense on operating lease assets	234			247			5	719			785			8
Total net operating lease revenue	$	134		$	121		11	$	373		$	339		10
Investment in operating leases, net	$	8,653		$	8,578		1	$	8,653		$	8,578		1

The following table presents the average balance and yield of the loan and operating lease portfolios of our Automotive Financing operations.



	Three months ended September 30,								Nine months ended September 30,
	2019				2018				2019				2018
($ in millions)	Average balance (a)		Yield		Average balance (a)		Yield		Average balance (a)		Yield		Average balance (a)		Yield
Finance receivables and loans, net (b)
Consumer automotive (c)	$	73,162	6.66	%	$	70,547	6.20	%	$	72,147	6.57	%	$	69,745	6.06	%
Commercial
Wholesale floorplan	27,520		4.57		28,381		4.35		28,838		4.72		29,013		4.10
Other commercial automotive (d)	5,753		4.69		6,070		4.71		5,681		4.71		6,112		4.53
Investment in operating leases, net (e)	8,525		6.24		8,634		5.56		8,428		5.92		8,615		5.26


(a)	Average balances are calculated using a combination of monthly and daily average methodologies.


(b)	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 2018 Annual Report on Form 10-K.


(c)	Includes the effects of derivative financial instruments designated as hedges.


(d)	Consists primarily of automotive dealer term loans, including those to finance dealership land and buildings, and dealer fleet financing.

(e)

Yield includes gains on the sale of off-lease vehicles of $28 million and $66 million for the three months and nine months ended September 30, 2019, respectively, compared to $27 million and $61 million for the three months and nine months ended September 30, 2018. Excluding these gains on sale, the annualized yield would be 4.93% and 4.87% for the three months and nine months ended September 30, 2019, respectively, compared to 4.32% and 4.30% for the three months and nine months ended September 30, 2018.

Our Automotive Finance operations earned income from continuing operations before income tax expense of $429 million and $1.2 billion for the three months and nine months ended September 30, 2019, respectively, compared to $383 million and $1.0 billion for the three months and nine months ended September 30, 2018. During the three months and nine months ended September 30, 2019, we continued to focus on driving capital optimization and expanding risk-adjusted returns. As a result, we experienced higher consumer loan financing revenue, primarily due to an increase in consumer loan portfolio yields and asset levels. We also experienced higher commercial financing revenue due to higher yields resulting from higher benchmark interest rates. Growth in finance revenue for both the three months and nine months ended September 30, 2019, was partially offset by higher interest expense driven by higher funding costs and growth in our consumer loan portfolio as well as an increase in provision expense.

Consumer loan financing revenue increased $130 million and $374 million for the three months and nine months ended September 30, 2019, respectively, compared to the same periods in 2018. The increases were primarily due to improved portfolio yields as a result of our continued focus on expanding risk-adjusted returns, and higher average retail asset levels resulting from sustained asset growth, including a continued focus on the used-vehicle portfolio primarily through franchised dealers. Through these actions, we continue to optimize our origination mix and achieve greater portfolio diversification.

Commercial loan financing revenue increased $4 million and $125 million for the three months and nine months ended September 30, 2019, respectively, compared to the same periods in 2018. The increases were primarily due to higher yields resulting from higher average benchmark interest rates. The increases were partially offset by a decrease in average outstanding floorplan assets compared to the same periods in 2018.

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Management’s Discussion and Analysis

Ally Financial Inc. • Form 10-Q

Interest expense was $671 million and $2.1 billion for the three months and nine months ended September 30, 2019, respectively, compared to $646 million and $1.8 billion in the same periods in 2018. The increases were primarily due to higher funding costs and growth in our consumer automotive loan portfolio.

We recorded gains from the sale of automotive loans of $8 million for the nine months ended September 30, 2019, compared to gains of $18 million for both the three months and nine months ended September 30, 2018. We continue to selectively utilize whole-loan sales to proactively manage our credit exposure, asset levels, funding, and capital utilization, including the sale of previously written-down consumer automotive loans related to consumers in Chapter 13 bankruptcy. There were no such sales during the three months ended September 30, 2019.

Other income decreased 5% and 6% for the three months and nine months ended September 30, 2019, respectively, compared to the same periods in 2018. The decreases were primarily due to a decrease in servicing fee income resulting from lower levels of off-balance sheet consumer automotive serviced loans. For the nine months ended September 30, 2019, the decrease was also attributable to a decrease in remarketing fee income resulting from lower operating lease termination volume.

Total net operating lease revenue increased $13 million and $34 million for the three months and nine months ended September 30, 2019, respectively, compared to the same periods in 2018. These increases were primarily due to favorable performance and mix in our outstanding lease portfolio. Additionally, we recognized remarketing gains of $28 million and $66 million for the three months and nine months ended September 30, 2019, compared to $27 million and $61 million for the same periods in 2018. For the nine months ended September 30, 2019, the increase was primarily due to higher gain per unit, partially offset by a lower number of terminated units. The lower number of terminated units was primarily due to the runoff of our legacy GM operating lease portfolio, which was substantially wound-down as of June 30, 2018. Refer to the Operating Lease Residual Risk Management section of this MD&A for further discussion.

The provision for loan losses was $265 million and $707 million for the three months and nine months ended September 30, 2019, respectively, compared to $229 million and $658 million for the same periods in 2018. For the three months ended September 30, 2019, the increase was primarily driven by higher net charge-offs and reserve increases associated with continued growth within our retail automotive loan portfolio. For the nine months ended September 30, 2019, the increase in provision for loan losses was primarily driven by reserve reductions during the nine months ended September 30, 2018, associated with hurricane activity experienced during 2017 in our retail automotive loan portfolio. These items were partially offset by lower net charge-offs, despite continued loan portfolio growth. We continue to experience strong overall credit performance driven by favorable macroeconomic conditions including low unemployment, as well as continued disciplined underwriting, and higher recoveries. Refer to the Risk Management section of this MD&A for further discussion.

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Management’s Discussion and Analysis

Ally Financial Inc. • Form 10-Q

Automotive Financing Volume

Consumer Automotive Financing

For the three months and nine months ended September 30, 2019, our portfolio yield for consumer automotive loans increased 46 and 51 basis points, respectively, relative to the same periods in 2018. We set our buy rates using a granular, risk-based methodology factoring in several variables including interest costs, projected net average annualized loss rates at the time of origination, anticipated operating costs, and targeted return on equity. The increases in rates on recent loan originations were primarily the result of our continued focus on risk adjusted returns and increased levels of used vehicle loan volume. Over the past several years, we have continued to focus on portfolio diversification and the used vehicle segment, primarily through franchised dealers, which has contributed to higher yields on our consumer automotive loan portfolio. Commensurate with this shift in origination mix, we continue to maintain consistent, disciplined underwriting within our new and used consumer automotive loan originations. The carrying value of our nonprime consumer automotive loans before allowance for loan losses was $8.4 billion, or approximately 11.6% of our total consumer automotive loans at September 30, 2019, as compared to $8.3 billion, or approximately 11.7% of our total consumer automotive loans at December 31, 2018.

The following table presents retail loan originations by credit tier and product type.



	Used retail				New retail
Credit Tier (a)	Volume ($ in billions)		% Share of volume	Average FICO®	Volume ($ in billions)		% Share of volume	Average FICO®
Three months ended September 30, 2019
S	$	1.2	26	738	$	1.5	44	744
A	1.9		41	679	1.3		38	676
B	1.2		26	647	0.5		15	644
C	0.3		7	616	0.1		3	615
Total retail originations	$	4.6	100	681	$	3.4	100	699
Three months ended September 30, 2018
S	$	1.1	26	737	$	1.3	45	744
A	1.9		44	676	1.1		38	675
B	1.0		23	645	0.4		14	645
C	0.3		7	614	0.1		3	614
Total retail originations	$	4.3	100	681	$	2.9	100	698
Nine months ended September 30, 2019
S	$	3.9	26	738	$	4.5	45	744
A	6.2		42	678	3.8		38	676
B	3.7		24	645	1.3		14	644
C	1.1		7	611	0.3		3	613
D	0.1		1	545	—		—	572
Total retail originations	$	15.0	100	680	$	9.9	100	699
Nine months ended September 30, 2018
S	$	3.8	27	738	$	4.7	47	746
A	6.0		43	675	3.6		37	675
B	3.3		24	644	1.4		14	645
C	0.9		6	611	0.3		2	614
Total retail originations	$	14.0	100	681	$	10.0	100	701

(a)

Represents Ally’s internal credit score, incorporating numerous borrower and structure attributes including: severity and aging of delinquency; number of credit inquiries; loan-to-value (LTV) ratio; and payment-to-income ratio. We periodically update our underwriting scorecard, which can have an impact on our credit tier scoring. We originated an insignificant amount of retail loans classified below Tier C during the three months ended September 30, 2019, and 2018, and the nine months ended September 30, 2018.

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Management’s Discussion and Analysis

Ally Financial Inc. • Form 10-Q

The following table presents the percentage of total retail loan originations, in dollars, by the loan term in months.



	Three months ended September 30,				Nine months ended September 30,
	2019		2018		2019		2018
0–71	19	%	20	%	20	%	20	%
72–75	65		67		65		67
76 +	16		13		15		13
Total retail originations (a)	100	%	100	%	100	%	100	%


(a)	Excludes RV loans.

Retail originations with a term of 76 months or more represented 16% and 15% of total retail originations for the three months and nine months ended September 30, 2019, respectively, compared to 13% for both the three months and nine months ended September 30, 2018. Substantially all of the loans originated with a term of 76 months or more during the three months and nine months ended September 30, 2019, and 2018, were considered to be prime and in credit tiers S, A, or B. We define prime consumer automotive loans primarily as those loans with a FICO® Score (or an equivalent score) at origination of 620 or greater.

The following table presents the percentage of total outstanding retail loans by origination year.



September 30,	2019		2018
Pre-2015	2	%	7	%
2015	6		12
2016	12		20
2017	19		30
2018	29		31
2019	32		—
Total	100	%	100	%

The 2019, 2018, and 2017 vintages compose 80% of the overall retail portfolio as of September 30, 2019, and have higher average buy rates than older vintages.

The following tables present the total retail loan and operating lease origination dollars and percentage mix by product type and by channel.



	Consumer automotive financing originations				% Share of Ally originations
Three months ended September 30, ($ in millions)	2019		2018		2019	2018
Used retail	$	4,621	$	4,279	50	52
New retail standard	3,332		2,753		36	34
Lease	1,255		977		13	12
New retail subvented	52		136		1	2
Total consumer automotive financing originations (a)	$	9,260	$	8,145	100	100


(a)	Includes Commercial Services Group (CSG) originations of $969 million and $837 million for the three months ended September 30, 2019, and 2018, respectively, and RV originations of $48 million for the three months ended September 30, 2018.



	Consumer automotive financing originations				% Share of Ally originations
Nine months ended September 30, ($ in millions)	2019		2018		2019	2018
Used retail	$	15,032	$	13,972	53	51
New retail standard	9,749		9,724		35	36
Lease	3,198		3,252		11	12
New retail subvented	175		240		1	1
Total consumer automotive financing originations (a)	$	28,154	$	27,188	100	100


(a)	Includes CSG originations of $3.0 billion and $2.7 billion for the nine months ended September 30, 2019, and 2018, respectively, and RV originations of $238 million for the nine months ended September 30, 2018.

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Management’s Discussion and Analysis

Ally Financial Inc. • Form 10-Q



	Consumer automotive financing originations				% Share of Ally originations
Three months ended September 30, ($ in millions)	2019		2018		2019	2018
Growth channel	$	4,239	$	3,815	46	47
Chrysler dealers	2,602		2,244		28	27
GM dealers	2,419		2,086		26	26
Total consumer automotive financing originations	$	9,260	$	8,145	100	100



	Consumer automotive financing originations				% Share of Ally originations
Nine months ended September 30, ($ in millions)	2019		2018		2019	2018
Growth channel	$	13,592	$	12,316	48	45
Chrysler dealers	7,338		7,400		26	27
GM dealers	7,224		7,472		26	28
Total consumer automotive financing originations	$	28,154	$	27,188	100	100

During the three months and nine months ended September 30, 2019, total consumer loan and operating lease originations increased $1.1 billion and $966 million, respectively, compared to the same periods in 2018. For the three months ended September 30, 2019, the increase was due to increased originations across all dealer channels. For the nine months ended September 30, 2019, the increase was primarily due to increased originations from the Growth channel, which was partially offset by lower originations from the GM and Chrysler channels. Over the past several years we have continued to diversify our portfolio through the Growth channel, including increased levels of used vehicle loan volume, which we view as an attractive asset class consistent with our continued focus on obtaining appropriate risk-adjusted returns.

We have included origination metrics by loan term and FICO® Score within this MD&A. 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 in our 2018 Annual Report on Form 10-K.

The following tables present the percentage of retail loan and operating lease originations, in dollars, by FICO® Score and product type.



	Used retail				New retail				Lease
Three months ended September 30,	2019		2018		2019		2018		2019		2018
740 +	18	%	18	%	24	%	24	%	46	%	49	%
660–739	39		39		34		34		37		34
620–659	25		27		20		22		11		10
540–619	13		12		7		6		4		5
< 540	1		1		1		1		—		—
Unscored (a)	4		3		14		13		2		2
Total consumer automotive financing originations	100	%	100	%	100	%	100	%	100	%	100	%


(a)	Unscored are primarily CSG contracts with business entities that have no FICO® Score.



	Used retail				New retail				Lease
Nine months ended September 30,	2019		2018		2019		2018		2019		2018
740 +	18	%	18	%	24	%	26	%	48	%	49	%
660–739	39		39		34		34		35		34
620–659	25		28		20		21		11		10
540–619	12		12		7		6		5		5
< 540	2		1		1		1		—		—
Unscored (a)	4		2		14		12		1		2
Total consumer automotive financing originations	100	%	100	%	100	%	100	%	100	%	100	%


(a)	Unscored are primarily CSG contracts with business entities that have no FICO® Score.

Originations with a FICO® Score of less than 620 (considered nonprime) represented 10% and 11% of total consumer loan and operating lease originations for the three months and nine months ended September 30, 2019, respectively, and 10% for both the three months and nine months ended September 30, 2018. Consumer loans and operating leases with FICO® Scores of less than 540 continued to compose only 1% of total originations for the three months and nine months ended September 30, 2019. Nonprime applications that are not

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Management’s Discussion and Analysis

Ally Financial Inc. • Form 10-Q

automatically declined by our proprietary credit-scoring models for risk reasons are manually reviewed and decisioned by an experienced underwriting team. Nonprime applications are subject to more stringent underwriting criteria (e.g., minimum payment-to-income ratio and vehicle mileage, and maximum amount financed), and our nonprime loan portfolio 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 the section titled Automotive Financing Volume—Manufacturer Marketing Incentives within the MD&A in our 2018 Annual Report on Form 10-K.

Commercial Wholesale Financing Volume

The following table presents the percentage of average balance of our commercial wholesale floorplan finance receivables, in dollars, by product type and by channel.



	Average balance						Average balance
	Three months ended September 30,						Nine months ended September 30,
($ in millions)	2019			2018			2019			2018
GM new vehicles	43		%	42		%	41		%	42		%
Chrysler new vehicles	31			33			32			31
Growth new vehicles	13			13			14			14
Used vehicles	13			12			13			13
Total	100		%	100		%	100		%	100		%
Total commercial wholesale finance receivables	$	27,520		$	28,381		$	28,838		$	29,013

Average commercial wholesale financing receivables outstanding decreased $861 million and $175 million during the three months and nine months ended September 30, 2019, respectively, compared to the same periods in 2018. The decrease for the three months ended September 30, 2019, was primarily driven by a reduction in the number of GM dealer relationships due to the competitive environment across the automotive lending market, partially offset by higher average vehicle prices. The decrease for the nine months ended September 30, 2019, was primarily driven by a reduction in the number of GM and Chrysler dealer relationships due to the competitive environment across the automotive lending market, partially offset by higher average vehicle prices and increased inventory levels at GM and Chrysler dealers. 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 and revolving loans and automotive fleet financing. Automotive dealer term and revolving 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 or other dealership assets and are typically personally guaranteed by the individual owners of the dealership. 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. The average balances of other commercial automotive loans decreased 5% and 7% for the three months and nine months ended September 30, 2019, respectively, compared to the same periods in 2018, to $5.8 billion and $5.7 billion.

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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 September 30,							Nine months ended September 30,
($ in millions)	2019			2018			Favorable/(unfavorable) % change	2019			2018			Favorable/(unfavorable) % change
Insurance premiums and other income
Insurance premiums and service revenue earned	$	280		$	258		9	$	802		$	753		7
Interest and dividends on investment securities and cash and cash equivalents, net (a)	14			14			—	41			39			5
Other gain on investments, net (b)	6			22			(73)	124			33			n/m
Other income	3			2			50	9			8			13
Total insurance premiums and other income	303			296			2	976			833			17
Expense
Insurance losses and loss adjustment expenses	74			77			4	260			241			(8)
Acquisition and underwriting expense
Compensation and benefits expense	19			18			(6)	60			57			(5)
Insurance commissions expense	120			113			(6)	351			332			(6)
Other expenses	34			33			(3)	104			110			5
Total acquisition and underwriting expense	173			164			(5)	515			499			(3)
Total expense	247			241			(2)	775			740			(5)
Income from continuing operations before income tax expense	$	56		$	55		2	$	201		$	93		116
Total assets	$	8,478		$	7,776		9	$	8,478		$	7,776		9
Insurance premiums and service revenue written	$	357		$	323		11	$	976		$	876		11
Combined ratio (c)	87.5		%	92.6		%		95.6		%	97.2		%

n/m = not meaningful


(a)	Includes interest expense of $20 million and $58 million for the three months and nine months ended September 30, 2019, respectively, and $17 million and $49 million for the three months and nine months ended September 30, 2018.


(b)	Includes net unrealized losses on equity investments of $10 million for the three months ended September 30, 2019, and net unrealized gains of $59 million for the nine months ended September 30, 2019, compared to $7 million of net unrealized gains for the three months ended September 30, 2018, and net unrealized losses of $21 million for the nine months ended September 30, 2018.


(c)	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 income.

Our Insurance operations earned income from continuing operations before income tax expense of $56 million and $201 million for the three months and nine months ended September 30, 2019, respectively, compared to $55 million and $93 million for the three months and nine months ended September 30, 2018. The increase for the nine months ended September 30, 2019, was primarily driven by $124 million of gain on investments due to favorable market conditions within our equity portfolio, compared to $33 million of gains for the nine months ended September 30, 2018.

Insurance premiums and service revenue earned was $280 million and $802 million for the three months and nine months ended September 30, 2019, respectively, compared to $258 million and $753 million for the three months and nine months ended September 30, 2018. The increases for the three months and nine months ended September 30, 2019, were primarily due to vehicle inventory insurance portfolio growth and rate increases.

Insurance losses and loss adjustment expenses totaled $74 million and $260 million for the three months and nine months ended September 30, 2019, respectively, compared to $77 million and $241 million for the same periods in 2018. The increase for the nine months ended September 30, 2019, was primarily driven by vehicle inventory insurance portfolio growth. Total acquisition and underwriting expense increased $9 million and $16 million for the three months and nine months ended September 30, 2019, respectively. The increases for the three months and nine months ended September 30, 2019, were primarily due to increases in insurance commissions expense, driven by growth in our written insurance premiums and service revenue. Insurance premiums and service revenue earnings growth outpaced expense increases which led to a decrease in the combined ratio to 87.5% and 95.6% for the three months and nine months ended September 30, 2019,

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Management’s Discussion and Analysis

Ally Financial Inc. • Form 10-Q

respectively, compared to 92.6% and 97.2% for the three months and nine months ended September 30, 2018. In April 2019, we renewed our annual reinsurance program and continue to utilize this coverage to manage our risk of weather-related loss.

Premium and Service Revenue Written

The following table summarizes premium and service revenue written by product.



	Three months ended September 30,						Nine months ended September 30,
($ in millions)	2019			2018			2019			2018
Vehicle service contracts
New retail	$	125		$	121		$	342		$	352
Used retail	163			145			488			419
Reinsurance (a)	(47		)	(38		)	(147		)	(127		)
Total vehicle service contracts (b)	241			228			683			644
Vehicle inventory insurance (c)	83			68			203			157
Other (d)	33			27			90			75
Total	$	357		$	323		$	976		$	876


(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)	Vehicle inventory insurance includes dealer ancillary products.


(d)	Other products include GAP coverage, VMCs, ClearGuard, and other ancillary products.

Insurance premiums and service revenue written was $357 million and $976 million for the three months and nine months ended September 30, 2019, respectively, compared to $323 million and $876 million for the same periods in 2018. The increases for the three months and nine months ended September 30, 2019, were primarily due to vehicle inventory insurance portfolio growth and rate increases, and higher vehicle service contract volume.

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 appetite, 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)	September 30, 2019		December 31, 2018
Cash
Noninterest-bearing cash	$	108	$	252
Interest-bearing cash	1,247		644
Total cash	1,355		896
Equity securities	562		766
Available-for-sale securities
Debt securities
U.S. Treasury and federal agencies	432		460
U.S. States and political subdivisions	526		691
Foreign government	155		145
Agency mortgage-backed residential	1,207		758
Mortgage-backed residential	122		135
Corporate debt	1,354		1,241
Total available-for-sale securities	3,796		3,430
Total cash and securities	$	5,713	$	5,092

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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 September 30,					Nine months ended September 30,
($ in millions)	2019		2018		Favorable/(unfavorable) % change	2019		2018		Favorable/(unfavorable) % change
Net financing revenue and other interest income
Total financing revenue and other interest income	$	144	$	126	14	$	440	$	345	28
Interest expense	105		82		(28)	305		214		(43)
Net financing revenue and other interest income	39		44		(11)	135		131		3
Gain on mortgage loans, net	10		2		n/m	14		4		n/m
Other income, net of losses	—		—		—	2		1		100
Total other revenue	10		2		n/m	16		5		n/m
Total net revenue	49		46		7	151		136		11
Provision for loan losses	—		2		100	2		4		50
Noninterest expense
Compensation and benefits expense	7		8		13	24		24		—
Other operating expenses	31		28		(11)	87		78		(12)
Total noninterest expense	38		36		(6)	111		102		(9)
Income from continuing operations before income tax expense	$	11	$	8	38	$	38	$	30	27
Total assets	$	16,583	$	14,896	11	$	16,583	$	14,896	11

n/m = not meaningful

Our Mortgage Finance operations earned income from continuing operations before income tax expense of $11 million and $38 million for the three months and nine months ended September 30, 2019, respectively, compared to $8 million and $30 million for the same periods in 2018. The increase for the nine months ended September 30, 2019, was primarily due to growth in our mortgage loan portfolio and an increase in the net gain on sale of mortgage loans, partially offset by accelerated premium amortization due to higher prepayment activity and higher noninterest expense driven primarily by continued asset growth. The increase for the three months ended September 30, 2019, was primarily driven by higher gains on the sale of mortgage loans, partially offset by accelerated premium amortization due to higher prepayment activity and higher noninterest expenses driven primarily by continued asset growth.

Net financing revenue and other interest income was $39 million and $135 million for the three months and nine months ended September 30, 2019, respectively, compared to $44 million and $131 million for the three months and nine months ended September 30, 2018. The decrease in net financing revenue and other interest income for the three months ended September 30, 2019, was primarily due to accelerated premium amortization due to higher prepayment activity during the three months ended September 30, 2019, partially offset by increased loan balances as a result of bulk purchases of high-quality jumbo and LMI mortgage loans and direct-to-consumer originations. During the three months ended September 30, 2019, we purchased $811 million of mortgage loans that were originated by third parties and originated $556 million of mortgage loans held-for-investment, compared to $1.7 billion and $88 million, respectively, during the three months ended September 30, 2018. The increase in net financing revenue and other interest income for the nine months ended September 30, 2019, was primarily due to increased loan balances as a result of bulk purchases of high-quality jumbo and LMI mortgage loans and direct-to-consumer originations, which were partially offset by accelerated premium amortization due to higher prepayment activity during the nine months ended September 30, 2019. During the nine months ended September 30, 2019, we purchased $2.7 billion of mortgage loans that were originated by third parties and originated $1.2 billion of mortgage loans held-for-investment, compared to $3.9 billion and $302 million, respectively, during the nine months ended September 30, 2018.

Gain on sale of mortgage loans, net, was $10 million and $14 million for the three months and nine months ended September 30, 2019, respectively, compared to $2 million and $4 million for the three months and nine months ended September 30, 2018. The increases were driven by higher direct-to-consumer mortgage originations and the subsequent sale of these loans to our fulfillment provider, and the execution of a whole-loan sale during the three months ended September 30, 2019. During the three months and nine months ended September 30, 2019, we originated $220 million and $464 million of loans held-for-sale compared to $86 million and $218 million, respectively, during the three months and nine months ended September 30, 2018.

The provision for loan losses decreased $2 million for the three months and nine months ended September 30, 2019, compared to the same periods in 2018, as a result of reserve reductions in the current period due to strong credit performance.

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Ally Financial Inc. • Form 10-Q

Total noninterest expense was $38 million and $111 million for the three months and nine months ended September 30, 2019, respectively, compared to $36 million and $102 million for the three months and nine months ended September 30, 2018. The increases were primarily driven by continued asset growth.

The following table presents the total unpaid principal balance (UPB) of purchases and originations of consumer mortgages held-for-investment, by FICO® Score at the time of acquisition.



FICO® Score	Volume ($ in millions)		% Share of volume
Three months ended September 30, 2019
740 +	$	1,148	84
720–739	120		9
700–719	91		6
680–699	8		1
Total consumer mortgage financing volume	$	1,367	100
Three months ended September 30, 2018
740 +	$	1,469	80
720–739	206		11
700–719	154		9
680–699	3		—
Total consumer mortgage financing volume	$	1,832	100
Nine months ended September 30, 2019
740 +	$	3,198	81
720–739	402		10
700–719	313		8
680–699	25		1
Total consumer mortgage financing volume	$	3,938	100
Nine months ended September 30, 2018
740 +	$	3,344	80
720–739	450		11
700–719	332		8
680–699	65		1
660–679	1		—
Total consumer mortgage financing volume	$	4,192	100

The following table presents the net UPB, net UPB as a percentage of total, weighted-average coupon (WAC), premium net of discounts, 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)
September 30, 2019
Adjustable-rate	$	1,843	12	3.44	%	$	24	52.06	%	773
Fixed-rate	13,671		88	4.14		244		61.90		774
Total	$	15,514	100	4.06		$	268	60.73		774
December 31, 2018
Adjustable-rate	$	2,828	19	3.40	%	$	37	53.69	%	775
Fixed-rate	12,042		81	4.15		248		60.97		774
Total	$	14,870	100	4.01		$	285	59.58		774


(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.

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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 September 30,					Nine months ended September 30,
($ in millions)	2019		2018		Favorable/(unfavorable) % change	2019		2018		Favorable/(unfavorable) % change
Net financing revenue and other interest income
Interest and fees on finance receivables and loans	$	90	$	79	14	$	274	$	237	16
Interest on loans held-for-sale	3		3		—	6		8		(25)
Interest expense	33		32		(3)	105		92		(14)
Net financing revenue and other interest income	60		50		20	175		153		14
Total other revenue	9		14		(36)	30		36		(17)
Total net revenue	69		64		8	205		189		8
Provision for loan losses	3		8		63	29		2		n/m
Noninterest expense
Compensation and benefits expense	13		13		—	45		40		(13)
Other operating expenses	9		7		(29)	28		24		(17)
Total noninterest expense	22		20		(10)	73		64		(14)
Income from continuing operations before income tax expense	$	44	$	36	22	$	103	$	123	(16)
Total assets	$	5,275	$	4,459	18	$	5,275	$	4,459	18

n/m = not meaningful

Our Corporate Finance operations earned income from continuing operations before income tax expense of $44 million and $103 million for the three months and nine months ended September 30, 2019, respectively, compared to $36 million and $123 million for the same periods in 2018. The increase for the three months ended September 30, 2019, was primarily due to higher net financing revenue and other interest income resulting from higher asset levels. The decrease for the nine months ended September 30, 2019, was due primarily to higher provision for loan losses recognized during the first quarter of 2019 and higher expenses to support the growth of the business, partially offset by higher net financing revenue and other interest income resulting from higher asset levels.

Net financing revenue and other interest income was $60 million and $175 million for the three months and nine months ended September 30, 2019, respectively, compared to $50 million and $153 million for the same periods in 2018. The increases were primarily due to the growth of our loan portfolio, represented by a 16% increase in the gross carrying value of finance receivables and loans as of September 30, 2019, compared to September 30, 2018.

Other revenue was $9 million and $30 million for the three months and nine months ended September 30, 2019, respectively, compared to $14 million and $36 million for the same periods in 2018. The decreases for the three months and nine months ended September 30, 2019, were primarily driven by lower syndication and other fee income, partially offset by higher gains related to our equity investments.

The provision for loan losses decreased $5 million and increased $27 million for the three months and nine months ended September 30, 2019, respectively, compared to the same periods in 2018. The decrease for the three months ended September 30, 2019, was primarily driven by lower provision expense for individually impaired loans, partially offset by an increase in reserves due to growth in our loan portfolio. The increase for the nine months ended September 30, 2019, was primarily driven by higher reserves associated with two loan exposures within separate industries in the first quarter of 2019, and a $6 million recovery of a previously charged-off loan recognized during the second quarter of 2018 that did not reoccur.

Total noninterest expense was $22 million and $73 million for the three months and nine months ended September 30, 2019, respectively, compared to $20 million and $64 million for the three months and nine months ended September 30, 2018. The increases were primarily associated with growth in the business.

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Management’s Discussion and Analysis

Ally Financial Inc. • Form 10-Q

Credit Portfolio

The following table presents loans held-for-sale, the gross carrying value of finance receivables and loans outstanding, unfunded commitments to lend, and total serviced loans of our Corporate Finance operations.



($ in millions)	September 30, 2019		December 31, 2018
Loans held-for-sale, net	$	240	$	47
Finance receivables and loans	$	5,033	$	4,636
Unfunded lending commitments (a)	$	2,371	$	2,141
Total serviced loans	$	6,041	$	5,501

(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 in the event of a draw by the beneficiary thereunder. As many of these commitments are subject to borrowing base agreements and other restrictive covenants or may expire without being fully drawn, the stated amounts of these unfunded commitments are not necessarily indicative of future cash requirements.

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.



	September 30, 2019		December 31, 2018
Industry
Health services	29.0	%	24.5	%
Services	27.5		25.6
Automotive and transportation	12.8		12.3
Machinery, equipment, and electronics	6.6		6.0
Wholesale	5.0		7.5
Food and beverages	4.3		5.0
Chemicals and metals	3.7		4.9
Other manufactured products	3.3		4.7
Paper, printing, and publishing	2.2		2.8
Retail trade	1.9		1.3
Other	3.7		5.4
Total finance receivables and loans	100.0	%	100.0	%

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Management’s Discussion and Analysis

Ally Financial Inc. • Form 10-Q

Corporate and Other

The following table summarizes the activities of Corporate and Other, which primarily consist of centralized corporate treasury activities such as management of the cash and corporate investment securities and loan portfolios, short- and long-term debt, retail and brokered deposit liabilities, derivative instruments, original issue discount, and the residual impacts of our corporate 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 Ally Invest, and reclassifications and eliminations between the reportable operating segments.



	Three months ended September 30,							Nine months ended September 30,
($ in millions)	2019			2018			Favorable/(unfavorable) % change	2019			2018			Favorable/(unfavorable) % change
Net financing revenue and other interest income
Interest and fees on finance receivables and loans (a)	$	17		$	25		(32)	$	58		$	56		4
Interest on loans held-for-sale	1			—			n/m	2			1			100
Interest and dividends on investment securities and other earning assets	209			169			24	637			481			32
Interest on cash and cash equivalents	13			16			(19)	48			43			12
Other, net	(3		)	(2		)	(50)	(9		)	(6		)	(50)
Total financing revenue and other interest income	237			208			14	736			575			28
Interest expense
Original issue discount amortization (b)	11			25			56	31			74			58
Other interest expense (c)	229			140			(64)	659			364			(81)
Total interest expense	240			165			(45)	690			438			(58)
Net financing (loss) revenue and other interest income	(3		)	43			(107)	46			137			(66)
Other revenue
Loss on mortgage and automotive loans, net	—			(3		)	100	—			(3		)	100
Other gain on investments, net	22			1			n/m	45			8			n/m
Other income, net of losses	24			22			9	60			67			(10)
Total other revenue	46			20			130	105			72			46
Total net revenue	43			63			(32)	151			209			(28)
Provision for loan losses	(5		)	(6		)	17	(16		)	(12		)	(33)
Total noninterest expense (d)	88			86			(2)	246			246			—
Loss from continuing operations before income tax expense	$	(40	)	$	(17	)	(135)	$	(79	)	$	(25	)	n/m
Total assets	$	36,053		$	31,295		15	$	36,053		$	31,295		15

n/m = not meaningful


(a)	Primarily related to impacts associated with hedging activities within our consumer automotive loan portfolio and financing revenue from our legacy mortgage portfolio.


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


(c)	Includes the residual impacts of our FTP methodology and impacts of hedging activities of certain debt obligations.

(d)

Includes reductions of $225 million and $673 million for the three months and nine months ended September 30, 2019, respectively, and $208 million and $634 million for the three months and nine months ended September 30, 2018, 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.

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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 September 30, 2019.



Year ended December 31, ($ in millions)	2019		2020		2021		2022		2023		2024 and thereafter (a)		Total
Original issue discount
Outstanding balance at year end	$	1,100	$	1,057	$	1,009	$	957	$	898	$	—
Total amortization (b)	11		43		48		52		59		898		$	1,111


(a)	The maximum annual scheduled amortization for any individual year is $145 million in 2030.


(b)	The amortization is included as interest on long-term debt in the Condensed Consolidated Statement of Comprehensive Income.

Corporate and Other incurred a loss from continuing operations before income tax expense of $40 million and $79 million for the three months and nine months ended September 30, 2019, respectively, compared to a loss of $17 million and $25 million for the three months and nine months ended September 30, 2018. Total financing revenue and other interest income increased for both the three months and nine months ended September 30, 2019, compared to the same periods in 2018, primarily driven by our investment securities portfolio. This increase was more than offset by higher funding costs from higher market rates and deposit growth.

Financing revenue and other interest income was $237 million and $736 million for the three months and nine months ended September 30, 2019, respectively, compared to $208 million and $575 million for the three months and nine months ended September 30, 2018. The increases were primarily driven by growth in the size of the investment portfolio and higher interest and dividends from investment securities, primarily as a result of higher yields.

Total interest expense was $240 million and $690 million for the three months and nine months ended September 30, 2019, respectively, compared to $165 million and $438 million for the three months and nine months ended September 30, 2018. The increases were primarily driven by increased interest on deposits resulting from higher market rates and deposit growth, partially offset by a decrease in higher-cost secured and unsecured debt borrowings.

Total other revenue was $46 million and $105 million for the three months and nine months ended September 30, 2019, respectively, compared to $20 million and $72 million for the three months and nine months ended September 30, 2018. The increases were primarily due to increased realized investment gains, partially offset by lower income related to certain equity hedges during the nine months ended September 30, 2019.

Total assets were $36.1 billion as of September 30, 2019, compared to $31.3 billion as of September 30, 2018. This increase was primarily the result of growth in our available-for-sale and held-to-maturity securities portfolios. The increase was partially offset by the continued runoff of our legacy mortgage portfolio. At September 30, 2019, the gross carrying value of the legacy mortgage portfolio was $1.2 billion, compared to $1.7 billion at September 30, 2018.

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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)	September 30, 2019		December 31, 2018
Cash
Noninterest-bearing cash	$	592	$	535
Interest-bearing cash	1,647		3,083
Total cash	2,239		3,618
Available-for-sale securities
Debt securities
U.S. Treasury and federal agencies	1,950		1,391
U.S. States and political subdivisions	104		111
Agency mortgage-backed residential	18,901		16,380
Mortgage-backed residential	2,690		2,551
Agency mortgage-backed commercial	1,413		3
Mortgage-backed commercial	113		714
Asset-backed	417		723
Total available-for-sale securities	25,588		21,873
Held-to-maturity securities
Debt securities
Agency mortgage-backed residential	2,662		2,264
Asset-backed retained notes	25		43
Total held-to-maturity securities	2,687		2,307
Total cash and securities	$	30,514	$	27,798

Ally Invest



	3rd quarter 2019		2nd quarter 2019		1st quarter 2019		4th quarter 2018		3rd quarter 2018
Trading days (a)	63.5		63.0		61.0		62.0		62.5
Average customer trades per day (in thousands)	17.7		18.3		19.5		19.6		19.1
Funded accounts (b) (in thousands)	346		337		320		302		287
Total net customer assets ($ in millions)	$	7,151	$	7,149	$	6,796	$	5,804	$	6,608
Total customer cash balances ($ in millions)	$	1,272	$	1,229	$	1,209	$	1,159	$	1,178


(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.

Total funded accounts increased 3% from the prior quarter and 21% from the third quarter of 2018 as a result of a continued focus on marketing campaigns. Average customer trades per day decreased from the prior quarter, primarily due to customer behavior trends and market dynamics. Additionally, net customer assets remain unchanged in the third quarter of 2019, as net customer acquisition was offset by the impact of equity market movement.

The competitive environment in the wealth management industry continues to evolve and more recently has led to changes in pricing models of industry participants. Consistent with recent industry developments, on October 4, 2019, Ally Invest announced that it would offer commission-free trading for its customers, effective October 9, 2019. We are currently evaluating the impact this may have on the projected revenue and earnings in relation to the carrying value of the goodwill of Ally Invest, which was $193 million as of September 30, 2019.

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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, and all employees are responsible for managing risk. We use multiple layers of defense to identify, monitor, and manage current and emerging risks.


•	Business lines — Responsible for owning and managing all of the risks that emanate from their risk-taking activities, including business units and support functions.


•	Independent risk management — Responsible for establishing and maintaining our risk-management framework and promulgating it enterprise-wide. Independent risk management also provides an objective, critical assessment of risks and—through oversight, effective challenge, and other means—evaluates whether Ally remains aligned with its risk appetite.


•	Internal audit — Provides its own independent assessments of the effectiveness of our risk management, internal controls, and governance; and independent assessments regarding the quality of our loan portfolios. Internal audit includes Audit Services and the Loan Review Group.

Our risk-management framework is overseen by the Risk Committee (RC) of the Ally Board of Directors (the Board). The RC sets the risk appetite across our company while risk-oriented management committees, the executive leadership team, and our associates identify and monitor current and emerging risks and manage those risks within our risk appetite. For more information on our risk management process, refer to the Risk Management MD&A section of our 2018 Annual Report on Form 10-K.

Loan and Operating Lease Exposure

The following table summarizes the exposures from our loan and operating lease activities.



($ in millions)	September 30, 2019		December 31, 2018
Finance receivables and loans
Automotive Finance	$	106,401	$	108,463
Mortgage Finance	15,782		15,155
Corporate Finance	5,033		4,636
Corporate and Other (a)	1,393		1,672
Total finance receivables and loans	128,609		129,926
Loans held-for-sale
Automotive Finance	—		210
Mortgage Finance (b)	693		8
Corporate Finance	240		47
Corporate and Other	67		49
Total loans held-for-sale	1,000		314
Total on-balance sheet loans	129,609		130,240
Off-balance sheet securitized loans
Automotive Finance (c)	561		1,235
Whole-loan sales
Automotive Finance (c)	297		634
Total off-balance sheet loans	858		1,869
Operating lease assets
Automotive Finance	8,653		8,417
Total loan and operating lease exposure	$	139,120	$	140,526


(a)	Includes $1.2 billion and $1.5 billion of consumer mortgage loans in our legacy mortgage portfolio at September 30, 2019, and December 31, 2018, respectively.


(b)	Represents the current balance of conforming mortgages originated directly to the held-for-sale portfolio, and at September 30, 2019, also includes $655 million of adjustable-rate mortgage loans previously classified as held-for-investment.


(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 operating lease exposures are largely driven by changes in the overall economy, used vehicle and housing price levels, unemployment levels, and their impact on 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 consumer 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 operating lease residual risk, which may be more volatile than

Table of Contents

Management’s Discussion and Analysis

Ally Financial Inc. • Form 10-Q

credit risk in stressed macroeconomic scenarios, has declined over the past several years as we have experienced growth in our consumer automotive loan portfolio and a significant reduction in operating lease assets since 2014. While all operating leases are exposed to potential reductions in used vehicle values, only loans where we take possession of the vehicle are affected by potential reductions in used vehicle values.

Credit Risk

Credit risk is defined as the risk of loss arising from an obligor not meeting its contractual obligations to us. Credit risk includes consumer credit risk, commercial credit risk, and counterparty credit risk.

Credit risk is a major source of potential economic loss to us. Credit risk is monitored by the risk committees, executive leadership team, and our associates. Together, they oversee credit decisioning, account servicing activities, and credit-risk-management processes and manage credit risk exposures 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 RC on a regular basis.

To mitigate risk, we have implemented specific policies and practices across business lines, utilizing both qualitative and quantitative analyses. This reflects our commitment to maintaining 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 operating 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 operating leases with potential credit weaknesses, and the assessment of the adequacy of internal credit risk policies and procedures. Our consumer and commercial loan and operating lease portfolios are subject to regular stress tests that are based on plausible, but unexpected, economic scenarios to assess how the portfolios may perform in a severe economic downturn. In addition, we establish and maintain underwriting policies and limits 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 with the aim of generating appropriate risk-adjusted returns. 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 and 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 7 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 consumer 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 payment extensions and rewrites of the loan terms. For mortgage loans, as part of certain programs, we offer mortgage loan modifications to qualified borrowers. These programs are in place to provide support to our mortgage customers in financial distress, including principal forgiveness, maturity extensions, delinquent interest capitalization, and changes to contractual interest rates.

Furthermore, we manage our credit exposure to financial counterparties 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 17 to the Condensed Consolidated Financial Statements.

We employ an internal team of economists to enhance our planning and forecasting capabilities. This team conducts industry and market research, monitors economic risks, and helps support various forms of scenario planning. This group closely monitors macroeconomic trends given the nature of our business and the potential impacts on our exposure to credit risk. During the three months and nine months ended September 30, 2019, the U.S. economy continued to modestly expand, led by consumer spending. The labor market remained healthy during the period, with the unemployment rate at 3.5% as of September 30, 2019. Within the U.S. automotive market, new light vehicle sales have moderated from both historic highs and year-over-year pace, to an average 17.0 million Seasonally Adjusted Annual Rate for both the three months and nine months ended September 30, 2019. We expect to experience modest downward pressure on used vehicle values for the remainder of 2019.

Consumer Credit Portfolio

During the three months and nine months ended September 30, 2019, the credit performance of the consumer loan portfolio reflected both our underwriting strategy to originate a diversified portfolio of consumer automotive loan assets, including used, nonsubvented new, higher LTV, extended term, Growth channel, and nonprime finance receivables and loans, as well as high-quality jumbo and LMI mortgage loans that are acquired through bulk loan purchases and direct-to-consumer mortgage originations. The carrying value of our nonprime consumer automotive loans before allowance for loan losses represented approximately 11.6% of our total consumer automotive loans at September 30, 2019, compared to approximately 11.7% at December 31, 2018. For information on our consumer credit risk practices and

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Ally Financial Inc. • Form 10-Q

policies regarding delinquencies, nonperforming status, and charge-offs, refer to Note 1 to the Consolidated Financial Statements in our 2018 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 (b)
($ in millions)	September 30, 2019		December 31, 2018		September 30, 2019		December 31, 2018		September 30, 2019		December 31, 2018
Consumer automotive (c) (d)	$	73,071	$	70,539	$	692	$	664	$	—	$	—
Consumer mortgage
Mortgage Finance	15,782		15,155		15		9		—		—
Mortgage — Legacy	1,228		1,546		43		70		—		—
Total consumer finance receivables and loans	$	90,081	$	87,240	$	750	$	743	$	—	$	—


(a)	Includes nonaccrual TDR loans of $239 million and $257 million at September 30, 2019, and December 31, 2018, respectively.


(b)	Loans are generally in nonaccrual status when principal or interest has been delinquent for 90 days or more, or when full collection is not expected. Refer to Note 1 to the Consolidated Financial Statements in our 2018 Annual Report on Form 10-K for a description of our accounting policies for finance receivables and loans.


(c)	Certain finance receivables and loans are included in fair value hedging relationships. Refer to Note 17 to the Condensed Consolidated Financial Statements for additional information.


(d)	Includes outstanding CSG loans of $8.1 billion and $7.9 billion at September 30, 2019, and December 31, 2018, respectively, and RV loans of $1.4 billion and $1.7 billion at September 30, 2019, and December 31, 2018, respectively.

Total consumer finance receivables and loans increased $2.8 billion at September 30, 2019, compared with December 31, 2018, reflecting an increase of $2.5 billion of consumer automotive finance receivables and loans and an increase of $309 million of consumer mortgage finance receivables and loans. The increase in consumer automotive finance receivables and loans was primarily related to continued momentum in our used vehicle lending. The increase in consumer mortgage finance receivables and loans was primarily due to the execution of bulk loan purchases totaling $2.7 billion and direct-to-consumer held-for-investment originations of $1.2 billion during the nine months ended September 30, 2019. These increases were partially offset by the transfer of $940 million of consumer mortgage finance receivables and loans to held-for-sale, of which $263 million were sold during the three months ended September 30, 2019, and portfolio runoff.

Total consumer nonperforming finance receivables and loans at September 30, 2019, increased $7 million to $750 million from December 31, 2018, reflecting an increase of $28 million of consumer automotive finance receivables and loans and a decrease of $21 million of consumer mortgage nonperforming finance receivables and loans. The increase in nonperforming consumer automotive finance receivables and loans was primarily due to growth in the portfolio, as well as seasonality. The decrease in nonperforming consumer mortgage finance receivables and loans was driven by the continued run-off of our legacy mortgage portfolio. Refer to Note 7 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 0.8% and 0.9% at September 30, 2019, and December 31, 2018, respectively.

Total consumer TDRs outstanding at September 30, 2019, increased $1 million since December 31, 2018, to $727 million. Results reflect a $19 million increase in our consumer automotive loan portfolio, largely offset by a $17 million decrease in our legacy mortgage portfolio. Refer to Note 7 to the Condensed Consolidated Financial Statements for additional information.

Consumer automotive loans accruing and past due 30 days or more decreased $73 million to $2.4 billion at September 30, 2019, compared to December 31, 2018, primarily due to seasonality. Consumer automotive loans accruing and past due 30 days or more increased $289 million at September 30, 2019, as compared to the same period in 2018, driven by growth in the overall size of the consumer automotive loan portfolio, as well as higher delinquency rates as part of our continued diversification strategy.

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Ally Financial Inc. • Form 10-Q

The following table includes consumer net charge-offs from finance receivables and loans at gross carrying value and related ratios.



	Three months ended September 30,										Nine months ended September 30,
	Net charge-offs (recoveries)						Net charge-off ratios (a)				Net charge-offs (recoveries)					Net charge-off ratios (a)
($ in millions)	2019			2018			2019		2018		2019			2018		2019		2018
Consumer automotive	$	253		$	233		1.4	%	1.3	%	$	659		$	668	1.2	%	1.3	%
Consumer mortgage
Mortgage Finance	—			1			—		—		—			3		—		—
Mortgage — Legacy	(2		)	(2		)	(0.6	)	(0.4	)	(6		)	4		(0.6	)	0.3
Total consumer finance receivables and loans	$	251		$	232		1.1		1.1		$	653		$	675	1.0		1.1


(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 $251 million and $653 million for the three months and nine months ended September 30, 2019, respectively, compared to $232 million and $675 million for the three months and nine months ended September 30, 2018. Net charge-offs for our consumer automotive portfolio increased $20 million and decreased $9 million for the three months and nine months ended September 30, 2019. The increase in consumer automotive net charge-offs for the three months ended September 30, 2019, was primarily driven by portfolio growth and seasoning of our used vehicle portfolio. The decrease in net charge-offs for the nine months ended September 30, 2019, was primarily driven by our consumer automotive loan portfolio which experienced strong overall credit performance driven by favorable macroeconomic conditions including low unemployment, as well as continued disciplined underwriting and higher recoveries. Net charge-offs for our consumer mortgage portfolio decreased $1 million and $13 million for the three months and nine months ended September 30, 2019, and were primarily driven by our consumer mortgage loan portfolio where we experienced overall lower net charge-offs and strong credit performance as the legacy mortgage portfolio continues to run-off and we continue to grow our Mortgage Finance business.

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 September 30,				Nine months ended September 30,
($ in millions)	2019		2018		2019		2018
Consumer automotive	$	8,005	$	7,168	$	24,956	$	23,936
Consumer mortgage (a)	775		175		1,678		520
Total consumer loan originations	$	8,780	$	7,343	$	26,634	$	24,456


(a)	Excludes bulk loan purchases associated with our Mortgage Finance operations and includes $220 million and $464 million of loans originated as held-for-sale for the three months and nine months ended September 30, 2019, respectively, and $86 million and $218 million for the three months and nine months ended September 30, 2018.

Total consumer loan originations increased $1.4 billion and $2.2 billion for the three months and nine months ended September 30, 2019, respectively, compared to the three months and nine months ended September 30, 2018, reflecting increases of $600 million and $1.2 billion of consumer mortgage loans and increases of $837 million and $1.0 billion of consumer automotive loans. The increases in consumer mortgage loan originations for the three months and nine months ended September 30, 2019, were primarily due to growth in the direct-to-consumer mortgage business. The increase in consumer automotive loan originations for the three months ended September 30, 2019, was primarily due to both higher new and used vehicle volume. For the nine months ended September 30, 2019, the increase was primarily due to higher used vehicle volume.

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Ally Financial Inc. • Form 10-Q

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 $73.1 billion and $70.5 billion at September 30, 2019, and December 31, 2018, respectively. Total consumer mortgage loans were $17.0 billion and $16.7 billion at September 30, 2019, and December 31, 2018, respectively.



	September 30, 2019 (a)				December 31, 2018
	Consumer automotive		Consumer mortgage		Consumer automotive		Consumer mortgage
California	8.4	%	34.7	%	8.4	%	36.9	%
Texas	12.5		6.4		12.8		6.2
Florida	8.8		5.0		8.8		4.7
Pennsylvania	4.6		1.9		4.5		1.4
Illinois	4.1		2.7		4.1		3.0
Georgia	3.9		2.7		4.1		2.8
North Carolina	3.9		1.9		3.9		1.7
New York	3.1		3.1		3.1		2.4
Ohio	3.6		0.5		3.5		0.4
New Jersey	2.8		2.3		2.7		2.1
Other United States	44.3		38.8		44.1		38.4
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 September 30, 2019.

We monitor our consumer loan portfolio for concentration risk across the states in which we lend. The highest concentrations of consumer loans are in California and Texas, which represented an aggregate of 24.8% and 25.4% of our total outstanding consumer finance receivables and loans at September 30, 2019, and December 31, 2018, 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, which is included in other assets on our 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 in our 2018 Annual Report on Form 10-K.

Repossessed consumer automotive loan assets in our Automotive Finance operations increased $14 million from December 31, 2018, to $150 million at September 30, 2019. Foreclosed mortgage assets at September 30, 2019, remained flat at $11 million from December 31, 2018.

Commercial Credit Portfolio

During the three months and nine months ended September 30, 2019, the credit performance of the commercial portfolio remained strong as nonperforming finance receivables and loans decreased, and our net charge-offs remained low. 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 in our 2018 Annual Report on Form 10-K.

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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 (b)
($ in millions)	September 30, 2019		December 31, 2018		September 30, 2019		December 31, 2018		September 30, 2019		December 31, 2018
Commercial and industrial
Automotive	$	29,122	$	33,672	$	64	$	203	$	—	$	—
Other (c)	4,377		4,205		111		142		—		—
Commercial real estate	5,029		4,809		4		4		—		—
Total commercial finance receivables and loans	$	38,528	$	42,686	$	179	$	349	$	—	$	—


(a)	Includes nonaccrual TDR loans of $105 million and $86 million at September 30, 2019, and December 31, 2018, respectively.


(b)	Loans are generally in nonaccrual status when principal or interest has been delinquent for 90 days or more, or when full collection is not expected. Refer to Note 1 to the Consolidated Financial Statements in our 2018 Annual Report on Form 10-K for a description of our accounting policies for finance receivables and loans.


(c)	Other commercial and industrial primarily includes senior secured commercial lending largely associated with our Corporate Finance operations.

Total commercial finance receivables and loans outstanding decreased $4.2 billion from December 31, 2018, to $38.5 billion at September 30, 2019. The decrease was primarily due to lower automotive dealer inventory levels and a reduction in the number of dealer relationships due to the competitive environment across the automotive lending market. This decrease was partially offset by growth in our Corporate Finance portfolio.

Total commercial nonperforming finance receivables and loans were $179 million at September 30, 2019, reflecting a decrease of $170 million when compared to December 31, 2018. The decrease was primarily due to reduced exposure to one large automotive dealer group that was placed into default in the fourth quarter of 2018, as well as the partial liquidation and charge-off of two accounts within our Corporate Finance portfolio. Nonperforming commercial finance receivables and loans as a percentage of outstanding commercial finance receivables and loans decreased to 0.5% at September 30, 2019, compared to 0.8% at December 31, 2018.

Total commercial TDRs outstanding at September 30, 2019, increased $25 million since December 31, 2018, to $111 million. The increase was primarily driven by TDRs involving one large automotive dealer group that was placed into default in the fourth quarter of 2018, as well as an increase in Corporate Finance as a result of two accounts being classified as TDRs, partially offset by the partial liquidation and charge-off of two accounts. Refer to Note 7 to the Consolidated Financial Statements in our 2018 Annual Report on Form 10-K for additional information.

The following table includes total commercial net charge-offs from finance receivables and loans at gross carrying value and related ratios.



	Three months ended September 30,								Nine months ended September 30,
	Net charge-offs				Net charge-off ratios (a)				Net charge-offs (recoveries)					Net charge-off ratios (a)
($ in millions)	2019		2018		2019		2018		2019		2018			2019		2018
Commercial and industrial
Automotive	$	1	$	3	—	%	—	%	$	2	$	5		—	%	—	%
Other	15		—		1.4		—		31		(6		)	0.9		(0.2	)
Commercial real estate	—		—		—		—		—		—			—		—
Total commercial finance receivables and loans	$	16	$	3	0.2		—		$	33	$	(1	)	0.1		—


(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 commercial finance receivables and loans were $16 million and $33 million for the three months and nine months ended September 30, 2019, respectively, compared to net charge-offs of $3 million for the three months ended September 30, 2018, and net recoveries of $1 million for the nine months ended September 30, 2018. The increase in net charge-offs for the three months ended September 30, 2019, was primarily driven by the partial charge-off of one Corporate Finance exposure. The increase for the nine months ended September 30, 2019, was primarily driven by partial charge-offs of three exposures within our Corporate Finance portfolio.

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 $5.0 billion and $4.8 billion at September 30, 2019, and December 31, 2018, respectively.

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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.



	September 30, 2019		December 31, 2018
Texas	14.5	%	15.5	%
Florida	12.7		11.6
Michigan	8.0		6.8
California	7.2		8.3
New York	5.9		4.8
North Carolina	4.4		3.6
Georgia	3.5		4.0
South Carolina	3.1		3.4
New Jersey	2.8		3.1
Utah	2.8		2.6
Other United States	35.1		36.3
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 decreased $150 million from December 31, 2018, to $3.8 billion at September 30, 2019. The decrease was primarily due to reduced exposure to one large automotive dealer group that defaulted in the fourth quarter of 2018, as well as declining automotive dealer inventory levels.

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.



	September 30, 2019		December 31, 2018
Industry
Automotive	79.6	%	80.6	%
Services	5.5		5.0
Health / Medical	4.7		3.7
Other	10.2		10.7
Total commercial criticized finance receivables and loans	100.0	%	100.0	%

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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 September 30, 2019 ($ in millions)	Consumer automotive			Consumer mortgage			Total consumer			Commercial			Total
Allowance at July 1, 2019	$	1,078		$	49		$	1,127		$	155		$	1,282
Charge-offs (a)	(374		)	(3		)	(377		)	(16		)	(393		)
Recoveries	121			5			126			—			126
Net charge-offs	(253		)	2			(251		)	(16		)	(267		)
Provision for loan losses	264			(5		)	259			4			263
Other	1			(2		)	(1		)	—			(1		)
Allowance at September 30, 2019	$	1,090		$	44		$	1,134		$	143		$	1,277
Ratio of allowance for loan losses to annualized net charge-offs at September 30, 2019	1.1			n/m			1.1			2.2			1.2
Net charge-offs to average finance receivables and loans outstanding for the three months ended September 30, 2019	1.4		%	—		%	1.1		%	0.2		%	0.8		%

n/m = not meaningful

(a)



Three months ended September 30, 2018 ($ in millions)	Consumer automotive			Consumer mortgage			Total consumer			Commercial			Total
Allowance at July 1, 2018	$	1,053		$	66		$	1,119		$	138		$	1,257
Charge-offs (a)	(343		)	(7		)	(350		)	(3		)	(353		)
Recoveries	110			8			118			—			118
Net charge-offs	(233		)	1			(232		)	(3		)	(235		)
Provision for loan losses	229			(4		)	225			8			233
Other (b)	(6		)	1			(5		)	(2		)	(7		)
Allowance at September 30, 2018	$	1,043		$	64		$	1,107		$	141		$	1,248
Ratio of allowance for loan losses to annualized net charge-offs at September 30, 2018	1.1			n/m			1.2			13.3			1.3
Net charge-offs to average finance receivables and loans outstanding for the three months ended September 30, 2018	1.3		%	—		%	1.1		%	—		%	0.7		%

n/m = not meaningful

(a)


(b)	Primarily related to the transfer of finance receivables and loans from held-for-investment to held-for-sale.

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Nine months ended September 30, 2019 ($ in millions)	Consumer automotive			Consumer mortgage			Total consumer			Commercial			Total
Allowance at January 1, 2019	$	1,048		$	53		$	1,101		$	141		$	1,242
Charge-offs (a)	(1,027		)	(11		)	(1,038		)	(33		)	(1,071		)
Recoveries	368			17			385			—			385
Net charge-offs	(659		)	6			(653		)	(33		)	(686		)
Provision for loan losses	701			(13		)	688			34			722
Other	—			(2		)	(2		)	1			(1		)
Allowance at September 30, 2019	$	1,090		$	44		$	1,134		$	143		$	1,277
Ratio of allowance for loan losses to annualized net charge-offs at September 30, 2019	1.2			n/m			1.3			3.3			1.4
Net charge-offs to average finance receivables and loans outstanding for the nine months ended September 30, 2019	1.2		%	—		%	1.0		%	0.1		%	0.7		%

n/m = not meaningful

(a)



Nine months ended September 30, 2018 ($ in millions)	Consumer automotive			Consumer mortgage			Total consumer			Commercial			Total
Allowance at January 1, 2018	$	1,066		$	79		$	1,145		$	131		$	1,276
Charge-offs (a)	(1,004		)	(27		)	(1,031		)	(5		)	(1,036		)
Recoveries	336			20			356			6			362
Net charge-offs	(668		)	(7		)	(675		)	1			(674		)
Provision for loan losses	650			(7		)	643			9			652
Other (b)	(5		)	(1		)	(6		)	—			(6		)
Allowance at September 30, 2018	$	1,043		$	64		$	1,107		$	141		$	1,248
Ratio of allowance for loan losses to annualized net charge-offs at September 30, 2018	1.2			6.5			1.2			n/m			1.4
Net charge-offs to average finance receivables and loans outstanding for the nine months ended September 30, 2018	1.3		%	0.1		%	1.1		%	—		%	0.7		%

n/m = not meaningful

(a)


(b)	Primarily related to the transfer of finance receivables and loans from held-for-investment to held-for-sale.



($ in millions)	Consumer automotive		Consumer mortgage		Total consumer		Commercial		Total
September 30, 2019
Allowance for loan losses to finance receivables and loans outstanding (a)	1.5	%	0.3	%	1.3	%	0.4	%	1.0	%
Allowance for loan losses to total nonperforming finance receivables and loans (a)	157.5	%	75.8	%	151.1	%	80.0	%	137.4	%
September 30, 2018
Allowance for loan losses to finance receivables and loans outstanding (a)	1.5	%	0.4	%	1.3	%	0.4	%	1.0	%
Allowance for loan losses to total nonperforming finance receivables and loans (a)	168.3	%	64.4	%	154.1	%	76.5	%	138.2	%


(a)	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 September 30, 2019, increased $27 million compared to September 30, 2018, reflecting an increase of $47 million in the consumer automotive allowance and a decrease of $20 million in the consumer mortgage allowance. The increase in our consumer automotive allowance was primarily driven by portfolio growth as finance receivable balances are up $3.1 billion from the prior-year period. The decrease in the consumer mortgage allowance was primarily driven by overall lower net charge-offs resulting

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from legacy mortgage portfolio run-off and strong credit performance, partially offset by year-over-year growth of $942 million in our Mortgage Finance receivables portfolio.

The allowance for commercial loan losses increased $2 million at September 30, 2019, compared to September 30, 2018. The increase was primarily driven by our commercial automotive portfolio as higher reserves for individually impaired accounts were partially offset by lower reserves associated with a decrease of $2.3 billion in finance receivable balances. Overall credit performance in our commercial portfolios remains stable.

Allowance for Loan Losses by Type

The following table summarizes the allocation of the allowance for loan losses by product type.



	2019						2018
September 30, ($ 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	$	1,090	1.5	%	85.4	%	$	1,043	1.5	%	83.6	%
Consumer mortgage
Mortgage Finance	17		0.1		1.3		20		0.1		1.6
Mortgage — Legacy	27		2.2		2.1		44		2.6		3.5
Total consumer mortgage	44		0.3		3.4		64		0.4		5.1
Total consumer loans	1,134		1.3		88.8		1,107		1.3		88.7
Commercial
Commercial and industrial
Automotive	40		0.1		3.1		37		0.1		3.0
Other	76		1.7		6.0		77		1.9		6.1
Commercial real estate	27		0.5		2.1		27		0.6		2.2
Total commercial loans	143		0.4		11.2		141		0.4		11.3
Total allowance for loan losses	$	1,277	1.0		100.0	%	$	1,248	1.0		100.0	%

Provision for Loan Losses

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



	Three months ended September 30,						Nine months ended September 30,
($ in millions)	2019			2018			2019			2018
Consumer
Consumer automotive	$	264		$	229		$	701		$	650
Consumer mortgage
Mortgage Finance	—			2			2			4
Mortgage — Legacy	(5		)	(6		)	(15		)	(11		)
Total consumer mortgage	(5		)	(4		)	(13		)	(7		)
Total consumer loans	259			225			688			643
Commercial
Commercial and industrial
Automotive	1			—			7			7
Other	3			8			28			—
Commercial real estate	—			—			(1		)	2
Total commercial loans	4			8			34			9
Total provision for loan losses	$	263		$	233		$	722		$	652

The provision for consumer loan losses was $259 million and $688 million for the three months and nine months ended September 30, 2019, respectively, compared to $225 million and $643 million for three months and nine months ended September 30, 2018. The provision

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for consumer automotive loan losses increased $35 million and $51 million during the three months and nine months ended September 30, 2019, as compared to the same periods in the prior year. The increase for the three months ended September 30, 2019, was driven primarily by higher net charge-offs and reserve increases associated with continued loan portfolio growth. For the nine months ended September 30, 2019, the increase in provision for loan losses was primarily driven by reserve reductions during the nine months ended September 30, 2018, associated with hurricane activity experienced during 2017 in our retail automotive loan portfolio. These items were partially offset by lower net charge-offs, despite continued loan portfolio growth. We continue to experience strong overall credit performance driven by favorable macroeconomic conditions including low unemployment, as well as continued disciplined underwriting and higher recoveries. The provision for consumer mortgage loan losses decreased $1 million and $6 million during the three months and nine months ended September 30, 2019, primarily driven by overall lower net charge-offs and strong credit performance, as the legacy mortgage portfolio continues to run-off and we continue to grow our Mortgage Finance business.

The provision for commercial loan losses decreased $4 million and increased $25 million for the three months and nine months ended September 30, 2019, respectively, compared to the three months and nine months ended September 30, 2018. The decrease in provision for commercial loan losses for the three months ended September 30, 2019, was impacted by our Corporate Finance portfolio, where we experienced a reserve increase for one specific exposure during the three months ended September 30, 2018, which did not reoccur. The increase in provision expense for the nine months ended September 30, 2019, was primarily driven by higher reserves associated with two specific exposures in our Corporate Finance portfolio which were within separate industries, and which were subsequently charged-off. This increase was also impacted by a $6 million recovery recognized during the nine months ended September 30, 2018, that did not reoccur. Overall credit performance in the Corporate Finance portfolio remains stable.

Market Risk

Our financing, investing, and insurance activities give rise to market risk, or the potential change in the value of our assets (including securities, assets held-for-sale, and operating leases) and liabilities (including deposits and debt) due to movements in market variables such as interest rates, credit spreads, foreign-exchange rates, equity prices, and off-lease vehicle prices.

The impact of changes in benchmark interest rates on our assets and liabilities (interest rate risk) represents an exposure to market risk. We primarily use interest rate derivatives to manage our interest rate risk exposure.

The fair value of our credit-sensitive assets is also exposed to credit spread risk. Credit spread is the amount of additional return over the benchmark interest rates that an investor would demand for taking exposure to the credit risk of an instrument. Generally, an increase in credit spreads would result in a decrease in a fair value measurement.

We are also exposed to 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 changes in the value of equity securities. We have exposure to equity securities with readily determinable fair values primarily related to our Insurance operations. For such equity securities, we use equity derivatives to manage our exposure to equity price fluctuations. In addition, we are exposed to changes in the value of other equity investments without readily determinable fair market values. Refer to Note 10 to the Condensed Consolidated Financial Statements for additional information. We may experience changes in the valuation of these investments, which may cause volatility in our earnings.

The composition of our balance sheet, including shorter-duration consumer automotive loans and variable-rate commercial loans, coupled with the continued funding shift toward retail deposits, partially mitigates market risk. Additionally, we maintain risk-management controls that measure and monitor market risk using a variety of analytical techniques including market value, sensitivity analysis, and value at risk models. Refer to Note 17 to the Condensed Consolidated Financial Statements for further information.

LIBOR Transition

In July 2017, the Chief Executive of the United Kingdom Financial Conduct Authority, which regulates LIBOR, announced its intent to stop persuading or compelling banks to submit rates for the calculation of LIBOR to the administrator of LIBOR after 2021. Due to the uncertainty surrounding the future of LIBOR, it is expected that a transition away from the use of LIBOR to alternative benchmark rates will occur by the end of 2021. We have exposure to LIBOR-based contracts within certain of our finance receivables and loans primarily related to commercial automotive loans, corporate finance loans, and mortgage loans, as well as certain investment securities, derivative contracts, and trust preferred securities, among other arrangements.

The discontinuation of LIBOR or LIBOR-based rates will present risks to our business, as further described in the section titled Risk Factors within our 2018 Annual Report on Form 10-K. In recognition of these risks and uncertainties, we have established an enterprise-wide initiative to identify, assess, monitor, and mitigate risks that may arise from the potential discontinuation of LIBOR and the related transition to an alternative reference rate. Through this initiative, we continue to assess and plan for potential impacts to our financial forecasts, operational processes, technology, modeling, as well as our current and potential future contracts with customers and counterparties.

We continue to evaluate the most appropriate course of action for each instrument that currently references LIBOR. For example, the Alternative Reference Rates Committee (ARRC), a group convened by the FRB, has identified the Secured Overnight Financing Rate (SOFR) as its preferred alternative rate for LIBOR. SOFR is a measure of the cost of borrowing cash overnight, collateralized by U.S. Treasury securities, and is based on directly observable U.S. Treasury-backed purchase transactions. We are evaluating SOFR, among other alternatives

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and actions, as a potential alternative reference rate to LIBOR and are taking steps to assess the operational, financial, and various other impacts this change could have to our business. Additionally, we continue to evaluate contract language for inclusion of appropriate fallback provisions to adequately address alternatives in the absence of LIBOR, including evaluating the fallback language proposed by the ARRC for certain contracts. We will continue to actively monitor industry developments and their potential impact to us.

We are also actively assessing how the discontinuation of LIBOR could impact accounting and financial reporting including, but not limited to, potential impacts to our hedge accounting, valuation or modeling, or impacts associated with modifying the terms of our loan agreements or debt instruments with our customers or counterparties. We also continue to monitor activities of standard setters such as the FASB, which recently proposed guidance that would help ease the potential effects of reference rate reform on financial reporting. The proposed guidance would offer optional expedients and exceptions for applying GAAP to contracts, hedging relationships, or other transactions affected by reference rate reform. Additionally, the FASB issued ASU 2018-16, Derivatives and Hedging (Topic 815): Inclusion of the Secured Overnight Financing Rate (SOFR) Overnight Index Swap (OIS) Rate as a Benchmark Interest Rate for Hedge Accounting Purposes, which permits the use of the OIS rate based on the SOFR to be designated as a benchmark interest rate for hedge accounting purposes.

Net Financing Revenue Sensitivity Analysis

Interest rate risk represents our most significant exposure to market risk. We actively monitor the level of exposure to movements in interest rates and take actions to mitigate adverse impacts these movements may have on 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. The analysis is highly dependent upon a variety of assumptions including the repricing characteristics of retail deposits with both contractual and non-contractual maturities. 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 rate scenarios relative to the baseline forecast. The changes in net financing revenue relative to the baseline are defined as the sensitivity. Our simulations incorporate contractual cash flows and repricing characteristics for all assets, liabilities, and off-balance sheet exposures and incorporate the effects of changing interest rates on the prepayment and attrition rates of certain assets and liabilities. Our simulation does not assume any specific future actions are taken to mitigate the impacts of changing interest rates.

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 the implied market forward curve. Management also evaluates 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. Relative to our baseline forecast, which is based on the implied forward curve, our net financing revenue over the next twelve months would decrease by $90 million if interest rates remain unchanged.

The following table presents the pretax dollar impact to forecasted net financing revenue over the next twelve months assuming 100 basis point and 200 basis point instantaneous parallel and gradual parallel shock increases, and assuming 100 basis point instantaneous parallel and gradual parallel shock decreases to the implied market forward curve as of September 30, 2019, and December 31, 2018.



	September 30, 2019						December 31, 2018
($ in millions)	Gradual (a)			Instantaneous			Gradual (a)			Instantaneous
Change in interest rates
-100 basis points	$	(26	)	$	(31	)	$	(20	)	$	(34	)
+100 basis points	20			25			51			10
+200 basis points	56			(64		)	81			(10		)


(a)	Gradual changes in interest rates are recognized over twelve months.

The implied forward rate curve was lower across all tenors compared to December 31, 2018, and includes multiple projected declines in the federal funds target rate in the forecast horizon. The impact of this change is reflected in our baseline net financing revenue projections. As of September 30, 2019, our net interest income sensitivity in the +100 and +200 basis point instantaneous shock scenarios has primarily been impacted by lower rates and the impact of funding sources shifting from short-term market-based funding to retail deposits, partially offset by year-to-date notional decreases in pay-fixed interest rate swaps.

The exposure in the downward instantaneous interest rate shock scenario has decreased as of September 30, 2019, primarily due to the lower pay-fixed interest rate swap notional referenced above as well as the addition of interest rate floor contracts, offset by increased mortgage prepayment risk in a lower interest rate environment.

Our risk position is influenced by the net impact of derivative hedging which primarily consists of interest rate swaps designated as fair value hedges of certain fixed-rate assets and fixed-rate debt instruments, and pay-fixed interest rate swaps designated as cash flow hedges of certain floating-rate debt instruments. During the nine months ended September 30, 2019, we initiated a hedge program of interest rate floor

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contracts designated as cash flow hedges on certain floating-rate assets. The size, maturity, and mix of our hedging activities are adjusted as our balance sheet, ALM objectives, and interest rate environment evolve over time.

Operating Lease Residual Risk Management

We are exposed to residual risk on vehicles in the consumer operating lease portfolio. This operating 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. However, certain automotive manufacturers have provided their guarantee for portions of our residual exposure, as further described in Note 8. Our operating lease portfolio, net of accumulated depreciation was $8.7 billion and $8.4 billion as of September 30, 2019, and December 31, 2018, respectively. The expected lease residual value of our operating lease portfolio at scheduled termination was $7.0 billion and $6.8 billion as of September 30, 2019, and December 31, 2018, respectively. For information on our valuation of automotive operating lease residuals including periodic revisions through adjustments to depreciation expense based on current and forecasted market conditions, refer to the section titled Critical Accounting Estimates—Valuation of Automotive Operating Lease Assets and Residuals within the MD&A in our 2018 Annual Report on Form 10-K.

Operating Lease Vehicle Terminations and Remarketing

The following table summarizes the volume of operating lease terminations and average gain per vehicle, as well as our methods of vehicle sales at lease termination, stated as a percentage of total operating lease vehicle disposals.



	Three months ended September 30,						Nine months ended September 30,
	2019			2018			2019			2018
Off-lease vehicles terminated (in units)	29,985			29,018			85,282			109,659
Average gain per vehicle ($ per unit)	$	944		$	944		$	773		$	561
Method of vehicle sales
Auction
Internet	54		%	51		%	53		%	53		%
Physical	14			17			15			14
Sale to dealer, lessee, and other	32			32			32			33

We recognized an average gain per vehicle of $944 and $773 for the three months and nine months ended September 30, 2019, compared to $944 and $561 for the same periods in 2018. The increase in average gain per vehicle for the nine months ended September 30, 2019, compared to the same period in 2018, was primarily due to an increase in the mix of trucks and sport utility vehicles and a decrease in the mix of cars, which drove more favorable remarketing results. The decrease in remarketing volume for the nine months ended September 30, 2019, was primarily due to the wind down of our legacy GM operating lease portfolio. We expect future termination volume to be more consistent with trends experienced during the nine months ended September 30, 2019. For more information on our investment in operating leases, refer to Note 8 to the Condensed Consolidated Financial Statements, and Note 1 to the Consolidated Financial Statements in our 2018 Annual Report on Form 10-K.

Operating Lease Portfolio Mix

We monitor the concentration of our outstanding operating leases. The following table presents the mix of operating lease assets by vehicle type, based on volume of units outstanding.

Our overall operating lease residual exposure has declined in recent years largely as a result of the runoff of our legacy GM operating lease portfolio, and as a result our exposure to Chrysler vehicles has grown and represented approximately 93% of our operating lease units as of September 30, 2019, as compared to 87% as of September 30, 2018.

Information Technology/Security Risk

Information technology/security risk includes risk resulting from the failure of, or insufficiency in, information technology (e.g., system outage) or intentional or accidental unauthorized access, sharing, removal, tampering, or disposal of company and customer data or records.

We and our service providers rely extensively on communications, data-management, and other operating systems and infrastructure to conduct our business and operations. Failures or disruptions to these systems or infrastructure from cyberattacks or other events may impede our ability to conduct business and operations and may result in business, reputational, financial, regulatory, or other harm.

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We and other financial institutions continue to be the target of various cyberattacks, including those by unauthorized parties who may seek to disrupt our operations through malware, phishing attacks, denial-of-service, or other security breaches, as part of an effort to disrupt the operations of financial institutions or obtain confidential, proprietary, or other information or assets of the Company, our customers, employees, or other third parties with whom we transact.

Cybersecurity and the continued development of our controls, processes, and systems to protect our technology infrastructure, customer information, and other proprietary information or assets remain a critical and ongoing priority. We recognize that cyber-related risks continue to evolve and have become increasingly sophisticated, and as a result we continuously evaluate the adequacy of our preventive and detective measures.

In order to help mitigate cybersecurity risks, we devote substantial resources to protect the Company from cyber-related incidents. We regularly assess vulnerabilities and threats to our environment utilizing various resources including independent third-party assessments to evaluate whether our layered system of controls effectively mitigates risk. We also invest in new technologies and infrastructure in order to respond to evolving risks within our environment. We continue to partner with other industry peers in order to share knowledge and information to further our security environment and invest in training and employee awareness to cyber-related risks. Additionally, as a further protective measure, we maintain insurance coverage that, subject to terms and conditions, may cover certain aspects of cybersecurity and information risks; however, such insurance may not be sufficient to cover losses. Management monitors a significant amount of operational metrics and data surrounding cybersecurity operations, and the organization monitors compliance with established limits in connection with our risk appetite. Senior leadership regularly reviews, questions, and challenges such information.

The RC reviews cybersecurity risks, incidents, and developments in connection with its oversight of our independent risk-management program. The Board and the Audit Committee (AC) also undertake reviews as appropriate. The Information Technology Risk Committee is responsible for supporting the Chief Risk Officer’s oversight of Ally’s management of cybersecurity and other risks involving our communications, data-management, and other operating systems and infrastructure. Additionally, our cybersecurity program is regularly assessed by Audit Services, which reports directly to the AC. The business lines are also actively engaged in overseeing the service providers that supply or support the operating systems and infrastructure on which we depend and, with effective challenge from the independent risk-management function, managing related operational and other risks.

Notwithstanding these risk and control initiatives, we may incur losses attributable to information technology/security risk from time to time, and there can be no assurance these losses will not be incurred in the future or will not be substantial. For further information on cybersecurity, technology, systems, and infrastructure, refer to the section titled Risk Factors within our 2018 Annual Report on Form 10-K.

We are currently preparing to implement a new technology platform for our consumer automotive loans and operating leases that will be utilized for customer servicing and financial reporting activities through their full lifecycle. This new platform will replace our existing consumer automotive loan and lease technology platform, and is expected to be implemented within the next six months. While we expect that this new platform will help us continue to expand our technological capabilities, there are inherent risks in implementing any new system such as this. We will continue to evaluate and test the new platform through a series of ongoing assessments until fully implemented.

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Liquidity Management, Funding, and Regulatory Capital

Overview

The purpose of liquidity management is to enable us to meet loan and operating 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, committed secured credit facilities, repurchase agreements, and advances from 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 facilitates 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 funding and liquidity strategies. Corporate Treasury is responsible for managing our liquidity positions within limits approved by ALCO and the RC. 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 secured credit facilities, public and private asset-backed securitizations, unsecured debt, FHLB advances, whole-loan sales, demand notes, and repurchase agreements. 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 to reduce reliance on any one source of funding and to achieve a well-balanced funding portfolio across a spectrum of risk, maturity, 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.

Essentially all asset originations are directed to Ally Bank to reduce parent company exposures and funding requirements, and to utilize our growing consumer deposit-taking capabilities. This allows us to use bank funding for an increasing proportion of our automotive finance and other assets and to provide a sustainable long-term funding channel for the business, while also improving the cost of funds for the enterprise.

Liquidity Risk Management

Multiple metrics are used to measure the level of liquidity risk, manage the liquidity position, identify related trends, and monitor such trends and metrics against established limits. These metrics include coverage ratios and comprehensive stress tests that measure the sufficiency of the liquidity portfolio over stressed horizons ranging from overnight to more than twelve months, stability ratios that measure longer-term structural liquidity, and concentration ratios that enable 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.

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We maintain available liquidity in the form of cash, unencumbered highly liquid securities, and available committed secured credit facility capacity. Our liquidity stress testing is designed to enable an ongoing total liquidity position that would allow us to operate our businesses and to meet our contractual and contingent obligations, including unsecured debt maturities, for at least twelve months, assuming severe market-wide disruptions and enterprise-specific events disrupt normal access to funding. We hold available liquidity at various entities, taking into consideration regulatory restrictions and tax implications that may limit our ability to transfer funds across entities. The following table summarizes our total available liquidity.



($ in millions)	September 30, 2019		December 31, 2018
Unencumbered highly liquid U.S. federal government and U.S. agency securities	$	23,478	$	12,849
Liquid cash and equivalents	3,183		4,227
Committed secured credit facilities
Total capacity	2,650		8,600
Outstanding	700		6,665
Unused capacity (a)	1,950		1,935
Total available liquidity	$	28,611	$	19,011


(a)	Funding from committed secured credit facilities is available on request in the event excess collateral resides in certain facilities or the extent incremental collateral is available and contributed to the facilities.

In addition, our average Modified Liquidity Coverage Ratio was 124% for the three months ended September 30, 2019, which exceeds the regulatory required minimum of 100%. Refer to Note 16 to the Condensed Consolidated Financial Statements and the section titled Regulation and Supervision in Part I, Item 1 of our 2018 Annual Report on Form 10-K for further discussion of our liquidity requirements.

Recent Funding Developments

During the first nine months of 2019, we accessed the public and private markets to execute secured funding transactions, an unsecured funding transaction, and to manage our committed secured credit facility capacity. Key funding highlights from January 1, 2019, to date were as follows:


•	During the first nine months of 2019, we raised $2.6 billion through securitizations backed by consumer automotive loans.


•	In May 2019, we accessed the unsecured debt capital markets and raised $750 million through the issuance of senior notes.


•	Our total capacity in committed secured credit facilities was reduced by $6.0 billion during the nine months ended September 30, 2019, as we continue to shift our overall funding toward a greater mix of cost-effective deposit funding.

Funding Sources

The following table summarizes our sources of funding and the amount outstanding under each category for the periods shown.



	September 30, 2019			December 31, 2018
($ in millions)	On-balance sheet funding		% Share of funding	On-balance sheet funding		% Share of funding
Deposits	$	119,230	74	$	106,178	66
Debt
Secured financings	26,471		17	39,596		25
Institutional term debt	11,822		7	11,760		7
Retail debt programs (a)	2,772		2	2,824		2
Total debt (b)	41,065		26	54,180		34
Total on-balance sheet funding	$	160,295	100	$	160,358	100


(a)	Includes $271 million and $347 million of retail term notes at September 30, 2019, and December 31, 2018, respectively.


(b)	Includes hedge basis adjustment as described in Note 17 to the Condensed Consolidated Financial Statements.

Refer to Note 12 to the Condensed Consolidated Financial Statements for a summary of the scheduled maturity of long-term debt at September 30, 2019.

Deposits

Ally Bank, which is a direct bank with no branch network, obtains retail deposits directly from customers through 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 is less sensitive to interest rate changes, market

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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 Ally Invest customer cash balances.

The following table shows Ally Bank’s number of accounts and deposit balances as of the end of each quarter since 2018.



	3rd quarter 2019		2nd quarter 2019		1st quarter 2019		4th quarter 2018		3rd quarter 2018		2nd quarter 2018		1st quarter 2018
Number of retail bank accounts (in thousands)	3,908		3,712		3,503		3,238		3,079		2,947		2,864
Deposits ($ in millions)
Retail	$	101,295	$	98,600	$	95,423	$	89,121	$	84,629	$	81,736	$	81,657
Brokered (a)	17,778		17,562		17,734		16,914		16,567		16,839		15,661
Other (b)	157		163		142		143		183		159		128
Total deposits	$	119,230	$	116,325	$	113,299	$	106,178	$	101,379	$	98,734	$	97,446


(a)	Brokered deposit balances include a deposit related to Ally Invest customer cash balances deposited at Ally Bank by a third party of $1.1 billion as of September 30, 2019, June 30, 2019, March 31, 2019, and December 31, 2018, and $1.2 billion as of the end of each other quarter presented.


(b)	Other deposits include mortgage escrow and other deposits.

During the first nine months of 2019, our total deposit base grew $13.1 billion and we added approximately 292 thousand retail deposit customers, resulting in 1.9 million total retail deposit customers as of September 30, 2019. The recent growth in total deposits has been primarily attributable to our retail deposit portfolio—particularly within our online savings product and retail CDs. Strong retention rates and customer acquisition, reflecting the strength of the brand, continue to drive growth in retail deposits. Refer to Note 11 to the Condensed Consolidated Financial Statements for a summary of deposit funding by type.

Securitizations and Secured Financings

In addition to building a larger deposit base, secured funding continues to be a significant, reliable, and cost-effective source of financing. Securitizations and secured funding transactions, collectively referred to as securitization transactions due to their similarities, allow us to convert our automotive finance receivables and operating leases into cash earlier than what would have occurred in the normal course of business, and we continue to remain active in the well-established securitization markets.

As part of these securitization transactions, we sell assets to various special purpose entities (SPEs) in exchange for the proceeds from the issuance of debt and other beneficial interests in the assets. The activities of the SPEs are generally limited to acquiring the assets, issuing and making payments on the debt, paying related expenses, and periodically reporting to investors.

These SPEs are separate legal entities that assume the risks and rewards of ownership of the receivables they hold. The assets of the SPEs are not available to satisfy our claims or those of our creditors. In addition, the SPEs do not invest in our equity or in the equity of any of our affiliates. Our economic exposure related to the SPEs is generally limited to cash reserves, retained interests, and customary representation and warranty provisions.

We typically agree to service the transferred assets in our securitization transactions for a fee, and we may also earn other related fees. The total amount of servicing fees earned is disclosed in Note 3 to the Condensed Consolidated Financial Statements. We may also retain a portion of senior and subordinated interests issued by the SPEs. Subordinate interests typically provide credit support to the more highly rated senior interest in a securitization transaction and may be subject to all or a portion of the first-loss position related to the sold assets.

Certain of these securitization transactions meet the criteria to be accounted for as off-balance sheet securitization transactions if we do not hold a potentially significant economic interest or do not provide servicing or asset management functions for the financial assets held by the securitization entity. Certain of our securitization transactions do not meet the required criteria to be accounted for as off-balance sheet securitization transactions; therefore, they are accounted for as secured borrowings. For information regarding our securitization activities, refer to Note 1 and Note 11 to the Consolidated Financial Statements in our 2018 Annual Report on Form 10-K.

During the first nine months of 2019, we raised $2.6 billion through the completion of term securitization transactions backed by consumer automotive loans. Additionally, for consumer automotive loans and operating leases, the term structure of the transaction locks in funding for a specified pool of loans and operating leases, creating an effective tool for managing interest rate and liquidity risk.

We manage securitization execution risk by maintaining a diverse investor base and available capacity from private committed secured credit facilities provided by banks. Our ability to access the unused capacity in these facilities depends on the availability of eligible assets to collateralize the incremental funding and, in some instances, on the execution of interest rate hedges. We maintain bilateral facilities, which fund our Automotive Finance operations. The facilities can be revolving in nature—generally having an original tenor ranging from 364 days to two years and allowing for additional funding during the commitment period—or they can be amortizing and not allow for any further funding after the commitment period. At September 30, 2019, all of our $2.7 billion of capacity was revolving and of this balance, $1.7 billion was from facilities with a remaining tenor greater than 364 days.

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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 September 30, 2019, we had pledged $24.7 billion of assets to the FHLB resulting in $19.0 billion in total funding capacity with $16.5 billion of debt outstanding.

At September 30, 2019, $46.2 billion of our total assets were restricted as collateral for the payment of debt obligations accounted for as secured borrowings and repurchase agreements. Refer to Note 12 to the Condensed Consolidated Financial Statements for further discussion.

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 $2.5 billion at September 30, 2019. We also have short-term and long-term unsecured debt outstanding from retail term note programs. These programs are composed of callable fixed-rate instruments with fixed-maturity dates and floating-rate notes. There were $271 million of retail term notes outstanding at September 30, 2019. The remainder of our unsecured debt is composed of institutional term debt. In May 2019, we accessed the unsecured debt capital markets and raised $750 million through the issuance of senior notes. Refer to Note 12 to the Condensed Consolidated Financial Statements for additional information about our outstanding short-term borrowings and long-term unsecured debt.

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 securities sold in repurchase agreements include U.S. government and federal agency obligations. As of September 30, 2019, we had $459 million of debt outstanding under repurchase agreements.

Additionally, we have access to the FRB Discount Window and can borrow funds to meet short-term liquidity demands. However, the FRB 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 had assets pledged and restricted as collateral to the FRB totaling $2.4 billion as of September 30, 2019. We had no debt outstanding with the FRB as of September 30, 2019.

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 $3.1 billion and $3.3 billion for the nine months ended September 30, 2019, and 2018, respectively. Activity was largely consistent year-over-year, as cash flows from our consumer and commercial lending activities offset a $105 million increase in net cash outflows associated with originations and purchases of loans held for sale, net of proceeds from sale and repayments.

Net cash used in investing activities was $3.1 billion for the nine months ended September 30, 2019, compared to $8.8 billion for the same period in 2018. The decrease was primarily due to a $5.5 billion net decrease in cash outflows from purchases, sales, originations and repayments of finance receivables and loans, as repayments outpaced originations. This decrease was also driven by a $251 million decrease in proceeds from equity securities, net of purchases. This was partially offset by a $391 million increase in net outflows from purchases of operating lease assets, net of disposals.

Net cash used in financing activities for the nine months ended September 30, 2019, was $1.2 billion, compared to net cash provided by financing activities of $4.9 billion for the same period in 2018. The change was primarily attributable to a $9.3 billion decrease in net cash inflows due to issuance of long-term debt and an increase in net cash outflows related to repayments of long-term debt of $1.1 billion between the two periods. This was partially offset by an increase of $5.0 billion from net cash inflows associated with deposits.

Capital Planning and Stress Tests

Under the final rules implementing the EGRRCP Act, as further described in Note 16 to the Condensed Consolidated Financial Statements, Ally will be (1) subject to supervisory stress testing on a two-year cycle rather than the current one-year cycle, (2) required to continue submitting an annual capital plan to the FRB, (3) allowed to continue excluding accumulated other comprehensive income from regulatory capital, (4) exempted from company-run stress testing, and (5) allowed to remain exempted from the supplementary leverage ratio and the countercyclical capital buffer.

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Ally may be precluded from or limited in paying dividends or other capital distributions without the FRB’s approval under certain circumstances—for example, when we would not meet minimum regulatory capital ratios and capital buffers after giving effect to the distributions.

The following table presents information related to our common stock and distributions to our common stockholders over the last seven quarters.



	Common stock repurchased during period (a)			Number of common shares outstanding		Cash dividends declared per common share (b)
($ in millions, except per share data; shares in thousands)	Approximate dollar value		Number of shares	Beginning of period	End of period	Cash dividends declared per common share (b)
2018
First quarter	$	185	6,473	437,054	432,691	$	0.13
Second quarter	195		7,280	432,691	425,752	0.13
Third quarter	250		9,194	425,752	416,591	0.15
Fourth quarter	309		12,121	416,591	404,900	0.15
2019
First quarter	$	211	8,113	404,900	399,761	$	0.17
Second quarter	229		7,775	399,761	392,775	0.17
Third quarter	300		9,287	392,775	383,523	0.17


(a)	Includes shares of common stock withheld to cover income taxes owed by participants in our share-based incentive plans.


(b)	On October 7, 2019, the Board declared a quarterly cash dividend of $0.17 per share on all common stock, payable on November 15, 2019. Refer to Note 24 to the Condensed Consolidated Financial Statements for further information regarding this common stock dividend.

Ally was not required to submit a capital plan to the FRB, participate in the supervisory stress test or CCAR, or conduct company-run stress tests during the 2019 cycle. Instead, our capital actions during this cycle are largely based on the results from our 2018 supervisory stress test. On April 1, 2019, the Board authorized an increase in our stock-repurchase program, permitting us to repurchase up to $1.25 billion of our common stock from time to time from the third quarter of 2019 through the second quarter of 2020, representing a 25% increase over our previously announced program. Additionally, on October 7, 2019, the Board declared a quarterly cash dividend of $0.17 per share of our common stock. Refer to Note 24 to the Condensed Consolidated Financial Statements for further information on the most recent dividend.

Regulatory Capital

Refer to Note 16 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).

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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	F3	BBB-	Stable	August 19, 2019 (a)
Moody’s	Not Prime	Ba2	Stable	February 11, 2019 (b)
S&P	A-3	BBB-	Stable	October 16, 2019 (c)
DBRS	R-3	BBB (Low)	Positive	May 20, 2019 (d)


(a)	Fitch upgraded our senior unsecured debt rating to BBB- from BB+, upgraded our short-term rating to F3 from B, and changed the outlook to Stable from Positive on August 19, 2019.

(b)

Moody’s upgraded our senior unsecured debt rating to Ba2 from Ba3, affirmed our short-term rating of Not Prime, and maintained a Stable outlook on February 11, 2019. Effective December 1, 2014, we determined to not renew our contractual arrangement with Moody’s related to their providing of our issuer, senior unsecured 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 upgraded our senior unsecured debt rating to BBB- from BB+, upgraded our short-term rating to A-3 from B, and changed the outlook to Stable from Positive on October 16, 2019.


(d)	DBRS affirmed our senior unsecured debt rating of BBB (Low), affirmed our short-term rating of R-3, and changed the outlook to Positive from Stable on May 20, 2019.

Rating agencies indicate that they base their ratings on many quantitative and qualitative factors, which may include capital adequacy, liquidity, asset quality, business mix, level and quality of earnings, and the current operating, legislative, and regulatory environment. Rating agencies themselves could make or be required to make substantial changes to their ratings policies and practices—particularly in response to legislative and regulatory changes. Potential changes in rating methodology, as well as in the legislative and regulatory environment, and the timing of those changes could impact our ratings, which as noted above could increase our borrowing costs and reduce our access to capital.

A credit rating is not a recommendation to buy, sell, or hold securities, and the ratings are subject to revision or withdrawal at any time by the assigning rating agency. Each rating should be evaluated independently of any other rating.

Insurance Financial Strength Ratings

Substantially all of our Insurance operations have a Financial Strength Rating (FSR) and an Issuer Credit Rating (ICR) from the

A.M. Best Company. The FSR is intended to be an indicator of the ability of the insurance company to meet its senior most obligations to policyholders. Lower ratings generally result in fewer opportunities to write business, as insureds, particularly large commercial insureds, and insurance companies purchasing reinsurance have guidelines requiring high FSR ratings. On August 30, 2019, A.M. Best upgraded the FSR for Ally Insurance Group to A- (excellent) from B++ (good), and upgraded the ICR to a- from bbb+. The outlook was revised to Stable from Positive.

Off-balance Sheet Arrangements

Refer to Note 9 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


•	Determination of provision for income taxes

During 2019, 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 2018 Annual Report on Form 10-K.

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.

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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.



	2019							2018							Increase (decrease) due to
Three months ended September 30, ($ 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	$	3,539		$	19	2.13	%	$	3,159		$	18	2.26	%	$	2		$	(1	)	$	1
Investment securities (b)	31,525			221		2.78		26,179			182		2.76		37			2			39
Loans held-for-sale, net	745			8		4.26		318			4		4.99		5			(1		)	4
Finance receivables and loans, net (b) (c)	128,799			1,859		5.73		124,986			1,708		5.42		52			99			151
Investment in operating leases, net (d)	8,525			134		6.24		8,634			121		5.56		(2		)	15			13
Other earning assets	1,183			16		5.37		1,134			16		5.60		1			(1		)	—
Total interest-earning assets	174,316			2,257		5.14		164,410			2,049		4.94								208
Noninterest-bearing cash and cash equivalents	391							502
Other assets	7,012							7,331
Allowance for loan losses	(1,287		)					(1,260		)
Total assets	$	180,432						$	170,983
Liabilities and equity
Interest-bearing deposit liabilities (b)	$	117,489		$	658	2.22	%	$	99,815		$	462	1.84	%	$	82		$	114		$	196
Short-term borrowings	5,550			33		2.36		5,531			29		2.08		—			4			4
Long-term debt (b)	36,395			378		4.12		46,967			451		3.81		(102		)	29			(73		)
Total interest-bearing liabilities	159,434			1,069		2.66		152,313			942		2.45								127
Noninterest-bearing deposit liabilities	149							149
Total funding sources	159,583			1,069		2.66		152,462			942		2.45
Other liabilities	6,468							5,388
Total liabilities	166,051							157,850
Total equity	14,381							13,133
Total liabilities and equity	$	180,432						$	170,983
Net financing revenue and other interest income				$	1,188						$	1,107									$	81
Net interest spread (e)						2.48	%						2.49	%
Net yield on interest-earning assets (f)						2.70	%						2.67	%


(a)	Average balances are calculated using a combination of monthly and daily average methodologies.


(b)	Includes the effects of derivative financial instruments designated as hedges. Refer to Note 17 to the Condensed Consolidated Financial Statements for further information about the effects of our hedging activities.


(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 2018 Annual Report on Form 10-K.


(d)	Yield includes gains on the sale of off-lease vehicles of $28 million and $27 million for the three months ended September 30, 2019, and 2018, respectively. Excluding these gains on sale, the annualized yield would be 4.93% and 4.32% for the three months ended September 30, 2019, and 2018, respectively.


(e)	Net interest spread represents the difference between the rate on total interest-earning assets and the rate on total interest-bearing liabilities.


(f)	Net yield on interest-earning assets represents annualized net financing revenue and other interest income as a percentage of total interest-earning assets.

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	2019							2018							Increase (decrease) due to
Nine months ended September 30, ($ 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	$	3,846		$	63	2.19	%	$	3,235		$	50	2.07	%	$	9		$	4		$	13
Investment securities (b)	30,707			670		2.92		25,723			518		2.69		100			52			152
Loans held-for-sale, net	376			13		4.62		251			10		5.33		5			(2		)	3
Finance receivables and loans, net (b) (c)	129,138			5,526		5.72		124,005			4,898		5.28		203			425			628
Investment in operating leases, net (d)	8,428			373		5.92		8,615			339		5.26		(7		)	41			34
Other earning assets	1,205			51		5.66		1,161			44		5.07		2			5			7
Total interest-earning assets	173,700			6,696		5.15		162,990			5,859		4.81								837
Noninterest-bearing cash and cash equivalents	459							514
Other assets	6,740							7,366
Allowance for loan losses	(1,273		)					(1,272		)
Total assets	$	179,626						$	169,598
Liabilities and equity
Interest-bearing deposit liabilities (b)	$	113,670		$	1,901	2.24	%	$	97,505		$	1,212	1.66	%	$	201		$	488		$	689
Short-term borrowings	6,158			114		2.48		7,536			101		1.79		(18		)	31			13
Long-term debt (b)	39,649			1,204		4.06		46,107			1,296		3.76		(182		)	90			(92		)
Total interest-bearing liabilities	159,477			3,219		2.70		151,148			2,609		2.31								610
Noninterest-bearing deposit liabilities	140							130
Total funding sources	159,617			3,219		2.70		151,278			2,609		2.31
Other liabilities	6,167							5,182
Total liabilities	165,784							156,460
Total equity	13,842							13,138
Total liabilities and equity	$	179,626						$	169,598
Net financing revenue and other interest income				$	3,477						$	3,250									$	227
Net interest spread (e)						2.45	%						2.50	%
Net yield on interest-earning assets (f)						2.68	%						2.67	%


(a)	Average balances are calculated using a combination of monthly and daily average methodologies.


(b)	Includes the effects of derivative financial instruments designated as hedges. Refer to Note 17 to the Condensed Consolidated Financial Statements for further information about the effects of our hedging activities.


(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 2018 Annual Report on Form 10-K.


(d)	Yield includes gains on the sale of off-lease vehicles of $66 million and $61 million for the nine months ended September 30, 2019, and 2018, respectively. Excluding these gains on sale, the annualized yield would be 4.87% and 4.30% for the nine months ended September 30, 2019, and 2018, respectively.


(e)	Net interest spread represents the difference between the rate on total interest-earning assets and the rate on total interest-bearing liabilities.


(f)	Net yield on interest-earning assets represents annualized net financing revenue and other interest income as a percentage of total interest-earning assets.

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Recently Issued Accounting Standards

Refer to Note 1 to the Condensed Consolidated Financial Statements.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

Refer to the Market Risk section of Item 2, Management’s Discussion and Analysis.

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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 September 30, 2019, that have materially affected, or were reasonably likely to materially affect, our internal control over financial reporting.

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PART II — OTHER INFORMATION

Ally Financial Inc. • Form 10-Q

Item 1. Legal Proceedings

Refer to Note 23 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 29 to the Consolidated Financial Statements in our 2018 Annual Report on Form 10-K.

Item 1A. Risk Factors

There have been no material changes to the Risk Factors described in our 2018 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 September 30, 2019.

Purchases of Equity Securities by the Issuer

The following table presents repurchases of our common stock, by month, for the three months ended September 30, 2019.



Three months ended September 30, 2019	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)
July 2019	2,485	$	32.44	2,485	$	1,169
August 2019	3,919	31.07		3,919	1,048
September 2019	2,883	33.75		2,883	950
Total	9,287	32.27		9,287


(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 April 1, 2019, we announced a common stock-repurchase program of up to $1.25 billion. The program commenced in the third quarter of 2019 and will expire on June 30, 2020. Refer to Note 16 to the Condensed Consolidated Financial Statements for further details.

Item 3. Defaults upon Senior Securities

None.

Item 4. Mine Safety Disclosures

Not applicable.

Item 5. Other Information

None.

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Item 6. Exhibits

The exhibits listed on the following index of exhibits are filed as a part of this report.



Exhibit	Description	Method of Filing

3.1	Amended and Restated Bylaws	Filed as Exhibit 3.1 to the Company’s Current Report on Form 8-K dated as of October 7, 2019, (File No. 1-03754), incorporated herein by reference.

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	The following information from our Form 10-Q for the quarter ended September 30, 2019, formatted in Inline XBRL: (i) Condensed Consolidated Statement of Comprehensive Income (unaudited), (ii) Condensed Consolidated Balance Sheet (unaudited), (iii) Condensed Consolidated Statement of Changes in Equity (unaudited), (iv) Condensed Consolidated Statement of Cash Flows (unaudited), and (v) the Notes to the Condensed Consolidated Financial Statements (unaudited)	Filed herewith.

104	The cover page of our Form 10-Q for the quarter ended September 30, 2019, (formatted in Inline XBRL and contained in Exhibit 101)	Filed herewith.

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Table of Contents

Signatures

Ally Financial Inc. • Form 10-Q

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this Quarterly Report on Form 10-Q to be signed on its behalf by the undersigned, thereunto duly authorized, this 5th day of November, 2019.




	Ally Financial Inc. (Registrant)

	/S/ JENNIFER A. LACLAIR
	Jennifer A. LaClair Chief Financial Officer




	/S/ DAVID J. DEBRUNNER
	David J. DeBrunner Vice President, Chief Accounting Officer, and Corporate Controller

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