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ALLY FINANCIAL INC. – 10-K – 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 theSEC . 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 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 governmental agencies, central banks, or supranational
authorities;
•changes in accounting standards or policies;
•changes in the automotive industry or the markets for new or used vehicles, 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 type, ownership, and use;
•any instability or breakdown in the financial system, including as a result of
the failure of a financial institution or other participant in it;
•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;
•the discontinuation of 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
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 lending, point-of-sale personal lending, credit cards, corporate finance, brokerage, and wealth management;
•our ability to develop capital plans acceptable to the FRB and our ability to
implement them, including any payment of dividends or share repurchases;
•our ability to conduct appropriate stress tests and effectively plan for and manage capital or liquidity consistent with evolving business or operational needs, risk-management standards, and regulatory or supervisory requirements or expectations;
•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
•adverse publicity or other reputational harm to us, our service providers, 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;
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•our ability to innovate, to anticipate the needs of current or future
customers, to successfully compete, to increase or hold market share in changing
competitive environments, or to deal with pricing or other competitive
pressures;
•the continuing profitability and viability of our dealer-centric automotive finance and insurance businesses, especially in the face of competition from captive finance companies and their automotive manufacturing sponsors 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;
•our ability to address heightened scrutiny and expectations from supervisory or
other governmental authorities and to timely and credibly remediate related
concerns or deficiencies;
•judicial, regulatory, or administrative inquiries, examinations,
investigations, proceedings, disputes, or rulings that create uncertainty for,
or are adverse to, us or the financial services industry;
•the potential outcomes of judicial, regulatory, or administrative inquiries, examinations, investigations, proceedings, or disputes to which we are or may be subject, and our ability to absorb and address any damages or other remedies that are sought or awarded, and any collateral consequences;
•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 manage and mitigate security risks, including our capacity to
withstand cyberattacks;
•our ability to maintain secure and functional financial, accounting,
technology, data processing, or other operating systems or infrastructure;
•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 or to maintain
rights or interests in associated intellectual property;
•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, cyber-warfare, and pandemics (such as adverse effects of the COVID-19 pandemic on us and our customers, counterparties, employees, and service providers);
•our ability to maintain appropriate ESG practices, oversight, and disclosures;
•policies and other actions of governments to manage and mitigate climate and
related environmental risks, and the effects of climate change or the transition
to a lower-carbon economy on our business, operations, and reputation; or
•other assumptions, risks, or uncertainties described in the Risk Factors (Item
1A), Management's Discussion and Analysis of Financial Condition and Results of
Operations (Item 7), or the Notes to the Consolidated Financial Statements (Item
8) in this Annual Report on Form 10-K 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
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Table of Contents
Management's Discussion and Analysis
Ally Financial Inc. • Form 10-K
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.
The term "partnerships" means business arrangements rather than partnerships as
defined by law.
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Table of Contents
Management's Discussion and Analysis
Ally Financial Inc. • Form 10-K
Overview
Ally Financial Inc. (together with its consolidated subsidiaries unless the context otherwise requires, Ally, the Company, we, us, or our) is a financial-services company with the nation's largest all-digital bank and an industry-leading automotive financing and insurance business, driven by a mission to "Do It Right" and be a relentless ally for customers and communities. The Company serves customers through a full range of online banking services (including deposits, mortgage lending, point-of-sale personal lending and credit-card products) and securities brokerage and investment advisory services. The Company also includes a corporate finance business that offers capital for equity sponsors and middle-market companies. Ally is aDelaware corporation and is registered as a BHC under the BHC Act, and an FHC under the GLB Act.
Our Business
Dealer Financial Services is composed of our Automotive Finance and Insurance segments. Our primary customers are automotive dealers, which are independently owned businesses, and automotive retailers, such as Carvana, CarMax, and EchoPark. A dealer may sell or lease a vehicle for cash but, more typically, enters into a retail installment sales contract or operating lease with the customer and then sells the retail installment sales contract or the operating lease and the leased vehicle, as applicable, to Ally or another automotive-finance provider. The purchase by Ally or another provider is commonly described as indirect automotive lending to the customer. OurDealer Financial Services business 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 their customers. We have deep dealer relationships that have been built throughout our over 100-year history, and we are leveraging competitive strengths to expand our dealer footprint. Our business model encourages dealers to use our broad range of products through incentive programs like our Ally Dealer Rewards program. Our automotive finance services include purchasing retail installment sales contracts and operating leases from dealers and automotive retailers, 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. We also offer retail VSCs and commercial insurance primarily covering dealers' vehicle inventories. We are a leading provider of VSCs, GAP, and VMCs.
Automotive Finance
Our Automotive Finance operations provideU.S. -based automotive financing services to consumers, automotive dealers and retailers, other businesses, and municipalities. Our business model, value-added products and services, full-spectrum financing, and business expertise proven over many credit cycles make us a premier automotive finance company. AtDecember 31, 2022 , our Automotive Finance operations had$111.5 billion of assets and generated$5.5 billion of total net revenue in 2022. For consumers, we provide financing for new and used vehicles. In addition, our CSG provides automotive financing for small businesses and municipalities. AtDecember 31, 2022 , our CSG had$10.0 billion of loans outstanding. Through our commercial automotive financing operations, we fund purchases of new and used vehicles through wholesale floorplan financing. We manage commercial account servicing on approximately 2,600 dealers that utilize our floorplan inventory lending or other commercial loans. We serviced 87.6 billion consumer loan and operating leases atDecember 31, 2022 , and our commercial automotive loan portfolio was approximately$18.8 billion atDecember 31, 2022 . The extensive infrastructure, technology, and analytics of our servicing operations, as well as the experience of our servicing personnel, enhance our ability to manage our loan losses and enable us to deliver a favorable customer experience to both our dealers and retail customers. During 2022, we continued to reposition our origination profile to focus on capital optimization and risk-adjusted returns. In 2022, total consumer automotive originations were$46.4 billion , an increase of$98 million compared to 2021. The shorter-term duration consumer automotive loan and variable-rate commercial loan portfolios offer attractive asset classes where we continue to optimize risk-adjusted returns through origination mix management and pricing and underwriting discipline. Our success as an automotive finance provider is driven by the consistent and broad range of products and services we offer to dealers and automotive retailers. The automotive marketplace is dynamic and evolving, including substantial investments in electrification by automotive manufacturers and suppliers. We remain focused on meeting the needs of both our dealer and consumer customers and continuing to strengthen and expand upon our approximately 23,000 dealer relationships. We continue to identify and cultivate relationships with automotive retailers, including those with leading eCommerce platforms. We also operate an online direct-lending platform for consumers seeking direct financing. 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. Furthermore, our strong and expansive dealer relationships, comprehensive suite of products and services, full-spectrum financing, and depth of experience position us to evolve with future shifts in automobile technologies, including electrification. We have provided and continue to provide automobile financing for hybrid and battery-electric vehicles, including brands such asJeep , Tesla, Ford, and BMW. This positions us to remain a leader in automotive financing as we believe the majority of these vehicles will be sold through dealerships and automotive retailers with whom we have an established relationship. We have focused on developing dealer relationships beyond those relationships that primarily were developed through our previous role as a captive finance company forGM and Stellantis. We have established relationships with thousands of automotive dealers through our customer-centric approach and specialized incentive programs designed to drive loyalty amongst dealers to our products and services. Our Growth channel includes brands such as Ford, Nissan, Kia, Hyundai, Toyota, Honda, as well as used-vehicle-only retailers with a national 42 -------------------------------------------------------------------------------- Table of Contents Management's Discussion and AnalysisAlly Financial Inc. • Form 10-K
presence and online-only automotive retailers. As of
approximately 66% of our Growth channel dealer relationships were with
franchised dealers.
Over the past several years, we have continued to focus on the consumer used-vehicle segment, primarily through franchised dealers and automotive retailers. This has resulted in used-vehicle financing volume growth, and has positioned us as an industry leader in used-vehicle financing. The highly fragmented used-vehicle financing market, with a total financing opportunity represented by approximately 285 million vehicles in operation, provides an attractive opportunity that we believe will further expand and support our dealer relationships and increase our risk-adjusted return on retail loan originations. For consumers, we provide automotive loan financing and leasing for approximately 4.3 million new and used vehicle contracts. Retail financing for the purchase of vehicles by individual consumers generally takes the form of installment sales financing. We originated a total of approximately 1.3 million and 1.4 million automotive loans and operating leases during the years endedDecember 31, 2022 , and 2021, respectively, totaling$46.4 billion and$46.3 billion . Our consumer automotive financing operations generate revenue primarily through finance charges on retail installment sales contracts and rental payments on operating lease contracts. For operating leases, when the contract is originated, we estimate the residual value of the leased vehicle at lease termination. Periodically thereafter we revise the projected residual value of the leased vehicle at lease termination and adjust depreciation expense over the remaining life of the lease, if appropriate. Given the fluctuations in used vehicle values, our actual sales proceeds from remarketing the vehicle may be higher or lower than the projected residual value, which results in gains or losses on lease termination. 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. Refer to the Operating Lease Residual Risk Management and Critical Accounting Estimates sections of this MD&A for further discussion of credit risk and lease residual risk. We continue to maintain a diverse mix of product offerings across a broad risk spectrum, subject to underwriting policies that reflect our risk appetite. Our current operating results increasingly reflect our ongoing strategy to grow used vehicle financing and expand risk-adjusted returns. While we predominately focus on prime-lending markets, we seek to be a meaningful source of financing to a wide spectrum of customers and continue to carefully measure risk versus return. We place great emphasis on our risk management and risk-based pricing policies and practices and employ robust credit decisioning processes coupled with granular pricing that is differentiated across our proprietary credit tiers. Our commercial automotive financing operations primarily fund inventory purchases of new and used vehicles by dealers, commonly referred to as wholesale floorplan financing. This represents the largest portion of our commercial automotive financing business. Wholesale floorplan loans are secured by vehicles financed (and all other vehicle inventory), which provide strong collateral protection in the event of dealership default. Additional collateral or other credit enhancements (for example, personal guarantees from dealership owners) are typically obtained to further mitigate credit risk. The amount we advance to dealers is equal to 100% of the wholesale invoice price of new vehicles, subject to payment curtailment schedules. Interest on wholesale automotive financing is generally payable monthly and is indexed to a floating-rate benchmark. The rate for a particular dealer is based on, among other considerations, competitive factors and the dealer's creditworthiness. During 2022, we financed an average of$11.4 billion of dealer vehicle inventory through wholesale floorplan financings. Other commercial automotive lending products, which averaged$5.0 billion during 2022, consist of automotive dealer revolving lines of credit, term loans, including those to finance dealership land and buildings, and dealer fleet financing. We also provide comprehensive automotive remarketing services, including the use of SmartAuction, our online auction platform, which efficiently supports dealer-to-dealer and other commercial wholesale vehicle transactions. SmartAuction provides diversified fee-based revenue and serves as a means of deepening relationships with our dealership customers. In 2022, Ally and other parties, including dealers, fleet rental companies, and financial institutions, utilized SmartAuction to sell approximately 336,000 vehicles to dealers and other commercial customers. SmartAuction served as the remarketing channel for 9% of our off-lease vehicles.
Insurance
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 2.5 million consumers nationwide across F&I and P&C products. In addition, we offer F&I products inCanada , where we serve more than 400 thousand consumers and are the preferred VSC and other protection plan provider for GM Canada and VSC provider forSubaru Canada . Additionally, during the third quarter of 2022, we entered into a long-term commitment to continue as the preferred VSC and other protection plan provider for GM Canada. Our Insurance operations had$8.7 billion of assets atDecember 31, 2022 , and generated$1.1 billion of total net revenue during 2022. As part of our focus on offering dealers a broad range of consumer F&I products, we offer VSCs, VMCs, and GAP products. 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. We also underwrite selected commercial insurance coverages, which primarily insure dealers' wholesale vehicle inventory, and offer additional products to protect a dealer's business, including property and liability coverage that is underwritten by a third-party carrier with a portion of the insurance risk assumed through a quota share agreement. On a smaller scale, we also periodically assume other insurance risks through quota share arrangements and perform services as an underwriting carrier for an insurance program managed by a third-party where we cede the majority of such business to external reinsurance markets.
From a dealer perspective, Ally provides significant value and expertise, which
creates high retention rates and strong relationships. In addition to our
product offerings, we provide consultative services and training to assist
dealers in optimizing F&I results while achieving
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high levels of customer satisfaction and regulatory compliance. We also advise
dealers regarding necessary liability and physical damage coverages.
Our F&I products are primarily distributed indirectly through the automotive dealer network. We have established approximately 1,500 F&I dealer relationships nationwide and 590 dealer relationships inCanada , with a focus on growing dealer relationships in the future. Our VSCs for retail customers offer owners and lessees mechanical repair protection and roadside assistance for new and used vehicles beyond the manufacturer's new vehicle warranty. These VSCs are marketed to the public through automotive dealerships and on a direct response basis. We also offer GAP products, which cover certain amounts owed by a customer beyond their covered vehicle's value in the event the vehicle is damaged or stolen and declared a total loss. We continue to evolve our product suite and digital capabilities to position our business for future opportunities through growing third-party relationships and sales through our online direct-lending platform. We have approximately 3,200 dealer relationships within our P&C business to whom we offer a variety of commercial products and levels of coverage. Vehicle inventory insurance for dealers provides physical damage protection for dealers' floorplan vehicles. Among dealers to whom we provide wholesale financing, our insurance product penetration rate is approximately 76%. Dealers who receive wholesale financing from us are eligible for insurance incentives such as automatic eligibility for our preferred insurance programs. 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.
Mortgage Finance
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 our direct-to-consumerAlly Home mortgage offering, and bulk purchases of high-quality jumbo and LMI mortgage loans originated by third parties. Our Mortgage Finance operations had$19.5 billion of assets atDecember 31, 2022 , and generated$248 million of total net revenue in 2022. Through our direct-to-consumer channel, we offer a variety of competitively priced jumbo and conforming fixed- and adjustable-rate mortgage products through a third-party. 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 and subserviced by a third party. 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. InApril 2019 , we announced a strategic partnership with BMC, which delivers an enhanced end-to-end digital mortgage experience for our customers through our direct-to-consumer channel. Through this partnership, BMC conducts the sales, processing, underwriting, and closing for Ally's digital mortgage offerings in a highly innovative, scalable, and cost-efficient manner, while Ally retains control of all the marketing and advertising strategies and loan pricing. This partnership with BMC limits operational volatility as the mortgage industry continues to evolve in the current interest rate environment. During the year endedDecember 31, 2022 , we originated$3.3 billion of mortgage loans through our direct-to-consumer channel. During 2018, we made a strategic equity investment in the parent of BMC (BMC Holdco) that was subsequently increased in 2019 and 2020. This investment is recognized as a nonmarketable equity investment within other assets of our Consolidated Balance Sheet and is included in Corporate and Other. Refer to the Market Risk section of this MD&A and Note 13 to the Consolidated Financial Statements for more information. 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 refinancing through our direct-to-consumer channel. During the year endedDecember 31, 2022 , we purchased$2.8 billion of mortgage loans that were originated by third parties. Our mortgage loan purchases are held-for-investment. The combination of our direct-to-consumer strategy and bulk portfolio purchase program 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.
Corporate Finance
Our Corporate Finance operations primarily offer senior-secured loans to private equity sponsor-ownedU.S. -based middle-market companies and to well-established asset managers that mostly provide leveraged loans. The portfolio is composed of floating-rate leveraged asset-based and cash flow/enterprise value loans. Our Corporate Finance operations had$10.5 billion of assets atDecember 31, 2022 , and generated$456 million of total net revenue during 2022, and continues to offer attractive returns and diversification benefits to our broader lending portfolio. 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. We have continued to prudently grow our lending portfolio with a focus on a disciplined and selective approach to credit quality, including a greater focus on asset-based loans. As ofDecember 31, 2022 , 59% of our loans and 55% of our lending commitments were asset-based, with 99.9% in a first-lien position. We seek markets and opportunities where our clients require customized, highly structured, and time-sensitive financing solutions. Our corporate-finance lending portfolio is generally composed of first-lien, first-out loans. 44 -------------------------------------------------------------------------------- Table of Contents Management's Discussion and AnalysisAlly Financial Inc. • Form 10-K Our Sponsor Finance business focuses on companies owned by private-equity sponsors with loans typically used for leveraged buyouts, refinancing and recapitalizations, mergers and acquisitions, growth, turnarounds, and debtor-in-possession financings. Additionally, our Lender Finance business provides asset managers with facilities to partially fund their direct-lending activities. We also provide a commercial real estate product, currently focused on lending to skilled nursing facilities, senior housing, and medical office buildings. Sponsor Finance loan facilities typically include both a revolver and term loan component. Our target commitment hold level for these individual exposures ranges from$15 million to$150 million , depending on product type. Additionally, hold sizes in our Lender Finance business range from$50 million to$750 million . We also selectively arrange larger transactions that we may retain on-balance sheet or syndicate to other lenders. By syndicating loans to other lenders, we are able to provide financing commitments in excess of our target hold levels to our customers and generate loan syndication fee income while reducing our risk exposure to individual borrowers. All our loans are floating-rate facilities with maturities typically ranging from two to seven years. In certain instances, we may be offered the opportunity to make small equity investments in our borrowers, which provides an additional revenue opportunity for our business. The portfolio is well diversified across multiple industries including financials, services, manufacturing distribution, and other specialty sectors. These specialty sectors include technology/venture finance, defense and aerospace, and transportation and logistics. Other smaller complementary product offerings that help strengthen our reputation as a full-spectrum provider of financing solutions for borrowers include issuing letters of credit throughAlly Bank and selectively offering second-out loans on certain transactions. Corporate and Other Overview 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 FTP and treasury ALM activities. Corporate and Other also includes activity related to certain equity investments, which primarily consist of FHLB and FRB stock, as well as other equity investments throughAlly Ventures , our strategic investment business. Additionally, Corporate and Other includes the management of our legacy mortgage portfolio, which primarily consists of loans originated prior toJanuary 1, 2009 , CRA loans and related investments, and reclassifications and eliminations between the reportable operating segments. Costs that are not allocated to our reportable operating segments as part of our COH methodology, which involves management judgment, are also included in Corporate and Other.
Ally Invest
Corporate and Other includes the results of Ally Invest, our digital brokerage and wealth management offering, which enables us to complement our competitive deposit products with low-cost investing. The digital wealth management business aligns with our strategy to create a premier digital financial services company and provides additional sources of fee income through asset management and certain other fees, with minimal balance sheet utilization. This business also provides an additional source of low-cost deposits through arrangements with Ally Invest's clearing broker. Through Ally Invest, we are able to offer a broad array of 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 generally accessible twenty-four hours a day, seven days a week, via the phone, web or email-consistent with the Ally brand. Ally Invest provides clients with self-directed trading services for a variety of securities including stocks, options, ETFs, mutual funds, and fixed-income products throughAlly Invest Securities .Ally Invest Securities also offers margin lending, which allows customers to borrow money by using securities and cash currently held in their accounts as collateral. Through Ally Invest Forex, we offer self-directed investors and traders the ability to trade over 50 currency pairs through a forex trading platform. Ally Invest also provides advisory services to clients through wealth advisors, web-based solutions, informational resources, and virtual interaction throughAlly Invest Advisors , anSEC -registered investment advisor.Ally Invest Advisors provides clients the opportunity to obtain professional portfolio management services in return for a fee based upon the client's assets under management. In addition to customized advice from wealth advisors, we offer cash enhanced portfolios that incur no management fee, and a number of core robo portfolios, which hold ETFs diversified across asset class, industry sector, and geography and which are customized for clients based on risk tolerance, investment time horizon, and wealth ratio.Ally Lending Ally Lending is also included within Corporate and Other and primarily serves medical and home improvement service providers by enabling promotional and fixed rate installment-loan products through a digital application process at point-of-sale. The home improvement vertical had originations of$1.2 billion during the year endedDecember 31, 2022 , and represented approximately 57% of new originations. Point-of-sale lending broadens our capabilities, and expands our product offering into consumer unsecured lending, all while helping to further meet the financial needs of our customers.
Ally Credit Card
Beginning inDecember 2021 with the acquisition ofFair Square , which we rebranded as Ally Credit Card, financial information for our credit-card business is included within Corporate and Other. The acquisition provides us with a scalable, digital-first credit card platform, and advances our evolution as a leading digital consumer bank. Ally Credit Card features leading-edge technology, and a proprietary, analytics- 45 -------------------------------------------------------------------------------- Table of Contents Management's Discussion and AnalysisAlly Financial Inc. • Form 10-K based underwriting model. We believe the addition of credit card to our suite of products enhances our ability to grow and deepen both new and existing customer relationships. As ofDecember 31, 2022 , our credit card business had approximately 1.0 million customers. Refer to Note 2 to the Consolidated Financial Statements for additional details on the acquisition of Ally Credit Card.
Corporate
The net financing revenue and other interest income of our Automotive Finance, Mortgage Finance, and Corporate Finance operations include the results of an FTP process that insulates these operations from interest rate volatility by matching assets and liabilities with similar interest rate sensitivity. The FTP process assigns charge rates to the assets and credit rates to the liabilities within our Automotive Finance, Mortgage Finance, and Corporate Finance operations, based on anticipated maturity and a benchmark rate curve plus an assumed credit spread. The assumed credit spread represents the cost of funds for each asset class based on a blend of funding channels available to the enterprise, including unsecured and secured capital markets, private funding facilities, and deposits. In addition, capital is managed with the goal of enhancing risk-adjusted returns on shareholders' equity, while maintaining a strong capital position that is consistent with our risk profile. We allocate capital to business growth opportunities, within an established risk appetite, to support our customers and communities. We seek to pay a competitive dividend and may also distribute excess capital to shareholders through common share repurchases.
Deposits
We are focused on growing and retaining a stable deposit base and deepening relationships with our 2.7 million primary deposit customers by leveraging our compelling brand and strong value proposition.Ally Bank is a digital direct bank with no branch network that obtains retail deposits directly from customers. We have grown our deposits with a strong brand that is based on a promise of being straightforward with our customers, and offering high-quality customer service and competitive interest rates.Ally Bank is the largest online only bank as measured by retail deposit balances. Our strong customer acquisition and retention rates reflect the strength of our brand and, together with our overall value proposition, continue to drive growth in retail deposits. AtDecember 31, 2022 ,Ally Bank had$152.3 billion of total deposits-including$137.7 billion of retail deposits, which grew$3.0 billion , or 2% during 2022. Over the past several years, the continued growth of our retail-deposit base has contributed to a more favorable mix of lower cost funding and we continue to focus on efficient deposit growth by continuing to expand the deposit value proposition beyond competitive deposit rates. Our segment results include cost of funds associated with these deposit-product offerings. Our deposit products and services are designed to develop long-term customer relationships and capitalize on the shift in consumer preference for direct banking. Our deposits franchise is key to growing and building momentum across our suite of digital offerings at Ally Home, Ally Invest,Ally Lending , and Ally Credit Card, consistent with our strategic objective to grow multi-product customers. These products and services appeal to a broad group of customers, many of whom appreciate a streamlined digital experience coupled with our strong value proposition.Ally Bank offers a full spectrum of retail deposit products, including online savings accounts, money-market demand accounts, CDs, interest-bearing checking accounts, trust accounts, and IRAs. Our deposit services include Zelle® person-to-person payment services, eCheck remote deposit capture, and mobile banking. As demonstrated with the successful launch of our Smart Savings Tools, Ally continues to deliver innovative digital tools on top of traditional financial products to add incremental value to customers, while also driving increased engagement and loyalty. Over 650,000 customers have adopted our Smart Savings Tools. We believe we are well-positioned to continue to benefit from the consumer-driven shift from branch banking to direct banking as demonstrated by the growth we have experienced since 2010. We had 2.7 million deposit customers and 5.0 million retail bank accounts as ofDecember 31, 2022 , compared to 2.5 million and 4.7 million, respectively, as ofDecember 31, 2021 . Our customer base spans across diverse demographic segmentations and socioeconomic bands. Our direct bank business model resonates particularly well with the millennial generation, which consistently makes up the largest percentage of our new customers. According to a 2022American Bankers Association survey, 83% of customers prefer to do their banking most often via digital and other direct channels (internet, mobile, telephone, and mail). Furthermore, over the past five years, estimated direct banking deposits as a percentage of the broader retail deposits market increased by approximately 1 percentage point, from 9% in 2017 to 10% in 2022. We have received a positive response to innovative savings and other deposit products. InApril 2022 , Forbes named Ally to its "World's Best Banks" list, and inJune 2022 , Kiplinger namedAlly Bank to its "Best Internet Banks" list for the sixth consecutive year. InSeptember 2022 , The Wall Street Journal namedAlly Bank the "Best Overall Online Bank." InNovember 2022 , MONEY® Magazine named Ally to its "Best Online Bank" list for the fifth consecutive year, as well as the tenth time in the past twelve years.Ally Bank's competitive direct banking offerings include online and mobile banking features such as electronic bill pay, remote deposit, and electronic funds transfer nationwide, and no minimum balance requirements. We intend to continue to grow and invest in our digital direct bank and further capitalize on the shift in consumer preference for direct banking with expanded digital capabilities and customer-centric products that utilize advanced analytics for personalized interactions and other technologies that improve efficiency, security, and the customer's connection to the brand. We are focused on growing, deepening, and further leveraging the customer relationships and brand loyalty that exist withAlly Bank as a catalyst for future loan and deposit growth, as well as revenue opportunities that arise from introducingAlly Bank deposit customers to our digital wealth management offering, Ally Invest.
Funding and Liquidity
Our funding strategy targets a stable retail deposit base, supplemented by
brokered deposits, public and private secured debt, and public unsecured debt.
These diversified funding sources are managed across products, markets, and
investors to enhance funding flexibility and stability, resulting in a more
cost-effective long-term funding strategy.
46 -------------------------------------------------------------------------------- Table of Contents Management's Discussion and AnalysisAlly Financial Inc. • Form 10-K Prudent expansion of asset originations atAlly Bank and continued growth of a stable deposit base continue to be the cornerstone of our long-term liquidity strategy. Our primary funding source is retail deposits, which provide us with stable, low-cost funding. We believe retail deposits are less sensitive to interest rate changes, market volatility, or changes in credit ratings when compared to other funding sources. In addition, we utilize brokered deposits, which are obtained through third-party intermediaries. AtDecember 31, 2022 , deposit liabilities totaled$152.3 billion , which reflects an increase of$10.7 billion as compared toDecember 31, 2021 . Deposits as a percentage of total liability-based funding decreased one percentage point to 88% atDecember 31, 2022 , as compared toDecember 31, 2021 . At bothDecember 31, 2022 , andDecember 31, 2021 , 95% of Ally's total assets were withinAlly Bank . Longer-term unsecured debt is the primary funding source utilized at the parent company. AtDecember 31, 2022 , we had$2.1 billion and$1.5 billion of unsecured long-term debt principal maturing in 2023 and 2024, respectively. We have substantially reduced our reliance on market-based funding by continuing to focus on retail deposit funding. The strategies outlined above have allowed us to build and maintain a conservative liquidity position. Total available liquidity atDecember 31, 2022 , was$27.3 billion . Absolute levels of liquidity decreased during 2022, primarily as a result of decreased unencumbered highly liquid securities. Refer to the section below titled Liquidity Management, Funding, andRegulatory Capital for a further discussion about liquidity risk management.
Credit Strategy
Our strategy and approach to extending credit, as well as our management of credit risk, are critical elements of our business. Credit performance is influenced by several factors including our risk appetite, our credit and underwriting processes, our monitoring and collection efforts, the financial condition of our borrowers, the performance of loan collateral, fiscal and monetary stimulus, and various macroeconomic considerations, including inflation. Our credit strategies are dynamic and are adjusted in response to asset performance, as well as changing macroeconomic conditions and outlook. Most of our businesses offer credit products and services, which drive overall business performance. Consistent with our risk appetite, our business lines operate under credit standards that consider the borrower's ability and willingness to repay loans. The failure to effectively manage credit risk can have a direct and significant impact on our earnings, capital position, and reputation. Refer to the Risk Management section of this MD&A for a further discussion of credit risk and performance of our consumer and commercial credit portfolios. Within our consumer automotive loan portfolio, we serve a mix of consumers across the credit spectrum to achieve portfolio diversification and to optimize the risk and return of our consumer automotive portfolio. This is achieved through the utilization of robust credit decisioning processes coupled with granular pricing that is differentiated across our proprietary credit tiers. While we are a full-spectrum automotive finance lender, the significant majority of our consumer automotive loans are underwritten within the prime-lending segment. We define prime consumer automotive loans primarily as those loans with a FICO® Score at origination of 620 or greater. The carrying value of our held-for-investment, nonprime consumer automotive loans before allowance for loan losses, as ofDecember 31, 2022 , was approximately 10.6% of our total consumer automotive loans atDecember 31, 2022 . During 2022, our strategy for originations has been to optimize the deployment of capital by focusing on risk-adjusted returns against available origination opportunities, which has included a continued gradual and measured shift towards used-vehicle financings. Our Mortgage Finance operations focus on applicants with credit profiles and income streams to support repayments of the loan and operates under credit standards that consider and assess the value of the underlying real estate in accordance with prudent credit practices and regulatory requirements. Refer to the Mortgage Finance section of the MD&A that follows for credit quality information about purchases and originations of consumer mortgages held-for-investment. We generally rely on appraisals conducted by licensed appraisers in conformance with the expectations and requirements of Fannie Mae and federal regulators. When appropriate, we require credit enhancements such as private mortgage insurance. We price each mortgage loan that we originate based on several factors, including the customer's FICO® Score, the LTV ratio, and the size of the loan. For bulk purchases, we only purchase loans from sellers with the experience to originate high-quality loans and the financial wherewithal to support their representations and warranties. WithinAlly Lending , our digital provider that offers point-of-sale financing to consumers, we serve a mix of consumers to achieve portfolio diversification and to optimize the risk-adjusted returns of our personal lending portfolio. As ofDecember 31, 2022 , the amortized cost of our finance receivables related toAlly Lending was$2.0 billion . Additionally, onDecember 1, 2021 , we acquiredFair Square , which we rebranded Ally Credit Card, a digital credit card provider. This expansion into credit card lending further broadens our consumer finance product portfolio. Through Ally Credit Card, we have grown and deepened new and existing customer relationships. As ofDecember 31, 2022 , the amortized cost of our finance receivables related to Ally Credit Card was$1.6 billion , as compared to$953 million atDecember 31, 2021 . Within our commercial lending portfolios, our Corporate Finance operations offer senior-secured loans to private equity sponsor-ownedU.S. -based middle-market companies and to well-established asset managers that mostly provide leveraged loans. The portfolio is composed of floating-rate leveraged asset-based and cash flow/enterprise value loans. Throughout 2022, we continued to prudently grow this portfolio with a disciplined and selective approach to credit quality, which included a greater focus on asset-based loans. This focus includes significant growth of our lender finance business, which provides senior secured revolving credit facilities to asset managers, collateralized by a portfolio of loans. Within our commercial automotive business, we continue to offer a variety of dealer-centric lending products, including automotive dealer revolving lines of credit, term loans, including those to finance dealership land and buildings, and dealer fleet financing. These commercial automotive products are an important aspect of our dealer relationships and offer a secured lending arrangement with strong 47 -------------------------------------------------------------------------------- Table of Contents Management's Discussion and AnalysisAlly Financial Inc. • Form 10-K collateral protections in the event of dealer default. The performance of our commercial credit portfolios continues to remain strong. Nonperforming finance receivables and loans decreased$95 million fromDecember 31, 2021 , to$162 million atDecember 31, 2022 . Our total net charge-offs within our commercial lending portfolio remained low at$55 million for the year endedDecember 31, 2022 , compared to$11 million for the year endedDecember 31, 2021 . Refer to the Risk Management section of the MD&A for further details.
Discontinued Operations
During 2013 and 2012, certain disposal groups met the criteria to be presented as discontinued operations. The remaining activity relates to previous discontinued operations for which we continue to have income taxes, net of valuation allowances, as well as wind-down, legal, and minimal operational costs. For all periods presented, the operating results for these operations have been removed from continuing operations. The MD&A has been adjusted to exclude discontinued operations unless otherwise noted.
Primary Business Lines
Dealer Financial Services , which includes our Automotive Finance and Insurance operations, Mortgage Finance, and Corporate Finance are our primary business lines. The remaining activity is reported in Corporate and Other, which primarily consists of centralized treasury activities as well as Ally Invest, our digital brokerage and wealth management offering,Ally Lending , our point-of-sale financing business, Ally Credit Card, CRA loans, and certain strategic investments. The following table summarizes the operating results excluding discontinued operations of each business line. Operating results for each of the business lines are more fully described in the MD&A sections that follow. Favorable/(unfavorable) Favorable/(unfavorable) Year ended December 31, ($ in millions) 2022 2021 2020 2022-2021 % change 2021-2020 % change Total net revenueDealer Financial Services Automotive Finance$ 5,530 $ 5,460 $ 4,488 1 22 Insurance 1,112 1,404 1,376 (21) 2 Mortgage Finance 248 218 220 14 (1) Corporate Finance 456 436 344 5 27 Corporate and Other 1,082 688 258 57 167 Total$ 8,428 $ 8,206 $ 6,686 3 23 Income (loss) from continuing operations before income tax expenseDealer Financial Services Automotive Finance$ 2,250 $ 3,384 $ 1,285 (34) 163 Insurance (38) 343 284 (111) 21 Mortgage Finance 55 32 53 72 (40) Corporate Finance 282 282 88 - n/m Corporate and Other (207) (186) (296) (11) 37 Total$ 2,342 $ 3,855 $ 1,414 (39) 173 n/m = not meaningful 48
-------------------------------------------------------------------------------- Table of Contents Management's Discussion and AnalysisAlly Financial Inc. • Form 10-K Consolidated Results of Operations The following table summarizes our consolidated operating results for the periods shown. Refer to the reportable operating segment sections of the MD&A that follows for a more complete discussion of operating results by business line. For a discussion of our fiscal 2021 results compared to fiscal 2020, refer to Part II, Item 7. Management Discussion and Analysis of Financial Condition and Results of Operations in our 2021 Annual Report on Form 10-K. Favorable/(unfavorable)
Favorable/(unfavorable)
Year ended December 31, ($ in millions) 2022 2021 2020 2022-2021 % change 2021-2020 % change Net financing revenue and other interest income Total financing revenue and other interest income$ 10,621 $ 8,651 $ 8,797 23 (2) Total interest expense 2,857 1,914 3,243 (49) 41 Net depreciation expense on operating lease assets 914 570 851 (60) 33 Net financing revenue and other interest income 6,850 6,167 4,703 11 31 Other revenue Insurance premiums and service revenue earned 1,151 1,117 1,103 3 1 Gain on mortgage and automotive loans, net 52 87 110 (40) (21) Loss on extinguishment of debt - (136) (102) 100 (33) Other (loss) gain on investments, net (120) 285 307 (142) (7) Other income, net of losses 495 686 565 (28) 21 Total other revenue 1,578 2,039 1,983 (23) 3 Total net revenue 8,428 8,206 6,686 3 23 Provision for credit losses 1,399 241 1,439 n/m 83 Noninterest expense Compensation and benefits expense 1,900 1,643 1,376 (16) (19) Insurance losses and loss adjustment expenses 280 261 363 (7) 28 Goodwill impairment - - 50 - 100 Other operating expenses 2,507 2,206 2,044 (14) (8) Total noninterest expense 4,687 4,110 3,833 (14) (7) Income from continuing operations before income tax expense 2,342 3,855 1,414 (39) 173 Income tax expense from continuing operations 627 790 328 21 (141) Net income from continuing operations$ 1,715 $ 3,065 $ 1,086 (44) 182 Financial ratios: Return on average assets (a) 0.93 % 1.70 % 0.59 % n/m n/m Return on average equity (a) 11.91 % 18.31 % 7.59 % n/m n/m Equity to assets (a) 7.77 % 9.26 % 7.83 % n/m n/m Common dividend payout ratio (b) 23.72 % 10.63 % 26.30 % n/m n/m n/m = not meaningful (a)The ratios were based on average assets and average total equity using an average daily balance methodology. (b)The common dividend payout ratio was calculated using basic earnings per common share.
2022 Compared to 2021
We earned net income from continuing operations of$1.7 billion for the year endedDecember 31, 2022 , compared to$3.1 billion for the year endedDecember 31, 2021 . During the year endedDecember 31, 2022 , results were favorably impacted by higher net financing revenue and other interest income, as well as lower income tax expense. These items were more than offset by higher provision for credit losses, noninterest expense, and other loss on investments, net for the year endedDecember 31, 2022 . Net financing revenue and other interest income increased$683 million for the year endedDecember 31, 2022 , as compared to the year endedDecember 31, 2021 . Consumer automotive revenue increased as higher average consumer assets contributed to the increase in revenue resulting from growth in the used-vehicle portfolio, primarily through franchised dealers, as well as increases in portfolio yields resulting from pricing actions. The increases were also favorably impacted by the acquisition of Ally Credit Card inDecember 2021 . We experienced higher interest expense for the year endedDecember 31, 2022 , as compared to 2021, in response to higher benchmark interest rates, which 49 -------------------------------------------------------------------------------- Table of Contents Management's Discussion and AnalysisAlly Financial Inc. • Form 10-K increased our cost of funds. Within our Automotive Finance operations, total net operating lease revenue decreased$298 million for the year endedDecember 31, 2022 , compared to 2021, driven by an increase in depreciation expense resulting from a declining impact of downward adjustments to the rate of depreciation enacted in prior years, as well as a decrease in remarketing performance due to the continued shift in off-lease disposition channel mix with lessee and dealer buyouts increasing from the prior year. These decreases were partially offset by an increase in gross operating lease revenue driven by higher vehicle prices on new originations. Loss on extinguishment of debt decreased$136 million for the year endedDecember 31, 2022 , as compared to the year endedDecember 31, 2021 . During the year endedDecember 31, 2021 , we incurred$131 million of losses incurred for the full redemption of the Series 2 TRUPs. Other loss on investments, net was$120 million for the year endedDecember 31, 2022 , compared to other gains on investments, net of$285 million for the year endedDecember 31, 2021 . The decrease for the year endedDecember 31, 2022 , as compared to 2021, was primarily driven by$215 million of unrealized equity mark-to-market losses, consistent with broader stock market performance, as compared to results from the year endedDecember 31, 2021 , which included$7 million of unrealized losses. Results were also impacted by elevated realized gains from the sale of available-for-sale securities and equity securities during the year endedDecember 31, 2021 , that did not reoccur. Other income, net of losses decreased$191 million for the year endedDecember 31, 2022 , as compared to the year endedDecember 31, 2021 . The decrease for the year endedDecember 31, 2022 , compared to 2021, was primarily due to net downward adjustments (including impairment) of$137 million related to equity investments without a readily determinable fair value during the year endedDecember 31, 2022 , compared to net upward adjustments of$87 million during the year endedDecember 31, 2021 . Refer to Note 13 to the Consolidated Financial Statements for further information. The provision for credit losses increased$1.2 billion for the year endedDecember 31, 2022 , compared to the year endedDecember 31, 2021 . The increases in provision for credit losses for the year endedDecember 31, 2022 , were primarily driven by higher net charge-offs, as well as reserve reductions during the year endedDecember 31, 2021 , associated with improvements to the macroeconomic environment following the onset of the COVID-19 pandemic. Refer to the Risk Management section of this MD&A for further discussion on our provision for credit losses. Noninterest expense was$4.7 billion for the year endedDecember 31, 2022 , compared to$4.1 billion for the year endedDecember 31, 2021 . The increase for the year endedDecember 31, 2022 , was driven by increased expenses to support the growth of our consumer product suite and expand our digital capabilities and portfolio of products. We recognized total income tax expense from continuing operations of$627 million for the year endedDecember 31, 2022 , compared to income tax expense of$790 million for 2021. The decrease in income tax expense for the year endedDecember 31, 2022 , compared to 2021, was primarily due to the tax effects of a decrease in pretax earnings, partially offset by adjustments to the valuation allowance on foreign tax credit carryforwards. Refer to Note 22 to the Consolidated Financial Statements for further information. 50 -------------------------------------------------------------------------------- Table of Contents Management's Discussion and AnalysisAlly Financial Inc. • Form 10-K Dealer Financial Services
Results for
segment, which includes our Automotive Finance and Insurance operations.
Automotive Finance
Results of Operations
The following table summarizes the operating results of our Automotive Finance
operations. The amounts presented are before the elimination of balances and
transactions with our other reportable operating segments.
Favorable/(unfavorable)
Favorable/(unfavorable)
Year ended December 31, ($ in millions) 2022 2021 2020 2022-2021 % change 2021-2020 % change Net financing revenue and other interest income Consumer$ 5,680 $ 5,198 $ 4,931 9 5 Commercial 712 514 833 39 (38) Loans held-for-sale 2 - - n/m - Operating leases 1,596 1,550 1,435 3 8 Other interest income - - 5 - (100) Total financing revenue and other interest income 7,990 7,262 7,204 10 1 Interest expense 1,852 1,483 2,069 (25) 28 Net depreciation expense on operating lease assets (a) 914 570 851 (60) 33 Net financing revenue and other interest income 5,224 5,209 4,284 - 22 Other revenue Gain on automotive loans, net 26 - - n/m - Other income 280 251 204 12 23 Total other revenue 306 251 204 22 23 Total net revenue 5,530 5,460 4,488 1 22 Provision for credit losses 1,036 53 1,236 n/m 96 Noninterest expense Compensation and benefits expense 629 571 549 (10) (4) Other operating expenses 1,615 1,452 1,418 (11) (2) Total noninterest expense 2,244 2,023 1,967 (11) (3) Income from continuing operations before income tax expense$ 2,250 $ 3,384 $ 1,285 (34) 163 Total assets$ 111,463 $ 103,653 $ 104,794 8 (1)
n/m = not meaningful
(a)Includes net remarketing gains of
million
2022 Compared to 2021
Our Automotive Finance operations earned income from continuing operations before income tax expense of$2.3 billion for the year endedDecember 31, 2022 , compared to$3.4 billion for the year endedDecember 31, 2021 . For the year endedDecember 31, 2022 , the decrease was primarily due to higher provision for credit losses, higher interest expense, higher net depreciation expense on operating lease assets, and higher noninterest expense, partially offset by higher financing revenue. Consumer automotive loan financing revenue increased$482 million for the year endedDecember 31, 2022 , compared to 2021. Higher average consumer assets contributed to the increase in revenue resulting from growth in the used-vehicle portfolio, primarily through franchised dealers, as well as increases in portfolio yields resulting from pricing actions.
Commercial loan financing revenue increased
yields from higher benchmark interest rates.
Interest expense was$1.9 billion for the year endedDecember 31, 2022 , compared to$1.5 billion for the year endedDecember 31, 2021 . The increase for the year endedDecember 31, 2022 , was primarily due to market and industry dynamics, which drove an increase in our deposit rates and other funding costs. 51 -------------------------------------------------------------------------------- Table of Contents Management's Discussion and AnalysisAlly Financial Inc. • Form 10-K
Total noninterest expense increased
2022
allocations, as well as compensation and benefits expense, which increased
primarily due to higher headcount to support the growth of the business.
Total net operating lease revenue decreased$298 million for the year endedDecember 31, 2022 , respectively, compared to 2021. We recognized remarketing gains of$170 million for the year endedDecember 31, 2022 , compared to remarketing gains of$344 million for the year endedDecember 31, 2021 , while depreciation expense on operating lease assets increased$170 million for the year endedDecember 31, 2022 , compared to 2021. The decrease in net operating lease revenue was primarily driven by an increase in depreciation expense resulting from a declining impact of downward adjustments to the rate of depreciation enacted in prior years, as well as a decrease in remarketing performance due to the continued shift in off-lease disposition channel mix with lessee and dealer buyouts increasing from the prior year. These decreases were partially offset by an increase in gross operating lease revenue driven by higher vehicle prices on new originations. The shift in off-lease vehicle disposition may limit our ability to optimize remarketing proceeds, but it is expected to moderate in the near term in connection with declining used vehicle values, which would soften any resulting adverse impacts to remarketing performance. Refer to the Operating Lease Residual Risk Management section of this MD&A for further discussion. The provision for credit losses increased$983 million for the year endedDecember 31, 2022 , compared to the year endedDecember 31, 2021 . The increase in provision for credit losses was primarily driven by higher net charge-offs during the year endedDecember 31, 2022 , as well as reserve reductions during the year endedDecember 31, 2021 , associated with improvements to the macroeconomic environment following the onset of the COVID-19 pandemic. Additionally, provision for credit losses was impacted by reserve increases associated with portfolio growth across our consumer and commercial automotive businesses for the year endedDecember 31, 2022 . Refer to the Risk Management section of this MD&A for further discussion on our provision for credit losses.
The following table presents the average balance and yield of the loan and
operating lease portfolios of our Automotive Financing operations.
2022 2021 2020
Year ended December 31, ($ in Average Average Average
millions) balance (a) Yield balance (a) Yield balance (a)
Yield
Finance receivables and loans, net (b) Consumer automotive (c)$ 81,032 7.19 %$ 75,689 6.65 %$ 72,805 6.54 % Commercial Wholesale floorplan (d) 11,418 4.49 11,183 3.17 19,308 3.45 Other commercial automotive (e) 5,044 4.38 5,273 4.21 5,740
4.21
Investment in operating leases, net (f) 10,656 6.41 10,518 9.32 9,264 6.30 (a)Average balances are calculated using an average daily balance methodology. (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. (c)Includes the effects of derivative financial instruments designated as hedges, which is included within Corporate and Other. Excluding the impact of hedging activities, the yield was 7.01%, 6.87%, and 6.77% for the years endedDecember 31, 2022 , 2021, and 2020, respectively. (d)Includes the effects of derivative financial instruments designated as hedges, which is included within Corporate and Other. Excluding the impact of hedging activities, the yield was 4.30%, 2.61%, and 3.07% for the years endedDecember 31, 2022 , 2021, and 2020, respectively. (e)Consists primarily of automotive dealer term loans, including those to finance dealership land and buildings, and dealer fleet financing. (f)Yield includes net gains on the sale of off-lease vehicles of$170 million ,$344 million , and$127 million for the years endedDecember 31, 2022 , 2021, 2020, respectively. Excluding these gains and losses on sale, the yield was 4.81%, 6.05%, and 4.93% for the years endedDecember 31, 2022 , 2021, and 2020, respectively. During the year endedDecember 31, 2022 , our portfolio yield for consumer automotive loans, excluding the impact of hedging activities, increased 14 basis points as compared to the year endedDecember 31, 2021 . The increase for the year endedDecember 31, 2022 , was primarily driven by a higher interest rate environment. Our portfolio yield for consumer automotive loans, including the effects of derivative financial instruments designated as hedges, was 18 basis points higher than our portfolio yield for consumer automotive loans excluding the effects of derivative financial instruments designated as hedges for the year endedDecember 31, 2022 , as compared to the year endedDecember 31, 2021 . This is attributable to the successful execution of hedging strategies that are used to mitigate interest rate risks. Refer to Note 21 to the Consolidated Financial Statements for further discussion. Our portfolio yield for investment in operating leases, net, including net gains on the sale of off-lease vehicles, was 6.41% for the year endedDecember 31, 2022 , compared to 9.32% for the year endedDecember 31, 2021 . The decline was due to an increase in depreciation expense resulting from a declining impact of downward adjustments to the rate of depreciation enacted in prior years, as well as a decrease in remarketing performance due to the continued shift in off-lease disposition channel mix with lessee and dealer buyouts increasing from the prior year. The shift in off-lease vehicle disposition mix may limit our ability to optimize remarketing proceeds, but is expected to moderate in the near term in connection with declining used vehicle values, which could soften any resulting adverse impacts to remarketing performance. Refer to the section titled Operating Lease Residual Risk Management within this MD&A for additional information. 52 -------------------------------------------------------------------------------- Table of Contents Management's Discussion and AnalysisAlly Financial Inc. • Form 10-K
Automotive Financing Volume
Our Automotive Finance operations provide automotive financing services to
consumers and automotive dealers and retailers. For consumers, we provide retail
financing and leasing for new and used vehicles, and through our commercial
automotive financing operations, we fund dealer purchases of new and used
vehicles through wholesale floorplan financing and provide dealer term and
revolving loans and automotive fleet financing.
Acquisition and Underwriting
Our consumer underwriting process is focused on multidimensional risk factors and data driven risk-adjusted probabilities that are continuously monitored and routinely updated. Each application is placed into an analytical category based on specific aspects of the applicant's credit profile and loan structure. We then evaluate the application by applying a proprietary credit scoring algorithm tailored to its applicable category. Inputs into this algorithm include, but are not limited to, proprietary scores and deal structure variables such as LTV, new or used vehicle collateral, and term of financing. The output of the algorithm is used to sort applications into various credit tiers (S, A, B, C, D, and E). Credit tiers help determine our primary indication of credit quality and pricing, and are also communicated to the dealer that submitted the application. This process is built on long established credit risk fundamentals to determine both the applicant's ability and willingness to repay. While advances in excess of 100% of the vehicle collateral value at loan origination-notwithstanding cash down and vehicle trade in value-are typical in the industry (primarily due to additional costs such as mechanical warranty contracts, taxes, license, and title fees), our pricing, risk, and underwriting processes are rooted in statistical analysis to manage this risk. Our underwriting process uses a combination of automated strategies and manual evaluation by an experienced team of dedicated underwriters. Continued advancements in our data-driven risk assessment process have allowed us to methodically increase our use of automated credit decisioning in recent years. This increase in automated decisioning has enhanced the buying experience for our dealer and consumer customers through improved response times, and more consistent credit decisions. Underwriting is also governed by our credit policies, which set forth guidelines such as acceptable transaction parameters and verification requirements. For higher-risk approved transactions, these guidelines require verification of details such as applicant income and employment through documentation provided by the applicant or other data sources. We continue to monitor loss performance across the risk spectrum, which enables us to implement risk mitigation strategies, including pricing increments and curtailment actions on underperforming microsegments. Underwriters have a limited ability to approve exceptions to the guidelines in our credit policies. For example, an exception may be approved to allow a term or a ratio of payment-to-income, debt-to-income, or LTV greater than that in the guidelines. Exceptions must be approved by underwriters with appropriate approval authority and generally are based on compensating factors. We monitor exceptions with the goal of limiting them to a small portion of approved applications and originated loans, and rarely permit more than a single exception to avoid layered risk.
Consumer Automotive Financing
New- and used-vehicle consumer financing through dealerships takes one of two
forms: retail installment sales contracts (retail contracts) and operating lease
contracts. We purchase retail contracts for new and used vehicles and operating
lease contracts from dealers after those contracts are executed by the dealers
and the consumers. Our consumer automotive financing operations generate revenue
primarily through finance charges on retail contracts and rental payments on
operating lease contracts. In connection with operating lease contracts, we
recognize depreciation expense on the vehicle over the operating lease contract
period and we may also recognize a gain or loss on the remarketing of the
vehicle at the end of the lease.
The amount we pay a dealer for a retail contract is based on the rate of finance
charge agreed by the dealer and customer, the negotiated purchase price of the
vehicle, any other products such as service contracts, less any vehicle trade-in
value, any down payment from the consumer, and any available automotive
manufacturer incentives. Under the retail contract, the consumer is obligated to
make payments in an amount equal to the purchase price of the vehicle (less any
trade-in or down payment) plus finance charges at a rate negotiated between the
consumer and the dealer. In addition, the consumer is responsible for charges
related to past-due payments. Consistent with industry practice, when we
purchase the retail contract, we pay the dealer at a rate discounted below the
rate agreed by the dealer and the consumer (generally described in the industry
as the "buy rate"). Our agreements with dealers limit the amount of the discount
that we will accept. Although we do not own the vehicles that we finance through
retail contracts, our agreements require that we hold a perfected security
interest in those vehicles.
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. Our underwriting capabilities allow us to manage our risk
tolerance levels to quickly react to major changes in the economy. Over the past
several years, we have continued to focus on optimizing pricing relative to
market interest rates as well as portfolio diversification and the used-vehicle
segment, primarily through franchised dealers and automotive retailers, which
has contributed to higher yields on our consumer automotive loan portfolio.
Commensurate with this shift in origination mix, we continue to maintain
disciplined underwriting within our new- and used- consumer automotive loan
originations.
53
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Table of Contents
Management's Discussion and Analysis
Ally Financial Inc. • Form 10-K
With respect to consumer leasing, we purchase 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 any vehicle
trade-in, any down payment from the consumer, and any available automotive
manufacturer incentives. Under an 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 any available
manufacturer incentives) exceeds the contract residual value (including residual
support) of the vehicle at lease termination, plus operating lease rental
charges. The consumer is also generally responsible for charges related to
past-due payments, excess mileage, excessive wear and tear, and certain disposal
fees where applicable. 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 vehicle 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 then-current market conditions and adjust depreciation expense, if
appropriate, over the remaining life of the contract. Upon termination of the
lease, lessees generally have the ability to exercise a purchase option at the
stated contractual amount. If the lessee declines to exercise the purchase
option, the dealer then has the ability to buy out the vehicle. If neither the
lessee or dealer completes the buyout, the vehicle is returned to us and we
remarket the vehicle. 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 recorded through depreciation expense.
Our standard consumer operating lease contract, SmartLease, requires a monthly
payment by the consumer. We also offer an alternative leasing plan, SmartLease
Plus, which requires one up-front payment of all operating lease amounts at the
time the consumer takes possession of the vehicle.
Our standard consumer lease contracts are operating leases; therefore, credit
losses on the operating lease portfolio are not as significant as losses on
retail contracts because lease credit losses are primarily limited to past-due
payments and assessed fees. Since some of these fees are not assessed until the
vehicle is returned, these losses on the operating lease portfolio are
correlated with lease termination volume. Operating lease accounts over 30 days
past due represented 1.1% and 0.8% of the portfolio at December 31, 2022 , and
2021, respectively.
With respect to all financed vehicles, whether subject to a retail contract or
an operating lease contract, we require that property damage insurance be
obtained by the consumer. In addition, for operating lease contracts, we require
that bodily injury, collision, and comprehensive insurance be obtained by the
consumer.
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Table of Contents
Management's Discussion and Analysis
Ally Financial Inc. • Form 10-K
The following table presents retail loan originations and purchases by credit
tier and product type.
Used retail New retail
Volume Volume
Credit Tier (a) ($ in billions) % Share of volume Average FICO® ($ in billions) % Share of volume Average FICO®
Year ended December 31, 2022
S $ 6.7 22 743 $ 4.4 35 746
A 15.0 50 686 6.7 53 686
B 6.2 21 648 1.4 11 654
C 1.5 4 611 0.1 1 629
D 0.5 2 569 - - 604
E 0.2 1 553 - - 541
Total retail originations $ 30.1 100 684 $ 12.6 100 700
Year ended December 31, 2021
S $ 5.4 19 736 $ 4.4 34 740
A 13.8 50 682 6.7 50 681
B 6.8 25 648 1.9 15 650
C 1.3 5 610 0.1 1 616
D 0.3 1 563 - - 585
E 0.1 - 545 - - 564
Total retail originations $ 27.7 100 679 $ 13.1 100 693
Year ended December 31, 2020
S $ 4.6 24 736 $ 4.9 44 736
A 9.2 48 682 4.8 43 678
B 4.1 21 646 1.3 11 646
C 1.0 5 609 0.2 2 611
D 0.3 1 566 - - 593
E 0.1 1 542 - - 574
Total retail originations $ 19.3 100 682 $ 11.2 100 698
(a)Represents Ally's internal credit score, incorporating numerous borrower and
structure attributes including: severity and aging of delinquency; number of
credit inquiries; LTV ratio; term; and payment-to-income ratio. We periodically
update our underwriting scorecard, which can have an impact on our credit tier
scoring.
The following table presents the percentage of total retail loan originations
and purchases, in dollars, by the loan term in months.
Year ended December 31, 2022 2021 2020 0-71 14 % 15 % 19 % 72-75 64 66 64 76 + 22 19 17 Total retail originations 100 % 100 % 100 % Retail originations with a term of 76 months or more represented 22% of total retail originations for the year endedDecember 31, 2022 , compared to 19% for the year endedDecember 31, 2021 , and 17% for the year endedDecember 31, 2020 . The increase in retail originations with a term of 76 months or more is consistent with broader industry trends, as increases in average transaction prices and higher interest rates elevated borrowers' monthly payments. Substantially all the loans originated with a term of 76 months or more during the years endedDecember 31, 2022 , 2021, and 2020, were considered to be prime and in credit tiers S, A, or B. Our underwriting processes are designed to consider various deal structure variables-such as payment-to-income, LTV, debt-to-income, and FICO® score-that compensate for longer loan terms and mitigate underwriting risk. 55 -------------------------------------------------------------------------------- Table of Contents Management's Discussion and AnalysisAlly Financial Inc. • Form 10-K The following table presents the percentage of total outstanding retail loans by origination year. December 31, 2022 2021 2020 Pre-2018 3 % 8 % 18 % 2018 4 9 18 2019 8 15 27 2020 13 22 37 2021 28 46 - 2022 44 - - Total retail 100 % 100 % 100 %
The following tables present the total retail loan and operating lease
origination and purchase dollars and percentage mix by product type and by
channel.
Consumer automotive financing originations % Share of Ally originations
Year ended December 31 , ($ in
millions) 2022 2021 2020 2022 2021 2020
Used retail $ 30,107 $ 27,743 $ 19,312 65 60 55
New retail 12,579 13,141 11,185 27 28 32
Lease 3,665 5,369 4,618 8 12 13
Total consumer automotive financing
originations (a) $ 46,351 $ 46,253 $ 35,115 100 100 100
(a)Includes CSG originations of
the years ended
Consumer automotive financing originations % Share of Ally originations
Year ended December 31 , ($ in
millions) 2022 2021 2020 2022 2021 2020
Growth channel $ 25,930 $ 24,680 $ 17,460 56 53 50
Stellantis dealers 10,396 11,989 9,745 22 26 28
GM dealers 10,025 9,584 7,910 22 21 22
Total consumer automotive financing
originations $ 46,351 $ 46,253 $ 35,115 100 100 100
Total consumer automotive loan and operating lease originations increased $98
million for the year ended December 31, 2022 , compared to 2021. The increase was
primarily driven by continued momentum in used-vehicle lending and higher
financed transaction amounts, partially offset by decreased application flow.
We have included origination metrics by loan term and FICO® Score within this
MD&A. In addition, we employ our own risk evaluation, including proprietary risk
models, in evaluating credit risk, as described in the section above titled
Automotive Financing Volume-Acquisition and Underwriting.
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Table of Contents
Management's Discussion and Analysis
Ally Financial Inc. • Form 10-K
The following table presents the percentage of retail loan and operating lease
originations and purchases, in dollars, by FICO® Score and product type. We
define prime consumer automotive loans primarily as those loans with a FICO®
Score at origination of 620 or greater.
Year ended December 31, 2022 Used retail New retail Lease
760 + 14 % 15 % 47 %
720-759 12 12 18
660-719 33 33 23
620-659 24 21 8
540-619 10 3 2
< 540 2 - -
Unscored (a) 5 16 2
Total consumer automotive financing originations 100 % 100 % 100 %
Year ended December 31, 2021
760 + 11 % 14 % 43 %
720-759 12 11 20
660-719 34 33 24
620-659 27 24 10
540-619 11 5 2
< 540 2 - -
Unscored (a) 3 13 1
Total consumer automotive financing originations 100 % 100 % 100 %
Year ended December 31, 2020
760 + 13 % 16 % 37 %
720-759 12 12 19
660-719 34 31 27
620-659 24 20 12
540-619 12 6 4
< 540 2 1 -
Unscored (a) 3 14 1
Total consumer automotive financing originations 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 9% of total consumer loan and operating lease originations for both the years endedDecember 31, 2022 , andDecember 31, 2021 , and 10% for the year endedDecember 31, 2020 . Consumer loans and operating leases with FICO® Scores of less than 540 represented 1% of total originations for the years endedDecember 31, 2022 , 2021, and 2020. Nonprime applications are subject to more stringent underwriting criteria (for example, minimum payment-to-income ratio, maximum debt-to-income ratio, and maximum amount financed), and our nonprime loan portfolio generally does not include any loans with a term of 76 months or more. The carrying value of our held-for-investment, nonprime consumer automotive loans before allowance for loan losses was$8.8 billion at bothDecember 31, 2022 , andDecember 31, 2021 , which represented approximately 10.6% and 11.3% of our total consumer automotive loans atDecember 31, 2022 , andDecember 31, 2021 , respectively. For discussion of our credit-risk-management practices and performance, refer to the section titled Risk Management. During the first quarter of 2023, we amended our relationship with Carvana, a leading e-commerce platform for buying and selling used vehicles. Specifically, we decreased our committed facility from a maximum of$5.0 billion to a maximum of$4.0 billion to support our continued efforts to optimize risk-adjusted returns. This commitment is effective for 364 days. As part of the agreement, we purchase finance receivables meeting certain prescribed eligibility requirements on a periodic basis from Carvana. We also have the opportunity to purchase additional contracts from Carvana on an ad-hoc basis that may fall outside of the prescribed eligibility requirements utilized within the recurring pools. The risk profile of the contractual purchases is similar to the volume we fund through other dealer-facing channels. All the finance receivables purchased through this channel are used vehicles, and are included in Growth channel in our consumer origination metrics. While different vintages exhibit varying performance, collectively to date, finance receivables purchased from Carvana have exhibited (1) favorable delinquency and loss performance, as compared to original expectations assumed at the time of purchase, and (2) consistent delinquency and loss performance compared to loans with similar credit characteristics acquired through our indirect dealer channel. Consumer finance receivables sourced from Carvana represented 7% of our total consumer automotive finance receivables as ofDecember 31, 2022 . 57 -------------------------------------------------------------------------------- Table of Contents Management's Discussion and AnalysisAlly Financial Inc. • Form 10-K
Manufacturer Marketing Incentives
Automotive manufacturers may elect to sponsor incentive programs on retail contracts and operating leases by subsidizing finance rates below market rates. These marketing incentives are also referred to as rate support or subvention. When an automotive manufacturer subsidizes the finance rate, we are compensated at contract inception for the present value of the difference between the manufacturer-supported customer rate and our standard rate. For a retail contract, we defer and recognize this amount as a yield adjustment over the life of the contract. For an operating lease contract, this payment reduces our cost basis in the underlying operating lease asset. Automotive manufacturers may also elect to sponsor incentives, referred to as residual support, on operating leases. When an automotive manufacturer provides residual support, we receive payment at contract inception that increases the contractual operating lease residual value resulting in a lower operating lease payment from the customer. The payment received from the automotive manufacturer reduces our cost basis in the underlying operating lease asset. Other operating lease incentive programs sponsored by automotive manufacturers may be made at contract inception indirectly through dealers, which also reduces our cost basis in the underlying operating lease asset. Under what the automotive finance industry refers to as "pull-ahead programs," consumers may be encouraged by the manufacturer to terminate operating leases early in conjunction with the acquisition of a new vehicle. As part of these programs, we may waive all or a portion of the customer's remaining payment obligation. Under most programs, the automotive manufacturer compensates us for a portion of the foregone revenue from the waived payments. This compensation may be partially offset to the extent that our remarketing sales proceeds are higher than otherwise would be realized if the vehicle had been remarketed upon contract maturity. Servicing We have historically serviced all retail contracts and operating leases we originated, including a small amount of retail contracts originated as held-for-sale. On occasion, we have sold a portion of the retail contracts we originated through whole-loan sales and securitizations, but generally retained the right to service and earn a servicing fee for our servicing functions. However, our expansion into direct-to-consumer lending and other relationships with automotive retailers have resulted in the employment of third-party servicers. As ofDecember 31, 2022 , we serviced 92% of our consumer automotive loan portfolio. Servicing activities consist largely of collecting and processing customer payments, responding to customer concerns and inquiries, processing customer requests (including those for payoff quotes, total-loss handling, and payment modifications), maintaining a perfected security interest in the financed vehicle, engaging in collections activity, and disposing of off-lease and repossessed vehicles. Servicing activities are generally consistent across our Automotive Finance operations; however, certain practices may be influenced by state laws. Our customers have the option to receive monthly billing statements and remit payment by mail or through electronic fund transfers, or to establish online web-based account administration through Ally Auto Online Services. Customer payments are processed by regional third-party processing centers that electronically transfer payment information to customers' accounts. Collections activity includes initiating contact with customers who fail to comply with the terms of the retail contract or operating lease agreement by sending reminder notices or contacting customers via various channels when an account becomes 3 to 7 days past due. The type of collection treatment and level of intensity increases as the account becomes more delinquent. The nature and timing of these activities depend on the repayment risk of the account. During the collections process, we may offer a payment extension to a customer experiencing temporary financial difficulty. A payment extension enables the customer to delay monthly payments for 30, 60, or 90 days. Extensions granted to a customer typically do not exceed 90 days in the aggregate during any 12-month period or 180 days in aggregate over the life of the contract. During the extension period, finance charges continue to accrue. If the customer's financial difficulty is not temporary but we believe the customer is willing and able to repay their loan at a lower payment amount, we may offer to modify the remaining obligation through a rewrite, extending the term and lowering the interest rate. In the event of a rewrite, the outstanding balance generally remains unchanged. The use of extensions and modifications helps us mitigate financial loss. Extensions may assist in cases where we believe the customer will recover from short-term financial difficulty and resume regularly scheduled payments. Modifications may also be utilized in cases where we believe customers can fulfill the obligation with lower payments over a longer period. Before offering an extension or modification, we evaluate and take into account the capacity of the customer to meet the revised payment terms. We generally do not consider extensions that fall within our policy guidelines to represent more than an insignificant delay in payment, and therefore, they are not considered a TDR. Although the granting of an extension could delay the eventual charge-off of an account, typically we are able to repossess and sell the related collateral, thereby mitigating the loss. AtDecember 31, 2022 , 14.8% of the total amount outstanding in the servicing portfolio had been granted an extension or was rewritten, compared to 18.8% atDecember 31, 2021 . As ofDecember 31, 2022 , we had fewer outstanding loans that were granted deferrals under our COVID-19 modification program, as compared to the prior year. 58 -------------------------------------------------------------------------------- Table of Contents Management's Discussion and AnalysisAlly Financial Inc. • Form 10-K Subject to legal considerations, we generally begin repossession activity once an account is at least 90 days past due. Repossession may occur earlier if we determine the customer is unwilling to pay, the vehicle is in danger of being damaged or hidden, or the customer voluntarily surrenders the vehicle. We assign accounts to approved third-party repossession vendors, who handle the repossession activity on our behalf. Any disruptions in the repossession process could impact our ability to timely or successfully repossess the vehicle. Generally, after repossession, the customer is given a period of time to redeem the vehicle or reinstate the contract by paying off the account or bringing the account current, respectively. If the vehicle is not redeemed or the contract is not reinstated, the vehicle is sold at auction. Generally, the proceeds do not cover the unpaid balance, including unpaid earned finance charges and allowable expenses, and the resulting deficiency is charged-off. Asset recovery centers pursue collections on accounts that have been charged-off, including those accounts where the vehicle was repossessed, and skip accounts where the vehicle cannot be located.
Our total consumer automotive loan and lease serviced portfolio was
compared to our consumer automotive on-balance-sheet serviced portfolio of
Remarketing and Sales of Leased Vehicles
When we acquire an operating lease, we assume ownership of the vehicle from the dealer. 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. Conversely, we may recognize a remarketing gain when the proceeds from a returned vehicle are greater than the expected residual value. Our ability to efficiently process and effectively market off-lease vehicles affects the disposal costs and the proceeds realized from vehicle sales. Our methods of vehicle sales at lease termination primarily include the following:
•Sale to lessee - The lessee has the first opportunity to purchase the off-lease
vehicle at the end of the lease term for the price stated in the lease
agreement, which equals the contract residual value determined at origination.
•Sale to dealer - After the lessee declines an option to purchase the off-lease vehicle, the dealer who accepts it has the opportunity to purchase it directly from us at a price we define. •Internet auctions - Once the lessee and the dealer decline to purchase the off-lease vehicle, we offer it to dealers and other third parties through our proprietary internet site (SmartAuction). Through SmartAuction, we seek to maximize the net sales proceeds from an off-lease vehicle by reducing the time between vehicle return and ultimate disposition, reducing holding costs, and broadening the number of prospective buyers. We use SmartAuction for our own vehicles and make it available for third-party use. We earn a service fee for every third-party vehicle sold through SmartAuction, which includes the cost of ClearGuard coverage, our protection product designed to assist in minimizing the risk to dealers of arbitration claims for eligible vehicles. In 2022, approximately 336,000 vehicles were sold through SmartAuction, as compared to approximately 261,000 in 2021. •Physical auctions - We dispose of an off-lease vehicle not purchased at termination by the lessee or dealer or sold on SmartAuction through traditional third-party, physical auctions. We are responsible for handling decisions at the auction including arranging for inspections, authorizing repairs and reconditioning, and determining whether bids received at auction should be accepted. We employ an internal team, including statisticians, to manage our analysis of projected used vehicle values and residual risk. This team aids in the pricing of new operating leases, managing the disposal process including vehicle concentration risk, geographic optimization of vehicles to maximize gains, disposal platform (internet vs. physical), and evaluating our residual risk on a real-time basis. This team tracks market movements of used vehicles using data down to the VIN level including trim and options, vehicle age, mileage, and seasonality factors that we feel are more relevant than other published indices (for example, Manheim, NADA). This analysis includes vehicles sold on our SmartAuction platform, as well as vehicles sold through Manheim, ADESA, and over 200 independent physical auction sites. We believe this analysis gives us a competitive advantage over our peers.
Commercial Automotive Financing
Automotive Wholesale Dealer Financing
One of the most important aspects of our dealer relationships is providing
wholesale floorplan financing for new- and used-vehicle inventories at
dealerships. Wholesale floorplan financing, including syndicated loan
arrangements, represents the largest portion of our commercial automotive
financing business and is the primary source of funding for dealers' purchases
of new and used vehicles.
59 -------------------------------------------------------------------------------- Table of Contents Management's Discussion and AnalysisAlly Financial Inc. • Form 10-K Wholesale floorplan financing is generally extended in the form of lines of credit to individual dealers. These lines of credit are secured by the vehicles financed and all other vehicle inventory, which provide strong collateral protection in the event of dealership default. Additional collateral (for example, blanket lien over all dealership assets) or other credit enhancements (for example, personal guarantees from dealership owners) are generally obtained to further mitigate credit risk. Furthermore, in some cases, we may benefit from situations where an automotive manufacturer repurchases vehicles. These repurchases may serve as an additional layer of protection in the event of repossession of dealership new-vehicle inventory or dealership franchise termination. The amount we advance to dealers for a new vehicle is equal to 100% of the manufacturer's wholesale invoice price, subject to payment curtailment schedules. The amount we advance to dealers for a used vehicle is typically 90-100% of the dealer's cost of acquiring it. Interest on wholesale floorplan financing is generally payable monthly. The majority of wholesale floorplan financing is structured to yield interest at a floating rate indexed to the Prime Rate. Although a small number of financing arrangements are indexed to LIBOR, we have established an enterprise-wide LIBOR transition program to manage the discontinuance of LIBOR. Refer to the section titled LIBOR Transition within the MD&A for further details. The rate for a particular dealer is based on, among other things, competitive factors, the size of the account, and the dealer's creditworthiness. Additionally, under our Ally Dealer Rewards Program, dealers benefit in certain circumstances from wholesale-floorplan-financing incentives, which we pay and account for as a reduction to interest income in the period they are earned. Under our wholesale-floorplan-financing agreement, a dealership is generally required to pay the principal amount financed for a vehicle within a specified number of days following the dealership's sale or lease of the vehicle. The agreement also affords us the right to demand payment of all amounts owed under the wholesale credit line at any time. We, however, generally make this demand only if we terminate the credit line, the dealer defaults, or a risk-based reason exists to do so.
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
Year ended December 31, ($ in millions) 2022 2021 2020
Used vehicles 44 % 34 % 18 %
Stellantis new vehicles 31 32 33
GM new vehicles 17 20 33
Growth new vehicles 8 14 16
Total 100 % 100 % 100 %
Total commercial wholesale finance receivables $ 11,418
Average commercial wholesale financing receivables outstanding increased$235 million during the year endedDecember 31, 2022 , as compared to 2021. The increase for the year endedDecember 31, 2022 , as compared to 2021, was primarily due to an increase in average vehicle values, and was partially offset by a reduction in the number ofGM dealer relationships due to the competitive environment across the automotive lending market. During the year endedDecember 31, 2022 , we amended Carvana's commercial line of credit to a total of$2.2 billion and included a participation agreement for a total of$200 million . The participation agreement met the requirements for derecognition and therefore all outstanding amounts under this$200 million agreement are excluded from finance receivables and loans, net on our Consolidated Balance Sheet. The$2.2 billion line of credit and related$200 million participation agreement are scheduled to terminate in the third quarter of 2023. The credit line will revert to$2.0 billion thereafter, with a scheduled maturity in the first quarter of 2024. The line of credit represents a commitment to fund Carvana's wholesale floorplan financing of used vehicles and is consistent in form and structure with our other wholesale floorplan financing arrangements. This includes the credit line being fully collateralized, as well as additional security placed through cash collateral, to mitigate counterparty credit risk in the event of a default. AtDecember 31, 2022 , Carvana's wholesale floorplan assets outstanding balance was$517 million , net of$52 million attributable to the third-party participation agreement.
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. Additionally, these loans generally include cross-collateral and cross-default provisions. 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$229 million for the year endedDecember 31, 2022 , compared to 2021, to an average of$5.0 billion for the year endedDecember 31, 2022 . 60 -------------------------------------------------------------------------------- Table of Contents Management's Discussion and AnalysisAlly Financial Inc. • Form 10-K
Servicing and Monitoring
We service all of the wholesale credit lines in our portfolio and the associated
wholesale automotive finance receivables. A statement setting forth billing and
account information is distributed on a monthly basis to each dealer. Interest
and other nonprincipal charges are billed in arrears and are required to be paid
immediately upon receipt of the monthly billing statement. Generally, dealers
remit payments to us through ACH transactions initiated by the dealer through a
secure web application.
We manage risk related to wholesale floorplan financing by assessing dealership
borrowers using a proprietary model based on various factors, including their
capital sufficiency, operating performance, and credit and payment history. This
model assigns dealership borrowers a risk rating that affects the amount of the
line of credit and the ongoing risk management of the account. We monitor the
level of borrowing under each dealer's credit line daily. We may adjust the
dealer's credit line if warranted, based on the dealership's vehicle sales rate,
and temporarily suspend the granting of additional credit, or take other actions
following evaluation and analysis of the dealer's financial condition.
We periodically inspect and verify the existence of dealer vehicle inventories.
The timing of these collateral audits varies, and no advance notice is given to
the dealer. Among other things, audits are intended to assess dealer compliance
with the financing agreement and confirm the status of our collateral.
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Table of Contents
Management's Discussion and Analysis
Ally Financial Inc. • Form 10-K
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.
Favorable/(unfavorable)
Favorable/(unfavorable)
Year ended December 31, ($ in millions) 2022 2021 2020 2022-2021 % change 2021-2020 % change Insurance premiums and other income Insurance premiums and service revenue earned$ 1,151 $ 1,117 $ 1,103 3
1
Interest and dividends on investment securities, cash and cash equivalents, and other earning assets, net (a) 89 59 42 51
40
Other (loss) gain on investments, net (b) (143) 216 220 (166) (2) Other income 15 12 11 25 9 Total insurance premiums and other income 1,112 1,404 1,376 (21)
2
Expense
Insurance losses and loss adjustment expenses 280 261 363 (7)
28
Acquisition and underwriting expense Compensation and benefits expense 101 92 82 (10)
(12)
Insurance commissions expense 610 562 517 (9) (9) Other expenses 159 146 130 (9) (12) Total acquisition and underwriting expense 870 800 729 (9) (10) Total expense 1,150 1,061 1,092 (8) 3 (Loss) income from continuing operations before income tax expense$ (38) $ 343 $ 284 (111) 21 Total assets$ 8,659 $ 9,381 $ 9,137 (8) 3 Insurance premiums and service revenue written$ 1,103 $ 1,197 $ 1,229 (8)
(3)
Combined ratio (c) 98.6 %
93.9 % 98.0 %
(a)Includes interest expense of$37 million ,$58 million , and$80 million for the years endedDecember 31, 2022 , 2021, and 2020, respectively. (b)Includes net unrealized losses on equity securities of$210 million and$10 million for the years endedDecember 31, 2022 , and 2021, respectively, and net unrealized gains on equity securities of$31 million for the year endedDecember 31, 2020 . (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 (excluding interest, dividends, and other investment activity).
2022 Compared to 2021
Our Insurance operations incurred a loss from continuing operations before income tax expense of$38 million for the year endedDecember 31, 2022 , compared to income earned of$343 million for the year endedDecember 31, 2021 . The decrease for the year endedDecember 31, 2022 , was primarily due to higher unrealized losses and lower realized gains on equity securities, as compared to the same period in 2021. Insurance premiums and service revenue earned was$1.2 billion for the year endedDecember 31, 2022 , compared to$1.1 billion for the same period in 2021. The increase for the year endedDecember 31, 2022 , was driven by a higher F&I earned premium, primarily related to VSCs and higher P&C revenues from ancillary dealer-related products, which more than offset declines from lower industry-wide dealer vehicle inventory levels as a result of supply chain disruptions. Other loss on investments, net was$143 million for the year endedDecember 31, 2022 , compared to other gain on investments, net of$216 million for the same period in 2021. The decrease was primarily attributable to elevated realized capital gains from equity securities during 2021 that did not reoccur. Additionally, results are inclusive of$210 million of unrealized equity mark-to-market losses, consistent with broader stock market performance, as compared to results from 2021, which included$10 million of unrealized losses. Insurance losses and loss adjustment expenses totaled$280 million for the year endedDecember 31, 2022 , compared to$261 million for the same period in 2021. Losses have increased from 2021 due to higher VSC and other F&I service contract claims and volume growth in other ancillary P&C products. These increases were partially offset by lower GAP claims as a result of higher used vehicle values. InApril 2022 , we renewed our annual excess of loss reinsurance agreement and continue to utilize this coverage for our vehicle inventory insurance to manage our risk of weather-related loss. Our weather-related losses for the year did not exceed the retention limit, therefore we did not cede weather-related losses for the year endedDecember 31, 2022 , pursuant to our reinsurance agreement. 62 -------------------------------------------------------------------------------- Table of Contents Management's Discussion and AnalysisAlly Financial Inc. • Form 10-K Total acquisition and underwriting expense increased$70 million for the year endedDecember 31, 2022 , as compared to the same period in 2021. The changes were primarily due to an increase in insurance commission expense, commensurate with higher earned premiums from our F&I products and higher ceding commissions assumed in connection with growth in our ancillary dealer product offering. Additionally, the increase was driven by higher incentive program expenses and higher compensation and benefits expense and business support costs. Our combined ratio was 98.6% for the year endedDecember 31, 2022 , compared to 93.9% for the same period in 2021. The increase was primarily driven by higher acquisition and underwriting expenses.
Premium and Service Revenue Written
The following table summarizes premium and service revenue written by product, net of premiums ceded to reinsurers, and premiums and service revenue assumed from third-parties. VSC and GAP revenue are earned over the life of the service contract on a basis proportionate to the anticipated loss pattern. Refer to Note 3 to the Consolidated Financial Statements for further discussion of this revenue stream. Year ended December 31, ($ in millions) 2022 2021 2020 Finance and insurance products Vehicle service contracts$ 702 $ 838 $ 850 Guaranteed asset protection and other finance and insurance products (a) 175 162 137 Total finance and insurance products 877 1,000 987 Property and casualty insurance (b) 215 197 242 Other premium and service revenue written (c) 11 - - Total$ 1,103 $ 1,197 $ 1,229 (a)Other financial and insurance products include VMCs, ClearGuard, and other ancillary products. (b)P&C insurance includes vehicle inventory insurance and dealer ancillary products including property and liability coverage underwritten by a third-party carrier. (c)Primarily includes non-automotive assumed reinsurance and revenues associated with performing services as an underwriting carrier. Insurance premiums and service revenue written was$1.1 billion for the year endedDecember 31, 2022 , compared to$1.2 billion for the same period in 2021. The decrease was primarily due to lower F&I volume commensurate with lower industry retail sales and a shift in VSC product mix toward dealer reinsurance structures. These decreases were partially offset by growth in other P&C dealer property and liability products, which also more than offset declines in P&C vehicle inventory insurance premiums related to lower industry vehicle inventory levels that resulted from supply chain disruptions.
Cash and Investments
A significant aspect of our Insurance operations is the investment of proceeds
from premiums and other revenue sources. We use these investments to satisfy our
obligations related to future claims at the time these claims are settled. Our
Insurance operations have an Investment Committee, which develops guidelines and
strategies for these investments. The guidelines established by this committee
reflect our risk appetite, liquidity requirements, regulatory requirements, and
rating agency considerations, among other factors.
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Management's Discussion and Analysis
Ally Financial Inc. • Form 10-K
The following table summarizes the composition of our Insurance operations cash
and investment portfolio at fair value.
December 31, ($ in millions) 2022 2021 Cash and cash equivalents Noninterest-bearing cash$ 91 $ 173 Interest-bearing cash 401 549 Total cash and cash equivalents 492 722 Equity securities 675 1,085 Available-for-sale securities Debt securities U.S. Treasury and federal agencies 485 255 U.S. States and political subdivisions 474 526 Foreign government 146 157 Agency mortgage-backed residential 1,026 703 Mortgage-backed residential 235 195 Corporate debt 1,719 1,887 Total available-for-sale securities 4,085 3,723
Total cash, cash equivalents, and securities
In addition to these cash and investment securities, the Insurance segment has an interest-bearing intercompany arrangement with Corporate and Other, callable on demand. The intercompany loan balance due to Insurance was$417 million and$923 million atDecember 31, 2022 , andDecember 31, 2021 , respectively, and interest income of$9 million and$14 million was recognized for the years endedDecember 31, 2022 , andDecember 31, 2021 , respectively. 64 -------------------------------------------------------------------------------- Table of Contents Management's Discussion and AnalysisAlly Financial Inc. • Form 10-K
Mortgage Finance
Results of Operations
The following table summarizes the activities of our Mortgage Finance
operations. The amounts presented are before the elimination of balances and
transactions with our reportable segments.
Favorable/(unfavorable)
Favorable/(unfavorable)
Year ended December 31, ($ in millions) 2022 2021 2020 2022-2021 % change 2021-2020 % change Net financing revenue and other interest income Total financing revenue and other interest income$ 575 $ 407 $ 487 41 (16) Interest expense 354 283 369 (25) 23 Net financing revenue and other interest income 221 124 118 78 5 Gain on mortgage loans, net 26 87 93 (70) (6) Other income, net of losses 1 7 9 (86) (22) Total other revenue 27 94 102 (71) (8) Total net revenue 248 218 220 14 (1) Provision for credit losses 3 (1) 7 n/m 114 Noninterest expense Compensation and benefits expense 23 22 22 (5) - Other operating expenses 167 165 138 (1) (20) Total noninterest expense 190 187 160 (2) (17) Income from continuing operations before income tax expense$ 55 $ 32 $ 53 72 (40) Total assets$ 19,529 $ 17,847 $ 14,889 9 20 n/m = not meaningful 2022 Compared to 2021 Our Mortgage Finance operations earned income from continuing operations before income tax expense of$55 million for the year endedDecember 31, 2022 , compared to$32 million for the year endedDecember 31, 2021 . The increase for the year endedDecember 31, 2022 , was primarily driven by higher net financing revenue and other interest income, partially offset by lower net gains on the sale of mortgage loans. Net financing revenue and other interest income was$221 million for the year endedDecember 31, 2022 , compared to$124 million for the year endedDecember 31, 2021 . The increase in net financing revenue and other interest income for the year endedDecember 31, 2022 , was primarily due to higher asset balances and lower prepayment activity, driven by a higher interest rate environment, which resulted in lower premium amortization. Premium amortization was$18 million for the year endedDecember 31, 2022 , compared to$92 million for the year endedDecember 31, 2021 . During the year endedDecember 31, 2022 , we purchased$2.8 billion of mortgage loans that were originated by third parties, compared to$3.9 billion for the year endedDecember 31, 2021 . We originated$1.1 billion of mortgage loans held-for-investment during the year endedDecember 31, 2022 , compared to$7.0 billion during the year endedDecember 31, 2021 . Gain on sale of mortgage loans, net, was$26 million for the year endedDecember 31, 2022 , compared to$87 million for the year endedDecember 31, 2021 . The decrease was attributable to lower margins and lower volume on direct-to-consumer mortgage originations and the subsequent sale of these loans to a third party. We originated$2.1 billion of loans held-for-sale during the year endedDecember 31, 2022 , compared to$3.4 billion during the year endedDecember 31, 2021 . The provision for credit losses increased$4 million for the year endedDecember 31, 2022 , compared to the year endedDecember 31, 2021 . The increase in provision for credit losses for the year endedDecember 31, 2022 , was primarily driven by reserve reductions during the year endedDecember 31, 2021 , associated with improvements to the macroeconomic environment following the onset of the COVID-19 pandemic. Refer to the Risk Management section of this MD&A for further discussion on our provision for credit losses. 65 -------------------------------------------------------------------------------- Table of Contents Management's Discussion and AnalysisAlly Financial Inc. • Form 10-K The following table presents the total UPB of purchases and originations of consumer mortgages held-for-investment, by FICO® Score at the time of acquisition. Volume FICO® Score ($ in millions) % Share of volume Year endedDecember 31, 2022 740 + $ 3,217 83 720-739 388 10 700-719 235 6 680-699 51 1 660-679 2 - Total consumer mortgage financing volume $ 3,893 100 Year endedDecember 31, 2021 740 + $ 9,830 90 720-739 783 7 700-719 268 3 680-699 12 - Total consumer mortgage financing volume $ 10,893 100 Year endedDecember 31, 2020 740 + $ 5,151 83 720-739 580 9 700-719 362 6 680-699 67 1 660-679 27 1 < 660 20 - Total consumer mortgage financing volume $ 6,207
100
During the year ended
consumer mortgage held-for-investment loans, as compared to the year ended
rate environment. When interest rates rise, the likelihood of refinancing
decreases and origination volumes tend to decrease.
The following table presents the net UPB, net UPB as a percentage of total, WAC,
premium net of discounts, LTV, and FICO® Scores for the products in our Mortgage
Finance held-for-investment loan portfolio.
Net premium
Net UPB (a) ($ (discount) ($ Average refreshed Average refreshed
Product in millions) % of total net UPB WAC in millions) LTV (b) FICO® (c)
December 31, 2022
Adjustable-rate $ 408 2 3.18 % $ 2 52.64 % 771
Fixed-rate 19,039 98 3.18 (4) 54.69 782
Total $ 19,447 100 3.18 $ (2) 54.65 781
December 31, 2021
Adjustable-rate $ 378 2 2.76 % $ 3 50.37 % 763
Fixed-rate 17,158 98 3.15 106 57.09 776
Total $ 17,536 100 3.14 $ 109 56.94 776
(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.
66
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Table of Contents
Management's Discussion and Analysis
Ally Financial Inc. • Form 10-K
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.
Favorable/(unfavorable)
Favorable/(unfavorable)
Year ended December 31, ($ in millions) 2022 2021 2020 2022-2021 % change 2021-2020 % change Net financing revenue and other interest income Interest and fees on finance receivables and loans$ 527 $ 334 $ 349 58 (4) Interest on loans held-for-sale 19 11 11 73 - Interest expense 212 37 61 n/m 39 Net financing revenue and other interest income 334 308 299 8 3 Total other revenue 122 128 45 (5) 184 Total net revenue 456 436 344 5 27 Provision for credit losses 43 38 149 (13) 74 Noninterest expense Compensation and benefits expense 75 70 62 (7) (13) Other operating expenses 56 46 45 (22) (2) Total noninterest expense 131 116 107 (13) (8) Income from continuing operations before income tax expense$ 282 $ 282 $ 88 - n/m Total assets$ 10,544 $ 7,950 $ 6,108 33 30 n/m = not meaningful 2022 Compared to 2021 Our Corporate Finance operations earned income from continuing operations before income tax expense of$282 million for both the years endedDecember 31, 2022 , and 2021. For the year endedDecember 31, 2022 , higher net financing revenue was offset by lower investment gains, and higher noninterest and provision expense compared to the year endedDecember 31, 2021 . Net financing revenue and other interest income was$334 million for the year endedDecember 31, 2022 , compared to$308 million for the year endedDecember 31, 2021 . The increase for the year endedDecember 31, 2022 , was primarily due to higher average assets from continued growth in the portfolio. This was partially offset by an increase in interest expense as benchmark interest rates continued to rise. Other revenue decreased$6 million for the year endedDecember 31, 2022 , compared to the year endedDecember 31, 2021 . The decrease was primarily due to lower investment gains, partially offset by higher syndication and fee income for the year endedDecember 31, 2022 , compared to 2021. The provision for credit losses increased$5 million for the year endedDecember 31, 2022 , compared to the year endedDecember 31, 2021 . The increase in provision for credit losses was primarily driven by reserve increases associated with portfolio growth, as well as higher specific provision activity. Refer to the Risk Management section of this MD&A for further discussion on our provision for credit losses. Total noninterest expense increased$15 million for the year endedDecember 31, 2022 , compared to the year endedDecember 31, 2021 . The increase was primarily due to higher direct and allocated expenses related to the growth of the business during 2022. 67 -------------------------------------------------------------------------------- Table of Contents Management's Discussion and AnalysisAlly Financial Inc. • Form 10-K
Credit Portfolio
The following table presents loans held for sale, the amortized cost of finance receivables and loans outstanding, unfunded commitments to lend, and total serviced loans of our Corporate Finance operations. As ofDecember 31, 2022 , 59% of our loans and 55% of our lending commitments were asset-based, with 99.9% in a first-lien position. December 31, ($ in millions) 2022 2021 Loans held-for-sale, net$ 445 $ 305
Finance receivables and loans
Unfunded lending commitments (a)
Total serviced loans
$ 14,823 $ 11,180 (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 amortized cost. December 31, 2022 2021 Industry Financial services 40.9 % 38.1 % Health services 14.5 16.4 Services 13.4 13.8 Automotive and transportation 8.7 8.9 Machinery, equipment, and electronics 7.3 5.4 Chemicals and metals 7.0 8.8 Wholesale 2.6 1.7 Other manufactured products 2.1 1.4 Retail trade 1.7 1.2 Other 1.8 4.3 Total finance receivables and loans 100.0 % 100.0 % 68 -------------------------------------------------------------------------------- Table of Contents Management's Discussion and AnalysisAlly Financial Inc. • Form 10-K 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 as well as other strategic investments throughAlly Ventures , the management of our legacy mortgage portfolio, which primarily consists of loans originated prior toJanuary 1, 2009 , the activity related to Ally Invest,Ally Lending , Ally Credit Card, CRA loans and related investments, and reclassifications and eliminations between the reportable operating segments. Additionally, Corporate and Other includes costs that are not allocated to our reportable operating segments as part of our COH methodology, which involves management judgment. Refer to Note 26 to the Consolidated Financial Statements for more information. Favorable/(unfavorable)
Favorable/(unfavorable)
Year ended December 31, ($ in millions) 2022 2021 2020 2022-2021 % change 2021-2020 % change Net financing revenue and other interest income Interest and fees on finance receivables and loans (a)$ 599 $ 5 $ (15) n/m 133 Interest on loans held-for-sale 7 3 4 133 (25) Interest and dividends on investment securities and other earning assets 726 498 629 46 (21) Interest on cash and cash equivalents 52 14 14 n/m - Other, net - - (8) - 100 Total financing revenue and other interest income 1,384 520 624 166 (17) Interest expense Original issue discount amortization (b) 53 49 47 (8) (4) Other interest expense (c) 349 4 617 n/m 99 Total interest expense 402 53 664 n/m 92 Net financing revenue (loss) and other interest income 982 467 (40) 110 n/m Other revenue Gain on mortgage and automotive loans, net - - 17 - (100) Loss on extinguishment of debt - (136) (102) 100 (33) Other gain on investments, net 22 64 88 (66) (27) Other income, net of losses 78 293 295 (73) (1) Total other revenue 100 221 298 (55) (26) Total net revenue 1,082 688 258 57 167 Provision for credit losses 317 151 47 (110) n/m Total noninterest expense (d) 972 723 507 (34) (43) Loss from continuing operations before income tax expense$ (207) $ (186) $ (296) (11) 37 Total assets$ 41,631 $ 43,283 $ 47,237 (4) (8) n/m = not meaningful (a)Includes impacts associated with hedging activities within our automotive loan portfolio, consumer other lending activity, and financing revenue from our legacy mortgage portfolio. (b)Amortization is included as interest on long-term debt in the Consolidated Statement of Income. (c)Includes the residual impacts of our FTP methodology and impacts of hedging activities of certain debt obligations. (d)Includes reductions of$1.3 billion ,$1.1 billion , and$986 million for the years endedDecember 31, 2022 , 2021, and 2020, respectively, related to the allocation of COH expenses to other segments. The receiving segments record their allocation of COH expense within other operating expense. 69 -------------------------------------------------------------------------------- Table of Contents Management's Discussion and AnalysisAlly Financial Inc. • Form 10-K
The following table presents the scheduled remaining amortization of the
original issue discount at
Year ended December 31, ($ 2028 and in millions) 2023 2024 2025 2026 2027 thereafter (a) Total Original issue discount Outstanding balance at year end$ 821 $ 753 $ 680 $ 598 $ 505 $ - Total amortization (b) 61 68 73 82 93 505$ 882
(a)The maximum annual scheduled amortization for any individual year is
(b)The amortization is included as interest on long-term debt in the
Consolidated Statement of Income.
2022 Compared to 2021
Corporate and Other incurred a loss from continuing operations before income tax expense of$207 million for the year endedDecember 31, 2022 , compared to a loss of$186 million for the year endedDecember 31, 2021 . The increase in loss for the year endedDecember 31, 2022 , was primarily driven by increases in both noninterest expense and provision expense, as well as a decrease in other revenue resulting from an impairment of an equity investment without a readily determinable fair value. The increase in loss was partially offset by an increase in net financing revenue and other interest income. Total financing revenue and other interest income was$1.4 billion for the year endedDecember 31, 2022 , compared to$520 million for the year endedDecember 31, 2021 . The increase was primarily driven by the impacts of a higher interest rate environment on the investment securities portfolio and hedging activities, along with financing revenue from Ally Credit Card, which we acquired in the fourth quarter of 2021. Total interest expense increased$349 million for the year endedDecember 31, 2022 , compared to the year endedDecember 31, 2021 . The increase was primarily driven by a higher interest rate environment, resulting in higher funding costs. Total other revenue decreased$121 million for the year endedDecember 31, 2022 , compared to the year endedDecember 31, 2021 . The decrease was primarily driven by net downward adjustments (including impairment) of$137 million related to equity investments without a readily determinable fair value during the year endedDecember 31, 2022 , compared to net upward adjustments of$87 million during the year endedDecember 31, 2021 . Refer to Note 13 to the Consolidated Financial Statements for additional information. The decrease was partially offset by the loss on extinguishment of debt during the year endedDecember 31, 2021 . The provision for credit losses increased$166 million for the year endedDecember 31, 2022 , compared to the year endedDecember 31, 2021 . For the year endedDecember 31, 2022 , the increase in provision for credit losses was primarily driven by higher net charge-offs within Ally Credit Card following our acquisition inDecember 2021 , as well as higher net charge-offs and portfolio growth withinAlly Lending . Refer to the Risk Management section of this MD&A for further discussion on our provision for credit losses. Noninterest expense increased$249 million for the year endedDecember 31, 2022 , as compared to the year endedDecember 31, 2021 . The increase was primarily driven by incremental costs associated with Ally Credit Card, as well as compensation and benefits expense, which increased primarily as a result of the settlement of our qualified defined pension plan. Total assets were$41.6 billion as ofDecember 31, 2022 , compared to$43.3 billion as ofDecember 31, 2021 . This decrease was primarily the result of a reduction in our investment securities balances, partially offset by growth in consumer loans associated withAlly Lending and Ally Credit Card. Additionally, as ofDecember 31, 2022 , the amortized cost of the legacy mortgage portfolio was$290 million , compared to$368 million atDecember 31, 2021 , which also contributed to the decrease. 70 -------------------------------------------------------------------------------- Table of Contents Management's Discussion and AnalysisAlly Financial Inc. • Form 10-K
The following table summarizes the composition of the cash and securities
portfolio at fair value for Corporate and Other.
December 31, ($ in millions) 2022 2021 Cash and cash equivalents Noninterest-bearing cash$ 451 $ 306 Interest-bearing cash 4,628 4,011 Total cash and cash equivalents 5,079 4,317 Equity securities - 6 Available-for-sale securities Debt securities U.S. Treasury and federal agencies 1,531 1,900 U.S. States and political subdivisions 286 338 Agency mortgage-backed residential 15,607 18,336 Mortgage-backed residential 4,064 4,230 Agency mortgage-backed commercial 3,535 4,526 Asset-backed 433 534 Total available-for-sale securities 25,456 29,864 Held-to-maturity securities Debt securities Agency mortgage-backed residential 884 1,204 Total held-to-maturity securities 884 1,204
Total cash, cash equivalents, and securities
Other Investments
The following table summarizes other investments at carrying value for Corporate and Other. Refer to Note 1 to the Consolidated Financial Statements for further information on these investments.December 31 , ($ in millions) 2022
2021
Other assets Investment in qualified affordable housing projects$ 1,596 $ 1,378 Nonmarketable equity investments 794 956 Equity-method investments (a) 563 424 Total other investments$ 2,953 $ 2,758
(a)Primarily relates to investments made in connection with our CRA program.
Ally Invest
Ally Invest is our digital brokerage and wealth management offering, which
enables us to complement our competitive deposit products with low-cost and
commission-free investing. The following table presents trading days and average
customer trades per day, the number of funded accounts, total net customer
assets, and total customer cash balances as of the end of each of the last five
quarters.
December 31, September 30, March 31, December 31,
2022 2022 June 30, 2022 2022 2021
Trading days (a) 62.5 64.0 62.0 62.0 63.5
Average customer trades per day,
(in thousands) 27.1 29.1 33.7 40.2 42.8
Funded accounts (b) (in thousands) 518 521 518 517 506
Total net customer assets (b) ($ in
millions) $ 12,834 $ 13,095
Total customer cash balances (b) ($
in millions)
$ 1,757 $ 1,917
(a)Represents the number of days theNew York Stock Exchange and otherU.S. stock exchange markets are open for trading. A half day represents a day when theU.S. markets close early. (b)Represents activity across the brokerage, robo, and wealth management portfolios. During the year endedDecember 31, 2022 , macroeconomic uncertainty and market volatility resulted in lower customer engagement and lower trade activity. Total funded accounts increased 2% from the fourth quarter of 2021. Average customer trades per day decreased 37% 71 -------------------------------------------------------------------------------- Table of Contents Management's Discussion and AnalysisAlly Financial Inc. • Form 10-K from the fourth quarter of 2021, driven primarily by lower customer engagement. Additionally, net customer assets decreased 26% from the fourth quarter of 2021, as a result of lower equity market valuations.
Ally Lending is our unsecured personal lending offering, which primarily serves medical and home improvement service providers by enabling promotional and fixed rate installment-loan products through a digital application process at point-of-sale. Total active merchants totaled approximately 3,400 as ofDecember 31, 2022 , reflecting an increase of 13% fromDecember 31, 2021 . Total active borrowers totaled approximately 460,000 as ofDecember 31, 2022 , reflecting an increase of 58% compared toDecember 31, 2021 . The following table presents personal lending originations by average FICO® Score. 2022 2021 Year ended December 31, ($ in millions) Volume Average FICO® Volume Average
FICO®
Total personal lending originations (a)$ 2,131 736$ 1,241
734
(a)Includes loans for which we have elected the fair value option measurement.
During the year endedDecember 31, 2022 , personal lending originations increased$890 million to$2.1 billion , as compared to the year endedDecember 31, 2021 . We continue to expand our relationships across the home improvement and medical verticals. The carrying value of our personal lending portfolio was$2.0 billion atDecember 31, 2022 , compared to$1.0 billion atDecember 31, 2021 , while the associated yield was 11.3% for the year endedDecember 31, 2022 , as compared to 13.8% for the year endedDecember 31, 2021 . The decrease in associated yields for the year endedDecember 31, 2022 , as compared to 2021, was due to increased originations in the home improvement vertical. The following table presents the percentage of total finance receivables and loans ofAlly Lending by vertical. The finance receivables and loans are reported at amortized cost. December 31, 2022 2021 Vertical Home improvement 61.9 % 39.3 % Medical 37.9 60.3 Other 0.2 0.4
Total finance receivables and loans (a) 100.0 % 100.0 %
(a)Includes loans for which we have elected the fair value option measurement.
Ally Credit Card
Ally Credit Card is our scalable, digital-first credit card platform that
features leading-edge technology, and a proprietary, analytics-based
underwriting model. The following table presents total active cardholders and
finance receivables and loans.
December 31, 2022 2021 Total active cardholders (in thousands) 1,042 766 Finance receivables and loans ($ in millions)
72 -------------------------------------------------------------------------------- Table of Contents Management's Discussion and AnalysisAlly Financial Inc. • Form 10-K 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 the risks that emanate
from their risk-taking activities, including business units and support
functions.
•Independent risk management - Operates independent of the business lines and is 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 regarding the quality of our loan portfolios as well as the effectiveness of our risk management, internal controls, and governance. Internal audit includes Audit Services and theLoan Review Group . Our risk-management framework is overseen by the RC of our 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. Our primary types of risks include the following:
•Credit risk - The risk of loss arising from an obligor not meeting its
contractual obligations to us.
•Insurance/underwriting risk - The risk of loss or of adverse change in the
value of insurance liabilities, due to inadequate pricing and provisioning
assumptions.
•Liquidity risk - The risk that our financial condition or overall safety and soundness is adversely affected by the actual or perceived inability to liquidate assets or obtain adequate funding or to easily unwind or offset specific exposures without significantly lowering market prices because of inadequate market depth or market disruptions. Refer to discussion in the section titled Liquidity Management, Funding, andRegulatory Capital within this MD&A. •Market risk - The risk that movements in market variables such as benchmark interest rates, investors' required risk premium, foreign-exchange rates, equity prices, and used car prices may adversely affect our earnings, capital, or economic value. Market risk includes interest rate risk, investment risk, and lease residual risk.
•Business/strategic risk - The risk resulting from the pursuit of business plans
that turn out to be unsuccessful due to a variety of factors.
•Reputation risk - The risk arising from negative public opinion on our business
practices, whether true or not, that could cause a decline in the customer base,
litigation, or revenue reductions.
•Operational risk - Operational risk is the risk of loss or harm arising from
inadequate or failed processes or systems, human factors, or external events and
is inherent in all of our risk-generating activities.
•Information technology/cybersecurity risk - The risk resulting from the failure
of, or insufficiency in, information technology (for example, a system outage)
or intentional or accidental unauthorized access, sharing, removal, tampering,
or disposal of company and customer data or records (for example,
cybersecurity).
•Compliance risk - The risk of legal or regulatory sanctions, financial loss, or
damage to reputation resulting from failure to comply with laws, regulations,
rules, other regulatory requirements, or codes of conduct and other standards of
self-regulatory organizations applicable to the banking organization (applicable
rules and standards).
•Conduct risk - The risk of customer harm, employee harm, reputational damage,
regulatory sanction, or financial loss resulting from the behavior of our
employees and contractors toward customers, counterparties, other employees and
contractors, or the markets in which we operate.
Our risk-governance structure starts within each business line, including
committees established to oversee risk in their respective areas. The business
lines are responsible for their risk-based performance and compliance with
risk-management policies and applicable law. The independent risk-management
function is accountable for independently identifying, monitoring, measuring,
and reporting on our various risks and for designing an effective
risk-management framework and structure. The independent risk-management
function is also responsible for developing, maintaining, and implementing
enterprise risk-management. In addition, the ERMC is responsible for supporting
the Chief Risk Officer's oversight of senior management's responsibility to
execute on our strategy within our risk appetite set by the RC, and the Chief
Risk Officer's implementation of our independent risk-management program. The
Chief Risk Officer reports to the RC, as well as administratively to the CEO.
All business lines and corporate functions are subject to full and unrestricted
audits by Audit Services. The Chief Audit Executive reports to the AC, as well
as administratively to the CEO, and is primarily responsible for assisting the
AC in fulfilling its governance and oversight
73
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Management's Discussion and Analysis
Ally Financial Inc. • Form 10-K
responsibilities. Audit Services is granted free and unrestricted access to any
and all of our records, physical properties, technologies, management, and
employees.
In addition, ourLoan Review Group provides an independent assessment of the quality of our extensions of credit and credit-risk-management practices, and all business lines that create or influence credit risk are subject to full and unrestricted reviews by theLoan Review Group . This group is also granted free and unrestricted access to any and all of our records, physical properties, technologies, management and employees, and reports directly to the RC. In addition to the primary risks that we manage, climate-related risk has been identified as an emerging risk. Climate-related risk refers to the risk of loss or change in business activities arising from climate change and represents a transverse risk that could impact other risks within Ally's risk-management framework, such as credit risk from negatively impacted borrowers, reputation risk from increased stakeholder concerns, and operational risk from physical climate risks. Refer to section titled Climate-Related Risk within this section for more information.
Loan and Operating Lease Exposure
The following table summarizes the exposures from our loan and operating-lease
activities based on our reportable operating segments.
December 31, ($ in millions) 2022 2021 Finance receivables and loans Automotive Finance (a)$ 102,070 $ 94,326 Mortgage Finance 19,445 17,644 Corporate Finance 10,147 7,770 Corporate and Other (b) 4,086 2,528 Total finance receivables and loans 135,748 122,268 Loans held-for-sale Automotive Finance 6 - Mortgage Finance (c) 13 80 Corporate Finance 445 305 Corporate and Other 190 164 Total loans held-for-sale 654 549 Total on-balance-sheet loans 136,402 122,817 Whole-loan sales Automotive Finance 227 - Corporate and Other 103 4 Total off-balance-sheet loans (d) 330 4 Operating lease assets Automotive Finance 10,444 10,862 Total operating lease assets 10,444 10,862
Total loan and operating lease exposure
(a)Includes a liability of$617 million and$37 million associated with fair value hedging adjustments atDecember 31, 2022 , andDecember 31, 2021 , respectively. Refer to Note 21 to the Consolidated Financial Statements for additional information. (b)Includes$290 million and$368 million of consumer mortgage loans in our legacy mortgage portfolio atDecember 31, 2022 , andDecember 31, 2021 , respectively. (c)Represents the current balance of conforming mortgages originated directly to the held-for-sale portfolio. (d)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 (including GDP trends and inflationary pressures), used vehicle and housing prices, unemployment levels, real personal income, household savings, 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 most of our consumer automotive and credit card 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 may be more volatile than credit risk in stressed macroeconomic scenarios. 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. •Finance receivables and loans - Loans that we have the intent and ability to hold for the foreseeable future or until maturity, or loans associated with an on-balance-sheet securitization classified as a secured borrowing. Finance receivables and loans are 74 -------------------------------------------------------------------------------- Table of Contents Management's Discussion and AnalysisAlly Financial Inc. • Form 10-K reported at their amortized cost basis, which includes the principal amount outstanding, net of unamortized deferred fees and costs on originated loans, unamortized premiums and discounts on purchased loans, unamortized basis adjustments arising from the designation of finance receivables and loans as the hedged item in qualifying fair value hedge relationships, and cumulative principal net charge-offs. We refer to the amortized cost basis less the allowance for loan losses as the net carrying value in finance receivables and loans. We manage the economic risks of these exposures, including credit risk, by adjusting underwriting standards and risk limits, augmenting our servicing and collection activities (including loan modifications and restructurings), and optimizing our product and geographic concentrations. Additionally, we may elect to account for certain loans at fair value. Changes in the fair value of these loans are recognized in a valuation allowance separate from the allowance for loan losses and are reflected in current period earnings. We may use market-based instruments, such as derivatives, to hedge changes in the fair value of these loans. •Loans held-for-sale - Loans that we do not have the intent and ability to hold for the foreseeable future or until maturity. These loans are recorded on our balance sheet at the lower of their net carrying value or fair market value and are evaluated by portfolio and product type. We manage the economic risks of these exposures, including market and credit risks, in various ways including the use of market-based instruments, such as derivatives. •Whole-loan sales - Loans that we transfer off-balance sheet to third-party investors. Our exposure is primarily limited to customary representation, warranty and covenant provisions. Similar to finance receivables and loans, we manage the economic risks of these exposures through activities including servicing and collections. •Operating lease assets - The net book value of the automotive assets we lease includes the expected residual values upon remarketing the vehicles at the end of the lease and is reported net of accumulated depreciation. We are exposed to fluctuations in the expected residual value upon remarketing the vehicle at the end of the lease, and accordingly 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 appropriately 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 recorded through depreciation expense. The balance sheet reflects both the operating lease asset as well as any associated rent receivables. The operating lease rent receivable is accrued when collection is reasonably assured and presented as a component of other assets. The operating lease asset is reviewed for impairment in accordance with applicable accounting standards.
Refer to the section titled Critical Accounting Estimates within this MD&A and
Note 1 to the Consolidated Financial Statements for further information.
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 executive leadership team and our associates, and is regularly reported to and reviewed with the RC. Management oversees credit decisioning, account servicing activities, and credit-risk-management processes, and manages credit risk exposures within our risk appetite. In addition, ourLoan Review Group provides an independent assessment of the quality of our credit portfolios and credit-risk-management practices and 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, microsegments 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 periodic stress tests, which include economic scenarios whose severity mirrors those developed and distributed by the FRB 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 (for example, 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 relative to expected credit losses at contract inception. We closely monitor our loan performance and profitability in light of forecasted economic conditions and manage credit risk and expectations of losses in the portfolio. 75 -------------------------------------------------------------------------------- Table of Contents Management's Discussion and AnalysisAlly Financial Inc. • Form 10-K We manage credit risk based on the risk profile of the borrower, the source of repayment, the underlying collateral, and current market and economic conditions. We monitor the credit risk profile of individual borrowers, various segmentations (for example, geographic region, product type, industry segment), as well as the aggregate portfolio. We perform quarterly analyses of the consumer automotive, consumer mortgage, consumer other, and commercial portfolios to assess the adequacy of the allowance for loan losses based on historical, current, and anticipated trends. Refer to Note 9 to the Consolidated Financial Statements for additional information. Additionally, we utilize numerous collection strategies to mitigate loss and provide ongoing support to customers in financial distress. We have enhanced our collection strategies to include customized messaging, digital communication, and proactive monitoring of vendor performance. 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 maturity extensions, delinquent interest capitalization, changes to contractual interest rates, and principal forgiveness. 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, lending arrangements, and certain cash balances. For more information on derivative counterparty credit risk, refer to Note 21 to the 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. As measured by GDP, theU.S. economy grew modestly in 2022, and the unemployment rate remained low at 3.5% as ofDecember 31, 2022 . Sales of new light vehicles have been adversely affected primarily by supply chain difficulties and slowed to an average annual rate of 13.8 million duringDecember 2022 . Sales of new light motor vehicles remain below the pre-pandemic annual pace of 17.0 million in 2019, driving an increase in used vehicle values, as further described in the section below titled Operating Lease Vehicle Terminations and Remarketing. Additionally, used vehicle values may also be impacted by availability, price of new vehicles, or changes in customer preferences. Consumer Credit Portfolio Our consumer loan portfolio primarily consists of automotive loans, first-lien mortgages, home equity loans, personal loans, and credit card loans. Loan losses in our consumer loan portfolio are influenced by changes in the overall economy (including GDP trends and inflationary pressures), used vehicle and housing prices, unemployment levels, real personal income, household savings, and their impact on our borrowers. Additionally, our consumer credit exposure is significantly concentrated in automotive lending. Credit risk management for the consumer loan portfolio begins with the initial underwriting and continues throughout a borrower's credit life cycle. We manage consumer credit risk through our loan origination and underwriting policies and the credit approval process. We use proprietary credit-scoring models to differentiate the expected default rates of credit applicants enabling us to better evaluate credit applications for approval and to tailor the pricing and financing structure according to this assessment of credit risk. We continue to monitor loss performance across the risk spectrum, which enables us to implement risk mitigation strategies, including pricing increments and curtailment actions on underperforming microsegments. We continuously monitor and routinely update the inputs of the credit scoring models. These and other actions mitigate but do not eliminate credit risk. Ineffective evaluations of a borrower's creditworthiness, fraud, or changes in the applicant's financial condition after approval could negatively affect the quality of our portfolio, resulting in loan losses. For example, early loss performance in our consumer automotive lending portfolio is trending higher compared to expectations at the time of origination for loans originated between the third quarter of 2021 and the second quarter of 2022. Our servicing activities are another important factor in managing consumer credit risk. Servicing activities consist of collecting and processing customer payments, responding to customer concerns and inquiries, processing customer requests (including those for payoff quotes, total-loss handling, and payment modifications), maintaining a perfected security interest in the financed vehicle, engaging in collections activity, and disposing of off-lease and repossessed vehicles. Servicing activities are generally consistent across our Automotive Finance operations; however, certain practices may be influenced by state laws. During the year endedDecember 31, 2022 , the credit performance of the consumer loan portfolio reflected our underwriting strategy to originate a diversified portfolio of consumer automotive loan assets, including new, used, prime and nonprime finance receivables and loans, high-quality jumbo and LMI mortgage loans that are obtained through bulk loan purchases and direct-to-consumer mortgage originations, as well as point-of-sale personal lending throughAlly Lending . Additionally, beginning inDecember 2021 with the acquisition of Ally Credit Card, financial information related to our credit card business is included within Corporate and Other. The carrying value of our nonprime held-for-investment consumer automotive loans before allowance for loan losses represented approximately 10.6% and 11.3% of our total consumer automotive loans atDecember 31, 2022 , andDecember 31, 2021 , respectively. For information on our consumer credit risk practices and policies regarding delinquencies, nonperforming status, and charge-offs, refer to Note 1 to the Consolidated Financial Statements. 76 -------------------------------------------------------------------------------- Table of Contents Management's Discussion and AnalysisAlly Financial Inc. • Form 10-K The following table includes consumer finance receivables and loans recorded at amortized cost. Accruing past due 90 days or Outstanding Nonperforming (a) more (b) December 31, ($ in millions) 2022 2021 2022 2021 2022 2021 Consumer automotive (c) (d)$ 83,286 $ 78,252 $ 1,187 $ 1,078 $ - $ - Consumer mortgage Mortgage Finance 19,445 17,644 34 59 - - Mortgage - Legacy 290 368 15 26 - - Total consumer mortgage 19,735 18,012 49 85 - - Consumer other Personal Lending (e) 1,987 1,002 13 5 - - Credit Card 1,599 953 43 11 - - Total consumer other 3,586 1,955 56 16 - - Total consumer finance receivables and loans$ 106,607 $ 98,219 $ 1,292 $ 1,179 $ - $ - (a)Includes nonaccrual TDR loans of$684 million and$714 million atDecember 31, 2022 , andDecember 31, 2021 , 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 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 21 to the Consolidated Financial Statements for additional information. (d)Includes outstanding CSG loans of$10.0 billion and$8.6 billion atDecember 31, 2022 , andDecember 31, 2021 , respectively, and RV loans of$578 million and$763 million atDecember 31, 2022 , andDecember 31, 2021 , respectively. (e)Excludes finance receivables of$3 million and$7 million atDecember 31, 2022 , andDecember 31, 2021 , respectively, for which we have elected the fair value option. Total consumer finance receivables and loans increased$8.4 billion atDecember 31, 2022 , compared withDecember 31, 2021 . The increase consists of$5.0 billion of consumer automotive finance receivables and loans,$1.7 billion of consumer mortgage finance receivables and loans and$1.6 billion of consumer other finance receivables and loans. The increase was primarily due to an increase in consumer automotive finance receivables and loans, primarily related to continued momentum in our used-vehicle lending. Growth within the consumer mortgage and consumer other finance receivables and loans portfolios was primarily due to loan originations and purchases, which outpaced portfolio runoff. Total consumer nonperforming finance receivables and loans atDecember 31, 2022 , increased$113 million to$1.3 billion fromDecember 31, 2021 . We experienced increases from prior year COVID-19 pandemic lows in delinquency and loss statistics in our consumer automotive portfolio. Refer to Note 9 to the Consolidated Financial Statements for additional information. Nonperforming consumer finance receivables and loans as a percentage of total outstanding consumer finance receivables and loans were 1.2% at bothDecember 31, 2022 , andDecember 31, 2021 . Total consumer TDRs outstanding atDecember 31, 2022 , decreased$346 million sinceDecember 31, 2021 , to$1.8 billion . Results primarily reflect a$348 million decrease in our consumer automotive portfolio. The level of consumer TDRs is continuing to stabilize, following our 2020 loan modification program offered to borrowers affected by the COVID-19 pandemic, which are continuing to runoff in the current year. Refer to Note 9 to the Consolidated Financial Statements for additional information.
Consumer automotive loans accruing and past due 30 days or more increased
billion
portfolio.
77 -------------------------------------------------------------------------------- Table of Contents Management's Discussion and AnalysisAlly Financial Inc. • Form 10-K
The following table includes consumer net charge-offs from finance receivables
and loans at amortized cost and related ratios.
Net charge-offs (recoveries) Net charge-off ratios (a)
Year ended December 31, ($ in millions) 2022 2021 2022 2021
Consumer automotive $ 785 $ 237 1.0 % 0.3 %
Consumer mortgage
Mortgage Finance - 2 - -
Mortgage - Legacy (9) (9) (2.7) (2.0)
Total consumer mortgage (9) (7) - -
Consumer other
Personal Lending 70 26 4.6 4.0
Credit Card 51 2 4.1 2.8
Total consumer other 121 28 4.4 3.3
Total consumer finance receivables and loans $ 897 $ 258 0.9 0.3
(a)Net charge-off ratios are calculated as 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
$897 million for the year ended December 31, 2022 , respectively, compared to net
charge-offs of $258 million for the year ended December 31, 2021 . Net
charge-offs for our consumer automotive portfolio increased by $548 million for
the year ended December 31, 2022 , compared to 2021. We experienced increases
from prior year COVID-19 pandemic lows in delinquency and loss statistics in our
consumer automotive portfolio. Net charge-offs in our consumer other portfolio
increased primarily due to the acquisition of Ally Credit Card, which we
acquired in December 2021 .
The following table summarizes total consumer loan originations for the periods
shown. Total consumer loan originations include loans classified as finance
receivables and loans held-for-sale during the period.
Year ended December 31, ($ in millions) 2022 2021 Consumer automotive (a)$ 42,923 $ 40,884 Consumer mortgage (b) 3,255 10,433 Consumer other (c) (d) 2,131 1,241 Total consumer loan originations$ 48,309 $
52,558
(a)Includes$237 million of loans originated as held-for-sale for the year endedDecember 31, 2022 . (b)Excludes bulk loan purchases associated with our Mortgage Finance operations, and includes$2.1 billion of loans originated as held-for-sale for the year endedDecember 31, 2022 , and$3.4 billion for the year endedDecember 31, 2021 . (c)Includes loans related to ourAlly Lending business for which we have elected the fair value option measurement. (d)Excludes credit card loans which are revolving in nature. Total consumer loan originations decreased$4.2 billion for the year endedDecember 31, 2022 , compared to the year endedDecember 31, 2021 . The decrease was primarily due to decreased loan originations within the consumer mortgage portfolio, due to a higher interest rate environment. The decrease was partially offset by increased originations in the consumer automotive portfolio, driven by higher financed transaction amounts, and partially offset by decreased application flow in the consumer automotive portfolio. 78 -------------------------------------------------------------------------------- Table of Contents Management's Discussion and AnalysisAlly Financial Inc. • Form 10-K
The following table shows the percentage of consumer finance receivables and
loans by state concentration based on amortized cost.
December 31, 2022 (a) December 31, 2021
Consumer Consumer Consumer other Consumer Consumer Consumer other
automotive mortgage (b) automotive mortgage (b)
California 8.7 % 38.8 % 8.4 % 8.7 % 39.6 % 9.4 %
Texas 13.6 7.3 7.7 13.0 7.3 7.4
Florida 9.5 6.6 7.8 9.3 6.3 8.4
Pennsylvania 4.5 2.1 4.6 4.4 2.3 4.5
Georgia 4.1 2.9 3.5 4.0 3.0 3.4
North Carolina 4.1 1.9 4.6 4.1 1.6 3.4
Illinois 3.5 2.8 4.3 3.7 3.1 4.4
New York 3.6 1.9 4.8 3.3 2.1 5.5
New Jersey 3.2 2.4 3.6 3.0 2.5 3.4
Ohio 3.4 0.4 3.6 3.4 0.5 3.9
Other United States 41.8 32.9 47.1 43.1 31.7 46.3
Total consumer loans 100.0 % 100.0 % 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 December 31, 2022 .
(b)Excludes $3 million and $7 million of finance receivables at December 31,
2022 , and December 31, 2021 , respectively, for which we have elected the fair
value option.
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 26.5% and 26.4% of our total
outstanding consumer finance receivables and loans at December 31, 2022 , and
December 31, 2021 , 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 a repossessed or foreclosed asset as held-for-sale, which is
included in other assets on our 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.
Repossessed consumer automotive loan assets in our Automotive Finance operations were$182 million and$120 million atDecember 31, 2022 , andDecember 31, 2021 , respectively, and foreclosed mortgage assets were$2 million and$1 million atDecember 31, 2022 , andDecember 31, 2021 , respectively.
Commercial Credit Portfolio
Our commercial portfolio consists primarily of automotive loans through the extension of wholesale floorplan financing, automotive dealer term real estate loans, and automotive fleet financing, as well as other commercial loans from our Corporate Finance operations. Wholesale floorplan loans are secured by the vehicles financed (and all other vehicle inventory), which provides strong collateral protection in the event of dealership default. Additional collateral (for example, a blanket lien over all dealership assets) or other credit enhancements (for example, personal guarantees from dealership owners) are typically obtained to further mitigate credit risk. Furthermore, in some cases, we may benefit from situations where an automotive manufacturer repurchases vehicles. These repurchases may serve as an additional layer of protection in the event of repossession of new-vehicle dealership inventory or dealership franchise termination. Within our commercial portfolio, we utilize proprietary risk rating models that are fundamental to managing credit risk exposure consistently across various types of commercial borrowers and captures critical risk factors for each borrower. The ratings are used for many areas of credit risk management, including loan origination, portfolio risk monitoring, management reporting, and loan loss reserves analyses. Therefore, the rating systems are critical to an effective and consistent credit-risk-management framework. During the year endedDecember 31, 2022 , the credit performance of the commercial portfolio remained strong. 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. 79 -------------------------------------------------------------------------------- Table of Contents Management's Discussion and AnalysisAlly Financial Inc. • Form 10-K The following table includes total commercial finance receivables and loans reported at amortized cost. Accruing past due 90 days or Outstanding Nonperforming (a) more (b) December 31, ($ in millions) 2022 2021 2022 2021 2022 2021 Commercial Commercial and industrial Automotive$ 14,595 $ 12,229 $ 5 $ 33 $ - $ - Other (c) 9,154 6,874 157 221 - - Commercial real estate 5,389 4,939 - 3 - - Total commercial finance receivables and loans$ 29,138 $ 24,042 $ 162 $ 257 $ - $ - (a)Includes nonaccrual TDR loans of$157 million and$117 million atDecember 31, 2022 , andDecember 31, 2021 , 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 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 increased
billion
were driven by a
primarily within the commercial and industrial receivables class.
Total commercial nonperforming finance receivables and loans were$162 million atDecember 31, 2022 , reflecting a decrease of$95 million compared toDecember 31, 2021 . This decrease was primarily impacted by a$64 million decrease in our Corporate Finance segment within the commercial and industrial receivables. Nonperforming commercial finance receivables and loans as a percentage of outstanding commercial finance receivables and loans decreased to 0.6% atDecember 31, 2022 , compared to 1.1% atDecember 31, 2021 . Total commercial TDRs outstanding atDecember 31, 2022 , increased$369 million fromDecember 31, 2021 , to$540 million . The increase was primarily driven by the restructuring of five exposures within commercial other in our commercial and industrial portfolio class. Refer to Note 9 to the Consolidated Financial Statements for additional information.
The following table includes total commercial net charge-offs from finance
receivables and loans at amortized cost and related ratios.
Net
(recoveries) charge-offs Net charge-off ratios (a)
Year ended
2022 2021 2022 2021 Commercial Commercial and industrial Automotive$ (1) $ - - % - % Other 57 11 0.7 0.2 Commercial real estate (1) - - - Total commercial finance receivables and loans$ 55 $ 11 0.2 - (a)Net charge-off ratios are calculated as 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$55 million for the year endedDecember 31, 2022 , compared to$11 million for the year endedDecember 31, 2021 . The increase for the year endedDecember 31, 2022 , was primarily driven by our Corporate Finance operations and included the partial charge-off of two exposures during 2022. 80 -------------------------------------------------------------------------------- Table of Contents Management's Discussion and AnalysisAlly Financial Inc. • Form 10-K
The commercial real estate portfolio consists of finance receivables and loans issued primarily to automotive dealers. Commercial real estate finance receivables and loans were$5.4 billion and$4.9 billion atDecember 31, 2022 , andDecember 31, 2021 , respectively. The following table presents the percentage of total commercial real estate finance receivables and loans by state concentration based on amortized cost. December 31, 2022 2021 Florida 17.9 % 16.4 % Texas 14.9 13.9 California 8.4 8.3 New York 6.3 3.8 North Carolina 5.3 5.8 Michigan 4.2 5.8 Ohio 4.2 3.4 Georgia 3.1 3.3 Utah 2.9 3.0 Illinois 2.7 2.9 Other United States 30.1 33.4
Total commercial real estate finance receivables and loans 100.0 %
100.0 %
Commercial Criticized Exposure
Finance receivables and loans classified as special mention, substandard, or doubtful are reported as criticized. These classifications are based on regulatory definitions and generally represent finance receivables and loans within our portfolio that have a higher default risk or have already defaulted. These finance receivables and loans require additional monitoring and review including specific actions to mitigate our potential loss. Total criticized exposures increased$889 million fromDecember 31, 2021 , to$2.6 billion atDecember 31, 2022 . The increase in total criticized exposures was primarily driven by increases in Special Mention loans within our Corporate Finance and Automotive Finance operations. Total criticized exposures represented 9.1% and 7.3% of total commercial finance receivables and loans atDecember 31, 2022 , andDecember 31, 2021 , respectively, representing strong overall credit performance as the commercial loan portfolio continues to grow. The following table presents the percentage of total commercial criticized finance receivables and loans by industry concentration based on amortized cost. December 31, 2022 2021 Industry Automotive 53.4 % 50.8 % Chemicals 14.7 14.4 Electronics 11.9 3.6 Other 20.0 31.2
Total commercial criticized finance receivables and loans 100.0 %
100.0 %
Allowance for Loan Losses
We adopted CECL onJanuary 1, 2020 . The CECL standard introduced a new accounting model to measure credit losses for financial assets measured at amortized costs. In contrast to the previous incurred loss model, CECL requires credit losses for financial assets measured at amortized cost to be determined based on the total current expected credit losses over the life of the financial asset or group of assets.
Under CECL, our modeling processes incorporate the following macroeconomic
considerations:
•a single forecast scenario for macroeconomic factors incorporated into the
modeling process;
•a 12-month reasonable and supportable forecast period for macroeconomic factors with a reversion to the historical mean on a straight-line basis over a 24-month period; and •data from the historical mean will be calculated fromJanuary 2008 through the most current period available, which includes data points from the most recent recessionary period. 81 -------------------------------------------------------------------------------- Table of Contents Management's Discussion and AnalysisAlly Financial Inc. • Form 10-K Our quantitatively determined allowance under CECL is impacted by certain forecasted economic factors as further described in Note 1 to the Consolidated Financial Statements. For example, our consumer automotive allowance for loan losses is most sensitive to state-level unemployment rates. Our process for determining the allowance for loan losses considers a borrower's willingness and ability to pay and considers other factors, including loan modification programs. In addition to our quantitative allowance for loan losses, we also incorporate qualitative adjustments that may relate to idiosyncratic risks, weather-related events, changes in current economic conditions that may not be reflected in quantitatively derived results such as the impacts associated with COVID-19, and other macroeconomic uncertainty. We also monitor model performance, using model error and related assessments, and we may incorporate qualitative reserves to adjust our quantitatively determined allowance if we observe deterioration in model performance. Additionally, we perform a sensitivity analysis of our allowance utilizing varying macroeconomic scenarios, as described further within Critical Accounting Estimates - Allowance for Credit Losses within the MD&A. ThroughDecember 31, 2022 , forecasted economic variables incorporated into our quantitative allowance processes were updated to include the current macroeconomic environment and our future expectations reflecting mild recessionary conditions in 2023. This included (but were not limited to) the following: the unemployment rate rising to approximately 4.6% in the fourth quarter of 2023, before reverting to the historical mean of approximately 6.3% by the fourth quarter of 2025, negative GDP growth as measured on a quarter-over-quarter seasonally adjusted annualized rate basis through the second quarter of 2023, before reverting to the historical mean of approximately 1.9% by the fourth quarter of 2025, and stable new light vehicle sales on a seasonally adjusted annualized rate basis of approximately 15 million units throughout the forecast horizon. Additionally, we maintain a qualitative allowance framework to account for ongoing uncertainty and volatility in the macroeconomic environment (including the impact of inflationary pressures) that could adversely impact frequency of loss and LGD. Our overall allowance for loan losses increased$444 million from the prior year to$3.7 billion atDecember 31, 2022 , representing 2.7% as a percentage of total finance receivables at bothDecember 31, 2022 , andDecember 31, 2021 . The following tables present an analysis of the activity in the allowance for loan losses on finance receivables and loans for the years ended,December 31, 2022 , andDecember 31, 2021 , respectively. Consumer Consumer ($ in millions) automotive mortgage Consumer other Total consumer Commercial Total Allowance at January 1, 2022$ 2,769 $ 27 $ 221$ 3,017 $ 250 $ 3,267 Charge-offs (a) (1,434) (3) (133) (1,570) (58) (1,628) Recoveries 649 12 12 673 3 676 Net charge-offs (785) 9 (121) (897) (55) (952) Provision due to change in portfolio size 196 3 182 381 33 414 Provision due to incremental charge-offs 785 (9) 121 897 55 952 Provision due to all other factors 55 (2) 23 76 (46)
30
Total provision for credit losses (b) 1,036 (8) 326 1,354 42 1,396 Other - (1) - (1) 1 - Allowance at December 31, 2022$ 3,020 $ 27
$ 426
Net charge-offs to average finance receivables and loans outstanding for the year ended December 31, 2022 1.0 % - % 4.4 % 0.9 % 0.2 % 0.7 % Allowance for loan losses to total nonperforming finance receivables and loans at December 31, 2022 (c) 254.3 % 54.3 % n/m 268.7 % 147.4 % 255.2 % Nonaccrual loans to finance receivables and loans outstanding at December 31, 2022 1.4 % 0.3 % 1.6 % 1.2 % 0.6 % 1.1 % Ratio of allowance for loan losses to annualized net charge-offs at December 31, 2022 3.8 (3.0) 3.5 3.9 4.3 3.9 n/m = not meaningful (a)Refer to Note 1 to the Consolidated Financial Statements for information regarding our charge-off policies. (b)Excludes$3 million of provision for credit losses related to our reserve for unfunded commitments. The liability related to the reserve for unfunded commitments is included in accrued expenses and other liabilities on our Consolidated Balance Sheet. (c)Coverage percentages are based on the allowance for loan losses related to finance receivables and loans excluding those loans held at fair value as a percentage of the amortized cost. 82 -------------------------------------------------------------------------------- Table of Contents Management's Discussion and AnalysisAlly Financial Inc. • Form 10-K Consumer Consumer ($ in millions) automotive mortgage Consumer other Total consumer Commercial Total Allowance at January 1, 2021$ 2,902 $ 33 $ 73$ 3,008 $ 275 $ 3,283 Charge-offs (a) (923) (6) (30) (959) (22) (981) Recoveries 686 13 2 701 11 712 Net charge-offs (237) 7 (28) (258) (11) (269) Provision due to change in portfolio size 182 4 181 367 11 378 Provision due to incremental charge-offs 237 (7) 28 258 11
269
Provision due to all other factors (315) (11) (46) (372) (34)
(406)
Total provision for credit losses 104 (14) 163 253 (12) 241 Other (b) - 1 13 14 (2) 12
Allowance at
$ 221
Net charge-offs to average finance receivables and loans outstanding for the year ended December 31, 2021 0.3 % - % 3.3 % 0.3 % - % 0.2 % Allowance for loan losses to total nonperforming finance receivables and loans at December 31, 2021 (c) 256.8 % 30.9 % n/m 255.7 % 97.8 % 227.4 % Nonaccrual loans to finance receivables and loans outstanding at December 31, 2021 1.4 % 0.5 % 0.8 % 1.2 % 1.1 % 1.2 % Ratio of allowance for loan losses to annualized net charge-offs at December 31, 2021 11.6 (3.7) 4.1 11.6 24.3 12.1 n/m= not meaningful (a)Refer to Note 1 to the Consolidated Financial Statements for information regarding our charge-off policies. (b)Includes$12 million of allowance for credit losses recognized on PCD loans acquired in the Ally Credit Card acquisition. Refer to Note 2 to the Consolidated Financial Statements for additional details. (c)Coverage percentages are based on the allowance for loan losses related to finance receivables and loans excluding those loans held at fair value as a percentage of the amortized cost. The allowance for consumer loan losses as ofDecember 31, 2022 , increased$456 million compared toDecember 31, 2021 , reflecting an increase of$251 million in the consumer automotive allowance, along with an increase of$205 million in the consumer other allowance. The increase in our consumer automotive allowance was primarily driven by portfolio growth. The increase in the consumer other allowance was primarily driven by the establishment of reserves related to the Ally Credit Card acquisition, as well as continued growth inAlly Lending and Ally Credit Card. The allowance for commercial loan losses as ofDecember 31, 2022 , decreased$12 million compared toDecember 31, 2021 . The decrease was primarily driven by reserve declines associated with continued improvements to the macroeconomic environment following the onset of the COVID-19 pandemic. 83 -------------------------------------------------------------------------------- Table of Contents Management's Discussion and AnalysisAlly Financial Inc. • Form 10-K
Provision for Loan Losses
The following table summarizes the provision for loan losses by loan portfolio
class.
Year ended December 31, ($ in millions) 2022 2021 2020 Consumer automotive$ 1,036 $ 104 $ 1,194 Consumer mortgage Mortgage Finance 3 (1) 7 Mortgage - Legacy (11) (13) (17) Total consumer mortgage (8) (14) (10) Consumer other Personal Lending 161 55 62 Credit Card 165 108 - Total consumer other 326 163 62 Total consumer 1,354 253 1,246 Commercial Commercial and industrial Automotive 1 (30) 28 Other 46 39 150 Commercial real estate (5) (21) 15 Total commercial 42 (12) 193 Total provision for loan losses (a)$ 1,396 $ 241
(a)Excludes
unfunded commitments during the year ended
The provision for consumer credit losses increased$1.1 billion for the year endedDecember 31, 2022 , compared to the year endedDecember 31, 2021 . The increase in provision for consumer credit losses for the year endedDecember 31, 2022 , was primarily driven by higher net charge-offs, and reserve reductions during the year endedDecember 31, 2021 , associated with improvements to the macroeconomic environment following the onset of the COVID-19 pandemic. The provision for commercial credit losses increased$54 million for the year endedDecember 31, 2022 , compared to the year endedDecember 31, 2021 . For the year endedDecember 31, 2022 , the increase in provision for commercial credit losses was primarily driven by higher provisions on specific exposures and reserve increases associated with portfolio growth within our Corporate Finance operations. 84 -------------------------------------------------------------------------------- Table of Contents Management's Discussion and AnalysisAlly Financial Inc. • Form 10-K
Allowance for Loan Losses by Type
The following table summarizes the allocation of the allowance for loan losses
by loan portfolio class.
2022 2021
Allowance as a % Allowance as a % of Allowance as a %
Allowance for Allowance as a % of of total allowance Allowance for loans
of total allowance
loan losses outstanding for loan losses Consumer automotive$ 3,020 3.6 % 81.4 %$ 2,769 3.5 % 84.8 % Consumer mortgage Mortgage Finance 22 0.1 0.6 19 0.1 0.6 Mortgage - Legacy 5 1.8 0.1 8 2.1 0.2 Total consumer mortgage 27 0.1 0.7 27 0.1 0.8 Consumer other Personal Lending 194 9.8 5.2 102 10.2 3.1 Credit Card 232 14.5 6.3 119 12.4 3.6 Total consumer other 426 11.9 11.5 221 11.3 6.7 Total consumer loans 3,473 3.3 93.6 3,017 3.1 92.3 Commercial Commercial and industrial Automotive 14 0.1 0.4 12 0.1 0.4 Other 188 2.1 5.0 198 2.9 6.1 Commercial real estate 36 0.7 1.0 40 0.8 1.2 Total commercial loans 238 0.8 6.4 250 1.0 7.7 Total allowance for loan losses$ 3,711 2.7 100.0 %$ 3,267 2.7 100.0 % Insurance/Underwriting Risk Underwriting risk represents the risk of loss or of adverse change in the value of insurance liabilities due to inadequate pricing and reserving assumptions. Insurance risk also includes event risk, which is synonymous with pure risk, or hazard risk, and presents no chance of gain, only of loss. The underwriting of our products, or the assumption of insurance risk through reinsurance, includes an assessment of the risk to determine acceptability and categorization for appropriate pricing. The acceptability of a particular risk is based on expected losses, expenses, and other factors specific to the product in question. For example, with respect to VSCs, considerations include the quality of the vehicles produced, the price of replacement parts, repair labor rates, and new model introductions. With respect to our vehicle inventory insurance product, considerations include the dealer's loss history and loss control practices, as well as the geographic exposure to weather events and natural disasters, among other factors. We also assume risks through reinsurance arrangements, where a managing general agent or third party provides certain functions for an insurance product or program which may include, but is not limited to, premium and claims administration and reporting, binding of policies and other customer servicing functions, or underwriting services in exchange for a commission. Where underwriting and risk acceptance is delegated to third parties, we will consider the appropriateness of the third party's underwriting guidelines and their ability to evaluate and assess risks within the context of those guidelines and routinely monitor arrangements with such parties. To support risk mitigation activities, we utilize a system of controls and governance including the use of a risk appetite framework to govern the amount and types of insurance risks we take, including the consideration of concentration risks, volatility of products, and a number of other factors. We also utilize a New Product Committee, Reserving Committee, Underwriting Committee, and Risk Management Committee to monitor, manage, and mitigate insurance risks, including consideration of pricing adequacy and risk of unfavorable loss development. We mitigate the risk of losses by the active management of claim settlement activities using experienced claims personnel and the evaluation of current period reported claims. Losses for these events may be compared to prior claims experience, expected claims, or loss expenses from similar incidents to assess the reasonableness of incurred losses. For business assumed through reinsurance, we may rely on third parties for claim adjudication or the estimation of unpaid losses and loss adjustment expenses. Reliance on third parties inherently includes certain risks and uncertainties that are unique relative to our direct insurance lines of business, which may include lags in reporting or different assessments of reserve adequacy. In order to mitigate such risks, we regularly review the performance of such business assumed through reinsurance and our carried loss reserves may differ from reserves reported to us from third parties if deemed appropriate.
In some instances, reinsurance is used to reduce the risk associated with
volatile business lines, such as catastrophe risk in vehicle inventory
insurance. Our vehicle inventory insurance product is covered by aggregate
excess-of-loss protection, which provides coverage for
85 -------------------------------------------------------------------------------- Table of Contents Management's Discussion and AnalysisAlly Financial Inc. • Form 10-K the accumulation of weather-related losses that exceed pre-determined retention levels. In addition, loss control techniques such as storm path monitoring to assist dealers in preparing for severe weather help to mitigate loss potential. The level of reinsurance utilized will depend on the assessment of market pricing for such protection, the size and composition of our insured risks and our overall risk appetite. In certain cases, we choose not to obtain reinsurance protection if the cost is perceived to outweigh the benefits of such protection. In accordance with industry and accounting practices and applicable insurance laws and regulatory requirements, we maintain loss reserves for reported losses, losses incurred but not reported, loss adjustment expenses, and unearned premium reserves for contracts in force. The adequacy of our estimated reserves and changes to the estimated values of reserves are routinely monitored by credentialed actuaries. Our reserves are regularly reviewed by management and subject to various governance and controls; however, since the reserves are estimates based on numerous assumptions, the ultimate liability may differ from the amount estimated. 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, loans and operating leases) and liabilities (including deposits and debt) due to movements in market variables, such as interest rates, spreads, foreign-exchange rates, equity prices, off-lease vehicle prices, and other equity investments. The impact of changes in benchmark interest rates on our assets and liabilities (interest rate risk) represents an exposure to market risk and can affect interest rate sensitivities and cash flows when compared to our expectations. We primarily use interest rate derivatives to manage our interest rate risk exposure. During 2022, theFederal Reserve increased the federal funds target range to 4.25-4.50% to address the elevated inflation levels. FRB officials have signaled that further increases are expected in 2023. As ofDecember 31, 2022 , we remain liability sensitive and expect increasing interest rates to have a negative impact to our near-term net interest income. The fair value of our spread-sensitive assets is also exposed to spread risk. Spread is the amount of additional return over the benchmark interest rates that an investor would demand for taking exposure to primarily credit and liquidity risk of an instrument. Generally, an increase in spreads would result in a decrease in fair value measurement.
We are also exposed to foreign-currency risk primarily from Canadian denominated
assets and liabilities. We enter into foreign currency hedges to mitigate
foreign exchange risk.
We 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 nonmarketable equity investments without readily determinable fair market values, which may cause volatility in our earnings. This includes our investment in BMC Holdco as described in the section above titled Primary Business Lines. •During 2021, we sold a portion of our investment in BMC Holdco for proceeds of $45 million and realized gains totaling $38 million. In addition, during 2021, BMC Holdco and Aurora announced several agreements relevant to the valuation of our remaining investment in BMC Holdco. •BMC Holdco entered into a merger agreement (together with all 2021 amendments, the Merger Agreement) with Aurora that provides for our remaining investment in BMC Holdco to be converted into publicly traded common stock of the entity surviving the merger. The Merger Agreement established a price per share reflecting a pre-money equity valuation of approximately $6.9 billion for BMCHoldco and included an Agreement End Date (as defined in the Merger Agreement) of September 30, 2022.
•BMC Holdco and Aurora entered into a bridge note purchase agreement with
investors to issue debt (the Notes) that converts into publicly traded common
stock of the entity surviving the merger as contemplated by the Merger
Agreement.
•During the third quarter of 2022, BMC Holdco and Aurora announced a further
amendment of the Merger Agreement that extends the Agreement End Date to March
8, 2023. Contemporaneously, BMC Holdco and Aurora entered into a letter
agreement with one of its existing investors that, in part and subject to
specified conditions, (i) extends the maturity date of the investor's Notes to
March 8, 2023, and (ii) without limiting the investor's rights under the bridge
note purchase agreement, if the merger has not been consummated by the maturity
date of the Notes, provides the investor with an option to alternatively
exchange its Notes for Class B common stock and preferred stock of BMC Holdco at
specified valuations.
•On February 7, 2023, Aurora announced the filing of a definitive proxy
statement to hold a special meeting of its shareholders on February 24, 2023, to
extend the date by which Aurora must consummate an initial business combination
under its articles of association from March 8, 2023, to September 30, 2023, or
any earlier date determined by its board. On the same day, Aurora also announced
its entry into a second letter agreement with BMC Holdco and the existing
investor that, in part and subject to specified conditions, (i) obligates Aurora
and BMC Holdco to use reasonable best efforts to obtain shareholder approval of
the extension proposal, to extend the Agreement End Date to September 30, 2023,
prior to that approval, and to further extend that date to March
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30, 2024, if necessary to provide sufficient time for the merger to be
consummated, (ii) defers the maturity date of the investor's Notes to September
30, 2023, and (iii) without limiting the investor's rights under the bridge note
purchase agreement, if the merger has not been consummated by the maturity date
of the Notes, provides the investor with an option to alternatively exchange its
Notes for Class B common stock and Series D equivalent preferred stock of BMC
Holdco at specified valuations.
The letter agreement entered into during the third quarter of 2022 was a
triggering event to assess our remaining investment in BMC Holdco for
impairment. We recognized an impairment charge on this investment of
$136 million during the third quarter of 2022. As of December 31, 2022, both the
cost basis at acquisition and the carrying value of this investment were
$19 million. The carrying value of this investment reflects cumulative upward
adjustments of $136 million and cumulative downward adjustments (including
impairment) of $136 million since acquisition. Refer to the section titled Risk
Factors in Part I, Item 1A for additional information regarding risk associated
with the valuation of our nonmarketable equity investments and Note 13 to the
Consolidated Financial Statements for additional information.
During the year ended December 31, 2022, we recorded $4.0 billion of net
unrealized losses on our available-for-sale securities, primarily due to an
increase in market interest rates. These unrealized losses are recorded in other
comprehensive income within our Consolidated Statement of Income, and are
generally not realized unless we decide to sell the securities prior to their
stated maturity date. If held until maturity, we would recapture the par value
of the securities and not realize any losses associated with changes in interest
rates. During the year ended December 31, 2022, management determined that there
were no expected credit losses for securities in an unrealized loss position.
Refer to Note 8 and Note 18 to the Consolidated Financial Statements for
additional information.
The composition of our balance sheet, including shorter-duration consumer
automotive loans and variable-rate commercial loans, along with our primary
funding source of 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 and
sensitivity analysis. Refer to Note 21 to the Consolidated Financial Statements
for additional information.
LIBOR Transition
We continue to monitor regulatory, legislative, and industry developments
surrounding the LIBOR transition and the impact of those developments to us. In
March 2021, the United Kingdom Financial Conduct Authority, which regulates
LIBOR's administrator, announced that U.S. dollar LIBOR settings (other than the
1-week and 2-month U.S. dollar LIBOR settings) will cease to be provided or
cease to be representative after June 30, 2023. The publication of the 1-week
and 2-month U.S. dollar LIBOR settings ceased to be provided or ceased to be
representative as of December 31, 2021. The LIBOR Act, enacted in March 2022,
provides a uniform approach for replacing LIBOR as a reference interest rate in
tough legacy contracts-that is, contracts that do not include effective fallback
provisions-when LIBOR is no longer published or is no longer representative.
Under the LIBOR Act, references to the most common tenors of LIBOR in these
contracts will be replaced as a matter of law, without the need to be amended by
the parties, to instead reference benchmark interest rates based on SOFR that
will be identified by the FRB. The FRB issued a final rule effective February
27, 2023, to implement the LIBOR Act. Ally continues to evaluate the effects of
the LIBOR Act and the FRB's final rule on Ally's LIBOR-linked contracts, which
remain uncertain. U.S. banking regulators have stated that safe-and-sound
practices include conducting the due diligence necessary to ensure that
alternative rate selections are appropriate for the supervised institution's
products, risk profile, risk management capabilities, customer and funding
needs, and operational capabilities. This due diligence includes understanding
how the chosen reference rate is constructed and being aware of any fragilities
associated with that rate and the markets that underlie it.
The discontinuation of LIBOR or LIBOR-based rates presents risks to our
business, as further described in the section titled Risk Factors in Part I,
Item 1A of this report. In recognition of the significance of LIBOR cessation,
in July 2018, Ally formed an enterprise-wide LIBOR transition program that
devotes numerous resources throughout all levels of the organization to
facilitate the transition to alternative reference rates. Our program spans
impacted business lines and functions to evaluate risks associated with the
transition, while taking into account specific considerations related to our
customers, products and instruments, and counterparty exposures. Through this
program, we continue to plan for and guide the transition away from LIBOR to
alternative reference rates, and evaluate the impacts and potential impacts to
our existing and future contracts with customers and counterparties, financial
forecasts, operational processes, technology, modeling, and vendor
relationships. Our program is also subject to the governance and oversight of
our Board through the RC and certain executive committees, including the ALCO
and the ERMC.
We continue to make progress on our transition efforts, including developing new
products and agreements that utilize alternative reference rates, such as Prime
and SOFR, and engaging our commercial customers with transitioning their
existing financing agreements from LIBOR to alternative rates, as appropriate.
During 2022, we accelerated our efforts of transitioning existing bilateral
commercial automotive lending arrangements from LIBOR to Prime, continued
originating corporate-finance loans using SOFR, and did not enter into new
contracts that use U.S. dollar LIBOR as a reference rate, in alignment with the
November 2020 guidance and subsequent clarifications from U.S. banking
regulators.
Our ongoing LIBOR transition program includes monitoring of our operations and
the progress of our broader transition efforts. As part of this, we collect and
analyze business-line level data about our LIBOR exposure on a monthly basis.
Our exposure to LIBOR-based contracts is significantly concentrated within
certain of our finance receivables and loans, primarily related to
corporate-finance and commercial automotive loans. We also have a smaller
portfolio of adjustable-rate mortgage loans that utilize contracts containing
LIBOR-based reference rates. As of December 31, 2022, we had a notional amount
of $7.4 billion of loan exposure that references LIBOR, compared to
$35.6 billion as of December 31, 2021. These notional amounts included
approximately $3.5 billion and $13.2 billion of associated
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LIBOR-based loans outstanding as of December 31, 2022, and 2021, respectively.
We are planning to transition our remaining exposure to alternative rates prior
to the cessation of the remaining U.S. dollar LIBOR tenors, which will no longer
be published after June 30, 2023.
Fair Value Sensitivity Analysis
The following table presents a fair value sensitivity analysis of our assets and liabilities using isolated hypothetical movements in specific market rates. The analysis assumes adverse instantaneous, parallel shifts in market-exchange rates, interest rate yield curves, and equity prices. Additionally, since only adverse fair value impacts are included, the natural offset between asset and liability rate sensitivities that arise within a diversified balance sheet, such as ours, may not be considered. December 31, ($ in millions) 2022 2021 Financial instruments exposed to changes in: Interest rates Estimated fair value (a)
(a)
Effect of 10% adverse change in rates (a)
(a)
Foreign-currency exchange rates Estimated fair value $ 394 $ 437 Effect of 10% adverse change in rates (10)
(11)
Equity prices Estimated fair value $ 819 (b) $ 1,408 Effect of 10% decrease in prices (79)
(126)
(a)Refer to the section below titled Net Financing Revenue Sensitivity Analysis for information on the interest rate sensitivity of our financial instruments. (b)Primarily includes $681 million and $1.1 billion of equity securities at December 31, 2022, and December 31, 2021, respectively, and $123 million and $260 million of equity securities without a readily determinable fair value at December 31, 2022, and December 31, 2021, respectively. For additional information on equity securities without a readily determinable fair value, refer to Note 13 to the Consolidated Financial Statements.
Net Financing Revenue Sensitivity Analysis
Interest rate risk represents one of our most significant exposures 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 a sensitivity analysis of net financing revenue as our primary
metric to measure and manage the interest rate risk of our financial
instruments.
We prepare 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 assumptions.
Simulations are then 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 simulations measure the potential change in our pretax
net financing revenue over the following 12 months. We test a number of
alternative rate scenarios, 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, our net financing revenue over the next 12 months is expected
to increase by $217 million if interest rates remain unchanged due to expected
increases in the federal funds rate, resulting in an inversion of the yield
curve.
The following table presents the pretax dollar impact to baseline forecasted net
financing revenue over the next 12 months assuming various shocks to the implied
market forward curve as of December 31, 2022, and December 31, 2021.
December 31, 2022 December 31, 2021
Gradual (a) Instantaneous Gradual (a) Instantaneous
Change in interest rates ($ in millions) ($ in millions)
+200 basis points $ 18 $ (76) $ 2 $ (169)
+100 basis points 3 (37) 16 (37)
-100 basis points (21) 21 n/m n/m
n/m = not meaningful
(a)Gradual changes in interest rates are recognized over 12 months.
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Since December 31, 2021, the implied forward rate curve has increased,
flattened, and inverted as market expectations for short-term interest rates
have increased more than long-term rates. The impact of this change is reflected
in our baseline net financing revenue projections. As of December 31, 2022, we
remain liability sensitive to a parallel instantaneous move in interest rates,
as the assumed repricing of our assets and pay-fixed swap position is more than
offset by assumed repricing of our liabilities.
Our exposure to the downward interest rate shock scenario as of December 31,
2021, is not provided because many interest rates were at or near historical
lows, limiting our model's ability to reprice lower.
Our risk position is influenced by the impact of hedging activity, 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. We also have the ability to use interest rate floor 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. Our hedging
strategies, however, are not designed to eliminate all interest-rate risk, and
we were adversely affected from rising interest rates in 2022.
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. Our operating lease portfolio, net of accumulated depreciation was $10.4 billion and $10.9 billion as of December 31, 2022, and December 31, 2021, respectively. The expected lease residual value of our operating lease portfolio at scheduled termination was $8.3 billion and $8.6 billion as of December 31, 2022, and December 31, 2021, 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 this MD&A. •Priced residual value projections - At contract inception, we determine pricing based on the projected residual value of the leased vehicle. This evaluation uses a proprietary model, which includes variables such as age, expected mileage, seasonality, segment factors, vehicle type, economic indicators, production cycle, automotive manufacturer incentives, and unanticipated shifts in used vehicle supply, as well as expert judgment. 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 over the remaining life of the contract as necessary. 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 recorded through depreciation expense. •Remarketing abilities - Our ability to efficiently process and effectively market off-lease vehicles affects the disposal costs and the proceeds realized from vehicle sales. Vehicles can be remarketed through auction (internet and physical), sale to dealer, sale to lessee, and other methods. The results within these channels vary, with physical auction typically resulting in the lowest-priced outcome.
•Manufacturer vehicle and marketing programs - Automotive manufacturers
influence operating lease residual results in the following ways:
•The brand image of automotive manufacturers and consumer demand for their
products affects residual risk.
•The discontinuation of, or stylistic changes to, a certain make or model may
affect the value of existing vehicles.
•Automotive manufacturer marketing programs may influence the used vehicle
market for those vehicles through programs such as incentives on new vehicles,
programs designed to encourage lessees to terminate their operating leases early
in conjunction with the acquisition of a new vehicle (referred to as pull-ahead
programs), and special rate used vehicle programs.
•Used vehicle market - We have exposure to changes in used vehicle prices.
General economic conditions, used vehicle supply and demand, and new vehicle
availability and market prices heavily influence used vehicle prices.
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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.
Year ended December 31, 2022 2021 2020 Off-lease vehicles terminated (in units) 110,634 127,708 106,601 Average gain per vehicle ($ per unit) $ 1,533 $ 2,693 $ 1,193 Method of vehicle sales Sale to dealer, lessee, and other 88 % 64 % 37 % Auction Internet 9 29 53 Physical 3 7 10 We recognized an average gain per vehicle of $1,533 for the year ended December 31, 2022, compared to an average gain per vehicle of $2,693 and $1,193 in 2021 and 2020, respectively. The number of off-lease vehicles remarketed during the year ended December 31, 2022, decreased 13%, compared to 2021, reflecting the normalization of termination volume to pre-COVID-19 levels. The decrease in remarketing performance was primarily due to a shift in off-lease vehicle disposition channel mix. The remarketing channel mix for dealer and lessee buyouts increased during the year ended December 31, 2022, primarily due to supply constraints increasing dealer demand for off-lease vehicles, as well as increases in new vehicle prices that are causing a shift in consumer preference. The shift in off-lease vehicle disposition may limit our ability to optimize remarketing proceeds, but it is expected to moderate in the near term in connection with declining used vehicle values, which would soften any resulting adverse impacts to remarketing performance.
Operating Lease Portfolio Mix
We monitor the concentration of our outstanding operating leases. Our exposure to Stellantis vehicles represented approximately 78% and 81% of our operating lease units as of December 31, 2022, and 2021, respectively.
The following table presents the mix of operating lease assets by vehicle type,
based on volume of units outstanding.
December 31, 2022 2021 2020 Sport utility vehicle 63 % 59 % 57 % Truck 31 34 34 Car 6 7 9
Business/Strategic Risk
Business/strategic risk is embedded in every facet of our organization and is one of our primary risk types. It is the risk resulting from the pursuit of business activities that turn out to be unsuccessful due to a variety of both controllable and non-controllable factors. We aim to mitigate this risk within our business lines through portfolio diversification, product innovations to meet ever-changing customer expectations, risk assessment on all new products and services prior to launch, monitoring of the execution of our strategic and capital plan, and a focus on efficiency and cost control. Our strategic plan is reviewed and approved annually by our Board, as are the capital plan and financial business plan. With oversight by our Board, executive management seeks to execute our strategic plan within the risk appetite approved by the RC. The executive management team continuously monitors business performance throughout the year to assess strategic risk and identify early warning signals so that risks can be proactively managed. Executive management regularly reviews actual performance versus the plan, updates our Board via reporting routines, and implements changes as deemed appropriate. Significant strategic actions, such as capital actions, material acquisitions or divestitures, and recovery and resolution plans are reviewed and approved by our Board as required. At the business level, as we introduce new products and services, we proactively assess the impact on our risk profile and then monitor performance relative to expectations for a period of time commensurate with the risk-based assessment. With oversight by our Board, executive management evaluates changes to the financial forecast and risk, capital, and liquidity positions throughout the year and takes actions to mitigate risks accordingly.
Reputation Risk
Reputation risk is the risk arising from negative public opinion on Ally's
business practices, whether true or not, that could cause a decline in customer
satisfaction, brand sentiment, our customer base, revenue, or result in
litigation towards Ally. Reputation risk may result from many of our activities,
including those related to the management of our business/strategic,
operational, and credit risks.
We maintain an enterprise-wide Reputation Risk Management program that
establishes the requirements for managing reputation risk. We manage reputation
risk through established policies and controls in our businesses and
risk-management processes to mitigate reputation risks in a timely manner
through proactive monitoring and identification of potential reputation risk
events. We have established processes
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and procedures to respond to events that give rise to reputation risk, including
educating individuals and organizations that influence public opinion, external
communication strategies to mitigate the risk, and informing key stakeholders of
potential reputation risks. Primary responsibility for the identification,
escalation, and resolution of reputation risk issues resides with our business
lines.
Our "LEAD" core values and "Do it Right" philosophy further strengthen our
efforts to mitigate reputational risks by promoting a transparent culture so
that any associate, at any time, can and should call attention to risks that
need to be addressed and taken into account. Our organization and governance
structures provide oversight of reputation risks, and key risk indicators are
reported regularly and directly to management and the RC, which provide primary
oversight of reputation risk.
Operational Risk
Operational risk is the risk of loss or harm arising from inadequate or failed
processes or systems, human factors, or external events and is inherent in all
of our risk-generating activities. Such risk can manifest in various ways,
including errors, business interruptions, and inappropriate behavior of
employees, and can potentially result in financial losses and other damage to
us. Operational risk includes business disruption risk, fraud risk, human
capital risk, legal risk, model risk, process execution and management risk, and
supplier (third party) risk.
•Business disruption risk - The risk of significant disruption to our operations
resulting from natural disasters, technology outages, or other incidents and
crisis events, such as pandemics.
•Fraud risk - The risk from deliberate misrepresentation or concealment of
information material to a transaction with the intent to deceive another and
that is reasonably relied on or used in decision making. Fraud can occur
internally (for example, employees) or externally (for example, criminal
activity, third-party suppliers).
•Human capital risk - The risk caused by high turnover, inadequate or improper
staffing levels, departure/unavailability of key personnel, or inadequate
training and includes our exposure to worker's compensation and employment
litigation.
•Legal risk - The risk arising from the potential that unenforceable contracts, lawsuits, or adverse judgments can disrupt or otherwise negatively affect our operations or condition. •Model risk - The potential for adverse consequences from decisions based on incorrect or misused model assumptions, inputs, outputs, and reports. This risk may include fundamental errors within the model that produce inaccurate outputs or that the model is used incorrectly or inappropriately.
•Process execution and management risk - The risk caused by failure to execute
or adhere to policies, standards, procedures, processes, controls, and
activities as designed and documented.
•Supplier (third party) risk - The risk associated with third-party suppliers
and their delivery of products or services and effect on overall business
performance. This includes a supplier's failure to comply with information
technology requirements, information and physical security, laws, rules,
regulations, and legal agreements.
To monitor and mitigate such risk, we maintain a system of policies and a control framework designed to provide a sound and well-controlled operational environment. This framework employs practices and tools designed to maintain risk identification, risk governance, risk and control assessment, risk testing and monitoring, and transparency through risk reporting mechanisms. The goal is to maintain operational risk at appropriate levels based on our financial strength, the characteristics of the businesses and the markets in which we operate, and the related competitive and regulatory environment.
Information Technology/Cybersecurity Risk
Information technology/cybersecurity risk includes risk resulting from the
failure of, or insufficiency in, information technology (for example, a 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, including cloud-based services, 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. We and other financial institutions continue to be the target of various cyberattacks, including through the introduction of 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 Ally, our customers, employees, or other third parties with whom we transact.
Cybersecurity and the continued enhancement 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 us from cyber-related incidents. We regularly assess vulnerabilities
and threats to our environment utilizing various resources including independent
third-party assessments to evaluate
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whether our layered system of controls effectively mitigates risk. Additionally,
we engage external expertise to perform comprehensive institutional-wide
simulations for senior management, which evaluates our preparedness to respond
to crisis events, including cybersecurity threats.
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 all losses. Management monitors 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 Technology Committee assists the Board in overseeing information-technology
and information-security risks (including cybersecurity risk) and our management
of them commensurate with our structure, risk profile, complexity, activities,
and size. Our RC reviews reports and other information from the Technology
Committee in approving our information-technology and information-security risk
appetite and otherwise exercising oversight of our independent risk-management
program. Our Board and the AC also undertake reviews as appropriate. The
Information Technology Risk Committee is responsible for supporting the Chief
Risk Officer's oversight of our 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/cybersecurity 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 in Part I,
Item 1A of this report.
Compliance Risk
Compliance risk is the risk of legal or regulatory sanctions, financial loss, or
damage to reputation resulting from failure to comply with laws, regulations,
rules, other regulatory requirements, or codes of conduct and other standards of
self-regulatory organizations applicable to the banking organization (applicable
rules and standards). Examples of such risks include compliance with regulations
set forth by banking agencies including fair and responsible banking, anti-money
laundering, or community reinvestment act, risks associated with offering our
products or services, or risks associated with deviating from internal policies
and procedures including those that are established to promote sound
risk-management and internal-control practices. Compliance risk also includes
fiduciary risk, which includes risks arising from our duty to exercise loyalty,
act in the best interest of our clients, and care for assets according to an
appropriate standard of care. This risk generally exists to the extent that we
exercise discretion in managing assets on behalf of a customer.
We recognize that an effective compliance program, which includes driving a
culture of compliance, plays a key role in managing and overseeing compliance
risk and that a proactive compliance environment and program are essential to
help meet various legal, regulatory, or other requirements or expectations. To
manage compliance risk, we maintain a system of policies, change-management
protocols, control frameworks, and other formal governance structures. Our
compliance function, which is led by the Chief Compliance Officer who reports to
our CEO, provides independent, enterprise-wide oversight of consumer and
customer-related compliance-risk exposures and related risk-management
practices. The Chief Compliance Officer has the authority and responsibility for
the oversight and administration of our consumer and customer-related compliance
program, which includes ongoing reporting of compliance-associated risk matters
to our Board, the RC, and various management committees established to govern
compliance-related risks. The Compliance Risk Management Committee, established
by the Chief Compliance Officer, serves to facilitate the management of consumer
and customer-related compliance risk, including matters impacting products,
geographies, and services. Other compliance-risk exposures are overseen and
addressed by designated subject-matter experts across the enterprise-including
in Finance, Tax, Accounting, Information Technology, Risk, Human Resources, and
Corporate Structure and Facilities-and are escalated through their established
governance and oversight routines.
Conduct Risk
Conduct risk is the risk of customer harm, employee harm, reputational damage,
regulatory sanction, or financial loss resulting from the behavior of our
employees and contractors toward customers, counterparties, other employees and
contractors, or the markets in which we operate.
Management is responsible for driving a culture that is consistent with our
"LEAD" core values and "Do it Right" philosophy. We maintain an enterprise-wide
Conduct Risk Management program that establishes the requirements for managing
conduct risk.
Under our governance framework, incentive compensation is subject to review and
recoupment so as to appropriately consider and not encourage imprudent
risk-taking. All incentive pay, whether paid or unpaid, vested or not vested, is
subject to cancellation or recoupment if based on, without limitation, material
misstatements, misrepresentations, or fraud, or if the employee recipient failed
to identify, raise, or assess issues with respect to financial loss or
reputational risk to us or otherwise engaged in or contributed to other conduct
adverse to us.
We manage conduct risk through a variety of enterprise programs, policies, and
procedures. Associates complete required training at on-boarding, and annually
thereafter, to affirm their compliance with our Code of Conduct and Ethics.
Training programs and other resources set
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expectations surrounding appropriate conduct, ethical behavior, and a culture of
compliance with applicable laws, regulations, policies, and standards. Officers
and employees are expected to take personal responsibility for maintaining the
highest standards of honesty, trustworthiness, and ethical behavior; to
understand and manage the risks associated with their positions; and to escalate
concerns about risk management (including reporting of potential violations of
the Code of Conduct and Ethics, our policies, or other laws and regulations).
Employee conduct is considered through various human resources and management
activities including associate recruiting, on-boarding, performance management,
incentive programs and compensation, conflicts of interest, and corrective
action. Oversight of conduct risk is performed by the Conduct Risk Officer
within Sustainability Risk Management.
Employee engagement surveys provide valuable insight into employee views and
opinions about the company's culture and conduct. The Ethics Hotline
(independently managed, available to associates 24 hours a day, 7 days a week)
and Open-Door Process provide additional avenues for employees to report
concerns or incidents of potential misconduct. Human Resources, Employee
Relations, and Enterprise Fraud, Security, and Investigations have established
processes and procedures for investigating and addressing cases of potential
fraud or employee misconduct.
Climate-Related Risk
We have identified and defined climate-related risk as an emerging risk. Pursuant to our risk-management framework, emerging risks include those that have yet to create a material impact or would only arise during stressful or unlikely circumstances. Climate-related risk is generally categorized into two major categories: (1) risk related to the transition to a lower-carbon economy (transition risk) and (2) risk related to the physical impacts of climate change. Transition risk considers how changes in policy, technology, and market preference could pose operational, financial, and reputational risk to companies. Physical risk from climate change can be acute or chronic. Acute physical risk refers to risks that are event-driven such as increased severity of extreme weather events, including tornadoes, hurricanes, or floods. Chronic physical risks refer to long-term shifts in climate patterns, such as sustained higher temperatures, that may, for example, cause sea levels to rise. We manage risks related to the physical impacts of climate change through the active engagement of our business continuity program, which is intended to limit disruptions during acute climate-related events. Additionally, we use excess of loss reinsurance to help mitigate risk of weather losses within our P&C business for our vehicle inventory program. We also use loss control techniques such as storm path monitoring to assist dealers in preparing for severe weather help to mitigate loss potential. As the impacts of climate change become more evident, we have recognized (1) the importance of understanding, preparing for and taking timely preventive action against potentially material climate-change impacts, (2) increasing investor demand for consistent and comparable climate-change risk data, (3) changing federal policy focus as a result of rejoining the Paris Climate Agreement and an increase in regulatory discussion about potential requirements and oversight, and (4) that Ally's commitment to "Do It Right" extends to the conservation of environmental resources to promote a sustainable future for our customers, employees, stockholders, and the communities in which we live and operate. Specifically, Ally has:
•Defined climate-related risk as an emerging risk within our risk-management
framework.
•Appointed a Sustainability Risk Executive reporting to ourChief Risk Officer and established a sustainability office staffed with employees focused on adopting sustainability measures and developing and executing a comprehensive enterprise strategy on climate-related risks and opportunities.
•Included sustainability and climate-related matters in executive level forums
and Board education.
•Completed a formal ESG Stakeholder Assessment in 2021 that included customers,
investors, community partners, local governments and employees to gain
perspective on ESG priorities and their importance to Ally.
•Committed to developing a comprehensive enterprise environmental sustainability strategy focusing on greater data collection, aggregation and analysis, with the goal of aligning with the recommendations from the Task Force on Climate-related Financial Disclosures in assessing and reporting on our exposures to climate-related risks and opportunities consistent with the financial industry. •Performed our annual assessment and calculation of our greenhouse gas emissions including Scope 1 emissions (direct emissions from owned or controlled sources), Scope 2 emissions (indirect emissions from the generation of purchased electricity, steam, heating and cooling consumed by the company), and relevant Scope 3 emissions (all other indirect emissions that occur in the company's value chain) for 2021.
•Executed Ally's operational carbon neutrality strategy for 2021 Scope 1 and 2
emissions through a combined purchase of carbon offsets and Green-e Energy
Certified renewable energy credits.
•Submitted our annual CDP (formally the Carbon Disclosure Project) climate
change questionnaire for 2021.
•Prioritized sustainable facilities by purchasing or leasing LEED certified
buildings that accounted for approximately 40% of the total square footage in
Ally facilities as of December 31, 2022.
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•Activated the "Green Teams" initiative in the fourth quarter of 2021 to engage
Ally employees in support of environmental volunteer opportunities within local
communities where Ally operates. Completed over 2,300 volunteer hours during the
year ended December 31, 2022.
Refer to the section titled Risk Factors in Part I, Item 1A of this report for
information on climate-related risks.
94 -------------------------------------------------------------------------------- Table of Contents Management's Discussion and AnalysisAlly Financial Inc. • Form 10-K 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, repurchase agreements, and advances from the FHLB ofPittsburgh . We define liquidity risk as the risk that an institution's financial condition or overall safety and soundness is adversely affected by the actual or perceived inability to liquidate assets or obtain adequate funding or to easily unwind or offset specific exposures without significantly lowering market prices because of inadequate market depth or market disruptions. 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 positions an organization 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 ALCO, chaired by the Corporate Treasurer, is responsible for overseeing our funding and liquidity strategies. CorporateTreasury is responsible for managing our liquidity positions within limits approved by ALCO, the ERMC, and the RC. As part of managing liquidity risk, Corporate Treasury prepares monthly forecasts depicting anticipated funding needs and sources of funds, executes our funding strategies, and manages liquidity under normal as well as more severely stressed macroeconomic environments. Oversight and monitoring of liquidity risk are provided by Independent Risk Management. The monthly liquidity forecasts demonstrate our ability to generate and obtain adequate amounts of cash to meet loan and operating lease demand, debt maturities, deposit withdrawals, and other cash commitments under normal operating conditions throughout the forecast horizon (currently through December 2025). Refer to Note 15 to the Consolidated Financial Statements for a summary of the scheduled maturity of long-term debt as of December 31, 2022. In recent years, we have become less reliant on market-based funding, reducing our exposure to disruptions in wholesale funding markets.
Funding Strategy
Liquidity and ongoing profitability are largely dependent on the timely and cost-effective access to retail deposits and funding in various segments of the capital markets. We focus on maintaining diversified funding sources across a broad base of depositors, lenders, and investors to meet liquidity needs throughout different economic cycles, including periods of financial distress. These funding sources include retail and brokered deposits, public and private asset-backed securitizations, unsecured debt, FHLB advances, and repurchase agreements. Our access to diversified funding sources enhances funding flexibility 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 manage our funding to achieve a well-balanced portfolio across a spectrum of risk, maturity, and cost-of-funds characteristics. Optimizing funding atAlly Bank continues to be a key part of our long-term liquidity strategy. We optimize our funding sources atAlly Bank by prioritizing retail deposits, maintaining active 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 toAlly 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 substantially all 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 liquidity risk, manage the liquidity
position, identify related trends, and monitor these trends and metrics against
established limits. These metrics include comprehensive stress tests that
measure the sufficiency of the liquidity portfolio over stressed horizons
ranging from overnight to 12 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.
Our liquidity stress testing is designed to allow us to operate our businesses
and to meet our contractual and contingent obligations, including unsecured debt
maturities, for at least 12 months, assuming our normal access to funding is
disrupted by severe market-wide and enterprise-specific events. We maintain
available liquidity in the form of cash and unencumbered highly liquid
securities. This available liquidity is held at various legal entities, and is
subject to regulatory restrictions and tax implications that may limit our
ability to transfer funds across entities.
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The following table summarizes our total available liquidity.
December 31, ($ in millions) 2022 2021 Unencumbered highly liquid securities (a) $ 22,155 $ 26,767 Liquid cash and equivalents 5,111 4,426 Total available liquidity $ 27,266 $ 31,193
(a)Includes unencumbered
corporate debt securities.
Recent Funding Developments
Key funding highlights from January 1, 2022, to date were as follows:
•During 2022, we accessed the unsecured debt capital markets and raised $1.5 billion through the issuance of senior notes, which provided additional liquidity atAlly Financial Inc. Additionally, we had $1.1 billion of unsecured debt mature during the year ended December 31, 2022.
•Our total deposit base increased $10.7 billion during 2022, to $152.3 billion
as of December 31, 2022.
•During the year ended December 31, 2022, the balance of outstanding short-term and long-term FHLB advances grew by $1.9 billion and decreased by $1.0 billion, respectively.
•During 2022, we raised $2.5 billion through the completion of term
securitization transactions backed by consumer automotive loans.
Funding Sources
The following table summarizes our sources of funding and the amount outstanding
under each category for the periods shown.
On-balance-sheet funding % Share of funding
December 31, ($ in millions) 2022 2021 2022 2021
Deposits $ 152,297 $ 141,558 88 89
Debt
Secured financings 10,124 7,619 6 5
Institutional term debt 9,678 9,194 6 6
Retail term notes 359 216 - -
Total debt (a) 20,161 17,029 12 11
Total on-balance-sheet funding $ 172,458 $ 158,587 100 100
(a)Includes hedge basis adjustments as described in Note 21 to the Consolidated
Financial Statements.
Refer to Note 15 to the Consolidated Financial Statements for a summary of the
scheduled maturity of long-term debt at December 31, 2022.
Deposits
Ally Bank is a digital direct bank with no branch network that obtains retail deposits directly from customers. We offer competitive rates and fees on a full spectrum of retail deposit products, including online savings accounts, money-market demand accounts, CDs, interest-bearing checking accounts, trust accounts, and IRAs. Our primary funding source is retail deposits, which provide us with stable, low-cost funding. We believe retail deposits are less sensitive to interest rate changes, market volatility, or changes in credit ratings when compared to other funding sources. Retail deposits constituted 80% of our total funding sources at December 31, 2022. In addition, we utilize brokered deposits, which are obtained through third-party intermediaries. 96 -------------------------------------------------------------------------------- Table of Contents Management's Discussion and AnalysisAlly Financial Inc. • Form 10-K
The following table shows
deposit balances as of the end of each of the last five quarters.
December 31, September 30, December 31,
2022 2022 June 30, 2022 March 31, 2022 2021
Total primary retail deposit customers (in
thousands) 2,681 2,597 2,546 2,518 2,476
Deposits ($ in millions)
Retail $ 137,684 $ 133,878 $ 131,155 $ 135,978 $ 134,672
Brokered 12,590 9,617 6,962 4,049 4,669
Other (a) 2,023 2,256 2,284 2,448 2,217
Total deposits $ 152,297 $ 145,751 $ 140,401 $ 142,475 $ 141,558
(a)Other deposits include mortgage escrow and other deposits. Additionally,
other deposits also include a deposit related to Ally Invest customer cash
balances deposited at
December 31, 2022, $2.0 billion as of September 30, 2022, $2.1 billion as of
both June 30, 2022, and December 31, 2021, and $2.3 billion as of March 31,
2022.
During the year ended December 31, 2022, our total deposit base increased $10.7 billion and we added approximately 205,000 retail deposit customers, ending with approximately 2.7 million retail deposit customers as of December 31, 2022. Total retail deposits increased $3.0 billion during the year ended December 31, 2022, bringing the total retail deposits portfolio to $137.7 billion as of December 31, 2022. The increase during the year ended December 31, 2022, was primarily driven by an increase in retail deposit customers, as well as higher deposit rates. Additionally, brokered deposits increased $7.9 billion during the year ended December 31, 2022. Overall, strong customer acquisition and retention rates, reflecting the strength of the brand, continue to deliver a favorable funding mix. We continue to advance our digital capabilities and deliver incremental value to our retail deposit customers beyond competitive rates. We have continued to deliver enhancements-such as our smart savings tools-improving our customer's digital banking experience and providing unique opportunities to organize and build their savings. In May 2021, we eliminated all overdraft fees across our retail deposit products for all customers. In January 2022, we announced Ally CoverDraft service, which provides a no fee overdraft allowance to our qualifying customers on debit transactions subject to a certain amount. In September 2022, we announced early direct deposit, an account feature that allows customers to access qualifying direct deposits up to two days in advance of receipt. These changes are examples of our "Do It Right" commitment for our customers. We continue to be recognized for the experience and value we provide our customers. In 2021,Ally Bank's checking account earned national Bank On certification from the CFE Fund. The organization recognized Ally's existing checking account, which goes above and beyond CFE criteria, for providing lower- and moderate-income consumers with a safe, affordable path to join the financial mainstream and achieve financial stability. In April 2022, Forbes named Ally to its "World's Best Banks" list, and in June 2022, Kiplinger namedAlly Bank to its "Best Internet Banks" list for the sixth consecutive year. In September 2022, The Wall Street Journal namedAlly Bank the "Best Overall Online Bank." In November 2022, MONEY® Magazine named Ally to its "Best Online Bank" list for the fifth consecutive year, as well as the tenth time in the past twelve years. For additional information on our deposit funding by type, refer to Note 14 to the Consolidated Financial Statements.
Securitizations and Secured Financings
In addition to building a larger deposit base in recent years, we maintain a
presence in the securitization markets to finance our automotive loan
portfolios. Securitizations and secured funding transactions, collectively
referred to as securitization transactions due to their similarities, allow us
to convert our automotive-finance receivables into cash earlier than what would
have occurred in the normal course of business.
As part of these securitization transactions, we sell assets to various 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, warranty, and covenant provisions. We
manage securitization execution risk by maintaining a diverse domestic and
foreign investor base.
We typically agree to service the assets transferred in our securitization
transactions for a fee, and we may be entitled to other related fees. The total
amount of servicing fees earned is disclosed in Note 5 to the 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.
These securitization transactions may 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. Our
securitization transactions may not meet the required criteria to be accounted
for as off-balance-sheet securitization
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transactions; therefore, they are accounted for as secured borrowings. We did
not have any off-balance sheet securitization exposures at December 31, 2022.
For information regarding our securitization activities, refer to Note 1 and
Note 11 to the Consolidated Financial Statements.
During 2022, we raised $2.5 billion through the completion of term
securitization transactions backed by consumer automotive loans.
We have access to funding through advances with the FHLB. These advances are primarily secured by consumer and commercial mortgage finance receivables and loans and investment securities. As of December 31, 2022, we had pledged $27.0 billion of assets to the FHLB resulting in $18.3 billion in total funding capacity with $7.2 billion of debt outstanding.
At December 31, 2022, $39.3 billion of our total assets were restricted as
collateral for the payment of debt obligations accounted for as secured
borrowings. Refer to Note 15 to the Consolidated Financial Statements for
further discussion.
Unsecured Financings
We 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. There were $359 million of retail term notes outstanding at December 31, 2022. The remainder of our unsecured debt is composed of institutional term debt. In 2022, we accessed the unsecured debt capital markets and raised $1.5 billion through the issuance of senior notes. Refer to Note 15 to the 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 includeU.S. government and federal agency obligations. As of December 31, 2022, we had $499 million 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 December 31, 2022. We had no debt outstanding with the FRB as of December 31, 2022. Guaranteed Securities Certain senior notes (collectively, the Guaranteed Notes) issued byAlly Financial Inc. (referred to within this section as the Parent) are unconditionally guaranteed on a joint and several basis by IB Finance, a subsidiary of the Parent and the direct parent ofAlly Bank , and Ally US LLC, a subsidiary of the Parent (together, the Guarantors, and the guarantee provided by each such Guarantor, the Note Guarantees). The Guarantors are primary obligors with respect to payment when due, whether at maturity, by acceleration or otherwise, of all payment obligations of the Parent in respect of the Guaranteed Notes pursuant to the terms of the applicable indenture. At both December 31, 2022, and December 31, 2021, the outstanding principal balance of the Guaranteed Notes was $2.0 billion, with the last scheduled maturity to take place in 2031. The Note Guarantees rank equally in right of payment with the applicable Guarantor's existing and future unsubordinated unsecured indebtedness and are subordinate to any secured indebtedness of the applicable Guarantor to the extent of the value of the assets securing such indebtedness. The Note Guarantees are structurally subordinate to indebtedness and other liabilities (including trade payables and lease obligations, and in the case ofAlly Bank , its deposits) of any nonguarantor subsidiaries of the applicable Guarantor to the extent of the value of the assets of such subsidiaries. The Note Guarantees and all other obligations of the Guarantors will terminate and be of no further force or effect (i) upon a permissible sale, disposition, or other transfer (including through merger or consolidation) of a majority of the equity interests (including any sale, disposition or other transfer following which the applicable Guarantor is no longer a subsidiary of the Parent), of the applicable Guarantor, or (ii) upon the discharge of the Parent's obligations related to the Guaranteed Notes. 98 -------------------------------------------------------------------------------- Table of Contents Management's Discussion and AnalysisAlly Financial Inc. • Form 10-K
The following tables present summarized financial data for the Parent and the
Guarantors on a combined basis. The Guarantors, both of which the Parent is
deemed to possess control over, are fully consolidated after eliminating
intercompany balances and transactions. Summarized financial data for
nonguarantor subsidiaries is excluded.
Year ended December 31, ($ in millions) 2022 2021 2020 Net financing loss and other interest income (a) $ (1,000) $ (1,070) $ (1,049) Dividends from bank subsidiaries 3,150 3,450 1,150 Dividends from nonbank subsidiaries 1 27 66 Total other revenue 103 243 367 Total net revenue 2,254 2,650 534 Provision for credit losses (32) (106) (68) Total noninterest expense 665 650 693
Income (loss) from continuing operations before income tax
benefit
1,621 2,106 (91) Income tax benefit from continuing operations (b) (253) (412) (300) Net income from continuing operations 1,874 2,518 209 Loss from discontinued operations, net of tax (1) (5) (1) Net income (c) $ 1,873 $ 2,513 $ 208
(a)Net financing loss and other interest income is primarily driven by interest
expense on long-term debt. Refer to Note 15 to the Consolidated Financial
Statements for further discussion.
(b)There is a significant variation in the customary relationship between pretax income (loss) and income tax benefit due to our accounting policy elections and consolidated tax adjustments. The income tax benefit excludes tax effects on dividends from subsidiaries.
(c)Excludes the Parent's and Guarantors' share of income of all nonguarantor
subsidiaries.
December 31, ($ in millions) 2022 2021 Total assets (a) $ 5,467 $ 5,737 Total liabilities $ 10,996 $ 11,304
(a)Excludes investments in all nonguarantor subsidiaries.
Cash Flows
The following summarizes the activity reflected in the 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 helpful 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 $6.2 billion and $4.0 billion for the years ended December 31, 2022, and 2021, respectively. Activity increased year-over-year, as higher net financing revenue and other interest income more than offset higher interest expense. Refer to the Consolidated Results of Operations section of this MD&A for further discussion. Net cash used in investing activities was $17.3 billion and $11.1 billion for the years ended December 31, 2022, and 2021, respectively. The change was primarily due to an increase of $10.8 billion in net cash outflows related to higher originations of loans held-for-investment, driven by higher financed transaction amounts. This was partially offset by an increase of $3.5 billion in net cash inflows related to available-for-sale securities. Net cash provided by financing activities for the year ended December 31, 2022, was $11.6 billion, compared to net cash used in financing activities of $3.8 billion for the same period in 2021. The change was primarily attributable to an increase in deposits of $6.2 billion, an increase in net cash inflows related to short-term borrowings of $4.5 billion, and an increase in net cash inflows from the issuance of long-term debt of $4.1 billion. Refer to the above section titled Recent Funding Developments for further information.
Capital Planning and Stress Tests
Under the Tailoring Rules, we are generally subject to supervisory stress testing on a two-year cycle and exempted from mandated company-run capital stress testing requirements. We are also required to submit an annual capital plan to the FRB. Our 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 our capital. The plan must also include a detailed description of our process for assessing capital adequacy, including a discussion of how we, under expected and stressful conditions, will maintain capital commensurate with our risks and above the minimum regulatory capital ratios, will serve as a source of strength toAlly Bank , and will maintain sufficient capital to continue our operations by maintaining ready access to funding, meeting our obligations to creditors and other counterparties, and continuing to serve as a credit intermediary. 99 -------------------------------------------------------------------------------- Table of Contents Management's Discussion and AnalysisAlly Financial Inc. • Form 10-K The Tailoring Rules align capital planning, supervisory stress testing, and stress capital buffer requirements for large banking organizations like Ally. As a Category IV firm, Ally is expected to have the ability to elect to participate in the supervisory stress test-and receive a correspondingly updated stress capital buffer requirement-in a year in which Ally would not generally be subject to the supervisory stress test. Refer to the section titledBasel Capital Framework in Note 20 to the Consolidated Financial Statements for further discussion about our stress capital buffer requirements. During a year in which Ally does not undergo a supervisory stress test, we would receive an updated stress capital buffer requirement only to reflect our updated planned common-stock dividends. Ally did not elect to participate in the 2021 or 2023 supervisory stress test but was subject to the 2022 supervisory stress test. We submitted our 2021 capital plan on April 5, 2021, which included planned capital distributions to common stockholders through share repurchases and cash dividends and other capital actions over the nine-quarter planning horizon. On January 11, 2021, our Board authorized a stock-repurchase program, permitting us to repurchase up to $1.6 billion of our common stock from time to time from the first quarter of 2021 through the fourth quarter of 2021 subject to restrictions imposed by the FRB. On July 12, 2021, our Board authorized an increase in the maximum amount of this stock-repurchase program, from $1.6 billion to $2.0 billion. During the second quarter of 2021, we issued $1.35 billion of Series B Preferred Stock and $1.0 billion of Series C Preferred Stock, both of which qualify as additional Tier 1 capital underU.S. Basel III. The proceeds from these issuances were used to redeem a portion of the Series 2 TRUPS then outstanding. Refer to Note 17 to the Consolidated Financial Statements for additional details about these instruments and capital actions. In June 2021, we submitted an updated capital plan to the FRB reflecting these capital actions and increases in our stock-repurchase program and common-stock dividend. This updated capital plan was used by the FRB to recalculate Ally's final stress capital buffer requirement, which was announced in August 2021 and remained unchanged at 3.5%. We submitted our 2022 capital plan to the FRB on April 5, 2022. Ally received an updated preliminary stress capital buffer requirement from the FRB in June 2022, which was determined to be 2.5%. The updated 2.5% stress capital buffer requirement was finalized in August 2022 and became effective on October 1, 2022. On January 10, 2022, our Board authorized a stock-repurchase program, permitting us to repurchase up to $2.0 billion of our common stock from time to time from the first quarter of 2022 through the fourth quarter of 2022 subject to restrictions imposed by the FRB, and an increase in our cash dividend on common stock from $0.25 per share for the fourth quarter of 2021 to $0.30 per share for the first quarter of 2022. During the year ended December 31, 2022, we repurchased $1.65 billion of common stock under our stock-repurchase program. Since the commencement of our initial stock-repurchase program in the third quarter of 2016, we have reduced the number of outstanding shares of our common stock by 38%, from 484 million as of June 30, 2016, to 299 million as of December 31, 2022. Our ability to make capital distributions, including our ability to pay dividends or repurchase shares of our common stock, will continue to be subject to the FRB's review and our internal governance requirements, including approval by our Board. The amount and size of any future dividends and share repurchases also will be subject to various factors, including Ally's capital and liquidity positions, accounting and regulatory considerations (including any restrictions that may be imposed by the FRB), the taxation of share repurchases, financial and operational performance, alternative uses of capital, common-stock price, and general market conditions, and may be extended, modified, or discontinued at any time. 100 -------------------------------------------------------------------------------- Table of Contents Management's Discussion and AnalysisAlly Financial Inc. • Form 10-K
Regulatory Capital
We became subject toU.S. Basel III on January 1, 2015, although a number of its provisions-including capital buffers and certain regulatory capital deductions-were subject to phase-in periods. For further information onU.S. Basel III, refer to the section titled Regulation and Supervision in Part I, Item 1 of this report, and Note 20 to the Consolidated Financial Statements. The following table presents selected regulatory capital data underU.S Basel III. December 31, ($ in millions) 2022 2021 Common Equity Tier 1 capital ratio 9.27 % 10.34 % Tier 1 capital ratio 10.72 % 11.89 % Total capital ratio 12.21 % 13.47 % Tier 1 leverage ratio (to adjusted quarterly average assets) (a) 8.65 % 9.67 % Total equity $ 12,859 $ 17,050 CECL phase-in adjustment (b) 887 1,183 Preferred stock (c) (2,324) (2,324) Goodwill and certain other intangibles (902) (941) Deferred tax assets arising from net operating loss and tax credit carryforwards (d) (4) (2) Other adjustments (e) 4,076 177 Common Equity Tier 1 capital
14,592 15,143 Preferred stock (c) 2,324 2,324 Other adjustments (49) (64) Tier 1 capital 16,867 17,403
Qualifying subordinated debt and other instruments qualifying as Tier
2
416 623 Qualifying allowance for loan losses and other adjustments 1,926 1,698 Total capital $ 19,209 $ 19,724 Risk-weighted assets (f) $ 157,346 $ 146,399 (a)Tier 1 leverage ratio equals Tier 1 capital divided by adjusted quarterly average total assets, which both reflect adjustments for disallowed goodwill, certain intangible assets, and disallowed deferred tax assets. (b)We elected to delay recognizing the estimated impact of CECL on regulatory capital until after a two-year deferral period, which for us extended through December 31, 2021. Beginning on January 1, 2022, we phased in 25% of the previously deferred estimated capital impact of CECL, with an additional 25% to be phased in at the beginning of each subsequent year until fully phased in by the first quarter of 2025. Refer to Note 20 to the Consolidated Financial Statements for further information. (c)In connection with our issuances of non-cumulative perpetual preferred stock in the second and third quarters of 2021, we redeemed a portion of the Series 2 TRUPS outstanding. In September 2021, we announced our intent to redeem the remaining shares of the Series 2 TRUPS outstanding without issuing a replacement capital instrument. The redemption was effectuated on October 15, 2021. Refer to Note 15 to the Consolidated Financial Statements for additional details about our issuances of non-cumulative perpetual preferred stock. (d)Contains deferred tax assets required to be deducted from capital underU.S. Basel III. (e)Primarily comprises adjustments related to our accumulated other comprehensive income opt-out election, which allows us to exclude most elements of accumulated other comprehensive income from regulatory capital. (f)Risk-weighted assets are defined by regulation and are generally determined by allocating assets and specified off-balance sheet exposures to various risk categories. 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). 101 -------------------------------------------------------------------------------- Table of Contents Management's Discussion and AnalysisAlly Financial Inc. • Form 10-K 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 Fitch (a) F3 BBB- Stable Moody's (b) P-3 Baa3 Stable S&P (c) A-3 BBB- Stable DBRS (d) R-2 (high) BBB Stable (a)Fitch affirmed our senior unsecured debt rating of BBB-, short-term rating of F3, and our outlook of Stable on March 24, 2022. (b)Moody's upgraded our senior unsecured rating to Baa3 from Ba1, upgraded our short-term rating to P-3 from Non-Prime and changed the outlook to Stable from Rating Under Review on August 27, 2021. (c)Standard & Poor's affirmed our senior unsecured debt rating of BBB-, affirmed our short-term rating of A-3, and changed the outlook to Stable from Negative on March 25, 2021. (d)DBRS upgraded our senior unsecured debt rating to BBB from BBB (Low), upgraded our short-term rating to R-2 (high) from R-3, and affirmed the outlook of Stable on February 18, 2022. As illustrated by the issuer ratings above, as of December 31, 2022, Ally holds an investment-grade rating from all the respective nationally recognized rating agencies. 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 an FSR and an ICR fromA.M. Best . 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 October 27, 2022,A.M. Best affirmed the FSR for Ally Insurance Group of A- (excellent), affirmed the ICR of a-, and maintained a Stable outlook.
Critical Accounting Estimates
Accounting policies are integral to understanding our Management's Discussion and Analysis of Financial Condition and Results of Operations. The preparation of financial statements in accordance withU.S. GAAP requires management to make certain judgments and assumptions, on the basis of information available at the time of the financial statements, in determining accounting estimates used in the preparation of these statements. Our significant accounting policies are described in Note 1 to the Consolidated Financial Statements. Certain of our critical accounting policies requiring significant management assumptions and judgment are described in this section. An accounting estimate is considered critical if the estimate requires management to make assumptions about matters that were highly uncertain at the time the accounting estimate was made. If actual results differ from our judgments and assumptions, then it may have an adverse impact on the results of operations and cash flows. Our management has discussed the development, selection, and disclosure of these critical accounting estimates with the Audit Committee of our Board, and the Audit Committee has reviewed our disclosure relating to these estimates.
Allowance for Loan Losses
We maintain an allowance for loan losses (the allowance) to reflect the net
amount expected to be collected from our lending portfolios. The allowance is
maintained at a level that management considers to be adequate based upon
ongoing quarterly assessments and evaluations using relevant available
information. The allowance is measured using statistically estimated models that
are designed to correlate customer and collateral quality, as well as certain
macroeconomic variables to expected future credit losses. The macroeconomic data
used in the models is based on forecasted variables for the next 12 months.
Beyond this forecast period, we revert to a historical average for each of the
variables on a straight-line basis over 24 months. Our baseline macroeconomic
forecast is consistent with the 50th percentile in a distribution of possible
economic outcomes.
The consumer portfolio segments consist of loans that generally share similar
risk characteristics within our Automotive Finance operations, Mortgage Finance
operations, and our personal lending and credit card operations, both of which
are included within Corporate and Other. For additional information regarding
the allowance calculation for the consumer portfolio segments, refer to Note 1
to the Consolidated Financial Statements.
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The commercial portfolio segment is composed of loans that may or may not share
similar risk characteristics within our Automotive Finance operations and
Corporate Finance operations. For additional information regarding the allowance
calculation for the commercial portfolio segment, refer to Note 1 to the
Consolidated Financial Statements.
The determination of the allowance is influenced by numerous assumptions and
factors that may materially affect estimates of loss. The critical assumptions
underlying the allowance include: (i) segmentation of each portfolio based on
common risk characteristics; (ii) the development of reasonable and supportable
forecasts of future macroeconomic conditions; and (iii) evaluation by management
of borrower, collateral, and geographic information. Management monitors the
adequacy of the allowance and makes adjustments as the assumptions in the
underlying analyses change to reflect an estimate of expected lifetime loan
losses at the reporting date, based on the best information available at that
time.
The allowance reflects management's estimate of expected credit losses over the
contractual term of our lending portfolio and involves significant judgment,
which could materially affect the provision for credit losses and, therefore,
net income. For additional information regarding our portfolio segments and
classes, allowance for loan losses, and other credit quality indicators, refer
to Note 9 to the Consolidated Financial Statements.
Macroeconomic Sensitivity Analysis
We perform a sensitivity analysis using scenarios derived from widely published macroeconomic forecasts to quantify the sensitivity of our baseline forecast to alternative changes in macroeconomic conditions. These scenarios are based on fixed probabilities of occurrence. •The unfavorable (or downside) scenario is consistent with the 90th percentile in a distribution of possible economic outcomes and implies that there is a 90% chance that the realized economy will be better than the defined path and a 10% chance that the realized economy will be worse than the defined path. •The alternative unfavorable (or alternative downside) scenario is consistent with the 96th percentile in a distribution of possible economic outcomes and implies that there is a 96% chance that the realized economy will be better than the defined path and a 4% chance that the realized economy will be worse than the defined path. As of December 31, 2022, results of this sensitivity analysis indicate that the downside scenario would increase our allowance for loan losses by 8% and the alternative unfavorable scenario would increase our allowance for loan losses by 11%. These results are estimates that are directly tied to the timing, severity, and duration of changes in the independently and instantaneously shocked macroeconomic scenario. Actual loss sensitivities and resulting estimates of consolidated allowance for loan losses may be influenced by numerous other factors including, but not limited to, the actual evaluation of macroeconomic conditions, future government and management actions, and other quantitative and qualitative information and adjustments. Therefore, this sensitivity analysis is hypothetical and is not intended to represent our expectation of changes in our estimate of expected credit losses due to a change in the macroeconomic environment.
Valuation of Automotive Operating Lease Assets and Residuals
We have significant investments in vehicles in our operating lease portfolio. In
accounting for operating leases, management must make a determination at the
beginning of the operating lease contract of the estimated realizable value
(i.e., residual value) of the vehicle at the end of the lease. This evaluation
is primarily based on a proprietary model, which includes variables such as age
of the vehicle, 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. The customer is
obligated to make payments during the term of the lease for the difference
between the purchase price and the contract residual value plus rental charges.
However, since the customer is not obligated to purchase the vehicle at the end
of the contract, we are exposed to a risk of loss to the extent the value of the
vehicle is below the residual value estimated at contract inception. For
additional information regarding residual value, refer to Note 1 to the
Consolidated Financial Statements.
To account for residual risk, we depreciate automotive operating lease assets to
expected realizable value on a straight-line basis over the lease term. The
estimated realizable value is initially based on the expected residual value
established at contract inception. Periodically, we review the projected value
of the leased vehicle at termination based on current market conditions, and
other relevant data points, and adjust depreciation expense as necessary over
the remaining term of the lease. Management periodically performs a detailed
review of the estimated realizable value of vehicles to assess the
appropriateness of the carrying value of operating lease assets. Impairment of
operating lease assets is assessed upon the occurrence of a triggering event.
Triggering events are systemic, observed events impacting the used vehicle
market such as shocks to oil and gas prices that may indicate impairment of the
operating lease asset. For additional information regarding operating lease
impairment, refer to Note 1 to the Consolidated Financial Statements.
Our depreciation methodology for operating lease assets considers management's
expectation of the value of the vehicles upon lease termination, which is based
on numerous assumptions and factors influencing used vehicle values. The
critical assumptions underlying the estimated carrying value of automotive
operating lease assets include: (i) estimated market value information obtained
and used by management in estimating residual values, (ii) proper identification
and estimation of business conditions, (iii) our remarketing abilities, and
(iv) automotive manufacturer vehicle and marketing programs. Changes in these
assumptions could have a significant impact on the operating lease residual
value.
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Lessees have the first opportunity to purchase the off-lease vehicle at the end
of the lease term for the price stated in the lease agreement. If the lessee
declines to purchase the off-lease vehicle, the dealer is offered the
opportunity to purchase the vehicle directly from us at a price we define. If
both the lessee and the dealer decline their options to purchase, we remarket
the off-lease vehicle at auction. At this point, we are exposed to a risk of
loss. If the realized values of our leased vehicles were to decline 1% below our
estimated realizable values, we would incur $82 million of incremental
depreciation expense over the remaining life of our operating lease portfolio.
This is based on the improbable event that all vehicles were remarketed at
auction due to lessees and dealers foregoing their purchase options.
Fair Value of Financial Instruments
We use fair value measurements to record fair value adjustments to certain instruments and to determine fair value disclosures. Refer to Note 24 to the Consolidated Financial Statements for a description of 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. We follow the fair value hierarchy set forth in Note 24 to the Consolidated Financial Statements in order to prioritize the inputs utilized to measure fair value. We review and modify, as necessary, our fair value hierarchy classifications on a quarterly basis, which can result in reclassifications between hierarchy levels. We have numerous internal controls in place to address risks inherent in estimating fair value measurements. Significant fair value measurements are subject to detailed analytics and management review and approval. We have an established risk management policy and model validation program. This model validation program establishes a controlled environment for the development, implementation, and operation of models used to generate fair value measurements and change procedures. Further, this program uses a risk-based approach to determine the frequency at which models are to be independently reviewed and validated. Additionally, a wide array of operational controls governs fair value measurements, including controls over the inputs into and the outputs from the fair value measurement models. For example, we backtest the internal assumptions used within models against actual performance. We also monitor the market for recent trades, market surveys, or other market information that may be used to benchmark model inputs or outputs. Certain valuations will also be benchmarked to market indices when appropriate and available. We have scheduled model or input recalibrations that occur on a periodic basis but will recalibrate earlier if significant variances are observed as part of the backtesting or benchmarking noted above. Considerable judgment is used in forming conclusions from market observable data used to estimate our Level 2 fair value measurements and 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. Refer to the section titled Fair Value Sensitivity Analysis within this MD&A for a sensitivity analysis of changes in interest rates, foreign-currency exchange rates, and equity prices.
Determination of Provision for Income Taxes
Our income tax expense, deferred tax assets and liabilities, and reserves for unrecognized tax benefits reflect management's best assessment of estimated current and future taxes to be paid. We are subject to income taxes predominantly inthe United States . We file income tax returns in approximately 50 jurisdictions: federal, state, and local. The laws and regulations of each jurisdiction are complex and may be subject to different interpretations. Significant judgments and estimates are required in determining consolidated income tax expense for each jurisdiction. Our interpretations of tax laws are subject to audits by various jurisdictions. Potential difference in the interpretation or changes in the tax laws may result in additional accrual of income tax expense or benefit, which could be material to our reported results. We consistently monitor new and reassess existing tax laws for changes and adjust our tax estimates accordingly. Our provision for income taxes is comprised of current and deferred income taxes. Deferred income taxes arise from temporary differences between the tax and financial statement recognition of revenue and expense. In evaluating our ability to recover our deferred tax assets within the jurisdiction from which they arise, we consider all available positive and negative evidence, including scheduled reversals of deferred tax liabilities, projected future taxable income, tax planning strategies, and recent results of operations. In projecting future taxable income, we begin with historical results adjusted for changes in accounting policies and incorporate assumptions about the amount of future state, federal, and foreign pretax operating income, the reversal of temporary differences, and the implementation of feasible and prudent tax planning strategies. These assumptions about future taxable income require significant judgment and are consistent with the plans and estimates we are using to manage the underlying businesses. In evaluating the objective evidence that historical results provide, we consider three years of cumulative operating income (loss). 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 currently hold deferred tax asset attributes related to net operating tax loss and foreign tax credit carryforwards. We perform regular assessments to determine whether our tax attributes are realizable. As of December 31, 2022, 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 these deferred tax assets relating to these carryforwards and it is reasonably possible that the valuation allowance may change in the next 12 months.
For additional information regarding our provision for income taxes, refer to
Note 22 to the Consolidated Financial Statements.
Recently Issued Accounting Standards
Refer to Note 1 to the Consolidated Financial Statements for further information
related to recently adopted accounting standards.
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Statistical Tables
The accompanying supplemental information should be read in conjunction with the more detailed information, including our Consolidated Financial Statements and the notes thereto, which appears elsewhere in this Annual 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.
2022 2021 2020
Interest Interest Interest
Average income/interest Average income/interest Average income/interest
Year ended December 31, ($ in millions) balance (a) expense Yield/rate balance (a) expense Yield/rate balance (a) expense Yield/rate
Assets
Interest-bearing cash and cash equivalents $ 3,886 $ 54 1.38 % $ 12,855 $ 15 0.12 % $ 13,985 $ 28 0.20 % Investment securities (b) 33,527 804 2.40 35,100 579 1.65 31,539 692 2.20 Loans held-for-sale, net 616 31 5.06 487 18 3.77 399 17 4.33 Finance receivables and loans, net (b) (c) 128,178 8,099 6.32 114,420 6,468 5.65 120,991 6,581 5.44 Investment in operating leases, net (d) 10,656 682 6.41 10,518 980 9.32 9,264 584 6.30 Other earning assets 870 37 4.27 693 21 2.92 977 44 4.43 Total interest-earning assets 177,733 9,707 5.46 174,073 8,081 4.64 177,155 7,946 4.49 Noninterest-bearing cash and cash equivalents 416 514 473 Other assets 10,442 9,098 8,021 Allowance for loan losses (3,439) (3,193) (3,149) Total assets $ 185,152 $ 180,492 $ 182,500 Liabilities and equity Interest-bearing deposit liabilities (b) $ 142,987 $ 1,987 1.39 % $ 138,947 $ 1,045 0.75 % $ 129,092 $ 1,952 1.51 % Short-term borrowings 4,292 107 2.49 201 1 0.31 3,721 42 1.12 Long-term debt (b) 16,683 763 4.58 17,620 860 4.88 29,058 1,249 4.30 Total interest-bearing liabilities 163,962 2,857 1.74 156,768 1,906 1.22 161,871 3,243 2.00 Noninterest-bearing deposit liabilities 193 157 146 Total funding sources 164,155 2,857 1.74 156,925 1,906 1.22 162,017 3,243 2.00 Other liabilities (e) 6,606 - n/m 6,855 8 n/m 6,195 - n/m Total liabilities 170,761 163,780 168,212 Total equity 14,391 16,712 14,288 Total liabilities and equity $ 185,152 $ 180,492 $
182,500
Net financing revenue and other interest income $ 6,850 $ 6,167 $ 4,703
Net interest spread (f) 3.72 % 3.42 % 2.49 %
Net yield on interest-earning assets (g) 3.85 % 3.54 % 2.65 %
n/m = not meaningful
(a)Average balances are calculated using an average daily balance methodology.
(b)Includes the effects of derivative financial instruments designated as
hedges. Refer to Note 21 to the 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.
(d)Yield includes gains on the sale of off-lease vehicles of $170 million, $344
million, and $127 million, for the years ended December 31, 2022, 2021, and
2020, respectively. Excluding gains on the sale of off-lease vehicles, the
annualized yield would be 4.81%, 6.05%, and 4.93%, for the years ended
December 31, 2022, 2021, and 2020, respectively.
(e)Represents interest expense on tax liabilities included in other liabilities
on the Consolidated Balance Sheet. The interest expense on tax liabilities is
included in the net yield on interest-earning assets and excluded from the
interest spread. For more information on our accounting policies regarding
income taxes, refer to Note 1 to the Consolidated Financial Statements.
(f)Net interest spread represents the difference between the rate on total
interest-earning assets and the rate on total interest-bearing liabilities.
(g)Net yield on interest-earning assets represents net financing revenue and
other interest income as a percentage of total interest-earning assets.
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The following table presents an analysis of the changes in net financing revenue
and other interest income, volume, and rate.
2022 vs. 2021 (Decrease)
increase due to 2021 vs. 2020 (Decrease) increase due to
(a) (a)
Year ended December 31, ($ in millions) Volume Yield/rate Total Volume Yield/rate Total
Assets
Interest-bearing cash and cash equivalents $ (10) $ 49 $ 39 $ (2) $ (11) $ (13) Investment securities (26) 251 225 78 (191) (113) Loans held-for-sale, net 5 8 13 4 (3) 1 Finance receivables and loans, net 778 853 1,631 (357) 244 (113) Investment in operating leases, net 13 (311) (298) 79 317 396 Other earning assets 5 11 16 (13) (10) (23) Total interest-earning assets $ 1,626 $ 135
Liabilities
Interest-bearing deposit liabilities $ 30 $ 912 $ 942 $ 149 $ (1,056) $ (907)
Short-term borrowings 20 86 106 (40) (1) (41)
Long-term debt (46) (51) (97) (492) 103 (389)
Total interest-bearing liabilities 951 (1,337)
Other liabilities n/m n/m (8) n/m n/m 8
Net financing revenue and other interest
income $ 683 $ 1,464
n/m = not meaningful
(a)Changes in interest not solely due to volume or yield/rate are allocated in
proportion to the absolute dollar amount of change in volume and yield/rate.
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Finance Receivables and Loans
The tables below show the maturity of the finance receivables and loans
portfolio and the distribution between fixed and floating interest rates based
on the stated terms of the loan agreements. This portfolio is reported based on
amortized cost.
Due in one Due after one Due after five
year or less year through years through Due after
December 31, 2022 ($ in millions) (a) five years fifteen years fifteen years Total (b)
Consumer automotive (c) (d) $ 963 $ 41,056 $ 41,787 $ 40 $ 83,846
Consumer mortgage
Mortgage Finance - 9 602 18,834 19,445
Mortgage - Legacy 4 1 167 118 290
Total consumer mortgage 4 10 769 18,952 19,735
Consumer other
Personal Lending (e) 61 773 1,153 3 1,990
Credit Card 1,599 - - - 1,599
Total consumer other 1,660 773 1,153 3 3,589
Total consumer 2,627 41,839 43,709 18,995 107,170
Commercial
Commercial and industrial
Automotive 13,307 524 764 - 14,595
Other 471 7,879 795 9 9,154
Commercial real estate 339 2,660 2,380 10 5,389
Total commercial 14,117 11,063 3,939 19 29,138
Total finance receivables and
loans $ 16,744 $ 52,902
$ 47,648 $ 19,014 $ 136,308
(a)Includes loans with revolving terms (for example, wholesale floorplan loans,
which are included within commercial and industrial, and credit cards).
(b)Loan maturities are based on the remaining maturities under contractual
terms.
(c)Certain consumer automotive loans are included in fair value hedging
relationships. The amortized cost excludes a liability of $560 million related
to basis adjustments for loans in closed portfolios with active hedges under the
portfolio layer method at December 31, 2022. These basis adjustments would be
allocated to the amortized cost of specific loans within the pool if the hedge
was dedesignated. Refer to Note 21 to the Consolidated Financial Statements for
additional information.
(d)Includes RV loans. RV lending was discontinued in 2018.
(e)Includes $3 million of finance receivables for which we have elected the fair
value option.
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Loans due after one year (a)
Loans at
Loans at fixed variable
December 31, 2022 ($ in millions) interest rates interest rates Total
Consumer automotive (b) $ 82,883 $ - $ 82,883
Consumer mortgage
Mortgage Finance 19,035 410 19,445
Mortgage - Legacy 70 216 286
Total consumer mortgage 19,105 626 19,731
Consumer other
Personal Lending 1,929 - 1,929
Total consumer other 1,929 - 1,929
Total consumer 103,917 626 104,543
Commercial
Commercial and industrial
Automotive 910 378 1,288
Other 63 8,620 8,683
Commercial real estate 3,801 1,249 5,050
Total commercial 4,774 10,247 15,021
Total finance receivables and loans $ 108,691
$ 10,873 $ 119,564
(a)Loan maturities are based on the remaining maturities under contractual
terms.
(b)Certain consumer automotive loans are included in fair value hedging
relationships. The amortized cost excludes a liability of $560 million related
to basis adjustments for loans in closed portfolios with active hedges under the
portfolio layer method at December 31, 2022. These basis adjustments would be
allocated to the amortized cost of specific loans within the pool if the hedge
was dedesignated. Refer to Note 21 to the Consolidated Financial Statements for
additional information.
Deposit Liabilities
The following table presents the average balances and interest rates paid for
our deposit liabilities.
2022 2021
Average Average
Year ended December 31, ($ in millions) balance (a)
Average deposit rate balance (a) Average deposit rate
Noninterest-bearing deposits
$ 193 - % $ 157 - % Interest-bearing deposits Savings, money market, and checking accounts 105,798 1.36 93,651 0.48 Certificates of deposit (b) 37,189 1.47 45,296 1.32 Total deposit liabilities $ 143,180 1.39 $ 139,104 0.75 (a)Average balances are calculated using an average daily balance methodology. (b)Includes brokered certificates of deposit average balance of $5.5 billion as of both December 31, 2022, and 2021.
The following table presents the amounts of uninsured certificates of deposit,
segregated by time remaining until maturity.
Three months or Over three months through Over six months
December 31, 2022 ($ in millions) less six months through twelve months Over twelve months
Total
Uninsured certificates of deposit $ 306 $ 314 $ 2,133 $ 1,477 $
4,230
As of December 31, 2022, we had $15.2 billion of deposit liabilities that are
estimated to be uninsured. In some instances, deposits in excess of federal
insurance limits may be insured based upon the number of account owners,
beneficiaries, and accounts held.
108
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Table of Contents
Quantitative and Qualitative Disclosures about Market Risk
Ally Financial Inc. • Form 10-K
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
Refer to the Market Risk section of Item 7, Management's Discussion and Analysis
of Financial Condition and Results of Operations.
109
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Table of Contents
Management's Report on Internal Control over Financial Reporting
Ally Financial Inc. • Form 10-K
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