UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
| ☑ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | ||||
For the fiscal year ended December 31, 2019,2020, or
| ☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | ||||
For the transition period from to
Commission file number: 1-3754
ALLY FINANCIAL INC.
(Exact name of registrant as specified in its charter)
| Delaware | 38-0572512 | |||||||
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |||||||
Ally Detroit Center
500 Woodward Ave.
Floor 10,, Detroit,, Michigan
48226
(Address of principal executive offices)
(Zip Code)
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||||||||||||
| Common Stock, par value $0.01 per share | ALLY | NYSE | ||||||||||||
| 8.125% Fixed Rate/Floating Rate Trust Preferred Securities, Series 2 of GMAC Capital Trust I | ALLY PRA | NYSE | ||||||||||||
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☑ No ☐
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No ☑
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☑ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☑ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer | ☑ | Accelerated filer | ☐ | ||||||||||||||||||||||||||||||
| Non-accelerated filer | ☐ | Smaller reporting company | ☐ | ||||||||||||||||||||||||||||||
| Emerging growth company | ☐ | ||||||||||||||||||||||||||||||||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐ | |||||||||||||||||||||||||||||||||
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☑
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No ☑
The aggregate market value of the Registrant’s common stock (Common Stock) held on June 28, 201930, 2020 by non-affiliated entities was approximately $12.2$7.4 billion (based on the June 28, 201930, 2020 closing price of Common Stock of $30.99$19.83 per share as reported on the New York Stock Exchange). At February 21, 2020,22, 2021, the number of shares outstanding of the Registrant’s common stock was 375,074,939374,011,518 shares.
Documents incorporated by reference: portions of the Registrant’s Proxy Statement for the annual meeting of stockholders to be held on April 28, 2020,May 4, 2021, are incorporated by reference in this Form 10-K in response to Items 10, 11, 12, 13, and 14 of Part III.
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| Item 16. | ||||||||
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Glossary of Abbreviations and Acronyms
The following is a list of abbreviations and acronyms that are used in this Annual Report on Form 10-K.
| Term | Definition | |||||||
| A.M. Best | A.M. Best Company, Inc. | |||||||
| ABS | Asset-backed securities | |||||||
| AC | Audit Committee of the Ally Board of Directors | |||||||
| ALCO | Asset-Liability Committee | |||||||
| ALM | Asset Liability Management | |||||||
| ASC | Accounting Standards Codification | |||||||
| ASU | Accounting Standards Update | |||||||
| Basel Committee | Basel Committee on Banking Supervision | |||||||
| BHC Act | Bank Holding Company Act of 1956 as amended | |||||||
| BHC | Bank holding company | |||||||
| BMC | Better Mortgage Company | |||||||
| Board | Ally Board of Directors | |||||||
| CARES Act | Coronavirus Aid, Relief, and Economic Security Act as amended | |||||||
| CCAR | Comprehensive Capital Analysis and Review | |||||||
| CD | Certificate of deposit | |||||||
| CECL | Accounting Standards Update 2016-13 (and related Accounting Standards Updates), or current expected credit loss | |||||||
| CFPB | Consumer Financial Protection Bureau | |||||||
| Chrysler | Stellantis N.V. | |||||||
| COVID-19 | Coronavirus disease 2019 | |||||||
| CRA | Community Reinvestment Act of 1977 as amended | |||||||
| CSG | Commercial Services Group | |||||||
| Dodd-Frank Act | Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 as amended | |||||||
| DIF | Deposit Insurance Fund | |||||||
| DTA | Deferred tax asset | |||||||
| D&I | Diversity and inclusion | |||||||
| EAD | Exposure at default | |||||||
| EGRRCP Act | Economic Growth, Regulatory Relief, and Consumer Protection Act as amended | |||||||
| ERMC | Enterprise Risk Management Committee | |||||||
| ERG | Employee resource group | |||||||
| ESG | Environmental, social, and governance | |||||||
| ETF | Exchange-traded fund | |||||||
| F&I | Finance and insurance | |||||||
| FASB | Financial Accounting Standards Board | |||||||
| FDI Act | Federal Deposit Insurance Act as amended | |||||||
| FDIC | Federal Deposit Insurance Corporation | |||||||
| FDICIA | Federal Deposit Insurance Corporation Improvement Act of 1991 as amended | |||||||
| FHC | Financial holding company | |||||||
| FHLB | Federal Home Loan Bank | |||||||
| FINRA | Financial Industry Regulatory Authority | |||||||
| FRB | Federal Reserve Bank, or Board of Governors of the Federal Reserve System, as the context requires | |||||||
| FSR | Financial Strength Rating | |||||||
| FTP | Funds-transfer pricing | |||||||
| GAP | Guaranteed asset protection | |||||||
| GDP | Gross domestic product of the United States of America | |||||||
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| Term | Definition | ||||||||
| GLB Act | Gramm-Leach-Bliley Act of 1999 as amended | ||||||||
| GM | General Motors Company | ||||||||
| IB Finance | IB Finance Holding Company, LLC | ||||||||
| IRA | Individual retirement account | ||||||||
| LCR | Liquidity coverage ratio | ||||||||
| LGD | Loss given default | ||||||||
| LIBOR | London Interbank Offered Rate | ||||||||
| LIHTC | Low-income housing tax credit | ||||||||
| LMI | Low-to-moderate income | ||||||||
| LTV | Loan-to-value | ||||||||
| MBS | Mortgage-backed securities | ||||||||
| MD&A | Management’s Discussion and Analysis of Financial Condition and Results of Operations | ||||||||
| Mortgage servicing asset | |||||||||
| New York Department of Financial | |||||||||
| NYSE | New York Stock Exchange | ||||||||
| OTC | Over-the-counter | ||||||||
| P&C | Property and casualty | ||||||||
| PCA | Prompt corrective action | ||||||||
| PD | Probability of default | ||||||||
| PPP | Paycheck Protection Program | ||||||||
| PSU | Performance Stock Unit or Award | ||||||||
| RC | Risk Committee of the Ally Board of Directors | ||||||||
| Right-of-use | |||||||||
| Restricted Stock Unit or Award | |||||||||
| Recreational vehicle | |||||||||
| Risk-weighted asset | |||||||||
| 8.125% Fixed Rate/Floating Rate Trust Preferred Securities, Series 2 of GMAC Capital Trust | |||||||||
| Secured Overnight Financing Rate | |||||||||
| Special-purpose entity | |||||||||
| Self-regulatory organizations | |||||||||
| Tax Cuts and Jobs Act of 2017 as amended | |||||||||
| Thurgood Marshall College Fund | |||||||||
| Troubled debt restructuring | |||||||||
| Utah Department of Financial Institutions | |||||||||
| UPB | Unpaid principal balance | ||||||||
| U.S. Basel III | The rules implementing the 2010 Basel III capital framework in the United States as well as related provisions of the Dodd-Frank Act, as amended from time to time | ||||||||
| U.S. GAAP | Accounting Principles Generally Accepted in the United States of America | ||||||||
| VIE | Variable interest entity | ||||||||
| VMC | Vehicle maintenance contract | ||||||||
| VSC | Vehicle service contract | ||||||||
| WAC | Weighted-average coupon | ||||||||
| wSTWF | Weighted short-term wholesale funding | ||||||||
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Item 1. Business
Our Business
Ally Financial Inc. (together with its consolidated subsidiaries unless the context otherwise requires, Ally, the Company, or we, us, or our) is a leading digital financial-services company with $180.6$182.2 billion in assets as of December 31, 2019.2020. As a customer-centric company with passionate customer service and innovative financial solutions, we are relentlessly focused on “Doing Itit Right” and being a trusted financial-services provider to our consumer, commercial, and corporate customers. We are one of the largest full-service automotive-financeautomotive finance operations in the countryUnited States and offer a wide range of financial services and insurance products to automotive dealerships and consumers. Our award-winning onlinedigital direct bank (Ally Bank, Member FDIC and Equal Housing Lender) offers mortgage-lending,mortgage lending, point-of-sale personal lending, and a variety of deposit and other banking products, including savings, money-market, and checking accounts, certificates of deposit (CDs),CDs, and individual retirement accounts (IRAs).IRAs. Additionally, we offer securities-brokerage and investment-advisory services through Ally Invest. Our robust corporate-finance business offers capital for equity sponsors and middle-market companies.
We are a Delaware corporation and are registered as a bank holding company (BHC)BHC under the Bank Holding CompanyBHC Act, of 1956, as amended (BHC Act), and a financial holding company (FHC)an FHC under the Gramm-Leach-Bliley Act of 1999, as amended (GLB Act).GLB Act. Our primary business lines are Dealer Financial Services, which is composed of our Automotive Finance and Insurance operations, Mortgage Finance, and Corporate Finance. Corporate and Other primarily consists of centralized corporate treasury activities, the management of our legacy mortgage portfolio, the activity related to Ally Invest and Ally Lending (formerly known as Health Credit Services)(our unsecured personal-lending business unit), and reclassifications and eliminations between the reportable operating segments. Ally Bank’s assets and operating results are included within our Automotive Finance, Mortgage Finance, and Corporate Finance segments, as well as Corporate and Other, based on its underlying business activities. As of December 31, 2019,2020, Ally Bank had total assets of $167.5$172.0 billion, and total nonaffiliate deposits of $120.8$137.0 billion.
Our strategic focus isobjectives are centered around (1) differentiating our company as a relentless ally for the financial well-being ofconsumer, commercial, and corporate customers, (2) ensuring our culture remains aligned with a focus on our customers, (2)communities, employees, and stockholders, (3) ongoing optimization of our market lendingleading automotive, insurance, and insurancedigitally-based bank business lines, (3)(4) sustained growth in customers and optimization ofongoing relationship deepening across our deposit funding profile, (4) expanding consumerscalable platforms, and expanded product offerings, and (5) efficient capital deployment and disciplined risk management, and (6) ensuring that our culture remains aligned with a relentless focus on our customers, communities, associates, and stockholders.management. We seek to extend our leading position in automotive finance in the United States by continuing to provide automotive dealers and their retail customers with premium service, a comprehensive product suite, consistent funding, and competitive pricing—reflecting our commitment to the automotive industry. Within our Automotive Finance and Insurance operations, we are also focused on strengthening our network of dealer relationships and pursuing digital distribution channels for our products and services, including through our operation of a direct-lending platform (Clearlane), our participation in other direct-lending platforms, and our work with dealers innovating in digital transactions—all while maintaining an appropriate level of risk.risk appetite. Within our other banking operations—including Mortgage Finance and Corporate Finance—we seek to expand our consumer and commercial banking products and services while providing a high level of customer service. In 2019, Ally acquired Credit Services Corporation, LLC and its subsidiary, Health Credit Services LLC, from which has been renamedAlly created the Ally Lending business unit. Ally Lending currently serves medical and which is strategically exploring ways to expand beyond its historical emphasis on unsecured personal lending for medical procedureshome improvement service providers by enabling promotional and serve as our point-of-sale personal-lending platform more generally.fixed rate installment-loan products through a digital application process at point-of-sale. In addition, we continue to focus on delivering significant and sustainable growth and retention in deposit customers and balances while optimizing our cost of funds. At Ally Invest, we seek to augment our securities-brokerage and investment-advisory services to more comprehensively assist our customers in managing their savings and wealth.
Upon launching our first ever enterprise-wide campaign themed “Do Itit Right,” we introduced a broad audience to our full suite of digital financial services, which emphasizes our relentless customer-centriccustomer focus and commitment to constantly create and reinvent our product offerings and digital experiences to meet the needs of consumers. We continue to build on this foundation and invest in enhancing the customer experience with integrated features across product lines on our digital platform. Our expanded product offerings and unique brand are increasingly gaining traction in the marketplace, as demonstrated by industry recognition of our award-winning digital direct online bank and strong customer acquisition and retention rates of our growing customer base.rates.
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 where the lessee is generally not obligated to acquire ownership of the vehicle at lease-end or compensate Ally for the vehicle’s residual value. The terms “lend,” “finance,” and “originate” mean our direct extension or origination of loans, our purchase or acquisition of loans, or our purchase of operating leases as applicable. The term “consumer” means all consumer products associated with our loan and operating-lease activities and all commercial retail installment sales contracts. The term “commercial” means all commercial products associated with our loan activities, other than commercial retail installment sales contracts. The term “partnerships” means business arrangements rather than partnerships as defined by law.
For further details and information related to our business segments and the products and services they provide, refer to Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A) in Part II, Item 7 of this report, and Note 26 to the Consolidated Financial Statements.
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Industry and Competition
The markets for automotive financing, insurance, banking (including corporate finance, mortgage finance, and point-of-sale personal lending), securities brokerage,securities-brokerage, and investment-advisory services are highly competitive. We directly compete in the automotive financing
market with banks, credit unions, captive automotive finance companies, and independent finance companies. Our insurance business also faces significant competition from automotive manufacturers, captive automotive finance companies, insurance carriers, third-party administrators, brokers, and other insurance-related companies. Some of these competitors in automotive financing and insurance, such as captive automotive finance companies, have certain exclusivity privileges with automotive manufacturers whose customers and dealers make up a significant portion of our customer base. In addition, our banking, securities brokerage,securities-brokerage, and investment-advisory businesses face intense competition from banks, savings associations, finance companies, credit unions, mutual funds, investment advisers, asset managers, brokerage firms, hedge funds, insurance companies, mortgage-banking companies, and credit cardcredit-card companies. Financial-technology (fintech) companies also compete with us directly and also have been partnering more oftenin partnership with financial servicesother banks and financial-services providers to compete against us in lending, deposits, securities-brokerage, investment-advisory, and other markets. Many of our competitors have substantial positions nationally or in the markets in which they operate. Some of our competitorsalso have significantly greater scale, financial and operational resources, investment capacity, and brand recognition as well as lower cost structures, substantially lower costs of capital, and less reliance on securitization, unsecured debt, and other capital markets.recognition. Our competitors may be subject to different and, in some cases, less stringent legislative, regulatory, and supervisory regimes than we are.Ally. A range of competitors differ from us in their strategic and tactical priorities and, for example, may be willing to suffer meaningful financial losses in the pursuit of disruptive innovation or to accept more aggressive business, compliance, and other risks in the pursuit of higher returns. Competition affects every aspect of our business, including product and service offerings, rates, pricing and fees, and customer service. Successfully competing in our markets also depends on our ability to innovate, to invest in technology and infrastructure, to maintain and enhance our reputation, and to attract, retain, and motivate talented employees, all the while effectively managing risks and expenses. We expect that competition will only intensify in the future.
Regulation and Supervision
We are subject to significant regulatory frameworks in the United States—at federal, state, and local levels—that affect the products and services that we may offer and the manner in which we may offer them, the risks that we may take, the ways in which we may operate, and the corporate and financial actions that we may take.
We are also subject to direct supervision and periodic examinations by various governmental agencies and industry self-regulatory organizations (SROs)SROs that are charged with overseeing the kinds of business activities in which we engage, including the Board of Governors ofFRB, the Federal Reserve System (FRB),UDFI, the Utah Department of Financial Institutions (UDFI),FDIC, the Federal Deposit Insurance Corporation (FDIC),CFPB, the Bureau of Consumer Financial Protection (CFPB), the Securities and Exchange Commission (SEC), the Financial Industry Regulatory Authority (FINRA),SEC, FINRA, and a number of state regulatory and licensing authorities such as the New York Department of Financial Services (NYDFS).NYDFS. These agencies and organizations generally have broad authority and discretion in restricting and otherwise affecting our businesses and operations and may take formal or informal supervisory, enforcement, and other actions against us when, in the applicable agency’s or organization’s judgment, our businesses or operations fail to comply with applicable law, comport with safe and sound practices, or meet its supervisory expectations.
This system of regulation, supervision, and examination is intended primarily for the protection and benefit of our depositors and other customers, the FDIC’s Deposit Insurance Fund (DIF),DIF, the banking and financial systems as a whole, and the broader economy—and not for the protection or benefit of our stockholders (except in the case of securities laws) or non-deposit creditors. The scope, intensity, and focus of this system can vary from time to time for reasons that range from the state of the economic and political environments to the performance of our businesses and operations, but for the foreseeable future, we expect to remain subject to extensive regulation, supervision, and examinations.
This section summarizes some relevant provisions of the principal statutes, regulations, and other laws that apply to us. The descriptions, however, are not complete and are qualified in their entirety by the full text and judicial or administrative interpretations of those laws and other laws that affect us.
Bank Holding Company, Financial Holding Company, and Depository Institution Status
Ally and IB Finance, Holding Company, LLC, a Delaware limited liability company, (IB Finance), are BHCs under the BHC Act. Ally is also an FHC under the GLB Act. IB Finance is a direct subsidiary of Ally and the direct parent of Ally Bank, which is a commercial bank that is organized under the laws of the State of Utah and whose deposits are insured by the FDIC under the Federal Deposit Insurance Act (FDI Act).FDI Act. As BHCs, Ally and IB Finance are subject to regulation, supervision, and examination by the FRB. Ally Bank is a member of the Federal Reserve System and is subject to regulation, supervision, and examination by the FRB and the UDFI.
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Capital Frameworks for additional information. In addition, our ability to expand these financial and related activities or to make acquisitions generally requires that we achieve a rating of satisfactory or better under the Community Reinvestment Act (CRA).CRA.
Further, under the BHC Act, we may be subject to approvals, conditions, and other restrictions when seeking to acquire control over another entity or its assets. For this purpose, “control” includes (a) directly or indirectly owning, controlling, or holding the power to vote 25% or more of any class of the entity’s voting securities, (b) controlling in any manner the election of a majority of the entity’s directors, trustees, or individuals performing similar functions, or (c) directly or indirectly exercising a controlling influence over the management or policies of the entity. Under rules of the FRB, whether Ally is presumed to have a “controlling influence” over an entity is determined by applying a framework of tiered presumptions of control that are based on the percentage of a class of voting securities held by Ally and nine other relationships with the entity. For example, Ally would be presumed to have such a controlling influence with less than 5% of a class of voting securities and any of the following: a management agreement with the entity, one-half or more of the directors on the entity’s board, or one-third or more of the total equity in the entity.
•Enhanced Prudential Standards — Ally is currently subject to enhanced prudential standards that have been established by the FRB under the Dodd-Frank Act. In May 2018, targeted amendments to the Dodd-Frank Act and other financial-services laws were enacted through the EGRRCP Act, including amendments that affect whether and, if so, how the FRB applies enhanced prudential standards to BHCs like us with $100 billion or more but less than $250 billion in total consolidated assets. In October 2019, the FRB and other U.S. banking agencies issued final rules implementing these amendments. The final rules—which are commonly known as the tailoring framework—were effective on December 31, 2019, and established four risk-based categories of prudential standards and capital and liquidity requirements for banking organizations with $100 billion or more in total consolidated assets. The most stringent standards and requirements apply to U.S. global systemically important BHCs, which are assigned to Category I. The assignment of other banking organizations to the remaining three categories is based on measures of size and four other risk-based indicators: cross-jurisdictional activity, wSTWF, nonbank assets, and off-balance-sheet exposure. Under the tailoring framework, Ally is |
•Capital Adequacy Requirements — Ally and Ally Bank are subject to various capital adequacy requirements. Refer to Note 20 to the Consolidated Financial Statements and the section below titled Basel Capital Frameworks for additional information.
•Capital Planning and Stress Tests — Under the tailoring framework described earlier in Enhanced Prudential Standards, Ally is generally subject to supervisory stress testing on a two-year cycle and exempted from mandated company-run capital stress testing requirements. Ally is also required to submit an annual capital plan to the FRB. Ally’s annual capital plan must include an assessment of its 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 participate indetermines could have an impact on our capital. The plan must also include a detailed description of Ally’s process for assessing capital adequacy, including a discussion of how Ally, under expected and stressful conditions, will maintain capital commensurate with its risks and above the minimum regulatory capital ratios, will serve as a source of strength to Ally Bank, and will maintain sufficient capital to continue its operations by maintaining ready access to funding, meeting its obligations to creditors and other counterparties, and continuing to serve as a credit intermediary.
We submitted our 2020 capital plan on April 3, 2020, which included planned capital distributions to common stockholders through share repurchases and cash dividends over the nine-quarter planning horizon. On June 25, 2020, the FRB provided us with the results of the supervisory stress test, additional industry-wide sensitivity analyses conducted in light of the COVID-19 pandemic, and our preliminary stress capital buffer requirement. At the same time, the FRB announced its determination that changes in financial markets or the Comprehensive Capital Analysis and Review (CCAR), or conduct company-run capital stress tests during the 2019 cycle. Instead, our capital actions during this cycle were largely basedmacroeconomic outlook could have a material effect on the results from our 2018 supervisory stress test.
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In January 2021, the FRB issued a final rule effective April 5, 2021, to align its capital planning and stress capital buffer requirements with the tailoring framework. Refer to the section below titled Basel Capital Framework for further discussion about our stress capital buffer requirements. Under the final rule, unless otherwise directed by the FRB in specified circumstances, Ally and other Category IV firms are generally no longer required to calculate forward-looking projections of revenues, losses, reserves, and pro forma capital levels under scenarios provided by the FRB. Each firm continues to be required, however, to provide a forward-looking analysis of income and capital levels under expected and stressful conditions that are designed by the firm. In addition, for Category IV firms, the final rule updated the frequency of calculating the portion of the stress capital buffer derived from the supervisory stress test to every other year. These firms 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 they would not generally be subject to the supervisory stress test. During a year in which a Category IV firm does not undergo a supervisory stress test, the firm would receive an updated stress capital buffer requirement that reflects its updated planned common-stock dividends. The final rule also includes reporting and other changes consistent with the tailoring framework.
•Resolution Planning — Under rules of the FDIC, Ally Bank is required to periodically submit to the FDIC a resolution plan (commonly known as a living will) that would enable the FDIC, as receiver, to resolve Ally Bank in the event of its insolvency under the FDI Act in a manner that ensures that depositors receive access to their insured deposits within one business day of Ally Bank’s failure (two business days if the failure occurs on a day other than Friday), maximizes the net present value return from the sale or disposition of its assets, and minimizes the amount of any loss realized by the creditors in the resolution. If the FDIC determines that the resolution plan is not credible and the deficiencies are not adequately remedied in a timely manner, the FDIC may take formal or informal supervisory, enforcement, and other actions against us. Ally Bank submitted its most recent resolution plan on July 1, 2018. In April 2019, the FDIC issued an advance notice of proposed rulemaking seeking comment on ways to tailor and improve its resolution-planning rules and, at the same time, delayed the next round of resolution-plan submissions until the rulemaking process has been completed. In May 2020, consistent with the advance notice of proposed rulemaking, the FDIC announced plans to engage in targeted engagement and capabilities testing related to resolution planning with select firms on an as-needed basis. In January 2021 the FDIC announced that, given the passage of time since the last submission of resolution plans and the uncertain economic outlook, the FDIC will resume requiring resolution plan submissions for insured depository institutions with $100 billion or more in assets, including Ally Bank. The FDIC indicated that firms will receive at least 12 months advance notice prior to such a submission. At the same time, the FDIC reiterated its plan to modify its supervisory approach to streamline content requirements for these submissions. Under the final rulestailoring framework described earlier inEnhanced Prudential Standards,, Ally is no longer required to submit to the FRB and the FDIC a plan for the rapid and orderly resolution of Ally and its significant legal entities under the U.S. Bankruptcy Code and other applicable insolvency laws in the event of future material financial distress or failure.
•Limitations on Bank and BHC Dividends and Other Capital Distributions — Federal and Utah law place a number of conditions, limits, and other restrictions on dividends and other capital distributions that may be paid by Ally Bank to IB Finance and thus indirectly to Ally. In addition, even if the FRB does not object to our capital plan as described earlier in Capital Planning and Stress Tests, Ally and IB Finance may be precluded from or limited in paying dividends or other capital distributions without the FRB’s approval under certain circumstances—for example, if Ally or IB Finance were to not meet minimum regulatory capital ratios after giving effect to the distributions. FRB supervisory guidance also directs BHCs like us to consult with the FRB prior to increasing dividends, implementing common-stock-repurchase programs, or redeeming or repurchasing capital instruments. Further, the U.S. banking agencies are authorized to prohibit an insured depository institution, like Ally Bank, or a BHC, like Ally, from engaging in unsafe or unsound banking practices and, depending upon the circumstances, could find that paying a dividend or other capital distribution would constitute an unsafe or unsound banking practice. On June 25, 2020, the FRB announced several actions to ensure that large firms, such as Ally, remain resilient despite the economic uncertainty from the COVID-19 pandemic, including for the third quarter of 2020 (1) the suspension of repurchases by any firm of its common stock, except repurchases relating to issuances of common stock related to employee stock ownership plans, and (2) the disallowance of any increase by a firm in the amount of its common-stock dividends and the imposition of a common-stock dividend limit equal to the average of the firm’s net income for the four preceding calendar quarters. These restrictions were extended by the FRB for the fourth quarter of 2020. On December 18, 2020, the FRB extended and modified these restrictions for the first quarter of 2021 to limit aggregate common-stock dividends and share repurchases to an amount equal to the average of the firm’s net income for the four preceding calendar quarters subject to specified exceptions. Restrictions of this kind may be further extended by the FRB. 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. For additional information on our capital actions, including our stock-repurchase program and dividends on our common stock, refer to Note 20 to 8 the Consolidated Financial Statements. 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), impacts related to the COVID-19 pandemic, 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. • |
Transactions with Affiliates — Sections 23A and 23B of the Federal Reserve Act and the FRB’s Regulation W prevent Ally and its nonbank subsidiaries from taking undue advantage of the benefits afforded to Ally Bank as a depository institution, including its access to federal deposit insurance and the FRB’s discount window. Pursuant to these laws, “covered transactions”—including Ally Bank’s extensions of credit to and asset purchases from its affiliates—are generally subject to meaningful restrictions. For example, unless otherwise exempted, (1) covered transactions are limited to 10% of Ally Bank’s capital stock and surplus in the case of any individual affiliate and 20% of Ally Bank’s capital stock and surplus in the case of all affiliates; (2) Ally Bank’s credit transactions with an affiliate are generally subject to stringent collateralization requirements; (3) with few exceptions, Ally Bank may not purchase any “low quality asset” from an affiliate; and (4) covered transactions must be conducted on terms and conditions that are consistent with safe and sound banking practices (collectively, Affiliate Transaction Restrictions). In addition, transactions between Ally Bank and an affiliate must be on terms and conditions that are either substantially the same as or more beneficial to Ally Bank than those prevailing at the time for comparable transactions with or involving nonaffiliates. |
Furthermore, these laws include an attribution rule that treats a transaction between Ally Bank and a nonaffiliate as a transaction between Ally Bank and an affiliate to the extent that the proceeds of the transaction are used for the benefit of or transferred to the affiliate. Thus, Ally Bank’s purchase from a dealer of a retail installment sales contract involving a vehicle for which Ally provided floorplan financing is subject to the Affiliate Transaction Restrictions because the purchase price paid by Ally Bank is ultimately transferred by the dealer to Ally to pay off the floorplan financing.
The Dodd-Frank Act tightened the Affiliate Transaction Restrictions in a number of ways. For example, the definition of covered transactions was expanded to include credit exposures arising from derivative transactions, securities lending and borrowing transactions, and the acceptance of affiliate-issued debt obligations (other than securities) as collateral. For a credit transaction that must be collateralized, the Dodd-Frank Act also requires that collateral be maintained at all times while the credit extension or credit exposure remains outstanding and places additional limits on acceptable collateral.
•Source of Strength — The Dodd-Frank Act codified the FRB’s policy requiring a BHC, like Ally, to serve as a source of financial strength for a depository-institution subsidiary, like Ally Bank, and to commit resources to support the subsidiary in circumstances when Ally might not otherwise elect to do so. The functional regulator of any nonbank subsidiary of Ally, however, may prevent that subsidiary from directly or indirectly contributing its financial support, and if that were to preclude Ally from serving as an adequate source of financial strength, the FRB may instead require the divestiture of Ally Bank and impose operating restrictions pending such a divestiture. •Single-Point-of-Entry Resolution Authority — Under the Dodd-Frank Act, a BHC whose failure would have serious adverse effects on the financial stability of the United States may be subjected to an FDIC-administered resolution regime called the orderly liquidation authority as an alternative to bankruptcy. If Ally were to be placed into receivership under the orderly liquidation authority, the FDIC as receiver would have considerable rights and powers in liquidating and winding up Ally, including the ability to assign assets and liabilities without the need for creditor consent or prior court review and the ability to differentiate and determine priority among creditors. In doing so, moreover, the FDIC’s primary goal would be a liquidation that mitigates risk to the |
financial stability of the United States and that minimizes moral hazard. Under the FDIC’s proposed single-point-of-entry strategy for the resolution of a systemically important financial institution under the orderly liquidation authority, the FDIC would place the top-tier U.S. holding company in receivership, keep its operating subsidiaries open and out of insolvency proceedings by transferring them to a new bridge holding company, impose losses on the stockholders and creditors of the holding company in receivership according to their statutory order of priority, and address the problems that led to the institution’s failure.
•Acceptance of Brokered Deposits —Under FDICIA, insured depository institutions such as Ally Bank must be well capitalized or adequately capitalized in order to accept brokered deposits, and even adequately capitalized institutions are subject to some restrictions on the rates they may offer for brokered deposits. At December 31, 2020, Ally Bank was well capitalized under the PCA framework. In December 2020, the FDIC approved a final rule to establish a new framework for analyzing whether deposits qualify as brokered deposits, including those that are accepted through arrangements between insured depository institutions, such as Ally Bank, and third parties, such as financial-technology companies. The final rule takes effect on April 1, 2021, with full compliance required as of January 1, 2022. We continue to evaluate the effect of the final rule on us, but at the present time, we expect that any effect would be a reduction in the number of deposit arrangements between Ally Bank and third parties that would be characterized as brokered deposits. Brokered deposits totaled $12.6 billion at December 31, 2020, which represented 9.2% of Ally Bank’s total deposits. •Enforcement Authority — The FRB possesses extensive authorities and powers to regulate and supervise the conduct of Ally’s businesses and operations. If the FRB were to take the position that Ally or any of its subsidiaries have violated any law or commitment or engaged in any unsafe or unsound practice, formal or informal enforcement and other supervisory actions could be taken by the FRB against Ally, its subsidiaries, and institution-affiliated parties (such as directors, officers, and agents). The UDFI and the FDIC have similarly expansive authorities and powers over Ally Bank and its subsidiaries. For example, any of these 9 |
In addition, the CFPB has broad authorities and powers to enforce federal consumer-protection laws involving financial products and services. The CFPB has exercised these authorities and powers through public enforcement actions, lawsuits, and consent orders and through nonpublic enforcement actions. In doing so, the CFPB has generally sought remediation of harm alleged to have been suffered by consumers, civil money penalties, and changes in practices and other conduct.
The SEC, FINRA, the Department of Justice, state attorneys general, and other domestic or foreign governmental authorities also have an array of means at their disposal to regulate and enforce matters within their jurisdiction that could impact Ally’s businesses and operations.
Basel Capital Framework
The FRB and other U.S. banking agencies have adopted risk-based and leverage capital standards that establish minimum capital-to-asset ratios for BHCs, like Ally, and depository institutions, like Ally Bank.
The risk-based capital ratios are based on a banking organization’s risk-weighted assets (RWAs),RWAs, which are generally determined under the standardized approach applicable to Ally and Ally Bank by (1) assigning on-balance-sheet exposures to broad risk-weight categories according to the counterparty or, if relevant, the guarantor or collateral (with higher risk weights assigned to categories of exposures perceived as representing greater risk), and (2) multiplying off-balance-sheet exposures by specified credit conversion factors to calculate credit equivalent amounts and assigning those credit equivalent amounts to the relevant risk-weight categories. The leverage ratio, in contrast, is based on an institution’s average unweighted on-balance-sheet exposures.
In December 2010, the Basel Committee on Banking Supervision (Basel Committee) reached an agreement on the global Basel III capital framework, which was designed to increase the quality and quantity of regulatory capital by introducing new risk-based and leverage capital standards.to strengthen the regulation, supervision, and risk management of banking organizations. In July 2013, the U.S. banking agencies finalized rules implementing theU.S. Basel III, capital framework inincluding the United States as well asimplementation of related provisions of the Dodd-Frank Act (U.S. Basel III). U.S. Basel III represents a substantial revision to the previously effective regulatory capital standards for U.S. banking organizations.Act. We became subject to U.S. Basel III on January 1, 2015, although a number of its provisions—including capital buffers and certain regulatory capital deductions—were subject to a phase-in period through December 31, 2018.
Under U.S. Basel III, Ally and Ally Bank must maintain a minimum Common Equity Tier 1 risk-based capital ratio of 4.5%, a minimum Tier 1 risk-based capital ratio of 6%, and a minimum total risk-based capital ratio of 8%. In addition to these minimum risk-based capital ratios, Ally and Ally Bank are subject to a capital conservation buffer requirement, which for Ally was 3.5% and for Ally Bank was 2.5% as of more than 2.5%.December 31, 2020. Failure to maintain more than the full amount of the capital conservation buffer requirement would result in restrictions on the ability of Ally and Ally Bank to make capital distributions, including dividend payments and stock repurchases and redemptions, and to pay discretionary bonuses to executive officers. U.S. Basel III also subjects Ally and Ally Bank to a minimum Tier 1 leverage ratio of 4%.
Prompted by the enactment of the EGRRCP Act, the FRB and other U.S. banking agencies tailored the capital and liquidity requirements that apply to large U.S. banking organizations. Refer to the section above titled Bank Holding Company, Financial Holding Company, and Depository Institution Status for additional information. In March 2020, the FRB issued a final rule to more closely align forward-looking stress testing results with the FRB’s non-stress regulatory capital requirements for BHCs with $100 billion or more in total consolidated assets and other specified companies. The final rule introduced a stress capital buffer requirement based on firm-specific stress test performance and planned dividends, which for Ally replaced the fixed 2.5% component of the capital conservation buffer requirement. The final rule also made several changes to the CCAR process, such as eliminating the CCAR quantitative objection, narrowing the set of planned capital actions assumed to occur in the stress scenario, assuming that a firm maintains a constant level of assets over the planning horizon, eliminating the 30% dividend payout ratio as a criterion for heightened scrutiny of a firm’s capital plan, and allowing a firm to make capital distributions in excess of those included in its capital plan if the firm is otherwise in compliance with the automatic distribution limits of the capital framework. The final rule became effective on May 18, 2020, and therefore applied to the 2020 CCAR process. Under the final rule, Ally’s stress capital buffer requirement is the greater of 2.5% and the result of the following calculation: (1) the difference between Ally’s starting and minimum projected Common Equity Tier 1 capital ratios under the severely adverse scenario in the supervisory stress test, plus (2) the sum of the dollar amount of Ally’s planned common stock dividends for each of the fourth through seventh quarters of its nine-quarter capital planning horizon, as a percentage of risk-weighted assets. For a Category IV firm like Ally, the capital conservation buffer requirement comprises the stress capital buffer requirement. The capital conservation buffer requirement applicable to Ally’s depository-institution subsidiary, Ally Bank, continues to be a fixed 2.5%. Ally received its first preliminary stress capital buffer requirement from the FRB on June 25, 2020, which was determined under this new methodology to be 3.5%, was finalized on August 10, 2020, and became effective on October 1, 2020. On June 25, 2020, the FRB also announced its determination that changes in financial markets or the macroeconomic outlook could have a material effect on the risk profiles and financial conditions of firms subject to the capital-plan rule and that, as a result, the firms (including Ally) would be required to resubmit capital plans to the FRB within 45 days after receiving updated stress scenarios from the FRB.
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On September 17, 2020, the FRB released two updated scenarios—severely adverse and alternative severe. We updated our capital plan in light of firm-specific baseline and stress scenarios, as required, and submitted our updated plan to the FRB on November 2, 2020. On December 18, 2020, the FRB publicly disclosed summary results of this second round of supervisory stress testing and extended its deadline for notifying firms about whether their stress capital buffer requirements will be recalculated to March 31, 2021. It is possible that this resubmission process may result in a change in Ally’s stress capital buffer requirement and, consequently, its capital conservation buffer requirement.
Under the capital conservation buffer requirement, the maximum amount of capital distributions and discretionary bonus payments that can be made by a banking organization, such as Ally or Ally Bank, is a function of its eligible retained income. During the COVID-19 pandemic, the FRB and other U.S. banking agencies expressed a concern that the definition of eligible retained income would not limit distributions in the gradual manner intended but instead could do so in a sudden and severe manner even if a banking organization were to experience only a modest reduction in its capital ratios. As a result, to better allow a banking organization to use its capital buffer as intended and continue lending in adverse conditions, the U.S. banking agencies issued an interim final rule that became effective on March 20, 2020, and revised the definition of eligible retained income to the greater of (1) a banking organization’s net income for the four preceding calendar quarters, net of any distributions and associated tax effects not already reflected in net income, and (2) the average of a banking organization’s net income over the preceding four quarters. This interim final rule was adopted as final with no changes effective January 1, 2021.
U.S. Basel III also revised the eligibility criteria for regulatory capital instruments and provides for the phase-out of instruments that had previously been recognized as capital but that do not satisfy these criteria. For example, subject to certain exceptions (such as certain debt or equity issued to the U.S. government under the Emergency Economic Stabilization Act), trust preferred and other hybrid securities were excluded from a BHC’s Tier 1 capital as of January 1, 2016. Also, subject to a phase-in schedule, certain items are deducted from Common Equity Tier 1 capital under U.S. Basel III that had not previously been deducted from regulatory capital, and certain other deductions from regulatory capital have been modified. Among other things, U.S. Basel III requires significant investments in the common stockcapital instruments of unconsolidated financial institutions, mortgage servicing assets (MSAs),MSAs, and certain deferred tax assets (DTAs)DTAs that individually exceed a specified individual and aggregate thresholdsthreshold to be deducted from Common Equity Tier 1 capital. U.S. Basel III also revised the standardized approach
for calculating RWAs by, among other things, modifying certain risk weights and the methods for calculating RWAs for certain types of assets and exposures.
In July 2019, the FRB and other U.S. banking agencies issued a final rule to simplify the capital treatment for MSAs, certain DTAs, and investments in the capital instruments of unconsolidated financial institutions (collectively, threshold items). UnderPrior to the current capitalfinal rule ataking effect, banking organization must deductorganizations deducted from capital amounts of threshold items that individually exceedexceeded 10% of Common Equity Tier 1 capital. The aggregate amount of threshold items not deducted under the 10% threshold deduction but that nonetheless exceedsexceeded 15% of Common Equity Tier 1 capital minus certain deductions from and adjustments to Common Equity Tier 1 capital mustwere also be deducted. Any amount of these MSAs and certain DTAs not deducted from Common Equity Tier 1 capital are currentlywere risk weighted at 100%. The final rule removesremoved the individual and aggregate deduction thresholds for threshold items and adoptsadopted a single 25% Common Equity Tier 1 capital deduction threshold for each item individually, and requiresrequired that any of the threshold items not deducted be risk weighted at 250%. The final rule also simplifiessimplified the calculation methodology for minority interests. These provisions will taketook effect for us on April 1, 2020. We do2020, and did not expect these provisions to have a significantmaterial impact on our capital position.
Ally and Ally Bank are subject to the U.S. Basel III standardized approach for counterparty credit risk but not to the U.S. Basel III advanced approaches for credit risk or operational risk. Ally is also not subject to the U.S. market-risk capital rule, which applies only to banking organizations with significant trading assets and liabilities.
The capital-to-assetrisk-based capital ratios and the Tier 1 leverage ratio play a central role in prompt corrective action (PCA),PCA, which is an enforcement framework used by the U.S. banking agencies to constrain the activities of depository institutions based on their levels of regulatory capital. Five categories have been established using thresholds for the Common Equity Tier 1 risk-based capital ratio, the Tier 1 risk-based capital ratio, the total risk-based capital ratio, and the Tier 1 leverage ratio: well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized, and critically undercapitalized. The Federal Deposit Insurance Corporation Improvement Act of 1991 (FDICIA)FDICIA generally prohibits a depository institution from making any capital distribution, including any payment of a cash dividend or a management fee to its BHC, if the depository institution would become undercapitalized after the distribution. An undercapitalized institution is also subject to growth limitations and must submit and fulfill a capital restoration plan. While BHCs are not subject to the PCA framework, the FRB is empowered to compel a BHC to take measures—such as the execution of financial or performance guarantees—when PCA is required in connection with one of its depository-institution subsidiaries. In addition, under FDICIA, only well-capitalized and, with a waiver from the FDIC, adequately capitalized institutions may accept brokered deposits, and even adequately capitalized institutions are subject to some restrictions on the rates they may offer for brokered deposits. At December 31, 2019,2020, Ally Bank was well capitalized under the PCA framework.
At December 31, 2019,2020, Ally and Ally Bank were in compliance with their regulatory capital requirements. For an additional discussion of capital adequacy requirements, refer to Note 20 to the Consolidated Financial Statements.
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September 30, 2020. We have elected this alternative option instead of the one described in the December 2018 rule. As a result, under the final rule, we will delay recognizing the estimated impact of CECL on regulatory capital purposes, this permitteduntil after a two-year deferral period, which for us extends through December 31, 2021. Beginning on January 1, 2022, we will be required to phase in 25% of the previously deferred estimated capital impact of CECL, on January 1, 2020, with an additional 25% to be phased in at the beginning of each subsequent year until fully phased in by the first quarter of 2023. In addition,2025. The estimated impact of CECL on regulatory capital that we will defer and later phase in is calculated as the FRB announced that, in order to reduce uncertainty, the FRB will maintain its current modeling framework for the allowance for loan losses in supervisory stress tests through the 2021 cycle.
In December 2017, the Basel Committee approved revisions to the global Basel III capital framework (commonly known as Basel IV), many of which—if adopted in the United States—could heighten regulatory capital standards. In March 2020, to better allow banking organizations to focus their resources on navigating the COVID-19 pandemic, the implementation date of these revisions was delayed by the Basel Committee from January 1, 2022, to January 1, 2023. At this time, how the FRB proposal and the Basel Committee revisions will be harmonized and finalized in the United States is not clear or predictable.predictable.
Insured Depository Institution Status
Ally Bank is an insured depository institution and, as such, is required to file periodic reports with the FDIC about its financial condition. Total assets of Ally Bank were $167.5$172.0 billion and $159.0$167.5 billion at December 31, 2020, and 2019, and 2018, respectively.
Ally Bank’s deposits are insured by the FDIC in the standard insurance amounts per depositor for each account ownership category as prescribed by the FDI Act. Deposit insurance is funded through assessments on Ally Bank and other insured depository institutions, and the FDIC may take action to increase insurance premiums if the DIF is not funded to its regulatory-mandated Designated Reserve Ratio (DRR). Currently, the FDIC is required to achievemaintain a DRR of 1.35% byunder the FDI Act. In 2020, due to extraordinary growth in insured deposits after the start of the COVID-19 pandemic, the DIF reserve ratio fell below the 1.35% statutory minimum. The FDI Act requires that the FDIC adopt a restoration plan when the DIF reserve ratio falls below 1.35% or is expected to do so within six months. The plan must restore the DIF reserve ratio to at least 1.35% within eight years, absent extraordinary circumstances. On September 30,15, 2020, the FDIC announced its restoration plan, projecting the DIF reserve ratio to return to a level above 1.35% without any increase to the deposit insurance assessment rate schedule while committing to closely monitor economic conditions, the health of the banking sector, and has established a target DRR of 2.0%.deposit-growth trends. Under the Dodd-Frank Act, the FDIC assesses premiums from each institution based on its average consolidated total assets minus its average tangible equity, while utilizing a scorecard method to determine each institution’s risk to the DIF. The Dodd-Frank Act also requiresIn June 2020, the FDIC approved a final rule that mitigates the deposit insurance assessment effects of participating in setting assessments, to offset the effect of increasing its reserve forPaycheck Protection Program, the DIF on institutions with consolidated total assets of less than $10 billion. To achieve the mandated DRR consistent with these provisions of the Dodd-Frank Act, the FDIC implemented a rule in 2016 imposing a surcharge of 4.5 basis points on all insured depository institutions with consolidated total assets of $10 billion or more in addition to their regular assessments. Under the rule, the surcharge would cease once a DRR of 1.35% had been achieved or on December 31, 2018, whichever came first. On September 30, 2018, the DRR reached 1.36%,Paycheck Protection Program Liquidity Facility, and the surcharge was eliminated.Money Market Mutual Fund Liquidity Facility.
If an insured depository institution like Ally Bank were to become insolvent or if other specified events were to occur relating to its financial condition or the propriety of its actions, the FDIC may be appointed as conservator or receiver for the institution. In that capacity, the FDIC would have the power to (1) transfer assets and liabilities of the institution to another person or entity without the approval of the institution’s creditors; (2) require that its claims process be followed and to enforce statutory or other limits on damages claimed by the institution’s creditors; (3) enforce the institution’s contracts or leases according to their terms; (4) repudiate or disaffirm the institution’s contracts or leases; (5) seek to reclaim, recover, or recharacterize transfers of the institution’s assets or to exercise control over assets in which the institution may claim an interest; (6) enforce statutory or other injunctions; and (7) exercise a wide range of other rights, powers, and authorities, including those that could impair the rights and interests of all or some of the institution’s creditors. In addition, the administrative expenses of the conservator or receiver could be afforded priority over all or some of the claims of the institution’s creditors, and under the FDI Act, the claims of depositors (including the FDIC as subrogee of depositors) would enjoy priority over the claims of the institution’s unsecured creditors.
Investments in Ally
Because Ally Bank is an insured depository institution and Ally and IB Finance are BHCs, direct or indirect control of us—whether through the ownership of voting securities, influence over management or policies, or other means—is subject to approvals, conditions, and other restrictions under federal and state laws. Refer to the section above titledBank Holding Company, Financial Holding Company, and Depository Institution Status earlier in this section. for additional information. These laws may differ in their purposes, definitions and presumptions of control, and restrictions, which for example is the case for the BHC Act and the Change in Bank Control Act. Investors are responsible for ensuring that they do not, directly or indirectly, acquire control of us in contravention of these laws.
Asset-Backed Securitizations
Section 941 of the Dodd-Frank Act requires securitizers of different types of asset-backed securitizations, including transactions backed by residential mortgages, commercial mortgages, and commercial, credit card, and automotive loans, to retain no less than five percent of the credit risk of the assets being securitized, subject to specified exceptions. Federal regulatory agencies issued final rules implementing this risk-retention requirement in October 2014, with compliance required for residential-mortgage securitizations beginning December 24, 2015, and for other securitizations beginning December 24, 2016.
Insurance Companies
Some of our insurance operations—including in the United States, Canada, and Bermuda—are subject to certain minimum aggregate capital requirements, net asset and dividend restrictions under applicable state and foreign insurance laws, and the rules and regulations promulgated by various U.S. and foreign regulatory agencies. Under various state and foreign insurance laws, dividend distributions may be
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made only from statutory unassigned surplus with approvals required from the regulatory authorities for dividends in excess of certain statutory limitations. Our insurance operations are also subject to applicable state and foreign laws generally governing insurance companies, as well as laws addressing products that are not regulated as insurance, such as vehicle service contracts (VSCs) VSCs and guaranteed asset protection (GAP)GAP waivers.
Mortgage Finance
Our mortgage business is subject to extensive federal, state, and local laws, including related judicial and administrative decisions. These laws, among other things, impose licensing obligations and financial requirements; limit the interest rates, finance charges, and other fees that can be charged; regulate the use of credit reports and the reporting of credit information; impose underwriting requirements; regulate marketing techniques and practices; require the safeguarding of nonpublic information about customers; and regulate servicing practices,
including in connection with assessments, collection and foreclosure activities, claims handling, and investment and interest payments on escrow accounts. The laws applicable to the mortgage business are complex and subject to change and to changes in interpretation and enforcement. Further, many existing laws were enacted without anticipating all of the technological and related innovations utilized by financial-technology firms and the financial-services companies that partner with them in the origination and servicing of mortgage loans, and as a result, the application of these legal frameworks is not always clear and can be subject to wide supervisory and enforcement discretion.
Through our direct-to-consumer mortgage offering, we offer a variety of jumbo and conforming fixed- and adjustable-rate mortgage products with the assistance of a third-party fulfillment provider.BMC. Jumbo mortgage loans are generally held on our balance sheet, and are accounted for as held-for-investment.held-for-investment, and serviced by Cenlar FSB. Conforming mortgage loans are generally originated as held-for-sale and then sold to the fulfillment provider,BMC, which in turn may sell the loans to the Federal National Mortgage Association (Fannie Mae), the Federal Home Loan Mortgage Corporation (Freddie Mac), or other participants in the secondary mortgage market. The nature and dynamics of this market, however, continue to evolve in ways that are often neither clear nor predictable. For example, Fannie Mae and Freddie Mac have been in conservatorship since September 2008. While the Federal Housing Finance Agency has published and pursued strategic goals for these government-sponsored enterprises during the conservatorship, their role in the market remains subject to uncertainty. Relatedly, during this same period, Congress has debated comprehensive housing-finance reform, but proposed legislation has yet to be meaningfully advanced.
Ally Invest Subsidiaries
Ally Invest Securities LLC (Ally Invest Securities) is registered as a securities broker-dealer with the SEC and in all 50 states, the District of Columbia, and Puerto Rico, is registered with the Municipal Securities Rulemaking Board as a municipal securities broker-dealer, and is a member of FINRA and the Securities Investor Protection Corporation (SIPC), and various other SROs, including Cboe, NYSE Arca, and Nasdaq Stock Market.. As a result, Ally Invest Securities and its personnel are subject to extensive requirements under the Securities Exchange Act of 1934, as amended (Exchange Act), SEC regulations, SRO rules, and state laws, which collectively cover all aspects of the firm’s securities activities—including sales and trading practices, capital adequacy, recordkeeping, privacy, anti-money laundering, financial and other reporting, supervision, misuse of material nonpublic information, conduct of its business in accordance with just and equitable principles of trade, and personnel qualifications. The firm operates as an introducing broker and clears all transactions, including all customer transactions, through a third-party clearing broker-dealer on a fully disclosed basis.
Ally Invest Forex LLC (Ally Invest Forex) is registered with the U.S. Commodity Futures Trading Commission (CFTC) as an introducing broker and is a member of the National Futures Association (NFA), which is the primary SRO for the U.S. futures industry. The firm is subject to similarly expansive requirements under the Commodity Exchange Act, CFTC and NFA rules governing introducing brokers and their personnel, and CFTC retail forex rules.
Ally Invest Advisors Inc. (Ally Invest Advisors) is registered as an investment adviser with the SEC. As a result, the firm is subject to a host of requirements governing investment advisers and their personnel under the Investment Advisers Act of 1940, as amended, and related rules and regulations, including certain fiduciary and other obligations with respect to its relationships with its investment advisory clients.
Regulators conduct periodic examinations of Ally Invest Securities, Ally Invest Forex, and Ally Invest Advisors and regularly review reports that the firms are required to submit on an ongoing basis. Violations of relevant regulatory requirements could result in adverse consequences for the firms and their personnel, including censure, penalties and fines, the issuance of cease-and-desist orders, and restriction, suspension or expulsion from the securities industry.
Other Laws
Ally is subject to numerous federal, state, and local statutes, regulations, and other laws, and the possibility of violating applicable law presents ongoing compliance, operational, reputation, and other risks to Ally. Some of the other more significant laws to which we are subject include:
•Privacy and Data Security — The GLB Act and related regulations impose obligations on financial institutions to safeguard specified consumer information maintained by them, to provide notice of their privacy practices to consumers in specified circumstances, and to allow consumers to opt out of specified kinds of information sharing with unaffiliated parties. Related regulatory guidance also directs financial institutions to notify consumers in specified cases of unauthorized access to sensitive consumer information. In addition, most states have enacted laws requiring notice of specified cases of unauthorized access to information. In February 2017, the NYDFS adopted expansive cybersecurity regulations that require regulated entities to establish cybersecurity programs and policies, to designate chief information security officers, to comply with notice and reporting obligations, and to take other actions in connection with the security of their information. On January 1, 2020, a comprehensive privacy law went into effect in the State of California, requiring regulated entities to establish measures to identify, manage, secure, track, produce, and delete personal information. |
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In December 2020, the U.S. banking agencies released a proposed rule to establish notification requirements for banking organizations in connection with significant computer security incidents. Under the proposal, a BHC, such as Ally, and a state-chartered bank that is a member of the Federal Reserve System, such as Ally Bank, would be required to notify the FRB within 36 hours of incidents that could result in the banking organization’s inability to deliver services to a material portion of its customer base, could jeopardize the viability of key operations of the banking organization, or could impact the stability of the financial sector. The effects on Ally and Ally Bank will depend on the content of the final rule and the manner of its implementation.
•Fair Credit Reporting Act — The Fair Credit Reporting Act regulates the dissemination of credit reports by credit reporting agencies, requires users of credit reports to provide specified notices to the subjects of those reports, imposes standards on the furnishing of information to credit reporting agencies, obligates furnishers to maintain reasonable procedures to deal with the risk of identity theft, addresses the sharing of specified kinds of information with affiliates and third parties, and regulates the use of credit reports to make preapproved offers of credit and insurance to consumers.
•Truth in Lending Act — The Truth in Lending Act (TILA) and Regulation Z, which implements TILA, require lenders to provide borrowers with uniform, understandable information about the terms and conditions in certain credit transactions. These rules apply to Ally and its subsidiaries when they extend credit to consumers and require, in the case of certain loans, conspicuous disclosure of the finance charge and annual percentage rate, as applicable. In addition, if an advertisement for credit states specific credit terms, Regulation Z requires that the advertisement state only those terms that actually are or will be arranged or offered by the creditor together with specified notices. The CFPB in recent years has issued substantial amendments to the mortgage requirements under Regulation Z, and additional changes are likely in the future. Amendments to Regulation Z and Regulation X, which implements the Real Estate Settlement Procedures Act, require integrated mortgage loan disclosures to be provided for applications received on or after October 3, 2015.
•Sarbanes-Oxley Act — The Sarbanes-Oxley Act of 2002 implemented a broad range of corporate-governance and accounting measures designed to improve the accuracy, reliability, and transparency of corporate financial reporting and disclosures and to reinforce the importance of corporate ethical standards. Among other things, this law provided for (1) the creation of an independent accounting oversight board; (2) auditor independence provisions that restrict non-audit services that accountants may provide to their audit clients; (3) additional corporate governance and responsibility measures including the requirement that the principal executive and financial officers certify financial statements; (4) the potential forfeiture of bonuses or other incentive-based compensation and profits from the sale of an issuer’s securities by directors and senior officers in the 12 month period following initial publication of any financial statements that later require restatement; (5) an increase in the oversight and enhancement of certain requirements relating to audit committees and how they interact with the independent auditors; (6) requirements that audit committee members must be independent and are barred from accepting consulting, advisory, or other compensatory fees from the issuer; (7) requirements that companies disclose whether at December 31, 2019,least one member of the audit committee is a “financial expert” (as defined by the SEC) and, 2018, respectively.if not, why the audit committee does not have a financial expert; (8) a prohibition on personal loans to directors and officers, except certain loans made by insured financial institutions, on non-preferential terms and in compliance with other bank regulatory requirements; (9) disclosure of a code of ethics; (10) requirements that management assess the effectiveness of internal control over financial reporting and that the independent registered public accounting firm attest to the assessment; and (11) a range of enhanced penalties for fraud and other violations.
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amended by the Anti-Money Laundering Act of 2020 (AMLA), which comprehensively reforms and modernizes U.S. anti-money-laundering laws. The Bank Secrecy Act, as amended by the USA PATRIOT Act and the Anti-Money Laundering Act of 2020, generally requires banks, certain other financial institutions, and, in certain cases, BHCs to undertake activities including maintaining an anti-money-laundering program, verifying the identity of clients, monitoring for and reporting on suspicious transactions, reporting on cash transactions exceeding specified thresholds, and responding to certain requests for information by regulatory authorities and law enforcement agencies. In addition, the AMLA codifies a risk-based approach to anti-money-laundering compliance for financial institutions, requires the U.S. Treasury Department to develop standards for evaluating technology and internal processes for Bank Secrecy Act compliance, directs the Financial Crimes Enforcement Network (FinCEN) to establish a registration database of beneficial-ownership information that designated companies will be required to report, and expands enforcement- and investigation-related authority and available sanctions for specified Bank Secrecy Act violations. Many provisions of the AMLA will require additional rulemakings, reports, and other measures, and the impact of the AMLA will depend at least in part on their development and implementation.
•Community Reinvestment Act — Under the CRA, a bank has a continuing and affirmative obligation, consistent with the safe and sound operation of the institution, to help meet the credit needs of its entire community, including low- and moderate-income persons and neighborhoods. While the CRA does not establish specific lending requirements or programs, banks are rated on their performance in meeting the needs of their communities. In its most recent performance evaluation in 2020, Ally Bank received an “Outstanding” rating. In January 2020, Ally Bank began operating under a new three-year CRA strategic plan approved by the FRB. Failure by Ally Bank to maintain a “Satisfactory” or better rating under the CRA may adversely affect our ability to expand our financial and related activities as an FHC or make acquisitions. Refer to the section above titled Bank Holding Company, Financial Holding Company, and Depository Institution Status for additional information. In September 2020, the FRB issued an advance notice of proposed rulemaking on an approach to modernize the regulations that implement the CRA by strengthening, clarifying, and tailoring them to reflect the current banking landscape and better meet the core purpose of the CRA, including by tailoring performance tests and assessments to account for differences in bank sizes and business models.
Human Capital
Our employees are integral to the success of our business, and central to our strategy is attracting, developing, and retaining talented individuals with the right skills to drive our business forward. We emphasize a working environment and company culture that embrace diverse talents, backgrounds, and perspectives and where colleagues feel valued as both individuals and members of the team. We had approximately 9,500 and 8,700 employees at December 31, 2020, and 2019, respectively, which consist primarily of full-time employees in the United States. Our employee growth for the year ended December 31, 2020, was primarily attributable to our focus on supporting customers through expanded servicing within our Automotive Finance business and enhanced digital capabilities. Some of our key objectives, programs, and initiatives that are designed to attract, develop, and retain talent are detailed below.
Culture
We recognize the long-term success of our Company is underpinned by the strength of our purpose-driven culture— a culture that sets us apart from the competition and gives us a distinct competitive advantage as we recruit and retain talented teammates. Our people-first approach enables a winning customer-centric philosophy focused on resiliency, adaptability, and a growth-mindset-oriented drive to “Be (Even) Better.” We strive to uphold our mantra to “Do it Right” through decisions and deeds at all levels of the organization, and we collectively commit to work with integrity and accountability and to uphold our LEAD core values in the workplace, in the marketplace, and in the community. Our culture is driven by our “LEAD” core values, where we emphasize that employees.
•[L]ook externally – We strive to meet and exceed the needs of our customers with agility, speed, and innovation. We continually evolve, respond quickly, and deliver a superior customer experience.
•[E]xecute with excellence – Good enough is never enough. With a focus on continuous improvement, our actions are driven by sound analysis and an intense focus on excellence.
•[A]ct with professionalism – We operate with integrity, hold ourselves and each other accountable, treat others with respect, and embrace diversity and inclusion. This is the cornerstone to our long-term success and at the very foundation of what it means to be an ally.
•[D]eliver results – We are passionate about winning – for our customers, our teams, and our company. Success is measured at both the outcome and the path to achieve it.
Diversity and Inclusion
We believe the best ideas come from a collective mixture of different voices and perspectives. We are an equal opportunity employer, and we strive for an inclusive work environment where all backgrounds, experiences, interests, viewpoints, and skills are respected, appreciated, and encouraged consistent with our culture. We are focused on diverse representation and retention in the workforce—including different genders, races, nationalities, sexual orientations, and other identities—across all levels of the organization from entry to leadership. Fostering these diverse perspectives is important and reflects the beliefs and actions that are the backbone of our culture.
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We have a deliberate focus on D&I. Its importance starts at the top with our CEO, who consistently stresses the value in leveraging our differences. In June 2017, our CEO was among the first 150 CEOs who signed on to the CEO Action Pledge for Diversity and Inclusion, and this commitment has been renewed every year since. In connection with nationwide movements against systemic racism and social injustices during 2020, our Board and Executive Council publicly pledged our continuing support for Black and Brown colleagues, suppliers, partners, and communities in the promotion of equity and equality.
In 2017, we launched a D&I Council, which provides executive leadership on D&I and promotes belonging at Ally and in our communities. In 2020, we further enhanced our commitment to D&I with a financial and social inclusion roadmap that includes specific objectives. The framework is built upon four pillars: Community, Customers, Employees, and Suppliers.
•Community: Further social justice and address disparate systems and policies through an intentional approach to its philanthropy, volunteerism, board service as well as CRA initiatives including loans, investments, and partnerships.
•Employees: Increase representation and retention of Black and Brown employees at professional, managerial, and executive levels through intentional programming and support.
•Customers: Enable financial and social inclusion through our culture of customer obsession, developing education and/or solutions to strengthen economic mobility for all.
•Suppliers: Actively promote ways diverse businesses can engage and succeed within the Ally Supply Chain.
We take deliberate steps to weave D&I through all of Ally’s human capital efforts: from pipelining candidates, onboarding, all the way through the employee lifecycle. With this approach, we have been able to build on our “One Ally” culture to celebrate the differences that our employees bring to the workplace. In 2020, we held Learn (In)clusion sessions, which are deeper dives on topics for our managers to learn the impacts of unconscious bias. Every employee has a specific culture-related performance objective, which includes a strong focus on D&I. Additionally, for all executive leaders, annual performance objectives and reviews include a specific focus on mobility and diversity trends within the workforce. The importance of D&I is also consistently reinforced by executive leadership through town hall meetings, employee communications, and active participation in our ERGs. A diverse and inclusive workforce makes us stronger, more agile, more innovative, and more adaptable. We believe it makes us better and benefits us from financial, operational, and cultural perspectives.
We maintain eight ERGs sponsored by members of Ally’s Executive Council. These ERGs consist of: Aliados, Asian/Middle Eastern, Black/African American, Diverse Abilities, Generational, Pride, Veteran, and Women ALLYs. Membership in Ally’s ERGs is voluntary and open to all employees, whether they identify with the ERG or view themselves as an ally to the group. At December 31, 2020, 38% of our workforce belonged to at least one ERG, increasing from 35% as of December 31, 2019. Our objective is to uphold a workplace environment where all employees feel heard and know that they can bring their authentic selves to work every day consistent with our culture.
In 2018, in response to the issue of economic mobility and to further enhance our D&I efforts, we continued to deepen our relationship with TMCF through a number of programs, including the launch of Moguls in the Making, and contributed $1 million to the Smithsonian’s National Museum of African American History and Culture. Moguls in the Making is an annual competition that helps foster opportunities for young, up-and-coming entrepreneurs from our nation’s publicly-supported historically black colleges and universities. In 2019, TMCF honored our CEO as its CEO of the Year. In 2020, we hosted our second annual Moguls in the Making competition, which was held virtually with 50 students working in teams to develop a business plan that took into account COVID-19 and social equity. These experiences help develop skills for future careers, including for the over 20 students who have been offered internships with Ally in 2020. In early 2021, we took additional steps to address inequality of access to careers with long-term growth potential with a $1.3 million commitment in scholarships and programs in partnership with the Congressional Black Caucus Foundation, TMCF, and other professional university groups.
We recognize one way to foster diverse and inclusive perspectives is to safeguard pay equality. We shifted from requests for salary history to salary expectations in our external hiring practices to help in confirming that our compensation is based on market rates for roles, experience, and performance. To the same end, we regularly benchmark our compensation against other companies both within and outside our industry. On February 1, 2021, we established an internal minimum hourly wage for our U.S. employees at $17.
In January 2020, Ally launched its Supplier Diversity program to focus on diversity and inclusion among its supplier base. The Supplier Diversity program includes a proactive business strategy encouraging the use of suppliers owned by U.S.-based minorities, women, LGBTQ, veterans, service-disabled veterans and those with disabilities, and small or disadvantaged businesses defined by local, state, or federal classifications. The program also encourages all Ally third-party suppliers to utilize diverse-owned suppliers and small businesses on a second-tier basis. During 2020, we initiated a second-tier reporting program to capture additional diverse spend associated with Ally’s prime suppliers that are utilizing minority, women, LGBTQ, veteran, disability-owned, and small or disadvantaged businesses to help support Ally. Additionally, in January 2021, Ally hosted its inaugural Supplier Diversity Symposium, engaging more than 40 diverse suppliers in a company-wide networking event with our CEO and other Ally business executives to build relationships and explore opportunities to expand our spend with diverse suppliers.
Engagement
Active engagement is key as we continue to build a company where our employees want to work, have purposeful careers, and feel empowered to make a difference. Throughout the year, we leverage a third-party provider to administer confidential, anonymous employee surveys to provide management feedback on key strengths, as well as to identify areas where we can take action to further improve our
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culture and further strengthen our engaged workforce. Our latest company-wide engagement survey in 2020 was responded to by 82% of our employees and had an average employee engagement score of 87 out of 100, as compared to the financial services industry benchmark of 72 out of 100, as measured by our third-party provider. Active employee engagement helps to strengthen our employee retention rate, which was 90.3% for the year ended December 31, 2020.
Learning and Development
We hold numerous programs to invest in the growth and development of our employees. Our employee base receives continuing education courses relevant to our industry through the Ally Learning Center, in addition to on-the-job training related to their function. We have organized a mentor-mentee program as an avenue for our employees to share knowledge, experience, and perspective and to foster the personal and professional growth of one another. We encourage internal mobility among our employees, contributing to 29% of our existing eligible workforce that has been with Ally for at least one year receiving promotions or taking on new roles during the year ended December 31, 2020. We also provide support for continuing education through a tuition reimbursement program, as well as student loan repayment assistance and contributions to employee’s 529 education savings plans. We emphasize career and skill development as part of our annual performance management process, in addition to targeted trainings for management development.
Total Rewards, Health, and Wellness
Our compensation program offers market-competitive base pay and pay-for-performance incentives based on achieving individual and company goals. In addition, our total rewards include competitive holiday and flexible paid-time-off, a 401(k) retirement savings plan with matching and company contributions that can total up to 10% of an employee’s salary per year, as well as other benefits designed to support the personal and professional lives of our employees. Examples of these benefits include paid parental and caregiver leave, adoption and surrogacy assistance, a backup child and adult/elder care program, and an employee assistance program. We also match employee donations to registered nonprofits subject to an annual cap and provide our employees with eight hours of voluntary-time-off to give back in the communities where we work.
We empower our employees to act as founders with an owner’s mindset across all levels of the organization and all parts of the business. In January 2020, we awarded all active, regular Ally employees with 100 restricted stock units, subject to a 3-year cliff vesting schedule, in recognition of our notable accomplishments and to support a founder’s mentality. A second grant of 100 restricted stock units with a 3-year cliff vesting schedule was issued in January 2021. To further encourage the mindset of an owner, we also maintain an employee stock purchase plan that provides employees with the opportunity to purchase Ally stock at a discount.
Supporting and valuing all of our employees is central to our culture. We offer flexible health insurance options including dental and vision for our employees, as well as a pre-tax health savings account with employer contributions. We provide life and disability benefits and manage a wellness program encouraging healthy living with financial rewards.
In response to the COVID-19 pandemic, we provided a range of financial-assistance offerings, including a $1,200 expense payment for those earning less than $100,000. We enhanced existing benefits and introduced new benefits related to COVID-19 and mental health concerns. In May 2020, we launched the Ally Employee Relief Fund with a $250,000 contribution. Including matching contributions by Ally, this fund has been augmented by over $160,000 in additional donations and has helped over 500 of our employees. In August, recognizing the continuing difficulties caused by the pandemic, we paid 50% of the 2020 incentive-compensation targets for most of our non-executive employees in advance of expected year-end amounts.
To curb the spread of COVID-19, we instituted a remote work protocol in mid-March 2020, and as of December 31, 2020, over 99% of our employees continue to work remotely. For those employees who are working at our facilities to address critical business needs, we have implemented a daily health and temperature screening and reconfigured our working environment to allow for social distancing. The health and safety of our employees remain paramount in our decision-making, and our phased reopening of our facilities will be based on viral trends, governmental regulations, and local ordinances.
Additional Information
Our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, and Current Reports on Form 8-K (and amendments to these reports) are available on our internet website, free of charge, as soon as reasonably practicable after the reports are electronically filed with or furnished to the SEC. These reports are available at www.ally.com/about/investor/sec-filings/. These reports can also be found on the SEC website at www.sec.gov.
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Item 1A. Risk Factors
We face many risks and uncertainties, any one or more of which could have a material adverse effect on our business, results of operations, financial condition (including capital and liquidity), or prospects or the value of or return on an investment in Ally. We believe that the most significantdescribe certain of these risks and uncertainties are described in this section, although we may be adversely affected by other risks or uncertainties that are not presently known to us, that we have failed to appreciate, or that we currently consider immaterial. These risk factors should be read in conjunction with the MD&A in Part II, Item 7 of this report, and the Consolidated Financial Statements and notes thereto. This Annual Report on Form 10-K is qualified in its entirety by these risk factors.
Risks Related to Regulation and Supervision
The regulatory and supervisory environment in which we operate could have an adverse effect on our business, financial condition, results of operations, and prospects.
We are subject to extensive regulatory frameworks and to direct supervision and periodic examinations by various governmental agencies and industry SROs that are charged with overseeing the kinds of business activities in which we engage. This regulatory and supervisory oversight is designed to protect public and private interests—such as macroeconomic policy objectives, financial-market stability and liquidity, and the confidence and security of depositors—depositors generally—that may not always be aligned with those of our stockholders or non-deposit creditors. At any given time, we are involved in a number of legal and regulatory proceedings and governmental and regulatory examinations, investigations, and other inquiries. Refer to the section above titled Regulation and Supervision in Part I, Item 1 of this report. In the last decade, governmental scrutiny of the financial-services industry has intensified, fundamental changes have been made to the banking, securities, and other laws that govern financial services, and a multitude of related business practices have been altered. While the scope, intensity, and focus of governmental oversight can vary from time to time, we expect to continue devoting substantial time and resources to risk management, compliance, regulatory-change management, and cybersecurity and other technology initiatives, each of which may adversely affect our ability to operate profitably or to pursue advantageous business opportunities.
Ally operateshas elected to be treated as an FHC, which permits us to engage in a number of financial and related activities—including securities, advisory, insurance, and merchant-banking activities—beyond the business of banking. To remain eligible to do so, Ally and Ally Bank must remain well capitalized and well managedare subject to ongoing requirements to qualify as defined under applicable law.an FHC. If Ally or Ally Bank wereis found not to be well capitalized or well managed, as defined under applicable law, we maycan be restricted from engaging in the broader range of financial and related activities permitted for FHCs, including the ability to acquire companies engaged in those activities, and maycan be required to discontinue these activities or even divest Ally Bank. In addition, if we fail to achieve a satisfactory or better rating under the CRA, our ability to expand these financial and related activities or make acquisitions could be restricted.
In connection with their continuous supervision and examinations of us, the FRB, the UDFI, the CFPB, the SEC, FINRA, the NYDFS, or other regulatory agencies may require changes in our business or operations. Such a requirement may be judicially enforceable or impractical for us to contest, and if we are unable to comply with the requirement in a timely and effective manner, we could become subject to formal or informal enforcement and other supervisory actions, including memoranda of understanding, written agreements, cease-and-desist orders, and prompt-corrective-action or safety-and-soundness directives. The financial-services industry continues to face scrutiny from supervisory authorities in the examination process, including through an increasing use of horizontal reviews from a broader industry perspective, as well as strict enforcement of laws at federal, state, and local levels, particularly in connection with mortgage-related practices, sales practices and related incentive-compensation programs, and compliance with anti-money-laundering, sanctions, and related laws. In general, the amounts paid by financial institutions in settling proceedings or investigations and the severity of other terms of regulatory settlements are likely to remain elevated. In some cases, governmental authorities have required criminal pleas or other extraordinary terms, including admissions of wrongdoing and the imposition of monitors, as part of settlements. Supervisory actions could entail significant restrictions on our existing business, our ability to develop new business, our flexibility in conducting operations, and our ability to pay dividends or utilize capital. Enforcement and other supervisory actions also maycan result in the imposition of civil monetary penalties or injunctions, related litigation by private plaintiffs, damage to our reputation, and a loss of customer or investor confidence. We could be required as well to dispose of specified assets and liabilities within a prescribed period of time. As a result, any enforcement or other supervisory action could have an adverse effect on our business, financial condition, results of operations, and prospects.
Our regulatory and supervisory environments environments—whether at federal, state, or local levels—are not static. No assurance can be given that applicable statutes, regulations, and other laws will not be amended or construed differently, that new laws will not be adopted, or that any of these laws will not be enforced more aggressively. For example, while Congress nullified the CFPB’s guidance about compliance with fair-lending laws in the context of indirect automotive financing, the NYDFS has since adopted arguably more far-reaching guidance on the subject. Changes in the regulatory and supervisory environments could adversely affect us in substantial and unpredictable ways, including by limiting the types of financial services and products we may offer, enhancing the ability of others to offer more competitive financial services and products, restricting our ability to make acquisitions or pursue other profitable opportunities, and negatively impacting our financial condition and results of operations. Further, our noncompliance with applicable laws laws—whether as a result of changes in interpretation or enforcement, system or human errors, or otherwise—could result in the suspension or revocation of licenses or registrations that we need to operate and in the initiation of enforcement and other supervisory actions or private litigation.
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Our ability to execute our business strategy for Ally Bank may be adversely affected by regulatory constraints.
A primary component of our business strategy is the continued growth of Ally Bank, which is a direct bank with no branch network. This growth includes expanding our consumer and commercial lending and increasing our deposit customers and balances while optimizing our cost of funds. If regulatory agencies raise concerns about any aspect of our business strategy for Ally Bank or the way in which we implement it, we may be obliged to limit or even reverse the growth of Ally Bank or otherwise alter our strategy, which could have an adverse effect on
our business, financial condition, results of operations, or prospects. In addition, if we are compelled to retain or shift any of our business activities in or to nonbank affiliates, our funding costs for those activities—such as unsecured funding in the capital markets—could be more expensive than our cost of funds at Ally Bank.
We are subject to stress tests, capital and liquidity planning, and other enhanced prudential standards, which impose significant restrictions and costly requirements on our business and operations.
We are currently subject to enhanced prudential standards that have been established by the FRB, as required or authorized under the Dodd-Frank Act. In May 2018, targeted amendmentsRefer to the Dodd-Frank Actsection above titled Regulation and other financial-services laws were enacted throughSupervision in Part I, Item 1 of this report. Under the EGRRCP Act, including amendments that affect whether and, if so, howFRB’s tailoring framework for the FRB applies enhanced prudential standards, to BHCs like us with $100 billion or more but less than $250 billion in total consolidated assets. In October 2019, the FRB and other U.S. banking agencies issued final rules implementing these amendments, which became effective on December 31, 2019. The final rules establish four risk-based categories of prudential standards and capital and liquidity requirements for banking organizations with $100 billion or more in total consolidated assets. The most stringent standards and requirements apply to U.S. global systemically important BHCs, which are assigned to Category I. The assignment of other banking organizations to the remaining three categories is based on measures of size and four other risk-based indicators. Under the final rules, Ally is designated as a Category IV firm and, as such, is madegenerally subject to supervisory stress testing on a two-year cycle and is required to submit an annual capital plan to the FRB. Refer to the section above titled Regulation and Supervision in Part I, Item 1 of this report. The FRB will either object to the plan, in whole or in part, or provide a notice of non-objection. The failure to receive a notice of non-objection from the FRB—whether due to how well our business and operations are forecasted to perform, how capably we execute our capital-planning process, how acutely the FRB projects severely adverse conditions to be, or otherwise—may prohibit us from paying dividends, repurchasing our common stock, or making other capital distributions, may compel us to issue capital instruments that could be dilutive to stockholders, may prevent us from maintaining or expanding lending or other business activities, or may damage our reputation and result in a loss of customer or investor confidence.
Further, we may be required to raise capital if we are at risk of failing to satisfy our minimum regulatory capital ratios or related supervisory requirements, whether due to inadequate operating results that erode capital, future growth that outpaces the accumulation of capital through earnings, changes in regulatory capital standards, changes in accounting standards that affect capital (such as CECL), or otherwise. In addition, we may elect to raise capital for strategic reasons even when we are not required to do so. Our ability to raise capital on favorable terms or at all will depend on general economic and market conditions, which are outside of our control, and on our operating and financial performance. Accordingly, we cannot be assured of being able to raise capital when needed or on favorable terms. An inability to raise capital when needed and on favorable terms could damage the performance and value of our business, prompt supervisory actions and private litigation, harm our reputation, and cause a loss of customer or investor confidence, and if the condition were to persist for any appreciable period of time, our viability as a going concern could be threatened. Even if we are able to raise capital but do so by issuing common stock or convertible securities, the ownership interest of our existing stockholders could be diluted, and the market price of our common stock could decline.
The revised enhanced prudential standards also require Ally, as a Category IV firm, to conduct quarterly liquidity stress tests, to maintain a buffer of unencumbered highly liquid assets to meet projected net stressed cash outflows over a 30-day planning horizon, to adopt a contingency funding plan that would address liquidity needs during various stress events, and to implement specified liquidity risk management and corporate governance measures. These enhanced liquidity standards could constrain our ability to originate or invest in longer-term or less liquid assets or to take advantage of other profitable opportunities and, therefore, may adversely affect our business, results of operations, and prospects.
Our ability to rely on deposits as a part of our funding strategy may be limited.
Ally Bank is a key part of our funding strategy, and we place great reliance on deposits at Ally Bank as a source of funding. Competition for deposits and deposit customers, however, is fierce and has only intensified with the implementation of enhanced capital and liquidity requirements in the last decade. Ally Bank does not have a branch network but, instead, obtains its deposits through online and other digital channels, from customers of Ally Invest, and through deposit brokers. Brokered deposits may be more price sensitive than other types of deposits and may become less available if alternative investments offer higher returns. Brokered deposits totaled $16.9$12.6 billion at December 31, 2019,2020, which represented 14.0%9.2% of Ally Bank’s total deposits. In addition, our ability to maintain or grow deposits may be constrained by our lack of in-person banking services, gaps in our product and service offerings, changes in consumer trends, our smaller scale relative to other financial institutions, competition from fintech companies and emerging financial-services providers, any failures or deterioration in our customer service, or any loss of confidence in our brand or our business. Our level of deposits also could be adversely affected by regulatory or supervisory restrictions, including any applicable prior approval requirements or limits on our offered rates or brokered deposit growth, and by changes in monetary or fiscal policies that influence deposit or other interest rates. Perceptions of our existing and future financial strength, rates or returns offered by other financial institutions or third parties, and other competitive factors beyond our control, including returns on alternative investments, will also impact the size of our deposit base.
Requirements under U.S. Basel III to increasethat increased the quality and quantity of regulatory capital and future revisions to the Basel III framework may adversely affect our business and financial results.results.
Ally and Ally Bank became subject to U.S. Basel III on January 1, 2015. Refer to the section above titled Regulation and Supervision in Part I, Item 1 of this report. U.S. Basel III subjects Ally and Ally Bank to higher minimum risk-based capital ratios and a capital conservation
buffer above these minimum ratios. Failure to maintain more than the full amount of the capital conservation buffer requirement would result in restrictions on our ability to make capital distributions, including dividend payments and stock repurchases and redemptions, and to pay
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discretionary bonuses to executive officers. U.S. Basel III also has, over time, imposed more stringent deductions for specified DTAs and other assets and limited our ability to meet regulatory capital requirements through the use of trust preferred securities or other hybrid securities.
If Ally or Ally Bank were to fail to satisfy its regulatory capital requirements, significant regulatory sanctions could result, such as a bar on capital distributions, as well aslimitations on acquisitions and new activities, restrictions on our acceptance of brokered deposits, a loss of our status as an FHC, or informal or formal enforcement and other supervisory actions. Such a failure also could irrevocably damage our reputation, prompt a loss of customer and investor confidence, generate private litigation, and even lead to our resolution or receivership. Any of these consequences could have an adverse effect on our business, results of operations, financial condition, or prospects.
In December 2017, the Basel Committee approved revisions to the global Basel III capital framework (commonly known as Basel IV), many of which—if adopted in the United States—could heighten regulatory capital standards. How these revisions will be finalized in the United States and harmonized with other regulatory proposals (such as the stress capital buffer) is not clear or predictable, and no assurance can be provided that they would not further impact our business, results of operations, financial condition, or prospects in an adverse way.
Our business and financial results could be adversely affected by the political environment and governmental fiscal and monetary policies.
A fractious or volatile political environment in the United States, including any related social unrest, could negatively impact business and market conditions, economic growth, financial stability, and business, consumer, investor, and regulatory sentiments, any one or more of which in turn could cause our business and financial results to suffer. In addition, disruptions in the foreign relations of the United States could adversely affect the automotive and other industries on which our business depends and our tax positions and other dealings in foreign countries. We also could be negatively impacted by political scrutiny of the financial-services industry in general or our business or operations in particular, whether or not warranted, and by an environment where criticizing financial-services providers or their activities is politically advantageous.
Our business and financial results are also significantly affected by the fiscal and monetary policies of the U.S. government and its agencies. We are particularly affected by the monetary policies of the FRB, which regulates the supply of money and credit in the United States in pursuit of maximum employment, stable prices, and moderate long-term interest rates. The FRB and its policies influence the availability and demand for loans and deposits, the rates and other terms for loans and deposits, the conditions in equity, fixed-income, currency, and other markets, and the value of securities and other financial instruments. Refer to the risk factor below, titled The levels of or changes in interest rates could affect our results of operations and financial condition, for more information on how the FRB could affect interest rates. These policies and related governmental actions could adversely affect every facet of our business and operations—for example, the new and used vehicle financing market, the cost of our deposits and other interest-bearing liabilities, and the yield on our earning assets. Additionally, changes to tax policies could have a material impact to our results of operations and financial condition. An increase in the federal statutory rate could result in a significant day-one tax expense related to the revaluation of our deferred tax assets and liabilities, and a significant increase in tax expense for future years. Tax and other fiscal policies, moreover, impact not only general economic and market conditions but also give rise to incentives or disincentives that affect how we and our customers prioritize objectives, deploy resources, and run households or operate businesses. Both the timing and the nature of any changes in monetary or fiscal policies, as well as their consequences for the economy and the markets in which we operate, are beyond our control and difficult to predict but could adversely affect us.
If our ability to receive distributions from subsidiaries is restricted, we may not be able to satisfy our obligations to counterparties or creditors, make dividend payments to stockholders, or repurchase our common stock.
Ally is a legal entity separate and distinct from its bank and nonbank subsidiaries and, in significant part, depends on dividend payments and other distributions from those subsidiaries to fund its obligations to counterparties and creditors, its dividend payments to stockholders, and its repurchases of common stock. Refer to the section above titled Regulation and Supervision in Part I, Item 1 of this report. Regulatory or other legal restrictions, deterioration in a subsidiary’s performance, or investments in a subsidiary’s own growth may limit the ability of the subsidiary to transfer funds freely to Ally. In particular, many of Ally’s subsidiaries are subject to laws that authorize their supervisory agencies to block or reduce the flow of funds to Ally in certain situations. In addition, if any subsidiary were unable to remain viable as a
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going concern, Ally’s right to participate in a distribution of assets would be subject to the prior claims of the subsidiary’s creditors (including, in the case of Ally Bank, its depositors and the FDIC).
Legislative or regulatory initiatives on cybersecurity and data privacy could adversely impact our business and financial results.
Cybersecurity and data privacy risks have received heightened legislative and regulatory attention. For example, the U.S. banking agencies have proposed enhanced cyber risk management standards that would apply to us and our service providers and that would address cyber risk governance and management, management of internal and external dependencies, and incident response, cyber resilience, and situational awareness. Several states and their governmental agencies, such as the NYDFS, also have adopted or proposed cybersecurity laws targeting these issues. In addition, a comprehensive privacy law has taken effect in the State of California, requiring regulated entities to establish measures to identify, manage, secure, track, produce, and delete personal information.
Legislation and regulations on cybersecurity and data privacy may compel us to enhance or modify our systems and infrastructure, invest in new systems and infrastructure, change our service providers, augment our scenario and vulnerability testing, or alter our business practices or our policies on security, data governance, and privacy. If any of these outcomes were to occur, our operational costs could increase significantly. In addition, if governmental authorities were to conclude that we or our service providers had not adequately implemented laws on cybersecurity and data privacy or had not otherwise met related supervisory expectations, we could be subject to enforcement and other supervisory actions, related litigation by private plaintiffs, reputational damage, or a loss of customer or investor confidence.
Our business and financial results may be affected by governmental responses to climate change and related environmental issues.
Governments have become increasingly focused on the effects of climate change and related environmental issues. For example, U.S. Treasury Secretary Yellen has identified climate change and its risk to the financial system as a high priority. In addition, the FRB recently became a member of the Network of Central Banks and Supervisors for Greening the Financial System and, in its Financial Stability Report of November 2020, specifically addressed the implications of climate change for markets, financial exposures, financial institutions, and financial stability.
How governments act to mitigate climate and related environmental risks, as well as associated changes in the behavior and preferences of businesses and consumers, could have an adverse effect on our business and financial results. The FRB, for example, may incorporate these risks into its supervisory stress tests and, in doing so, negatively impact us and our future capital plans at least in part because of our concentration in automotive finance. We also could experience a decline in the demand for and value of used gasoline-powered vehicles that secure our loans to dealers and consumers or that we remarket. Further, we may be compelled to change or cease some of our lending or other business practices or our operational processes because of climate- or environmental-driven changes in applicable law or supervisory expectations or due to related political, social, market, or similar pressure. It is possible as well that changes in climate and related environmental risks, perceptions of them, and governmental responses to them may occur more rapidly than we are able to adapt without disrupting our business and impairing our financial results.
Risks Related to Our Business
The COVID-19 pandemic is adversely affecting us and our customers, counterparties, employees, and third-party service providers, and the adverse impacts on our business, financial position, results of operations, and prospects could be significant.
The spread of COVID-19 has created a global public-health crisis that has resulted in the substantial loss of life, with widespread volatility and deteriorations in household, business, economic, and market conditions, including in the United States where we conduct nearly all of our business. The extent of the impact of the COVID-19 pandemic on our capital, liquidity, and other financial positions and on our business, results of operations, and prospects will depend on a number of evolving factors, including:
•The duration, extent, and severity of the pandemic. COVID-19 has not yet been contained and could continue to affect significantly more households and businesses. The duration and severity of the pandemic remain difficult to predict.
•The response of governmental and nongovernmental authorities and the effect on economies and markets. Many governmental and nongovernmental authorities initially responded to COVID-19 by curtailing household and business activity as a containment measure while simultaneously deploying fiscal- and monetary-policy measures to partially mitigate the adverse effects on individual households and businesses. Although this response slowed the rate of spread of COVID-19 and supported economic stability, the number of cases has risen meaningfully at times and remains volatile, and the potential exists for further resurgences to occur, especially during the cold-and-flu season and in the wake of holidays and other times when social gatherings, travel, or vacations are common. In addition, while monetary policy remains highly accommodative, a number of stimulative fiscal programs and actions have expired or been exhausted without renewal as the U.S. government continues to assess whether and how to continue or refine them. Even with COVID-19 vaccinations having begun, national, regional, and local economies and markets could suffer further disruptions that are lasting.
•The effect on our customers, counterparties, employees, and third-party service providers. COVID-19 and its associated consequences and uncertainties are affecting individuals, households, and businesses differently and unevenly. Many, however, have changed their behavior in response to governmental mandates and advisories to restrict or alter commercial and social interactions. As a result, our credit, operational, and other risks have generally been elevated and are expected to remain so—if not increase further—for the foreseeable future.
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During the year ended December 31, 2020, the most notable impact to our results of operations was higher provision expense for credit losses. Our provision expense was $1.4 billion for the year ended December 31, 2020, compared to $998 million during the same period in 2019, with the increase primarily driven by incremental reserves associated with a deterioration in macroeconomic variables such as unemployment during the year ended December 31, 2020. During the year ended December 31, 2020, the provision for credit losses was also impacted by the adoption of CECL, as further described in Note 1 to the Consolidated Financial Statements. For more detail and further discussion on the impact to our business from COVID-19, refer to the section titled COVID-19 Impacts within the MD&A. Given the unpredictability of COVID-19 and its direct and indirect effects, however, our forecast of macroeconomic conditions and operating results—including expected lifetime credit losses on our loan portfolio—is subject to meaningful uncertainty.
As consumers, businesses, and governmental authorities have adapted to evolving conditions, we have observed a recovery in quality loan application volume and resulting booked originations within our Automotive Finance business. For more detail and further discussion, including in connection with our non-automotive businesses, refer to the section titled Significant Business Developments Related to COVID-19 within the MD&A. We cannot yet be confident in the sustainability of these improvements in our business or the trajectory of the macroeconomic outlook—especially with the most recent resurgence of COVID-19 in much of the United States, the discovery of variants of the COVID-19 virus, and ongoing uncertainties around the efficacy, availability, acceptance, and distribution of vaccines and other medical treatments—and the adverse effects on our business, financial position, results of operations, and prospects could be significant as time goes on.
Governments have taken necessary and unprecedented steps to partially mitigate the adverse effects of their actions to contain the spread of COVID-19. For example, in late March 2020, the CARES Act was enacted to inject more than $2 trillion of financial assistance into the U.S. economy. The FRB has taken decisive and sweeping actions as well. Since March 15, 2020, these actions have included a reduction in the target range for the federal funds rate to zero to 0.25 percent, a program to purchase an indeterminate amount of Treasury securities and agency mortgage-backed securities, and numerous facilities to support the flow of credit to households and businesses. Still, while monetary policy has remained highly accommodative since the declaration of the pandemic, fiscal stimulus has waned as a meaningful economic rebound developed in the second half of the year and the political environment became more unstable during and after the 2020 elections. While the possibility of further stimulative fiscal-policy measures has become more probable, their potential scope and effect remain highly uncertain. Similarly, while recent developments associated with COVID-19 vaccinations have been promising, the timing and extent of their impact is not predictable.
We also have acted swiftly to support our customers with industry-leading relief programs, while prudently managing our credit risk exposure. For more detail on these relief programs and further discussion, refer to the section titled Risk Management in the MD&A that follows.
The degree to which our actions and those of governments and others will directly or indirectly assist our customers, counterparties, and third-party service providers and advance our business and the economy generally is not yet clear. For example, while our loan-deferral programs may have better positioned customers to make their regular payments to us and enhanced our brand and customer loyalty, our credit performance may still be negatively impacted to the extent that customers depend on a continuation of fiscal-policy measures or other forms of more robust relief. In addition, while the FRB’s accommodative monetary policy may benefit us to some degree by supporting economic activity among our customers, this policy and sudden shifts in it may inhibit our ability to grow or sustain net interest income and effectively manage interest-rate and market risks. Further, while extraordinary governmental intervention in the economy and markets has created stability, the scale of these actions inevitably heightens political, reputational, litigation, and similar risks for financial intermediaries like us.
We are unable to estimate the near-term and ultimate impacts of COVID-19 on our business and operations. The pandemic and its direct and indirect effects could cause us to experience higher credit losses in our lending portfolio, additional increases in our allowance for credit losses, impairment of our goodwill and other financial assets, heightened volatility in and diminished access to capital markets and other funding sources, further reduced demand for our products and services, and other negative impacts on our financial position, results of operations, and prospects. In addition, while we continue to anticipate that our capital and liquidity positions will be sufficient, sustained adverse effects may impair these positions, prevent us from satisfying our minimum regulatory capital ratios and other supervisory requirements, and result in downgrades in our credit ratings. The COVID-19 pandemic and related governmental mandates and advisories also have necessitated changes in the way we and our third-party service providers continue operations—including an extended period of remote work arrangements—and we may face heightened security, information-technology, operational, and similar risks as a result. The length of time we and our third-party service providers may be required to operate under these circumstances, as well as the potential for conditions to worsen or for significant disruptions to occur, remains unpredictable. All of these risks and uncertainties can be expected to persist at least until the pandemic is demonstrably and sustainably contained, authorities cease curbing household and business activity, and consumer and business confidence recover.
Weak or deteriorating economic conditions, failures in underwriting, changes in underwriting standards, financial or systemic shocks, or continued growth in our nonprime or used vehicle financing business could increase our credit risk, which could adversely affect our business and financial results.
Our business is centered around lending and banking with an emphasis on our digital platform, and a significant percentage of our assets are composed of loans, operating leases, and securities. As a result, in the ordinary course of business, credit risk is our most significant risk.
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Our business and financial results depend significantly on household, business, economic, and market conditions. When those conditions are weak or deteriorating, we could simultaneously experience reduced demand for credit and increased delinquencies or defaults, including in the loans that we have securitized and in which we retain a residual interest. These kinds of conditions also could dampen the demand for products and services in our insurance, banking, brokerage, advisory, and other businesses. Increased delinquencies or defaults could also result from our failing to appropriately underwrite loans and operating leases that we originate or purchase or from our adopting—for strategic, competitive, or other reasons—more liberal underwriting standards. If delinquencies or defaults on our loans and operating leases increase, their value and the income derived from them could be adversely affected, and we could incur increased administrative and other costs in seeking a recovery on claims and any collateral. If unfavorable conditions are negatively affecting used vehicle or other collateral values at the same time, the amount and timing of recoveries could suffer as well. Weak or deteriorating economic conditions also may negatively impact the market value and liquidity of our investment securities, and we may be required to record additional impairment charges that adversely affect earnings if debt securities suffer a decline in value that is considered other-than-temporary. There can be no assurance that our monitoring of credit risk and our efforts to mitigate credit risk through risk-based pricing, appropriate underwriting and investment policies, loss-mitigation strategies, and diversification are, or will be, sufficient to prevent an adverse impact to our business and financial results. In addition, because of CECL, our financial results may be negatively affected as soon as weak or deteriorating economic conditions are forecasted and alter our expectations for credit losses. Refer to Note 1 to the Consolidated Financial Statements and the section above titled Regulation and Supervision in Part I, Item 1 of this report. A financial or systemic shock and a failure of a significant counterparty or a significant group of counterparties could negatively impact us as well, possibly to a severe degree, due to our role as a financial intermediary and the interconnectedness of the financial system.
We continue to have exposure to nonprime consumer automotive financing and used vehicle financing. We define nonprime consumer automotive loans primarily as those loans with a FICO® Score (or an equivalent score) at origination of less than 620. Customers that finance used vehicles tend to have lower FICO® Scores as compared to new vehicle customers, and defaults resulting from vehicle breakdowns are more likely to occur with used vehicles as compared to new vehicles that are financed. The carrying value of our nonprime consumer automotive loans before allowance for loan losses was $8.6 billion, or approximately 11.7% of our total consumer automotive loans at December 31, 2020, as compared to $8.4 billion, or approximately 11.6% of our total consumer automotive loans at December 31, 2019, as compared to $8.3 billion, or approximately 11.7% of our total consumer automotive loans at December 31, 2018.2019. At December 31, 2020, and 2019, and 2018, $214$337 million and $203$214 million, respectively, of nonprime consumer automotive loans were considered nonperforming as they had been placed on nonaccrual status in accordance with our accounting policies. Refer to the Nonaccrual Loans section of Note 1 to the Consolidated Financial Statements for additional information. Additionally, the carrying value of our consumer automotive used vehicle loans before allowance for loan losses was $43.0 billion, or approximately 58.3% of our total consumer automotive loans at December 31, 2020, as compared to $39.7 billion, or approximately 54.9% of our total consumer automotive loans at December 31, 2019, as compared to $36.3 billion, or approximately 51.5% of our total consumer automotive loans at December 31, 2018.2019. If our exposure to nonprime consumer automotive loans or used vehicle financing continue to increase over time, our credit risk will increase to a possibly significant degree.
As part of the underwriting process, we rely heavily upon information supplied by applicants and other third parties, such as automotive dealers and credit reporting agencies. If any of this information is intentionally or negligently misrepresented and the misrepresentation is not detected before completing the transaction, we may experience increased credit risk.
Our allowance for loan losses may not be adequate to cover actual losses, and we may be required to significantly increase our allowance, which may adversely affect our financial condition and results of operations.
Through its adoptionthe issuance of CECL, the FASB has implementedrequired the implementation of a new accounting model to measure credit losses for financial assets measured at amortized cost, which includes the vast majority of our finance receivables and loan portfolio. Under this new model, the allowance is established to reserve for management’s best estimate of expected lifetime losses inherent in our finance receivables and loan portfolio. This new standard was effective January 1, 2020. Refer to Note 1 to the Consolidated Financial Statements and the section above titled Regulation and Supervision in Part I, Item 1 of this report. On the effective date, CECL substantially increased our allowance for loan losses with a resulting negative day-one adjustment to equity. While the FRB and other U.S. banking agencies have taken steps to mitigate the impact of CECL on regulatory capital, it is not yet clear whether these actions will do so to a degree that is sufficient for us to sustain appropriate levels of regulatory capital without meaningfully altering our business, financial, and operational plans, including our current level of capital distributions. Refer to the risk factor above, titled Requirements under U.S. Basel III to increase the quality and quantity of regulatory capital and future revisions to the Basel III framework may adversely affect our business and financial results, for more information about the consequences of our failure to satisfy regulatory capital requirements.
Regulatory agencies periodically review our allowance for loan losses, as well as our methodology and models used for calculating our allowance for loan losses, and from time to time may insist on an increase in the allowance for loan losses or the recognition of additional loan charge-offs based on judgments different than those of management. If these differences in judgment are considerable, our allowance could meaningfully increase and result in a sizable decrease in our net income and capital.
The determination of the appropriate level of the allowance for loan losses inherently involves a high degree of subjectivity and requires us to make significant estimates of current and future credit risks using existing quantitative and qualitative information, all of which may change substantially over time. Changes in economic conditions affecting borrowers, revisions to accounting rules and related guidance, the implementation of CECL, new qualitative or quantitative information about existing loans, identification of additional problem loans, changes in the size or composition of our finance receivables and loan portfolio, changes to our models or loss estimation techniques including consideration of forecasted economic assumptions, and other factors, both within and outside of our control, may require an increase in the allowance for loan losses. For example, our shift to a full credit spectrum consumer automotive finance portfolio over the past several years has resulted in additional increases in our allowance for loan losses, and could result in additional increases in the future. Any increase in the allowance in future periods may adversely affect our financial condition or results of operations.
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We have dealer-centric automotive finance and insurance businesses, and a change in the key role of dealers within the automotive industry or our ability to maintain or build relationships with them could have an adverse effect on our business, results of operations, financial condition, or prospects.
Our Dealer Financial Services business, which includes our Automotive Finance and Insurance segments, depends on the continuation of the key role of dealers within the automotive industry, the maintenance of our existing relationships with dealers, and our creation of new relationships with dealers. Refer to the section titled Our Business in the MD&A that follows.
A number of trends are affecting the automotive industry and the role of dealers within it. These include challenges to the dealer’s role as intermediary between manufacturers and purchasers, shifting financial and other pressures exerted by manufacturers on dealers, the rise of vehicle sharing and ride hailing, the development of autonomous and alternative-energy vehicles, the impact of demographic shifts on attitudes and behaviors toward vehicle ownership and use, changing expectations around the vehicle buying experience, adjustments in the geographic distribution of new and used vehicle sales, and advancements in communications technology. While it is not currently clear how and how quickly these trends may develop, any one or more of them could adversely affect the key role of dealers and their business models, profitability, and viability, and if this were to occur, our dealer-centric automotive finance and insurance businesses could suffer as well.
Our share of commercial wholesale financing remains at risk of decreasing in the future as a result of intense competition and other factors. The number of dealers with whom we have wholesale relationships decreased approximately 8%6% as compared to December 31, 2018.2019. If we are not able to maintain existing relationships with significant automotive dealers or if we are not able to develop new relationships for any reason—including if we are not able to provide services on a timely basis, offer products and services that meet the needs of the dealers, compete successfully with the products and services of our competitors, or effectively counter the influence that captive automotive finance companies have in the marketplace or the exclusivity privileges that some competitors have with automotive manufacturers—our wholesale funding volumes, and the number of dealers with whom we have retail funding relationships, could decline in the future. If this were to occur, our business, results of operations, financial condition, or prospects could be adversely affected.
While we continue to diversify our automotive finance and insurance businesses and to expand into other financial services, GM and Chrysler dealers and their retail customers still constitute a significant portion of our customer base. In 2020, 40% of our new vehicle dealer inventory financing and 22% of our consumer automotive financing volume were transacted for GM-franchised dealers and customers, and 40% of our new vehicle dealer inventory financing and 28% of our consumer automotive financing volume were transacted for Chrysler dealers and customers. In 2019, 46% of our new vehicle dealer inventory financing and 26% of our consumer automotive financing volume were transacted for GM-franchised dealers and customers, and 38% of our new vehicle dealer inventory financing and 27% of our consumer automotive financing volume were transacted for Chrysler dealers and customers. GM, Chrysler, and their captive automotive finance companies compete vigorously with us and could take further actions that negatively impact the amount of business that we do with GM and Chrysler dealers and their retail customers. Further, a significant adverse change in GM’s or Chrysler’s businesses—including, for example, in the production or sale of GM or Chrysler vehicles,
the quality or resale value of GM or Chrysler vehicles, GM’s or Chrysler’s relationships with its key suppliers, or the rate or volume of recalls of GM or Chrysler vehicles—could negatively impact our GM and Chrysler dealer and retail customer bases and the value of collateral securing our extensions of credit to them. Any future reductions in GM and Chrysler business that we are not able to offset could adversely affect our business and financial results.
Our business and financial results are dependent upon overall U.S. automotive industry sales volume.
Our automotive finance and insurance businesses can be impacted by the sales volume for new and used vehicles. Vehicle sales are impacted, in turn, by several economic and market conditions, including employment levels, household income, interest rates, credit availability, inventory levels, customer preferences, and fuel costs. For example, new vehicle sales decreased dramatically during the economic crisis that began in 2007–2008 and did not rebound significantly until 2012 and 2013. More recently, automotive manufacturers have reported that a shortage in their supply of semiconductor chips is expected to materially constrain their production of new vehicles through the near term. Any future declines in new or used vehicle sales could have an adverse effect on our business and financial results.
Vehicle loans and operating leases make up a significant part of our earning assets, and our business and financial results could suffer if used vehicle prices are low or volatile or decrease in the future.
During the year ended December 31, 2019,2020, approximately 63%57% of our average earning assets were composed of vehicle loans or operating leases and related residual securitization interests. If we experience higher losses on the sale of repossessed vehicles or lower or more volatile residual values for off-lease vehicles, our business or financial results could be adversely affected.
General economic conditions, the supply of off-lease and other vehicles to be sold, the levels of demand for vehicle ownership and use, relative market prices for new and used vehicles, perceived vehicle quality, the shift from gasoline to electric vehicles, overall vehicle prices, the vehicle disposition channel, volatility in gasoline or diesel fuel prices, levels of household income, interest rates, and other factors outside of our control heavily influence used vehicle prices. Consumer confidence levels and the strength of automotive manufacturers and dealers can also influence the used vehicle market. For example, during the economic crisis that began in 2007–2008, sharp declines in used vehicle demand and sale prices adversely affected our remarketing proceeds and financial results.
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Our expectation of the residual value of a vehicle subject to an automotive operating lease contract is a critical element used to determine the amount of the operating lease payments under the contract at the time the customer enters into it. As a result, to the extent that the actual residual value of the vehicle—as reflected in the sale proceeds received upon remarketing at lease termination—is less than the expected residual value for the vehicle at lease inception, we will incur additional depreciation expense and lower profit on the operating lease transaction than our priced expectations. Our expectation of used vehicle values is also a factor in determining our pricing of new loan and operating lease originations. In stressed economic environments, residual-value risk may be even more volatile than credit risk. To the extent that used vehicle prices are significantly lower than our expectations, our profit on vehicle loans and operating leases could be substantially less than our expectations, even more so if our estimate of loss frequency is underestimated as well. In addition, we could be adversely affected if we fail to efficiently process and effectively market off-lease vehicles and repossessed vehicles and, as a consequence, incur higher-than-expected disposal costs or lower-than-expected proceeds from the vehicle sales.
The levels of or changes in interest rates could affect our results of operations and financial condition.condition.
We are highly dependent on net interest income, which is the difference between interest income on earning assets (such as loans and investments) and interest expense on deposits and borrowings. Net interest income is significantly affected by market rates of interest, which in turn are influenced by monetary and fiscal policies, general economic and market conditions, the political and regulatory environments, business and consumer sentiment, competitive pressures, and expectations about the future (including future changes in interest rates). We may be adversely affected by policies, laws, and events that have the effect of flattening or inverting the yield curve (that is, the difference between long-term and short-term interest rates), depressing the interest rates associated with our earning assets to levels near the rates associated with our interest expense, increasing the volatility of market rates of interest, or changing the spreads among different interest rate indices.
The levels of or changes in interest rates could adversely affect us beyond our net interest income, including the following:
•increase the cost or decrease the availability of deposits or other variable-rate funding instruments;
•reduce the return on or demand for loans or increase the prepayment speed of loans;
•increase customer or counterparty delinquencies or defaults;
•negatively impact our ability to remarket off-lease and repossessed vehicles; and
•reduce the value of our loans, retained interests in securitizations, and fixed-income securities in our investment portfolio and the efficacy of our hedging strategies.
The level of and changes in market rates of interest—and, as a result, these risks and uncertainties—are beyond our control. The dynamics among these risks and uncertainties are also challenging to assess and manage. For example, while an accommodative monetary policy may benefit us to some degree by spurring economic activity among our customers, such a policy may ultimately cause us more harm by inhibiting our ability to grow or sustain net interest income. A rising interest rate environment can pose different challenges, such as
potentially slowing the demand for credit, increasing delinquencies and defaults, and reducing the values of our loans and fixed-income securities. Following a prolonged period in which the federal funds rate was stable or decreasing, the FRB increased this benchmark rate on a number of occasions during 2017 and 2018 and began to end its quantitative-easing program and reduce the size of its balance sheet. During 2019, however, the FRB reversed course and reduced the federal funds rate several times.times, and in March 2020, reduced the target range for the federal funds rate to zero to 0.25 percent. These past actions, and potential future actions, exert upward or downward pressure on interest rates and may create market volatility in interest rates. Refer to the section titled Market Risk in the MD&A that follows and Note 21 to the Consolidated Financial Statements.
Uncertainty about the future of the London Interbank Offered Rate (LIBOR)LIBOR may adversely affect our business and financial results.
LIBOR meaningfully influences market interest rates around the globe. We have exposure to LIBOR-based contracts through a number of our finance receivables and loans primarily related to commercial automotive loans, corporate-financecorporate finance loans, and mortgage loans, as well as certain investment securities, derivative contracts, and other arrangements. Among our liabilities, we have issued trust preferred securities with an interest rate linked to LIBOR and also have secured facilities, asset-backed securitizations, and brokered certificates of deposit that also contain LIBOR-based reference rates.rates.
In July 2017, the Chief Executive of the United Kingdom Financial Conduct Authority, which regulates LIBOR, announced its intent to stop persuading or compelling banks to submit rates for the calculation of LIBOR to the administrator of LIBOR after 2021. This announcement indicated that the continuation of LIBOR as currently constructed is not guaranteed after 2021. It is impossible to predict whether and to what extent banks will continue to provide LIBOR submissions toIn November 2020, the administrator of the LIBOR whether any additional reformsbenchmark announced their intention to LIBOR may be enacted inconsult with the United Kingdom or elsewhere, and whether other rate or rates may become accepted alternatives to LIBOR.
No assurance can be provided that the uncertainties around LIBOR or their resolution will not adversely affect the use, level, and volatility of LIBOR or other interest rates or the value of LIBOR-based securities. Further, the viability of SOFR as an alternative reference rate and the availability and acceptance of other alternative reference rates are unclear and also may have adverse effects on market rates of interest and the value of securities and other financial arrangements. These uncertainties, proposals and actions to resolve them, and their
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ultimate resolution also could negatively impact our funding costs, loan and other asset values, asset-liability management strategies, and other aspects of our business and financial results.
We rely extensively on third-party service providers in delivering products and services to our customers and otherwise conducting our business and operations, and their failure to perform to our standards or other issues of concern with them could adversely affect our reputation, business, and financial results.
We seek to distinguish ourselves as a customer-centric company that delivers passionate customer service and innovative financial solutions and that is relentlessly focused on “Doing Itit Right.” Third-party service providers, however, are key to much of our business and operations, including online and mobile banking, mortgage finance, brokerage, customer service, and operating systems and infrastructure. While we have implemented a supplier-risk-management program and can exert varying degrees of influence over our service providers, we do not control them, their actions, or their businesses. Our contracts with service providers, moreover, may not require or sufficiently incent them to perform at levels and in ways that we would choose to act on our own. No assurance can be provided that our service providers will perform to our standards, adequately represent our brand, comply with applicable law, appropriately manage their own risks, remain financially or operationally viable, abide by their contractual obligations, or continue to provide us with the services that we require. In such a circumstance, our ability to deliver products and services to customers, to satisfy customer expectations, and to otherwise successfully conduct our business and operations could be adversely affected. In addition, we may need to incur substantial expenses to address issues of concern with a service provider, and even if the issues cannot be acceptably resolved, we may not be able to timely or effectively replace the service provider due to contractual restrictions, the unavailability of acceptable alternative providers, or other reasons. Further, regardless of how much we can influence our service providers, issues of concern with them could result in supervisory actions and private litigation against us and could harm our reputation, business, and financial results.
Our operating systems or infrastructure, as well as those of our service providers or others on whom we rely, could fail or be interrupted, which could disrupt our business and adversely affect our results of operations, financial condition, and prospects.
We rely heavily upon communications, data management, and other operating systems and infrastructure to conduct our business and operations, which creates meaningful operational risk for us. Any failure of or interruption in these systems or infrastructure or those of our service providers or others on whom we rely—including as a result of inadequate or failed technology or processes, unplanned or unsuccessful updates to technology, sudden increases in transaction volume, human errors, fraud or other misconduct, deficiencies in the integration of acquisitions or the commencement of new businesses, energy or similar infrastructure outages, disruptions in communications networks or systems, natural disasters, catastrophic events, pandemics, acts of terrorism, political or social unrest, external or internal security
breaches, acts of vandalism, cyberattacks such as computer viruses and malware, misplaced or lost data, or breakdowns in business continuity plans—could cause failures or delays in receiving applications for loans and operating leases, underwriting or processing loan or operating-lease applications, servicing loans and operating leases, accessing online accounts, processing transactions, executing brokerage orders, communicating with our customers, managing our investment portfolio, or otherwise conducting our business and operations. These adverse effects could be exacerbated if systems or infrastructure need to be taken offline or meaningfully repaired, if backup systems or infrastructure are not adequately redundant and effective for the conduct of our business and operations, or if technological or other solutions do not exist or are slow to be developed. Further, to the extent that the systems or infrastructure of service providers or others are involved, we may have little or no knowledge, control, or influence over how and when failures or delays are addressed. As a digital financial servicesfinancial-services company with a meaningful dependence on service providers, we are especially susceptible to business, reputational, financial, regulatory, and other harm as a result of these risks.
In the ordinary course of our business, we collect, store, process, and transmit sensitive, confidential, or proprietary data and other information, including business information, intellectual property, and the personally identifiable information of customers and employees. The secure collection, storage, processing, and transmission of this information are critical to our business and reputation, and if any of this information were mishandled, misused, improperly accessed, lost, or stolen or if related operations were disabled or otherwise disrupted, we could suffer significant business, reputational, financial, regulatory, and other damage.
Even when a failure of or interruption in operating systems or infrastructure is timely resolved, we may need to expend substantial resources in doing so, may be required to take actions that could adversely affect customer satisfaction or behavior, and may be exposed to reputational damage. We also could be exposed to contractual claims, supervisory actions, or litigation by private plaintiffs.
We face a wide array of security risks that could result in business, reputational, financial, regulatory, and other harm to us.
Our operating systems and infrastructure, as well as those of our service providers or others on whom we rely, are subject to security risks that are rapidly evolving and increasing in scope and complexity, in part, because of the introduction of new technologies, the expanded use of the internet and telecommunications technologies (including mobile devices) to conduct financial and other business transactions, and the increased sophistication and activities of hostile state-sponsored actors, organized crime, perpetrators of fraud, hackers, terrorists, and others. We, along with other financial institutions, our service providers, and others on whom we rely, have been and are expected to continue to be the target of cyberattacks, which could include computer viruses, malware, malicious or destructive code, phishing or spear phishing attacks, denial-of-service or denial-of-information attacks, ransomware, identity theft, access violations by employees or vendors, attacks on the personal email of employees, and ransom demands accompanied by threats to expose security vulnerabilities. We, our service providers, and others on whom we rely are also exposed to more traditional security threats to physical facilities and personnel.
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These security risks could result in business, reputational, financial, regulatory, and other harm to us.us, especially as a digital financial-services company with a meaningful dependence on service providers. For example, if sensitive, confidential, or proprietary data or other information about us or our customers or employees were improperly accessed or destroyed because of a security breach, we could experience business or operational disruptions, reputational damage, contractual claims, supervisory actions, or litigation by private plaintiffs. As security threats evolve, moreover, we expect to continue expending significant resources to enhance our defenses, to educate our employees, to monitor and support the defenses established by our service providers and others on whom we rely, and to investigate and remediate incidents and vulnerabilities as they arise or are identified. Even so, we may not be able to anticipate or implement effective preventive measures against all security breaches, especially because techniques change frequently, and attacks can be launched with no warning from a wide variety of sources around the globe. A sophisticated breach, moreover, may not be identified until well after the attack has occurred and the damage has been caused.
We also could be adversely affected by security risks faced by others. For example, a cyberattack or other security breach affecting a service provider or another entity on whom we rely could negatively impact us and our ability to conduct business and operations just as much as a breach affecting us directly. Even worse, in such a circumstance, we may not receive timely notice of or information about the breach or be able to exert any meaningful control or influence over how and when the breach is addressed. In addition, a security threat affecting the business community, the markets, or parts of them may cycle or cascade through the financial system and harm us. The mere perception of a security breach involving us or any part of the financial services industry, whether or not true, also could damage our business, operations, or reputation.
Many if not all of these risks and uncertainties are beyond our control. Refer to the section titled Risk Management in the MD&A that follows.
We are heavily reliant on technology, and a failure in effectively implementing technology initiatives or anticipating future technology needs or demands could adversely affect our business or financial results.
demands of customers, or the competitive landscape for technology. If we were to misstep in any of these areas, our business, financial results, or reputation could be negatively impacted.
Our enterprise risk-management framework or independent risk-management function may not be effective in mitigating risk and loss.
We maintain an enterprise risk-management framework that is designed to identify, measure, assess, monitor, test, control, report, escalate, and mitigate the risks that we face. These include credit, insurance/underwriting, market, liquidity, business/strategic, reputation, operational, information-technology/security, compliance, and conduct risks. The framework incorporates risk culture and incentives, risk governance and organization, strategy and risk appetite, a material-risk taxonomy, key risk-management processes, and risk capabilities. Our chief risk officer, chief compliance officer, and other personnel who make up our independent risk-management function are responsible for overseeing and implementing the framework. Refer to the section titled Risk Management in the MD&A that follows. While we continue to evolve our risk-management framework to consider changes in business and regulatory expectations, there can be no assurance that the framework—including its design and implementation—will effectively mitigate risk and limit losses in our business and operations. If conditions or circumstances arise that expose flaws or gaps in the framework or its implementation, the performance and value of our business and operations could be adversely affected. An ineffective risk-management framework or function also could give rise to enforcement and other supervisory actions, damage our reputation, and result in private litigation.
We are or may be subject to potential liability in connection with pending or threatened legal proceedings and other matters, which could adversely affect our business or financial results.
The course and outcome of legal matters are inherently unpredictable. This is especially so when a matter is still in its early stages, the damages sought are indeterminate or unsupported, significant facts are unclear or disputed, novel questions of law or other meaningful legal uncertainties exist, a request to certify a proceeding as a class action is outstanding or granted, multiple parties are named, or regulatory or other governmental entities are involved. Other contingent exposures and their ultimate resolution are similarly unpredictable for reasons that can vary based on the circumstances. As a result, we often are unable to determine how or when threatened or pending legal matters and other
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contingent exposures will be resolved and what losses may be incrementally and ultimately incurred. Actual losses may be higher or lower than any amounts accrued or estimated for those matters and other exposures, possibly to a significant degree. Refer to Note 29 to the Consolidated Financial Statements. In addition, while we maintain insurance policies to mitigate the cost of litigation and other proceedings, these policies have deductibles, limits, and exclusions that may diminish their value or efficacy. Substantial legal claims, even if not meritorious, could have a detrimental impact on our business, results of operations, and financial condition and could cause us reputational harm.
Our inability to attract, retain, or motivate qualified employees could adversely affect our business or financial results.
Skilled employees are our most important resource, and competition for talented people is intense. Even though compensation and benefits expense is among our highest expenses, we may not be able to locate and hire the best people, keep them with us, or properly motivate them to perform at a high level. This risk may be exacerbated due to some of our competitors having significantly greater scale, financial and operational resources, and brand recognition. Recent scrutiny of compensation practices, especially in the financial services industry, has made this only more difficult. In addition, many parts of our business are particularly dependent on key personnel. If we were to lose and find ourselves unable to replace these personnel or other skilled employees or if the competition for talent were to drive our compensation costs to unsustainable levels, our business and financial results could be negatively impacted.
Our ability to successfully make acquisitions is subject to significant risks, including the risk that governmental authorities will not provide the requisite approvals, the risk that integrating acquisitions may be more difficult, costly, or time consuming than expected, and the risk that the value of acquisitions may be less than anticipated.
We may from time to time seek to acquire other financial services companies or businesses. These acquisitions may be subject to regulatory approval, and no assurance can be provided that we will be able to obtain that approval in a timely manner or at all or that approval may not be subject to burdensome conditions. Refer to the section above titled Regulation and Supervision in Part I, Item 1 of this report. Even when we are able to obtain regulatory approval, the failure of other closing conditions to be satisfied or waived could delay the completion of an acquisition for a significant period of time or prevent it from occurring altogether. Any failure or delay in closing an acquisition could adversely affect our reputation, business, and performance.
Acquisitions involve numerous risks and uncertainties, including inaccurate financial and operational assumptions, incomplete or failed due diligence, lower-than-expected performance, higher-than-expected costs, difficulties related to integration, diversion of management’s attention from other business activities, adverse market or other reactions, changes in relationships with customers or counterparties, the potential loss of key personnel, and the possibility of litigation and other disputes. An acquisition also could be dilutive to our existing stockholders if we were to issue common stock to fully or partially pay or fund the purchase price. We, moreover, may not be successful in identifying appropriate acquisition candidates, integrating acquired companies or businesses, or realizing expected value from acquisitions.
There is significant competition for valuable acquisition targets, and we may not be able to acquire other companies or businesses on attractive terms. No assurance can be given that we will pursue future acquisitions, and our ability to grow and successfully compete may be impaired if we choose not to pursue or are unable to successfully make acquisitions.
Our business requires substantial capital and liquidity, and a disruption in our funding sources or access to the capitalmarkets may have an adverse effect on our liquidity, capital positions, and financial condition.
Liquidity is the ability to fund increases in assets and meet obligations as they come due, all without incurring unacceptable losses. Banks are especially vulnerable to liquidity risk because of their role in the maturity transformation of demand or short-term deposits into longer-term loans or other extensions of credit. We, like other financial services companies, rely to a significant extent on external sources of funding (such as deposits and borrowings) for the liquidity needed to conduct our business and operations. A number of factors beyond our control, however, could have a detrimental impact on the availability or cost of that funding and thus on our liquidity. These include market disruptions, changes in our credit ratings or the sentiment of our investors, the state of the regulatory environment and monetary and fiscal policies, reputational damage, the confidence of depositors in us, financial or systemic shocks, and significant counterparty failures. Weak business or operational performance, unexpected declines or limits on dividends or other distributions from our subsidiaries, and other failures to execute our strategic plan also could adversely affect Ally’s liquidity position.
We have significant maturities of unsecured debt each year. While we have reduced our reliance on unsecured funding in recent years, it remains an important component of our capital structure and financing plans. At December 31, 2019,2020, approximately $2.3 billion$702 million in principal amount of total outstanding consolidated unsecured debt is scheduled to mature in 2020,2021, and approximately $702 million$1.1 billion and $1.1$2.1 billion is scheduled to mature in 20212022 and 2022,2023, respectively. We also obtainhave obtained short-term funding from the sale of floating-rate demand notes, all of which the holders may elect to have redeemed at any time without restriction. We announced the termination of our demand note program and the redemption of all outstanding demand notes on March 1, 2021. At December 31, 2019,2020, approximately $2.6$2.1 billion in principal amount of demand notes were outstanding, which is not included in the amount of unsecured debt described above. We also rely substantially on secured funding. At December 31, 2019,2020, approximately $7.0$4.5 billion in principal amount of total outstanding consolidated secured long-term debt is scheduled to mature in 2020,2021, approximately $9.5$4.9 billion is scheduled to mature in 2021,2022, and approximately $5.6 billion$617 million is scheduled to mature in 2022.2023. Furthermore, at December 31, 2019,2020, approximately $41.4$41.8 billion in certificates of deposit at Ally Bank are scheduled to mature in 2020,2021, which is not included in the amounts provided above. Additional funding, whether through deposits or borrowings, will be required to fund a substantial portion of the debt maturities over these periods.
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We continue to rely as well on our ability to borrow from other financial institutions, and many of our primary bank facilities are up for renewal on a yearly basis. Any weakness in market conditions, tightening of credit availability, or other events referenced earlier in this risk factor could have a negative effect on our ability to refinance these facilities and could increase the costs of bank funding. Ally and Ally Bank also continue to access the securitization markets. While those markets have stabilized following the liquidity crisis that commenced in 2007–2008, there can be no assurances that these sources of liquidity will remain available to us.
Our policies and controls are designed to enable us to maintain adequate liquidity to conduct our business in the ordinary course even in a stressed environment. There is no guarantee, however, that our liquidity position will never become compromised. In such an event, we may be required to sell assets at a loss or reduce loan and operating lease originations in order to continue operations. This could damage the performance and value of our business, prompt regulatory intervention and private litigation, harm our reputation, and cause a loss of customer and investor confidence, and if the condition were to persist for any appreciable period of time, our viability as a going concern could be threatened. Refer to the section titled Liquidity Management, Funding, and Regulatory Capital in the MD&A that follows and Note 20 to the Consolidated Financial Statements.
Our indebtedness and other obligations are significant and could adversely affect our business and financial results.
We have a significant amount of indebtedness apart from deposit liabilities. At December 31, 2019,2020, we had approximately $40.7$25.1 billion in principal amount of indebtedness outstanding (including $25.8$10.0 billion in secured indebtedness). Interest expense on our indebtedness constituted approximately 17.3%14.7% of our total financing revenue and other interest income for the year ended December 31, 2019.2020. We also have the ability to create additional indebtedness.
If our debt service obligations increase, whether due to the increased cost of existing indebtedness or the incurrence of additional indebtedness, more of our cash flow from operations would need to be allocated to the payment of principal of, and interest on, our indebtedness, which would reduce the funds available for other purposes. Our indebtedness also could limit our ability to execute our strategic plan and withstand competitive pressures and could reduce our flexibility in responding to changing business and economic conditions. In addition, if we are unable to satisfy our indebtedness and other obligations in full and on time, our business, reputation, and value as a going concern could be profoundly and perhaps inexorably damaged.
Our borrowing costs and access to the banking and capital markets could be negatively impacted if our credit ratings are downgraded or otherwise fail to meet investor expectations or demands.expectations.
The cost and availability of our funding are meaningfully affected by our short- and long-term credit ratings. Each of Standard & Poor’s Rating Services, Moody’s Investors Service, Inc., Fitch, Inc., and Dominion Bond Rating Service rates some or all of our debt, and these ratings reflect the rating agency’s opinion of our financial strength, operating performance, strategic position, and ability to meet our obligations. Agency ratings are not a recommendation to buy, sell, or hold any security and may be revised or withdrawn at any time. Each agency’s rating should be evaluated independently of any other agency’s rating.
The markets for automotive financing, insurance, banking (including corporate finance, mortgage finance, and point-of-sale personal lending), brokerage, and investment-advisory services are extremely competitive, and competitive pressures could adversely affect our business and financial results.
The markets for automotive financing, insurance, banking (including corporate finance, mortgage finance, and point-of-sale personal lending), brokerage, and investment-advisory services are highly competitive, and we expect competitive pressures only to intensify in the future, especially in light of the regulatory and supervisory environments in which we operate, technological innovations that alter the barriers to entry, current and evolving economic and market conditions, changing customer preferences and consumer and business sentiment, and monetary and fiscal policies. Refer to the section above titled Industry and Competition in Part I, Item 1 of this report. Competitive pressures may drive us to take actions that we might otherwise eschew, such as lowering the interest rates or fees on loans, raising the interest rates on deposits, or adopting more liberal underwriting standards. These pressures also may accelerate actions that we might otherwise elect to defer, such as substantial investment in systems or infrastructure. Whatever the reason, actions that we take in response to competition may adversely affect our results of operations and financial condition. These consequences could be exacerbated if we are not successful in introducing new products and services, achieving market acceptance of our products and services, developing and maintaining a strong customer base, continuing to enhance our reputation, or prudently managing risks and expenses.
Challenging business, economic, or market conditions may adversely affect our business, results of operations, and financial condition.
Our businesses are driven by wealth creation in the economy, robust economic and market activity, monetary and fiscal stability, and positive investor, business, and consumer sentiment. A downturn in economic conditions, disruptions in the equity or debt markets, high unemployment or underemployment, depressed vehicle or housing prices, unsustainable debt levels, unfavorable changes in interest rates, declines in household incomes, deteriorating consumer or business sentiment, consumer or commercial bankruptcy filings, or declines in the strength of national or local economies could decrease demand for our products and services, increase the amount and rate of delinquencies and losses, raise our operating and other expenses, and negatively impact the returns on and the value of our loans, investment portfolio, and other assets. Further, if a
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significant and sustained increase in fuel prices or other adverse conditions were to lead to diminished new and used vehicle purchases or prices, our automotive finance and insurance businesses could suffer considerably. In addition, concerns about the pace of economic growth and uncertainty about fiscal and monetary policies can result in significant volatility in the financial markets and could impact our ability to obtain cost-effective funding. If any of these events were to occur or worsen, our business, results of operation, and financial condition could be adversely affected.
Acts or threats of terrorism, natural disasters, and other conditions or events beyond our control could adversely affect us.
Geopolitical conditions, natural disasters, pandemics, and other conditions or events beyond our control may adversely affect our business, results of operations, financial condition, or prospects. Refer to the risk factor above, titled The COVID-19 pandemic is adversely affecting us and our customers, counterparties, employees, and third-party service providers, and the adverse impacts on our business, financial position, results of operations, and prospects could be significant, for more information on risks associated with the COVID-19 pandemic. For example, acts or threats of terrorism and political or military actions taken in response to terrorism could adversely affect general economic, business, or market conditions and, in turn, us.us, especially as an intermediary within the financial system. We also could be negatively impacted if our key personnel, a significant number of our employees, or our systems or infrastructure were to become unavailable or damaged due to a pandemic, natural disaster, war, act of terrorism, accident, or similar cause. These same risks and uncertainties arise too for the service providers and counterparties on whom we depend as well as their own third-party service providers and counterparties.
Significant repurchases or indemnification payments in our securitizations or whole-loan sales could harm our profitability and financial condition.
We have repurchase and indemnification obligations in our securitizations and whole-loan sales.securitizations. If we were to breach a representation, warranty, or covenant in connection with a securitization, or whole-loan sale, we may be required to repurchase the affected loans or operating leases or otherwise compensate investors or purchasers for losses caused by the breach. If the scale or frequency of repurchases or indemnification payments were to increase substantially from its present levels, our results of operations and financial condition could be adversely affected. In such a circumstance, we also could suffer reputational damage, become subject to stricter supervisory scrutiny and private litigation, and find our access to capital and banking markets more limited or more costly.
Our business and operations make extensive use of models, and we could be adversely affected if our design, implementation, or use of models is flawed.
We use quantitative models to price products and services, measure risk, calculate the quantitative portfolio of our allowance for loan losses, estimate asset and liability values, assess capital and liquidity, manage our balance sheet, create financial forecasts, and otherwise conduct our business and operations. If the design, implementation, or use of any of these models is flawed, we could make strategic or tactical decisions based on incorrect, misleading, or incomplete information. In addition, to the extent that any flawed models or inaccurate model outputs are used in reports to banking agencies or the public, we could be subjected to supervisory actions, private litigation, and other proceedings that may adversely affect our business and financial results. Refer to the section titled Risk Management in the MD&A that follows.
Our hedging strategies may not be successful in mitigating our interest rate, foreign exchange, and market risks, which could adversely affect our financial results.
We employ various hedging strategies to mitigate the interest rate, foreign exchange, and market risks inherent in many of our assets and liabilities. Our hedging strategies rely considerably on assumptions and projections regarding our assets and liabilities as well as general market factors. If any of these assumptions or projections prove to be incorrect or our hedges do not adequately mitigate the impact of changes in interest rates, foreign exchange rates, and other market factors, we may experience volatility in our earnings that could adversely affect our profitability and financial condition. In addition, we may not be able to find market participants that are willing to act as our hedging counterparties on acceptable terms or at all, which could have an adverse effect on the success of our hedging strategies.
We use estimates and assumptions in determining the value or amount of many of our assets and liabilities. If our estimates or assumptions prove to be incorrect, our cash flow, profitability, financial condition, and prospects could be adversely affected.
We use estimates and assumptions in determining the fair value of many of our assets, including retained interests from securitizations, loans held-for-sale,held for sale, and other investments that do not have an established market value or are not publicly traded. We also use estimates and assumptions in determining the residual values of our operating lease assets. In addition, we use estimates and assumptions in determining our allowance for loan losses, reserves for legal matters, insurance losses, and loss adjustment expenses (which represent the accumulation of estimates for both reported losses and those incurred, but not reported, including claims adjustment expenses relating to direct insurance and assumed reinsurance agreements). Refer to the section titled Critical Accounting Estimates in the MD&A that follows. Our assumptions and estimates may be inaccurate for many reasons. For example, they often involve matters that are inherently difficult to predict and that are beyond our control (such as macroeconomic conditions and their impact on automotive dealers) and often involve complex interactions between a number of dependent and independent variables, factors, and other assumptions. Assumptions and estimates are also far more difficult during periods of market dislocation or illiquidity. As a result, our actual experience may differ substantially from these estimates and assumptions. A meaningful difference between our estimates and assumptions and our actual experience may adversely affect our cash flow, profitability, financial condition, and prospects and may increase the volatility of our financial results. In addition, several different judgments associated with assumptions or estimates could be reasonable under the circumstances and yet result in significantly different results being reported.
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Significant fluctuations in the valuation of investment securities or market prices could negatively affect our financial results.
Market prices for securities and other financial assets are subject to considerable fluctuation. Fluctuations may result, for example, from perceived changes in the value of the asset, the relative price of alternative investments, shifts in investor sentiment, geopolitical events, actual or expected changes in monetary or fiscal policies, and general market conditions. Due to these kinds of fluctuations, the amount that we realize in the subsequent sale of an investment may significantly differ from the last reported value and could negatively affect our financial results. Additionally, negative fluctuations in the value of available-for-sale investment securities could result in unrealized losses recorded in equity.
Changes in accounting standards could adversely affect our reported revenues, expenses, profitability, and financial condition.
Our financial statements are subject to the application of GAAP, which are periodically revised or expanded. The application of GAAP is also subject to varying interpretations over time. Accordingly, we are required to adopt new or revised accounting standards or comply with revised interpretations that are issued from time to time by various parties, including accounting standard setters and those who interpret the standards, such as the FASB, the SEC, banking agencies, and our independent registered public accounting firm. Those changes are beyond our control but could adversely affect our revenues, expenses, profitability, or financial condition. For example, the adoption of CECL effective January 1, 2020, has resulted in a significant increase to our allowance for loan losses. Refer to Note 1 to the Consolidated Financial Statements for financial accounting standards issued by the FASB, but not yet adopted by the company.
The financial system is highly interrelated, and the failure of even a single financial institution could adversely affect us.
The financial system is highly interrelated, including as a result of lending, trading, clearing, counterparty, and other relationships. We have exposure to and routinely execute transactions with a wide variety of financial institutions, including brokers, dealers, commercial banks, and investment banks. If any of these institutions were to become or perceived to be unstable, were to fail in meeting its obligations in full and on time, or were to enter bankruptcy, conservatorship, or receivership, the consequences could ripple throughout the financial system and may adversely affect our business, results of operations, financial condition, or prospects. Because of interrelationships within the
financial system, this could occur even if the institution itself were not systemically important or perceived to play a meaningful role in the stable functioning of the financial markets.
Adverse economic conditions or changes in laws in the states where we have loan or operating lease concentrations may negatively affect our business and financial results.
We are exposed to portfolio concentrations in some states, including California, Texas, and Florida. Factors adversely affecting the economies and applicable laws in these states could have an adverse effect on our business, results of operations, and financial condition.
Negative publicity outside of our control, or our failure to successfully manage issues arising from our conduct or in connection with the financial services industry generally, could damage our reputation and adversely affect our business or financial results.
The performance and value of our business could be negatively impacted by any reputational harm that we may suffer.suffer, especially as an intermediary within the financial system. This harm could arise from negative publicity outside of our control or our failure to adequately address issues arising from our conduct or in connection with the financial services industry generally. Risks to our reputation could arise in any number of contexts—for example, stricter regulatory or supervisory environments, cyber incidents and other security breaches, inabilities to meet customer expectations, mergers and acquisitions, lending or banking practices, actual or perceived conflicts of interest, failures to prevent money laundering, inappropriate conduct by employees, and inadequate corporate governance.
Our failure to maintain appropriate environmental, social, and governance (ESG)ESG practices and disclosures could result in reputational harm, a loss of customer and investor confidence, and adverse business and financial results.
Governments, investors, customers, and the general public are increasingly focused on ESG practices and disclosures. For us and others in the financial-services industry, this focus extends to the practices and disclosures of the customers, counterparties, and service providers with whom we choose to do business. For example, while we have a relatively smaller carbon footprint as a digital financial services company and do not have commercial-lending relationships with a host of sensitive industries (such as those whose products are or are perceived to be harmful to the environment or the public health), the majority of our business and operations are connected to the automotive industry. Views about ESG are diverse, dynamic, and rapidly changing, and if we were to fail to maintain appropriate ESG practices and disclosures, we could suffer reputational damage, a loss of customer and investor confidence, and adverse business and financial results.
Risks Related to Ownership of Our Common Stock
Our ability to pay dividends on our common stock or repurchase shares in the future may be limited.
Any future dividends on our common stock or changes in our stock-repurchase program will be determined by our Board of Directors in its sole discretion and will depend on our business, financial condition, earnings, capital, liquidity, and other factors at the time. In addition, any plans to continue dividends or share repurchases in the future will be subject to our stress capital buffer requirement and the FRB’s review of and non-objection to our annual capital plan, which is unpredictable. There is no assurance that our Board will approve, or the FRB will permit, future dividends or share repurchases. Refer to the section above titled Regulation and Supervision in Part I, Item 1 of this report. There is no assurance that our Board
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Ally Financial Inc. • Form 10-K
It is possible that any indentures or other financing arrangements that we execute in the future could limit our ability to pay dividends on our capital stock, including our common stock. In the event that any of our indentures or other financing arrangements in the future restrict that ability, we may be unable to pay dividends unless and until we can refinance the amounts outstanding under those arrangements. In addition, under Delaware law, our Board of Directors may declare dividends on our capital stock only to the extent of our statutory surplus (which is defined as the amount equal to total assets minus total liabilities, in each case at fair market value, minus statutory capital) or, if no surplus exists, out of our net profits for the then-current or immediately preceding fiscal year. Further, even if we are permitted under our contractual obligations and Delaware law to pay dividends on our common stock, we may not have sufficient cash or regulatory approvals to do so.
The market price of our common stock could be adversely impacted by anti-takeover provisions in our organizational documents and Delaware law that could delay or prevent a takeover attempt or change in control of Ally or by other banking, antitrust, or corporate laws that have or are perceived as having an anti-takeover effect.
Our certificate of incorporation, our bylaws, and Delaware law contain provisions that could have the effect of discouraging, hindering, or preventing an acquisition that our Board of Directors does not find to be in the best interests of us and our stockholders. For example, our organizational documents include provisions:
•limiting the liability of our directors and providing indemnification to our directors and officers; and
•limiting the ability of our stockholders to call and bring business before special meetings of stockholders by requiring any requesting stockholders to hold at least 25% of our common stock in the aggregate.
These provisions, alone or together, could delay hostile takeovers and changes in control of Ally or changes in management.
In addition, we are subject to Section 203 of the General Corporation Law of the State of Delaware, which generally prohibits a corporation from engaging in various business combination transactions with any interested stockholder (generally defined as a stockholder
who owns 15% or more of a corporation’s voting stock) for a period of three years following the time that the stockholder became an interested stockholder, except under specified circumstances such as the receipt of prior board approval.
Banking and antitrust laws, including associated regulatory-approval requirements, also impose significant restrictions on the acquisition of direct or indirect control over any BHC like Ally or any insured depository institution like Ally Bank. Refer to the section above titled Regulation and Supervision in Part I, Item 1 of this report.
Any provision of our organizational documents or applicable law that deters, hinders, or prevents a non-negotiated takeover or change in control of Ally could limit the opportunity for our stockholders to receive a premium for their shares of our common stock and could also affect the price that some investors are willing to pay for our common stock.
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Item 1B. Unresolved Staff Comments
None.
Item 2. Properties
Our principal corporate offices are located in Detroit, Michigan, and Charlotte, North Carolina. In Detroit, we lease approximately 317,000330,000 square feet of office space under a lease that expires in December 2028. In Charlotte, we lease approximately 234,000 square feet of office space under a variety of leases expiring between June 2021 and May 2024. In September 2017, we entered into a new agreement, scheduled to commence in April 2021, to lease approximately 543,000 square feet of office space in Charlotte under a lease that is expected to expire in March 2036. Under the new lease we plan to consolidate most of our three current Charlotte, North Carolina locations, through a series of phases, as the existing leases expire.
The primary offices for both our Automotive Finance and Insurance operations are located in Detroit, and are included in the totals referenced above. The primary office for our Mortgage Finance operations is located in Charlotte, where, in addition to the totals referenced above, we lease approximately 84,000 square feet of office space under a lease that expires in December 2022. Upon expiration, our Mortgage Finance operations will relocate to the consolidated office space in Charlotte, North Carolina, referenced above. The primary office for our Corporate Finance operations is located in New York, New York, where we lease approximately 55,000 square feet of office space under a lease that expires in June 2023.
In addition to the properties described above, we lease additional space to conduct our operations. We believe our facilities are adequate for us to conduct our present business activities.
Item 3. Legal Proceedings
Refer to Note 29 to the Consolidated Financial Statements for a discussion related to our legal proceedings.
Item 4. Mine Safety Disclosures
Not applicable.
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Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Market Information
Our common stock is listed on the New York Stock Exchange (NYSE)NYSE under the symbol “ALLY.” At December 31, 2019,2020, we had 374,331,998374,674,415 shares of common stock outstanding, compared to 404,899,599374,331,998 shares at December December��31, 2018.2019. As of February 21, 2020,22, 2021, we had approximately 3330 holders of record of our common stock.
Securities Authorized for Issuance Under Equity Compensation Plans
For information regarding securities authorized for issuance under our equity compensation plans, see Part III, Item 12.
Stock Performance Graph
The following graph compares the cumulative total return to stockholders on our common stock relative to the cumulative total returns of the S&P 500 index and the S&P Financials index. An investment of $100 (with reinvestment of all dividends) is assumed to have been made in our common stock and in each index on December 31, 2014,2015, and its relative performance is tracked through December 31, 2019.2020. The returns shown are based on historical results and are not intended to suggest future performance.
This performance graph is not deemed to be “filed” for purposes of Section 18 of the Exchange Act, or otherwise subject to the liabilities of that section, or incorporated by reference into any filing of Ally under the Securities Act of 1933, as amended, or the Exchange Act, except as expressly set forth by specific reference in such a filing.
Recent Sales of Unregistered Securities
Ally did not have any sales of unregistered securities in the last three fiscal years.
| Three months ended December 31, 2019 | Total number of shares repurchased (a) (in thousands) | Weighted-average price paid per share (a) (b) (in dollars) | Total number of shares repurchased as part of publicly announced program (a) (c) (in thousands) | Maximum approximate dollar value of shares that may yet be repurchased under the program (a) (b) (c) ($ in millions) | ||||||||||
| October 2019 | 3,304 | $ | 31.07 | 3,304 | $ | 848 | ||||||||
| November 2019 | 3,061 | 31.44 | 3,061 | 751 | ||||||||||
| December 2019 | 3,189 | 31.27 | 3,189 | 652 | ||||||||||
| Total | 9,554 | 31.25 | 9,554 | |||||||||||
| ($ in millions, except per share data; shares in thousands) | 2019 | 2018 | 2017 | 2016 | 2015 | |||||||||||||||
| Total financing revenue and other interest income | $ | 9,857 | $ | 9,052 | $ | 8,322 | $ | 8,305 | $ | 8,397 | ||||||||||
| Total interest expense | 4,243 | 3,637 | 2,857 | 2,629 | 2,429 | |||||||||||||||
| Net depreciation expense on operating lease assets | 981 | 1,025 | 1,244 | 1,769 | 2,249 | |||||||||||||||
| Net financing revenue and other interest income | 4,633 | 4,390 | 4,221 | 3,907 | 3,719 | |||||||||||||||
| Total other revenue | 1,761 | 1,414 | 1,544 | 1,530 | 1,142 | |||||||||||||||
| Total net revenue | 6,394 | 5,804 | 5,765 | 5,437 | 4,861 | |||||||||||||||
| Provision for loan losses | 998 | 918 | 1,148 | 917 | 707 | |||||||||||||||
| Total noninterest expense | 3,429 | 3,264 | 3,110 | 2,939 | 2,761 | |||||||||||||||
| Income from continuing operations before income tax expense | 1,967 | 1,622 | 1,507 | 1,581 | 1,393 | |||||||||||||||
| Income tax expense from continuing operations (a) | 246 | 359 | 581 | 470 | 496 | |||||||||||||||
| Net income from continuing operations | 1,721 | 1,263 | 926 | 1,111 | 897 | |||||||||||||||
| (Loss) income from discontinued operations, net of tax | (6 | ) | — | 3 | (44 | ) | 392 | |||||||||||||
| Net income | $ | 1,715 | $ | 1,263 | $ | 929 | $ | 1,067 | $ | 1,289 | ||||||||||
| Basic earnings per common share (b): | ||||||||||||||||||||
| Net income (loss) from continuing operations | $ | 4.38 | $ | 2.97 | $ | 2.04 | $ | 2.25 | $ | (3.47 | ) | |||||||||
| Net income (loss) | 4.36 | 2.97 | 2.05 | 2.15 | (2.66 | ) | ||||||||||||||
| Weighted-average common shares outstanding | 393,234 | 425,165 | 453,704 | 481,105 | 482,873 | |||||||||||||||
| Diluted earnings per common share (b): | ||||||||||||||||||||
| Net income (loss) from continuing operations | $ | 4.35 | $ | 2.95 | $ | 2.03 | $ | 2.24 | $ | (3.47 | ) | |||||||||
| Net income (loss) | 4.34 | 2.95 | 2.04 | 2.15 | (2.66 | ) | ||||||||||||||
| Weighted-average common shares outstanding (c) | 395,395 | 427,680 | 455,350 | 482,182 | 482,873 | |||||||||||||||
| Common share information: | ||||||||||||||||||||
| Cash dividends declared per common share | $ | 0.68 | $ | 0.56 | $ | 0.40 | $ | 0.16 | $ | — | ||||||||||
| Period-end common shares outstanding | 374,332 | 404,900 | 437,054 | 467,000 | 481,980 | |||||||||||||||
December 31, ($ in millions) | 2019 | 2018 | 2017 | 2016 | 2015 | |||||||||||||||
| Selected period-end balance sheet data: | ||||||||||||||||||||
| Total assets | $ | 180,644 | $ | 178,869 | $ | 167,148 | $ | 163,728 | $ | 158,581 | ||||||||||
| Total deposit liabilities | $ | 120,752 | $ | 106,178 | $ | 93,256 | $ | 79,022 | $ | 66,478 | ||||||||||
| Long-term debt | $ | 34,027 | $ | 44,193 | $ | 44,226 | $ | 54,128 | $ | 66,234 | ||||||||||
| Preferred stock | $ | — | $ | — | $ | — | $ | — | $ | 696 | ||||||||||
| Total equity | $ | 14,416 | $ | 13,268 | $ | 13,494 | $ | 13,317 | $ | 13,439 | ||||||||||
| Year ended December 31, | 2019 | 2018 | 2017 | 2016 | 2015 | ||||||||||
| Financial ratios: | |||||||||||||||
| Return on average assets (a) | 0.95 | % | 0.74 | % | 0.57 | % | 0.68 | % | 0.84 | % | |||||
| Return on average equity (a) | 12.26 | % | 9.65 | % | 6.89 | % | 7.80 | % | 8.69 | % | |||||
| Equity to assets (a) | 7.78 | % | 7.65 | % | 8.28 | % | 8.69 | % | 9.65 | % | |||||
| Common dividend payout ratio (b) | 15.60 | % | 18.86 | % | 19.51 | % | 7.44 | % | — | % | |||||
| Net interest spread (a) (c) | 2.45 | % | 2.47 | % | 2.58 | % | 2.49 | % | 2.44 | % | |||||
| Net yield on interest-earning assets (a) (d) | 2.67 | % | 2.65 | % | 2.71 | % | 2.63 | % | 2.57 | % | |||||
We are a Delaware corporation and are registered as a BHC under the BHC Act, and an FHC under the GLB Act. Our primary business lines are Dealer Financial Services, which is composed of our Automotive Finance and Insurance operations, Mortgage Finance, and Corporate Finance. Corporate and Other primarily consists of centralized corporate treasury activities, the management of our legacy mortgage portfolio, the activity related to Ally Invest and Ally Lending (our unsecured personal-lending business unit), which reflect new and higherreclassifications and eliminations between the reportable operating segments. Ally Bank’s assets and operating results are included within our Automotive Finance, Mortgage Finance, and Corporate Finance segments, as well as Corporate and Other, based on its underlying business activities. As of December 31, 2020, Ally Bank had total assets of $172.0 billion, and total nonaffiliate deposits of $137.0 billion.
Our strategic objectives are centered around (1) differentiating our company as a relentless ally for consumer, commercial, and corporate customers, (2) ensuring our culture remains aligned with a focus on our customers, communities, employees, and stockholders, (3) ongoing optimization of our market leading automotive, insurance, and digitally-based bank business lines, (4) sustained growth in customers and ongoing relationship deepening across our scalable platforms, and expanded product offerings, and (5) efficient capital requirements, capital buffers,deployment and new regulatory capital definitions, deductionsdisciplined risk management. We seek to extend our leading position in automotive finance in the United States by continuing to provide automotive dealers and adjustments. Refer to Note 20their retail customers with premium service, a comprehensive product suite, consistent funding, and competitive pricing—reflecting our commitment to the Consolidated Financial Statementsautomotive industry. Within our Automotive Finance and Insurance operations, we are also focused on strengthening our network of dealer relationships and pursuing digital distribution channels for further information. The following table presents selected regulatory capital data under U.S Basel III as subjectour products and services, including through our operation of a direct-lending platform and our work with dealers innovating in digital transactions—all while maintaining an appropriate level of risk appetite. Within our other banking operations—including Mortgage Finance and Corporate Finance—we seek to transitional provisions primarily related to deductionsexpand our consumer and adjustments impacting Common Equity Tier 1 capitalcommercial banking products and Tier 1 capital.
December 31, ($ in millions) | 2019 | 2018 | 2017 | 2016 | 2015 | |||||||||||||||
| Common Equity Tier 1 capital ratio | 9.54 | % | 9.14 | % | 9.53 | % | 9.37 | % | 9.21 | % | ||||||||||
| Tier 1 capital ratio | 11.22 | % | 10.80 | % | 11.25 | % | 10.93 | % | 11.10 | % | ||||||||||
| Total capital ratio | 12.76 | % | 12.31 | % | 12.94 | % | 12.57 | % | 12.52 | % | ||||||||||
| Tier 1 leverage ratio (to adjusted quarterly average assets) (a) | 9.08 | % | 9.00 | % | 9.53 | % | 9.54 | % | 9.73 | % | ||||||||||
| Total equity | $ | 14,416 | $ | 13,268 | $ | 13,494 | $ | 13,317 | $ | 13,439 | ||||||||||
| Preferred stock | — | — | — | — | (696 | ) | ||||||||||||||
| Goodwill and certain other intangibles | (450 | ) | (285 | ) | (283 | ) | (272 | ) | (27 | ) | ||||||||||
| Deferred tax assets arising from net operating loss and tax credit carryforwards (b) | (25 | ) | (143 | ) | (224 | ) | (410 | ) | (392 | ) | ||||||||||
| Other adjustments | (104 | ) | 557 | 250 | 343 | 183 | ||||||||||||||
| Common Equity Tier 1 capital | 13,837 | 13,397 | 13,237 | 12,978 | 12,507 | |||||||||||||||
| Preferred stock | — | — | — | — | 696 | |||||||||||||||
| Trust preferred securities | 2,496 | 2,493 | 2,491 | 2,489 | 2,520 | |||||||||||||||
| Deferred tax assets arising from net operating loss and tax credit carryforwards (b) | — | — | (56 | ) | (273 | ) | (588 | ) | ||||||||||||
| Other adjustments | (62 | ) | (59 | ) | (44 | ) | (47 | ) | (58 | ) | ||||||||||
| Tier 1 capital | 16,271 | 15,831 | 15,628 | 15,147 | 15,077 | |||||||||||||||
| Qualifying subordinated debt and other instruments qualifying as Tier 2 | 1,033 | 1,031 | 1,113 | 1,174 | 932 | |||||||||||||||
| Qualifying allowance for credit losses and other adjustments | 1,202 | 1,184 | 1,233 | 1,098 | 996 | |||||||||||||||
| Total capital | $ | 18,506 | $ | 18,046 | $ | 17,974 | $ | 17,419 | $ | 17,005 | ||||||||||
| Risk-weighted assets (c) | $ | 145,072 | $ | 146,561 | $ | 138,933 | $ | 138,539 | $ | 135,844 | ||||||||||
its subsidiary, Health Credit Services LLC, from which Ally Financial Inc. • Form 10-K
Upon launching our first ever enterprise-wide campaign themed “Do it Right,” we introduced a broad audience to our full suite of the media, or others.
unique brand are increasingly gaining traction in the continuing profitability and viabilitymarketplace, as demonstrated by industry recognition of our dealer-centric automotive financeaward-winning digital direct bank and insurance businesses, especially in the face of competition from captive finance companiesstrong customer acquisition and their automotive manufacturing sponsors and challenges to the dealer’s role as intermediary between manufacturers and purchasers;
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 where the lessee is generally not obligated to acquire ownership of the vehicle at lease-end or compensate Ally for the vehicle’s residual value. The terms “lend,” “finance,” and “originate” mean our direct extension or origination of loans, our purchase or acquisition of loans, or our purchase of operating leases as applicable. The term “consumer” means all consumer products associated with our loan and operating-lease activities and all commercial retail installment sales contracts. The term “commercial” means all commercial products associated with our loan activities, other than commercial retail installment sales contracts. The term “partnerships” means business arrangements rather than partnerships as defined by law.
Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A) in Part II, Item 7 of this report, and Note 26 to the Consolidated Financial Statements.
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The markets for automotive financing, insurance, banking (including corporate finance, mortgage finance, and point-of-sale personal lending), securities-brokerage, and investment-advisory services through Ally Invest.are highly competitive. We directly compete in the automotive financing market with banks, credit unions, captive automotive finance companies, and independent finance companies. Our robust corporate-financeinsurance business offers capitalalso faces significant competition from automotive manufacturers, captive automotive finance companies, insurance carriers, third-party administrators, brokers, and other insurance-related companies. Some of these competitors in automotive financing and insurance, such as captive automotive finance companies, have certain exclusivity privileges with automotive manufacturers whose customers and dealers make up a significant portion of our customer base. In addition, our banking, securities-brokerage, and investment-advisory businesses face intense competition from banks, savings associations, finance companies, credit unions, mutual funds, investment advisers, asset managers, brokerage firms, hedge funds, insurance companies, mortgage-banking companies, and credit-card companies. Financial-technology (fintech) companies also compete with us directly and in partnership with other banks and financial-services providers in lending, deposits, securities-brokerage, investment-advisory, and other markets. Many of our competitors have substantial positions nationally or in the markets in which they operate. Some also have significantly greater scale, financial and operational resources, investment capacity, and brand recognition. Our competitors may be subject to different and, in some cases, less stringent legislative, regulatory, and supervisory regimes than Ally. A range of competitors differ from us in their strategic and tactical priorities and, for equity sponsorsexample, may be willing to suffer meaningful financial losses in the pursuit of disruptive innovation or to accept more aggressive business, compliance, and middle-market companies. other risks in the pursuit of higher returns. Competition affects every aspect of our business, including product and service offerings, rates, pricing and fees, and customer service. Successfully competing in our markets also depends on our ability to innovate, to invest in technology and infrastructure, to maintain and enhance our reputation, and to attract, retain, and motivate talented employees, all while effectively managing risks and expenses. We expect that competition will only intensify in the future.
Regulation and Supervision
We are subject to significant regulatory frameworks in the United States—at federal, state, and local levels—that affect the products and services that we may offer and the manner in which we may offer them, the risks that we may take, the ways in which we may operate, and the corporate and financial actions that we may take.
We are also subject to direct supervision and periodic examinations by various governmental agencies and industry SROs that are charged with overseeing the kinds of business activities in which we engage, including the FRB, the UDFI, the FDIC, the CFPB, the SEC, FINRA, and a number of state regulatory and licensing authorities such as the NYDFS. These agencies and organizations generally have broad authority and discretion in restricting and otherwise affecting our businesses and operations and may take formal or informal supervisory, enforcement, and other actions against us when, in the applicable agency’s or organization’s judgment, our businesses or operations fail to comply with applicable law, comport with safe and sound practices, or meet its supervisory expectations.
This system of regulation, supervision, and examination is intended primarily for the protection and benefit of our depositors and other customers, the FDIC’s DIF, the banking and financial systems as a whole, and the broader economy—and not for the protection or benefit of our stockholders (except in the case of securities laws) or non-deposit creditors. The scope, intensity, and focus of this system can vary from time to time for reasons that range from the state of the economic and political environments to the performance of our businesses and operations, but for the foreseeable future, we expect to remain subject to extensive regulation, supervision, and examinations.
This section summarizes some relevant provisions of the principal statutes, regulations, and other laws that apply to us. The descriptions, however, are not complete and are qualified in their entirety by the full text and judicial or administrative interpretations of those laws and other laws that affect us.
Bank Holding Company, Financial Holding Company, and Depository Institution Status
Ally and IB Finance, a Delaware corporationlimited liability company, are BHCs under the BHC Act. Ally is also an FHC under the GLB Act. IB Finance is a direct subsidiary of Ally and the direct parent of Ally Bank, which is a commercial bank that is organized under the laws of the State of Utah and whose deposits are insured by the FDIC under the FDI Act. As BHCs, Ally and IB Finance are subject to regulation, supervision, and examination by the FRB. Ally Bank is a member of the Federal Reserve System and is subject to regulation, supervision, and examination by the FRB and the UDFI.
•Permitted Activities — Under the BHC Act, BHCs and their subsidiaries are generally limited to the business of banking and to closely related activities that are incident to banking. The GLB Act amended the BHC Act and created a regulatory framework for FHCs, which are BHCs that meet certain qualifications and elect FHC status. FHCs, directly or indirectly through their nonbank subsidiaries, are generally permitted to engage in a broader range of financial and related activities than those that are permissible for BHCs—for example, (1) underwriting, dealing in, and making a market in securities; (2) providing financial, investment, and economic advisory services; (3) underwriting insurance; and (4) merchant banking activities. The FRB regulates, supervises, and examines FHCs, as it does all BHCs, but insurance and securities activities conducted by an FHC or any of its nonbank subsidiaries are also regulated, supervised, and examined by functional regulators such as state insurance commissioners, the SEC, or FINRA. The expanded powers permitted to FHCs include the ability to provide insurance products and services, to deliver our SmartAuction finder services and a number of related vehicle-remarketing services for third parties, and to offer certain kinds of brokerage and advisory services. To remain eligible to conduct and expand these broader financial and related activities, Ally and Ally Bank must continue to be treated as an FHC. Refer to Note 20 to the Consolidated Financial Statements and the section below titled Basel
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Capital Frameworks for additional information. In addition, our ability to expand these financial and related activities or to make acquisitions generally requires that we achieve a rating of satisfactory or better under the CRA.
Further, under the BHC Act, we may be subject to approvals, conditions, and other restrictions when seeking to acquire control over another entity or its assets. For this purpose, “control” includes (a) directly or indirectly owning, controlling, or holding the power to vote 25% or more of any class of the entity’s voting securities, (b) controlling in any manner the election of a majority of the entity’s directors, trustees, or individuals performing similar functions, or (c) directly or indirectly exercising a controlling influence over the management or policies of the entity. Under rules of the FRB, whether Ally is presumed to have a “controlling influence” over an entity is determined by applying a framework of tiered presumptions of control that are based on the percentage of a class of voting securities held by Ally and nine other relationships with the entity. For example, Ally would be presumed to have such a controlling influence with less than 5% of a class of voting securities and any of the following: a management agreement with the entity, one-half or more of the directors on the entity’s board, or one-third or more of the total equity in the entity.
•Enhanced Prudential Standards — Ally is currently subject to enhanced prudential standards that have been established by the FRB under the Dodd-Frank Act. In May 2018, targeted amendments to the Dodd-Frank Act and other financial-services laws were enacted through the EGRRCP Act, including amendments that affect whether and, if so, how the FRB applies enhanced prudential standards to BHCs like us with $100 billion or more but less than $250 billion in total consolidated assets. In October 2019, the FRB and other U.S. banking agencies issued final rules implementing these amendments. The final rules—which are commonly known as the tailoring framework—were effective on December 31, 2019, and established four risk-based categories of prudential standards and capital and liquidity requirements for banking organizations with $100 billion or more in total consolidated assets. The most stringent standards and requirements apply to U.S. global systemically important BHCs, which are assigned to Category I. The assignment of other banking organizations to the remaining three categories is based on measures of size and four other risk-based indicators: cross-jurisdictional activity, wSTWF, nonbank assets, and off-balance-sheet exposure. Under the tailoring framework, Ally is a Category IV firm and, as such, is (1) subject to supervisory stress testing on a two-year cycle rather than the previously required one-year cycle, (2) required to continue submitting an annual capital plan to the FRB, (3) allowed to continue excluding accumulated other comprehensive income from regulatory capital, (4) required to continue maintaining a buffer of unencumbered highly liquid assets to meet projected net stressed cash outflows over a 30-day planning horizon, (5) required to conduct liquidity stress tests on a quarterly basis rather than the previously required monthly basis, (6) allowed to engage in more tailored liquidity risk management, including monthly rather than weekly calculations of collateral positions, the elimination of limits for activities that are not relevant to the firm, and fewer required elements of monitoring of intraday liquidity exposures, (7) exempted from company-run capital stress testing requirements, (8) exempted from the requirements of the LCR and the net stable funding ratio provided that our average wSTWF continues to remain under $50 billion, and (9) allowed to remain exempted from the requirements of the supplementary leverage ratio, the countercyclical capital buffer, and single-counterparty credit limits. We continue to be subject to rules enabling the FRB to conduct supervisory stress testing on a more or less frequent basis based on our financial condition, size, complexity, risk profile, scope of operations, or activities, or risks to the U.S. economy. Further, we remain subject to rules requiring the resubmission of our capital plan if we determine that there has been or will be a material change in our risk profile, financial condition, or corporate structure since we last submitted the capital plan or if the FRB determines that (a) our capital plan is incomplete or our capital plan or internal capital adequacy process contains material weaknesses, (b) there has been, or will likely be, a material change in our risk profile (including a material change in our business strategy or any risk exposure), financial condition, or corporate structure, (c) the BHC stress scenario(s) are not appropriate for our business model and portfolios, or changes in the financial markets or the macroeconomic outlook that could have a material impact on our risk profile and financial condition require the use of updated scenarios, or (d) our capital plan or condition raise any issues of objection.
•Capital Adequacy Requirements — Ally and Ally Bank are subject to various capital adequacy requirements. Refer to Note 20 to the Consolidated Financial Statements and the section below titled Basel Capital Frameworks for additional information.
•Capital Planning and Stress Tests — Under the tailoring framework described earlier in Enhanced Prudential Standards, Ally is generally subject to supervisory stress testing on a two-year cycle and exempted from mandated company-run capital stress testing requirements. Ally is also required to submit an annual capital plan to the FRB. Ally’s annual capital plan must include an assessment of its 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 Ally’s process for assessing capital adequacy, including a discussion of how Ally, under expected and stressful conditions, will maintain capital commensurate with its risks and above the minimum regulatory capital ratios, will serve as a source of strength to Ally Bank, and will maintain sufficient capital to continue its operations by maintaining ready access to funding, meeting its obligations to creditors and other counterparties, and continuing to serve as a credit intermediary.
We submitted our 2020 capital plan on April 3, 2020, which included planned capital distributions to common stockholders through share repurchases and cash dividends over the nine-quarter planning horizon. On June 25, 2020, the FRB provided us with the results of the supervisory stress test, additional industry-wide sensitivity analyses conducted in light of the COVID-19 pandemic, and our preliminary stress capital buffer requirement. At the same time, the FRB announced its determination that changes in financial markets or the macroeconomic outlook could have a material effect on the risk profiles and financial conditions of firms subject to the capital-plan rule and that, as a result, the firms (including Ally) would be required to resubmit capital plans to
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the FRB within 45 days after receiving updated stress scenarios from the FRB. On September 17, 2020, the FRB released two updated scenarios—severely adverse and alternative severe. We updated our capital plan in light of firm-specific baseline and stress scenarios, as required, and submitted our updated plan to the FRB on November 2, 2020. On December 18, 2020, the FRB publicly disclosed summary results of this second round of supervisory stress testing and extended its deadline for notifying firms about whether their stress capital buffer requirements will be recalculated to March 31, 2021. Refer to the section below titled Limitations on Bank and BHC Dividends and Other Capital Distributions for further details about limitations on distributions placed on firms by the FRB after its supervisory stress testing processes in 2020.
In January 2021, the FRB issued a final rule effective April 5, 2021, to align its capital planning and stress capital buffer requirements with the tailoring framework. Refer to the section below titled Basel Capital Framework for further discussion about our stress capital buffer requirements. Under the final rule, unless otherwise directed by the FRB in specified circumstances, Ally and other Category IV firms are generally no longer required to calculate forward-looking projections of revenues, losses, reserves, and pro forma capital levels under scenarios provided by the FRB. Each firm continues to be required, however, to provide a forward-looking analysis of income and capital levels under expected and stressful conditions that are designed by the firm. In addition, for Category IV firms, the final rule updated the frequency of calculating the portion of the stress capital buffer derived from the supervisory stress test to every other year. These firms 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 they would not generally be subject to the supervisory stress test. During a year in which a Category IV firm does not undergo a supervisory stress test, the firm would receive an updated stress capital buffer requirement that reflects its updated planned common-stock dividends. The final rule also includes reporting and other changes consistent with the tailoring framework.
•Resolution Planning — Under rules of the FDIC, Ally Bank is required to periodically submit to the FDIC a resolution plan (commonly known as a living will) that would enable the FDIC, as receiver, to resolve Ally Bank in the event of its insolvency under the FDI Act in a manner that ensures that depositors receive access to their insured deposits within one business day of Ally Bank’s failure (two business days if the failure occurs on a day other than Friday), maximizes the net present value return from the sale or disposition of its assets, and minimizes the amount of any loss realized by the creditors in the resolution. If the FDIC determines that the resolution plan is not credible and the deficiencies are not adequately remedied in a timely manner, the FDIC may take formal or informal supervisory, enforcement, and other actions against us. Ally Bank submitted its most recent resolution plan on July 1, 2018. In April 2019, the FDIC issued an advance notice of proposed rulemaking seeking comment on ways to tailor and improve its resolution-planning rules and, at the same time, delayed the next round of resolution-plan submissions until the rulemaking process has been completed. In May 2020, consistent with the advance notice of proposed rulemaking, the FDIC announced plans to engage in targeted engagement and capabilities testing related to resolution planning with select firms on an as-needed basis. In January 2021 the FDIC announced that, given the passage of time since the last submission of resolution plans and the uncertain economic outlook, the FDIC will resume requiring resolution plan submissions for insured depository institutions with $100 billion or more in assets, including Ally Bank. The FDIC indicated that firms will receive at least 12 months advance notice prior to such a submission. At the same time, the FDIC reiterated its plan to modify its supervisory approach to streamline content requirements for these submissions. Under the tailoring framework described earlier in Enhanced Prudential Standards, Ally is no longer required to submit to the FRB and the FDIC a plan for the rapid and orderly resolution of Ally and its significant legal entities under the U.S. Bankruptcy Code and other applicable insolvency laws in the event of future material financial distress or failure.
•Limitations on Bank and BHC Dividends and Other Capital Distributions — Federal and Utah law place a number of conditions, limits, and other restrictions on dividends and other capital distributions that may be paid by Ally Bank to IB Finance and thus indirectly to Ally. In addition, even if the FRB does not object to our capital plan as described earlier in Capital Planning and Stress Tests, Ally and IB Finance may be precluded from or limited in paying dividends or other capital distributions without the FRB’s approval under certain circumstances—for example, if Ally or IB Finance were to not meet minimum regulatory capital ratios after giving effect to the distributions. FRB supervisory guidance also directs BHCs like us to consult with the FRB prior to increasing dividends, implementing common-stock-repurchase programs, or redeeming or repurchasing capital instruments. Further, the U.S. banking agencies are authorized to prohibit an insured depository institution, like Ally Bank, or a BHC, like Ally, from engaging in unsafe or unsound banking practices and, depending upon the circumstances, could find that paying a dividend or other capital distribution would constitute an unsafe or unsound banking practice.
On June 25, 2020, the FRB announced several actions to ensure that large firms, such as Ally, remain resilient despite the economic uncertainty from the COVID-19 pandemic, including for the third quarter of 2020 (1) the suspension of repurchases by any firm of its common stock, except repurchases relating to issuances of common stock related to employee stock ownership plans, and (2) the disallowance of any increase by a firm in the amount of its common-stock dividends and the imposition of a common-stock dividend limit equal to the average of the firm’s net income for the four preceding calendar quarters. These restrictions were extended by the FRB for the fourth quarter of 2020. On December 18, 2020, the FRB extended and modified these restrictions for the first quarter of 2021 to limit aggregate common-stock dividends and share repurchases to an amount equal to the average of the firm’s net income for the four preceding calendar quarters subject to specified exceptions. Restrictions of this kind may be further extended by the FRB. 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. For additional information on our capital actions, including our stock-repurchase program and dividends on our common stock, refer to Note 20 to
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the Consolidated Financial Statements. 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), impacts related to the COVID-19 pandemic, 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.
•Transactions with Affiliates — Sections 23A and 23B of the Federal Reserve Act and the FRB’s Regulation W prevent Ally and its nonbank subsidiaries from taking undue advantage of the benefits afforded to Ally Bank as a depository institution, including its access to federal deposit insurance and the FRB’s discount window. Pursuant to these laws, “covered transactions”—including Ally Bank’s extensions of credit to and asset purchases from its affiliates—are generally subject to meaningful restrictions. For example, unless otherwise exempted, (1) covered transactions are limited to 10% of Ally Bank’s capital stock and surplus in the case of any individual affiliate and 20% of Ally Bank’s capital stock and surplus in the case of all affiliates; (2) Ally Bank’s credit transactions with an affiliate are generally subject to stringent collateralization requirements; (3) with few exceptions, Ally Bank may not purchase any “low quality asset” from an affiliate; and (4) covered transactions must be conducted on terms and conditions that are consistent with safe and sound banking practices (collectively, Affiliate Transaction Restrictions). In addition, transactions between Ally Bank and an affiliate must be on terms and conditions that are either substantially the same as or more beneficial to Ally Bank than those prevailing at the time for comparable transactions with or involving nonaffiliates.
Furthermore, these laws include an attribution rule that treats a transaction between Ally Bank and a nonaffiliate as a transaction between Ally Bank and an affiliate to the extent that the proceeds of the transaction are used for the benefit of or transferred to the affiliate.
The Dodd-Frank Act tightened the Affiliate Transaction Restrictions in a number of ways. For example, the definition of covered transactions was expanded to include credit exposures arising from derivative transactions, securities lending and borrowing transactions, and the acceptance of affiliate-issued debt obligations (other than securities) as collateral. For a credit transaction that must be collateralized, the Dodd-Frank Act also requires that collateral be maintained at all times while the credit extension or credit exposure remains outstanding and places additional limits on acceptable collateral.
•Source of Strength — The Dodd-Frank Act codified the FRB’s policy requiring a BHC, like Ally, to serve as a source of financial strength for a depository-institution subsidiary, like Ally Bank, and to commit resources to support the subsidiary in circumstances when Ally might not otherwise elect to do so. The functional regulator of any nonbank subsidiary of Ally, however, may prevent that subsidiary from directly or indirectly contributing its financial support, and if that were to preclude Ally from serving as an adequate source of financial strength, the FRB may instead require the divestiture of Ally Bank and impose operating restrictions pending such a divestiture.
•Single-Point-of-Entry Resolution Authority — Under the Dodd-Frank Act, a BHC whose failure would have serious adverse effects on the financial stability of the United States may be subjected to an FDIC-administered resolution regime called the orderly liquidation authority as an alternative to bankruptcy. If Ally were to be placed into receivership under the orderly liquidation authority, the FDIC as receiver would have considerable rights and powers in liquidating and winding up Ally, including the ability to assign assets and liabilities without the need for creditor consent or prior court review and the ability to differentiate and determine priority among creditors. In doing so, moreover, the FDIC’s primary goal would be a liquidation that mitigates risk to the financial stability of the United States and that minimizes moral hazard. Under the FDIC’s proposed single-point-of-entry strategy for the resolution of a systemically important financial institution under the orderly liquidation authority, the FDIC would place the top-tier U.S. holding company in receivership, keep its operating subsidiaries open and out of insolvency proceedings by transferring them to a new bridge holding company, impose losses on the stockholders and creditors of the holding company in receivership according to their statutory order of priority, and address the problems that led to the institution’s failure.
•Acceptance of Brokered Deposits —Under FDICIA, insured depository institutions such as Ally Bank must be well capitalized or adequately capitalized in order to accept brokered deposits, and even adequately capitalized institutions are subject to some restrictions on the rates they may offer for brokered deposits. At December 31, 2020, Ally Bank was well capitalized under the PCA framework. In December 2020, the FDIC approved a final rule to establish a new framework for analyzing whether deposits qualify as brokered deposits, including those that are accepted through arrangements between insured depository institutions, such as Ally Bank, and third parties, such as financial-technology companies. The final rule takes effect on April 1, 2021, with full compliance required as of January 1, 2022. We continue to evaluate the effect of the final rule on us, but at the present time, we expect that any effect would be a reduction in the number of deposit arrangements between Ally Bank and third parties that would be characterized as brokered deposits. Brokered deposits totaled $12.6 billion at December 31, 2020, which represented 9.2% of Ally Bank’s total deposits.
•Enforcement Authority — The FRB possesses extensive authorities and powers to regulate and supervise the conduct of Ally’s businesses and operations. If the FRB were to take the position that Ally or any of its subsidiaries have violated any law or commitment or engaged in any unsafe or unsound practice, formal or informal enforcement and other supervisory actions could be taken by the FRB against Ally, its subsidiaries, and institution-affiliated parties (such as directors, officers, and agents). The UDFI and the FDIC have similarly expansive authorities and powers over Ally Bank and its subsidiaries. For example, any of these
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governmental authorities could order us to cease and desist from engaging in specified activities or practices or could affirmatively compel us to correct specified violations or practices. Some or all of these government authorities also would have the power, as applicable, to issue administrative orders against us that can be judicially enforced, to direct us to increase capital and liquidity, to limit our dividends and other capital distributions, to restrict or redirect the growth of our assets, businesses, and operations, to assess civil money penalties against us, to remove our officers and directors, to require the divestiture or the retention of assets or entities, to terminate deposit insurance, or to force us into bankruptcy, conservatorship, or receivership. These actions could directly affect not only Ally, its subsidiaries, and institution-affiliated parties but also Ally’s counterparties, stockholders, and creditors and its commitments, arrangements, and other dealings with them.
In addition, the CFPB has broad authorities and powers to enforce federal consumer-protection laws involving financial products and services. The CFPB has exercised these authorities and powers through public enforcement actions, lawsuits, and consent orders and through nonpublic enforcement actions. In doing so, the CFPB has generally sought remediation of harm alleged to have been suffered by consumers, civil money penalties, and changes in practices and other conduct.
The SEC, FINRA, the Department of Justice, state attorneys general, and other domestic or foreign governmental authorities also have an array of means at their disposal to regulate and enforce matters within their jurisdiction that could impact Ally’s businesses and operations.
Basel Capital Framework
The FRB and other U.S. banking agencies have adopted risk-based and leverage capital standards that establish minimum capital-to-asset ratios for BHCs, like Ally, and depository institutions, like Ally Bank.
The risk-based capital ratios are based on a banking organization’s RWAs, which are generally determined under the standardized approach applicable to Ally and Ally Bank by (1) assigning on-balance-sheet exposures to broad risk-weight categories according to the counterparty or, if relevant, the guarantor or collateral (with higher risk weights assigned to categories of exposures perceived as representing greater risk), and (2) multiplying off-balance-sheet exposures by specified credit conversion factors to calculate credit equivalent amounts and assigning those credit equivalent amounts to the relevant risk-weight categories. The leverage ratio, in contrast, is based on an institution’s average unweighted on-balance-sheet exposures.
In December 2010, the Basel Committee reached an agreement on the global Basel III capital framework, which was designed to increase the quality and quantity of regulatory capital and to strengthen the regulation, supervision, and risk management of banking organizations. In July 2013, the U.S. banking agencies finalized U.S. Basel III, including the implementation of related provisions of the Dodd-Frank Act. We became subject to U.S. Basel III on January 1, 2015, although a number of its provisions—including capital buffers and certain regulatory capital deductions—were subject to a phase-in period through December 31, 2018.
Under U.S. Basel III, Ally and Ally Bank must maintain a minimum Common Equity Tier 1 risk-based capital ratio of 4.5%, a minimum Tier 1 risk-based capital ratio of 6%, and a minimum total risk-based capital ratio of 8%. In addition to these minimum risk-based capital ratios, Ally and Ally Bank are subject to a capital conservation buffer requirement, which for Ally was 3.5% and for Ally Bank was 2.5% as of December 31, 2020. Failure to maintain more than the full amount of the capital conservation buffer requirement would result in restrictions on the ability of Ally and Ally Bank to make capital distributions, including dividend payments and stock repurchases and redemptions, and to pay discretionary bonuses to executive officers. U.S. Basel III also subjects Ally and Ally Bank to a minimum Tier 1 leverage ratio of 4%.
Prompted by the enactment of the EGRRCP Act, the FRB and other U.S. banking agencies tailored the capital and liquidity requirements that apply to large U.S. banking organizations. Refer to the section above titled Bank Holding Company, Financial Holding Company, and Depository Institution Status for additional information. In March 2020, the FRB issued a final rule to more closely align forward-looking stress testing results with the FRB’s non-stress regulatory capital requirements for BHCs with $100 billion or more in total consolidated assets and other specified companies. The final rule introduced a stress capital buffer requirement based on firm-specific stress test performance and planned dividends, which for Ally replaced the fixed 2.5% component of the capital conservation buffer requirement. The final rule also made several changes to the CCAR process, such as eliminating the CCAR quantitative objection, narrowing the set of planned capital actions assumed to occur in the stress scenario, assuming that a firm maintains a constant level of assets over the planning horizon, eliminating the 30% dividend payout ratio as a criterion for heightened scrutiny of a firm’s capital plan, and allowing a firm to make capital distributions in excess of those included in its capital plan if the firm is otherwise in compliance with the automatic distribution limits of the capital framework. The final rule became effective on May 18, 2020, and therefore applied to the 2020 CCAR process. Under the final rule, Ally’s stress capital buffer requirement is the greater of 2.5% and the result of the following calculation: (1) the difference between Ally’s starting and minimum projected Common Equity Tier 1 capital ratios under the severely adverse scenario in the supervisory stress test, plus (2) the sum of the dollar amount of Ally’s planned common stock dividends for each of the fourth through seventh quarters of its nine-quarter capital planning horizon, as a percentage of risk-weighted assets. For a Category IV firm like Ally, the capital conservation buffer requirement comprises the stress capital buffer requirement. The capital conservation buffer requirement applicable to Ally’s depository-institution subsidiary, Ally Bank, continues to be a fixed 2.5%. Ally received its first preliminary stress capital buffer requirement from the FRB on June 25, 2020, which was determined under this new methodology to be 3.5%, was finalized on August 10, 2020, and became effective on October 1, 2020. On June 25, 2020, the FRB also announced its determination that changes in financial markets or the macroeconomic outlook could have a material effect on the risk profiles and financial conditions of firms subject to the capital-plan rule and that, as a result, the firms (including Ally) would be required to resubmit capital plans to the FRB within 45 days after receiving updated stress scenarios from the FRB.
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On September 17, 2020, the FRB released two updated scenarios—severely adverse and alternative severe. We updated our capital plan in light of firm-specific baseline and stress scenarios, as required, and submitted our updated plan to the FRB on November 2, 2020. On December 18, 2020, the FRB publicly disclosed summary results of this second round of supervisory stress testing and extended its deadline for notifying firms about whether their stress capital buffer requirements will be recalculated to March 31, 2021. It is possible that this resubmission process may result in a change in Ally’s stress capital buffer requirement and, consequently, its capital conservation buffer requirement.
Under the capital conservation buffer requirement, the maximum amount of capital distributions and discretionary bonus payments that can be made by a banking organization, such as Ally or Ally Bank, is a function of its eligible retained income. During the COVID-19 pandemic, the FRB and other U.S. banking agencies expressed a concern that the definition of eligible retained income would not limit distributions in the gradual manner intended but instead could do so in a sudden and severe manner even if a banking organization were to experience only a modest reduction in its capital ratios. As a result, to better allow a banking organization to use its capital buffer as intended and continue lending in adverse conditions, the U.S. banking agencies issued an interim final rule that became effective on March 20, 2020, and revised the definition of eligible retained income to the greater of (1) a banking organization’s net income for the four preceding calendar quarters, net of any distributions and associated tax effects not already reflected in net income, and (2) the average of a banking organization’s net income over the preceding four quarters. This interim final rule was adopted as final with no changes effective January 1, 2021.
U.S. Basel III also revised the eligibility criteria for regulatory capital instruments and provides for the phase-out of instruments that had previously been recognized as capital but that do not satisfy these criteria. For example, subject to certain exceptions (such as certain debt or equity issued to the U.S. government under the Emergency Economic Stabilization Act), trust preferred and other hybrid securities were excluded from a BHC’s Tier 1 capital as of January 1, 2016. Also, subject to a phase-in schedule, certain items are deducted from Common Equity Tier 1 capital under U.S. Basel III that had not previously been deducted from regulatory capital, and certain other deductions from regulatory capital have been modified. Among other things, U.S. Basel III requires investments in the capital instruments of unconsolidated financial institutions, MSAs, and certain DTAs that individually exceed a specified threshold to be deducted from Common Equity Tier 1 capital. U.S. Basel III also revised the standardized approach for calculating RWAs by, among other things, modifying certain risk weights and the methods for calculating RWAs for certain types of assets and exposures.
In July 2019, the FRB and other U.S. banking agencies issued a final rule to simplify the capital treatment for MSAs, certain DTAs, and investments in the capital instruments of unconsolidated financial institutions (collectively, threshold items). Prior to the final rule taking effect, banking organizations deducted from capital amounts of threshold items that individually exceeded 10% of Common Equity Tier 1 capital. The aggregate amount of threshold items not deducted under the 10% threshold deduction but that nonetheless exceeded 15% of Common Equity Tier 1 capital minus certain deductions from and adjustments to Common Equity Tier 1 capital were also deducted. Any amount of these MSAs and certain DTAs not deducted from Common Equity Tier 1 capital were risk weighted at 100%. The final rule removed the individual and aggregate deduction thresholds for threshold items and adopted a single 25% Common Equity Tier 1 capital deduction threshold for each item individually, and required that any of the threshold items not deducted be risk weighted at 250%. The final rule also simplified the calculation methodology for minority interests. These provisions took effect for us on April 1, 2020, and did not have a material impact on our capital position.
Ally and Ally Bank are subject to the U.S. Basel III standardized approach for counterparty credit risk but not to the U.S. Basel III advanced approaches for credit risk or operational risk. Ally is also not subject to the U.S. market-risk capital rule, which applies only to banking organizations with significant trading assets and liabilities.
The risk-based capital ratios and the Tier 1 leverage ratio play a central role in PCA, which is an enforcement framework used by the U.S. banking agencies to constrain the activities of depository institutions based on their levels of regulatory capital. Five categories have been established using thresholds for the Common Equity Tier 1 risk-based capital ratio, the Tier 1 risk-based capital ratio, the total risk-based capital ratio, and the Tier 1 leverage ratio: well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized, and critically undercapitalized. FDICIA generally prohibits a depository institution from making any capital distribution, including any payment of a cash dividend or a management fee to its BHC, if the depository institution would become undercapitalized after the distribution. An undercapitalized institution is also subject to growth limitations and must submit and fulfill a capital restoration plan. While BHCs are not subject to the PCA framework, the FRB is empowered to compel a BHC to take measures—such as the execution of financial or performance guarantees—when PCA is required in connection with one of its depository-institution subsidiaries. In addition, under FDICIA, only well-capitalized and, with a waiver from the FDIC, adequately capitalized institutions may accept brokered deposits, and even adequately capitalized institutions are subject to some restrictions on the rates they may offer for brokered deposits. At December 31, 2020, Ally Bank was well capitalized under the PCA framework.
At December 31, 2020, Ally and Ally Bank were in compliance with their regulatory capital requirements. For an additional discussion of capital adequacy requirements, refer to Note 20 to the Consolidated Financial Statements.
On January 1, 2020, we adopted CECL, which is further described in Note 1 to the Consolidated Financial Statements. In December 2018, the FRB and other U.S. banking agencies approved a final rule to address the impact of CECL on regulatory capital by allowing BHCs and banks, including Ally, the option to phase in the day-one impact of CECL over a three-year period. In March 2020, the FRB and other U.S. banking agencies issued an interim final rule that became effective on March 31, 2020, and that provides BHCs and banks with an alternative option to temporarily delay an estimate of the impact of CECL, relative to the incurred loss methodology for estimating the allowance for loan losses, on regulatory capital. The interim final rule was clarified and adjusted in a final rule that became effective
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September 30, 2020. We have elected this alternative option instead of the one described in the December 2018 rule. As a result, under the final rule, we will delay recognizing the estimated impact of CECL on regulatory capital until after a two-year deferral period, which for us extends through December 31, 2021. Beginning on January 1, 2022, we will be required to phase 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. The estimated impact of CECL on regulatory capital that we will defer and later phase in is calculated as the entire day-one impact at adoption plus 25% of the subsequent change in allowance during the two-year deferral period. As of December 31, 2020, the total deferred impact on Common Equity Tier 1 capital related to our adoption of CECL was $1.2 billion.
In December 2017, the Basel Committee approved revisions to the global Basel III capital framework (commonly known as Basel IV), many of which—if adopted in the United States—could heighten regulatory capital standards. In March 2020, to better allow banking organizations to focus their resources on navigating the COVID-19 pandemic, the implementation date of these revisions was delayed by the Basel Committee from January 1, 2022, to January 1, 2023. At this time, how the revisions will be harmonized and finalized in the United States is not clear or predictable.
Insured Depository Institution Status
Ally Bank is an insured depository institution and, as such, is required to file periodic reports with the FDIC about its financial condition. Total assets of Ally Bank were $172.0 billion and $167.5 billion at December 31, 2020, and 2019, respectively.
Ally Bank’s deposits are insured by the FDIC in the standard insurance amounts per depositor for each account ownership category as prescribed by the FDI Act. Deposit insurance is funded through assessments on Ally Bank and other insured depository institutions, and the FDIC may take action to increase insurance premiums if the DIF is not funded to its regulatory-mandated Designated Reserve Ratio (DRR). Currently, the FDIC is required to maintain a DRR of 1.35% under the FDI Act. In 2020, due to extraordinary growth in insured deposits after the start of the COVID-19 pandemic, the DIF reserve ratio fell below the 1.35% statutory minimum. The FDI Act requires that the FDIC adopt a restoration plan when the DIF reserve ratio falls below 1.35% or is expected to do so within six months. The plan must restore the DIF reserve ratio to at least 1.35% within eight years, absent extraordinary circumstances. On September 15, 2020, the FDIC announced its restoration plan, projecting the DIF reserve ratio to return to a level above 1.35% without any increase to the deposit insurance assessment rate schedule while committing to closely monitor economic conditions, the health of the banking sector, and deposit-growth trends. Under the Dodd-Frank Act, the FDIC assesses premiums from each institution based on its average consolidated total assets minus its average tangible equity, while utilizing a scorecard method to determine each institution’s risk to the DIF. In June 2020, the FDIC approved a final rule that mitigates the deposit insurance assessment effects of participating in the Paycheck Protection Program, the Paycheck Protection Program Liquidity Facility, and the Money Market Mutual Fund Liquidity Facility.
If an insured depository institution like Ally Bank were to become insolvent or if other specified events were to occur relating to its financial condition or the propriety of its actions, the FDIC may be appointed as conservator or receiver for the institution. In that capacity, the FDIC would have the power to (1) transfer assets and liabilities of the institution to another person or entity without the approval of the institution’s creditors; (2) require that its claims process be followed and to enforce statutory or other limits on damages claimed by the institution’s creditors; (3) enforce the institution’s contracts or leases according to their terms; (4) repudiate or disaffirm the institution’s contracts or leases; (5) seek to reclaim, recover, or recharacterize transfers of the institution’s assets or to exercise control over assets in which the institution may claim an interest; (6) enforce statutory or other injunctions; and (7) exercise a wide range of other rights, powers, and authorities, including those that could impair the rights and interests of all or some of the institution’s creditors. In addition, the administrative expenses of the conservator or receiver could be afforded priority over all or some of the claims of the institution’s creditors, and under the FDI Act, the claims of depositors (including the FDIC as subrogee of depositors) would enjoy priority over the claims of the institution’s unsecured creditors.
Investments in Ally
Because Ally Bank is an insured depository institution and Ally and IB Finance are BHCs, direct or indirect control of us—whether through the ownership of voting securities, influence over management or policies, or other means—is subject to approvals, conditions, and other restrictions under federal and state laws. Refer to the section above titled Bank Holding Company, Financial Holding Company, and Depository Institution Status for additional information. These laws may differ in their purposes, definitions and presumptions of control, and restrictions, which for example is the case for the BHC Act and the Change in Bank Control Act. Investors are responsible for ensuring that they do not, directly or indirectly, acquire control of us in contravention of these laws.
Asset-Backed Securitizations
Section 941 of the Dodd-Frank Act requires securitizers of different types of asset-backed securitizations, including transactions backed by residential mortgages, commercial mortgages, and commercial, credit card, and automotive loans, to retain no less than five percent of the credit risk of the assets being securitized, subject to specified exceptions. Federal regulatory agencies issued final rules implementing this risk-retention requirement in October 2014, with compliance required for residential-mortgage securitizations beginning December 24, 2015, and for other securitizations beginning December 24, 2016.
Insurance Companies
Some of our insurance operations—including in the United States, Canada, and Bermuda—are subject to certain minimum aggregate capital requirements, net asset and dividend restrictions under applicable state and foreign insurance laws, and the rules and regulations promulgated by various U.S. and foreign regulatory agencies. Under various state and foreign insurance laws, dividend distributions may be
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made only from statutory unassigned surplus with approvals required from the regulatory authorities for dividends in excess of certain statutory limitations. Our insurance operations are also subject to applicable state and foreign laws generally governing insurance companies, as well as laws addressing products that are not regulated as insurance, such as VSCs and GAP waivers.
Mortgage Finance
Our mortgage business is subject to extensive federal, state, and local laws, including related judicial and administrative decisions. These laws, among other things, impose licensing obligations and financial requirements; limit the interest rates, finance charges, and other fees that can be charged; regulate the use of credit reports and the reporting of credit information; impose underwriting requirements; regulate marketing techniques and practices; require the safeguarding of nonpublic information about customers; and regulate servicing practices, including in connection with assessments, collection and foreclosure activities, claims handling, and investment and interest payments on escrow accounts. The laws applicable to the mortgage business are complex and subject to change and to changes in interpretation and enforcement. Further, many existing laws were enacted without anticipating all of the technological and related innovations utilized by financial-technology firms and the financial-services companies that partner with them in the origination and servicing of mortgage loans, and as a result, the application of these legal frameworks is not always clear and can be subject to wide supervisory and enforcement discretion.
Through our direct-to-consumer mortgage offering, we offer a variety of jumbo and conforming fixed- and adjustable-rate mortgage products with the assistance of BMC. Jumbo mortgage loans are generally held on our balance sheet, accounted for as held-for-investment, and serviced by Cenlar FSB. Conforming mortgage loans are generally originated as held-for-sale and then sold to BMC, which in turn may sell the loans to the Federal National Mortgage Association (Fannie Mae), the Federal Home Loan Mortgage Corporation (Freddie Mac), or other participants in the secondary mortgage market. The nature and dynamics of this market, however, continue to evolve in ways that are often neither clear nor predictable. For example, Fannie Mae and Freddie Mac have been in conservatorship since September 2008. While the Federal Housing Finance Agency has published and pursued strategic goals for these government-sponsored enterprises during the conservatorship, their role in the market remains subject to uncertainty. Relatedly, during this same period, Congress has debated comprehensive housing-finance reform, but proposed legislation has yet to be meaningfully advanced.
Ally Invest Subsidiaries
Ally Invest Securities LLC (Ally Invest Securities) is registered as a bank holding company (BHC)securities broker-dealer with the SEC and in all 50 states, the District of Columbia, and Puerto Rico, is registered with the Municipal Securities Rulemaking Board as a municipal securities broker-dealer, and is a member of FINRA and the Securities Investor Protection Corporation (SIPC). As a result, Ally Invest Securities and its personnel are subject to extensive requirements under the Securities Exchange Act of 1934, as amended (Exchange Act), SEC regulations, SRO rules, and state laws, which collectively cover all aspects of the firm’s securities activities—including sales and trading practices, capital adequacy, recordkeeping, privacy, anti-money laundering, financial and other reporting, supervision, misuse of material nonpublic information, conduct of its business in accordance with just and equitable principles of trade, and personnel qualifications. The firm operates as an introducing broker and clears all transactions, including all customer transactions, through a third-party clearing broker-dealer on a fully disclosed basis.
Ally Invest Forex LLC (Ally Invest Forex) is registered with the U.S. Commodity Futures Trading Commission (CFTC) as an introducing broker and is a member of the National Futures Association (NFA), which is the primary SRO for the U.S. futures industry. The firm is subject to similarly expansive requirements under the Commodity Exchange Act, CFTC and NFA rules governing introducing brokers and their personnel, and CFTC retail forex rules.
Ally Invest Advisors Inc. (Ally Invest Advisors) is registered as an investment adviser with the SEC. As a result, the firm is subject to a host of requirements governing investment advisers and their personnel under the Investment Advisers Act of 1940, as amended, and related rules and regulations, including certain fiduciary and other obligations with respect to its relationships with its investment advisory clients.
Regulators conduct periodic examinations of Ally Invest Securities, Ally Invest Forex, and Ally Invest Advisors and regularly review reports that the firms are required to submit on an ongoing basis. Violations of relevant regulatory requirements could result in adverse consequences for the firms and their personnel, including censure, penalties and fines, the issuance of cease-and-desist orders, and restriction, suspension or expulsion from the securities industry.
Other Laws
Ally is subject to numerous federal, state, and local statutes, regulations, and other laws, and the possibility of violating applicable law presents ongoing compliance, operational, reputation, and other risks to Ally. Some of the other more significant laws to which we are subject include:
•Privacy and Data Security — The GLB Act and related regulations impose obligations on financial institutions to safeguard specified consumer information maintained by them, to provide notice of their privacy practices to consumers in specified circumstances, and to allow consumers to opt out of specified kinds of information sharing with unaffiliated parties. Related regulatory guidance also directs financial institutions to notify consumers in specified cases of unauthorized access to sensitive consumer information. In addition, most states have enacted laws requiring notice of specified cases of unauthorized access to information. In February 2017, the NYDFS adopted expansive cybersecurity regulations that require regulated entities to establish cybersecurity programs and policies, to designate chief information security officers, to comply with notice and reporting obligations, and to take other actions in connection with the security of their information. On January 1, 2020, a comprehensive privacy law went into effect in the State of California, requiring regulated entities to establish measures to identify, manage, secure, track, produce, and delete personal information.
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In December 2020, the U.S. banking agencies released a proposed rule to establish notification requirements for banking organizations in connection with significant computer security incidents. Under the proposal, a BHC, such as Ally, and a state-chartered bank that is a member of the Federal Reserve System, such as Ally Bank, would be required to notify the FRB within 36 hours of incidents that could result in the banking organization’s inability to deliver services to a material portion of its customer base, could jeopardize the viability of key operations of the banking organization, or could impact the stability of the financial sector. The effects on Ally and Ally Bank will depend on the content of the final rule and the manner of its implementation.
•Volcker Rule — Under the Dodd-Frank Act and implementing regulations of the CFTC, the FDIC, the FRB, the Office of the Comptroller of the Currency, and the SEC (collectively, the Volcker Rule), insured depository institutions and their affiliates are prohibited from (1) engaging in proprietary trading, and (2) investing in or sponsoring certain types of funds (covered funds) subject to limited exceptions. The final rules contain exemptions for market-making, hedging, underwriting, and trading in U.S. government and agency obligations and also permit the retention of ownership interests in certain types of funds and the offering and sponsoring of funds under certain conditions. In early 2017, the FRB granted us a five-year extension to conform with requirements related to certain covered-fund activities. Effective January 1, 2020, the regulatory agencies amended the proprietary-trading provisions in the Volcker Rule to simplify and streamline compliance requirements for firms that do not have significant trading activity, such as Ally. In addition, effective October 1, 2020, the regulatory agencies amended the covered-fund provisions in the Volcker Rule to clarify and streamline their application and to permit banking entities to engage in activities that do not raise concerns that the Volcker Rule was intended to address, including in connection with specified credit funds, venture-capital funds, family-wealth-management vehicles, and customer-facilitation vehicles.
•Fair Lending Laws — The Equal Credit Opportunity Act, the Fair Housing Act, and similar fair-lending laws (collectively, Fair Lending Laws) generally prohibit a creditor from discriminating against an applicant or borrower in any aspect of a credit transaction on the basis of specified characteristics known as prohibited bases such as race, gender, and religion. Creditors are also required under the Fair Lending Laws to follow a number of highly prescriptive rules, including rules requiring credit decisions to be made promptly, notices of adverse actions to be given, and, in the case of mortgage lenders of a certain size, anonymized data and information about mortgage applicants and credit decisions to be gathered and made publicly available.
•Fair Credit Reporting Act — The Fair Credit Reporting Act regulates the dissemination of credit reports by credit reporting agencies, requires users of credit reports to provide specified notices to the subjects of those reports, imposes standards on the furnishing of information to credit reporting agencies, obligates furnishers to maintain reasonable procedures to deal with the risk of identity theft, addresses the sharing of specified kinds of information with affiliates and third parties, and regulates the use of credit reports to make preapproved offers of credit and insurance to consumers.
•Truth in Lending Act — The Truth in Lending Act (TILA) and Regulation Z, which implements TILA, require lenders to provide borrowers with uniform, understandable information about the terms and conditions in certain credit transactions. These rules apply to Ally and its subsidiaries when they extend credit to consumers and require, in the case of certain loans, conspicuous disclosure of the finance charge and annual percentage rate, as applicable. In addition, if an advertisement for credit states specific credit terms, Regulation Z requires that the advertisement state only those terms that actually are or will be arranged or offered by the creditor together with specified notices. The CFPB in recent years has issued substantial amendments to the mortgage requirements under Regulation Z, and additional changes are likely in the future. Amendments to Regulation Z and Regulation X, which implements the Real Estate Settlement Procedures Act, require integrated mortgage loan disclosures to be provided for applications received on or after October 3, 2015.
•Sarbanes-Oxley Act — The Sarbanes-Oxley Act of 2002 implemented a broad range of corporate-governance and accounting measures designed to improve the accuracy, reliability, and transparency of corporate financial reporting and disclosures and to reinforce the importance of corporate ethical standards. Among other things, this law provided for (1) the creation of an independent accounting oversight board; (2) auditor independence provisions that restrict non-audit services that accountants may provide to their audit clients; (3) additional corporate governance and responsibility measures including the requirement that the principal executive and financial officers certify financial statements; (4) the potential forfeiture of bonuses or other incentive-based compensation and profits from the sale of an issuer’s securities by directors and senior officers in the 12 month period following initial publication of any financial statements that later require restatement; (5) an increase in the oversight and enhancement of certain requirements relating to audit committees and how they interact with the independent auditors; (6) requirements that audit committee members must be independent and are barred from accepting consulting, advisory, or other compensatory fees from the issuer; (7) requirements that companies disclose whether at least one member of the audit committee is a “financial expert” (as defined by the SEC) and, if not, why the audit committee does not have a financial expert; (8) a prohibition on personal loans to directors and officers, except certain loans made by insured financial institutions, on non-preferential terms and in compliance with other bank regulatory requirements; (9) disclosure of a code of ethics; (10) requirements that management assess the effectiveness of internal control over financial reporting and that the independent registered public accounting firm attest to the assessment; and (11) a range of enhanced penalties for fraud and other violations.
•USA PATRIOT Act/Anti-Money-Laundering Requirements— In 2001, the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act (USA PATRIOT Act) was signed into law. Title III of the USA PATRIOT Act amends the Bank Secrecy Act and contains provisions designed to detect and prevent the use of the U.S. financial system for money laundering and terrorist financing activities. In January 2021, the Bank Secrecy Act was further
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amended by the Anti-Money Laundering Act of 2020 (AMLA), which comprehensively reforms and modernizes U.S. anti-money-laundering laws. The Bank Secrecy Act, as amended by the USA PATRIOT Act and the Anti-Money Laundering Act of 2020, generally requires banks, certain other financial institutions, and, in certain cases, BHCs to undertake activities including maintaining an anti-money-laundering program, verifying the identity of clients, monitoring for and reporting on suspicious transactions, reporting on cash transactions exceeding specified thresholds, and responding to certain requests for information by regulatory authorities and law enforcement agencies. In addition, the AMLA codifies a risk-based approach to anti-money-laundering compliance for financial institutions, requires the U.S. Treasury Department to develop standards for evaluating technology and internal processes for Bank Secrecy Act compliance, directs the Financial Crimes Enforcement Network (FinCEN) to establish a registration database of beneficial-ownership information that designated companies will be required to report, and expands enforcement- and investigation-related authority and available sanctions for specified Bank Secrecy Act violations. Many provisions of the AMLA will require additional rulemakings, reports, and other measures, and the impact of the AMLA will depend at least in part on their development and implementation.
•Community Reinvestment Act — Under the CRA, a bank has a continuing and affirmative obligation, consistent with the safe and sound operation of the institution, to help meet the credit needs of its entire community, including low- and moderate-income persons and neighborhoods. While the CRA does not establish specific lending requirements or programs, banks are rated on their performance in meeting the needs of their communities. In its most recent performance evaluation in 2020, Ally Bank received an “Outstanding” rating. In January 2020, Ally Bank began operating under a new three-year CRA strategic plan approved by the FRB. Failure by Ally Bank to maintain a “Satisfactory” or better rating under the CRA may adversely affect our ability to expand our financial and related activities as an FHC or make acquisitions. Refer to the section above titled Bank Holding Company, ActFinancial Holding Company, and Depository Institution Status for additional information. In September 2020, the FRB issued an advance notice of 1956,proposed rulemaking on an approach to modernize the regulations that implement the CRA by strengthening, clarifying, and tailoring them to reflect the current banking landscape and better meet the core purpose of the CRA, including by tailoring performance tests and assessments to account for differences in bank sizes and business models.
Human Capital
Our employees are integral to the success of our business, and central to our strategy is attracting, developing, and retaining talented individuals with the right skills to drive our business forward. We emphasize a working environment and company culture that embrace diverse talents, backgrounds, and perspectives and where colleagues feel valued as amended, both individuals and members of the team. We had approximately 9,500 and 8,700 employees at December 31, 2020, and 2019, respectively, which consist primarily of full-time employees in the United States. Our employee growth for the year ended December 31, 2020, was primarily attributable to our focus on supporting customers through expanded servicing within our Automotive Finance business and enhanced digital capabilities. Some of our key objectives, programs, and initiatives that are designed to attract, develop, and retain talent are detailed below.
Culture
We recognize the long-term success of our Company is underpinned by the strength of our purpose-driven culture— a culture that sets us apart from the competition and gives us a distinct competitive advantage as we recruit and retain talented teammates. Our people-first approach enables a winning customer-centric philosophy focused on resiliency, adaptability, and a growth-mindset-oriented drive to “Be (Even) Better.” We strive to uphold our mantra to “Do it Right” through decisions and deeds at all levels of the organization, and we collectively commit to work with integrity and accountability and to uphold our LEAD core values in the workplace, in the marketplace, and in the community. Our culture is driven by our “LEAD” core values, where we emphasize that employees.
•[L]ook externally – We strive to meet and exceed the needs of our customers with agility, speed, and innovation. We continually evolve, respond quickly, and deliver a superior customer experience.
•[E]xecute with excellence – Good enough is never enough. With a focus on continuous improvement, our actions are driven by sound analysis and an intense focus on excellence.
•[A]ct with professionalism – We operate with integrity, hold ourselves and each other accountable, treat others with respect, and embrace diversity and inclusion. This is the cornerstone to our long-term success and at the very foundation of what it means to be an ally.
•[D]eliver results – We are passionate about winning – for our customers, our teams, and our company. Success is measured at both the outcome and the path to achieve it.
Diversity and Inclusion
We believe the best ideas come from a collective mixture of different voices and perspectives. We are an equal opportunity employer, and we strive for an inclusive work environment where all backgrounds, experiences, interests, viewpoints, and skills are respected, appreciated, and encouraged consistent with our culture. We are focused on diverse representation and retention in the workforce—including different genders, races, nationalities, sexual orientations, and other identities—across all levels of the organization from entry to leadership. Fostering these diverse perspectives is important and reflects the beliefs and actions that are the backbone of our culture.
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We have a deliberate focus on D&I. Its importance starts at the top with our CEO, who consistently stresses the value in leveraging our differences. In June 2017, our CEO was among the first 150 CEOs who signed on to the CEO Action Pledge for Diversity and Inclusion, and this commitment has been renewed every year since. In connection with nationwide movements against systemic racism and social injustices during 2020, our Board and Executive Council publicly pledged our continuing support for Black and Brown colleagues, suppliers, partners, and communities in the promotion of equity and equality.
In 2017, we launched a D&I Council, which provides executive leadership on D&I and promotes belonging at Ally and in our communities. In 2020, we further enhanced our commitment to D&I with a financial holdingand social inclusion roadmap that includes specific objectives. The framework is built upon four pillars: Community, Customers, Employees, and Suppliers.
•Community: Further social justice and address disparate systems and policies through an intentional approach to its philanthropy, volunteerism, board service as well as CRA initiatives including loans, investments, and partnerships.
•Employees: Increase representation and retention of Black and Brown employees at professional, managerial, and executive levels through intentional programming and support.
•Customers: Enable financial and social inclusion through our culture of customer obsession, developing education and/or solutions to strengthen economic mobility for all.
•Suppliers: Actively promote ways diverse businesses can engage and succeed within the Ally Supply Chain.
We take deliberate steps to weave D&I through all of Ally’s human capital efforts: from pipelining candidates, onboarding, all the way through the employee lifecycle. With this approach, we have been able to build on our “One Ally” culture to celebrate the differences that our employees bring to the workplace. In 2020, we held Learn (In)clusion sessions, which are deeper dives on topics for our managers to learn the impacts of unconscious bias. Every employee has a specific culture-related performance objective, which includes a strong focus on D&I. Additionally, for all executive leaders, annual performance objectives and reviews include a specific focus on mobility and diversity trends within the workforce. The importance of D&I is also consistently reinforced by executive leadership through town hall meetings, employee communications, and active participation in our ERGs. A diverse and inclusive workforce makes us stronger, more agile, more innovative, and more adaptable. We believe it makes us better and benefits us from financial, operational, and cultural perspectives.
We maintain eight ERGs sponsored by members of Ally’s Executive Council. These ERGs consist of: Aliados, Asian/Middle Eastern, Black/African American, Diverse Abilities, Generational, Pride, Veteran, and Women ALLYs. Membership in Ally’s ERGs is voluntary and open to all employees, whether they identify with the ERG or view themselves as an ally to the group. At December 31, 2020, 38% of our workforce belonged to at least one ERG, increasing from 35% as of December 31, 2019. Our objective is to uphold a workplace environment where all employees feel heard and know that they can bring their authentic selves to work every day consistent with our culture.
In 2018, in response to the issue of economic mobility and to further enhance our D&I efforts, we continued to deepen our relationship with TMCF through a number of programs, including the launch of Moguls in the Making, and contributed $1 million to the Smithsonian’s National Museum of African American History and Culture. Moguls in the Making is an annual competition that helps foster opportunities for young, up-and-coming entrepreneurs from our nation’s publicly-supported historically black colleges and universities. In 2019, TMCF honored our CEO as its CEO of the Year. In 2020, we hosted our second annual Moguls in the Making competition, which was held virtually with 50 students working in teams to develop a business plan that took into account COVID-19 and social equity. These experiences help develop skills for future careers, including for the over 20 students who have been offered internships with Ally in 2020. In early 2021, we took additional steps to address inequality of access to careers with long-term growth potential with a $1.3 million commitment in scholarships and programs in partnership with the Congressional Black Caucus Foundation, TMCF, and other professional university groups.
We recognize one way to foster diverse and inclusive perspectives is to safeguard pay equality. We shifted from requests for salary history to salary expectations in our external hiring practices to help in confirming that our compensation is based on market rates for roles, experience, and performance. To the same end, we regularly benchmark our compensation against other companies both within and outside our industry. On February 1, 2021, we established an internal minimum hourly wage for our U.S. employees at $17.
In January 2020, Ally launched its Supplier Diversity program to focus on diversity and inclusion among its supplier base. The Supplier Diversity program includes a proactive business strategy encouraging the use of suppliers owned by U.S.-based minorities, women, LGBTQ, veterans, service-disabled veterans and those with disabilities, and small or disadvantaged businesses defined by local, state, or federal classifications. The program also encourages all Ally third-party suppliers to utilize diverse-owned suppliers and small businesses on a second-tier basis. During 2020, we initiated a second-tier reporting program to capture additional diverse spend associated with Ally’s prime suppliers that are utilizing minority, women, LGBTQ, veteran, disability-owned, and small or disadvantaged businesses to help support Ally. Additionally, in January 2021, Ally hosted its inaugural Supplier Diversity Symposium, engaging more than 40 diverse suppliers in a company-wide networking event with our CEO and other Ally business executives to build relationships and explore opportunities to expand our spend with diverse suppliers.
Engagement
Active engagement is key as we continue to build a company (FHC)where our employees want to work, have purposeful careers, and feel empowered to make a difference. Throughout the year, we leverage a third-party provider to administer confidential, anonymous employee surveys to provide management feedback on key strengths, as well as to identify areas where we can take action to further improve our
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culture and further strengthen our engaged workforce. Our latest company-wide engagement survey in 2020 was responded to by 82% of our employees and had an average employee engagement score of 87 out of 100, as compared to the financial services industry benchmark of 72 out of 100, as measured by our third-party provider. Active employee engagement helps to strengthen our employee retention rate, which was 90.3% for the year ended December 31, 2020.
Learning and Development
We hold numerous programs to invest in the growth and development of our employees. Our employee base receives continuing education courses relevant to our industry through the Ally Learning Center, in addition to on-the-job training related to their function. We have organized a mentor-mentee program as an avenue for our employees to share knowledge, experience, and perspective and to foster the personal and professional growth of one another. We encourage internal mobility among our employees, contributing to 29% of our existing eligible workforce that has been with Ally for at least one year receiving promotions or taking on new roles during the year ended December 31, 2020. We also provide support for continuing education through a tuition reimbursement program, as well as student loan repayment assistance and contributions to employee’s 529 education savings plans. We emphasize career and skill development as part of our annual performance management process, in addition to targeted trainings for management development.
Total Rewards, Health, and Wellness
Our compensation program offers market-competitive base pay and pay-for-performance incentives based on achieving individual and company goals. In addition, our total rewards include competitive holiday and flexible paid-time-off, a 401(k) retirement savings plan with matching and company contributions that can total up to 10% of an employee’s salary per year, as well as other benefits designed to support the personal and professional lives of our employees. Examples of these benefits include paid parental and caregiver leave, adoption and surrogacy assistance, a backup child and adult/elder care program, and an employee assistance program. We also match employee donations to registered nonprofits subject to an annual cap and provide our employees with eight hours of voluntary-time-off to give back in the communities where we work.
We empower our employees to act as founders with an owner’s mindset across all levels of the organization and all parts of the business. In January 2020, we awarded all active, regular Ally employees with 100 restricted stock units, subject to a 3-year cliff vesting schedule, in recognition of our notable accomplishments and to support a founder’s mentality. A second grant of 100 restricted stock units with a 3-year cliff vesting schedule was issued in January 2021. To further encourage the mindset of an owner, we also maintain an employee stock purchase plan that provides employees with the opportunity to purchase Ally stock at a discount.
Supporting and valuing all of our employees is central to our culture. We offer flexible health insurance options including dental and vision for our employees, as well as a pre-tax health savings account with employer contributions. We provide life and disability benefits and manage a wellness program encouraging healthy living with financial rewards.
In response to the COVID-19 pandemic, we provided a range of financial-assistance offerings, including a $1,200 expense payment for those earning less than $100,000. We enhanced existing benefits and introduced new benefits related to COVID-19 and mental health concerns. In May 2020, we launched the Ally Employee Relief Fund with a $250,000 contribution. Including matching contributions by Ally, this fund has been augmented by over $160,000 in additional donations and has helped over 500 of our employees. In August, recognizing the continuing difficulties caused by the pandemic, we paid 50% of the 2020 incentive-compensation targets for most of our non-executive employees in advance of expected year-end amounts.
To curb the spread of COVID-19, we instituted a remote work protocol in mid-March 2020, and as of December 31, 2020, over 99% of our employees continue to work remotely. For those employees who are working at our facilities to address critical business needs, we have implemented a daily health and temperature screening and reconfigured our working environment to allow for social distancing. The health and safety of our employees remain paramount in our decision-making, and our phased reopening of our facilities will be based on viral trends, governmental regulations, and local ordinances.
Additional Information
Our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, and Current Reports on Form 8-K (and amendments to these reports) are available on our internet website, free of charge, as soon as reasonably practicable after the reports are electronically filed with or furnished to the SEC. These reports are available at www.ally.com/about/investor/sec-filings/. These reports can also be found on the SEC website at www.sec.gov.
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Item 1A. Risk Factors
We face many risks and uncertainties, any one or more of which could have a material adverse effect on our business, results of operations, financial condition (including capital and liquidity), or prospects or the value of or return on an investment in Ally. We describe certain of these risks and uncertainties in this section, although we may be adversely affected by other risks or uncertainties that are not presently known to us, that we have failed to appreciate, or that we currently consider immaterial. These risk factors should be read in conjunction with the MD&A in Part II, Item 7 of this report, and the Consolidated Financial Statements and notes thereto. This Annual Report on Form 10-K is qualified in its entirety by these risk factors.
Risks Related to Regulation and Supervision
The regulatory and supervisory environment in which we operate could have an adverse effect on our business, financial condition, results of operations, and prospects.
We are subject to extensive regulatory frameworks and to direct supervision and periodic examinations by various governmental agencies and industry SROs that are charged with overseeing the kinds of business activities in which we engage. This regulatory and supervisory oversight is designed to protect public and private interests—such as macroeconomic policy objectives, financial-market stability and liquidity, and the confidence and security of depositors generally—that may not always be aligned with those of our stockholders or non-deposit creditors. At any given time, we are involved in a number of legal and regulatory proceedings and governmental and regulatory examinations, investigations, and other inquiries. Refer to the section above titled Regulation and Supervision in Part I, Item 1 of this report. In the last decade, governmental scrutiny of the financial-services industry has intensified, fundamental changes have been made to the banking, securities, and other laws that govern financial services, and a multitude of related business practices have been altered. While the scope, intensity, and focus of governmental oversight can vary from time to time, we expect to continue devoting substantial time and resources to risk management, compliance, regulatory-change management, and cybersecurity and other technology initiatives, each of which may adversely affect our ability to operate profitably or to pursue advantageous business opportunities.
Ally has elected to be treated as an FHC, which permits us to engage in a number of financial and related activities—including securities, advisory, insurance, and merchant-banking activities—beyond the business of banking. Ally and Ally Bank are subject to ongoing requirements to qualify as an FHC. If Ally or Ally Bank is found not to be well capitalized or well managed, as defined under applicable law, we can be restricted from engaging in the broader range of financial and related activities permitted for FHCs, including the ability to acquire companies engaged in those activities, and can be required to discontinue these activities or even divest Ally Bank. In addition, if we fail to achieve a satisfactory or better rating under the Gramm-Leach-BlileyCRA, our ability to expand these financial and related activities or make acquisitions could be restricted.
In connection with their continuous supervision and examinations of us, the FRB, the UDFI, the CFPB, the SEC, FINRA, the NYDFS, or other regulatory agencies may require changes in our business or operations. Such a requirement may be judicially enforceable or impractical for us to contest, and if we are unable to comply with the requirement in a timely and effective manner, we could become subject to formal or informal enforcement and other supervisory actions, including memoranda of understanding, written agreements, cease-and-desist orders, and prompt-corrective-action or safety-and-soundness directives. The financial-services industry continues to face scrutiny from supervisory authorities in the examination process, including through an increasing use of horizontal reviews from a broader industry perspective, as well as strict enforcement of laws at federal, state, and local levels, particularly in connection with mortgage-related practices, sales practices and related incentive-compensation programs, and compliance with anti-money-laundering, sanctions, and related laws. In general, the amounts paid by financial institutions in settling proceedings or investigations and the severity of other terms of regulatory settlements are likely to remain elevated. In some cases, governmental authorities have required criminal pleas or other extraordinary terms, including admissions of wrongdoing and the imposition of monitors, as part of settlements. Supervisory actions could entail significant restrictions on our existing business, our ability to develop new business, our flexibility in conducting operations, and our ability to pay dividends or utilize capital. Enforcement and other supervisory actions also can result in the imposition of civil monetary penalties or injunctions, related litigation by private plaintiffs, damage to our reputation, and a loss of customer or investor confidence. We could be required as well to dispose of specified assets and liabilities within a prescribed period of time. As a result, any enforcement or other supervisory action could have an adverse effect on our business, financial condition, results of operations, and prospects.
Our regulatory and supervisory environments—whether at federal, state, or local levels—are not static. No assurance can be given that applicable statutes, regulations, and other laws will not be amended or construed differently, that new laws will not be adopted, or that any of these laws will not be enforced more aggressively. For example, while Congress nullified the CFPB’s guidance about compliance with fair-lending laws in the context of indirect automotive financing, the NYDFS has since adopted arguably more far-reaching guidance on the subject. Changes in the regulatory and supervisory environments could adversely affect us in substantial and unpredictable ways, including by limiting the types of financial services and products we may offer, enhancing the ability of others to offer more competitive financial services and products, restricting our ability to make acquisitions or pursue other profitable opportunities, and negatively impacting our financial condition and results of operations. Further, our noncompliance with applicable laws—whether as a result of changes in interpretation or enforcement, system or human errors, or otherwise—could result in the suspension or revocation of licenses or registrations that we need to operate and in the initiation of enforcement and other supervisory actions or private litigation.
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Our ability to execute our business strategy for Ally Bank may be adversely affected by regulatory constraints.
A primary component of our business strategy is the continued growth of Ally Bank, which is a direct bank with no branch network. This growth includes expanding our consumer and commercial lending and increasing our deposit customers and balances while optimizing our cost of funds. If regulatory agencies raise concerns about any aspect of our business strategy for Ally Bank or the way in which we implement it, we may be obliged to limit or even reverse the growth of Ally Bank or otherwise alter our strategy, which could have an adverse effect on our business, financial condition, results of operations, or prospects. In addition, if we are compelled to retain or shift any of our business activities in or to nonbank affiliates, our funding costs for those activities—such as unsecured funding in the capital markets—could be more expensive than our cost of funds at Ally Bank.
We are subject to stress tests, capital and liquidity planning, and other enhanced prudential standards, which impose significant restrictions and costly requirements on our business and operations.
We are currently subject to enhanced prudential standards that have been established by the FRB, as required or authorized under the Dodd-Frank Act. Refer to the section above titled Regulation and Supervision in Part I, Item 1 of this report. Under the FRB’s tailoring framework for the enhanced prudential standards, Ally is a Category IV firm and, as such, is generally subject to supervisory stress testing on a two-year cycle and is required to submit an annual capital plan to the FRB. The FRB will either object to the plan, in whole or in part, or provide a notice of non-objection. The failure to receive a notice of non-objection from the FRB—whether due to how well our business and operations are forecasted to perform, how capably we execute our capital-planning process, how acutely the FRB projects severely adverse conditions to be, or otherwise—may prohibit us from paying dividends, repurchasing our common stock, or making other capital distributions, may compel us to issue capital instruments that could be dilutive to stockholders, may prevent us from maintaining or expanding lending or other business activities, or may damage our reputation and result in a loss of customer or investor confidence.
Further, we may be required to raise capital if we are at risk of failing to satisfy our minimum regulatory capital ratios or related supervisory requirements, whether due to inadequate operating results that erode capital, future growth that outpaces the accumulation of capital through earnings, changes in regulatory capital standards, changes in accounting standards that affect capital (such as CECL), or otherwise. In addition, we may elect to raise capital for strategic reasons even when we are not required to do so. Our ability to raise capital on favorable terms or at all will depend on general economic and market conditions, which are outside of our control, and on our operating and financial performance. Accordingly, we cannot be assured of being able to raise capital when needed or on favorable terms. An inability to raise capital when needed and on favorable terms could damage the performance and value of our business, prompt supervisory actions and private litigation, harm our reputation, and cause a loss of customer or investor confidence, and if the condition were to persist for any appreciable period of time, our viability as a going concern could be threatened. Even if we are able to raise capital but do so by issuing common stock or convertible securities, the ownership interest of our existing stockholders could be diluted, and the market price of our common stock could decline.
The enhanced prudential standards also require Ally, as a Category IV firm, to conduct quarterly liquidity stress tests, to maintain a buffer of unencumbered highly liquid assets to meet projected net stressed cash outflows over a 30-day planning horizon, to adopt a contingency funding plan that would address liquidity needs during various stress events, and to implement specified liquidity risk management and corporate governance measures. These enhanced liquidity standards could constrain our ability to originate or invest in longer-term or less liquid assets or to take advantage of other profitable opportunities and, therefore, may adversely affect our business, results of operations, and prospects.
Our ability to rely on deposits as a part of our funding strategy may be limited.
Ally Bank is a key part of our funding strategy, and we place great reliance on deposits at Ally Bank as a source of funding. Competition for deposits and deposit customers, however, is fierce and has only intensified with the implementation of enhanced capital and liquidity requirements in the last decade. Ally Bank does not have a branch network but, instead, obtains its deposits through online and other digital channels, from customers of Ally Invest, and through deposit brokers. Brokered deposits may be more price sensitive than other types of deposits and may become less available if alternative investments offer higher returns. Brokered deposits totaled $12.6 billion at December 31, 2020, which represented 9.2% of Ally Bank’s total deposits. In addition, our ability to maintain or grow deposits may be constrained by our lack of in-person banking services, gaps in our product and service offerings, changes in consumer trends, our smaller scale relative to other financial institutions, competition from fintech companies and emerging financial-services providers, any failures or deterioration in our customer service, or any loss of confidence in our brand or our business. Our level of deposits also could be adversely affected by regulatory or supervisory restrictions, including any applicable prior approval requirements or limits on our offered rates or brokered deposit growth, and by changes in monetary or fiscal policies that influence deposit or other interest rates. Perceptions of our existing and future financial strength, rates or returns offered by other financial institutions or third parties, and other competitive factors beyond our control, including returns on alternative investments, will also impact the size of our deposit base.
Requirements under U.S. Basel III that increased the quality and quantity of regulatory capital and future revisions to the Basel III framework may adversely affect our business and financial results.
Ally and Ally Bank became subject to U.S. Basel III on January 1, 2015. Refer to the section above titled Regulation and Supervision in Part I, Item 1 of this report. U.S. Basel III subjects Ally and Ally Bank to higher minimum risk-based capital ratios and a capital conservation buffer above these minimum ratios. Failure to maintain more than the full amount of the capital conservation buffer requirement would result in restrictions on our ability to make capital distributions, including dividend payments and stock repurchases and redemptions, and to pay
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discretionary bonuses to executive officers. U.S. Basel III also has, over time, imposed more stringent deductions for specified DTAs and other assets and limited our ability to meet regulatory capital requirements through the use of trust preferred securities or other hybrid securities.
If Ally or Ally Bank were to fail to satisfy its regulatory capital requirements, significant regulatory sanctions could result, such as a bar on capital distributions, limitations on acquisitions and new activities, restrictions on our acceptance of brokered deposits, a loss of our status as an FHC, or informal or formal enforcement and other supervisory actions. Such a failure also could irrevocably damage our reputation, prompt a loss of customer and investor confidence, generate private litigation, and even lead to our resolution or receivership. Any of these consequences could have an adverse effect on our business, results of operations, financial condition, or prospects.
CECL became effective on January 1, 2020, and substantially increased our allowance for loan losses with a resulting negative day-one adjustment to equity. Refer to Note 1 to the Consolidated Financial Statements and the section above titled Regulation and Supervision in Part I, Item 1 of this report. We are permitted to delay recognizing the estimated impact of CECL on regulatory capital until after a two-year deferral period, which for us extends through December 31, 2021. Beginning on January 1, 2022, we will be required to phase 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. The estimated impact of CECL on regulatory capital that we will defer and later phase in is calculated as the entire day-one impact at adoption plus 25% of the subsequent change in allowance during the two-year deferral period. In addition, the FRB has announced that, in order to reduce uncertainty, the FRB will maintain its current modeling framework for the allowance for loan losses in supervisory stress tests through the 2021 cycle. It is not yet clear whether, taken together, these actions by the U.S. banking agencies will mitigate the impact of CECL to a degree that is sufficient for us to sustain appropriate levels of regulatory capital without meaningfully altering our business, financial, and operational plans, including our current level of capital distributions. If the actions are insufficient, our business, results of operations, financial condition, or prospects could suffer.
In December 2017, the Basel Committee approved revisions to the global Basel III capital framework (commonly known as Basel IV), many of which—if adopted in the United States—could heighten regulatory capital standards. How these revisions will be finalized in the United States and harmonized with other regulatory proposals (such as the stress capital buffer) is not clear or predictable, and no assurance can be provided that they would not further impact our business, results of operations, financial condition, or prospects in an adverse way.
Our business and financial results could be adversely affected by the political environment and governmental fiscal and monetary policies.
A fractious or volatile political environment in the United States, including any related social unrest, could negatively impact business and market conditions, economic growth, financial stability, and business, consumer, investor, and regulatory sentiments, any one or more of which in turn could cause our business and financial results to suffer. In addition, disruptions in the foreign relations of the United States could adversely affect the automotive and other industries on which our business depends and our tax positions and other dealings in foreign countries. We also could be negatively impacted by political scrutiny of the financial-services industry in general or our business or operations in particular, whether or not warranted, and by an environment where criticizing financial-services providers or their activities is politically advantageous.
Our business and financial results are also significantly affected by the fiscal and monetary policies of the U.S. government and its agencies. We are particularly affected by the monetary policies of the FRB, which regulates the supply of money and credit in the United States in pursuit of maximum employment, stable prices, and moderate long-term interest rates. The FRB and its policies influence the availability and demand for loans and deposits, the rates and other terms for loans and deposits, the conditions in equity, fixed-income, currency, and other markets, and the value of securities and other financial instruments. Refer to the risk factor below, titled The levels of or changes in interest rates could affect our results of operations and financial condition, for more information on how the FRB could affect interest rates. These policies and related governmental actions could adversely affect every facet of our business and operations—for example, the new and used vehicle financing market, the cost of our deposits and other interest-bearing liabilities, and the yield on our earning assets. Additionally, changes to tax policies could have a material impact to our results of operations and financial condition. An increase in the federal statutory rate could result in a significant day-one tax expense related to the revaluation of our deferred tax assets and liabilities, and a significant increase in tax expense for future years. Tax and other fiscal policies, moreover, impact not only general economic and market conditions but also give rise to incentives or disincentives that affect how we and our customers prioritize objectives, deploy resources, and run households or operate businesses. Both the timing and the nature of any changes in monetary or fiscal policies, as well as their consequences for the economy and the markets in which we operate, are beyond our control and difficult to predict but could adversely affect us.
If our ability to receive distributions from subsidiaries is restricted, we may not be able to satisfy our obligations to counterparties or creditors, make dividend payments to stockholders, or repurchase our common stock.
Ally is a legal entity separate and distinct from its bank and nonbank subsidiaries and, in significant part, depends on dividend payments and other distributions from those subsidiaries to fund its obligations to counterparties and creditors, its dividend payments to stockholders, and its repurchases of common stock. Refer to the section above titled Regulation and Supervision in Part I, Item 1 of this report. Regulatory or other legal restrictions, deterioration in a subsidiary’s performance, or investments in a subsidiary’s own growth may limit the ability of the subsidiary to transfer funds freely to Ally. In particular, many of Ally’s subsidiaries are subject to laws that authorize their supervisory agencies to block or reduce the flow of funds to Ally in certain situations. In addition, if any subsidiary were unable to remain viable as a
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going concern, Ally’s right to participate in a distribution of assets would be subject to the prior claims of the subsidiary’s creditors (including, in the case of Ally Bank, its depositors and the FDIC).
Legislative or regulatory initiatives on cybersecurity and data privacy could adversely impact our business and financial results.
Cybersecurity and data privacy risks have received heightened legislative and regulatory attention. For example, the U.S. banking agencies have proposed enhanced cyber risk management standards that would apply to us and our service providers and that would address cyber risk governance and management, management of internal and external dependencies, and incident response, cyber resilience, and situational awareness. Several states and their governmental agencies, such as the NYDFS, also have adopted or proposed cybersecurity laws targeting these issues. In addition, a comprehensive privacy law has taken effect in the State of California, requiring regulated entities to establish measures to identify, manage, secure, track, produce, and delete personal information.
Legislation and regulations on cybersecurity and data privacy may compel us to enhance or modify our systems and infrastructure, invest in new systems and infrastructure, change our service providers, augment our scenario and vulnerability testing, or alter our business practices or our policies on security, data governance, and privacy. If any of these outcomes were to occur, our operational costs could increase significantly. In addition, if governmental authorities were to conclude that we or our service providers had not adequately implemented laws on cybersecurity and data privacy or had not otherwise met related supervisory expectations, we could be subject to enforcement and other supervisory actions, related litigation by private plaintiffs, reputational damage, or a loss of customer or investor confidence.
Our business and financial results may be affected by governmental responses to climate change and related environmental issues.
Governments have become increasingly focused on the effects of climate change and related environmental issues. For example, U.S. Treasury Secretary Yellen has identified climate change and its risk to the financial system as a high priority. In addition, the FRB recently became a member of the Network of Central Banks and Supervisors for Greening the Financial System and, in its Financial Stability Report of November 2020, specifically addressed the implications of climate change for markets, financial exposures, financial institutions, and financial stability.
How governments act to mitigate climate and related environmental risks, as well as associated changes in the behavior and preferences of businesses and consumers, could have an adverse effect on our business and financial results. The FRB, for example, may incorporate these risks into its supervisory stress tests and, in doing so, negatively impact us and our future capital plans at least in part because of our concentration in automotive finance. We also could experience a decline in the demand for and value of used gasoline-powered vehicles that secure our loans to dealers and consumers or that we remarket. Further, we may be compelled to change or cease some of our lending or other business practices or our operational processes because of climate- or environmental-driven changes in applicable law or supervisory expectations or due to related political, social, market, or similar pressure. It is possible as well that changes in climate and related environmental risks, perceptions of them, and governmental responses to them may occur more rapidly than we are able to adapt without disrupting our business and impairing our financial results.
Risks Related to Our Business
The COVID-19 pandemic is adversely affecting us and our customers, counterparties, employees, and third-party service providers, and the adverse impacts on our business, financial position, results of operations, and prospects could be significant.
The spread of COVID-19 has created a global public-health crisis that has resulted in the substantial loss of life, with widespread volatility and deteriorations in household, business, economic, and market conditions, including in the United States where we conduct nearly all of our business. The extent of the impact of the COVID-19 pandemic on our capital, liquidity, and other financial positions and on our business, results of operations, and prospects will depend on a number of evolving factors, including:
•The duration, extent, and severity of the pandemic. COVID-19 has not yet been contained and could continue to affect significantly more households and businesses. The duration and severity of the pandemic remain difficult to predict.
•The response of governmental and nongovernmental authorities and the effect on economies and markets. Many governmental and nongovernmental authorities initially responded to COVID-19 by curtailing household and business activity as a containment measure while simultaneously deploying fiscal- and monetary-policy measures to partially mitigate the adverse effects on individual households and businesses. Although this response slowed the rate of spread of COVID-19 and supported economic stability, the number of cases has risen meaningfully at times and remains volatile, and the potential exists for further resurgences to occur, especially during the cold-and-flu season and in the wake of holidays and other times when social gatherings, travel, or vacations are common. In addition, while monetary policy remains highly accommodative, a number of stimulative fiscal programs and actions have expired or been exhausted without renewal as the U.S. government continues to assess whether and how to continue or refine them. Even with COVID-19 vaccinations having begun, national, regional, and local economies and markets could suffer further disruptions that are lasting.
•The effect on our customers, counterparties, employees, and third-party service providers. COVID-19 and its associated consequences and uncertainties are affecting individuals, households, and businesses differently and unevenly. Many, however, have changed their behavior in response to governmental mandates and advisories to restrict or alter commercial and social interactions. As a result, our credit, operational, and other risks have generally been elevated and are expected to remain so—if not increase further—for the foreseeable future.
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During the year ended December 31, 2020, the most notable impact to our results of operations was higher provision expense for credit losses. Our provision expense was $1.4 billion for the year ended December 31, 2020, compared to $998 million during the same period in 2019, with the increase primarily driven by incremental reserves associated with a deterioration in macroeconomic variables such as unemployment during the year ended December 31, 2020. During the year ended December 31, 2020, the provision for credit losses was also impacted by the adoption of CECL, as further described in Note 1 to the Consolidated Financial Statements. For more detail and further discussion on the impact to our business from COVID-19, refer to the section titled COVID-19 Impacts within the MD&A. Given the unpredictability of COVID-19 and its direct and indirect effects, however, our forecast of macroeconomic conditions and operating results—including expected lifetime credit losses on our loan portfolio—is subject to meaningful uncertainty.
As consumers, businesses, and governmental authorities have adapted to evolving conditions, we have observed a recovery in quality loan application volume and resulting booked originations within our Automotive Finance business. For more detail and further discussion, including in connection with our non-automotive businesses, refer to the section titled Significant Business Developments Related to COVID-19 within the MD&A. We cannot yet be confident in the sustainability of these improvements in our business or the trajectory of the macroeconomic outlook—especially with the most recent resurgence of COVID-19 in much of the United States, the discovery of variants of the COVID-19 virus, and ongoing uncertainties around the efficacy, availability, acceptance, and distribution of vaccines and other medical treatments—and the adverse effects on our business, financial position, results of operations, and prospects could be significant as time goes on.
Governments have taken necessary and unprecedented steps to partially mitigate the adverse effects of their actions to contain the spread of COVID-19. For example, in late March 2020, the CARES Act was enacted to inject more than $2 trillion of 1999,financial assistance into the U.S. economy. The FRB has taken decisive and sweeping actions as amendedwell. Since March 15, 2020, these actions have included a reduction in the target range for the federal funds rate to zero to 0.25 percent, a program to purchase an indeterminate amount of Treasury securities and agency mortgage-backed securities, and numerous facilities to support the flow of credit to households and businesses. Still, while monetary policy has remained highly accommodative since the declaration of the pandemic, fiscal stimulus has waned as a meaningful economic rebound developed in the second half of the year and the political environment became more unstable during and after the 2020 elections. While the possibility of further stimulative fiscal-policy measures has become more probable, their potential scope and effect remain highly uncertain. Similarly, while recent developments associated with COVID-19 vaccinations have been promising, the timing and extent of their impact is not predictable.
We also have acted swiftly to support our customers with industry-leading relief programs, while prudently managing our credit risk exposure. For more detail on these relief programs and further discussion, refer to the section titled Risk Management in the MD&A that follows.
The degree to which our actions and those of governments and others will directly or indirectly assist our customers, counterparties, and third-party service providers and advance our business and the economy generally is not yet clear. For example, while our loan-deferral programs may have better positioned customers to make their regular payments to us and enhanced our brand and customer loyalty, our credit performance may still be negatively impacted to the extent that customers depend on a continuation of fiscal-policy measures or other forms of more robust relief. In addition, while the FRB’s accommodative monetary policy may benefit us to some degree by supporting economic activity among our customers, this policy and sudden shifts in it may inhibit our ability to grow or sustain net interest income and effectively manage interest-rate and market risks. Further, while extraordinary governmental intervention in the economy and markets has created stability, the scale of these actions inevitably heightens political, reputational, litigation, and similar risks for financial intermediaries like us.
We are unable to estimate the near-term and ultimate impacts of COVID-19 on our business and operations. The pandemic and its direct and indirect effects could cause us to experience higher credit losses in our lending portfolio, additional increases in our allowance for credit losses, impairment of our goodwill and other financial assets, heightened volatility in and diminished access to capital markets and other funding sources, further reduced demand for our products and services, and other negative impacts on our financial position, results of operations, and prospects. In addition, while we continue to anticipate that our capital and liquidity positions will be sufficient, sustained adverse effects may impair these positions, prevent us from satisfying our minimum regulatory capital ratios and other supervisory requirements, and result in downgrades in our credit ratings. The COVID-19 pandemic and related governmental mandates and advisories also have necessitated changes in the way we and our third-party service providers continue operations—including an extended period of remote work arrangements—and we may face heightened security, information-technology, operational, and similar risks as a result. The length of time we and our third-party service providers may be required to operate under these circumstances, as well as the potential for conditions to worsen or for significant disruptions to occur, remains unpredictable. All of these risks and uncertainties can be expected to persist at least until the pandemic is demonstrably and sustainably contained, authorities cease curbing household and business activity, and consumer and business confidence recover.
Weak or deteriorating economic conditions, failures in underwriting, changes in underwriting standards, financial or systemic shocks, or continued growth in our nonprime or used vehicle financing business could increase our credit risk, which could adversely affect our business and financial results.
Our business is centered around lending and banking with an emphasis on our digital platform, and a significant percentage of our assets are composed of loans, operating leases, and securities. As a result, in the ordinary course of business, credit risk is our most significant risk.
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Our business and financial results depend significantly on household, business, economic, and market conditions. When those conditions are weak or deteriorating, we could simultaneously experience reduced demand for credit and increased delinquencies or defaults, including in the loans that we have securitized and in which we retain a residual interest. These kinds of conditions also could dampen the demand for products and services in our insurance, banking, brokerage, advisory, and other businesses. Increased delinquencies or defaults could also result from our failing to appropriately underwrite loans and operating leases that we originate or purchase or from our adopting—for strategic, competitive, or other reasons—more liberal underwriting standards. If delinquencies or defaults on our loans and operating leases increase, their value and the income derived from them could be adversely affected, and we could incur increased administrative and other costs in seeking a recovery on claims and any collateral. If unfavorable conditions are negatively affecting used vehicle or other collateral values at the same time, the amount and timing of recoveries could suffer as well. Weak or deteriorating economic conditions also may negatively impact the market value and liquidity of our investment securities, and we may be required to record additional impairment charges that adversely affect earnings if debt securities suffer a decline in value that is considered other-than-temporary. There can be no assurance that our monitoring of credit risk and our efforts to mitigate credit risk through risk-based pricing, appropriate underwriting and investment policies, loss-mitigation strategies, and diversification are, or will be, sufficient to prevent an adverse impact to our business and financial results. In addition, because of CECL, our financial results may be negatively affected as soon as weak or deteriorating economic conditions are forecasted and alter our expectations for credit losses. Refer to Note 1 to the Consolidated Financial Statements and the section above titled Regulation and Supervision in Part I, Item 1 of this report. A financial or systemic shock and a failure of a significant counterparty or a significant group of counterparties could negatively impact us as well, possibly to a severe degree, due to our role as a financial intermediary and the interconnectedness of the financial system.
We continue to have exposure to nonprime consumer automotive financing and used vehicle financing. We define nonprime consumer automotive loans primarily as those loans with a FICO® Score (or an equivalent score) at origination of less than 620. Customers that finance used vehicles tend to have lower FICO® Scores as compared to new vehicle customers, and defaults resulting from vehicle breakdowns are more likely to occur with used vehicles as compared to new vehicles that are financed. The carrying value of our nonprime consumer automotive loans before allowance for loan losses was $8.6 billion, or approximately 11.7% of our total consumer automotive loans at December 31, 2020, as compared to $8.4 billion, or approximately 11.6% of our total consumer automotive loans at December 31, 2019. At December 31, 2020, and 2019, $337 million and $214 million, respectively, of nonprime consumer automotive loans were considered nonperforming as they had been placed on nonaccrual status in accordance with our accounting policies. Refer to the Nonaccrual Loans section of Note 1 to the Consolidated Financial Statements for additional information. Additionally, the carrying value of our consumer automotive used vehicle loans before allowance for loan losses was $43.0 billion, or approximately 58.3% of our total consumer automotive loans at December 31, 2020, as compared to $39.7 billion, or approximately 54.9% of our total consumer automotive loans at December 31, 2019. If our exposure to nonprime consumer automotive loans or used vehicle financing continue to increase over time, our credit risk will increase to a possibly significant degree.
As part of the underwriting process, we rely heavily upon information supplied by applicants and other third parties, such as automotive dealers and credit reporting agencies. If any of this information is intentionally or negligently misrepresented and the misrepresentation is not detected before completing the transaction, we may experience increased credit risk.
Our allowance for loan losses may not be adequate to cover actual losses, and we may be required to significantly increase our allowance, which may adversely affect our financial condition and results of operations.
Through the issuance of CECL, the FASB has required the implementation of a new accounting model to measure credit losses for financial assets measured at amortized cost, which includes the vast majority of our finance receivables and loan portfolio. Under this new model, the allowance is established to reserve for management’s best estimate of expected lifetime losses inherent in our finance receivables and loan portfolio. CECL substantially increased our allowance for loan losses with a resulting negative day-one adjustment to equity.
Regulatory agencies periodically review our allowance for loan losses, as well as our methodology and models used for calculating our allowance for loan losses, and from time to time may insist on an increase in the allowance for loan losses or the recognition of additional loan charge-offs based on judgments different than those of management. If these differences in judgment are considerable, our allowance could meaningfully increase and result in a sizable decrease in our net income and capital.
The determination of the appropriate level of the allowance for loan losses inherently involves a high degree of subjectivity and requires us to make significant estimates of current and future credit risks using existing quantitative and qualitative information, all of which may change substantially over time. Changes in economic conditions affecting borrowers, revisions to accounting rules and related guidance, new qualitative or quantitative information about existing loans, identification of additional problem loans, changes in the size or composition of our finance receivables and loan portfolio, changes to our models or loss estimation techniques including consideration of forecasted economic assumptions, and other factors, both within and outside of our control, may require an increase in the allowance for loan losses. For example, our shift to a full credit spectrum consumer automotive finance portfolio over the past several years has resulted in additional increases in our allowance for loan losses, and could result in additional increases in the future. Any increase in the allowance in future periods may adversely affect our financial condition or results of operations.
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We have dealer-centric automotive finance and insurance businesses, and a change in the key role of dealers within the automotive industry or our ability to maintain or build relationships with them could have an adverse effect on our business, results of operations, financial condition, or prospects.
Our Dealer Financial Services business, which includes our Automotive Finance and Insurance segments, depends on the continuation of the key role of dealers within the automotive industry, the maintenance of our existing relationships with dealers, and our creation of new relationships with dealers. Refer to the section titled Our Business in the MD&A that follows.
A number of trends are affecting the automotive industry and the role of dealers within it. These include challenges to the dealer’s role as intermediary between manufacturers and purchasers, shifting financial and other pressures exerted by manufacturers on dealers, the rise of vehicle sharing and ride hailing, the development of autonomous and alternative-energy vehicles, the impact of demographic shifts on attitudes and behaviors toward vehicle ownership and use, changing expectations around the vehicle buying experience, adjustments in the geographic distribution of new and used vehicle sales, and advancements in communications technology. While it is not currently clear how and how quickly these trends may develop, any one or more of them could adversely affect the key role of dealers and their business models, profitability, and viability, and if this were to occur, our dealer-centric automotive finance and insurance businesses could suffer as well.
Our share of commercial wholesale financing remains at risk of decreasing in the future as a result of intense competition and other factors. The number of dealers with whom we have wholesale relationships decreased approximately 6% as compared to December 31, 2019. If we are not able to maintain existing relationships with significant automotive dealers or if we are not able to develop new relationships for any reason—including if we are not able to provide services on a timely basis, offer products and services that meet the needs of the dealers, compete successfully with the products and services of our competitors, or effectively counter the influence that captive automotive finance companies have in the marketplace or the exclusivity privileges that some competitors have with automotive manufacturers—our wholesale funding volumes, and the number of dealers with whom we have retail funding relationships, could decline in the future. If this were to occur, our business, results of operations, financial condition, or prospects could be adversely affected.
GM and Chrysler dealers and their retail customers continue to constitute a significant portion of our customer base, which creates concentration risk for us.
While we continue to diversify our automotive finance and insurance businesses and to expand into other financial services, GM and Chrysler dealers and their retail customers still constitute a significant portion of our customer base. In 2020, 40% of our new vehicle dealer inventory financing and 22% of our consumer automotive financing volume were transacted for GM-franchised dealers and customers, and 40% of our new vehicle dealer inventory financing and 28% of our consumer automotive financing volume were transacted for Chrysler dealers and customers. In 2019, 46% of our new vehicle dealer inventory financing and 26% of our consumer automotive financing volume were transacted for GM-franchised dealers and customers, and 38% of our new vehicle dealer inventory financing and 27% of our consumer automotive financing volume were transacted for Chrysler dealers and customers. GM, Chrysler, and their captive automotive finance companies compete vigorously with us and could take further actions that negatively impact the amount of business that we do with GM and Chrysler dealers and their retail customers. Further, a significant adverse change in GM’s or Chrysler’s businesses—including, for example, in the production or sale of GM or Chrysler vehicles, the quality or resale value of GM or Chrysler vehicles, GM’s or Chrysler’s relationships with its key suppliers, or the rate or volume of recalls of GM or Chrysler vehicles—could negatively impact our GM and Chrysler dealer and retail customer bases and the value of collateral securing our extensions of credit to them. Any future reductions in GM and Chrysler business that we are not able to offset could adversely affect our business and financial results.
Our business and financial results are dependent upon overall U.S. automotive industry sales volume.
Our automotive finance and insurance businesses can be impacted by the sales volume for new and used vehicles. Vehicle sales are impacted, in turn, by several economic and market conditions, including employment levels, household income, interest rates, credit availability, inventory levels, customer preferences, and fuel costs. For example, new vehicle sales decreased dramatically during the economic crisis that began in 2007–2008 and did not rebound significantly until 2012 and 2013. More recently, automotive manufacturers have reported that a shortage in their supply of semiconductor chips is expected to materially constrain their production of new vehicles through the near term. Any future declines in new or used vehicle sales could have an adverse effect on our business and financial results.
Vehicle loans and operating leases make up a significant part of our earning assets, and our business and financial results could suffer if used vehicle prices are low or volatile or decrease in the future.
During the year ended December 31, 2020, approximately 57% of our average earning assets were composed of vehicle loans or operating leases and related residual securitization interests. If we experience higher losses on the sale of repossessed vehicles or lower or more volatile residual values for off-lease vehicles, our business or financial results could be adversely affected.
General economic conditions, the supply of off-lease and other vehicles to be sold, the levels of demand for vehicle ownership and use, relative market prices for new and used vehicles, perceived vehicle quality, the shift from gasoline to electric vehicles, overall vehicle prices, the vehicle disposition channel, volatility in gasoline or diesel fuel prices, levels of household income, interest rates, and other factors outside of our control heavily influence used vehicle prices. Consumer confidence levels and the strength of automotive manufacturers and dealers can also influence the used vehicle market. For example, during the economic crisis that began in 2007–2008, sharp declines in used vehicle demand and sale prices adversely affected our remarketing proceeds and financial results.
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Our expectation of the residual value of a vehicle subject to an automotive operating lease contract is a critical element used to determine the amount of the operating lease payments under the contract at the time the customer enters into it. As a result, to the extent that the actual residual value of the vehicle—as reflected in the sale proceeds received upon remarketing at lease termination—is less than the expected residual value for the vehicle at lease inception, we will incur additional depreciation expense and lower profit on the operating lease transaction than our priced expectations. Our expectation of used vehicle values is also a factor in determining our pricing of new loan and operating lease originations. In stressed economic environments, residual-value risk may be even more volatile than credit risk. To the extent that used vehicle prices are significantly lower than our expectations, our profit on vehicle loans and operating leases could be substantially less than our expectations, even more so if our estimate of loss frequency is underestimated as well. In addition, we could be adversely affected if we fail to efficiently process and effectively market off-lease vehicles and repossessed vehicles and, as a consequence, incur higher-than-expected disposal costs or lower-than-expected proceeds from the vehicle sales.
The levels of or changes in interest rates could affect our results of operations and financial condition.
We are highly dependent on net interest income, which is the difference between interest income on earning assets (such as loans and investments) and interest expense on deposits and borrowings. Net interest income is significantly affected by market rates of interest, which in turn are influenced by monetary and fiscal policies, general economic and market conditions, the political and regulatory environments, business and consumer sentiment, competitive pressures, and expectations about the future (including future changes in interest rates). We may be adversely affected by policies, laws, and events that have the effect of flattening or inverting the yield curve (that is, the difference between long-term and short-term interest rates), depressing the interest rates associated with our earning assets to levels near the rates associated with our interest expense, increasing the volatility of market rates of interest, or changing the spreads among different interest rate indices.
The levels of or changes in interest rates could adversely affect us beyond our net interest income, including the following:
•increase the cost or decrease the availability of deposits or other variable-rate funding instruments;
•reduce the return on or demand for loans or increase the prepayment speed of loans;
•increase customer or counterparty delinquencies or defaults;
•negatively impact our ability to remarket off-lease and repossessed vehicles; and
•reduce the value of our loans, retained interests in securitizations, and fixed-income securities in our investment portfolio and the efficacy of our hedging strategies.
The level of and changes in market rates of interest—and, as a result, these risks and uncertainties—are beyond our control. The dynamics among these risks and uncertainties are also challenging to assess and manage. For example, while an accommodative monetary policy may benefit us to some degree by spurring economic activity among our customers, such a policy may ultimately cause us more harm by inhibiting our ability to grow or sustain net interest income. A rising interest rate environment can pose different challenges, such as potentially slowing the demand for credit, increasing delinquencies and defaults, and reducing the values of our loans and fixed-income securities. Following a prolonged period in which the federal funds rate was stable or decreasing, the FRB increased this benchmark rate on a number of occasions during 2017 and 2018 and began to end its quantitative-easing program and reduce the size of its balance sheet. During 2019, however, the FRB reversed course and reduced the federal funds rate several times, and in March 2020, reduced the target range for the federal funds rate to zero to 0.25 percent. These past actions, and potential future actions, exert upward or downward pressure on interest rates and may create market volatility in interest rates. Refer to the section titled Market Risk in the MD&A that follows and Note 21 to the Consolidated Financial Statements.
Uncertainty about the future of LIBOR may adversely affect our business and financial results.
LIBOR meaningfully influences market interest rates around the globe. We have exposure to LIBOR-based contracts through a number of our finance receivables and loans primarily related to commercial automotive loans, corporate finance loans, and mortgage loans, as well as certain investment securities, derivative contracts, and other arrangements. Among our liabilities, we have issued trust preferred securities with an interest rate linked to LIBOR and also have secured facilities, asset-backed securitizations, and brokered certificates of deposit that contain LIBOR-based reference rates.
In July 2017, the Chief Executive of the United Kingdom Financial Conduct Authority, which regulates LIBOR, announced its intent to stop persuading or compelling banks to submit rates for the calculation of LIBOR to the administrator of LIBOR after 2021. In November 2020, the administrator of the LIBOR benchmark announced their intention to consult with the United Kingdom Financial Conduct Authority, LIBOR panel banks, and other official sector bodies on a proposal to extend the publication of certain key USD LIBOR tenors until the end of the second quarter of 2023. Additionally in November 2020, the U.S. banking regulators issued guidance encouraging banks to stop new USD LIBOR issuances as soon as practicable, but no later than the end of 2021.
No assurance can be provided that the uncertainties around LIBOR or their resolution will not adversely affect the use, level, and volatility of LIBOR or other interest rates or the value of LIBOR-based securities. Further, the viability of SOFR as an alternative reference rate and the availability and acceptance of other alternative reference rates are unclear and also may have adverse effects on market rates of interest and the value of securities and other financial arrangements. These uncertainties, proposals and actions to resolve them, and their
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ultimate resolution also could negatively impact our funding costs, loan and other asset values, asset-liability management strategies, and other aspects of our business and financial results.
We rely extensively on third-party service providers in delivering products and services to our customers and otherwise conducting our business and operations, and their failure to perform to our standards or other issues of concern with them could adversely affect our reputation, business, and financial results.
We seek to distinguish ourselves as a customer-centric company that delivers passionate customer service and innovative financial solutions and that is relentlessly focused on “Doing it Right.” Third-party service providers, however, are key to much of our business and operations, including online and mobile banking, mortgage finance, brokerage, customer service, and operating systems and infrastructure. While we have implemented a supplier-risk-management program and can exert varying degrees of influence over our service providers, we do not control them, their actions, or their businesses. Our contracts with service providers, moreover, may not require or sufficiently incent them to perform at levels and in ways that we would choose to act on our own. No assurance can be provided that our service providers will perform to our standards, adequately represent our brand, comply with applicable law, appropriately manage their own risks, remain financially or operationally viable, abide by their contractual obligations, or continue to provide us with the services that we require. In such a circumstance, our ability to deliver products and services to customers, to satisfy customer expectations, and to otherwise successfully conduct our business and operations could be adversely affected. In addition, we may need to incur substantial expenses to address issues of concern with a service provider, and even if the issues cannot be acceptably resolved, we may not be able to timely or effectively replace the service provider due to contractual restrictions, the unavailability of acceptable alternative providers, or other reasons. Further, regardless of how much we can influence our service providers, issues of concern with them could result in supervisory actions and private litigation against us and could harm our reputation, business, and financial results.
Our operating systems or infrastructure, as well as those of our service providers or others on whom we rely, could fail or be interrupted, which could disrupt our business and adversely affect our results of operations, financial condition, and prospects.
We rely heavily upon communications, data management, and other operating systems and infrastructure to conduct our business and operations, which creates meaningful operational risk for us. Any failure of or interruption in these systems or infrastructure or those of our service providers or others on whom we rely—including as a result of inadequate or failed technology or processes, unplanned or unsuccessful updates to technology, sudden increases in transaction volume, human errors, fraud or other misconduct, deficiencies in the integration of acquisitions or the commencement of new businesses, energy or similar infrastructure outages, disruptions in communications networks or systems, natural disasters, catastrophic events, pandemics, acts of terrorism, political or social unrest, external or internal security breaches, acts of vandalism, cyberattacks such as computer viruses and malware, misplaced or lost data, or breakdowns in business continuity plans—could cause failures or delays in receiving applications for loans and operating leases, underwriting or processing loan or operating-lease applications, servicing loans and operating leases, accessing online accounts, processing transactions, executing brokerage orders, communicating with our customers, managing our investment portfolio, or otherwise conducting our business and operations. These adverse effects could be exacerbated if systems or infrastructure need to be taken offline or meaningfully repaired, if backup systems or infrastructure are not adequately redundant and effective for the conduct of our business and operations, or if technological or other solutions do not exist or are slow to be developed. Further, to the extent that the systems or infrastructure of service providers or others are involved, we may have little or no knowledge, control, or influence over how and when failures or delays are addressed. As a digital financial-services company with a meaningful dependence on service providers, we are especially susceptible to business, reputational, financial, regulatory, and other harm as a result of these risks.
In the ordinary course of our business, we collect, store, process, and transmit sensitive, confidential, or proprietary data and other information, including business information, intellectual property, and the personally identifiable information of customers and employees. The secure collection, storage, processing, and transmission of this information are critical to our business and reputation, and if any of this information were mishandled, misused, improperly accessed, lost, or stolen or if related operations were disabled or otherwise disrupted, we could suffer significant business, reputational, financial, regulatory, and other damage.
Even when a failure of or interruption in operating systems or infrastructure is timely resolved, we may need to expend substantial resources in doing so, may be required to take actions that could adversely affect customer satisfaction or behavior, and may be exposed to reputational damage. We also could be exposed to contractual claims, supervisory actions, or litigation by private plaintiffs.
We face a wide array of security risks that could result in business, reputational, financial, regulatory, and other harm to us.
Our operating systems and infrastructure, as well as those of our service providers or others on whom we rely, are subject to security risks that are rapidly evolving and increasing in scope and complexity, in part, because of the introduction of new technologies, the expanded use of the internet and telecommunications technologies (including mobile devices) to conduct financial and other business transactions, and the increased sophistication and activities of hostile state-sponsored actors, organized crime, perpetrators of fraud, hackers, terrorists, and others. We, along with other financial institutions, our service providers, and others on whom we rely, have been and are expected to continue to be the target of cyberattacks, which could include computer viruses, malware, malicious or destructive code, phishing or spear phishing attacks, denial-of-service or denial-of-information attacks, ransomware, identity theft, access violations by employees or vendors, attacks on the personal email of employees, and ransom demands accompanied by threats to expose security vulnerabilities. We, our service providers, and others on whom we rely are also exposed to more traditional security threats to physical facilities and personnel.
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These security risks could result in business, reputational, financial, regulatory, and other harm to us, especially as a digital financial-services company with a meaningful dependence on service providers. For example, if sensitive, confidential, or proprietary data or other information about us or our customers or employees were improperly accessed or destroyed because of a security breach, we could experience business or operational disruptions, reputational damage, contractual claims, supervisory actions, or litigation by private plaintiffs. As security threats evolve, moreover, we expect to continue expending significant resources to enhance our defenses, to educate our employees, to monitor and support the defenses established by our service providers and others on whom we rely, and to investigate and remediate incidents and vulnerabilities as they arise or are identified. Even so, we may not be able to anticipate or implement effective preventive measures against all security breaches, especially because techniques change frequently, and attacks can be launched with no warning from a wide variety of sources around the globe. A sophisticated breach, moreover, may not be identified until well after the attack has occurred and the damage has been caused.
We also could be adversely affected by security risks faced by others. For example, a cyberattack or other security breach affecting a service provider or another entity on whom we rely could negatively impact us and our ability to conduct business and operations just as much as a breach affecting us directly. Even worse, in such a circumstance, we may not receive timely notice of or information about the breach or be able to exert any meaningful control or influence over how and when the breach is addressed. In addition, a security threat affecting the business community, the markets, or parts of them may cycle or cascade through the financial system and harm us. The mere perception of a security breach involving us or any part of the financial services industry, whether or not true, also could damage our business, operations, or reputation.
Many if not all of these risks and uncertainties are beyond our control. Refer to the section titled Risk Management in the MD&A that follows.
We are heavily reliant on technology, and a failure in effectively implementing technology initiatives or anticipating future technology needs or demands could adversely affect our business or financial results.
As much if not more than other financial institutions, we significantly depend on technology to deliver our products and services and to otherwise conduct our business and operations. To remain technologically competitive and operationally efficient, we invest in system upgrades, new solutions, and other technology initiatives. Many of these initiatives take a significant amount of time to develop and implement, are tied to critical systems, and require substantial financial, human, and other resources. Although we take steps to mitigate the risks and uncertainties associated with these initiatives, no assurance can be provided that they will be implemented on time, within budget, or without negative financial, operational, or customer impact or that, once implemented, they will perform as we or our customers expect. We also may not succeed in anticipating or keeping pace with future technology needs, the technology demands of customers, or the competitive landscape for technology. If we were to misstep in any of these areas, our business, financial results, or reputation could be negatively impacted.
Our enterprise risk-management framework or independent risk-management function may not be effective in mitigating risk and loss.
We maintain an enterprise risk-management framework that is designed to identify, measure, assess, monitor, test, control, report, escalate, and mitigate the risks that we face. These include credit, insurance/underwriting, market, liquidity, business/strategic, reputation, operational, information-technology/security, compliance, and conduct risks. The framework incorporates risk culture and incentives, risk governance and organization, strategy and risk appetite, a material-risk taxonomy, key risk-management processes, and risk capabilities. Our chief risk officer, chief compliance officer, and other personnel who make up our independent risk-management function are responsible for overseeing and implementing the framework. Refer to the section titled Risk Management in the MD&A that follows. While we continue to evolve our risk-management framework to consider changes in business and regulatory expectations, there can be no assurance that the framework—including its design and implementation—will effectively mitigate risk and limit losses in our business and operations. If conditions or circumstances arise that expose flaws or gaps in the framework or its implementation, the performance and value of our business and operations could be adversely affected. An ineffective risk-management framework or function also could give rise to enforcement and other supervisory actions, damage our reputation, and result in private litigation.
We are or may be subject to potential liability in connection with pending or threatened legal proceedings and other matters, which could adversely affect our business or financial results.
As a financial-services company, we are regularly involved in pending or threatened legal proceedings and other matters and are or may be subject to potential liability in connection with them. These legal matters may be formal or informal and include litigation and arbitration with one or more identified claimants, certified or purported class actions with yet-to-be-identified claimants, and regulatory or other governmental information-gathering requests, examinations, investigations, and enforcement proceedings. Our legal matters exist in varying stages of adjudication, arbitration, negotiation, or investigation and span our business lines and operations. Claims may be based in law or equity—such as those arising under contracts or in tort and those involving banking, consumer-protection, securities, tax, employment, and other laws—and some can present novel legal theories and allege substantial or indeterminate damages.
The course and outcome of legal matters are inherently unpredictable. This is especially so when a matter is still in its early stages, the damages sought are indeterminate or unsupported, significant facts are unclear or disputed, novel questions of law or other meaningful legal uncertainties exist, a request to certify a proceeding as a class action is outstanding or granted, multiple parties are named, or regulatory or other governmental entities are involved. Other contingent exposures and their ultimate resolution are similarly unpredictable for reasons that can vary based on the circumstances. As a result, we often are unable to determine how or when threatened or pending legal matters and other
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contingent exposures will be resolved and what losses may be incrementally and ultimately incurred. Actual losses may be higher or lower than any amounts accrued or estimated for those matters and other exposures, possibly to a significant degree. Refer to Note 29 to the Consolidated Financial Statements. In addition, while we maintain insurance policies to mitigate the cost of litigation and other proceedings, these policies have deductibles, limits, and exclusions that may diminish their value or efficacy. Substantial legal claims, even if not meritorious, could have a detrimental impact on our business, results of operations, and financial condition and could cause us reputational harm.
Our inability to attract, retain, or motivate qualified employees could adversely affect our business or financial results.
Skilled employees are our most important resource, and competition for talented people is intense. Even though compensation and benefits expense is among our highest expenses, we may not be able to locate and hire the best people, keep them with us, or properly motivate them to perform at a high level. This risk may be exacerbated due to some of our competitors having significantly greater scale, financial and operational resources, and brand recognition. Recent scrutiny of compensation practices, especially in the financial services industry, has made this only more difficult. In addition, many parts of our business are particularly dependent on key personnel. If we were to lose and find ourselves unable to replace these personnel or other skilled employees or if the competition for talent were to drive our compensation costs to unsustainable levels, our business and financial results could be negatively impacted.
Our ability to successfully make acquisitions is subject to significant risks, including the risk that governmental authorities will not provide the requisite approvals, the risk that integrating acquisitions may be more difficult, costly, or time consuming than expected, and the risk that the value of acquisitions may be less than anticipated.
We may from time to time seek to acquire other financial services companies or businesses. These acquisitions may be subject to regulatory approval, and no assurance can be provided that we will be able to obtain that approval in a timely manner or at all or that approval may not be subject to burdensome conditions. Refer to the section above titled Regulation and Supervision in Part I, Item 1 of this report. Even when we are able to obtain regulatory approval, the failure of other closing conditions to be satisfied or waived could delay the completion of an acquisition for a significant period of time or prevent it from occurring altogether. Any failure or delay in closing an acquisition could adversely affect our reputation, business, and performance.
Acquisitions involve numerous risks and uncertainties, including inaccurate financial and operational assumptions, incomplete or failed due diligence, lower-than-expected performance, higher-than-expected costs, difficulties related to integration, diversion of management’s attention from other business activities, adverse market or other reactions, changes in relationships with customers or counterparties, the potential loss of key personnel, and the possibility of litigation and other disputes. An acquisition also could be dilutive to our existing stockholders if we were to issue common stock to fully or partially pay or fund the purchase price. We, moreover, may not be successful in identifying appropriate acquisition candidates, integrating acquired companies or businesses, or realizing expected value from acquisitions. There is significant competition for valuable acquisition targets, and we may not be able to acquire other companies or businesses on attractive terms. No assurance can be given that we will pursue future acquisitions, and our ability to grow and successfully compete may be impaired if we choose not to pursue or are unable to successfully make acquisitions.
Our business requires substantial capital and liquidity, and a disruption in our funding sources or access to the capital markets may have an adverse effect on our liquidity, capital positions, and financial condition.
Liquidity is the ability to fund increases in assets and meet obligations as they come due, all without incurring unacceptable losses. Banks are especially vulnerable to liquidity risk because of their role in the maturity transformation of demand or short-term deposits into longer-term loans or other extensions of credit. We, like other financial services companies, rely to a significant extent on external sources of funding (such as deposits and borrowings) for the liquidity needed to conduct our business and operations. A number of factors beyond our control, however, could have a detrimental impact on the availability or cost of that funding and thus on our liquidity. These include market disruptions, changes in our credit ratings or the sentiment of our investors, the state of the regulatory environment and monetary and fiscal policies, reputational damage, the confidence of depositors in us, financial or systemic shocks, and significant counterparty failures. Weak business or operational performance, unexpected declines or limits on dividends or other distributions from our subsidiaries, and other failures to execute our strategic plan also could adversely affect Ally’s liquidity position.
We have significant maturities of unsecured debt each year. While we have reduced our reliance on unsecured funding in recent years, it remains an important component of our capital structure and financing plans. At December 31, 2020, approximately $702 million in principal amount of total outstanding consolidated unsecured debt is scheduled to mature in 2021, and approximately $1.1 billion and $2.1 billion is scheduled to mature in 2022 and 2023, respectively. We also have obtained short-term funding from the sale of floating-rate demand notes, all of which the holders may elect to have redeemed at any time without restriction. We announced the termination of our demand note program and the redemption of all outstanding demand notes on March 1, 2021. At December 31, 2020, approximately $2.1 billion in principal amount of demand notes were outstanding, which is not included in the amount of unsecured debt described above. We also rely substantially on secured funding. At December 31, 2020, approximately $4.5 billion in principal amount of total outstanding consolidated secured long-term debt is scheduled to mature in 2021, approximately $4.9 billion is scheduled to mature in 2022, and approximately $617 million is scheduled to mature in 2023. Furthermore, at December 31, 2020, approximately $41.8 billion in certificates of deposit at Ally Bank are scheduled to mature in 2021, which is not included in the amounts provided above. Additional funding, whether through deposits or borrowings, will be required to fund a substantial portion of the debt maturities over these periods.
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We continue to rely as well on our ability to borrow from other financial institutions, and many of our primary bank facilities are up for renewal on a yearly basis. Any weakness in market conditions, tightening of credit availability, or other events referenced earlier in this risk factor could have a negative effect on our ability to refinance these facilities and could increase the costs of bank funding. Ally and Ally Bank also continue to access the securitization markets. While those markets have stabilized following the liquidity crisis that commenced in 2007–2008, there can be no assurances that these sources of liquidity will remain available to us.
Our policies and controls are designed to enable us to maintain adequate liquidity to conduct our business in the ordinary course even in a stressed environment. There is no guarantee, however, that our liquidity position will never become compromised. In such an event, we may be required to sell assets at a loss or reduce loan and operating lease originations in order to continue operations. This could damage the performance and value of our business, prompt regulatory intervention and private litigation, harm our reputation, and cause a loss of customer and investor confidence, and if the condition were to persist for any appreciable period of time, our viability as a going concern could be threatened. Refer to the section titled Liquidity Management, Funding, and Regulatory Capital in the MD&A that follows and Note 20 to the Consolidated Financial Statements.
Our indebtedness and other obligations are significant and could adversely affect our business and financial results.
We have a significant amount of indebtedness apart from deposit liabilities. At December 31, 2020, we had approximately $25.1 billion in principal amount of indebtedness outstanding (including $10.0 billion in secured indebtedness). Interest expense on our indebtedness constituted approximately 14.7% of our total financing revenue and other interest income for the year ended December 31, 2020. We also have the ability to create additional indebtedness.
If our debt service obligations increase, whether due to the increased cost of existing indebtedness or the incurrence of additional indebtedness, more of our cash flow from operations would need to be allocated to the payment of principal of, and interest on, our indebtedness, which would reduce the funds available for other purposes. Our indebtedness also could limit our ability to execute our strategic plan and withstand competitive pressures and could reduce our flexibility in responding to changing business and economic conditions. In addition, if we are unable to satisfy our indebtedness and other obligations in full and on time, our business, reputation, and value as a going concern could be profoundly and perhaps inexorably damaged.
Our borrowing costs and access to the banking and capital markets could be negatively impacted if our credit ratings are downgraded or otherwise fail to meet investor expectations.
The cost and availability of our funding are meaningfully affected by our short- and long-term credit ratings. Each of Standard & Poor’s Rating Services, Moody’s Investors Service, Inc., Fitch, Inc., and Dominion Bond Rating Service rates some or all of our debt, and these ratings reflect the rating agency’s opinion of our financial strength, operating performance, strategic position, and ability to meet our obligations. Agency ratings are not a recommendation to buy, sell, or hold any security and may be revised or withdrawn at any time. Each agency’s rating should be evaluated independently of any other agency’s rating.
Future downgrades to our credit ratings or their failure to meet investor expectations may result in higher borrowing costs, reduced access to the banking and capital markets, more restrictive terms and conditions being added to any new or replacement financing arrangements.
The markets for automotive financing, insurance, banking (including corporate finance, mortgage finance, and point-of-sale personal lending), brokerage, and investment-advisory services are extremely competitive, and competitive pressures could adversely affect our business and financial results.
The markets for automotive financing, insurance, banking (including corporate finance, mortgage finance, and point-of-sale personal lending), brokerage, and investment-advisory services are highly competitive, and we expect competitive pressures only to intensify in the future, especially in light of the regulatory and supervisory environments in which we operate, technological innovations that alter the barriers to entry, current and evolving economic and market conditions, changing customer preferences and consumer and business sentiment, and monetary and fiscal policies. Refer to the section above titled Industry and Competition in Part I, Item 1 of this report. Competitive pressures may drive us to take actions that we might otherwise eschew, such as lowering the interest rates or fees on loans, raising the interest rates on deposits, or adopting more liberal underwriting standards. These pressures also may accelerate actions that we might otherwise elect to defer, such as substantial investment in systems or infrastructure. Whatever the reason, actions that we take in response to competition may adversely affect our results of operations and financial condition. These consequences could be exacerbated if we are not successful in introducing new products and services, achieving market acceptance of our products and services, developing and maintaining a strong customer base, continuing to enhance our reputation, or prudently managing risks and expenses.
Challenging business, economic, or market conditions may adversely affect our business, results of operations, and financial condition.
Our businesses are driven by robust economic and market activity, monetary and fiscal stability, and positive investor, business, and consumer sentiment. A downturn in economic conditions, disruptions in the equity or debt markets, high unemployment or underemployment, depressed vehicle or housing prices, unsustainable debt levels, unfavorable changes in interest rates, declines in household incomes, deteriorating consumer or business sentiment, consumer or commercial bankruptcy filings, or declines in the strength of national or local economies could decrease demand for our products and services, increase the amount and rate of delinquencies and losses, raise our operating and other expenses, and negatively impact the returns on and the value of our loans, investment portfolio, and other assets. Further, if a
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significant and sustained increase in fuel prices or other adverse conditions were to lead to diminished new and used vehicle purchases or prices, our automotive finance and insurance businesses could suffer considerably. In addition, concerns about the pace of economic growth and uncertainty about fiscal and monetary policies can result in significant volatility in the financial markets and could impact our ability to obtain cost-effective funding. If any of these events were to occur or worsen, our business, results of operation, and financial condition could be adversely affected.
Acts or threats of terrorism, natural disasters, and other conditions or events beyond our control could adversely affect us.
Geopolitical conditions, natural disasters, pandemics, and other conditions or events beyond our control may adversely affect our business, results of operations, financial condition, or prospects. Refer to the risk factor above, titled The COVID-19 pandemic is adversely affecting us and our customers, counterparties, employees, and third-party service providers, and the adverse impacts on our business, financial position, results of operations, and prospects could be significant, for more information on risks associated with the COVID-19 pandemic. For example, acts or threats of terrorism and political or military actions taken in response to terrorism could adversely affect general economic, business, or market conditions and, in turn, us, especially as an intermediary within the financial system. We also could be negatively impacted if our key personnel, a significant number of our employees, or our systems or infrastructure were to become unavailable or damaged due to a pandemic, natural disaster, war, act of terrorism, accident, or similar cause. These same risks and uncertainties arise too for the service providers and counterparties on whom we depend as well as their own third-party service providers and counterparties.
Significant repurchases or indemnification payments in our securitizations could harm our profitability and financial condition.
We have repurchase and indemnification obligations in our securitizations. If we were to breach a representation, warranty, or covenant in connection with a securitization, we may be required to repurchase the affected loans or otherwise compensate investors or purchasers for losses caused by the breach. If the scale or frequency of repurchases or indemnification payments were to increase substantially from its present levels, our results of operations and financial condition could be adversely affected. In such a circumstance, we also could suffer reputational damage, become subject to stricter supervisory scrutiny and private litigation, and find our access to capital and banking markets more limited or more costly.
Our business and operations make extensive use of models, and we could be adversely affected if our design, implementation, or use of models is flawed.
We use quantitative models to price products and services, measure risk, calculate the quantitative portfolio of our allowance for loan losses, estimate asset and liability values, assess capital and liquidity, manage our balance sheet, create financial forecasts, and otherwise conduct our business and operations. If the design, implementation, or use of any of these models is flawed, we could make strategic or tactical decisions based on incorrect, misleading, or incomplete information. In addition, to the extent that any flawed models or inaccurate model outputs are used in reports to banking agencies or the public, we could be subjected to supervisory actions, private litigation, and other proceedings that may adversely affect our business and financial results. Refer to the section titled Risk Management in the MD&A that follows.
Our hedging strategies may not be successful in mitigating our interest rate, foreign exchange, and market risks, which could adversely affect our financial results.
We employ various hedging strategies to mitigate the interest rate, foreign exchange, and market risks inherent in many of our assets and liabilities. Our hedging strategies rely considerably on assumptions and projections regarding our assets and liabilities as well as general market factors. If any of these assumptions or projections prove to be incorrect or our hedges do not adequately mitigate the impact of changes in interest rates, foreign exchange rates, and other market factors, we may experience volatility in our earnings that could adversely affect our profitability and financial condition. In addition, we may not be able to find market participants that are willing to act as our hedging counterparties on acceptable terms or at all, which could have an adverse effect on the success of our hedging strategies.
We use estimates and assumptions in determining the value or amount of many of our assets and liabilities. If our estimates or assumptions prove to be incorrect, our cash flow, profitability, financial condition, and prospects could be adversely affected.
We use estimates and assumptions in determining the fair value of many of our assets, including retained interests from securitizations, loans held for sale, and other investments that do not have an established market value or are not publicly traded. We also use estimates and assumptions in determining the residual values of our operating lease assets. In addition, we use estimates and assumptions in determining our allowance for loan losses, reserves for legal matters, insurance losses, and loss adjustment expenses (which represent the accumulation of estimates for both reported losses and those incurred, but not reported, including claims adjustment expenses relating to direct insurance and assumed reinsurance agreements). Refer to the section titled Critical Accounting Estimates in the MD&A that follows. Our assumptions and estimates may be inaccurate for many reasons. For example, they often involve matters that are inherently difficult to predict and that are beyond our control (such as macroeconomic conditions and their impact on automotive dealers) and often involve complex interactions between a number of dependent and independent variables, factors, and other assumptions. Assumptions and estimates are also far more difficult during periods of market dislocation or illiquidity. As a result, our actual experience may differ substantially from these estimates and assumptions. A meaningful difference between our estimates and assumptions and our actual experience may adversely affect our cash flow, profitability, financial condition, and prospects and may increase the volatility of our financial results. In addition, several different judgments associated with assumptions or estimates could be reasonable under the circumstances and yet result in significantly different results being reported.
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Significant fluctuations in the valuation of investment securities or market prices could negatively affect our financial results.
Market prices for securities and other financial assets are subject to considerable fluctuation. Fluctuations may result, for example, from perceived changes in the value of the asset, the relative price of alternative investments, shifts in investor sentiment, geopolitical events, actual or expected changes in monetary or fiscal policies, and general market conditions. Due to these kinds of fluctuations, the amount that we realize in the subsequent sale of an investment may significantly differ from the last reported value and could negatively affect our financial results. Additionally, negative fluctuations in the value of available-for-sale investment securities could result in unrealized losses recorded in equity.
Changes in accounting standards could adversely affect our reported revenues, expenses, profitability, and financial condition.
Our financial statements are subject to the application of GAAP, which are periodically revised or expanded. The application of GAAP is also subject to varying interpretations over time. Accordingly, we are required to adopt new or revised accounting standards or comply with revised interpretations that are issued from time to time by various parties, including accounting standard setters and those who interpret the standards, such as the FASB, the SEC, banking agencies, and our independent registered public accounting firm. Those changes are beyond our control but could adversely affect our revenues, expenses, profitability, or financial condition. For example, the adoption of CECL effective January 1, 2020, has resulted in a significant increase to our allowance for loan losses. Refer to Note 1 to the Consolidated Financial Statements for financial accounting standards issued by the FASB, but not yet adopted by the company.
The financial system is highly interrelated, and the failure of even a single financial institution could adversely affect us.
The financial system is highly interrelated, including as a result of lending, trading, clearing, counterparty, and other relationships. We have exposure to and routinely execute transactions with a wide variety of financial institutions, including brokers, dealers, commercial banks, and investment banks. If any of these institutions were to become or perceived to be unstable, were to fail in meeting its obligations in full and on time, or were to enter bankruptcy, conservatorship, or receivership, the consequences could ripple throughout the financial system and may adversely affect our business, results of operations, financial condition, or prospects. Because of interrelationships within the financial system, this could occur even if the institution itself were not systemically important or perceived to play a meaningful role in the stable functioning of the financial markets.
Adverse economic conditions or changes in laws in the states where we have loan or operating lease concentrations may negatively affect our business and financial results.
We are exposed to portfolio concentrations in some states, including California, Texas, and Florida. Factors adversely affecting the economies and applicable laws in these states could have an adverse effect on our business, results of operations, and financial condition.
Negative publicity outside of our control, or our failure to successfully manage issues arising from our conduct or in connection with the financial services industry generally, could damage our reputation and adversely affect our business or financial results.
The performance and value of our business could be negatively impacted by any reputational harm that we may suffer, especially as an intermediary within the financial system. This harm could arise from negative publicity outside of our control or our failure to adequately address issues arising from our conduct or in connection with the financial services industry generally. Risks to our reputation could arise in any number of contexts—for example, stricter regulatory or supervisory environments, cyber incidents and other security breaches, inabilities to meet customer expectations, mergers and acquisitions, lending or banking practices, actual or perceived conflicts of interest, failures to prevent money laundering, inappropriate conduct by employees, and inadequate corporate governance.
Our failure to maintain appropriate ESG practices and disclosures could result in reputational harm, a loss of customer and investor confidence, and adverse business and financial results.
Governments, investors, customers, and the general public are increasingly focused on ESG practices and disclosures. For us and others in the financial-services industry, this focus extends to the practices and disclosures of the customers, counterparties, and service providers with whom we choose to do business. For example, while we have a relatively smaller carbon footprint as a digital financial services company and do not have commercial-lending relationships with a host of sensitive industries (such as those whose products are or are perceived to be harmful to the environment or the public health), the majority of our business and operations are connected to the automotive industry. Views about ESG are diverse, dynamic, and rapidly changing, and if we were to fail to maintain appropriate ESG practices and disclosures, we could suffer reputational damage, a loss of customer and investor confidence, and adverse business and financial results.
Risks Related to Ownership of Our Common Stock
Our ability to pay dividends on our common stock or repurchase shares in the future may be limited.
Any future dividends on our common stock or changes in our stock-repurchase program will be determined by our Board in its sole discretion and will depend on our business, financial condition, earnings, capital, liquidity, and other factors at the time. In addition, any plans to continue dividends or share repurchases in the future will be subject to our stress capital buffer requirement and the FRB’s review of and non-objection to our annual capital plan, which is unpredictable. There is no assurance that our Board will approve, or the FRB will permit, future dividends or share repurchases. Refer to the section above titled Regulation and Supervision in Part I, Item 1 of this report.
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It is possible that any indentures or other financing arrangements that we execute in the future could limit our ability to pay dividends on our capital stock, including our common stock. In the event that any of our indentures or other financing arrangements in the future restrict that ability, we may be unable to pay dividends unless and until we can refinance the amounts outstanding under those arrangements. In addition, under Delaware law, our Board may declare dividends on our capital stock only to the extent of our statutory surplus (which is defined as the amount equal to total assets minus total liabilities, in each case at fair market value, minus statutory capital) or, if no surplus exists, out of our net profits for the then-current or immediately preceding fiscal year. Further, even if we are permitted under our contractual obligations and Delaware law to pay dividends on our common stock, we may not have sufficient cash or regulatory approvals to do so.
The market price of our common stock could be adversely impacted by anti-takeover provisions in our organizational documents and Delaware law that could delay or prevent a takeover attempt or change in control of Ally or by other banking, antitrust, or corporate laws that have or are perceived as having an anti-takeover effect.
Our certificate of incorporation, our bylaws, and Delaware law contain provisions that could have the effect of discouraging, hindering, or preventing an acquisition that our Board of Directors does not find to be in the best interests of us and our stockholders. For example, our organizational documents include provisions:
•limiting the liability of our directors and providing indemnification to our directors and officers; and
•limiting the ability of our stockholders to call and bring business before special meetings of stockholders by requiring any requesting stockholders to hold at least 25% of our common stock in the aggregate.
These provisions, alone or together, could delay hostile takeovers and changes in control of Ally or changes in management.
In addition, we are subject to Section 203 of the General Corporation Law of the State of Delaware, which generally prohibits a corporation from engaging in various business combination transactions with any interested stockholder (generally defined as a stockholder who owns 15% or more of a corporation’s voting stock) for a period of three years following the time that the stockholder became an interested stockholder, except under specified circumstances such as the receipt of prior board approval.
Banking and antitrust laws, including associated regulatory-approval requirements, also impose significant restrictions on the acquisition of direct or indirect control over any BHC like Ally or any insured depository institution like Ally Bank. Refer to the section above titled Regulation and Supervision in Part I, Item 1 of this report.
Any provision of our organizational documents or applicable law that deters, hinders, or prevents a non-negotiated takeover or change in control of Ally could limit the opportunity for our stockholders to receive a premium for their shares of our common stock and could also affect the price that some investors are willing to pay for our common stock.
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Item 1B. Unresolved Staff Comments
None.
Item 2. Properties
Our principal corporate offices are located in Detroit, Michigan, and Charlotte, North Carolina. In Detroit, we lease approximately 330,000 square feet of office space under a lease that expires in December 2028. In Charlotte, we lease approximately 234,000 square feet of office space under a variety of leases expiring between June 2021 and May 2024. In September 2017, we entered into a new agreement, scheduled to commence in April 2021, to lease approximately 543,000 square feet of office space in Charlotte under a lease that is expected to expire in March 2036. Under the new lease we plan to consolidate most of our Charlotte, North Carolina locations, through a series of phases, as the existing leases expire.
The primary offices for both our Automotive Finance and Insurance operations are located in Detroit, and are included in the totals referenced above. The primary office for our Mortgage Finance operations is located in Charlotte, where, in addition to the totals referenced above, we lease approximately 84,000 square feet of office space under a lease that expires in December 2022. Upon expiration, our Mortgage Finance operations will relocate to the consolidated office space in Charlotte, North Carolina, referenced above. The primary office for our Corporate Finance operations is located in New York, New York, where we lease approximately 55,000 square feet of office space under a lease that expires in June 2023.
In addition to the properties described above, we lease additional space to conduct our operations. We believe our facilities are adequate for us to conduct our present business activities.
Item 3. Legal Proceedings
Refer to Note 29 to the Consolidated Financial Statements for a discussion related to our legal proceedings.
Item 4. Mine Safety Disclosures
Not applicable.
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Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Market Information
Our common stock is listed on the NYSE under the symbol “ALLY.” At December 31, 2020, we had 374,674,415 shares of common stock outstanding, compared to 374,331,998 shares at December��31, 2019. As of February 22, 2021, we had approximately 30 holders of record of our common stock.
Securities Authorized for Issuance Under Equity Compensation Plans
For information regarding securities authorized for issuance under our equity compensation plans, see Part III, Item 12.
Stock Performance Graph
The following graph compares the cumulative total return to stockholders on our common stock relative to the cumulative total returns of the S&P 500 index and the S&P Financials index. An investment of $100 (with reinvestment of all dividends) is assumed to have been made in our common stock and in each index on December 31, 2015, and its relative performance is tracked through December 31, 2020. The returns shown are based on historical results and are not intended to suggest future performance.
This performance graph is not deemed to be “filed” for purposes of Section 18 of the Exchange Act, or otherwise subject to the liabilities of that section, or incorporated by reference into any filing of Ally under the Securities Act of 1933, as amended, or the Exchange Act, except as expressly set forth by specific reference in such a filing.
Recent Sales of Unregistered Securities
Ally did not have any sales of unregistered securities in the last three fiscal years.
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Our Business
Ally Financial Inc. (together with its consolidated subsidiaries unless the context otherwise requires, Ally, the Company, or we, us, or our) is a leading digital financial-services company with $182.2 billion in assets as of December 31, 2020. As a customer-centric company with passionate customer service and innovative financial solutions, we are relentlessly focused on “Doing it Right” and being a trusted financial-services provider to our consumer, commercial, and corporate customers. We are one of the largest full-service automotive finance operations in the United States and offer a wide range of financial services and insurance products to automotive dealerships and consumers. Our award-winning digital direct bank (Ally Bank, Member FDIC and Equal Housing Lender) offers mortgage lending, point-of-sale personal lending, and a variety of deposit and other banking products, including savings, money-market, and checking accounts, CDs, and IRAs. Additionally, we offer securities-brokerage and investment-advisory services through Ally Invest. Our corporate-finance business offers capital for equity sponsors and middle-market companies.
We are a Delaware corporation and are registered as a BHC under the BHC Act, and an FHC under the GLB Act. Our primary business lines are Dealer Financial Services, which is composed of our Automotive Finance and Insurance operations, Mortgage Finance, and Corporate Finance. Corporate and Other primarily consists of centralized corporate treasury activities, the management of our legacy mortgage portfolio, the activity related to Ally Invest and Ally Lending (our unsecured personal-lending business unit), and reclassifications and eliminations between the reportable operating segments. Ally Bank’s assets and operating results are included within our Automotive Finance, Mortgage Finance, and Corporate Finance segments, as well as Corporate and Other, based on its underlying business activities. As of December 31, 2020, Ally Bank had total assets of $172.0 billion, and total nonaffiliate deposits of $137.0 billion.
Our strategic objectives are centered around (1) differentiating our company as a relentless ally for consumer, commercial, and corporate customers, (2) ensuring our culture remains aligned with a focus on our customers, communities, employees, and stockholders, (3) ongoing optimization of our market leading automotive, insurance, and digitally-based bank business lines, (4) sustained growth in customers and ongoing relationship deepening across our scalable platforms, and expanded product offerings, and (5) efficient capital deployment and disciplined risk management. We seek to extend our leading position in automotive finance in the United States by continuing to provide automotive dealers and their retail customers with premium service, a comprehensive product suite, consistent funding, and competitive pricing—reflecting our commitment to the automotive industry. Within our Automotive Finance and Insurance operations, we are also focused on strengthening our network of dealer relationships and pursuing digital distribution channels for our products and services, including through our operation of a direct-lending platform and our work with dealers innovating in digital transactions—all while maintaining an appropriate level of risk appetite. Within our other banking operations—including Mortgage Finance and Corporate Finance—we seek to expand our consumer and commercial banking products and services while providing a high level of customer service. In 2019, Ally acquired Credit Services Corporation, LLC and its subsidiary, Health Credit Services LLC, from which Ally created the Ally Lending business unit. Ally Lending currently 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. In addition, we continue to focus on delivering significant and sustainable growth and retention in deposit customers and balances while optimizing our cost of funds. At Ally Invest, we seek to augment our securities-brokerage and investment-advisory services to more comprehensively assist our customers in managing their savings and wealth.
Upon launching our first ever enterprise-wide campaign themed “Do it Right,” we introduced a broad audience to our full suite of digital financial services, which emphasizes our relentless customer focus and commitment to constantly create and reinvent our product offerings and digital experiences to meet the needs of consumers. We continue to build on this foundation and invest in enhancing the customer experience with integrated features across product lines on our digital platform. Our expanded product offerings and unique brand are increasingly gaining traction in the marketplace, as demonstrated by industry recognition of our award-winning digital direct bank and strong customer acquisition and retention rates.
Unless the context otherwise requires, the following definitions apply. The term “loans” means the following consumer and commercial products associated with our direct and indirect financing activities: loans, retail installment sales contracts, lines of credit, and other financing products excluding operating leases. The term “operating leases” means consumer- and commercial-vehicle lease agreements where Ally is the lessor and the lessee is generally not obligated to acquire ownership of the vehicle at lease-end or compensate Ally for the vehicle’s residual value. The terms “lend,” “finance,” and “originate” mean our direct extension or origination of loans, our purchase or acquisition of loans, or our purchase of operating leases as applicable. The term “consumer” means all consumer products associated with our loan and operating-lease activities and all commercial retail installment sales contracts. The term “commercial” means all commercial products associated with our loan activities, other than commercial retail installment sales contracts. The term “partnerships” means business arrangements rather than partnerships as defined by law.
For further details and information related to our business segments and the products and services they provide, refer to Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A) in Part II, Item 7 of this report, and Note 26 to the Consolidated Financial Statements.
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Industry and Competition
The markets for automotive financing, insurance, banking (including corporate finance, mortgage finance, and point-of-sale personal lending), securities-brokerage, and investment-advisory services are highly competitive. We directly compete in the automotive financing market with banks, credit unions, captive automotive finance companies, and independent finance companies. Our insurance business also faces significant competition from automotive manufacturers, captive automotive finance companies, insurance carriers, third-party administrators, brokers, and other insurance-related companies. Some of these competitors in automotive financing and insurance, such as captive automotive finance companies, have certain exclusivity privileges with automotive manufacturers whose customers and dealers make up a significant portion of our customer base. In addition, our banking, securities-brokerage, and investment-advisory businesses face intense competition from banks, savings associations, finance companies, credit unions, mutual funds, investment advisers, asset managers, brokerage firms, hedge funds, insurance companies, mortgage-banking companies, and credit-card companies. Financial-technology (fintech) companies also compete with us directly and in partnership with other banks and financial-services providers in lending, deposits, securities-brokerage, investment-advisory, and other markets. Many of our competitors have substantial positions nationally or in the markets in which they operate. Some also have significantly greater scale, financial and operational resources, investment capacity, and brand recognition. Our competitors may be subject to different and, in some cases, less stringent legislative, regulatory, and supervisory regimes than Ally. A range of competitors differ from us in their strategic and tactical priorities and, for example, may be willing to suffer meaningful financial losses in the pursuit of disruptive innovation or to accept more aggressive business, compliance, and other risks in the pursuit of higher returns. Competition affects every aspect of our business, including product and service offerings, rates, pricing and fees, and customer service. Successfully competing in our markets also depends on our ability to innovate, to invest in technology and infrastructure, to maintain and enhance our reputation, and to attract, retain, and motivate talented employees, all while effectively managing risks and expenses. We expect that competition will only intensify in the future.
Regulation and Supervision
We are subject to significant regulatory frameworks in the United States—at federal, state, and local levels—that affect the products and services that we may offer and the manner in which we may offer them, the risks that we may take, the ways in which we may operate, and the corporate and financial actions that we may take.
We are also subject to direct supervision and periodic examinations by various governmental agencies and industry SROs that are charged with overseeing the kinds of business activities in which we engage, including the FRB, the UDFI, the FDIC, the CFPB, the SEC, FINRA, and a number of state regulatory and licensing authorities such as the NYDFS. These agencies and organizations generally have broad authority and discretion in restricting and otherwise affecting our businesses and operations and may take formal or informal supervisory, enforcement, and other actions against us when, in the applicable agency’s or organization’s judgment, our businesses or operations fail to comply with applicable law, comport with safe and sound practices, or meet its supervisory expectations.
This system of regulation, supervision, and examination is intended primarily for the protection and benefit of our depositors and other customers, the FDIC’s DIF, the banking and financial systems as a whole, and the broader economy—and not for the protection or benefit of our stockholders (except in the case of securities laws) or non-deposit creditors. The scope, intensity, and focus of this system can vary from time to time for reasons that range from the state of the economic and political environments to the performance of our businesses and operations, but for the foreseeable future, we expect to remain subject to extensive regulation, supervision, and examinations.
This section summarizes some relevant provisions of the principal statutes, regulations, and other laws that apply to us. The descriptions, however, are not complete and are qualified in their entirety by the full text and judicial or administrative interpretations of those laws and other laws that affect us.
Bank Holding Company, Financial Holding Company, and Depository Institution Status
Ally and IB Finance, a Delaware limited liability company, are BHCs under the BHC Act. Ally is also an FHC under the GLB Act. IB Finance is a direct subsidiary of Ally and the direct parent of Ally Bank, which is a commercial bank that is organized under the laws of the State of Utah and whose deposits are insured by the FDIC under the FDI Act. As BHCs, Ally and IB Finance are subject to regulation, supervision, and examination by the FRB. Ally Bank is a member of the Federal Reserve System and is subject to regulation, supervision, and examination by the FRB and the UDFI.
•Permitted Activities — Under the BHC Act, BHCs and their subsidiaries are generally limited to the business of banking and to closely related activities that are incident to banking. The GLB Act amended the BHC Act and created a regulatory framework for FHCs, which are BHCs that meet certain qualifications and elect FHC status. FHCs, directly or indirectly through their nonbank subsidiaries, are generally permitted to engage in a broader range of financial and related activities than those that are permissible for BHCs—for example, (1) underwriting, dealing in, and making a market in securities; (2) providing financial, investment, and economic advisory services; (3) underwriting insurance; and (4) merchant banking activities. The FRB regulates, supervises, and examines FHCs, as it does all BHCs, but insurance and securities activities conducted by an FHC or any of its nonbank subsidiaries are also regulated, supervised, and examined by functional regulators such as state insurance commissioners, the SEC, or FINRA. The expanded powers permitted to FHCs include the ability to provide insurance products and services, to deliver our SmartAuction finder services and a number of related vehicle-remarketing services for third parties, and to offer certain kinds of brokerage and advisory services. To remain eligible to conduct and expand these broader financial and related activities, Ally and Ally Bank must continue to be treated as an FHC. Refer to Note 20 to the Consolidated Financial Statements and the section below titled Basel
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Capital Frameworks for additional information. In addition, our ability to expand these financial and related activities or to make acquisitions generally requires that we achieve a rating of satisfactory or better under the CRA.
Further, under the BHC Act, we may be subject to approvals, conditions, and other restrictions when seeking to acquire control over another entity or its assets. For this purpose, “control” includes (a) directly or indirectly owning, controlling, or holding the power to vote 25% or more of any class of the entity’s voting securities, (b) controlling in any manner the election of a majority of the entity’s directors, trustees, or individuals performing similar functions, or (c) directly or indirectly exercising a controlling influence over the management or policies of the entity. Under rules of the FRB, whether Ally is presumed to have a “controlling influence” over an entity is determined by applying a framework of tiered presumptions of control that are based on the percentage of a class of voting securities held by Ally and nine other relationships with the entity. For example, Ally would be presumed to have such a controlling influence with less than 5% of a class of voting securities and any of the following: a management agreement with the entity, one-half or more of the directors on the entity’s board, or one-third or more of the total equity in the entity.
•Enhanced Prudential Standards — Ally is currently subject to enhanced prudential standards that have been established by the FRB under the Dodd-Frank Act. In May 2018, targeted amendments to the Dodd-Frank Act and other financial-services laws were enacted through the EGRRCP Act, including amendments that affect whether and, if so, how the FRB applies enhanced prudential standards to BHCs like us with $100 billion or more but less than $250 billion in total consolidated assets. In October 2019, the FRB and other U.S. banking agencies issued final rules implementing these amendments. The final rules—which are commonly known as the tailoring framework—were effective on December 31, 2019, and established four risk-based categories of prudential standards and capital and liquidity requirements for banking organizations with $100 billion or more in total consolidated assets. The most stringent standards and requirements apply to U.S. global systemically important BHCs, which are assigned to Category I. The assignment of other banking organizations to the remaining three categories is based on measures of size and four other risk-based indicators: cross-jurisdictional activity, wSTWF, nonbank assets, and off-balance-sheet exposure. Under the tailoring framework, Ally is a Category IV firm and, as such, is (1) subject to supervisory stress testing on a two-year cycle rather than the previously required one-year cycle, (2) required to continue submitting an annual capital plan to the FRB, (3) allowed to continue excluding accumulated other comprehensive income from regulatory capital, (4) required to continue maintaining a buffer of unencumbered highly liquid assets to meet projected net stressed cash outflows over a 30-day planning horizon, (5) required to conduct liquidity stress tests on a quarterly basis rather than the previously required monthly basis, (6) allowed to engage in more tailored liquidity risk management, including monthly rather than weekly calculations of collateral positions, the elimination of limits for activities that are not relevant to the firm, and fewer required elements of monitoring of intraday liquidity exposures, (7) exempted from company-run capital stress testing requirements, (8) exempted from the requirements of the LCR and the net stable funding ratio provided that our average wSTWF continues to remain under $50 billion, and (9) allowed to remain exempted from the requirements of the supplementary leverage ratio, the countercyclical capital buffer, and single-counterparty credit limits. We continue to be subject to rules enabling the FRB to conduct supervisory stress testing on a more or less frequent basis based on our financial condition, size, complexity, risk profile, scope of operations, or activities, or risks to the U.S. economy. Further, we remain subject to rules requiring the resubmission of our capital plan if we determine that there has been or will be a material change in our risk profile, financial condition, or corporate structure since we last submitted the capital plan or if the FRB determines that (a) our capital plan is incomplete or our capital plan or internal capital adequacy process contains material weaknesses, (b) there has been, or will likely be, a material change in our risk profile (including a material change in our business strategy or any risk exposure), financial condition, or corporate structure, (c) the BHC stress scenario(s) are not appropriate for our business model and portfolios, or changes in the financial markets or the macroeconomic outlook that could have a material impact on our risk profile and financial condition require the use of updated scenarios, or (d) our capital plan or condition raise any issues of objection.
•Capital Adequacy Requirements — Ally and Ally Bank are subject to various capital adequacy requirements. Refer to Note 20 to the Consolidated Financial Statements and the section below titled Basel Capital Frameworks for additional information.
•Capital Planning and Stress Tests — Under the tailoring framework described earlier in Enhanced Prudential Standards, Ally is generally subject to supervisory stress testing on a two-year cycle and exempted from mandated company-run capital stress testing requirements. Ally is also required to submit an annual capital plan to the FRB. Ally’s annual capital plan must include an assessment of its 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 Ally’s process for assessing capital adequacy, including a discussion of how Ally, under expected and stressful conditions, will maintain capital commensurate with its risks and above the minimum regulatory capital ratios, will serve as a source of strength to Ally Bank, and will maintain sufficient capital to continue its operations by maintaining ready access to funding, meeting its obligations to creditors and other counterparties, and continuing to serve as a credit intermediary.
We submitted our 2020 capital plan on April 3, 2020, which included planned capital distributions to common stockholders through share repurchases and cash dividends over the nine-quarter planning horizon. On June 25, 2020, the FRB provided us with the results of the supervisory stress test, additional industry-wide sensitivity analyses conducted in light of the COVID-19 pandemic, and our preliminary stress capital buffer requirement. At the same time, the FRB announced its determination that changes in financial markets or the macroeconomic outlook could have a material effect on the risk profiles and financial conditions of firms subject to the capital-plan rule and that, as a result, the firms (including Ally) would be required to resubmit capital plans to
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the FRB within 45 days after receiving updated stress scenarios from the FRB. On September 17, 2020, the FRB released two updated scenarios—severely adverse and alternative severe. We updated our capital plan in light of firm-specific baseline and stress scenarios, as required, and submitted our updated plan to the FRB on November 2, 2020. On December 18, 2020, the FRB publicly disclosed summary results of this second round of supervisory stress testing and extended its deadline for notifying firms about whether their stress capital buffer requirements will be recalculated to March 31, 2021. Refer to the section below titled Limitations on Bank and BHC Dividends and Other Capital Distributions for further details about limitations on distributions placed on firms by the FRB after its supervisory stress testing processes in 2020.
In January 2021, the FRB issued a final rule effective April 5, 2021, to align its capital planning and stress capital buffer requirements with the tailoring framework. Refer to the section below titled Basel Capital Framework for further discussion about our stress capital buffer requirements. Under the final rule, unless otherwise directed by the FRB in specified circumstances, Ally and other Category IV firms are generally no longer required to calculate forward-looking projections of revenues, losses, reserves, and pro forma capital levels under scenarios provided by the FRB. Each firm continues to be required, however, to provide a forward-looking analysis of income and capital levels under expected and stressful conditions that are designed by the firm. In addition, for Category IV firms, the final rule updated the frequency of calculating the portion of the stress capital buffer derived from the supervisory stress test to every other year. These firms 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 they would not generally be subject to the supervisory stress test. During a year in which a Category IV firm does not undergo a supervisory stress test, the firm would receive an updated stress capital buffer requirement that reflects its updated planned common-stock dividends. The final rule also includes reporting and other changes consistent with the tailoring framework.
•Resolution Planning — Under rules of the FDIC, Ally Bank is required to periodically submit to the FDIC a resolution plan (commonly known as a living will) that would enable the FDIC, as receiver, to resolve Ally Bank in the event of its insolvency under the FDI Act in a manner that ensures that depositors receive access to their insured deposits within one business day of Ally Bank’s failure (two business days if the failure occurs on a day other than Friday), maximizes the net present value return from the sale or disposition of its assets, and minimizes the amount of any loss realized by the creditors in the resolution. If the FDIC determines that the resolution plan is not credible and the deficiencies are not adequately remedied in a timely manner, the FDIC may take formal or informal supervisory, enforcement, and other actions against us. Ally Bank submitted its most recent resolution plan on July 1, 2018. In April 2019, the FDIC issued an advance notice of proposed rulemaking seeking comment on ways to tailor and improve its resolution-planning rules and, at the same time, delayed the next round of resolution-plan submissions until the rulemaking process has been completed. In May 2020, consistent with the advance notice of proposed rulemaking, the FDIC announced plans to engage in targeted engagement and capabilities testing related to resolution planning with select firms on an as-needed basis. In January 2021 the FDIC announced that, given the passage of time since the last submission of resolution plans and the uncertain economic outlook, the FDIC will resume requiring resolution plan submissions for insured depository institutions with $100 billion or more in assets, including Ally Bank. The FDIC indicated that firms will receive at least 12 months advance notice prior to such a submission. At the same time, the FDIC reiterated its plan to modify its supervisory approach to streamline content requirements for these submissions. Under the tailoring framework described earlier in Enhanced Prudential Standards, Ally is no longer required to submit to the FRB and the FDIC a plan for the rapid and orderly resolution of Ally and its significant legal entities under the U.S. Bankruptcy Code and other applicable insolvency laws in the event of future material financial distress or failure.
•Limitations on Bank and BHC Dividends and Other Capital Distributions — Federal and Utah law place a number of conditions, limits, and other restrictions on dividends and other capital distributions that may be paid by Ally Bank to IB Finance and thus indirectly to Ally. In addition, even if the FRB does not object to our capital plan as described earlier in Capital Planning and Stress Tests, Ally and IB Finance may be precluded from or limited in paying dividends or other capital distributions without the FRB’s approval under certain circumstances—for example, if Ally or IB Finance were to not meet minimum regulatory capital ratios after giving effect to the distributions. FRB supervisory guidance also directs BHCs like us to consult with the FRB prior to increasing dividends, implementing common-stock-repurchase programs, or redeeming or repurchasing capital instruments. Further, the U.S. banking agencies are authorized to prohibit an insured depository institution, like Ally Bank, or a BHC, like Ally, from engaging in unsafe or unsound banking practices and, depending upon the circumstances, could find that paying a dividend or other capital distribution would constitute an unsafe or unsound banking practice.
On June 25, 2020, the FRB announced several actions to ensure that large firms, such as Ally, remain resilient despite the economic uncertainty from the COVID-19 pandemic, including for the third quarter of 2020 (1) the suspension of repurchases by any firm of its common stock, except repurchases relating to issuances of common stock related to employee stock ownership plans, and (2) the disallowance of any increase by a firm in the amount of its common-stock dividends and the imposition of a common-stock dividend limit equal to the average of the firm’s net income for the four preceding calendar quarters. These restrictions were extended by the FRB for the fourth quarter of 2020. On December 18, 2020, the FRB extended and modified these restrictions for the first quarter of 2021 to limit aggregate common-stock dividends and share repurchases to an amount equal to the average of the firm’s net income for the four preceding calendar quarters subject to specified exceptions. Restrictions of this kind may be further extended by the FRB. 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. For additional information on our capital actions, including our stock-repurchase program and dividends on our common stock, refer to Note 20 to
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the Consolidated Financial Statements. 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), impacts related to the COVID-19 pandemic, 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.
•Transactions with Affiliates — Sections 23A and 23B of the Federal Reserve Act and the FRB’s Regulation W prevent Ally and its nonbank subsidiaries from taking undue advantage of the benefits afforded to Ally Bank as a depository institution, including its access to federal deposit insurance and the FRB’s discount window. Pursuant to these laws, “covered transactions”—including Ally Bank’s extensions of credit to and asset purchases from its affiliates—are generally subject to meaningful restrictions. For example, unless otherwise exempted, (1) covered transactions are limited to 10% of Ally Bank’s capital stock and surplus in the case of any individual affiliate and 20% of Ally Bank’s capital stock and surplus in the case of all affiliates; (2) Ally Bank’s credit transactions with an affiliate are generally subject to stringent collateralization requirements; (3) with few exceptions, Ally Bank may not purchase any “low quality asset” from an affiliate; and (4) covered transactions must be conducted on terms and conditions that are consistent with safe and sound banking practices (collectively, Affiliate Transaction Restrictions). In addition, transactions between Ally Bank and an affiliate must be on terms and conditions that are either substantially the same as or more beneficial to Ally Bank than those prevailing at the time for comparable transactions with or involving nonaffiliates.
Furthermore, these laws include an attribution rule that treats a transaction between Ally Bank and a nonaffiliate as a transaction between Ally Bank and an affiliate to the extent that the proceeds of the transaction are used for the benefit of or transferred to the affiliate.
The Dodd-Frank Act tightened the Affiliate Transaction Restrictions in a number of ways. For example, the definition of covered transactions was expanded to include credit exposures arising from derivative transactions, securities lending and borrowing transactions, and the acceptance of affiliate-issued debt obligations (other than securities) as collateral. For a credit transaction that must be collateralized, the Dodd-Frank Act also requires that collateral be maintained at all times while the credit extension or credit exposure remains outstanding and places additional limits on acceptable collateral.
•Source of Strength — The Dodd-Frank Act codified the FRB’s policy requiring a BHC, like Ally, to serve as a source of financial strength for a depository-institution subsidiary, like Ally Bank, and to commit resources to support the subsidiary in circumstances when Ally might not otherwise elect to do so. The functional regulator of any nonbank subsidiary of Ally, however, may prevent that subsidiary from directly or indirectly contributing its financial support, and if that were to preclude Ally from serving as an adequate source of financial strength, the FRB may instead require the divestiture of Ally Bank and impose operating restrictions pending such a divestiture.
•Single-Point-of-Entry Resolution Authority — Under the Dodd-Frank Act, a BHC whose failure would have serious adverse effects on the financial stability of the United States may be subjected to an FDIC-administered resolution regime called the orderly liquidation authority as an alternative to bankruptcy. If Ally were to be placed into receivership under the orderly liquidation authority, the FDIC as receiver would have considerable rights and powers in liquidating and winding up Ally, including the ability to assign assets and liabilities without the need for creditor consent or prior court review and the ability to differentiate and determine priority among creditors. In doing so, moreover, the FDIC’s primary goal would be a liquidation that mitigates risk to the financial stability of the United States and that minimizes moral hazard. Under the FDIC’s proposed single-point-of-entry strategy for the resolution of a systemically important financial institution under the orderly liquidation authority, the FDIC would place the top-tier U.S. holding company in receivership, keep its operating subsidiaries open and out of insolvency proceedings by transferring them to a new bridge holding company, impose losses on the stockholders and creditors of the holding company in receivership according to their statutory order of priority, and address the problems that led to the institution’s failure.
•Acceptance of Brokered Deposits —Under FDICIA, insured depository institutions such as Ally Bank must be well capitalized or adequately capitalized in order to accept brokered deposits, and even adequately capitalized institutions are subject to some restrictions on the rates they may offer for brokered deposits. At December 31, 2020, Ally Bank was well capitalized under the PCA framework. In December 2020, the FDIC approved a final rule to establish a new framework for analyzing whether deposits qualify as brokered deposits, including those that are accepted through arrangements between insured depository institutions, such as Ally Bank, and third parties, such as financial-technology companies. The final rule takes effect on April 1, 2021, with full compliance required as of January 1, 2022. We continue to evaluate the effect of the final rule on us, but at the present time, we expect that any effect would be a reduction in the number of deposit arrangements between Ally Bank and third parties that would be characterized as brokered deposits. Brokered deposits totaled $12.6 billion at December 31, 2020, which represented 9.2% of Ally Bank’s total deposits.
•Enforcement Authority — The FRB possesses extensive authorities and powers to regulate and supervise the conduct of Ally’s businesses and operations. If the FRB were to take the position that Ally or any of its subsidiaries have violated any law or commitment or engaged in any unsafe or unsound practice, formal or informal enforcement and other supervisory actions could be taken by the FRB against Ally, its subsidiaries, and institution-affiliated parties (such as directors, officers, and agents). The UDFI and the FDIC have similarly expansive authorities and powers over Ally Bank and its subsidiaries. For example, any of these
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governmental authorities could order us to cease and desist from engaging in specified activities or practices or could affirmatively compel us to correct specified violations or practices. Some or all of these government authorities also would have the power, as applicable, to issue administrative orders against us that can be judicially enforced, to direct us to increase capital and liquidity, to limit our dividends and other capital distributions, to restrict or redirect the growth of our assets, businesses, and operations, to assess civil money penalties against us, to remove our officers and directors, to require the divestiture or the retention of assets or entities, to terminate deposit insurance, or to force us into bankruptcy, conservatorship, or receivership. These actions could directly affect not only Ally, its subsidiaries, and institution-affiliated parties but also Ally’s counterparties, stockholders, and creditors and its commitments, arrangements, and other dealings with them.
In addition, the CFPB has broad authorities and powers to enforce federal consumer-protection laws involving financial products and services. The CFPB has exercised these authorities and powers through public enforcement actions, lawsuits, and consent orders and through nonpublic enforcement actions. In doing so, the CFPB has generally sought remediation of harm alleged to have been suffered by consumers, civil money penalties, and changes in practices and other conduct.
The SEC, FINRA, the Department of Justice, state attorneys general, and other domestic or foreign governmental authorities also have an array of means at their disposal to regulate and enforce matters within their jurisdiction that could impact Ally’s businesses and operations.
Basel Capital Framework
The FRB and other U.S. banking agencies have adopted risk-based and leverage capital standards that establish minimum capital-to-asset ratios for BHCs, like Ally, and depository institutions, like Ally Bank.
The risk-based capital ratios are based on a banking organization’s RWAs, which are generally determined under the standardized approach applicable to Ally and Ally Bank by (1) assigning on-balance-sheet exposures to broad risk-weight categories according to the counterparty or, if relevant, the guarantor or collateral (with higher risk weights assigned to categories of exposures perceived as representing greater risk), and (2) multiplying off-balance-sheet exposures by specified credit conversion factors to calculate credit equivalent amounts and assigning those credit equivalent amounts to the relevant risk-weight categories. The leverage ratio, in contrast, is based on an institution’s average unweighted on-balance-sheet exposures.
In December 2010, the Basel Committee reached an agreement on the global Basel III capital framework, which was designed to increase the quality and quantity of regulatory capital and to strengthen the regulation, supervision, and risk management of banking organizations. In July 2013, the U.S. banking agencies finalized U.S. Basel III, including the implementation of related provisions of the Dodd-Frank Act. We became subject to U.S. Basel III on January 1, 2015, although a number of its provisions—including capital buffers and certain regulatory capital deductions—were subject to a phase-in period through December 31, 2018.
Under U.S. Basel III, Ally and Ally Bank must maintain a minimum Common Equity Tier 1 risk-based capital ratio of 4.5%, a minimum Tier 1 risk-based capital ratio of 6%, and a minimum total risk-based capital ratio of 8%. In addition to these minimum risk-based capital ratios, Ally and Ally Bank are subject to a capital conservation buffer requirement, which for Ally was 3.5% and for Ally Bank was 2.5% as of December 31, 2020. Failure to maintain more than the full amount of the capital conservation buffer requirement would result in restrictions on the ability of Ally and Ally Bank to make capital distributions, including dividend payments and stock repurchases and redemptions, and to pay discretionary bonuses to executive officers. U.S. Basel III also subjects Ally and Ally Bank to a minimum Tier 1 leverage ratio of 4%.
Prompted by the enactment of the EGRRCP Act, the FRB and other U.S. banking agencies tailored the capital and liquidity requirements that apply to large U.S. banking organizations. Refer to the section above titled Bank Holding Company, Financial Holding Company, and Depository Institution Status for additional information. In March 2020, the FRB issued a final rule to more closely align forward-looking stress testing results with the FRB’s non-stress regulatory capital requirements for BHCs with $100 billion or more in total consolidated assets and other specified companies. The final rule introduced a stress capital buffer requirement based on firm-specific stress test performance and planned dividends, which for Ally replaced the fixed 2.5% component of the capital conservation buffer requirement. The final rule also made several changes to the CCAR process, such as eliminating the CCAR quantitative objection, narrowing the set of planned capital actions assumed to occur in the stress scenario, assuming that a firm maintains a constant level of assets over the planning horizon, eliminating the 30% dividend payout ratio as a criterion for heightened scrutiny of a firm’s capital plan, and allowing a firm to make capital distributions in excess of those included in its capital plan if the firm is otherwise in compliance with the automatic distribution limits of the capital framework. The final rule became effective on May 18, 2020, and therefore applied to the 2020 CCAR process. Under the final rule, Ally’s stress capital buffer requirement is the greater of 2.5% and the result of the following calculation: (1) the difference between Ally’s starting and minimum projected Common Equity Tier 1 capital ratios under the severely adverse scenario in the supervisory stress test, plus (2) the sum of the dollar amount of Ally’s planned common stock dividends for each of the fourth through seventh quarters of its nine-quarter capital planning horizon, as a percentage of risk-weighted assets. For a Category IV firm like Ally, the capital conservation buffer requirement comprises the stress capital buffer requirement. The capital conservation buffer requirement applicable to Ally’s depository-institution subsidiary, Ally Bank, continues to be a fixed 2.5%. Ally received its first preliminary stress capital buffer requirement from the FRB on June 25, 2020, which was determined under this new methodology to be 3.5%, was finalized on August 10, 2020, and became effective on October 1, 2020. On June 25, 2020, the FRB also announced its determination that changes in financial markets or the macroeconomic outlook could have a material effect on the risk profiles and financial conditions of firms subject to the capital-plan rule and that, as a result, the firms (including Ally) would be required to resubmit capital plans to the FRB within 45 days after receiving updated stress scenarios from the FRB.
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On September 17, 2020, the FRB released two updated scenarios—severely adverse and alternative severe. We updated our capital plan in light of firm-specific baseline and stress scenarios, as required, and submitted our updated plan to the FRB on November 2, 2020. On December 18, 2020, the FRB publicly disclosed summary results of this second round of supervisory stress testing and extended its deadline for notifying firms about whether their stress capital buffer requirements will be recalculated to March 31, 2021. It is possible that this resubmission process may result in a change in Ally’s stress capital buffer requirement and, consequently, its capital conservation buffer requirement.
Under the capital conservation buffer requirement, the maximum amount of capital distributions and discretionary bonus payments that can be made by a banking organization, such as Ally or Ally Bank, is a function of its eligible retained income. During the COVID-19 pandemic, the FRB and other U.S. banking agencies expressed a concern that the definition of eligible retained income would not limit distributions in the gradual manner intended but instead could do so in a sudden and severe manner even if a banking organization were to experience only a modest reduction in its capital ratios. As a result, to better allow a banking organization to use its capital buffer as intended and continue lending in adverse conditions, the U.S. banking agencies issued an interim final rule that became effective on March 20, 2020, and revised the definition of eligible retained income to the greater of (1) a banking organization’s net income for the four preceding calendar quarters, net of any distributions and associated tax effects not already reflected in net income, and (2) the average of a banking organization’s net income over the preceding four quarters. This interim final rule was adopted as final with no changes effective January 1, 2021.
U.S. Basel III also revised the eligibility criteria for regulatory capital instruments and provides for the phase-out of instruments that had previously been recognized as capital but that do not satisfy these criteria. For example, subject to certain exceptions (such as certain debt or equity issued to the U.S. government under the Emergency Economic Stabilization Act), trust preferred and other hybrid securities were excluded from a BHC’s Tier 1 capital as of January 1, 2016. Also, subject to a phase-in schedule, certain items are deducted from Common Equity Tier 1 capital under U.S. Basel III that had not previously been deducted from regulatory capital, and certain other deductions from regulatory capital have been modified. Among other things, U.S. Basel III requires investments in the capital instruments of unconsolidated financial institutions, MSAs, and certain DTAs that individually exceed a specified threshold to be deducted from Common Equity Tier 1 capital. U.S. Basel III also revised the standardized approach for calculating RWAs by, among other things, modifying certain risk weights and the methods for calculating RWAs for certain types of assets and exposures.
In July 2019, the FRB and other U.S. banking agencies issued a final rule to simplify the capital treatment for MSAs, certain DTAs, and investments in the capital instruments of unconsolidated financial institutions (collectively, threshold items). Prior to the final rule taking effect, banking organizations deducted from capital amounts of threshold items that individually exceeded 10% of Common Equity Tier 1 capital. The aggregate amount of threshold items not deducted under the 10% threshold deduction but that nonetheless exceeded 15% of Common Equity Tier 1 capital minus certain deductions from and adjustments to Common Equity Tier 1 capital were also deducted. Any amount of these MSAs and certain DTAs not deducted from Common Equity Tier 1 capital were risk weighted at 100%. The final rule removed the individual and aggregate deduction thresholds for threshold items and adopted a single 25% Common Equity Tier 1 capital deduction threshold for each item individually, and required that any of the threshold items not deducted be risk weighted at 250%. The final rule also simplified the calculation methodology for minority interests. These provisions took effect for us on April 1, 2020, and did not have a material impact on our capital position.
Ally and Ally Bank are subject to the U.S. Basel III standardized approach for counterparty credit risk but not to the U.S. Basel III advanced approaches for credit risk or operational risk. Ally is also not subject to the U.S. market-risk capital rule, which applies only to banking organizations with significant trading assets and liabilities.
The risk-based capital ratios and the Tier 1 leverage ratio play a central role in PCA, which is an enforcement framework used by the U.S. banking agencies to constrain the activities of depository institutions based on their levels of regulatory capital. Five categories have been established using thresholds for the Common Equity Tier 1 risk-based capital ratio, the Tier 1 risk-based capital ratio, the total risk-based capital ratio, and the Tier 1 leverage ratio: well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized, and critically undercapitalized. FDICIA generally prohibits a depository institution from making any capital distribution, including any payment of a cash dividend or a management fee to its BHC, if the depository institution would become undercapitalized after the distribution. An undercapitalized institution is also subject to growth limitations and must submit and fulfill a capital restoration plan. While BHCs are not subject to the PCA framework, the FRB is empowered to compel a BHC to take measures—such as the execution of financial or performance guarantees—when PCA is required in connection with one of its depository-institution subsidiaries. In addition, under FDICIA, only well-capitalized and, with a waiver from the FDIC, adequately capitalized institutions may accept brokered deposits, and even adequately capitalized institutions are subject to some restrictions on the rates they may offer for brokered deposits. At December 31, 2020, Ally Bank was well capitalized under the PCA framework.
At December 31, 2020, Ally and Ally Bank were in compliance with their regulatory capital requirements. For an additional discussion of capital adequacy requirements, refer to Note 20 to the Consolidated Financial Statements.
On January 1, 2020, we adopted CECL, which is further described in Note 1 to the Consolidated Financial Statements. In December 2018, the FRB and other U.S. banking agencies approved a final rule to address the impact of CECL on regulatory capital by allowing BHCs and banks, including Ally, the option to phase in the day-one impact of CECL over a three-year period. In March 2020, the FRB and other U.S. banking agencies issued an interim final rule that became effective on March 31, 2020, and that provides BHCs and banks with an alternative option to temporarily delay an estimate of the impact of CECL, relative to the incurred loss methodology for estimating the allowance for loan losses, on regulatory capital. The interim final rule was clarified and adjusted in a final rule that became effective
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September 30, 2020. We have elected this alternative option instead of the one described in the December 2018 rule. As a result, under the final rule, we will delay recognizing the estimated impact of CECL on regulatory capital until after a two-year deferral period, which for us extends through December 31, 2021. Beginning on January 1, 2022, we will be required to phase 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. The estimated impact of CECL on regulatory capital that we will defer and later phase in is calculated as the entire day-one impact at adoption plus 25% of the subsequent change in allowance during the two-year deferral period. As of December 31, 2020, the total deferred impact on Common Equity Tier 1 capital related to our adoption of CECL was $1.2 billion.
In December 2017, the Basel Committee approved revisions to the global Basel III capital framework (commonly known as Basel IV), many of which—if adopted in the United States—could heighten regulatory capital standards. In March 2020, to better allow banking organizations to focus their resources on navigating the COVID-19 pandemic, the implementation date of these revisions was delayed by the Basel Committee from January 1, 2022, to January 1, 2023. At this time, how the revisions will be harmonized and finalized in the United States is not clear or predictable.
Insured Depository Institution Status
Ally Bank is an insured depository institution and, as such, is required to file periodic reports with the FDIC about its financial condition. Total assets of Ally Bank were $172.0 billion and $167.5 billion at December 31, 2020, and 2019, respectively.
Ally Bank’s deposits are insured by the FDIC in the standard insurance amounts per depositor for each account ownership category as prescribed by the FDI Act. Deposit insurance is funded through assessments on Ally Bank and other insured depository institutions, and the FDIC may take action to increase insurance premiums if the DIF is not funded to its regulatory-mandated Designated Reserve Ratio (DRR). Currently, the FDIC is required to maintain a DRR of 1.35% under the FDI Act. In 2020, due to extraordinary growth in insured deposits after the start of the COVID-19 pandemic, the DIF reserve ratio fell below the 1.35% statutory minimum. The FDI Act requires that the FDIC adopt a restoration plan when the DIF reserve ratio falls below 1.35% or is expected to do so within six months. The plan must restore the DIF reserve ratio to at least 1.35% within eight years, absent extraordinary circumstances. On September 15, 2020, the FDIC announced its restoration plan, projecting the DIF reserve ratio to return to a level above 1.35% without any increase to the deposit insurance assessment rate schedule while committing to closely monitor economic conditions, the health of the banking sector, and deposit-growth trends. Under the Dodd-Frank Act, the FDIC assesses premiums from each institution based on its average consolidated total assets minus its average tangible equity, while utilizing a scorecard method to determine each institution’s risk to the DIF. In June 2020, the FDIC approved a final rule that mitigates the deposit insurance assessment effects of participating in the Paycheck Protection Program, the Paycheck Protection Program Liquidity Facility, and the Money Market Mutual Fund Liquidity Facility.
If an insured depository institution like Ally Bank were to become insolvent or if other specified events were to occur relating to its financial condition or the propriety of its actions, the FDIC may be appointed as conservator or receiver for the institution. In that capacity, the FDIC would have the power to (1) transfer assets and liabilities of the institution to another person or entity without the approval of the institution’s creditors; (2) require that its claims process be followed and to enforce statutory or other limits on damages claimed by the institution’s creditors; (3) enforce the institution’s contracts or leases according to their terms; (4) repudiate or disaffirm the institution’s contracts or leases; (5) seek to reclaim, recover, or recharacterize transfers of the institution’s assets or to exercise control over assets in which the institution may claim an interest; (6) enforce statutory or other injunctions; and (7) exercise a wide range of other rights, powers, and authorities, including those that could impair the rights and interests of all or some of the institution’s creditors. In addition, the administrative expenses of the conservator or receiver could be afforded priority over all or some of the claims of the institution’s creditors, and under the FDI Act, the claims of depositors (including the FDIC as subrogee of depositors) would enjoy priority over the claims of the institution’s unsecured creditors.
Investments in Ally
Because Ally Bank is an insured depository institution and Ally and IB Finance are BHCs, direct or indirect control of us—whether through the ownership of voting securities, influence over management or policies, or other means—is subject to approvals, conditions, and other restrictions under federal and state laws. Refer to the section above titled Bank Holding Company, Financial Holding Company, and Depository Institution Status for additional information. These laws may differ in their purposes, definitions and presumptions of control, and restrictions, which for example is the case for the BHC Act and the Change in Bank Control Act. Investors are responsible for ensuring that they do not, directly or indirectly, acquire control of us in contravention of these laws.
Asset-Backed Securitizations
Section 941 of the Dodd-Frank Act requires securitizers of different types of asset-backed securitizations, including transactions backed by residential mortgages, commercial mortgages, and commercial, credit card, and automotive loans, to retain no less than five percent of the credit risk of the assets being securitized, subject to specified exceptions. Federal regulatory agencies issued final rules implementing this risk-retention requirement in October 2014, with compliance required for residential-mortgage securitizations beginning December 24, 2015, and for other securitizations beginning December 24, 2016.
Insurance Companies
Some of our insurance operations—including in the United States, Canada, and Bermuda—are subject to certain minimum aggregate capital requirements, net asset and dividend restrictions under applicable state and foreign insurance laws, and the rules and regulations promulgated by various U.S. and foreign regulatory agencies. Under various state and foreign insurance laws, dividend distributions may be
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made only from statutory unassigned surplus with approvals required from the regulatory authorities for dividends in excess of certain statutory limitations. Our insurance operations are also subject to applicable state and foreign laws generally governing insurance companies, as well as laws addressing products that are not regulated as insurance, such as VSCs and GAP waivers.
Mortgage Finance
Our mortgage business is subject to extensive federal, state, and local laws, including related judicial and administrative decisions. These laws, among other things, impose licensing obligations and financial requirements; limit the interest rates, finance charges, and other fees that can be charged; regulate the use of credit reports and the reporting of credit information; impose underwriting requirements; regulate marketing techniques and practices; require the safeguarding of nonpublic information about customers; and regulate servicing practices, including in connection with assessments, collection and foreclosure activities, claims handling, and investment and interest payments on escrow accounts. The laws applicable to the mortgage business are complex and subject to change and to changes in interpretation and enforcement. Further, many existing laws were enacted without anticipating all of the technological and related innovations utilized by financial-technology firms and the financial-services companies that partner with them in the origination and servicing of mortgage loans, and as a result, the application of these legal frameworks is not always clear and can be subject to wide supervisory and enforcement discretion.
Through our direct-to-consumer mortgage offering, we offer a variety of jumbo and conforming fixed- and adjustable-rate mortgage products with the assistance of BMC. Jumbo mortgage loans are generally held on our balance sheet, accounted for as held-for-investment, and serviced by Cenlar FSB. Conforming mortgage loans are generally originated as held-for-sale and then sold to BMC, which in turn may sell the loans to the Federal National Mortgage Association (Fannie Mae), the Federal Home Loan Mortgage Corporation (Freddie Mac), or other participants in the secondary mortgage market. The nature and dynamics of this market, however, continue to evolve in ways that are often neither clear nor predictable. For example, Fannie Mae and Freddie Mac have been in conservatorship since September 2008. While the Federal Housing Finance Agency has published and pursued strategic goals for these government-sponsored enterprises during the conservatorship, their role in the market remains subject to uncertainty. Relatedly, during this same period, Congress has debated comprehensive housing-finance reform, but proposed legislation has yet to be meaningfully advanced.
Ally Invest Subsidiaries
Ally Invest Securities LLC (Ally Invest Securities) is registered as a securities broker-dealer with the SEC and in all 50 states, the District of Columbia, and Puerto Rico, is registered with the Municipal Securities Rulemaking Board as a municipal securities broker-dealer, and is a member of FINRA and the Securities Investor Protection Corporation (SIPC). As a result, Ally Invest Securities and its personnel are subject to extensive requirements under the Securities Exchange Act of 1934, as amended (Exchange Act), SEC regulations, SRO rules, and state laws, which collectively cover all aspects of the firm’s securities activities—including sales and trading practices, capital adequacy, recordkeeping, privacy, anti-money laundering, financial and other reporting, supervision, misuse of material nonpublic information, conduct of its business in accordance with just and equitable principles of trade, and personnel qualifications. The firm operates as an introducing broker and clears all transactions, including all customer transactions, through a third-party clearing broker-dealer on a fully disclosed basis.
Ally Invest Forex LLC (Ally Invest Forex) is registered with the U.S. Commodity Futures Trading Commission (CFTC) as an introducing broker and is a member of the National Futures Association (NFA), which is the primary SRO for the U.S. futures industry. The firm is subject to similarly expansive requirements under the Commodity Exchange Act, CFTC and NFA rules governing introducing brokers and their personnel, and CFTC retail forex rules.
Ally Invest Advisors Inc. (Ally Invest Advisors) is registered as an investment adviser with the SEC. As a result, the firm is subject to a host of requirements governing investment advisers and their personnel under the Investment Advisers Act of 1940, as amended, and related rules and regulations, including certain fiduciary and other obligations with respect to its relationships with its investment advisory clients.
Regulators conduct periodic examinations of Ally Invest Securities, Ally Invest Forex, and Ally Invest Advisors and regularly review reports that the firms are required to submit on an ongoing basis. Violations of relevant regulatory requirements could result in adverse consequences for the firms and their personnel, including censure, penalties and fines, the issuance of cease-and-desist orders, and restriction, suspension or expulsion from the securities industry.
Other Laws
Ally is subject to numerous federal, state, and local statutes, regulations, and other laws, and the possibility of violating applicable law presents ongoing compliance, operational, reputation, and other risks to Ally. Some of the other more significant laws to which we are subject include:
•Privacy and Data Security — The GLB Act and related regulations impose obligations on financial institutions to safeguard specified consumer information maintained by them, to provide notice of their privacy practices to consumers in specified circumstances, and to allow consumers to opt out of specified kinds of information sharing with unaffiliated parties. Related regulatory guidance also directs financial institutions to notify consumers in specified cases of unauthorized access to sensitive consumer information. In addition, most states have enacted laws requiring notice of specified cases of unauthorized access to information. In February 2017, the NYDFS adopted expansive cybersecurity regulations that require regulated entities to establish cybersecurity programs and policies, to designate chief information security officers, to comply with notice and reporting obligations, and to take other actions in connection with the security of their information. On January 1, 2020, a comprehensive privacy law went into effect in the State of California, requiring regulated entities to establish measures to identify, manage, secure, track, produce, and delete personal information.
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In December 2020, the U.S. banking agencies released a proposed rule to establish notification requirements for banking organizations in connection with significant computer security incidents. Under the proposal, a BHC, such as Ally, and a state-chartered bank that is a member of the Federal Reserve System, such as Ally Bank, would be required to notify the FRB within 36 hours of incidents that could result in the banking organization’s inability to deliver services to a material portion of its customer base, could jeopardize the viability of key operations of the banking organization, or could impact the stability of the financial sector. The effects on Ally and Ally Bank will depend on the content of the final rule and the manner of its implementation.
•Volcker Rule — Under the Dodd-Frank Act and implementing regulations of the CFTC, the FDIC, the FRB, the Office of the Comptroller of the Currency, and the SEC (collectively, the Volcker Rule), insured depository institutions and their affiliates are prohibited from (1) engaging in proprietary trading, and (2) investing in or sponsoring certain types of funds (covered funds) subject to limited exceptions. The final rules contain exemptions for market-making, hedging, underwriting, and trading in U.S. government and agency obligations and also permit the retention of ownership interests in certain types of funds and the offering and sponsoring of funds under certain conditions. In early 2017, the FRB granted us a five-year extension to conform with requirements related to certain covered-fund activities. Effective January 1, 2020, the regulatory agencies amended the proprietary-trading provisions in the Volcker Rule to simplify and streamline compliance requirements for firms that do not have significant trading activity, such as Ally. In addition, effective October 1, 2020, the regulatory agencies amended the covered-fund provisions in the Volcker Rule to clarify and streamline their application and to permit banking entities to engage in activities that do not raise concerns that the Volcker Rule was intended to address, including in connection with specified credit funds, venture-capital funds, family-wealth-management vehicles, and customer-facilitation vehicles.
•Fair Lending Laws — The Equal Credit Opportunity Act, the Fair Housing Act, and similar fair-lending laws (collectively, Fair Lending Laws) generally prohibit a creditor from discriminating against an applicant or borrower in any aspect of a credit transaction on the basis of specified characteristics known as prohibited bases such as race, gender, and religion. Creditors are also required under the Fair Lending Laws to follow a number of highly prescriptive rules, including rules requiring credit decisions to be made promptly, notices of adverse actions to be given, and, in the case of mortgage lenders of a certain size, anonymized data and information about mortgage applicants and credit decisions to be gathered and made publicly available.
•Fair Credit Reporting Act — The Fair Credit Reporting Act regulates the dissemination of credit reports by credit reporting agencies, requires users of credit reports to provide specified notices to the subjects of those reports, imposes standards on the furnishing of information to credit reporting agencies, obligates furnishers to maintain reasonable procedures to deal with the risk of identity theft, addresses the sharing of specified kinds of information with affiliates and third parties, and regulates the use of credit reports to make preapproved offers of credit and insurance to consumers.
•Truth in Lending Act — The Truth in Lending Act (TILA) and Regulation Z, which implements TILA, require lenders to provide borrowers with uniform, understandable information about the terms and conditions in certain credit transactions. These rules apply to Ally and its subsidiaries when they extend credit to consumers and require, in the case of certain loans, conspicuous disclosure of the finance charge and annual percentage rate, as applicable. In addition, if an advertisement for credit states specific credit terms, Regulation Z requires that the advertisement state only those terms that actually are or will be arranged or offered by the creditor together with specified notices. The CFPB in recent years has issued substantial amendments to the mortgage requirements under Regulation Z, and additional changes are likely in the future. Amendments to Regulation Z and Regulation X, which implements the Real Estate Settlement Procedures Act, require integrated mortgage loan disclosures to be provided for applications received on or after October 3, 2015.
•Sarbanes-Oxley Act — The Sarbanes-Oxley Act of 2002 implemented a broad range of corporate-governance and accounting measures designed to improve the accuracy, reliability, and transparency of corporate financial reporting and disclosures and to reinforce the importance of corporate ethical standards. Among other things, this law provided for (1) the creation of an independent accounting oversight board; (2) auditor independence provisions that restrict non-audit services that accountants may provide to their audit clients; (3) additional corporate governance and responsibility measures including the requirement that the principal executive and financial officers certify financial statements; (4) the potential forfeiture of bonuses or other incentive-based compensation and profits from the sale of an issuer’s securities by directors and senior officers in the 12 month period following initial publication of any financial statements that later require restatement; (5) an increase in the oversight and enhancement of certain requirements relating to audit committees and how they interact with the independent auditors; (6) requirements that audit committee members must be independent and are barred from accepting consulting, advisory, or other compensatory fees from the issuer; (7) requirements that companies disclose whether at least one member of the audit committee is a “financial expert” (as defined by the SEC) and, if not, why the audit committee does not have a financial expert; (8) a prohibition on personal loans to directors and officers, except certain loans made by insured financial institutions, on non-preferential terms and in compliance with other bank regulatory requirements; (9) disclosure of a code of ethics; (10) requirements that management assess the effectiveness of internal control over financial reporting and that the independent registered public accounting firm attest to the assessment; and (11) a range of enhanced penalties for fraud and other violations.
•USA PATRIOT Act/Anti-Money-Laundering Requirements— In 2001, the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act (USA PATRIOT Act) was signed into law. Title III of the USA PATRIOT Act amends the Bank Secrecy Act and contains provisions designed to detect and prevent the use of the U.S. financial system for money laundering and terrorist financing activities. In January 2021, the Bank Secrecy Act was further
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amended by the Anti-Money Laundering Act of 2020 (AMLA), which comprehensively reforms and modernizes U.S. anti-money-laundering laws. The Bank Secrecy Act, as amended by the USA PATRIOT Act and the Anti-Money Laundering Act of 2020, generally requires banks, certain other financial institutions, and, in certain cases, BHCs to undertake activities including maintaining an anti-money-laundering program, verifying the identity of clients, monitoring for and reporting on suspicious transactions, reporting on cash transactions exceeding specified thresholds, and responding to certain requests for information by regulatory authorities and law enforcement agencies. In addition, the AMLA codifies a risk-based approach to anti-money-laundering compliance for financial institutions, requires the U.S. Treasury Department to develop standards for evaluating technology and internal processes for Bank Secrecy Act compliance, directs the Financial Crimes Enforcement Network (FinCEN) to establish a registration database of beneficial-ownership information that designated companies will be required to report, and expands enforcement- and investigation-related authority and available sanctions for specified Bank Secrecy Act violations. Many provisions of the AMLA will require additional rulemakings, reports, and other measures, and the impact of the AMLA will depend at least in part on their development and implementation.
•Community Reinvestment Act — Under the CRA, a bank has a continuing and affirmative obligation, consistent with the safe and sound operation of the institution, to help meet the credit needs of its entire community, including low- and moderate-income persons and neighborhoods. While the CRA does not establish specific lending requirements or programs, banks are rated on their performance in meeting the needs of their communities. In its most recent performance evaluation in 2020, Ally Bank received an “Outstanding” rating. In January 2020, Ally Bank began operating under a new three-year CRA strategic plan approved by the FRB. Failure by Ally Bank to maintain a “Satisfactory” or better rating under the CRA may adversely affect our ability to expand our financial and related activities as an FHC or make acquisitions. Refer to the section above titled Bank Holding Company, Financial Holding Company, and Depository Institution Status for additional information. In September 2020, the FRB issued an advance notice of proposed rulemaking on an approach to modernize the regulations that implement the CRA by strengthening, clarifying, and tailoring them to reflect the current banking landscape and better meet the core purpose of the CRA, including by tailoring performance tests and assessments to account for differences in bank sizes and business models.
Human Capital
Our employees are integral to the success of our business, and central to our strategy is attracting, developing, and retaining talented individuals with the right skills to drive our business forward. We emphasize a working environment and company culture that embrace diverse talents, backgrounds, and perspectives and where colleagues feel valued as both individuals and members of the team. We had approximately 9,500 and 8,700 employees at December 31, 2020, and 2019, respectively, which consist primarily of full-time employees in the United States. Our employee growth for the year ended December 31, 2020, was primarily attributable to our focus on supporting customers through expanded servicing within our Automotive Finance business and enhanced digital capabilities. Some of our key objectives, programs, and initiatives that are designed to attract, develop, and retain talent are detailed below.
Culture
We recognize the long-term success of our Company is underpinned by the strength of our purpose-driven culture— a culture that sets us apart from the competition and gives us a distinct competitive advantage as we recruit and retain talented teammates. Our people-first approach enables a winning customer-centric philosophy focused on resiliency, adaptability, and a growth-mindset-oriented drive to “Be (Even) Better.” We strive to uphold our mantra to “Do it Right” through decisions and deeds at all levels of the organization, and we collectively commit to work with integrity and accountability and to uphold our LEAD core values in the workplace, in the marketplace, and in the community. Our culture is driven by our “LEAD” core values, where we emphasize that employees.
•[L]ook externally – We strive to meet and exceed the needs of our customers with agility, speed, and innovation. We continually evolve, respond quickly, and deliver a superior customer experience.
•[E]xecute with excellence – Good enough is never enough. With a focus on continuous improvement, our actions are driven by sound analysis and an intense focus on excellence.
•[A]ct with professionalism – We operate with integrity, hold ourselves and each other accountable, treat others with respect, and embrace diversity and inclusion. This is the cornerstone to our long-term success and at the very foundation of what it means to be an ally.
•[D]eliver results – We are passionate about winning – for our customers, our teams, and our company. Success is measured at both the outcome and the path to achieve it.
Diversity and Inclusion
We believe the best ideas come from a collective mixture of different voices and perspectives. We are an equal opportunity employer, and we strive for an inclusive work environment where all backgrounds, experiences, interests, viewpoints, and skills are respected, appreciated, and encouraged consistent with our culture. We are focused on diverse representation and retention in the workforce—including different genders, races, nationalities, sexual orientations, and other identities—across all levels of the organization from entry to leadership. Fostering these diverse perspectives is important and reflects the beliefs and actions that are the backbone of our culture.
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We have a deliberate focus on D&I. Its importance starts at the top with our CEO, who consistently stresses the value in leveraging our differences. In June 2017, our CEO was among the first 150 CEOs who signed on to the CEO Action Pledge for Diversity and Inclusion, and this commitment has been renewed every year since. In connection with nationwide movements against systemic racism and social injustices during 2020, our Board and Executive Council publicly pledged our continuing support for Black and Brown colleagues, suppliers, partners, and communities in the promotion of equity and equality.
In 2017, we launched a D&I Council, which provides executive leadership on D&I and promotes belonging at Ally and in our communities. In 2020, we further enhanced our commitment to D&I with a financial and social inclusion roadmap that includes specific objectives. The framework is built upon four pillars: Community, Customers, Employees, and Suppliers.
•Community: Further social justice and address disparate systems and policies through an intentional approach to its philanthropy, volunteerism, board service as well as CRA initiatives including loans, investments, and partnerships.
•Employees: Increase representation and retention of Black and Brown employees at professional, managerial, and executive levels through intentional programming and support.
•Customers: Enable financial and social inclusion through our culture of customer obsession, developing education and/or solutions to strengthen economic mobility for all.
•Suppliers: Actively promote ways diverse businesses can engage and succeed within the Ally Supply Chain.
We take deliberate steps to weave D&I through all of Ally’s human capital efforts: from pipelining candidates, onboarding, all the way through the employee lifecycle. With this approach, we have been able to build on our “One Ally” culture to celebrate the differences that our employees bring to the workplace. In 2020, we held Learn (In)clusion sessions, which are deeper dives on topics for our managers to learn the impacts of unconscious bias. Every employee has a specific culture-related performance objective, which includes a strong focus on D&I. Additionally, for all executive leaders, annual performance objectives and reviews include a specific focus on mobility and diversity trends within the workforce. The importance of D&I is also consistently reinforced by executive leadership through town hall meetings, employee communications, and active participation in our ERGs. A diverse and inclusive workforce makes us stronger, more agile, more innovative, and more adaptable. We believe it makes us better and benefits us from financial, operational, and cultural perspectives.
We maintain eight ERGs sponsored by members of Ally’s Executive Council. These ERGs consist of: Aliados, Asian/Middle Eastern, Black/African American, Diverse Abilities, Generational, Pride, Veteran, and Women ALLYs. Membership in Ally’s ERGs is voluntary and open to all employees, whether they identify with the ERG or view themselves as an ally to the group. At December 31, 2020, 38% of our workforce belonged to at least one ERG, increasing from 35% as of December 31, 2019. Our objective is to uphold a workplace environment where all employees feel heard and know that they can bring their authentic selves to work every day consistent with our culture.
In 2018, in response to the issue of economic mobility and to further enhance our D&I efforts, we continued to deepen our relationship with TMCF through a number of programs, including the launch of Moguls in the Making, and contributed $1 million to the Smithsonian’s National Museum of African American History and Culture. Moguls in the Making is an annual competition that helps foster opportunities for young, up-and-coming entrepreneurs from our nation’s publicly-supported historically black colleges and universities. In 2019, TMCF honored our CEO as its CEO of the Year. In 2020, we hosted our second annual Moguls in the Making competition, which was held virtually with 50 students working in teams to develop a business plan that took into account COVID-19 and social equity. These experiences help develop skills for future careers, including for the over 20 students who have been offered internships with Ally in 2020. In early 2021, we took additional steps to address inequality of access to careers with long-term growth potential with a $1.3 million commitment in scholarships and programs in partnership with the Congressional Black Caucus Foundation, TMCF, and other professional university groups.
We recognize one way to foster diverse and inclusive perspectives is to safeguard pay equality. We shifted from requests for salary history to salary expectations in our external hiring practices to help in confirming that our compensation is based on market rates for roles, experience, and performance. To the same end, we regularly benchmark our compensation against other companies both within and outside our industry. On February 1, 2021, we established an internal minimum hourly wage for our U.S. employees at $17.
In January 2020, Ally launched its Supplier Diversity program to focus on diversity and inclusion among its supplier base. The Supplier Diversity program includes a proactive business strategy encouraging the use of suppliers owned by U.S.-based minorities, women, LGBTQ, veterans, service-disabled veterans and those with disabilities, and small or disadvantaged businesses defined by local, state, or federal classifications. The program also encourages all Ally third-party suppliers to utilize diverse-owned suppliers and small businesses on a second-tier basis. During 2020, we initiated a second-tier reporting program to capture additional diverse spend associated with Ally’s prime suppliers that are utilizing minority, women, LGBTQ, veteran, disability-owned, and small or disadvantaged businesses to help support Ally. Additionally, in January 2021, Ally hosted its inaugural Supplier Diversity Symposium, engaging more than 40 diverse suppliers in a company-wide networking event with our CEO and other Ally business executives to build relationships and explore opportunities to expand our spend with diverse suppliers.
Engagement
Active engagement is key as we continue to build a company where our employees want to work, have purposeful careers, and feel empowered to make a difference. Throughout the year, we leverage a third-party provider to administer confidential, anonymous employee surveys to provide management feedback on key strengths, as well as to identify areas where we can take action to further improve our
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culture and further strengthen our engaged workforce. Our latest company-wide engagement survey in 2020 was responded to by 82% of our employees and had an average employee engagement score of 87 out of 100, as compared to the financial services industry benchmark of 72 out of 100, as measured by our third-party provider. Active employee engagement helps to strengthen our employee retention rate, which was 90.3% for the year ended December 31, 2020.
Learning and Development
We hold numerous programs to invest in the growth and development of our employees. Our employee base receives continuing education courses relevant to our industry through the Ally Learning Center, in addition to on-the-job training related to their function. We have organized a mentor-mentee program as an avenue for our employees to share knowledge, experience, and perspective and to foster the personal and professional growth of one another. We encourage internal mobility among our employees, contributing to 29% of our existing eligible workforce that has been with Ally for at least one year receiving promotions or taking on new roles during the year ended December 31, 2020. We also provide support for continuing education through a tuition reimbursement program, as well as student loan repayment assistance and contributions to employee’s 529 education savings plans. We emphasize career and skill development as part of our annual performance management process, in addition to targeted trainings for management development.
Total Rewards, Health, and Wellness
Our compensation program offers market-competitive base pay and pay-for-performance incentives based on achieving individual and company goals. In addition, our total rewards include competitive holiday and flexible paid-time-off, a 401(k) retirement savings plan with matching and company contributions that can total up to 10% of an employee’s salary per year, as well as other benefits designed to support the personal and professional lives of our employees. Examples of these benefits include paid parental and caregiver leave, adoption and surrogacy assistance, a backup child and adult/elder care program, and an employee assistance program. We also match employee donations to registered nonprofits subject to an annual cap and provide our employees with eight hours of voluntary-time-off to give back in the communities where we work.
We empower our employees to act as founders with an owner’s mindset across all levels of the organization and all parts of the business. In January 2020, we awarded all active, regular Ally employees with 100 restricted stock units, subject to a 3-year cliff vesting schedule, in recognition of our notable accomplishments and to support a founder’s mentality. A second grant of 100 restricted stock units with a 3-year cliff vesting schedule was issued in January 2021. To further encourage the mindset of an owner, we also maintain an employee stock purchase plan that provides employees with the opportunity to purchase Ally stock at a discount.
Supporting and valuing all of our employees is central to our culture. We offer flexible health insurance options including dental and vision for our employees, as well as a pre-tax health savings account with employer contributions. We provide life and disability benefits and manage a wellness program encouraging healthy living with financial rewards.
In response to the COVID-19 pandemic, we provided a range of financial-assistance offerings, including a $1,200 expense payment for those earning less than $100,000. We enhanced existing benefits and introduced new benefits related to COVID-19 and mental health concerns. In May 2020, we launched the Ally Employee Relief Fund with a $250,000 contribution. Including matching contributions by Ally, this fund has been augmented by over $160,000 in additional donations and has helped over 500 of our employees. In August, recognizing the continuing difficulties caused by the pandemic, we paid 50% of the 2020 incentive-compensation targets for most of our non-executive employees in advance of expected year-end amounts.
To curb the spread of COVID-19, we instituted a remote work protocol in mid-March 2020, and as of December 31, 2020, over 99% of our employees continue to work remotely. For those employees who are working at our facilities to address critical business needs, we have implemented a daily health and temperature screening and reconfigured our working environment to allow for social distancing. The health and safety of our employees remain paramount in our decision-making, and our phased reopening of our facilities will be based on viral trends, governmental regulations, and local ordinances.
Additional Information
Our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, and Current Reports on Form 8-K (and amendments to these reports) are available on our internet website, free of charge, as soon as reasonably practicable after the reports are electronically filed with or furnished to the SEC. These reports are available at www.ally.com/about/investor/sec-filings/. These reports can also be found on the SEC website at www.sec.gov.
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Item 1A. Risk Factors
We face many risks and uncertainties, any one or more of which could have a material adverse effect on our business, results of operations, financial condition (including capital and liquidity), or prospects or the value of or return on an investment in Ally. We describe certain of these risks and uncertainties in this section, although we may be adversely affected by other risks or uncertainties that are not presently known to us, that we have failed to appreciate, or that we currently consider immaterial. These risk factors should be read in conjunction with the MD&A in Part II, Item 7 of this report, and the Consolidated Financial Statements and notes thereto. This Annual Report on Form 10-K is qualified in its entirety by these risk factors.
Risks Related to Regulation and Supervision
The regulatory and supervisory environment in which we operate could have an adverse effect on our business, financial condition, results of operations, and prospects.
We are subject to extensive regulatory frameworks and to direct supervision and periodic examinations by various governmental agencies and industry SROs that are charged with overseeing the kinds of business activities in which we engage. This regulatory and supervisory oversight is designed to protect public and private interests—such as macroeconomic policy objectives, financial-market stability and liquidity, and the confidence and security of depositors generally—that may not always be aligned with those of our stockholders or non-deposit creditors. At any given time, we are involved in a number of legal and regulatory proceedings and governmental and regulatory examinations, investigations, and other inquiries. Refer to the section above titled Regulation and Supervision in Part I, Item 1 of this report. In the last decade, governmental scrutiny of the financial-services industry has intensified, fundamental changes have been made to the banking, securities, and other laws that govern financial services, and a multitude of related business practices have been altered. While the scope, intensity, and focus of governmental oversight can vary from time to time, we expect to continue devoting substantial time and resources to risk management, compliance, regulatory-change management, and cybersecurity and other technology initiatives, each of which may adversely affect our ability to operate profitably or to pursue advantageous business opportunities.
Ally has elected to be treated as an FHC, which permits us to engage in a number of financial and related activities—including securities, advisory, insurance, and merchant-banking activities—beyond the business of banking. Ally and Ally Bank are subject to ongoing requirements to qualify as an FHC. If Ally or Ally Bank is found not to be well capitalized or well managed, as defined under applicable law, we can be restricted from engaging in the broader range of financial and related activities permitted for FHCs, including the ability to acquire companies engaged in those activities, and can be required to discontinue these activities or even divest Ally Bank. In addition, if we fail to achieve a satisfactory or better rating under the CRA, our ability to expand these financial and related activities or make acquisitions could be restricted.
In connection with their continuous supervision and examinations of us, the FRB, the UDFI, the CFPB, the SEC, FINRA, the NYDFS, or other regulatory agencies may require changes in our business or operations. Such a requirement may be judicially enforceable or impractical for us to contest, and if we are unable to comply with the requirement in a timely and effective manner, we could become subject to formal or informal enforcement and other supervisory actions, including memoranda of understanding, written agreements, cease-and-desist orders, and prompt-corrective-action or safety-and-soundness directives. The financial-services industry continues to face scrutiny from supervisory authorities in the examination process, including through an increasing use of horizontal reviews from a broader industry perspective, as well as strict enforcement of laws at federal, state, and local levels, particularly in connection with mortgage-related practices, sales practices and related incentive-compensation programs, and compliance with anti-money-laundering, sanctions, and related laws. In general, the amounts paid by financial institutions in settling proceedings or investigations and the severity of other terms of regulatory settlements are likely to remain elevated. In some cases, governmental authorities have required criminal pleas or other extraordinary terms, including admissions of wrongdoing and the imposition of monitors, as part of settlements. Supervisory actions could entail significant restrictions on our existing business, our ability to develop new business, our flexibility in conducting operations, and our ability to pay dividends or utilize capital. Enforcement and other supervisory actions also can result in the imposition of civil monetary penalties or injunctions, related litigation by private plaintiffs, damage to our reputation, and a loss of customer or investor confidence. We could be required as well to dispose of specified assets and liabilities within a prescribed period of time. As a result, any enforcement or other supervisory action could have an adverse effect on our business, financial condition, results of operations, and prospects.
Our regulatory and supervisory environments—whether at federal, state, or local levels—are not static. No assurance can be given that applicable statutes, regulations, and other laws will not be amended or construed differently, that new laws will not be adopted, or that any of these laws will not be enforced more aggressively. For example, while Congress nullified the CFPB’s guidance about compliance with fair-lending laws in the context of indirect automotive financing, the NYDFS has since adopted arguably more far-reaching guidance on the subject. Changes in the regulatory and supervisory environments could adversely affect us in substantial and unpredictable ways, including by limiting the types of financial services and products we may offer, enhancing the ability of others to offer more competitive financial services and products, restricting our ability to make acquisitions or pursue other profitable opportunities, and negatively impacting our financial condition and results of operations. Further, our noncompliance with applicable laws—whether as a result of changes in interpretation or enforcement, system or human errors, or otherwise—could result in the suspension or revocation of licenses or registrations that we need to operate and in the initiation of enforcement and other supervisory actions or private litigation.
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Our ability to execute our business strategy for Ally Bank may be adversely affected by regulatory constraints.
A primary component of our business strategy is the continued growth of Ally Bank, which is a direct bank with no branch network. This growth includes expanding our consumer and commercial lending and increasing our deposit customers and balances while optimizing our cost of funds. If regulatory agencies raise concerns about any aspect of our business strategy for Ally Bank or the way in which we implement it, we may be obliged to limit or even reverse the growth of Ally Bank or otherwise alter our strategy, which could have an adverse effect on our business, financial condition, results of operations, or prospects. In addition, if we are compelled to retain or shift any of our business activities in or to nonbank affiliates, our funding costs for those activities—such as unsecured funding in the capital markets—could be more expensive than our cost of funds at Ally Bank.
We are subject to stress tests, capital and liquidity planning, and other enhanced prudential standards, which impose significant restrictions and costly requirements on our business and operations.
We are currently subject to enhanced prudential standards that have been established by the FRB, as required or authorized under the Dodd-Frank Act. Refer to the section above titled Regulation and Supervision in Part I, Item 1 of this report. Under the FRB’s tailoring framework for the enhanced prudential standards, Ally is a Category IV firm and, as such, is generally subject to supervisory stress testing on a two-year cycle and is required to submit an annual capital plan to the FRB. The FRB will either object to the plan, in whole or in part, or provide a notice of non-objection. The failure to receive a notice of non-objection from the FRB—whether due to how well our business and operations are forecasted to perform, how capably we execute our capital-planning process, how acutely the FRB projects severely adverse conditions to be, or otherwise—may prohibit us from paying dividends, repurchasing our common stock, or making other capital distributions, may compel us to issue capital instruments that could be dilutive to stockholders, may prevent us from maintaining or expanding lending or other business activities, or may damage our reputation and result in a loss of customer or investor confidence.
Further, we may be required to raise capital if we are at risk of failing to satisfy our minimum regulatory capital ratios or related supervisory requirements, whether due to inadequate operating results that erode capital, future growth that outpaces the accumulation of capital through earnings, changes in regulatory capital standards, changes in accounting standards that affect capital (such as CECL), or otherwise. In addition, we may elect to raise capital for strategic reasons even when we are not required to do so. Our ability to raise capital on favorable terms or at all will depend on general economic and market conditions, which are outside of our control, and on our operating and financial performance. Accordingly, we cannot be assured of being able to raise capital when needed or on favorable terms. An inability to raise capital when needed and on favorable terms could damage the performance and value of our business, prompt supervisory actions and private litigation, harm our reputation, and cause a loss of customer or investor confidence, and if the condition were to persist for any appreciable period of time, our viability as a going concern could be threatened. Even if we are able to raise capital but do so by issuing common stock or convertible securities, the ownership interest of our existing stockholders could be diluted, and the market price of our common stock could decline.
The enhanced prudential standards also require Ally, as a Category IV firm, to conduct quarterly liquidity stress tests, to maintain a buffer of unencumbered highly liquid assets to meet projected net stressed cash outflows over a 30-day planning horizon, to adopt a contingency funding plan that would address liquidity needs during various stress events, and to implement specified liquidity risk management and corporate governance measures. These enhanced liquidity standards could constrain our ability to originate or invest in longer-term or less liquid assets or to take advantage of other profitable opportunities and, therefore, may adversely affect our business, results of operations, and prospects.
Our ability to rely on deposits as a part of our funding strategy may be limited.
Ally Bank is a key part of our funding strategy, and we place great reliance on deposits at Ally Bank as a source of funding. Competition for deposits and deposit customers, however, is fierce and has only intensified with the implementation of enhanced capital and liquidity requirements in the last decade. Ally Bank does not have a branch network but, instead, obtains its deposits through online and other digital channels, from customers of Ally Invest, and through deposit brokers. Brokered deposits may be more price sensitive than other types of deposits and may become less available if alternative investments offer higher returns. Brokered deposits totaled $12.6 billion at December 31, 2020, which represented 9.2% of Ally Bank’s total deposits. In addition, our ability to maintain or grow deposits may be constrained by our lack of in-person banking services, gaps in our product and service offerings, changes in consumer trends, our smaller scale relative to other financial institutions, competition from fintech companies and emerging financial-services providers, any failures or deterioration in our customer service, or any loss of confidence in our brand or our business. Our level of deposits also could be adversely affected by regulatory or supervisory restrictions, including any applicable prior approval requirements or limits on our offered rates or brokered deposit growth, and by changes in monetary or fiscal policies that influence deposit or other interest rates. Perceptions of our existing and future financial strength, rates or returns offered by other financial institutions or third parties, and other competitive factors beyond our control, including returns on alternative investments, will also impact the size of our deposit base.
Requirements under U.S. Basel III that increased the quality and quantity of regulatory capital and future revisions to the Basel III framework may adversely affect our business and financial results.
Ally and Ally Bank became subject to U.S. Basel III on January 1, 2015. Refer to the section above titled Regulation and Supervision in Part I, Item 1 of this report. U.S. Basel III subjects Ally and Ally Bank to higher minimum risk-based capital ratios and a capital conservation buffer above these minimum ratios. Failure to maintain more than the full amount of the capital conservation buffer requirement would result in restrictions on our ability to make capital distributions, including dividend payments and stock repurchases and redemptions, and to pay
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discretionary bonuses to executive officers. U.S. Basel III also has, over time, imposed more stringent deductions for specified DTAs and other assets and limited our ability to meet regulatory capital requirements through the use of trust preferred securities or other hybrid securities.
If Ally or Ally Bank were to fail to satisfy its regulatory capital requirements, significant regulatory sanctions could result, such as a bar on capital distributions, limitations on acquisitions and new activities, restrictions on our acceptance of brokered deposits, a loss of our status as an FHC, or informal or formal enforcement and other supervisory actions. Such a failure also could irrevocably damage our reputation, prompt a loss of customer and investor confidence, generate private litigation, and even lead to our resolution or receivership. Any of these consequences could have an adverse effect on our business, results of operations, financial condition, or prospects.
CECL became effective on January 1, 2020, and substantially increased our allowance for loan losses with a resulting negative day-one adjustment to equity. Refer to Note 1 to the Consolidated Financial Statements and the section above titled Regulation and Supervision in Part I, Item 1 of this report. We are permitted to delay recognizing the estimated impact of CECL on regulatory capital until after a two-year deferral period, which for us extends through December 31, 2021. Beginning on January 1, 2022, we will be required to phase 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. The estimated impact of CECL on regulatory capital that we will defer and later phase in is calculated as the entire day-one impact at adoption plus 25% of the subsequent change in allowance during the two-year deferral period. In addition, the FRB has announced that, in order to reduce uncertainty, the FRB will maintain its current modeling framework for the allowance for loan losses in supervisory stress tests through the 2021 cycle. It is not yet clear whether, taken together, these actions by the U.S. banking agencies will mitigate the impact of CECL to a degree that is sufficient for us to sustain appropriate levels of regulatory capital without meaningfully altering our business, financial, and operational plans, including our current level of capital distributions. If the actions are insufficient, our business, results of operations, financial condition, or prospects could suffer.
In December 2017, the Basel Committee approved revisions to the global Basel III capital framework (commonly known as Basel IV), many of which—if adopted in the United States—could heighten regulatory capital standards. How these revisions will be finalized in the United States and harmonized with other regulatory proposals (such as the stress capital buffer) is not clear or predictable, and no assurance can be provided that they would not further impact our business, results of operations, financial condition, or prospects in an adverse way.
Our business and financial results could be adversely affected by the political environment and governmental fiscal and monetary policies.
A fractious or volatile political environment in the United States, including any related social unrest, could negatively impact business and market conditions, economic growth, financial stability, and business, consumer, investor, and regulatory sentiments, any one or more of which in turn could cause our business and financial results to suffer. In addition, disruptions in the foreign relations of the United States could adversely affect the automotive and other industries on which our business depends and our tax positions and other dealings in foreign countries. We also could be negatively impacted by political scrutiny of the financial-services industry in general or our business or operations in particular, whether or not warranted, and by an environment where criticizing financial-services providers or their activities is politically advantageous.
Our business and financial results are also significantly affected by the fiscal and monetary policies of the U.S. government and its agencies. We are particularly affected by the monetary policies of the FRB, which regulates the supply of money and credit in the United States in pursuit of maximum employment, stable prices, and moderate long-term interest rates. The FRB and its policies influence the availability and demand for loans and deposits, the rates and other terms for loans and deposits, the conditions in equity, fixed-income, currency, and other markets, and the value of securities and other financial instruments. Refer to the risk factor below, titled The levels of or changes in interest rates could affect our results of operations and financial condition, for more information on how the FRB could affect interest rates. These policies and related governmental actions could adversely affect every facet of our business and operations—for example, the new and used vehicle financing market, the cost of our deposits and other interest-bearing liabilities, and the yield on our earning assets. Additionally, changes to tax policies could have a material impact to our results of operations and financial condition. An increase in the federal statutory rate could result in a significant day-one tax expense related to the revaluation of our deferred tax assets and liabilities, and a significant increase in tax expense for future years. Tax and other fiscal policies, moreover, impact not only general economic and market conditions but also give rise to incentives or disincentives that affect how we and our customers prioritize objectives, deploy resources, and run households or operate businesses. Both the timing and the nature of any changes in monetary or fiscal policies, as well as their consequences for the economy and the markets in which we operate, are beyond our control and difficult to predict but could adversely affect us.
If our ability to receive distributions from subsidiaries is restricted, we may not be able to satisfy our obligations to counterparties or creditors, make dividend payments to stockholders, or repurchase our common stock.
Ally is a legal entity separate and distinct from its bank and nonbank subsidiaries and, in significant part, depends on dividend payments and other distributions from those subsidiaries to fund its obligations to counterparties and creditors, its dividend payments to stockholders, and its repurchases of common stock. Refer to the section above titled Regulation and Supervision in Part I, Item 1 of this report. Regulatory or other legal restrictions, deterioration in a subsidiary’s performance, or investments in a subsidiary’s own growth may limit the ability of the subsidiary to transfer funds freely to Ally. In particular, many of Ally’s subsidiaries are subject to laws that authorize their supervisory agencies to block or reduce the flow of funds to Ally in certain situations. In addition, if any subsidiary were unable to remain viable as a
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going concern, Ally’s right to participate in a distribution of assets would be subject to the prior claims of the subsidiary’s creditors (including, in the case of Ally Bank, its depositors and the FDIC).
Legislative or regulatory initiatives on cybersecurity and data privacy could adversely impact our business and financial results.
Cybersecurity and data privacy risks have received heightened legislative and regulatory attention. For example, the U.S. banking agencies have proposed enhanced cyber risk management standards that would apply to us and our service providers and that would address cyber risk governance and management, management of internal and external dependencies, and incident response, cyber resilience, and situational awareness. Several states and their governmental agencies, such as the NYDFS, also have adopted or proposed cybersecurity laws targeting these issues. In addition, a comprehensive privacy law has taken effect in the State of California, requiring regulated entities to establish measures to identify, manage, secure, track, produce, and delete personal information.
Legislation and regulations on cybersecurity and data privacy may compel us to enhance or modify our systems and infrastructure, invest in new systems and infrastructure, change our service providers, augment our scenario and vulnerability testing, or alter our business practices or our policies on security, data governance, and privacy. If any of these outcomes were to occur, our operational costs could increase significantly. In addition, if governmental authorities were to conclude that we or our service providers had not adequately implemented laws on cybersecurity and data privacy or had not otherwise met related supervisory expectations, we could be subject to enforcement and other supervisory actions, related litigation by private plaintiffs, reputational damage, or a loss of customer or investor confidence.
Our business and financial results may be affected by governmental responses to climate change and related environmental issues.
Governments have become increasingly focused on the effects of climate change and related environmental issues. For example, U.S. Treasury Secretary Yellen has identified climate change and its risk to the financial system as a high priority. In addition, the FRB recently became a member of the Network of Central Banks and Supervisors for Greening the Financial System and, in its Financial Stability Report of November 2020, specifically addressed the implications of climate change for markets, financial exposures, financial institutions, and financial stability.
How governments act to mitigate climate and related environmental risks, as well as associated changes in the behavior and preferences of businesses and consumers, could have an adverse effect on our business and financial results. The FRB, for example, may incorporate these risks into its supervisory stress tests and, in doing so, negatively impact us and our future capital plans at least in part because of our concentration in automotive finance. We also could experience a decline in the demand for and value of used gasoline-powered vehicles that secure our loans to dealers and consumers or that we remarket. Further, we may be compelled to change or cease some of our lending or other business practices or our operational processes because of climate- or environmental-driven changes in applicable law or supervisory expectations or due to related political, social, market, or similar pressure. It is possible as well that changes in climate and related environmental risks, perceptions of them, and governmental responses to them may occur more rapidly than we are able to adapt without disrupting our business and impairing our financial results.
Risks Related to Our Business
The COVID-19 pandemic is adversely affecting us and our customers, counterparties, employees, and third-party service providers, and the adverse impacts on our business, financial position, results of operations, and prospects could be significant.
The spread of COVID-19 has created a global public-health crisis that has resulted in the substantial loss of life, with widespread volatility and deteriorations in household, business, economic, and market conditions, including in the United States where we conduct nearly all of our business. The extent of the impact of the COVID-19 pandemic on our capital, liquidity, and other financial positions and on our business, results of operations, and prospects will depend on a number of evolving factors, including:
•The duration, extent, and severity of the pandemic. COVID-19 has not yet been contained and could continue to affect significantly more households and businesses. The duration and severity of the pandemic remain difficult to predict.
•The response of governmental and nongovernmental authorities and the effect on economies and markets. Many governmental and nongovernmental authorities initially responded to COVID-19 by curtailing household and business activity as a containment measure while simultaneously deploying fiscal- and monetary-policy measures to partially mitigate the adverse effects on individual households and businesses. Although this response slowed the rate of spread of COVID-19 and supported economic stability, the number of cases has risen meaningfully at times and remains volatile, and the potential exists for further resurgences to occur, especially during the cold-and-flu season and in the wake of holidays and other times when social gatherings, travel, or vacations are common. In addition, while monetary policy remains highly accommodative, a number of stimulative fiscal programs and actions have expired or been exhausted without renewal as the U.S. government continues to assess whether and how to continue or refine them. Even with COVID-19 vaccinations having begun, national, regional, and local economies and markets could suffer further disruptions that are lasting.
•The effect on our customers, counterparties, employees, and third-party service providers. COVID-19 and its associated consequences and uncertainties are affecting individuals, households, and businesses differently and unevenly. Many, however, have changed their behavior in response to governmental mandates and advisories to restrict or alter commercial and social interactions. As a result, our credit, operational, and other risks have generally been elevated and are expected to remain so—if not increase further—for the foreseeable future.
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During the year ended December 31, 2020, the most notable impact to our results of operations was higher provision expense for credit losses. Our provision expense was $1.4 billion for the year ended December 31, 2020, compared to $998 million during the same period in 2019, with the increase primarily driven by incremental reserves associated with a deterioration in macroeconomic variables such as unemployment during the year ended December 31, 2020. During the year ended December 31, 2020, the provision for credit losses was also impacted by the adoption of CECL, as further described in Note 1 to the Consolidated Financial Statements. For more detail and further discussion on the impact to our business from COVID-19, refer to the section titled COVID-19 Impacts within the MD&A. Given the unpredictability of COVID-19 and its direct and indirect effects, however, our forecast of macroeconomic conditions and operating results—including expected lifetime credit losses on our loan portfolio—is subject to meaningful uncertainty.
As consumers, businesses, and governmental authorities have adapted to evolving conditions, we have observed a recovery in quality loan application volume and resulting booked originations within our Automotive Finance business. For more detail and further discussion, including in connection with our non-automotive businesses, refer to the section titled Significant Business Developments Related to COVID-19 within the MD&A. We cannot yet be confident in the sustainability of these improvements in our business or the trajectory of the macroeconomic outlook—especially with the most recent resurgence of COVID-19 in much of the United States, the discovery of variants of the COVID-19 virus, and ongoing uncertainties around the efficacy, availability, acceptance, and distribution of vaccines and other medical treatments—and the adverse effects on our business, financial position, results of operations, and prospects could be significant as time goes on.
Governments have taken necessary and unprecedented steps to partially mitigate the adverse effects of their actions to contain the spread of COVID-19. For example, in late March 2020, the CARES Act was enacted to inject more than $2 trillion of financial assistance into the U.S. economy. The FRB has taken decisive and sweeping actions as well. Since March 15, 2020, these actions have included a reduction in the target range for the federal funds rate to zero to 0.25 percent, a program to purchase an indeterminate amount of Treasury securities and agency mortgage-backed securities, and numerous facilities to support the flow of credit to households and businesses. Still, while monetary policy has remained highly accommodative since the declaration of the pandemic, fiscal stimulus has waned as a meaningful economic rebound developed in the second half of the year and the political environment became more unstable during and after the 2020 elections. While the possibility of further stimulative fiscal-policy measures has become more probable, their potential scope and effect remain highly uncertain. Similarly, while recent developments associated with COVID-19 vaccinations have been promising, the timing and extent of their impact is not predictable.
We also have acted swiftly to support our customers with industry-leading relief programs, while prudently managing our credit risk exposure. For more detail on these relief programs and further discussion, refer to the section titled Risk Management in the MD&A that follows.
The degree to which our actions and those of governments and others will directly or indirectly assist our customers, counterparties, and third-party service providers and advance our business and the economy generally is not yet clear. For example, while our loan-deferral programs may have better positioned customers to make their regular payments to us and enhanced our brand and customer loyalty, our credit performance may still be negatively impacted to the extent that customers depend on a continuation of fiscal-policy measures or other forms of more robust relief. In addition, while the FRB’s accommodative monetary policy may benefit us to some degree by supporting economic activity among our customers, this policy and sudden shifts in it may inhibit our ability to grow or sustain net interest income and effectively manage interest-rate and market risks. Further, while extraordinary governmental intervention in the economy and markets has created stability, the scale of these actions inevitably heightens political, reputational, litigation, and similar risks for financial intermediaries like us.
We are unable to estimate the near-term and ultimate impacts of COVID-19 on our business and operations. The pandemic and its direct and indirect effects could cause us to experience higher credit losses in our lending portfolio, additional increases in our allowance for credit losses, impairment of our goodwill and other financial assets, heightened volatility in and diminished access to capital markets and other funding sources, further reduced demand for our products and services, and other negative impacts on our financial position, results of operations, and prospects. In addition, while we continue to anticipate that our capital and liquidity positions will be sufficient, sustained adverse effects may impair these positions, prevent us from satisfying our minimum regulatory capital ratios and other supervisory requirements, and result in downgrades in our credit ratings. The COVID-19 pandemic and related governmental mandates and advisories also have necessitated changes in the way we and our third-party service providers continue operations—including an extended period of remote work arrangements—and we may face heightened security, information-technology, operational, and similar risks as a result. The length of time we and our third-party service providers may be required to operate under these circumstances, as well as the potential for conditions to worsen or for significant disruptions to occur, remains unpredictable. All of these risks and uncertainties can be expected to persist at least until the pandemic is demonstrably and sustainably contained, authorities cease curbing household and business activity, and consumer and business confidence recover.
Weak or deteriorating economic conditions, failures in underwriting, changes in underwriting standards, financial or systemic shocks, or continued growth in our nonprime or used vehicle financing business could increase our credit risk, which could adversely affect our business and financial results.
Our business is centered around lending and banking with an emphasis on our digital platform, and a significant percentage of our assets are composed of loans, operating leases, and securities. As a result, in the ordinary course of business, credit risk is our most significant risk.
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Our business and financial results depend significantly on household, business, economic, and market conditions. When those conditions are weak or deteriorating, we could simultaneously experience reduced demand for credit and increased delinquencies or defaults, including in the loans that we have securitized and in which we retain a residual interest. These kinds of conditions also could dampen the demand for products and services in our insurance, banking, brokerage, advisory, and other businesses. Increased delinquencies or defaults could also result from our failing to appropriately underwrite loans and operating leases that we originate or purchase or from our adopting—for strategic, competitive, or other reasons—more liberal underwriting standards. If delinquencies or defaults on our loans and operating leases increase, their value and the income derived from them could be adversely affected, and we could incur increased administrative and other costs in seeking a recovery on claims and any collateral. If unfavorable conditions are negatively affecting used vehicle or other collateral values at the same time, the amount and timing of recoveries could suffer as well. Weak or deteriorating economic conditions also may negatively impact the market value and liquidity of our investment securities, and we may be required to record additional impairment charges that adversely affect earnings if debt securities suffer a decline in value that is considered other-than-temporary. There can be no assurance that our monitoring of credit risk and our efforts to mitigate credit risk through risk-based pricing, appropriate underwriting and investment policies, loss-mitigation strategies, and diversification are, or will be, sufficient to prevent an adverse impact to our business and financial results. In addition, because of CECL, our financial results may be negatively affected as soon as weak or deteriorating economic conditions are forecasted and alter our expectations for credit losses. Refer to Note 1 to the Consolidated Financial Statements and the section above titled Regulation and Supervision in Part I, Item 1 of this report. A financial or systemic shock and a failure of a significant counterparty or a significant group of counterparties could negatively impact us as well, possibly to a severe degree, due to our role as a financial intermediary and the interconnectedness of the financial system.
We continue to have exposure to nonprime consumer automotive financing and used vehicle financing. We define nonprime consumer automotive loans primarily as those loans with a FICO® Score (or an equivalent score) at origination of less than 620. Customers that finance used vehicles tend to have lower FICO® Scores as compared to new vehicle customers, and defaults resulting from vehicle breakdowns are more likely to occur with used vehicles as compared to new vehicles that are financed. The carrying value of our nonprime consumer automotive loans before allowance for loan losses was $8.6 billion, or approximately 11.7% of our total consumer automotive loans at December 31, 2020, as compared to $8.4 billion, or approximately 11.6% of our total consumer automotive loans at December 31, 2019. At December 31, 2020, and 2019, $337 million and $214 million, respectively, of nonprime consumer automotive loans were considered nonperforming as they had been placed on nonaccrual status in accordance with our accounting policies. Refer to the Nonaccrual Loans section of Note 1 to the Consolidated Financial Statements for additional information. Additionally, the carrying value of our consumer automotive used vehicle loans before allowance for loan losses was $43.0 billion, or approximately 58.3% of our total consumer automotive loans at December 31, 2020, as compared to $39.7 billion, or approximately 54.9% of our total consumer automotive loans at December 31, 2019. If our exposure to nonprime consumer automotive loans or used vehicle financing continue to increase over time, our credit risk will increase to a possibly significant degree.
As part of the underwriting process, we rely heavily upon information supplied by applicants and other third parties, such as automotive dealers and credit reporting agencies. If any of this information is intentionally or negligently misrepresented and the misrepresentation is not detected before completing the transaction, we may experience increased credit risk.
Our allowance for loan losses may not be adequate to cover actual losses, and we may be required to significantly increase our allowance, which may adversely affect our financial condition and results of operations.
Through the issuance of CECL, the FASB has required the implementation of a new accounting model to measure credit losses for financial assets measured at amortized cost, which includes the vast majority of our finance receivables and loan portfolio. Under this new model, the allowance is established to reserve for management’s best estimate of expected lifetime losses inherent in our finance receivables and loan portfolio. CECL substantially increased our allowance for loan losses with a resulting negative day-one adjustment to equity.
Regulatory agencies periodically review our allowance for loan losses, as well as our methodology and models used for calculating our allowance for loan losses, and from time to time may insist on an increase in the allowance for loan losses or the recognition of additional loan charge-offs based on judgments different than those of management. If these differences in judgment are considerable, our allowance could meaningfully increase and result in a sizable decrease in our net income and capital.
The determination of the appropriate level of the allowance for loan losses inherently involves a high degree of subjectivity and requires us to make significant estimates of current and future credit risks using existing quantitative and qualitative information, all of which may change substantially over time. Changes in economic conditions affecting borrowers, revisions to accounting rules and related guidance, new qualitative or quantitative information about existing loans, identification of additional problem loans, changes in the size or composition of our finance receivables and loan portfolio, changes to our models or loss estimation techniques including consideration of forecasted economic assumptions, and other factors, both within and outside of our control, may require an increase in the allowance for loan losses. For example, our shift to a full credit spectrum consumer automotive finance portfolio over the past several years has resulted in additional increases in our allowance for loan losses, and could result in additional increases in the future. Any increase in the allowance in future periods may adversely affect our financial condition or results of operations.
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We have dealer-centric automotive finance and insurance businesses, and a change in the key role of dealers within the automotive industry or our ability to maintain or build relationships with them could have an adverse effect on our business, results of operations, financial condition, or prospects.
Our Dealer Financial Services business, which includes our Automotive Finance and Insurance segments, depends on the continuation of the key role of dealers within the automotive industry, the maintenance of our existing relationships with dealers, and our creation of new relationships with dealers. Refer to the section titled Our Business in the MD&A that follows.
A number of trends are affecting the automotive industry and the role of dealers within it. These include challenges to the dealer’s role as intermediary between manufacturers and purchasers, shifting financial and other pressures exerted by manufacturers on dealers, the rise of vehicle sharing and ride hailing, the development of autonomous and alternative-energy vehicles, the impact of demographic shifts on attitudes and behaviors toward vehicle ownership and use, changing expectations around the vehicle buying experience, adjustments in the geographic distribution of new and used vehicle sales, and advancements in communications technology. While it is not currently clear how and how quickly these trends may develop, any one or more of them could adversely affect the key role of dealers and their business models, profitability, and viability, and if this were to occur, our dealer-centric automotive finance and insurance businesses could suffer as well.
Our share of commercial wholesale financing remains at risk of decreasing in the future as a result of intense competition and other factors. The number of dealers with whom we have wholesale relationships decreased approximately 6% as compared to December 31, 2019. If we are not able to maintain existing relationships with significant automotive dealers or if we are not able to develop new relationships for any reason—including if we are not able to provide services on a timely basis, offer products and services that meet the needs of the dealers, compete successfully with the products and services of our competitors, or effectively counter the influence that captive automotive finance companies have in the marketplace or the exclusivity privileges that some competitors have with automotive manufacturers—our wholesale funding volumes, and the number of dealers with whom we have retail funding relationships, could decline in the future. If this were to occur, our business, results of operations, financial condition, or prospects could be adversely affected.
GM and Chrysler dealers and their retail customers continue to constitute a significant portion of our customer base, which creates concentration risk for us.
While we continue to diversify our automotive finance and insurance businesses and to expand into other financial services, GM and Chrysler dealers and their retail customers still constitute a significant portion of our customer base. In 2020, 40% of our new vehicle dealer inventory financing and 22% of our consumer automotive financing volume were transacted for GM-franchised dealers and customers, and 40% of our new vehicle dealer inventory financing and 28% of our consumer automotive financing volume were transacted for Chrysler dealers and customers. In 2019, 46% of our new vehicle dealer inventory financing and 26% of our consumer automotive financing volume were transacted for GM-franchised dealers and customers, and 38% of our new vehicle dealer inventory financing and 27% of our consumer automotive financing volume were transacted for Chrysler dealers and customers. GM, Chrysler, and their captive automotive finance companies compete vigorously with us and could take further actions that negatively impact the amount of business that we do with GM and Chrysler dealers and their retail customers. Further, a significant adverse change in GM’s or Chrysler’s businesses—including, for example, in the production or sale of GM or Chrysler vehicles, the quality or resale value of GM or Chrysler vehicles, GM’s or Chrysler’s relationships with its key suppliers, or the rate or volume of recalls of GM or Chrysler vehicles—could negatively impact our GM and Chrysler dealer and retail customer bases and the value of collateral securing our extensions of credit to them. Any future reductions in GM and Chrysler business that we are not able to offset could adversely affect our business and financial results.
Our business and financial results are dependent upon overall U.S. automotive industry sales volume.
Our automotive finance and insurance businesses can be impacted by the sales volume for new and used vehicles. Vehicle sales are impacted, in turn, by several economic and market conditions, including employment levels, household income, interest rates, credit availability, inventory levels, customer preferences, and fuel costs. For example, new vehicle sales decreased dramatically during the economic crisis that began in 2007–2008 and did not rebound significantly until 2012 and 2013. More recently, automotive manufacturers have reported that a shortage in their supply of semiconductor chips is expected to materially constrain their production of new vehicles through the near term. Any future declines in new or used vehicle sales could have an adverse effect on our business and financial results.
Vehicle loans and operating leases make up a significant part of our earning assets, and our business and financial results could suffer if used vehicle prices are low or volatile or decrease in the future.
During the year ended December 31, 2020, approximately 57% of our average earning assets were composed of vehicle loans or operating leases and related residual securitization interests. If we experience higher losses on the sale of repossessed vehicles or lower or more volatile residual values for off-lease vehicles, our business or financial results could be adversely affected.
General economic conditions, the supply of off-lease and other vehicles to be sold, the levels of demand for vehicle ownership and use, relative market prices for new and used vehicles, perceived vehicle quality, the shift from gasoline to electric vehicles, overall vehicle prices, the vehicle disposition channel, volatility in gasoline or diesel fuel prices, levels of household income, interest rates, and other factors outside of our control heavily influence used vehicle prices. Consumer confidence levels and the strength of automotive manufacturers and dealers can also influence the used vehicle market. For example, during the economic crisis that began in 2007–2008, sharp declines in used vehicle demand and sale prices adversely affected our remarketing proceeds and financial results.
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Our expectation of the residual value of a vehicle subject to an automotive operating lease contract is a critical element used to determine the amount of the operating lease payments under the contract at the time the customer enters into it. As a result, to the extent that the actual residual value of the vehicle—as reflected in the sale proceeds received upon remarketing at lease termination—is less than the expected residual value for the vehicle at lease inception, we will incur additional depreciation expense and lower profit on the operating lease transaction than our priced expectations. Our expectation of used vehicle values is also a factor in determining our pricing of new loan and operating lease originations. In stressed economic environments, residual-value risk may be even more volatile than credit risk. To the extent that used vehicle prices are significantly lower than our expectations, our profit on vehicle loans and operating leases could be substantially less than our expectations, even more so if our estimate of loss frequency is underestimated as well. In addition, we could be adversely affected if we fail to efficiently process and effectively market off-lease vehicles and repossessed vehicles and, as a consequence, incur higher-than-expected disposal costs or lower-than-expected proceeds from the vehicle sales.
The levels of or changes in interest rates could affect our results of operations and financial condition.
We are highly dependent on net interest income, which is the difference between interest income on earning assets (such as loans and investments) and interest expense on deposits and borrowings. Net interest income is significantly affected by market rates of interest, which in turn are influenced by monetary and fiscal policies, general economic and market conditions, the political and regulatory environments, business and consumer sentiment, competitive pressures, and expectations about the future (including future changes in interest rates). We may be adversely affected by policies, laws, and events that have the effect of flattening or inverting the yield curve (that is, the difference between long-term and short-term interest rates), depressing the interest rates associated with our earning assets to levels near the rates associated with our interest expense, increasing the volatility of market rates of interest, or changing the spreads among different interest rate indices.
The levels of or changes in interest rates could adversely affect us beyond our net interest income, including the following:
•increase the cost or decrease the availability of deposits or other variable-rate funding instruments;
•reduce the return on or demand for loans or increase the prepayment speed of loans;
•increase customer or counterparty delinquencies or defaults;
•negatively impact our ability to remarket off-lease and repossessed vehicles; and
•reduce the value of our loans, retained interests in securitizations, and fixed-income securities in our investment portfolio and the efficacy of our hedging strategies.
The level of and changes in market rates of interest—and, as a result, these risks and uncertainties—are beyond our control. The dynamics among these risks and uncertainties are also challenging to assess and manage. For example, while an accommodative monetary policy may benefit us to some degree by spurring economic activity among our customers, such a policy may ultimately cause us more harm by inhibiting our ability to grow or sustain net interest income. A rising interest rate environment can pose different challenges, such as potentially slowing the demand for credit, increasing delinquencies and defaults, and reducing the values of our loans and fixed-income securities. Following a prolonged period in which the federal funds rate was stable or decreasing, the FRB increased this benchmark rate on a number of occasions during 2017 and 2018 and began to end its quantitative-easing program and reduce the size of its balance sheet. During 2019, however, the FRB reversed course and reduced the federal funds rate several times, and in March 2020, reduced the target range for the federal funds rate to zero to 0.25 percent. These past actions, and potential future actions, exert upward or downward pressure on interest rates and may create market volatility in interest rates. Refer to the section titled Market Risk in the MD&A that follows and Note 21 to the Consolidated Financial Statements.
Uncertainty about the future of LIBOR may adversely affect our business and financial results.
LIBOR meaningfully influences market interest rates around the globe. We have exposure to LIBOR-based contracts through a number of our finance receivables and loans primarily related to commercial automotive loans, corporate finance loans, and mortgage loans, as well as certain investment securities, derivative contracts, and other arrangements. Among our liabilities, we have issued trust preferred securities with an interest rate linked to LIBOR and also have secured facilities, asset-backed securitizations, and brokered certificates of deposit that contain LIBOR-based reference rates.
In July 2017, the Chief Executive of the United Kingdom Financial Conduct Authority, which regulates LIBOR, announced its intent to stop persuading or compelling banks to submit rates for the calculation of LIBOR to the administrator of LIBOR after 2021. In November 2020, the administrator of the LIBOR benchmark announced their intention to consult with the United Kingdom Financial Conduct Authority, LIBOR panel banks, and other official sector bodies on a proposal to extend the publication of certain key USD LIBOR tenors until the end of the second quarter of 2023. Additionally in November 2020, the U.S. banking regulators issued guidance encouraging banks to stop new USD LIBOR issuances as soon as practicable, but no later than the end of 2021.
No assurance can be provided that the uncertainties around LIBOR or their resolution will not adversely affect the use, level, and volatility of LIBOR or other interest rates or the value of LIBOR-based securities. Further, the viability of SOFR as an alternative reference rate and the availability and acceptance of other alternative reference rates are unclear and also may have adverse effects on market rates of interest and the value of securities and other financial arrangements. These uncertainties, proposals and actions to resolve them, and their
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ultimate resolution also could negatively impact our funding costs, loan and other asset values, asset-liability management strategies, and other aspects of our business and financial results.
We rely extensively on third-party service providers in delivering products and services to our customers and otherwise conducting our business and operations, and their failure to perform to our standards or other issues of concern with them could adversely affect our reputation, business, and financial results.
We seek to distinguish ourselves as a customer-centric company that delivers passionate customer service and innovative financial solutions and that is relentlessly focused on “Doing it Right.” Third-party service providers, however, are key to much of our business and operations, including online and mobile banking, mortgage finance, brokerage, customer service, and operating systems and infrastructure. While we have implemented a supplier-risk-management program and can exert varying degrees of influence over our service providers, we do not control them, their actions, or their businesses. Our contracts with service providers, moreover, may not require or sufficiently incent them to perform at levels and in ways that we would choose to act on our own. No assurance can be provided that our service providers will perform to our standards, adequately represent our brand, comply with applicable law, appropriately manage their own risks, remain financially or operationally viable, abide by their contractual obligations, or continue to provide us with the services that we require. In such a circumstance, our ability to deliver products and services to customers, to satisfy customer expectations, and to otherwise successfully conduct our business and operations could be adversely affected. In addition, we may need to incur substantial expenses to address issues of concern with a service provider, and even if the issues cannot be acceptably resolved, we may not be able to timely or effectively replace the service provider due to contractual restrictions, the unavailability of acceptable alternative providers, or other reasons. Further, regardless of how much we can influence our service providers, issues of concern with them could result in supervisory actions and private litigation against us and could harm our reputation, business, and financial results.
Our operating systems or infrastructure, as well as those of our service providers or others on whom we rely, could fail or be interrupted, which could disrupt our business and adversely affect our results of operations, financial condition, and prospects.
We rely heavily upon communications, data management, and other operating systems and infrastructure to conduct our business and operations, which creates meaningful operational risk for us. Any failure of or interruption in these systems or infrastructure or those of our service providers or others on whom we rely—including as a result of inadequate or failed technology or processes, unplanned or unsuccessful updates to technology, sudden increases in transaction volume, human errors, fraud or other misconduct, deficiencies in the integration of acquisitions or the commencement of new businesses, energy or similar infrastructure outages, disruptions in communications networks or systems, natural disasters, catastrophic events, pandemics, acts of terrorism, political or social unrest, external or internal security breaches, acts of vandalism, cyberattacks such as computer viruses and malware, misplaced or lost data, or breakdowns in business continuity plans—could cause failures or delays in receiving applications for loans and operating leases, underwriting or processing loan or operating-lease applications, servicing loans and operating leases, accessing online accounts, processing transactions, executing brokerage orders, communicating with our customers, managing our investment portfolio, or otherwise conducting our business and operations. These adverse effects could be exacerbated if systems or infrastructure need to be taken offline or meaningfully repaired, if backup systems or infrastructure are not adequately redundant and effective for the conduct of our business and operations, or if technological or other solutions do not exist or are slow to be developed. Further, to the extent that the systems or infrastructure of service providers or others are involved, we may have little or no knowledge, control, or influence over how and when failures or delays are addressed. As a digital financial-services company with a meaningful dependence on service providers, we are especially susceptible to business, reputational, financial, regulatory, and other harm as a result of these risks.
In the ordinary course of our business, we collect, store, process, and transmit sensitive, confidential, or proprietary data and other information, including business information, intellectual property, and the personally identifiable information of customers and employees. The secure collection, storage, processing, and transmission of this information are critical to our business and reputation, and if any of this information were mishandled, misused, improperly accessed, lost, or stolen or if related operations were disabled or otherwise disrupted, we could suffer significant business, reputational, financial, regulatory, and other damage.
Even when a failure of or interruption in operating systems or infrastructure is timely resolved, we may need to expend substantial resources in doing so, may be required to take actions that could adversely affect customer satisfaction or behavior, and may be exposed to reputational damage. We also could be exposed to contractual claims, supervisory actions, or litigation by private plaintiffs.
We face a wide array of security risks that could result in business, reputational, financial, regulatory, and other harm to us.
Our operating systems and infrastructure, as well as those of our service providers or others on whom we rely, are subject to security risks that are rapidly evolving and increasing in scope and complexity, in part, because of the introduction of new technologies, the expanded use of the internet and telecommunications technologies (including mobile devices) to conduct financial and other business transactions, and the increased sophistication and activities of hostile state-sponsored actors, organized crime, perpetrators of fraud, hackers, terrorists, and others. We, along with other financial institutions, our service providers, and others on whom we rely, have been and are expected to continue to be the target of cyberattacks, which could include computer viruses, malware, malicious or destructive code, phishing or spear phishing attacks, denial-of-service or denial-of-information attacks, ransomware, identity theft, access violations by employees or vendors, attacks on the personal email of employees, and ransom demands accompanied by threats to expose security vulnerabilities. We, our service providers, and others on whom we rely are also exposed to more traditional security threats to physical facilities and personnel.
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These security risks could result in business, reputational, financial, regulatory, and other harm to us, especially as a digital financial-services company with a meaningful dependence on service providers. For example, if sensitive, confidential, or proprietary data or other information about us or our customers or employees were improperly accessed or destroyed because of a security breach, we could experience business or operational disruptions, reputational damage, contractual claims, supervisory actions, or litigation by private plaintiffs. As security threats evolve, moreover, we expect to continue expending significant resources to enhance our defenses, to educate our employees, to monitor and support the defenses established by our service providers and others on whom we rely, and to investigate and remediate incidents and vulnerabilities as they arise or are identified. Even so, we may not be able to anticipate or implement effective preventive measures against all security breaches, especially because techniques change frequently, and attacks can be launched with no warning from a wide variety of sources around the globe. A sophisticated breach, moreover, may not be identified until well after the attack has occurred and the damage has been caused.
We also could be adversely affected by security risks faced by others. For example, a cyberattack or other security breach affecting a service provider or another entity on whom we rely could negatively impact us and our ability to conduct business and operations just as much as a breach affecting us directly. Even worse, in such a circumstance, we may not receive timely notice of or information about the breach or be able to exert any meaningful control or influence over how and when the breach is addressed. In addition, a security threat affecting the business community, the markets, or parts of them may cycle or cascade through the financial system and harm us. The mere perception of a security breach involving us or any part of the financial services industry, whether or not true, also could damage our business, operations, or reputation.
Many if not all of these risks and uncertainties are beyond our control. Refer to the section titled Risk Management in the MD&A that follows.
We are heavily reliant on technology, and a failure in effectively implementing technology initiatives or anticipating future technology needs or demands could adversely affect our business or financial results.
As much if not more than other financial institutions, we significantly depend on technology to deliver our products and services and to otherwise conduct our business and operations. To remain technologically competitive and operationally efficient, we invest in system upgrades, new solutions, and other technology initiatives. Many of these initiatives take a significant amount of time to develop and implement, are tied to critical systems, and require substantial financial, human, and other resources. Although we take steps to mitigate the risks and uncertainties associated with these initiatives, no assurance can be provided that they will be implemented on time, within budget, or without negative financial, operational, or customer impact or that, once implemented, they will perform as we or our customers expect. We also may not succeed in anticipating or keeping pace with future technology needs, the technology demands of customers, or the competitive landscape for technology. If we were to misstep in any of these areas, our business, financial results, or reputation could be negatively impacted.
Our enterprise risk-management framework or independent risk-management function may not be effective in mitigating risk and loss.
We maintain an enterprise risk-management framework that is designed to identify, measure, assess, monitor, test, control, report, escalate, and mitigate the risks that we face. These include credit, insurance/underwriting, market, liquidity, business/strategic, reputation, operational, information-technology/security, compliance, and conduct risks. The framework incorporates risk culture and incentives, risk governance and organization, strategy and risk appetite, a material-risk taxonomy, key risk-management processes, and risk capabilities. Our chief risk officer, chief compliance officer, and other personnel who make up our independent risk-management function are responsible for overseeing and implementing the framework. Refer to the section titled Risk Management in the MD&A that follows. While we continue to evolve our risk-management framework to consider changes in business and regulatory expectations, there can be no assurance that the framework—including its design and implementation—will effectively mitigate risk and limit losses in our business and operations. If conditions or circumstances arise that expose flaws or gaps in the framework or its implementation, the performance and value of our business and operations could be adversely affected. An ineffective risk-management framework or function also could give rise to enforcement and other supervisory actions, damage our reputation, and result in private litigation.
We are or may be subject to potential liability in connection with pending or threatened legal proceedings and other matters, which could adversely affect our business or financial results.
As a financial-services company, we are regularly involved in pending or threatened legal proceedings and other matters and are or may be subject to potential liability in connection with them. These legal matters may be formal or informal and include litigation and arbitration with one or more identified claimants, certified or purported class actions with yet-to-be-identified claimants, and regulatory or other governmental information-gathering requests, examinations, investigations, and enforcement proceedings. Our legal matters exist in varying stages of adjudication, arbitration, negotiation, or investigation and span our business lines and operations. Claims may be based in law or equity—such as those arising under contracts or in tort and those involving banking, consumer-protection, securities, tax, employment, and other laws—and some can present novel legal theories and allege substantial or indeterminate damages.
The course and outcome of legal matters are inherently unpredictable. This is especially so when a matter is still in its early stages, the damages sought are indeterminate or unsupported, significant facts are unclear or disputed, novel questions of law or other meaningful legal uncertainties exist, a request to certify a proceeding as a class action is outstanding or granted, multiple parties are named, or regulatory or other governmental entities are involved. Other contingent exposures and their ultimate resolution are similarly unpredictable for reasons that can vary based on the circumstances. As a result, we often are unable to determine how or when threatened or pending legal matters and other
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contingent exposures will be resolved and what losses may be incrementally and ultimately incurred. Actual losses may be higher or lower than any amounts accrued or estimated for those matters and other exposures, possibly to a significant degree. Refer to Note 29 to the Consolidated Financial Statements. In addition, while we maintain insurance policies to mitigate the cost of litigation and other proceedings, these policies have deductibles, limits, and exclusions that may diminish their value or efficacy. Substantial legal claims, even if not meritorious, could have a detrimental impact on our business, results of operations, and financial condition and could cause us reputational harm.
Our inability to attract, retain, or motivate qualified employees could adversely affect our business or financial results.
Skilled employees are our most important resource, and competition for talented people is intense. Even though compensation and benefits expense is among our highest expenses, we may not be able to locate and hire the best people, keep them with us, or properly motivate them to perform at a high level. This risk may be exacerbated due to some of our competitors having significantly greater scale, financial and operational resources, and brand recognition. Recent scrutiny of compensation practices, especially in the financial services industry, has made this only more difficult. In addition, many parts of our business are particularly dependent on key personnel. If we were to lose and find ourselves unable to replace these personnel or other skilled employees or if the competition for talent were to drive our compensation costs to unsustainable levels, our business and financial results could be negatively impacted.
Our ability to successfully make acquisitions is subject to significant risks, including the risk that governmental authorities will not provide the requisite approvals, the risk that integrating acquisitions may be more difficult, costly, or time consuming than expected, and the risk that the value of acquisitions may be less than anticipated.
We may from time to time seek to acquire other financial services companies or businesses. These acquisitions may be subject to regulatory approval, and no assurance can be provided that we will be able to obtain that approval in a timely manner or at all or that approval may not be subject to burdensome conditions. Refer to the section above titled Regulation and Supervision in Part I, Item 1 of this report. Even when we are able to obtain regulatory approval, the failure of other closing conditions to be satisfied or waived could delay the completion of an acquisition for a significant period of time or prevent it from occurring altogether. Any failure or delay in closing an acquisition could adversely affect our reputation, business, and performance.
Acquisitions involve numerous risks and uncertainties, including inaccurate financial and operational assumptions, incomplete or failed due diligence, lower-than-expected performance, higher-than-expected costs, difficulties related to integration, diversion of management’s attention from other business activities, adverse market or other reactions, changes in relationships with customers or counterparties, the potential loss of key personnel, and the possibility of litigation and other disputes. An acquisition also could be dilutive to our existing stockholders if we were to issue common stock to fully or partially pay or fund the purchase price. We, moreover, may not be successful in identifying appropriate acquisition candidates, integrating acquired companies or businesses, or realizing expected value from acquisitions. There is significant competition for valuable acquisition targets, and we may not be able to acquire other companies or businesses on attractive terms. No assurance can be given that we will pursue future acquisitions, and our ability to grow and successfully compete may be impaired if we choose not to pursue or are unable to successfully make acquisitions.
Our business requires substantial capital and liquidity, and a disruption in our funding sources or access to the capital markets may have an adverse effect on our liquidity, capital positions, and financial condition.
Liquidity is the ability to fund increases in assets and meet obligations as they come due, all without incurring unacceptable losses. Banks are especially vulnerable to liquidity risk because of their role in the maturity transformation of demand or short-term deposits into longer-term loans or other extensions of credit. We, like other financial services companies, rely to a significant extent on external sources of funding (such as deposits and borrowings) for the liquidity needed to conduct our business and operations. A number of factors beyond our control, however, could have a detrimental impact on the availability or cost of that funding and thus on our liquidity. These include market disruptions, changes in our credit ratings or the sentiment of our investors, the state of the regulatory environment and monetary and fiscal policies, reputational damage, the confidence of depositors in us, financial or systemic shocks, and significant counterparty failures. Weak business or operational performance, unexpected declines or limits on dividends or other distributions from our subsidiaries, and other failures to execute our strategic plan also could adversely affect Ally’s liquidity position.
We have significant maturities of unsecured debt each year. While we have reduced our reliance on unsecured funding in recent years, it remains an important component of our capital structure and financing plans. At December 31, 2020, approximately $702 million in principal amount of total outstanding consolidated unsecured debt is scheduled to mature in 2021, and approximately $1.1 billion and $2.1 billion is scheduled to mature in 2022 and 2023, respectively. We also have obtained short-term funding from the sale of floating-rate demand notes, all of which the holders may elect to have redeemed at any time without restriction. We announced the termination of our demand note program and the redemption of all outstanding demand notes on March 1, 2021. At December 31, 2020, approximately $2.1 billion in principal amount of demand notes were outstanding, which is not included in the amount of unsecured debt described above. We also rely substantially on secured funding. At December 31, 2020, approximately $4.5 billion in principal amount of total outstanding consolidated secured long-term debt is scheduled to mature in 2021, approximately $4.9 billion is scheduled to mature in 2022, and approximately $617 million is scheduled to mature in 2023. Furthermore, at December 31, 2020, approximately $41.8 billion in certificates of deposit at Ally Bank are scheduled to mature in 2021, which is not included in the amounts provided above. Additional funding, whether through deposits or borrowings, will be required to fund a substantial portion of the debt maturities over these periods.
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We continue to rely as well on our ability to borrow from other financial institutions, and many of our primary bank facilities are up for renewal on a yearly basis. Any weakness in market conditions, tightening of credit availability, or other events referenced earlier in this risk factor could have a negative effect on our ability to refinance these facilities and could increase the costs of bank funding. Ally and Ally Bank also continue to access the securitization markets. While those markets have stabilized following the liquidity crisis that commenced in 2007–2008, there can be no assurances that these sources of liquidity will remain available to us.
Our policies and controls are designed to enable us to maintain adequate liquidity to conduct our business in the ordinary course even in a stressed environment. There is no guarantee, however, that our liquidity position will never become compromised. In such an event, we may be required to sell assets at a loss or reduce loan and operating lease originations in order to continue operations. This could damage the performance and value of our business, prompt regulatory intervention and private litigation, harm our reputation, and cause a loss of customer and investor confidence, and if the condition were to persist for any appreciable period of time, our viability as a going concern could be threatened. Refer to the section titled Liquidity Management, Funding, and Regulatory Capital in the MD&A that follows and Note 20 to the Consolidated Financial Statements.
Our indebtedness and other obligations are significant and could adversely affect our business and financial results.
We have a significant amount of indebtedness apart from deposit liabilities. At December 31, 2020, we had approximately $25.1 billion in principal amount of indebtedness outstanding (including $10.0 billion in secured indebtedness). Interest expense on our indebtedness constituted approximately 14.7% of our total financing revenue and other interest income for the year ended December 31, 2020. We also have the ability to create additional indebtedness.
If our debt service obligations increase, whether due to the increased cost of existing indebtedness or the incurrence of additional indebtedness, more of our cash flow from operations would need to be allocated to the payment of principal of, and interest on, our indebtedness, which would reduce the funds available for other purposes. Our indebtedness also could limit our ability to execute our strategic plan and withstand competitive pressures and could reduce our flexibility in responding to changing business and economic conditions. In addition, if we are unable to satisfy our indebtedness and other obligations in full and on time, our business, reputation, and value as a going concern could be profoundly and perhaps inexorably damaged.
Our borrowing costs and access to the banking and capital markets could be negatively impacted if our credit ratings are downgraded or otherwise fail to meet investor expectations.
The cost and availability of our funding are meaningfully affected by our short- and long-term credit ratings. Each of Standard & Poor’s Rating Services, Moody’s Investors Service, Inc., Fitch, Inc., and Dominion Bond Rating Service rates some or all of our debt, and these ratings reflect the rating agency’s opinion of our financial strength, operating performance, strategic position, and ability to meet our obligations. Agency ratings are not a recommendation to buy, sell, or hold any security and may be revised or withdrawn at any time. Each agency’s rating should be evaluated independently of any other agency’s rating.
Future downgrades to our credit ratings or their failure to meet investor expectations may result in higher borrowing costs, reduced access to the banking and capital markets, more restrictive terms and conditions being added to any new or replacement financing arrangements.
The markets for automotive financing, insurance, banking (including corporate finance, mortgage finance, and point-of-sale personal lending), brokerage, and investment-advisory services are extremely competitive, and competitive pressures could adversely affect our business and financial results.
The markets for automotive financing, insurance, banking (including corporate finance, mortgage finance, and point-of-sale personal lending), brokerage, and investment-advisory services are highly competitive, and we expect competitive pressures only to intensify in the future, especially in light of the regulatory and supervisory environments in which we operate, technological innovations that alter the barriers to entry, current and evolving economic and market conditions, changing customer preferences and consumer and business sentiment, and monetary and fiscal policies. Refer to the section above titled Industry and Competition in Part I, Item 1 of this report. Competitive pressures may drive us to take actions that we might otherwise eschew, such as lowering the interest rates or fees on loans, raising the interest rates on deposits, or adopting more liberal underwriting standards. These pressures also may accelerate actions that we might otherwise elect to defer, such as substantial investment in systems or infrastructure. Whatever the reason, actions that we take in response to competition may adversely affect our results of operations and financial condition. These consequences could be exacerbated if we are not successful in introducing new products and services, achieving market acceptance of our products and services, developing and maintaining a strong customer base, continuing to enhance our reputation, or prudently managing risks and expenses.
Challenging business, economic, or market conditions may adversely affect our business, results of operations, and financial condition.
Our businesses are driven by robust economic and market activity, monetary and fiscal stability, and positive investor, business, and consumer sentiment. A downturn in economic conditions, disruptions in the equity or debt markets, high unemployment or underemployment, depressed vehicle or housing prices, unsustainable debt levels, unfavorable changes in interest rates, declines in household incomes, deteriorating consumer or business sentiment, consumer or commercial bankruptcy filings, or declines in the strength of national or local economies could decrease demand for our products and services, increase the amount and rate of delinquencies and losses, raise our operating and other expenses, and negatively impact the returns on and the value of our loans, investment portfolio, and other assets. Further, if a
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significant and sustained increase in fuel prices or other adverse conditions were to lead to diminished new and used vehicle purchases or prices, our automotive finance and insurance businesses could suffer considerably. In addition, concerns about the pace of economic growth and uncertainty about fiscal and monetary policies can result in significant volatility in the financial markets and could impact our ability to obtain cost-effective funding. If any of these events were to occur or worsen, our business, results of operation, and financial condition could be adversely affected.
Acts or threats of terrorism, natural disasters, and other conditions or events beyond our control could adversely affect us.
Geopolitical conditions, natural disasters, pandemics, and other conditions or events beyond our control may adversely affect our business, results of operations, financial condition, or prospects. Refer to the risk factor above, titled The COVID-19 pandemic is adversely affecting us and our customers, counterparties, employees, and third-party service providers, and the adverse impacts on our business, financial position, results of operations, and prospects could be significant, for more information on risks associated with the COVID-19 pandemic. For example, acts or threats of terrorism and political or military actions taken in response to terrorism could adversely affect general economic, business, or market conditions and, in turn, us, especially as an intermediary within the financial system. We also could be negatively impacted if our key personnel, a significant number of our employees, or our systems or infrastructure were to become unavailable or damaged due to a pandemic, natural disaster, war, act of terrorism, accident, or similar cause. These same risks and uncertainties arise too for the service providers and counterparties on whom we depend as well as their own third-party service providers and counterparties.
Significant repurchases or indemnification payments in our securitizations could harm our profitability and financial condition.
We have repurchase and indemnification obligations in our securitizations. If we were to breach a representation, warranty, or covenant in connection with a securitization, we may be required to repurchase the affected loans or otherwise compensate investors or purchasers for losses caused by the breach. If the scale or frequency of repurchases or indemnification payments were to increase substantially from its present levels, our results of operations and financial condition could be adversely affected. In such a circumstance, we also could suffer reputational damage, become subject to stricter supervisory scrutiny and private litigation, and find our access to capital and banking markets more limited or more costly.
Our business and operations make extensive use of models, and we could be adversely affected if our design, implementation, or use of models is flawed.
We use quantitative models to price products and services, measure risk, calculate the quantitative portfolio of our allowance for loan losses, estimate asset and liability values, assess capital and liquidity, manage our balance sheet, create financial forecasts, and otherwise conduct our business and operations. If the design, implementation, or use of any of these models is flawed, we could make strategic or tactical decisions based on incorrect, misleading, or incomplete information. In addition, to the extent that any flawed models or inaccurate model outputs are used in reports to banking agencies or the public, we could be subjected to supervisory actions, private litigation, and other proceedings that may adversely affect our business and financial results. Refer to the section titled Risk Management in the MD&A that follows.
Our hedging strategies may not be successful in mitigating our interest rate, foreign exchange, and market risks, which could adversely affect our financial results.
We employ various hedging strategies to mitigate the interest rate, foreign exchange, and market risks inherent in many of our assets and liabilities. Our hedging strategies rely considerably on assumptions and projections regarding our assets and liabilities as well as general market factors. If any of these assumptions or projections prove to be incorrect or our hedges do not adequately mitigate the impact of changes in interest rates, foreign exchange rates, and other market factors, we may experience volatility in our earnings that could adversely affect our profitability and financial condition. In addition, we may not be able to find market participants that are willing to act as our hedging counterparties on acceptable terms or at all, which could have an adverse effect on the success of our hedging strategies.
We use estimates and assumptions in determining the value or amount of many of our assets and liabilities. If our estimates or assumptions prove to be incorrect, our cash flow, profitability, financial condition, and prospects could be adversely affected.
We use estimates and assumptions in determining the fair value of many of our assets, including retained interests from securitizations, loans held for sale, and other investments that do not have an established market value or are not publicly traded. We also use estimates and assumptions in determining the residual values of our operating lease assets. In addition, we use estimates and assumptions in determining our allowance for loan losses, reserves for legal matters, insurance losses, and loss adjustment expenses (which represent the accumulation of estimates for both reported losses and those incurred, but not reported, including claims adjustment expenses relating to direct insurance and assumed reinsurance agreements). Refer to the section titled Critical Accounting Estimates in the MD&A that follows. Our assumptions and estimates may be inaccurate for many reasons. For example, they often involve matters that are inherently difficult to predict and that are beyond our control (such as macroeconomic conditions and their impact on automotive dealers) and often involve complex interactions between a number of dependent and independent variables, factors, and other assumptions. Assumptions and estimates are also far more difficult during periods of market dislocation or illiquidity. As a result, our actual experience may differ substantially from these estimates and assumptions. A meaningful difference between our estimates and assumptions and our actual experience may adversely affect our cash flow, profitability, financial condition, and prospects and may increase the volatility of our financial results. In addition, several different judgments associated with assumptions or estimates could be reasonable under the circumstances and yet result in significantly different results being reported.
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Significant fluctuations in the valuation of investment securities or market prices could negatively affect our financial results.
Market prices for securities and other financial assets are subject to considerable fluctuation. Fluctuations may result, for example, from perceived changes in the value of the asset, the relative price of alternative investments, shifts in investor sentiment, geopolitical events, actual or expected changes in monetary or fiscal policies, and general market conditions. Due to these kinds of fluctuations, the amount that we realize in the subsequent sale of an investment may significantly differ from the last reported value and could negatively affect our financial results. Additionally, negative fluctuations in the value of available-for-sale investment securities could result in unrealized losses recorded in equity.
Changes in accounting standards could adversely affect our reported revenues, expenses, profitability, and financial condition.
Our financial statements are subject to the application of GAAP, which are periodically revised or expanded. The application of GAAP is also subject to varying interpretations over time. Accordingly, we are required to adopt new or revised accounting standards or comply with revised interpretations that are issued from time to time by various parties, including accounting standard setters and those who interpret the standards, such as the FASB, the SEC, banking agencies, and our independent registered public accounting firm. Those changes are beyond our control but could adversely affect our revenues, expenses, profitability, or financial condition. For example, the adoption of CECL effective January 1, 2020, has resulted in a significant increase to our allowance for loan losses. Refer to Note 1 to the Consolidated Financial Statements for financial accounting standards issued by the FASB, but not yet adopted by the company.
The financial system is highly interrelated, and the failure of even a single financial institution could adversely affect us.
The financial system is highly interrelated, including as a result of lending, trading, clearing, counterparty, and other relationships. We have exposure to and routinely execute transactions with a wide variety of financial institutions, including brokers, dealers, commercial banks, and investment banks. If any of these institutions were to become or perceived to be unstable, were to fail in meeting its obligations in full and on time, or were to enter bankruptcy, conservatorship, or receivership, the consequences could ripple throughout the financial system and may adversely affect our business, results of operations, financial condition, or prospects. Because of interrelationships within the financial system, this could occur even if the institution itself were not systemically important or perceived to play a meaningful role in the stable functioning of the financial markets.
Adverse economic conditions or changes in laws in the states where we have loan or operating lease concentrations may negatively affect our business and financial results.
We are exposed to portfolio concentrations in some states, including California, Texas, and Florida. Factors adversely affecting the economies and applicable laws in these states could have an adverse effect on our business, results of operations, and financial condition.
Negative publicity outside of our control, or our failure to successfully manage issues arising from our conduct or in connection with the financial services industry generally, could damage our reputation and adversely affect our business or financial results.
The performance and value of our business could be negatively impacted by any reputational harm that we may suffer, especially as an intermediary within the financial system. This harm could arise from negative publicity outside of our control or our failure to adequately address issues arising from our conduct or in connection with the financial services industry generally. Risks to our reputation could arise in any number of contexts—for example, stricter regulatory or supervisory environments, cyber incidents and other security breaches, inabilities to meet customer expectations, mergers and acquisitions, lending or banking practices, actual or perceived conflicts of interest, failures to prevent money laundering, inappropriate conduct by employees, and inadequate corporate governance.
Our failure to maintain appropriate ESG practices and disclosures could result in reputational harm, a loss of customer and investor confidence, and adverse business and financial results.
Governments, investors, customers, and the general public are increasingly focused on ESG practices and disclosures. For us and others in the financial-services industry, this focus extends to the practices and disclosures of the customers, counterparties, and service providers with whom we choose to do business. For example, while we have a relatively smaller carbon footprint as a digital financial services company and do not have commercial-lending relationships with a host of sensitive industries (such as those whose products are or are perceived to be harmful to the environment or the public health), the majority of our business and operations are connected to the automotive industry. Views about ESG are diverse, dynamic, and rapidly changing, and if we were to fail to maintain appropriate ESG practices and disclosures, we could suffer reputational damage, a loss of customer and investor confidence, and adverse business and financial results.
Risks Related to Ownership of Our Common Stock
Our ability to pay dividends on our common stock or repurchase shares in the future may be limited.
Any future dividends on our common stock or changes in our stock-repurchase program will be determined by our Board in its sole discretion and will depend on our business, financial condition, earnings, capital, liquidity, and other factors at the time. In addition, any plans to continue dividends or share repurchases in the future will be subject to our stress capital buffer requirement and the FRB’s review of and non-objection to our annual capital plan, which is unpredictable. There is no assurance that our Board will approve, or the FRB will permit, future dividends or share repurchases. Refer to the section above titled Regulation and Supervision in Part I, Item 1 of this report.
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It is possible that any indentures or other financing arrangements that we execute in the future could limit our ability to pay dividends on our capital stock, including our common stock. In the event that any of our indentures or other financing arrangements in the future restrict that ability, we may be unable to pay dividends unless and until we can refinance the amounts outstanding under those arrangements. In addition, under Delaware law, our Board may declare dividends on our capital stock only to the extent of our statutory surplus (which is defined as the amount equal to total assets minus total liabilities, in each case at fair market value, minus statutory capital) or, if no surplus exists, out of our net profits for the then-current or immediately preceding fiscal year. Further, even if we are permitted under our contractual obligations and Delaware law to pay dividends on our common stock, we may not have sufficient cash or regulatory approvals to do so.
The market price of our common stock could be adversely impacted by anti-takeover provisions in our organizational documents and Delaware law that could delay or prevent a takeover attempt or change in control of Ally or by other banking, antitrust, or corporate laws that have or are perceived as having an anti-takeover effect.
Our certificate of incorporation, our bylaws, and Delaware law contain provisions that could have the effect of discouraging, hindering, or preventing an acquisition that our Board of Directors does not find to be in the best interests of us and our stockholders. For example, our organizational documents include provisions:
•limiting the liability of our directors and providing indemnification to our directors and officers; and
•limiting the ability of our stockholders to call and bring business before special meetings of stockholders by requiring any requesting stockholders to hold at least 25% of our common stock in the aggregate.
These provisions, alone or together, could delay hostile takeovers and changes in control of Ally or changes in management.
In addition, we are subject to Section 203 of the General Corporation Law of the State of Delaware, which generally prohibits a corporation from engaging in various business combination transactions with any interested stockholder (generally defined as a stockholder who owns 15% or more of a corporation’s voting stock) for a period of three years following the time that the stockholder became an interested stockholder, except under specified circumstances such as the receipt of prior board approval.
Banking and antitrust laws, including associated regulatory-approval requirements, also impose significant restrictions on the acquisition of direct or indirect control over any BHC like Ally or any insured depository institution like Ally Bank. Refer to the section above titled Regulation and Supervision in Part I, Item 1 of this report.
Any provision of our organizational documents or applicable law that deters, hinders, or prevents a non-negotiated takeover or change in control of Ally could limit the opportunity for our stockholders to receive a premium for their shares of our common stock and could also affect the price that some investors are willing to pay for our common stock.
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Item 1B. Unresolved Staff Comments
None.
Item 2. Properties
Our principal corporate offices are located in Detroit, Michigan, and Charlotte, North Carolina. In Detroit, we lease approximately 330,000 square feet of office space under a lease that expires in December 2028. In Charlotte, we lease approximately 234,000 square feet of office space under a variety of leases expiring between June 2021 and May 2024. In September 2017, we entered into a new agreement, scheduled to commence in April 2021, to lease approximately 543,000 square feet of office space in Charlotte under a lease that is expected to expire in March 2036. Under the new lease we plan to consolidate most of our Charlotte, North Carolina locations, through a series of phases, as the existing leases expire.
The primary offices for both our Automotive Finance and Insurance operations are located in Detroit, and are included in the totals referenced above. The primary office for our Mortgage Finance operations is located in Charlotte, where, in addition to the totals referenced above, we lease approximately 84,000 square feet of office space under a lease that expires in December 2022. Upon expiration, our Mortgage Finance operations will relocate to the consolidated office space in Charlotte, North Carolina, referenced above. The primary office for our Corporate Finance operations is located in New York, New York, where we lease approximately 55,000 square feet of office space under a lease that expires in June 2023.
In addition to the properties described above, we lease additional space to conduct our operations. We believe our facilities are adequate for us to conduct our present business activities.
Item 3. Legal Proceedings
Refer to Note 29 to the Consolidated Financial Statements for a discussion related to our legal proceedings.
Item 4. Mine Safety Disclosures
Not applicable.
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Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Market Information
Our common stock is listed on the NYSE under the symbol “ALLY.” At December 31, 2020, we had 374,674,415 shares of common stock outstanding, compared to 374,331,998 shares at December��31, 2019. As of February 22, 2021, we had approximately 30 holders of record of our common stock.
Securities Authorized for Issuance Under Equity Compensation Plans
For information regarding securities authorized for issuance under our equity compensation plans, see Part III, Item 12.
Stock Performance Graph
The following graph compares the cumulative total return to stockholders on our common stock relative to the cumulative total returns of the S&P 500 index and the S&P Financials index. An investment of $100 (with reinvestment of all dividends) is assumed to have been made in our common stock and in each index on December 31, 2015, and its relative performance is tracked through December 31, 2020. The returns shown are based on historical results and are not intended to suggest future performance.
This performance graph is not deemed to be “filed” for purposes of Section 18 of the Exchange Act, or otherwise subject to the liabilities of that section, or incorporated by reference into any filing of Ally under the Securities Act of 1933, as amended, or the Exchange Act, except as expressly set forth by specific reference in such a filing.
Recent Sales of Unregistered Securities
Ally did not have any sales of unregistered securities in the last three fiscal years.
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Purchases of Equity Securities by the Issuer
The following table presents repurchases of our common stock, by month, for the three months ended December 31, 2020.
| Three months ended December 31, 2020 | Total number of shares repurchased (a) (b) (in thousands) | Weighted-average price paid per share (a) (b) (in dollars) | ||||||||||||||||||||||||
| October 2020 | — | $ | 22.12 | |||||||||||||||||||||||
| November 2020 | 15 | 29.63 | ||||||||||||||||||||||||
| December 2020 | 22 | 33.91 | ||||||||||||||||||||||||
| Total | 37 | 32.14 | ||||||||||||||||||||||||
(a)Consists of shares of common stock withheld to cover income taxes owed by participants in our share-based incentive plans.
(b)On March 17, 2020, we announced the voluntary suspension of our stock-repurchase program through its termination on June 30, 2020. Consistent with the FRB’s restrictions on common-stock repurchases for large firms such as Ally, described in Note 20 to the Consolidated Financial Statements, we did not implement a new stock-repurchase program or repurchase shares of our common stock, except in connection with compensation plans, for the remainder of 2020.Refer to Note 20 to the Consolidated Financial Statements for further details.
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Item 6. Selected Financial Data
The selected historical financial information set forth below should be read in conjunction with Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A) in Part II, Item 7 of this report, and our Consolidated Financial Statements and the notes thereto. The historical financial information presented may not be indicative of our future performance.
The following table presents selected Consolidated Statement of Income and earnings per common share data.
| ($ in millions, except per share data; shares in thousands) | 2020 | 2019 | 2018 | 2017 | 2016 | |||||||||||||||||||||||||||||||||||||||
| Total financing revenue and other interest income | $ | 8,797 | $ | 9,857 | $ | 9,052 | $ | 8,322 | $ | 8,305 | ||||||||||||||||||||||||||||||||||
| Total interest expense | 3,243 | 4,243 | 3,637 | 2,857 | 2,629 | |||||||||||||||||||||||||||||||||||||||
| Net depreciation expense on operating lease assets | 851 | 981 | 1,025 | 1,244 | 1,769 | |||||||||||||||||||||||||||||||||||||||
| Net financing revenue and other interest income | 4,703 | 4,633 | 4,390 | 4,221 | 3,907 | |||||||||||||||||||||||||||||||||||||||
| Total other revenue | 1,983 | 1,761 | 1,414 | 1,544 | 1,530 | |||||||||||||||||||||||||||||||||||||||
| Total net revenue | 6,686 | 6,394 | 5,804 | 5,765 | 5,437 | |||||||||||||||||||||||||||||||||||||||
| Provision for credit losses | 1,439 | 998 | 918 | 1,148 | 917 | |||||||||||||||||||||||||||||||||||||||
| Total noninterest expense | 3,833 | 3,429 | 3,264 | 3,110 | 2,939 | |||||||||||||||||||||||||||||||||||||||
| Income from continuing operations before income tax expense | 1,414 | 1,967 | 1,622 | 1,507 | 1,581 | |||||||||||||||||||||||||||||||||||||||
| Income tax expense from continuing operations (a) | 328 | 246 | 359 | 581 | 470 | |||||||||||||||||||||||||||||||||||||||
| Net income from continuing operations | 1,086 | 1,721 | 1,263 | 926 | 1,111 | |||||||||||||||||||||||||||||||||||||||
| (Loss) income from discontinued operations, net of tax | (1) | (6) | — | 3 | (44) | |||||||||||||||||||||||||||||||||||||||
| Net income | $ | 1,085 | $ | 1,715 | $ | 1,263 | $ | 929 | $ | 1,067 | ||||||||||||||||||||||||||||||||||
| Basic earnings per common share (b): | ||||||||||||||||||||||||||||||||||||||||||||
| Net income from continuing operations | $ | 2.89 | $ | 4.38 | $ | 2.97 | $ | 2.04 | $ | 2.25 | ||||||||||||||||||||||||||||||||||
| Net income | 2.89 | 4.36 | 2.97 | 2.05 | 2.15 | |||||||||||||||||||||||||||||||||||||||
| Weighted-average common shares outstanding | 375,629 | 393,234 | 425,165 | 453,704 | 481,105 | |||||||||||||||||||||||||||||||||||||||
| Diluted earnings per common share (b): | ||||||||||||||||||||||||||||||||||||||||||||
| Net income from continuing operations | $ | 2.88 | $ | 4.35 | $ | 2.95 | $ | 2.03 | $ | 2.24 | ||||||||||||||||||||||||||||||||||
| Net income | 2.88 | 4.34 | 2.95 | 2.04 | 2.15 | |||||||||||||||||||||||||||||||||||||||
| Weighted-average common shares outstanding | 377,101 | 395,395 | 427,680 | 455,350 | 482,182 | |||||||||||||||||||||||||||||||||||||||
| Common share information: | ||||||||||||||||||||||||||||||||||||||||||||
| Cash dividends declared per common share | $ | 0.76 | $ | 0.68 | $ | 0.56 | $ | 0.40 | $ | 0.16 | ||||||||||||||||||||||||||||||||||
| Period-end common shares outstanding | 374,674 | 374,332 | 404,900 | 437,054 | 467,000 | |||||||||||||||||||||||||||||||||||||||
(a)As a result of the Tax Act, an additional $119 million of tax expense was incurred during 2017. Additionally, during the second quarter of 2019, we realized an income tax benefit of approximately $200 million from the release of valuation allowance on foreign tax credit carry forwards.
(a)Figures in the table may not recalculate exactly due to rounding. Earnings per share is calculated based on unrounded numbers. Includes shares related to share-based compensation that vested but were not yet issued.
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The following tables present selected Consolidated Balance Sheet and ratio data.
December 31, ($ in millions) | 2020 | 2019 | 2018 | 2017 | 2016 | |||||||||||||||||||||||||||
| Selected period-end balance sheet data: | ||||||||||||||||||||||||||||||||
| Total assets | $ | 182,165 | $ | 180,644 | $ | 178,869 | $ | 167,148 | $ | 163,728 | ||||||||||||||||||||||
| Total deposit liabilities | $ | 137,036 | $ | 120,752 | $ | 106,178 | $ | 93,256 | $ | 79,022 | ||||||||||||||||||||||
| Long-term debt | $ | 22,006 | $ | 34,027 | $ | 44,193 | $ | 44,226 | $ | 54,128 | ||||||||||||||||||||||
| Total equity | $ | 14,703 | $ | 14,416 | $ | 13,268 | $ | 13,494 | $ | 13,317 | ||||||||||||||||||||||
| Year ended December 31, | 2020 | 2019 | 2018 | 2017 | 2016 | |||||||||||||||||||||||||||||||||||||||
| Financial ratios: | ||||||||||||||||||||||||||||||||||||||||||||
| Return on average assets (a) | 0.59 | % | 0.95 | % | 0.74 | % | 0.57 | % | 0.68 | % | ||||||||||||||||||||||||||||||||||
| Return on average equity (a) | 7.59 | % | 12.26 | % | 9.65 | % | 6.89 | % | 7.80 | % | ||||||||||||||||||||||||||||||||||
| Equity to assets (a) | 7.83 | % | 7.78 | % | 7.65 | % | 8.28 | % | 8.69 | % | ||||||||||||||||||||||||||||||||||
| Common dividend payout ratio (b) | 26.30 | % | 15.60 | % | 18.86 | % | 19.51 | % | 7.44 | % | ||||||||||||||||||||||||||||||||||
| Net interest spread (a) (c) | 2.49 | % | 2.45 | % | 2.47 | % | 2.58 | % | 2.49 | % | ||||||||||||||||||||||||||||||||||
| Net yield on interest-earning assets (a) (d) | 2.65 | % | 2.67 | % | 2.65 | % | 2.71 | % | 2.63 | % | ||||||||||||||||||||||||||||||||||
(a)The ratios were based on average assets and average equity using an average daily balance methodology.
(b)The common dividend payout ratio was calculated using basic earnings per common share.
(c)Net interest spread represents the difference between the rate on total interest-earning assets and the rate on total interest-bearing liabilities, excluding discontinued operations for the periods shown.
(d)Net yield on interest-earning assets represents net financing revenue and other interest income as a percentage of total interest-earning assets.
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We became subject to U.S. Basel III on January 1, 2015, although a number of its provisions—including capital buffers and certain regulatory capital deductions—were subject to a phase-in period through December 31, 2018. For further information, 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 under U.S Basel III as subject to transitional provisions primarily related to deductions and adjustments impacting Common Equity Tier 1 capital and Tier 1 capital.
December 31, ($ in millions) | 2020 | 2019 | 2018 | 2017 | 2016 | |||||||||||||||||||||||||||||||||
| Common Equity Tier 1 capital ratio | 10.64 | % | 9.54 | % | 9.14 | % | 9.53 | % | 9.37 | % | ||||||||||||||||||||||||||||
| Tier 1 capital ratio | 12.37 | % | 11.22 | % | 10.80 | % | 11.25 | % | 10.93 | % | ||||||||||||||||||||||||||||
| Total capital ratio | 14.15 | % | 12.76 | % | 12.31 | % | 12.94 | % | 12.57 | % | ||||||||||||||||||||||||||||
| Tier 1 leverage ratio (to adjusted quarterly average assets) (a) | 9.41 | % | 9.08 | % | 9.00 | % | 9.53 | % | 9.54 | % | ||||||||||||||||||||||||||||
| Total equity | $ | 14,703 | $ | 14,416 | $ | 13,268 | $ | 13,494 | $ | 13,317 | ||||||||||||||||||||||||||||
| CECL phase-in adjustment (b) | 1,188 | |||||||||||||||||||||||||||||||||||||
| Goodwill and certain other intangibles | (382) | (450) | (285) | (283) | (272) | |||||||||||||||||||||||||||||||||
| Deferred tax assets arising from net operating loss and tax credit carryforwards (c) | (20) | (25) | (143) | (224) | (410) | |||||||||||||||||||||||||||||||||
| Other adjustments (d) | (611) | (104) | 557 | 250 | 343 | |||||||||||||||||||||||||||||||||
| Common Equity Tier 1 capital | 14,878 | 13,837 | 13,397 | 13,237 | 12,978 | |||||||||||||||||||||||||||||||||
| Trust preferred securities | 2,499 | 2,496 | 2,493 | 2,491 | 2,489 | |||||||||||||||||||||||||||||||||
| Deferred tax assets arising from net operating loss and tax credit carryforwards (c) | — | — | — | (56) | (273) | |||||||||||||||||||||||||||||||||
| Other adjustments | (88) | (62) | (59) | (44) | (47) | |||||||||||||||||||||||||||||||||
| Tier 1 capital | 17,289 | 16,271 | 15,831 | 15,628 | 15,147 | |||||||||||||||||||||||||||||||||
| Qualifying subordinated debt and other instruments qualifying as Tier 2 | 829 | 1,033 | 1,031 | 1,113 | 1,174 | |||||||||||||||||||||||||||||||||
| Qualifying allowance for loan losses and other adjustments | 1,660 | 1,202 | 1,184 | 1,233 | 1,098 | |||||||||||||||||||||||||||||||||
| Total capital | $ | 19,778 | $ | 18,506 | $ | 18,046 | $ | 17,974 | $ | 17,419 | ||||||||||||||||||||||||||||
| Risk-weighted assets (e) | $ | 139,787 | $ | 145,072 | $ | 146,561 | $ | 138,933 | $ | 138,539 | ||||||||||||||||||||||||||||
(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 have elected to delay recognizing the estimated impact of CECL on regulatory capital until after a two-year deferral period, which for us extends through December 31, 2021. Beginning on January 1, 2022, we will be required to phase 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)Contains deferred tax assets required to be deducted from capital under U.S. Basel III.
(d)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.
(e)Risk-weighted assets are defined by regulation and are generally determined by allocating assets and specified off-balance-sheet exposures to various risk categories.
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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Cautionary Notice about Forward-Looking Statements and Other Terms
From time to time we have made, and in the future will make, forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements can be identified by the fact that they do not relate strictly to historical or current facts. Forward-looking statements often use words such as “believe,” “expect,” “anticipate,” “intend,” “pursue,” “seek,” “continue,” “estimate,” “project,” “outlook,” “forecast,” “potential,” “target,” “objective,” “trend,” “plan,” “goal,” “initiative,” “priorities,” or other words of comparable meaning or future-tense or conditional verbs such as “may,” “will,” “should,” “would,” or “could.” Forward-looking statements convey our expectations, intentions, or forecasts about future events, circumstances, or results.
This report, including any information incorporated by reference in this report, contains forward-looking statements. We also may make forward-looking statements in other documents that are filed or furnished with the SEC. In addition, we may make forward-looking statements orally or in writing to investors, analysts, members of the media, or others.
All forward-looking statements, by their nature, are subject to assumptions, risks, and uncertainties, which may change over time and many of which are beyond our control. You should not rely on any forward-looking statement as a prediction or guarantee about the future. Actual future objectives, strategies, plans, prospects, performance, conditions, or results may differ materially from those set forth in any forward-looking statement. While no list of assumptions, risks, or uncertainties could be complete, some of the factors that may cause actual results or other future events or circumstances to differ from those in forward-looking statements include:
•evolving local, regional, national, or international business, economic, or political conditions;
•changes in laws or the regulatory or supervisory environment, including as a result of recent financial services legislation, regulation, or policies or changes in government officials or other personnel;
•changes in monetary, fiscal, or trade laws or policies, including as a result of actions by 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;
•disruptions or shifts in investor sentiment or behavior in the securities, capital, or other financial markets, including financial or systemic shocks and volatility or changes in market liquidity, interest or currency rates, or valuations;
•uncertainty about the future of LIBOR and any negative impacts that could result;
•changes in business or consumer sentiment, preferences, or behavior, including spending, borrowing, or saving by businesses or households;
•changes in our corporate or business strategies, the composition of our assets, or the way in which we fund those assets;
•our ability to execute our business strategy for Ally Bank, including its digital focus;
•our ability to optimize our automotive finance and insurance businesses and to continue diversifying into and growing other consumer and commercial business lines, including mortgage lending, point-of-sale personal lending, corporate finance, brokerage, and wealth management;
•our ability to develop capital plans that will receive non-objection from the FRB and our ability to implement them, including any payment of dividends or share repurchases;
•our ability to effectively manage capital or liquidity consistent with evolving business or operational needs, risk-management standards, and regulatory or supervisory requirements;
•our ability to cost-effectively fund our business and operations, including through deposits and the capital markets;
•changes in any credit rating assigned to Ally, including Ally Bank;
•adverse publicity or other reputational harm to us or our senior officers;
•our ability to develop, maintain, or market our products or services or to absorb unanticipated costs or liabilities associated with those products or services;
•our ability to innovate, to anticipate the needs of current or future customers, to successfully compete, to increase or hold market share in changing competitive environments, or to deal with pricing or other competitive pressures;
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•the continuing profitability and viability of our dealer-centric automotive finance and insurance businesses, especially in the face of competition from captive finance companies and their automotive manufacturing sponsors and challenges to the dealer’s role as intermediary between manufacturers and purchasers;
•our ability to appropriately underwrite loans that we originate or purchase and to otherwise manage credit risk;
•changes in the credit, liquidity, or other financial condition of our customers, counterparties, service providers, or competitors;
•our ability to effectively deal with economic, business, or market slowdowns or disruptions;
•judicial, regulatory, or administrative investigations, proceedings, disputes, or rulings that create uncertainty for, or are adverse to, us or the financial services industry;
•the potential outcomes of legal and regulatory proceedings and governmental and regulatory examinations, investigations, and other inquiries to which we are or may be subject at any given time, and our ability to remediate regulatory deficiencies on a timely basis and to otherwise absorb and address the heightened scrutiny and expectations generally from supervisory and other governmental authorities, the severity of remedies sought, such as enforcement proceeds, and the potential collateral consequences arising from those outcomes;
•the performance and availability of third-party service providers on whom we rely in delivering products and services to our customers and otherwise conducting our business and operations;
•our ability to maintain secure and functional financial, accounting, technology, data processing, or other operating systems or infrastructure, including our capacity to withstand cyberattacks;
•the adequacy of our corporate governance, risk-management framework, compliance programs, or internal controls over financial reporting, including our ability to control lapses or deficiencies in financial reporting or to effectively mitigate or manage operational risk;
•the efficacy of our methods or models in assessing business strategies or opportunities or in valuing, measuring, estimating, monitoring, or managing positions or risk;
•our ability to keep pace with changes in technology that affect us or our customers, counterparties, service providers, or competitors;
•our ability to successfully make and integrate acquisitions;
•the adequacy of our succession planning for key executives or other personnel and our ability to attract or retain qualified employees;
•natural or man-made disasters, calamities, or conflicts, including terrorist events and pandemics (such as adverse effects of the COVID-19 pandemic on us and our customers, counterparties, employees, and third-party service providers);
•policies and other actions of governments to mitigate climate and related environmental risks, as well as associated changes in the behavior and preferences of businesses and consumers; 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 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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Overview
Ally Financial Inc. (together with its consolidated subsidiaries unless the context otherwise requires, Ally, the Company, or we, us, or our) is a leading digital financial-services company. As a customer-centric company with passionate customer service and innovative financial solutions, we are relentlessly focused on “Doing it Right” and being a trusted financial-services provider to our consumer, commercial, and corporate customers. We are one of the largest full-service automotive finance operations in the United States and offer a wide range of financial services and insurance products to automotive dealerships and consumers. Our award-winning digital direct bank (Ally Bank, Member FDIC and Equal Housing Lender) offers mortgage lending, point-of-sale personal lending, and a variety of deposit and other banking products, including savings, money-market, and checking accounts, CDs, and IRAs. Additionally, we offer securities-brokerage and investment-advisory services through Ally Invest. Our corporate-finance business offers capital for equity sponsors and middle-market companies. We are a Delaware corporation and are registered as a BHC under the BHC Act, and an FHC under the GLB Act.
Our Business
Dealer Financial Services
Dealer Financial Services comprises our Automotive Finance and Insurance segments. Our primary customers are automotive dealers, which are independently owned businesses. 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.
Our Dealer 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 dealer-centric business model encourages dealers to use our broad range of products through incentive programs like our Ally Dealer Rewards program, which rewards individual dealers based on the depth and breadth of our relationship.program. Our automotive finance services include purchasing retail installment sales contracts and operating leases from dealers, extending automotive loans directly to consumers, offering term loans to dealers, financing dealer floorplans and providing other lines of credit to dealers, supplying warehouse lines to automotive retailers, offering automotive-fleet financing, providing financing to companies and municipalities for the purchase or lease of vehicles, and supplying vehicle-remarketing services. We also offer retail VSCs and commercial insurance primarily covering dealers’ vehicle inventories. We are a leading provider of VSCs, GAP, and vehicle maintenance contracts (VMCs).VMCs.
Automotive Finance
Our Automotive Finance operations provide U.S.-based automotive financing services to consumers, automotive dealers, other businesses, and municipalities. Our dealer-focused 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. At December 31, 2019,2020, our Automotive Finance operations had $113.9$104.8 billion of assets and generated $4.4$4.5 billion of total net revenue in 2019.2020. For consumers, we provide financing for new and used vehicles. In addition, our Commercial Services Group (CSG)CSG provides automotive financing for small businesses.businesses and municipalities. At December 31, 2019,2020, our CSG had $8.2 billion of loans outstanding. Through our commercial automotive financing operations, we fund dealer purchases of new and used vehicles through wholesale floorplan financing. We manage commercial account servicing on approximately 3,3003,200 dealers that utilize our floorplan inventory lending or other commercial loans. We service an $80.6$80.2 billion consumer loan and operating lease portfolio at December 31, 2019,2020, and our commercial automotive loan portfolio was approximately $32.5$23.1 billion at December 31, 2019.2020. The extensive infrastructure, technology, and analytics of our servicing operations as well as the experience of our servicing personnel enhance our ability to minimize our loan losses and enable us to deliver a favorable customer experience to both our dealers and retail customers. During 2019,2020, we continued to reposition our origination profile to focus on capital optimization and risk-adjusted returns. In 2019,2020, total consumer automotive originations were $36.3$35.1 billion, an increasea decrease of $898 million$1.2 billion compared to 2018.2019. 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. The automotive marketplace is dynamic and evolving, including substantial investments in electrification by automobile manufacturers and we aresuppliers. Ally remains focused on meeting the needs of both our dealer and consumer customers and continuing to strengthen and expand upon the 18,30018,700 dealer relationships we have. Clearlane, our online automotive lender exchange, expands our direct-to-consumer capabilities and provides a digital platform for consumers seeking financing. Clearlane further enhances our automotive financing offerings, dealer relationships, and digital capabilities. In addition to providing a digital direct-to-consumer channel for Ally, Clearlane is a fee-based business that generates revenue by successfully referring leads to other automotive lenders. Additionally, weWe continue to identify and cultivate relationships with automotive retailers including those with leading eCommerce platforms. We also operate Clearlane, our online direct-lending platform, which provides a digital 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. Ally has and continues to provide automobile financing for hybrid and battery-electric vehicles today, and is well positioned to remain a leader in automotive financing as we believe the vast majority of these vehicles will be sold through dealerships with whom we have an established relationship.
The Growth channel was established to focus on developing dealer relationships beyond those relationships that primarily were developed through our previous role as a captive finance company for General Motors Company (GM)GM and Fiat Chrysler Automobiles US LLC (Chrysler).Chrysler. The Growth channel was expanded to include direct-to-consumer financing through Clearlane and other channels and our arrangements with online automotive retailers. We have established relationships with thousands of Growth channel dealers through our customer-centric approach and specialized incentive programs designed
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to drive loyalty amongst dealers to our products and services. The success of the Growth channel has been a key enabler to convertingin evolving our business model from a focused captive finance company to a leading market competitor. In this channel, we currently have over 11,80012,300 dealer relationships, of which approximately 88%86% are franchised dealers (including brands such as Ford, Nissan, Kia, Hyundai, Toyota, Honda, and others), or used vehicle only retailers with a national presence.
Over the past several years, we have continued to focus on the consumer used vehicle segment primarily through franchised dealers, which 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 over 279282 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 new and used vehicles to approximately 4.5 million customers. 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 both the years ended December 31, 2020, and 2019, and 2018, totaling $36.3$35.1 billion and $35.4$36.3 billion, respectively.
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 Risk Management section 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 continue to 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 dealer inventory purchases of new and used vehicles, 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. 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 2019,2020, we financed an average of $28.2$19.3 billion of dealer vehicle inventory through wholesale floorplan financings. Other commercial automotive lending products, which averaged $5.7 billion during 2019,2020, 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 2019,2020, Ally and other parties, including dealers, fleet rental companies, and financial institutions, utilized SmartAuction to sell approximately 270,000258,000 vehicles to dealers and other commercial customers. SmartAuction served as the remarketing channel for 53% 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 2.42.5 million consumers nationwide across FinanceF&I and Insurance (F&I) and Property and Casualty (P&C)P&C products. In addition, we offer F&I products in Canada, where we serve approximately 445more than 400 thousand consumers and are the VSC and other protection plan provider for GM Canada and VSC provider for Subaru Canada. Our Insurance operations had $8.5$9.1 billion of assets at December 31, 2019,2020, and generated $1.3$1.4 billion of total net revenue during 2019.2020. As part of our focus on offering dealers a broad range of consumer financial and insuranceF&I products, we offer VSCs, VMCs, and GAP products. We also underwrite selected commercial insurance coverages, which primarily insure dealers’ wholesale vehicle inventory. Ally Premier Protection is our flagship VSC offering, which provides coverage for new and used vehicles of virtually all makes and models. We also offer ClearGuard on the SmartAuction platform, which is a protection product designed to minimize the risk to dealers from arbitration claims for eligible vehicles sold at auction.
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 high levels of customer satisfaction and regulatory compliance. We also advise dealers regarding necessary liability and physical damage coverages.
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Our F&I products are primarily distributed indirectly through the automotive dealer network. We have established approximately 1,8001,600 F&I dealer relationships nationwide and 600 dealer relationships in Canada, 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 allow the recovery of a specified amount beyond the 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 automotive lending exchange,direct-lending platform, Clearlane.
We have approximately 3,400 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 77%78%. Dealers who receive wholesale financing from us are eligible for insurance incentives such as automatic eligibility for our preferred insurance programs. In April 2019, we renewed our annual reinsurance agreement to obtain excess of loss coverage for our vehicle inventory insurance product to manage our risk of weather-related loss.
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-consumer Ally Home mortgage offering, and bulk purchases of high-quality jumbo and low-to-moderate income (LMI)LMI mortgage loans originated by third parties, and our direct-to-consumer Ally Home mortgage offering.parties. Our Mortgage Finance operations had $16.3$14.9 billion of assets at December 31, 2019,2020, and generated $193$220 million of total net revenue in 2019.2020.
Through our direct-to-consumer channel, which was introduced late in 2016, we offer a variety of competitively priced jumbo and conforming fixed- and adjustable-rate mortgage products through a third-party fulfillment provider. Under our current arrangement, our direct-to-consumer conforming mortgages are originated as held for sale and sold, while jumbo and LMI mortgages are originated as held for investment. Loans originated in the direct-to-consumer channel are sourced by existing Ally customer marketing, prospect marketing on third-party websites, and email or direct mail campaigns. In April 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. During the year ended December 31, 2020, we originated $4.7 billion of mortgage loans through our direct-to-consumer channel.
Through the bulk loan channel, we purchase loans from several qualified sellers including direct originators and large aggregators who have the financial capacity to support strong representations and warranties and the industry knowledge and experience to originate high-quality assets. Bulk purchases are made on a servicing-released basis, allowing us to directly oversee servicing activities and manage prepayments through retention modification or refinancing through our direct-to-consumer channel. During the year ended December 31, 2019,2020, we purchased $3.5$4.2 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 and our direct-to-consumer strategy provides the capacity to expand revenue sources and further grow and diversify our finance receivable portfolio with an attractive asset class while also deepening relationships with existing Ally customers.
Corporate Finance
Our Corporate Finance operations primarily provides senior secured leveraged cash flow and asset-based loans to mostly U.S.-based middle-market companies owned by private equity sponsors, and loans to asset managers that primarily provide leveraged loans. Our Corporate Finance operations had $5.8$6.1 billion of assets at December 31, 2019,2020, and generated $284$344 million of total net revenue during 2019,2020, 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. While there has been an increase incontinues to be a significant level of liquidity and competition in the middle-market lending space, given a strong economic environment and favorable returns in this area, 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. We seek markets and opportunities where our clients require customized, complex,highly structured, and time-sensitive financing solutions. Our corporate financecorporate-finance lending portfolio is generally composed of first-lien, first-out loans.
Our primary focus is on businesses owned by private equity sponsors with loans typically used for leveraged buyouts, mergers and acquisitions, debt refinancing, expansions, restructurings, and working capital. 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, our Lender Finance business provides asset managers with partial funding forfacilities from $50 million to up to $500 million to partially fund their direct-lending activities. Our target commitment hold level for individual exposures ranges from $25 million to $150 million for individual borrowers, depending on product type. 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 limiting our risk exposure to individual borrowers. Loan facilities typically include both a revolver and term loan component. All of 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
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small equity investments in our borrowers, where we could benefit from potential appreciation in the company’s value.borrowers. The portfolio is well diversified across multiple industries including manufacturing, financials, distribution, services, and other specialty sectors. These specialty sectors include our Healthcare and Technology Finance and Healthcare verticals. Our Technology Finance vertical provides financing solutions to venture capital-backed, technology-based companies. The Healthcare vertical provides financing across the healthcare spectrum including services, pharmaceuticals, manufacturing, and medical devices and supplies. We also provide a commercial real estate product focused on lending to skilled nursing
facilities, senior housing, medical office buildings, and hospitals. Our Technology Finance vertical provides financing solutions to venture capital-backed, technology-based companies. Other smaller complementary product offerings that help strengthen our reputation as a full-spectrum provider of financing solutions for borrowers include selectively offering second-out loans on certain transactions and issuing letters of credit through Ally Bank.
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 funds-transfer pricing (FTP)FTP and treasury asset liability management (ALM)ALM activities. Corporate and Other also includes activity related to certain equity investments, which primarily consist of Federal Home Loan Bank (FHLB)FHLB and FRB stock as well as other strategic investments, the management of our legacy mortgage portfolio, which primarily consists of loans originated prior to January 1, 2009, the activity related to Ally Invest and Ally Lending, CRA loans and related investments, and reclassifications and eliminations between the reportable operating segments.
Ally Invest
Corporate and Other also 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 brokered deposits through arrangements with Ally Invest’s clearing broker.
Through Ally Invest, we are able to offer a broader 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, exchange-traded funds (ETFs),ETFs, mutual funds, and fixed-income products through Ally 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 state-of-the-art forex trading platform.
Ally Invest also provides digital advisory services to clients through web-based solutions, informational resources, and virtual interaction through Ally Invest Advisors, an SEC-registered investment advisor. These services have emerged as a fast-growing segment within the financial services industry over the past several years. 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. We also offer cash enhanced portfolios that incur no management fee. A number of core managed portfolios are offered, 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
Additionally, beginning in October 2019 with the acquisition of Health Credit Services, financial information related to our point-of-sale consumer unsecured financing is included within Corporate and Other. The Health Credit Services business has been renamed Ally Lending and currently serves medical and home improvement service providers by enabling promotional and fixed rate installment-loan products through a fully digital application process that offers direct integration with health care provider systems. This platform includes providing underwriting, financing applicationat point-of-sale. The home improvement segment, which was launched in the second quarter of 2020, now represents nearly 20% of new originations, and loan processing, servicing and collections. While we currently focus on healthcare-related lending, weis expected to grow. We believe the market outlook for point-of-sale lending provides attractive opportunities for future diversification.diversification, including in the automotive servicing and vehicle upfit space. 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. Refer to Note 2 to the Consolidated Financial Statements for additional details on the acquisition of Health Credit Services.Ally Lending.
Corporate Treasury and ALM Activities
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 and maturity characteristics. 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, a risk-based methodology is used to allocate equity to these operations.
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Deposits
We are focused on growing and retaining a stable deposit base and deepening relationships with our nearly 2.02.3 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 through internet, telephone, mobile, and mail channels. 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. Ally Bank has consistently increased its share of the direct banking deposit market and remains one of the largest direct banks in terms of retail deposit balances. Our strong customer acquisition and retention rates and a growing customer base reflect the strength of our brand and, together with competitive deposit rates, continue to drive growth in retail deposits. At December 31, 2019,2020, Ally Bank had $120.8$137.0 billion of total deposits—including $103.7$124.4 billion of retail deposits, which grew $14.6$20.6 billion, or 16%20% during 2019.2020. 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, and Ally Lending, 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 product offerings, such asproducts, including online savings and money-market accounts, money market demand accounts, CDs, interest-bearing checking accounts, CDs, including several raise-your-rate CD terms, IRAs,trust accounts, and trust accounts.IRAs. Our deposit services include Zelle® person-to-person payment services, eCheck remote deposit capture, and mobile banking. In February 2020, we introduced a collection of smart savings tools to our online savings product, and continue to enhance our suite of online and mobile banking features. In 2020, our online savings customers created over 1 million savings buckets throughout the year within our smart savings tools. In addition, brokered deposits are obtained through third-party intermediaries.
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.experienced since 2010. Our nearly 2.02.3 million deposit customers and 4.04.5 million retail bank accounts as of December 31, 2019,2020, reflect increases from 1.62.0 million and 3.24.0 million, respectively, as compared to December 31, 2018.2019. 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 20192020 American Bankers Association survey, 83%87% 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 3 percentage points, from 7% to 10%. We have received a positive response to innovative savings and other deposit products and have been recognized as a “best online bank”named the “Best Internet Bank” by industryKiplinger for the fourth consecutive year in June 2020, and consumer publications.for the eighth time in the last ten years, we were named “Best Online Bank” by MONEY® Magazine in October 2020. Ally Bank’s competitive direct banking includes online and mobile banking features such as electronic bill pay, remote deposit, and electronic funds transfer nationwide, with innovative interfaces such as banking through Alexa-enabled devices, and no minimum balance requirements.
We intend to continue to grow and invest in our digital direct online 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 with Ally Bank as a catalyst for future loan and deposit growth, as well as revenue opportunities that arise from introducing Ally Bank deposit customers to our digital wealth management offering, Ally Invest.
Significant Business Developments Related to COVID-19
The spread of COVID-19 has created a global public-health crisis that has resulted in the substantial loss of life, with widespread volatility and deteriorations in household, business, economic, and market conditions, including in the United States where we conduct nearly all of our business. Although several leading measures, such as labor conditions and the rate of growth as measured by GDP, have improved since the early stages of the pandemic, COVID-19 has not yet been contained and could continue to affect significantly more households and businesses.
Many governmental and nongovernmental authorities have responded to COVID-19 by curtailing household and business activity as a containment measure while simultaneously deploying fiscal- and monetary-policy measures to partially mitigate the adverse effects on individual households and businesses. Although these responses have slowed the rate of spread of COVID-19 and supported economic stability, the number of cases has risen meaningfully at times, and the potential exists for further resurgences to occur, especially during the traditional cold-and-flu season. In addition, while monetary policy remains highly accommodative and a number of stimulative fiscal programs and actions have been deployed, the national economy and regional and local economies and markets could suffer further disruptions that are lasting.
While we have experienced improvements in our business since the early stages of the COVID-19 pandemic, it has nonetheless negatively impacted us and our customers, counterparties, employees, and third-party service providers since the spread of the disease began to accelerate in March 2020. At this time, we cannot yet be confident in the extent of this negative impact or the trajectory of the macroeconomic outlook—especially with the most recent resurgence of COVID-19 in much of the United States and ongoing uncertainties around the efficacy, availability, acceptance, and distribution of vaccines and other medical treatments—and the adverse effects on our
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business, financial position, results of operations, and prospects could be significant. For further information on these risks and uncertainties, refer to the section titled Risk Factors in Part I, Item 1A of this report.
During the pandemic, we have consistently prioritized the health and well-being of our employees, offered industry-leading support and relief to our customers, and strived to make a difference in the communities where we operate. These actions reflect our relentless “Do it Right” philosophy.
•Credit-risk management — The credit performance of our portfolio of loans has been impacted by the pandemic. Prior to the pandemic, the national unemployment rate was below 4% for an extended period and was projected to sustain those levels into the foreseeable future. Additionally, most widely available forecasts assumed that a moderate rate of growth would continue throughout 2020. The impact of the lockdowns, stay-in-place directives, and other restrictive actions issued and enforced by federal, state and local officials as a result of the pandemic, contributed to a significant increase in the national unemployment rate, which rose to a peak of 14.7%, as adjusted, in April before initially moderating at a faster-than-expected-pace to 7.9%, as adjusted, as of September 30 2020. In the fourth quarter of 2020, the national unemployment rate stabilized—particularly in November and December—ending at 6.7% as of December 31, 2020. Similarly, the rate of economic growth, as measured by GDP, declined sharply on a quarter-over-quarter seasonally adjusted annualized rate basis in the second quarter by 31.7%, and rebounded in the third and fourth quarters of 2020 as the economy grew by 33.1%, as adjusted, and 4.0%, respectively, quarter-over-quarter based on this measure. On a year-over-year basis, GDP contracted by 2.5%.
In response to the impacts caused by the COVID-19 pandemic, we have taken significant actions to support our customers with industry-leading relief programs, while prudently managing our credit risk exposure. Refer to the section titled Risk Management within this MD&A for additional details on these programs. Following the termination of these programs, we have continued to work with impacted customers in accordance with our established credit risk management policies and practices. We have invested significant resources, including introducing enhanced digital capabilities and new communication tools, to support customers who continue to experience hardships after the initial deferrals expire. Additionally, our scaled staffing model and resource capabilities have allowed for a nimble response to augment staffing to support these efforts.
In addition to the support that we have provided to our customers, governments have taken necessary and unprecedented steps to partially mitigate the adverse effects of their actions to contain the spread of COVID-19. For example, in late March 2020, the CARES Act was enacted to inject more than $2 trillion of financial assistance into the U.S. economy. One component of the CARES Act is the PPP, which is a guaranteed, unsecured loan program administered by the Small Business Administration (SBA). Loans under the PPP are made to borrowers by participating lenders, are fully guaranteed, and may be forgiven, by the SBA. PPP eligible borrowers must use loan proceeds for payroll costs and other allowable expenses, including mortgage payments, rents, and utilities. At December 31, 2020, we had loans with a principal balance of $638 million outstanding to our commercial dealer customers under the PPP. As these loans are guaranteed by the SBA, we do not maintain an allowance for loan losses under CECL for this portfolio. Among its other provisions, the CARES Act significantly expanded eligibility for, and the amount of, unemployment benefits, created and funded the advance payment of a refundable tax credit for 2020, and appropriated $500 billion to the Treasury Secretary to support U.S. air carriers and other U.S. businesses that have not otherwise received adequate economic relief as well as states and municipalities. Following the expiration of the stimulus programs under the CARES Act, the Consolidated Appropriations Act, 2021 was signed into law. This law included a $900 billion COVID-19 relief package that extended certain programs introduced in the CARES Act and included incremental funding for the PPP, enhanced unemployment benefits, and direct payments for qualifying individuals and households. We will continue to work with our commercial dealer customers that are eligible for additional assistance under the PPP program.
The deterioration and uncertainty in the macroeconomic environment experienced in 2020 from the pandemic and related mitigation efforts drove a significant increase in our allowance for loan losses and provision for credit losses. Our provision expense for credit losses increased $441 million to $1.4 billion for the year ended December 31, 2020, compared to 2019. While the macroeconomic environment rebounded significantly in the third quarter and stabilized in the fourth quarter of 2020, the increase in provision expense year-over-year reflects the significant deterioration observed since the inception of the pandemic. During the second half of March 2020, the U.S. economy experienced a significant deterioration driven by the COVID-19 pandemic, which impacted our allowance for loan losses. During the first quarter, we recorded an additional $602 million of provision expense for credit losses associated with the deterioration in the macroeconomic outlook from COVID-19. During the second quarter of 2020, we incurred total provision expense of $287 million, which included $128 million attributable to the macroeconomic environment and other factors aside from changes in portfolio size and incremental net charge-offs. During the third quarter of 2020, we incurred total provision expense of $147 million, which included a reduction in reserves of $34 million attributable to the improving macroeconomic environment—predominately the unemployment rate, and other factors aside from changes in portfolio size and incremental net charge-offs. During the fourth quarter of 2020, we recorded total provision expense of $102 million, which included a further reduction in reserves of $114 million attributable to the continued economic recovery, and other factors aside from changes in portfolio size and incremental net charge-offs. During the year ended December 31, 2020, the provision for credit losses was also impacted by the adoption of CECL, as further described in Note 1 to the Consolidated Financial Statements.
Provision expense for credit losses was favorably impacted by lower net charge-offs in our consumer automotive portfolio as losses decreased $84 million for the three months ended December 31, 2020, compared to the same period in 2019. The significant decrease in net charge-offs in our consumer automotive portfolio for the three months ended December 31, 2020, was attributable to
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strong payment performance and delinquency trends through the pandemic. Personal income and savings levels have increased as lenders, including us, have provided significant support in the form of loan modifications and fee waivers, which is in addition to the fiscal and monetary stimulus actions detailed above. Similarly, consumer discretionary spending levels have decreased significantly during the pandemic, most notably in the first and second quarters of 2020, driven by reductions in spending on services, travel, and entertainment, as a result of stay-in-place orders. Net charge-offs in our consumer automotive portfolio also continue to benefit from strong used vehicle prices. In the second half of 2020, used vehicle prices, as well as our off-lease gain per unit, reached the highest level since January 2010, which reduced the realized loss impact in instances of default. Used vehicle prices normalized modestly in the fourth quarter of 2020, but remain elevated.
While we are encouraged by the positive signs in performance observed during the second half of 2020, the degree to which our actions and those of governments and others will directly or indirectly assist our customers, and the economy generally, is not yet clear.
•Liquidity management, funding, and capital markets — Our retail deposit business has remained a source of strength for us through the pandemic. To support our retail deposit customers, we waived fees for overdrafts, and excessive transactions, and expedited shipping of checks and debit cards through July 31, 2020. Through December 31, 2020, we refunded fees of approximately $7 million on excess transactions and overdrafts. For our brokerage customers, we waived fees for broker-assisted trades, paper statements, and overnight outbound check processing through July 31, 2020. In our retail deposits business, we continue to monitor several key items in light of a highly uncertain macroeconomic outlook, including elevated competitive pressures on the direct-banking industry given the low rate environment, overall financial health of the U.S. consumer and potential impacts of the pandemic, uncertainty around further stimulus measures, and how customers deploy elevated savings levels over time. Our deposits franchise recorded strong growth in retail deposits during the year ended December 31, 2020. During the year ended December 31, 2020, we grew retail deposits by approximately $20.6 billion to $124.4 billion, representing 20% growth year-over-year, despite declines in online savings and CD product yields. Our retail deposit customer retention rate remained steady through 2020 at approximately 96% while we grew our mix of total deposit funding to 85%, with the remainder of liability-based funding through secured, unsecured, and FHLB borrowings. For additional discussions surrounding our liquidity positions and related risks, refer to the section titled Liquidity Management, Funding, and Regulatory Capital in this MD&A.
In addition to the significant injection of fiscal stimulus by the federal government throughout 2020, the FRB has taken decisive and sweeping actions. Since March 15, 2020, these actions have included a reduction in the target range for the federal funds rate to zero to 0.25 percent, a program to purchase an indeterminate amount of Treasury securities and agency mortgage-backed securities, and numerous facilities to support the flow of credit to households and businesses, such as the Municipal Liquidity Facility, the Main Street Lending Program, the Primary Market Corporate Credit Facility, the Secondary Market Corporate Credit Facility, the Term Asset-Backed Securities Loan Facility, the Money Market Mutual Fund Liquidity Facility, and the Commercial Paper Funding Facility. During 2020, we executed opportunistic liability management actions and secured additional liquidity at Ally Financial Inc. through the unsecured debt capital markets. On April 6, 2020, we issued $750 million aggregate principal amount of 5.8% senior unsecured notes due 2025. On June 1 2020, we issued $800 million aggregate principal amount of 3.05% senior unsecured notes due 2023. On September 16, 2020, and December 1, 2020, we issued $750 million and $450 million, respectively, aggregate principal amounts of 1.45% senior unsecured notes due 2023. To more cost-effectively manage liquidity at Ally Bank, we elected to prepay and early terminate 25 FHLB advances with an aggregate principal balance of $4.3 billion during the year ended December 31, 2020. In doing so, we recognized losses on the early repayments of FHLB borrowings of $99 million. We continue to assess liability management opportunities utilizing our deposit funding at Ally Bank.
Public equity markets have experienced significant volatility as a result of the pandemic, which has impacted our investment securities portfolio. For the year ended December 31, 2020, we recognized net realized and unrealized gains on equity securities of $107 million and $29 million, respectively. Given the unpredictability of COVID-19 and its direct and indirect effects on market conditions, it is possible that unusual volatility in the equity markets could positively or negatively impact our results.
•Regulatory capital and stress testing — We continue to carefully monitor our capital and liquidity positions. On March 17, 2020, in order to support the FRB’s effort to mitigate the impact of the COVID-19 pandemic on the U.S. economy and the financial system, we announced the voluntary suspension of our stock-repurchase program through its termination on June 30, 2020. Consistent with the FRB’s restrictions on common-stock repurchases by large firms such as Ally, described below, we did not implement a new stock-repurchase program or repurchase shares of our common stock, except in connection with compensation plans, for the remainder of 2020.
We have elected to phase the estimated impact of CECL into regulatory capital in accordance with the interim final rule of the FRB and other U.S. banking agencies that became effective on March 31, 2020, and that was subsequently clarified and adjusted in a final rule effective September 30, 2020. As further described in Note 20 to the Consolidated Financial Statements, we will delay recognizing the estimated impact of CECL on regulatory capital until after a two-year deferral period, which for us extends through December 31, 2021. Beginning on January 1, 2022, we will be required to phase 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. As of December 31, 2020, the total deferred impact on Common Equity Tier 1 capital related to our adoption of CECL was $1.2 billion.
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We submitted our 2020 capital plan to the FRB in April 2020. In June 2020, the FRB provided us with the results of the supervisory stress test, additional industry-wide sensitivity analyses conducted in light of the COVID-19 pandemic, and our preliminary stress capital buffer requirement. At the same time, the FRB announced its determination that changes in financial markets or the macroeconomic outlook could have a material effect on the risk profiles and financial conditions of firms subject to the capital-plan rule and that, as a result, the firms (including Ally) would be required to resubmit capital plans to the FRB within 45 days after receiving updated stress scenarios from the FRB. Also at the same time, the FRB announced the suspension of nearly all common-stock repurchases and restrictions on common-stock dividends for large firms such as Ally during the third quarter of 2020. In September 2020, the FRB released its updated scenarios and extended the limitations on common-stock repurchases and common-stock dividends for the fourth quarter of 2020. We updated our capital plan in light of firm-specific baseline and stress scenarios, as required, and submitted our updated plan to the FRB on November 2, 2020. In December 2020, the FRB publicly disclosed summary results of its second round of supervisory stress testing and extended the deadline by which firms will be notified about whether their stress capital buffer requirements will be recalculated to March 31, 2021. At the same time, the FRB extended and modified its restrictions on common-stock repurchases and common-stock dividends for the first quarter of 2021, limiting such distributions to an amount equal to the average of the firm’s net income for the four preceding calendar quarters. In January 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. Refer to Note 20 to the Consolidated Financial Statements for further discussion about regulatory capital, capital planning, and stress testing.
At December 31, 2020, Ally and Ally Bank were “well-capitalized” and met all applicable regulatory capital requirements, with Common Equity Tier 1 capital ratios of 10.64% and 13.38%, respectively. We continue to anticipate that we will have sufficient capital levels to meet all of these requirements.
•Dealer Financial Services — Our lending and finance receivable balances have been impacted by the COVID-19 pandemic. Through the second quarter of 2020, as governments acted to temporarily close or restrict the operations of businesses, including automotive dealers, and as many consumers and businesses changed their behavior in response to governmental mandates and advisories to sharply restrain commercial and social interactions, we experienced significant reductions in our consumer automotive loan applications. In addition, we took actions at the beginning of the second quarter of 2020 to mitigate credit risk exposure on net originations by systematically reducing approval rates on high-risk application segments and increasing the scope of manual underwriter reviews, with a heightened emphasis on income and employment verifications. Furthermore, we observed downward pressure on the automotive sales and other operating results of our dealer customers, on their capacity to accept the return of leased vehicles, and on used-vehicle auction activity and values. Many automotive manufacturers and their suppliers also had taken measures to slow or shut down production in response to the pandemic, which negatively affected dealer inventory levels and sales and significantly reduced wholesale floorplan lending business to dealers. As consumers and businesses adapted to changed conditions and many governmental authorities relaxed their restrictions later in the second quarter, we began to observe a recovery in loan application volume and resulting booked originations. As the outlook for national unemployment improved from peak levels, we also methodically eased certain credit underwriting restrictions that were enacted at the start of the pandemic. Additionally, automotive manufacturers and suppliers restarted production, albeit at reduced levels, and in August 2020 we experienced our first month-over-month increase in wholesale floorplan balances since the pandemic was declared. This modest recovery in wholesale floorplan balances continued through December 31, 2020. Since declining $9.7 billion in the second quarter of 2020, our commercial automotive assets increased $146 million and $1.3 billion in the third and fourth quarters of 2020, respectively. In the second, third, and fourth quarters of 2020, we decisioned 3.1 million, 3.2 million, and 2.8 million of consumer automotive financing applications, respectively, compared to 3.3 million, 3.2 million, and 2.9 million in the same periods of 2019. These applications resulted in funded balances of approximately $7.2 billion, $9.8 billion, and $9.1 billion, in the second, third, and fourth quarters of 2020, respectively, as compared to $9.7 billion, $9.3 billion, and $8.1 billion in the same periods of 2019. Booked contracts from our used segment totaled over $19.3 billion in 2020. The carrying value of our consumer automotive used vehicle loans before allowance for loan losses was 58.3% of our total consumer automotive loans at December 31, 2020, as compared to 54.9% of our total consumer automotive loans at December 31, 2019. Refer to the section titled Automotive Financing Volume in this MD&A for a further discussion regarding the impacts of COVID-19 on our business.
In our Insurance operations, we similarly experienced significantly reduced F&I written premiums in late March and early in the second quarter, followed by a recovery through the end of 2020. Total F&I written premiums were $236 million, $269 million, and $242 million in the second, third, and fourth quarters of 2020, compared to $270 million, $274 million, and $250 million during the same periods in the prior year. Written insurance premiums from our property and casualty business declined during the year ended December 31, 2020, as a result of lower vehicle inventory levels due primarily to impacts of COVID-19.
•Other consumer and commercial products — Within our Corporate Finance business, we experienced higher draws on commercial customer lines of credit during the second half of March 2020, but this trend abated in April. Through the remainder of 2020, we experienced significant pay-downs on draws that had been taken at the outset of the pandemic. Our balance of unfunded commitments increased from $2.5 billion at the end of the first quarter of 2020 to $3.5 billion, $3.8 billion, and $4.2 billion at the end of the second, third, and fourth quarters, respectively.
In our Mortgage Finance business, refinance volume and prepayment activity increased through the end of 2020, driven by lower market interest rates.
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In Ally Invest, we observed a significant increase in the number of self-directed accounts to 406,000 through the fourth quarter of 2020, up 17% year-over-year. While we experienced a significant outflow of deposits to brokerage accounts after the pandemic had been declared, Ally Invest was able to capture approximately one-third of these outflows. Net customer assets reached $13.4 billion as of December 31, 2020, and we experienced higher than usual daily trade volume throughout the pandemic.
In our point-of-sale personal lending business, we originated $503 million of personal loans during the year ended December 31, 2020, as we continue to grow Ally Lending.
•General operations — The COVID-19 pandemic and related governmental mandates and advisories have necessitated changes in the way we operate our business. We activated our business continuity plan in late February 2020 and, since then, have migrated nearly all our workforce off-site or to work-from-home arrangements to mitigate health risks. We are also carefully monitoring the activities of our vendors and other third-party service providers to manage the risks associated with any potential service disruptions. The length of time we may be required to operate under these circumstances, as well as the potential for them to worsen or for significant disruptions to occur, remains uncertain. While we have not yet experienced material adverse disruptions to our internal operations or third-party services due to the COVID-19 pandemic, we continue to review evolving risks and developments.
•Employees and communities — To support our employees during the pandemic, we have provided a range of financial-assistance offerings and enhanced benefits, including a $1,200 payment for those earning less than $100,000. In May, we launched the Ally Employee Relief Fund with a $250,000 contribution. Including matching contributions by Ally, this fund has been augmented by over $160,000 in additional donations and has helped over 500 of our employees. In August, recognizing the continuing difficulties caused by the pandemic, we paid 50% of the 2020 incentive-compensation targets for most of our non-executive employees. These payments were not incremental but rather were an advance of expected year-end amounts.
Consistent with our culture and “Do it Right” philosophy, we have pledged financial support to our communities for emergency needs, such as food, health care, emergency housing, and childcare. For example, on September 24, 2020, we announced our commitment to invest $30 million in communities across our geographic footprint over the next three years. We also announced the creation of the Ally Charitable Foundation, which will deploy grants to support economic mobility in the communities we serve with a focus on affordable housing, financial literacy, workplace preparedness, and other initiatives. In December 2020, we contributed $34 million to the Ally Charitable Foundation.
We are committed to driving financial and social inclusion as part of our ‘Do it Right’ philosophy. This means engaging with stakeholders—including our customers, communities, employees, and suppliers— to improve economic mobility. In January 2020, Ally launched its Supplier Diversity program to focus on diversity and inclusion among its supplier base. The Supplier Diversity program includes a proactive business strategy encouraging the use of suppliers owned by U.S.-based minorities, women, LGBTQ, veterans, service-disabled veterans and those with disabilities, and small or disadvantaged businesses defined by local, state, or federal classifications. The program also encourages all Ally third-party suppliers to utilize diverse-owned suppliers and small businesses on a second-tier basis. During 2020, we initiated a second-tier reporting program to capture additional diverse spend associated with Ally’s prime suppliers that are utilizing minority, women, LGBTQ, veteran, disability-owned, and small or disadvantaged businesses to help support Ally. Additionally, in January 2021, Ally hosted its inaugural Supplier Diversity Symposium, engaging more than 40 diverse suppliers in a company-wide networking event with our CEO and other Ally business executives to build relationships and explore opportunities to expand our spend with diverse suppliers.
In 2020, we hosted our second annual Moguls in the Making competition, which was held virtually with 50 students working in teams to develop a business plan that took into account COVID-19 and social equity. These experiences help develop skills for future careers, including for the over 20 students who have been offered internships with Ally in 2020. In early 2021, we took additional steps to address inequality of access to careers with long-term growth potential with a $1.3 million commitment in scholarships and programs in partnership with the Congressional Black Caucus Foundation, TMCF, and other professional university groups.
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.
Prudent expansion of asset originations at Ally Bank and continued growth of a stable deposit base continue to be the cornerstone of our long-term liquidity strategy. Retail deposits provide a low-cost source of funds that are less sensitive to interest rate changes, market volatility, or changes in our credit ratings than other funding sources. At December 31, 2019,2020, deposit liabilities totaled $120.8$137.0 billion, which reflects an increase of $14.6$16.3 billion as compared to December 31, 2018.2019. Deposits as a percentage of total liability-based funding increased nineten percentage points to 75%85% at December 31, 2019,2020, as compared to December 31, 2018.2019.
In addition to building a larger deposit base, we continue to remain activemaintain a presence in the securitization markets to finance our automotive loan portfolios. During 2019, we issued $3.6 billion in securitizations backed by consumer automotive loans. Securitizations continue to be a reliable and cost-effective source of funding due to structural efficiencies and the established market. Additionally, for retail loans, and operating leases, the term structure of the transaction locks in funding for a specified pool of loans and operating leases.loans. Once a pool of consumer automotive loans is selected and placed into a securitization, the underlying assets and corresponding debt amortize simultaneously
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resulting in committed and matched funding for the life of the asset. We manage the execution risk arising from securitizations by maintaining a diverse domestic and foreign investor base and committed secured credit facilities.
As we continue to migrate assets to Ally Bank and grow our bank funding capabilities, our need for funding at the parent company has been reduced. At December 31, 2019, 93%2020, 94% of Ally’s total assets were within Ally Bank. This compares to approximately 89%93% as of December 31, 2018.2019. Longer-term unsecured debt is the primary funding source utilized at the parent company. At December 31, 2019,2020, we had $2.3 billion and $702 million and $1.1 billion of unsecured long-term debt principal maturing in 20202021 and 2021,2022, respectively. We plan to reduce our reliance on market-based funding by continuing to focus on stable, lower cost retail deposit funding.
The strategies outlined above have allowed us to build and maintain a conservative liquidity position. Total available liquidity at December 31, 2019,2020, was $29.9$40.3 billion. Absolute levels of liquidity increased during 20192020 primarily as a result of continued growth in our portfolio of highlyincreased liquid investment securities.cash and equivalents. Refer to the section below titled Liquidity Management, Funding, and Regulatory 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 a number ofseveral 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. The majorityMost 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 Ally’s 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 Automotive Finance operations, we target 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. The carrying value of our nonprime consumer automotive loans before allowance for loan losses, as of December 31, 2019,2020, was approximately 11.6%.11.7% of our total consumer automotive loans at December 31, 2020. During 2019,2020, our strategy for originations washas 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 toward our Growth channel including used vehicle financings.
The Mortgage Financemortgage-finance team focuses on applicants with stronger credit profiles and with 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 a number ofseveral factors, including the customer’s FICO® Score, the loan-to-value (LTV)LTV ratio, and the size of the loan. For bulk purchases, we only purchase loans from sellers with the financial wherewithal to support their representations and warranties and the experience to originate high-quality loans.
Within our commercial lending portfolios, Corporate Finance operations primarily provide senior secured leveraged cash flow and asset-based loans to mostly U.S.-based middle-market companies. During 2019,Throughout 2020, we continued to prudently grow this portfolio with a disciplined and selective approach to credit quality, which has generally included the avoidance of covenant-light lending arrangements. This includes growth of our lender finance vertical launched in 2019, 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 that primarily relate to floorplan financing and term loans. These commercial products are an important aspect of our dealer relationships and offer a secured lending arrangement with a number of strong collateral protections in the event of dealer default. The performance of our commercial credit portfolios continues to remain strong, as nonperforming finance receivables and loans decreased $134$54 million from December 31, 2018,2019, to $215$161 million at December 31, 2019.2020. During the years ended December 31, 2020, and 2019, and 2018, we recognizedour total net charge-offs of $49 million and $8 million, respectively, within our commercial lending portfolios, primarily driven by partial charge-offsportfolio remained stable at $51 million and $49 million, respectively. Despite this level of four exposures within our Corporate Finance portfolio, as well as three accounts within our commercial automotive portfolio. Despite the increase in net charge-offs, our total commercial net charge-off ratioratios represented 0.1%0.2% of average commercial receivables and loans for the year ended December 31, 2019.2020. Refer to the Risk Management section of this MD&A for further details.
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the second half of 2020. Additionally, used vehicle values may also be impacted by household, business, economic,changes in customer preferences, including alternative transportation methods such as public transportation, vehicle sharing, and market conditions—including used vehicle and housing price levels, and unemployment levels—and their impact to our borrowers. We expect to experience modest downward pressure on used vehicle values during 2020.ride hailing.
Discontinued Operations
During 2013 and 2012, certain disposal groups met the criteria to be presented as discontinued operations. The remaining activity relates to previous discontinued operations for which we continue to have wind-down, legal, and minimal operational costs. For all periods presented, the operating results for these operations have been removed from continuing operations. The MD&A has been adjusted to exclude discontinued operations unless otherwise noted.
Dealer Financial Services which includescomprises our Automotive Finance and Insurance operations, Mortgage Finance,segments. Our primary customers are automotive dealers, which are independently owned businesses. 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 Corporate Finance are our primary business lines. The following table summarizesthen sells the retail installment sales contract or the operating results excluding discontinued operations of eachlease 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.
Our Dealer Financial Services business line. Operating results for eachis one of the business lines are more fully describedlargest full-service automotive finance operations in the MD&A sectionscountry and offers a wide range of financial services and insurance products to automotive dealerships and their customers. We have deep dealer relationships that follow.have been built throughout our over 100-year history, and we are leveraging competitive strengths to expand our dealer footprint. Our dealer-centric 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, 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 provide U.S.-based automotive financing services to consumers, automotive dealers, other businesses, and municipalities. Our dealer-focused 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. At December 31, 2020, our Automotive Finance operations had $104.8 billion of assets and generated $4.5 billion of total net revenue in 2020. For consumers, we provide financing for new and used vehicles. In addition, our CSG provides automotive financing for small businesses and municipalities. At December 31, 2020, our CSG had $8.2 billion of loans outstanding. Through our commercial automotive financing operations, we fund dealer purchases of new and used vehicles through wholesale floorplan financing. We manage commercial account servicing on approximately 3,200 dealers that utilize our floorplan inventory lending or other commercial loans. We service an $80.2 billion consumer loan and operating lease portfolio at December 31, 2020, and our commercial automotive loan portfolio was approximately $23.1 billion at December 31, 2020. The extensive infrastructure, technology, and analytics of our servicing operations as well as the experience of our servicing personnel enhance our ability to minimize our loan losses and enable us to deliver a favorable customer experience to both our dealers and retail customers. During 2020, we continued to reposition our origination profile to focus on capital optimization and risk-adjusted returns. In 2020, total consumer automotive originations were $35.1 billion, a decrease of $1.2 billion compared to 2019. 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. The automotive marketplace is dynamic and evolving, including substantial investments in electrification by automobile manufacturers and suppliers. Ally remains focused on meeting the needs of both our dealer and consumer customers and continuing to strengthen and expand upon the 18,700 dealer relationships we have. We continue to identify and cultivate relationships with automotive retailers including those with leading eCommerce platforms. We also operate Clearlane, our online direct-lending platform, which provides a digital 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. Ally has and continues to provide automobile financing for hybrid and battery-electric vehicles today, and is well positioned to remain a leader in automotive financing as we believe the vast majority of these vehicles will be sold through dealerships with whom we have an established relationship.
The Growth channel was established to focus on developing dealer relationships beyond those relationships that primarily were developed through our previous role as a captive finance company for GM and Chrysler. The Growth channel was expanded to include direct-to-consumer financing through Clearlane and other channels and our arrangements with online automotive retailers. We have established relationships with thousands of Growth channel dealers through our customer-centric approach and specialized incentive programs designed
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Year ended December 31, ($ in millions) | 2019 | 2018 | 2017 | Favorable/(unfavorable) 2019–2018 % change | Favorable/(unfavorable) 2018–2017 % change | ||||||||||
| Total net revenue | |||||||||||||||
| Dealer Financial Services | |||||||||||||||
| Automotive Finance | $ | 4,390 | $ | 4,038 | $ | 4,068 | 9 | (1) | |||||||
| Insurance | 1,328 | 1,035 | 1,118 | 28 | (7) | ||||||||||
| Mortgage Finance | 193 | 186 | 136 | 4 | 37 | ||||||||||
| Corporate Finance | 284 | 242 | 212 | 17 | 14 | ||||||||||
| Corporate and Other | 199 | 303 | 231 | (34) | 31 | ||||||||||
| Total | $ | 6,394 | $ | 5,804 | $ | 5,765 | 10 | 1 | |||||||
| Income (loss) from continuing operations before income tax expense | |||||||||||||||
| Dealer Financial Services | |||||||||||||||
| Automotive Finance | $ | 1,618 | $ | 1,368 | $ | 1,220 | 18 | 12 | |||||||
| Insurance | 315 | 80 | 168 | n/m | (52) | ||||||||||
| Mortgage Finance | 40 | 45 | 20 | (11) | 125 | ||||||||||
| Corporate Finance | 153 | 144 | 114 | 6 | 26 | ||||||||||
| Corporate and Other | (159 | ) | (15 | ) | (15 | ) | n/m | — | |||||||
| Total | $ | 1,967 | $ | 1,622 | $ | 1,507 | 21 | 8 | |||||||
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 Risk Management section 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 segment sectionsresults 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 dealer inventory purchases of new and used vehicles, 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 MD&A that followswholesale invoice price of new vehicles. Interest on wholesale automotive financing is generally payable monthly and is indexed to a floating-rate benchmark. The rate for a more complete discussionparticular dealer is based on, among other considerations, competitive factors and the dealer’s creditworthiness. During 2020, we financed an average of operating results by business line. For$19.3 billion of dealer vehicle inventory through wholesale floorplan financings. Other commercial automotive lending products, which averaged $5.7 billion during 2020, 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 discussionmeans of deepening relationships with our dealership customers. In 2020, Ally and other parties, including dealers, fleet rental companies, and financial institutions, utilized SmartAuction to sell approximately 258,000 vehicles to dealers and other commercial customers. SmartAuction served as the remarketing channel for 53% of our fiscal 2018 results comparedoff-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 fiscal 2017, refer to Part II, Item 7. Management Discussiondealers. We serve approximately 2.5 million consumers nationwide across F&I and AnalysisP&C products. In addition, we offer F&I products in Canada, where we serve more than 400 thousand consumers and are the VSC and other protection plan provider for GM Canada and VSC provider for Subaru Canada. Our Insurance operations had $9.1 billion of Financial Condition and Results of Operation in our 2018 Annual Report on Form 10-K.
Year ended December 31, ($ in millions) | 2019 | 2018 | 2017 | Favorable/(unfavorable) 2019–2018 % change | Favorable/(unfavorable) 2018–2017 % change | ||||||||||
| Net financing revenue and other interest income | |||||||||||||||
| Total financing revenue and other interest income | $ | 9,857 | $ | 9,052 | $ | 8,322 | 9 | 9 | |||||||
| Total interest expense | 4,243 | 3,637 | 2,857 | (17) | (27) | ||||||||||
| Net depreciation expense on operating lease assets | 981 | 1,025 | 1,244 | 4 | 18 | ||||||||||
| Net financing revenue and other interest income | 4,633 | 4,390 | 4,221 | 6 | 4 | ||||||||||
| Other revenue | |||||||||||||||
| Insurance premiums and service revenue earned | 1,087 | 1,022 | 973 | 6 | 5 | ||||||||||
| Gain on mortgage and automotive loans, net | 28 | 25 | 68 | 12 | (63) | ||||||||||
| Other gain (loss) on investments, net | 243 | (50 | ) | 102 | n/m | (149) | |||||||||
| Other income, net of losses | 403 | 417 | 401 | (3) | 4 | ||||||||||
| Total other revenue | 1,761 | 1,414 | 1,544 | 25 | (8) | ||||||||||
| Total net revenue | 6,394 | 5,804 | 5,765 | 10 | 1 | ||||||||||
| Provision for loan losses | 998 | 918 | 1,148 | (9) | 20 | ||||||||||
| Noninterest expense | |||||||||||||||
| Compensation and benefits expense | 1,222 | 1,155 | 1,095 | (6) | (5) | ||||||||||
| Insurance losses and loss adjustment expenses | 321 | 295 | 332 | (9) | 11 | ||||||||||
| Other operating expenses | 1,886 | 1,814 | 1,683 | (4) | (8) | ||||||||||
| Total noninterest expense | 3,429 | 3,264 | 3,110 | (5) | (5) | ||||||||||
| Income from continuing operations before income tax expense | 1,967 | 1,622 | 1,507 | 21 | 8 | ||||||||||
| Income tax expense from continuing operations | 246 | 359 | 581 | 31 | 38 | ||||||||||
| Net income from continuing operations | $ | 1,721 | $ | 1,263 | $ | 926 | 36 | 36 | |||||||
From a dealer perspective, Ally provides significant value and expertise, which creates high retention rates and strong relationships. In addition to higher yields resulting from higher average benchmark interest rates. Income from interest and dividends on investment securities and other earning assets, including cash and cash equivalents, increased $173 million for the year ended December 31, 2019, compared to 2018, due to both higher yields and higher balances of investment securities as we continue to utilize this portfolio to manage liquidity and generate a stable source of income. Financing revenue and other interest income within our Corporate Finance operations was favorably impacted by our strategy to prudently grow assets and our product suite within existing verticalsofferings, we provide consultative services and training to assist dealers in optimizing F&I results while selectively pursuing opportunities to broaden industryachieving high levels of customer satisfaction and product diversification. The increase to financing revenueregulatory compliance. We also advise dealers regarding necessary liability and other interest income was partially offset by an increase of 17% in total interest expense for the year ended December 31, 2019, compared to the year ended December 31, 2018.
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We have approximately 3,400 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 78%. 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. Additionally,We use these investments to satisfy our overall borrowing levels were higherobligations related to supportfuture claims at the growth intime 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 lending operations. risk appetite, liquidity requirements, regulatory requirements, and rating agency considerations, among other factors.
Mortgage Finance
Our total deposit liabilities increased $14.6Mortgage 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-consumer Ally Home mortgage offering, and bulk purchases of high-quality jumbo and LMI mortgage loans originated by third parties. Our Mortgage Finance operations had $14.9 billion to $120.8 billion as of assets at December 31, 2020, and generated $220 million of total net revenue in 2020.
Through our direct-to-consumer channel, which was introduced late in 2016, we offer a variety of competitively priced jumbo and conforming fixed- and adjustable-rate mortgage products through a third-party fulfillment provider. Under our current arrangement, our direct-to-consumer conforming mortgages are originated as held for sale and sold, while jumbo and LMI mortgages are originated as held for investment. Loans originated in the direct-to-consumer channel are sourced by existing Ally customer marketing, prospect marketing on third-party websites, and email or direct mail campaigns. In April 2019, as compared to December 31, 2018.
Through the bulk loan channel, we purchase loans from several qualified sellers including direct originators and large aggregators who have the financial capacity to $1.0 billion for 2018. The increase forsupport 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 ended December 31, 2019, was2020, we purchased $4.2 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 dueprovides senior secured leveraged cash flow and asset-based loans to vehicle inventory insurance portfolio growthmostly U.S.-based middle-market companies owned by private equity sponsors, and rate increases.
Our focus is on businesses owned by private equity sponsors with loans typically used for leveraged buyouts, mergers and acquisitions, debt refinancing, expansions, restructurings, and working capital. 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, our Lender Finance business provides asset managers with facilities from $50 million to up to $500 million to partially fund their direct-lending activities. We also selectively arrange larger transactions that did not reoccur. We continuewe may retain on-balance sheet or syndicate to experience strong overall credit performance driven by favorable macroeconomic conditions including low unemployment, as well as continued disciplined underwriting and higher recoveries. Referother lenders. By syndicating loans to the Risk Management section of this MD&A for further discussion on our provision for loan losses.
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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 strategic investments, the management of our legacy mortgage portfolio, which primarily consists of loans originated prior to January 1, 2009, the activity related to Ally Invest and Ally Lending, CRA loans and related investments, and reclassifications and eliminations between the reportable operating segments.
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 brokered deposits through arrangements with Ally Invest’s clearing broker.
Through Ally Invest, we are able to offer a broader 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 through Ally 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 state-of-the-art forex trading platform.
Ally Invest also provides digital advisory services to clients through web-based solutions, informational resources, and virtual interaction through Ally Invest Advisors, an SEC-registered investment advisor. These services have emerged as a fast-growing segment within the financial services industry over the past several years. 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. We also offer cash enhanced portfolios that incur no management fee. A number of core managed portfolios are offered, 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
Additionally, beginning in October 2019 with the acquisition of Health Credit Services, financial information related to our consumer unsecured financing is included within Corporate and Other. The Health Credit Services business has been renamed Ally Lending and currently 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 segment, which was launched in the second quarter of 2020, now represents nearly 20% of new originations, and is expected to grow. We believe the market outlook for point-of-sale lending provides attractive opportunities for future diversification, including in the automotive servicing and vehicle upfit space. 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. Refer to Note 2 for additional details on the acquisition of Ally Lending.
Corporate Treasury and ALM Activities
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 and maturity characteristics. 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, a risk-based methodology is used to allocate equity to these operations.
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Deposits
We are focused on growing and retaining a stable deposit base and deepening relationships with our 2.3 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 through internet, telephone, mobile, and mail channels. 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. Ally Bank has consistently increased its share of the direct banking deposit market and remains one of the largest direct banks in terms of retail deposit balances. Our strong customer acquisition and retention rates reflect the strength of our brand and, together with competitive deposit rates, continue to drive growth in retail deposits. At December 31, 2020, Ally Bank had $137.0 billion of total deposits—including $124.4 billion of retail deposits, which grew $20.6 billion, or 20% during 2020. 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, and Ally Lending, 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. In February 2020, we introduced a collection of smart savings tools to our online savings product, and continue to enhance our suite of online and mobile banking features. In 2020, our online savings customers created over 1 million savings buckets throughout the year within our smart savings tools. In addition, brokered deposits are obtained through third-party intermediaries.
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. Our nearly 2.3 million deposit customers and 4.5 million retail bank accounts as of December 31, 2020, reflect increases from 2.0 million and 4.0 million, respectively, as compared to December 31, 2019. 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 2020 American Bankers Association survey, 87% 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 3 percentage points, from 7% to 10%. We have received a positive response to innovative savings and other deposit products and have been named the “Best Internet Bank” by Kiplinger for the fourth consecutive year in June 2020, and for the eighth time in the last ten years, we were named “Best Online Bank” by MONEY® Magazine in October 2020. Ally Bank’s competitive direct banking includes online and mobile banking features such as electronic bill pay, remote deposit, and electronic funds transfer nationwide, with innovative interfaces such as banking through Alexa-enabled devices, 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 with Ally Bank as a catalyst for future loan and deposit growth, as well as revenue opportunities that arise from introducing Ally Bank deposit customers to our digital wealth management offering, Ally Invest.
Significant Business Developments Related to COVID-19
The spread of COVID-19 has created a global public-health crisis that has resulted in the substantial loss of life, with widespread volatility and deteriorations in household, business, economic, and market conditions, including in the United States where we conduct nearly all of our business. Although several leading measures, such as labor conditions and the rate of growth as measured by GDP, have improved since the early stages of the pandemic, COVID-19 has not yet been contained and could continue to affect significantly more households and businesses.
Many governmental and nongovernmental authorities have responded to COVID-19 by curtailing household and business activity as a containment measure while simultaneously deploying fiscal- and monetary-policy measures to partially mitigate the adverse effects on individual households and businesses. Although these responses have slowed the rate of spread of COVID-19 and supported economic stability, the number of cases has risen meaningfully at times, and the potential exists for further resurgences to occur, especially during the traditional cold-and-flu season. In addition, while monetary policy remains highly accommodative and a number of stimulative fiscal programs and actions have been deployed, the national economy and regional and local economies and markets could suffer further disruptions that are lasting.
While we have experienced improvements in our business since the early stages of the COVID-19 pandemic, it has nonetheless negatively impacted us and our customers, counterparties, employees, and third-party service providers since the spread of the disease began to accelerate in March 2020. At this time, we cannot yet be confident in the extent of this negative impact or the trajectory of the macroeconomic outlook—especially with the most recent resurgence of COVID-19 in much of the United States and ongoing uncertainties around the efficacy, availability, acceptance, and distribution of vaccines and other medical treatments—and the adverse effects on our
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business, financial position, results of operations, and prospects could be significant. For further information on these risks and uncertainties, refer to the section titled Risk Factors in Part I, Item 1A of this report.
During the pandemic, we have consistently prioritized the health and well-being of our employees, offered industry-leading support and relief to our customers, and strived to make a difference in the communities where we operate. These actions reflect our relentless “Do it Right” philosophy.
•Credit-risk management — The credit performance of our portfolio of loans has been impacted by the pandemic. Prior to the pandemic, the national unemployment rate was below 4% for an extended period and was projected to sustain those levels into the foreseeable future. Additionally, most widely available forecasts assumed that a moderate rate of growth would continue throughout 2020. The impact of the lockdowns, stay-in-place directives, and other restrictive actions issued and enforced by federal, state and local officials as a result of the pandemic, contributed to a significant increase in the national unemployment rate, which rose to a peak of 14.7%, as adjusted, in April before initially moderating at a faster-than-expected-pace to 7.9%, as adjusted, as of September 30 2020. In the fourth quarter of 2020, the national unemployment rate stabilized—particularly in November and December—ending at 6.7% as of December 31, 2020. Similarly, the rate of economic growth, as measured by GDP, declined sharply on a quarter-over-quarter seasonally adjusted annualized rate basis in the second quarter by 31.7%, and rebounded in the third and fourth quarters of 2020 as the economy grew by 33.1%, as adjusted, and 4.0%, respectively, quarter-over-quarter based on this measure. On a year-over-year basis, GDP contracted by 2.5%.
In response to the impacts caused by the COVID-19 pandemic, we have taken significant actions to support our customers with industry-leading relief programs, while prudently managing our credit risk exposure. Refer to the section titled Risk Management within this MD&A for additional details on these programs. Following the termination of these programs, we have continued to work with impacted customers in accordance with our established credit risk management policies and practices. We have invested significant resources, including introducing enhanced digital capabilities and new communication tools, to support customers who continue to experience hardships after the initial deferrals expire. Additionally, our scaled staffing model and resource capabilities have allowed for a nimble response to augment staffing to support these efforts.
In addition to the support that we have provided to our customers, governments have taken necessary and unprecedented steps to partially mitigate the adverse effects of their actions to contain the spread of COVID-19. For example, in late March 2020, the CARES Act was enacted to inject more than $2 trillion of financial assistance into the U.S. economy. One component of the CARES Act is the PPP, which is a guaranteed, unsecured loan program administered by the Small Business Administration (SBA). Loans under the PPP are made to borrowers by participating lenders, are fully guaranteed, and may be forgiven, by the SBA. PPP eligible borrowers must use loan proceeds for payroll costs and other allowable expenses, including mortgage payments, rents, and utilities. At December 31, 2020, we had loans with a principal balance of $638 million outstanding to our commercial dealer customers under the PPP. As these loans are guaranteed by the SBA, we do not maintain an allowance for loan losses under CECL for this portfolio. Among its other provisions, the CARES Act significantly expanded eligibility for, and the amount of, unemployment benefits, created and funded the advance payment of a refundable tax credit for 2020, and appropriated $500 billion to the Treasury Secretary to support U.S. air carriers and other U.S. businesses that have not otherwise received adequate economic relief as well as states and municipalities. Following the expiration of the stimulus programs under the CARES Act, the Consolidated Appropriations Act, 2021 was signed into law. This law included a $900 billion COVID-19 relief package that extended certain programs introduced in the CARES Act and included incremental funding for the PPP, enhanced unemployment benefits, and direct payments for qualifying individuals and households. We will continue to work with our commercial dealer customers that are eligible for additional assistance under the PPP program.
The deterioration and uncertainty in the macroeconomic environment experienced in 2020 from the pandemic and related mitigation efforts drove a significant increase in our allowance for loan losses and provision for credit losses. Our provision expense for credit losses increased $441 million to $1.4 billion for the year ended December 31, 2020, compared to 2019. While the macroeconomic environment rebounded significantly in the third quarter and stabilized in the fourth quarter of 2020, the increase in provision expense year-over-year reflects the significant deterioration observed since the inception of the pandemic. During the second half of March 2020, the U.S. economy experienced a significant deterioration driven by the COVID-19 pandemic, which impacted our allowance for loan losses. During the first quarter, we recorded an additional $602 million of provision expense for credit losses associated with the deterioration in the macroeconomic outlook from COVID-19. During the second quarter of 2020, we incurred total provision expense of $287 million, which included $128 million attributable to the macroeconomic environment and other factors aside from changes in portfolio size and incremental net charge-offs. During the third quarter of 2020, we incurred total provision expense of $147 million, which included a reduction in reserves of $34 million attributable to the improving macroeconomic environment—predominately the unemployment rate, and other factors aside from changes in portfolio size and incremental net charge-offs. During the fourth quarter of 2020, we recorded total provision expense of $102 million, which included a further reduction in reserves of $114 million attributable to the continued economic recovery, and other factors aside from changes in portfolio size and incremental net charge-offs. During the year ended December 31, 2020, the provision for credit losses was also impacted by the adoption of CECL, as further described in Note 1 to the Consolidated Financial Statements.
Provision expense for credit losses was favorably impacted by lower net charge-offs in our consumer automotive portfolio as losses decreased $84 million for the three months ended December 31, 2020, compared to the same period in 2019. The significant decrease in net charge-offs in our consumer automotive portfolio for the three months ended December 31, 2020, was attributable to
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strong payment performance and delinquency trends through the pandemic. Personal income and savings levels have increased as lenders, including us, have provided significant support in the form of loan modifications and fee waivers, which is in addition to the fiscal and monetary stimulus actions detailed above. Similarly, consumer discretionary spending levels have decreased significantly during the pandemic, most notably in the first and second quarters of 2020, driven by reductions in spending on services, travel, and entertainment, as a result of stay-in-place orders. Net charge-offs in our consumer automotive portfolio also continue to benefit from strong used vehicle prices. In the second half of 2020, used vehicle prices, as well as our off-lease gain per unit, reached the highest level since January 2010, which reduced the realized loss impact in instances of default. Used vehicle prices normalized modestly in the fourth quarter of 2020, but remain elevated.
While we are encouraged by the positive signs in performance observed during the second half of 2020, the degree to which our actions and those of governments and others will directly or indirectly assist our customers, and the economy generally, is not yet clear.
•Liquidity management, funding, and capital markets — Our retail deposit business has remained a source of strength for us through the pandemic. To support our retail deposit customers, we waived fees for overdrafts, and excessive transactions, and expedited shipping of checks and debit cards through July 31, 2020. Through December 31, 2020, we refunded fees of approximately $7 million on excess transactions and overdrafts. For our brokerage customers, we waived fees for broker-assisted trades, paper statements, and overnight outbound check processing through July 31, 2020. In our retail deposits business, we continue to monitor several key items in light of a highly uncertain macroeconomic outlook, including elevated competitive pressures on the direct-banking industry given the low rate environment, overall financial health of the U.S. consumer and potential impacts of the pandemic, uncertainty around further stimulus measures, and how customers deploy elevated savings levels over time. Our deposits franchise recorded strong growth in retail deposits during the year ended December 31, 2020. During the year ended December 31, 2020, we grew retail deposits by approximately $20.6 billion to $124.4 billion, representing 20% growth year-over-year, despite declines in online savings and CD product yields. Our retail deposit customer retention rate remained steady through 2020 at approximately 96% while we grew our mix of total deposit funding to 85%, with the remainder of liability-based funding through secured, unsecured, and FHLB borrowings. For additional discussions surrounding our liquidity positions and related risks, refer to the section titled Liquidity Management, Funding, and Regulatory Capital in this MD&A.
In addition to the significant injection of fiscal stimulus by the federal government throughout 2020, the FRB has taken decisive and sweeping actions. Since March 15, 2020, these actions have included a reduction in the target range for the federal funds rate to zero to 0.25 percent, a program to purchase an indeterminate amount of Treasury securities and agency mortgage-backed securities, and numerous facilities to support the flow of credit to households and businesses, such as the Municipal Liquidity Facility, the Main Street Lending Program, the Primary Market Corporate Credit Facility, the Secondary Market Corporate Credit Facility, the Term Asset-Backed Securities Loan Facility, the Money Market Mutual Fund Liquidity Facility, and the Commercial Paper Funding Facility. During 2020, we executed opportunistic liability management actions and secured additional liquidity at Ally Financial Inc. through the unsecured debt capital markets. On April 6, 2020, we issued $750 million aggregate principal amount of 5.8% senior unsecured notes due 2025. On June 1 2020, we issued $800 million aggregate principal amount of 3.05% senior unsecured notes due 2023. On September 16, 2020, and December 1, 2020, we issued $750 million and $450 million, respectively, aggregate principal amounts of 1.45% senior unsecured notes due 2023. To more cost-effectively manage liquidity at Ally Bank, we elected to prepay and early terminate 25 FHLB advances with an aggregate principal balance of $4.3 billion during the year ended December 31, 2020. In doing so, we recognized losses on the early repayments of FHLB borrowings of $99 million. We continue to assess liability management opportunities utilizing our deposit funding at Ally Bank.
Public equity markets have experienced significant volatility as a result of the pandemic, which has impacted our investment securities portfolio. For the year ended December 31, 2020, we recognized net realized and unrealized gains on equity securities of $107 million and $29 million, respectively. Given the unpredictability of COVID-19 and its direct and indirect effects on market conditions, it is possible that unusual volatility in the equity markets could positively or negatively impact our results.
•Regulatory capital and stress testing — We continue to carefully monitor our capital and liquidity positions. On March 17, 2020, in order to support the FRB’s effort to mitigate the impact of the COVID-19 pandemic on the U.S. economy and the financial system, we announced the voluntary suspension of our stock-repurchase program through its termination on June 30, 2020. Consistent with the FRB’s restrictions on common-stock repurchases by large firms such as Ally, described below, we did not implement a new stock-repurchase program or repurchase shares of our common stock, except in connection with compensation plans, for the remainder of 2020.
We have elected to phase the estimated impact of CECL into regulatory capital in accordance with the interim final rule of the FRB and other U.S. banking agencies that became effective on March 31, 2020, and that was subsequently clarified and adjusted in a final rule effective September 30, 2020. As further described in Note 20 to the Consolidated Financial Statements, we will delay recognizing the estimated impact of CECL on regulatory capital until after a two-year deferral period, which for us extends through December 31, 2021. Beginning on January 1, 2022, we will be required to phase 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. As of December 31, 2020, the total deferred impact on Common Equity Tier 1 capital related to our adoption of CECL was $1.2 billion.
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We submitted our 2020 capital plan to the FRB in April 2020. In June 2020, the FRB provided us with the results of the supervisory stress test, additional industry-wide sensitivity analyses conducted in light of the COVID-19 pandemic, and our preliminary stress capital buffer requirement. At the same time, the FRB announced its determination that changes in financial markets or the macroeconomic outlook could have a material effect on the risk profiles and financial conditions of firms subject to the capital-plan rule and that, as a result, the firms (including Ally) would be required to resubmit capital plans to the FRB within 45 days after receiving updated stress scenarios from the FRB. Also at the same time, the FRB announced the suspension of nearly all common-stock repurchases and restrictions on common-stock dividends for large firms such as Ally during the third quarter of 2020. In September 2020, the FRB released its updated scenarios and extended the limitations on common-stock repurchases and common-stock dividends for the fourth quarter of 2020. We updated our capital plan in light of firm-specific baseline and stress scenarios, as required, and submitted our updated plan to the FRB on November 2, 2020. In December 2020, the FRB publicly disclosed summary results of its second round of supervisory stress testing and extended the deadline by which firms will be notified about whether their stress capital buffer requirements will be recalculated to March 31, 2021. At the same time, the FRB extended and modified its restrictions on common-stock repurchases and common-stock dividends for the first quarter of 2021, limiting such distributions to an amount equal to the average of the firm’s net income for the four preceding calendar quarters. In January 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. Refer to Note 20 to the Consolidated Financial Statements for further discussion about regulatory capital, capital planning, and stress testing.
At December 31, 2020, Ally and Ally Bank were “well-capitalized” and met all applicable regulatory capital requirements, with Common Equity Tier 1 capital ratios of 10.64% and 13.38%, respectively. We continue to anticipate that we will have sufficient capital levels to meet all of these requirements.
•Dealer Financial Services — Our lending and finance receivable balances have been impacted by the COVID-19 pandemic. Through the second quarter of 2020, as governments acted to temporarily close or restrict the operations of businesses, including automotive dealers, and as many consumers and businesses changed their behavior in response to governmental mandates and advisories to sharply restrain commercial and social interactions, we experienced significant reductions in our consumer automotive loan applications. In addition, we took actions at the beginning of the second quarter of 2020 to mitigate credit risk exposure on net originations by systematically reducing approval rates on high-risk application segments and increasing the scope of manual underwriter reviews, with a heightened emphasis on income and employment verifications. Furthermore, we observed downward pressure on the automotive sales and other operating results of our dealer customers, on their capacity to accept the return of leased vehicles, and on used-vehicle auction activity and values. Many automotive manufacturers and their suppliers also had taken measures to slow or shut down production in response to the pandemic, which negatively affected dealer inventory levels and sales and significantly reduced wholesale floorplan lending business to dealers. As consumers and businesses adapted to changed conditions and many governmental authorities relaxed their restrictions later in the second quarter, we began to observe a recovery in loan application volume and resulting booked originations. As the outlook for national unemployment improved from peak levels, we also methodically eased certain credit underwriting restrictions that were enacted at the start of the pandemic. Additionally, automotive manufacturers and suppliers restarted production, albeit at reduced levels, and in August 2020 we experienced our first month-over-month increase in wholesale floorplan balances since the pandemic was declared. This modest recovery in wholesale floorplan balances continued through December 31, 2020. Since declining $9.7 billion in the second quarter of 2020, our commercial automotive assets increased $146 million and $1.3 billion in the third and fourth quarters of 2020, respectively. In the second, third, and fourth quarters of 2020, we decisioned 3.1 million, 3.2 million, and 2.8 million of consumer automotive financing applications, respectively, compared to 3.3 million, 3.2 million, and 2.9 million in the same periods of 2019. These applications resulted in funded balances of approximately $7.2 billion, $9.8 billion, and $9.1 billion, in the second, third, and fourth quarters of 2020, respectively, as compared to $9.7 billion, $9.3 billion, and $8.1 billion in the same periods of 2019. Booked contracts from our used segment totaled over $19.3 billion in 2020. The carrying value of our consumer automotive used vehicle loans before allowance for loan losses was 58.3% of our total consumer automotive loans at December 31, 2020, as compared to 54.9% of our total consumer automotive loans at December 31, 2019. Refer to the section titled Automotive Financing Volume in this MD&A for a further discussion regarding the impacts of COVID-19 on our business.
In our Insurance operations, we similarly experienced significantly reduced F&I written premiums in late March and early in the second quarter, followed by a recovery through the end of 2020. Total F&I written premiums were $236 million, $269 million, and $242 million in the second, third, and fourth quarters of 2020, compared to $270 million, $274 million, and $250 million during the same periods in the prior year. Written insurance premiums from our property and casualty business declined during the year ended December 31, 2020, as a result of lower vehicle inventory levels due primarily to impacts of COVID-19.
•Other consumer and commercial products — Within our Corporate Finance business, we experienced higher draws on commercial customer lines of credit during the second half of March 2020, but this trend abated in April. Through the remainder of 2020, we experienced significant pay-downs on draws that had been taken at the outset of the pandemic. Our balance of unfunded commitments increased from $2.5 billion at the end of the first quarter of 2020 to $3.5 billion, $3.8 billion, and $4.2 billion at the end of the second, third, and fourth quarters, respectively.
In our Mortgage Finance business, refinance volume and prepayment activity increased through the end of 2020, driven by lower market interest rates.
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In Ally Invest, we observed a significant increase in the number of self-directed accounts to 406,000 through the fourth quarter of 2020, up 17% year-over-year. While we experienced a significant outflow of deposits to brokerage accounts after the pandemic had been declared, Ally Invest was able to capture approximately one-third of these outflows. Net customer assets reached $13.4 billion as of December 31, 2020, and we experienced higher than usual daily trade volume throughout the pandemic.
In our point-of-sale personal lending business, we originated $503 million of personal loans during the year ended December 31, 2020, as we continue to grow Ally Lending.
•General operations — The COVID-19 pandemic and related governmental mandates and advisories have necessitated changes in the way we operate our business. We activated our business continuity plan in late February 2020 and, since then, have migrated nearly all our workforce off-site or to work-from-home arrangements to mitigate health risks. We are also carefully monitoring the activities of our vendors and other third-party service providers to manage the risks associated with any potential service disruptions. The length of time we may be required to operate under these circumstances, as well as the potential for them to worsen or for significant disruptions to occur, remains uncertain. While we have not yet experienced material adverse disruptions to our internal operations or third-party services due to the COVID-19 pandemic, we continue to review evolving risks and developments.
•Employees and communities — To support our employees during the pandemic, we have provided a range of financial-assistance offerings and enhanced benefits, including a $1,200 payment for those earning less than $100,000. In May, we launched the Ally Employee Relief Fund with a $250,000 contribution. Including matching contributions by Ally, this fund has been augmented by over $160,000 in additional donations and has helped over 500 of our employees. In August, recognizing the continuing difficulties caused by the pandemic, we paid 50% of the 2020 incentive-compensation targets for most of our non-executive employees. These payments were not incremental but rather were an advance of expected year-end amounts.
Consistent with our culture and “Do it Right” philosophy, we have pledged financial support to our communities for emergency needs, such as food, health care, emergency housing, and childcare. For example, on September 24, 2020, we announced our commitment to invest $30 million in communities across our geographic footprint over the next three years. We also announced the creation of the Ally Charitable Foundation, which will deploy grants to support economic mobility in the communities we serve with a focus on affordable housing, financial literacy, workplace preparedness, and other initiatives. In December 2020, we contributed $34 million to the Ally Charitable Foundation.
We are committed to driving financial and social inclusion as part of our ‘Do it Right’ philosophy. This means engaging with stakeholders—including our customers, communities, employees, and suppliers— to improve economic mobility. In January 2020, Ally launched its Supplier Diversity program to focus on diversity and inclusion among its supplier base. The Supplier Diversity program includes a proactive business strategy encouraging the use of suppliers owned by U.S.-based minorities, women, LGBTQ, veterans, service-disabled veterans and those with disabilities, and small or disadvantaged businesses defined by local, state, or federal classifications. The program also encourages all Ally third-party suppliers to utilize diverse-owned suppliers and small businesses on a second-tier basis. During 2020, we initiated a second-tier reporting program to capture additional diverse spend associated with Ally’s prime suppliers that are utilizing minority, women, LGBTQ, veteran, disability-owned, and small or disadvantaged businesses to help support Ally. Additionally, in January 2021, Ally hosted its inaugural Supplier Diversity Symposium, engaging more than 40 diverse suppliers in a company-wide networking event with our CEO and other Ally business executives to build relationships and explore opportunities to expand our spend with diverse suppliers.
In 2020, we hosted our second annual Moguls in the Making competition, which was held virtually with 50 students working in teams to develop a business plan that took into account COVID-19 and social equity. These experiences help develop skills for future careers, including for the over 20 students who have been offered internships with Ally in 2020. In early 2021, we took additional steps to address inequality of access to careers with long-term growth potential with a $1.3 million commitment in scholarships and programs in partnership with the Congressional Black Caucus Foundation, TMCF, and other professional university groups.
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.
Prudent expansion of asset originations at Ally Bank and continued growth of a stable deposit base continue to be the cornerstone of our long-term liquidity strategy. Retail deposits provide a low-cost source of funds that are less sensitive to interest rate changes, market volatility, or changes in our credit ratings than other funding sources. At December 31, 2020, deposit liabilities totaled $137.0 billion, which reflects an increase of $16.3 billion as compared to December 31, 2019. Deposits as a percentage of total liability-based funding increased ten percentage points to 85% at December 31, 2020, as compared to December 31, 2019.
In addition to building a larger deposit base, we maintain a presence in the securitization markets to finance our automotive loan portfolios. Securitizations continue to be a reliable and cost-effective source of funding due to structural efficiencies and the established market. Additionally, for retail loans, the term structure of the transaction locks in funding for a specified pool of loans. Once a pool of consumer automotive loans is selected and placed into a securitization, the underlying assets and corresponding debt amortize simultaneously
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resulting in committed and matched funding for the life of the asset. We manage the execution risk arising from securitizations by maintaining a diverse domestic and foreign investor base and committed secured credit facilities.
As we continue to migrate assets to Ally Bank and grow our bank funding capabilities, our need for funding at the parent company has been reduced. At December 31, 2020, 94% of Ally’s total assets were within Ally Bank. This compares to approximately 93% as of December 31, 2019. Longer-term unsecured debt is the primary funding source utilized at the parent company. At December 31, 2020, we had $702 million and $1.1 billion of unsecured long-term debt principal maturing in 2021 and 2022, respectively. We plan to reduce our reliance on market-based funding by continuing to focus on stable, lower cost retail deposit funding.
The strategies outlined above have allowed us to build and maintain a conservative liquidity position. Total available liquidity at December 31, 2020, was $40.3 billion. Absolute levels of liquidity increased during 2020 primarily as a result of increased liquid cash and equivalents. Refer to the section below titled Liquidity Management, Funding, and Regulatory 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. 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 Ally’s 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 Automotive Finance operations, we target 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. The carrying value of our nonprime consumer automotive loans before allowance for loan losses, as of December 31, 2020, was approximately 11.7% of our total consumer automotive loans at December 31, 2020. During 2020, 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 toward our Growth channel including used vehicle financings.
The mortgage-finance team focuses on applicants with stronger credit profiles and with 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 financial wherewithal to support their representations and warranties and the experience to originate high-quality loans.
Additionally, on October 1, 2019, we acquired Health Credit Services which we renamed Ally Lending, a digital payment provider that offers point-of-sale financing to consumers. This expansion into digital point-of-sale lending further broadens our product portfolio to unsecured consumer financing. As of December 31, 2020, the amortized cost of our finance receivables related to Ally Lending was $407 million.
Within our commercial lending portfolios, Corporate Finance operations primarily provide senior secured leveraged cash flow and asset-based loans to mostly U.S.-based middle-market companies. Throughout 2020, we continued to prudently grow this portfolio with a disciplined and selective approach to credit quality, which has generally included the avoidance of covenant-light lending arrangements. This includes growth of our lender finance vertical launched in 2019, 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 that primarily relate to floorplan financing and term loans. These commercial products are an important aspect of our dealer relationships and offer a secured lending arrangement with strong collateral protections in the event of dealer default. The performance of our commercial credit portfolios continues to remain strong, as nonperforming finance receivables and loans decreased $54 million from December 31, 2019, to $161 million at December 31, 2020. During the years ended December 31, 2020, and 2019, our total net charge-offs within our commercial lending portfolio remained stable at $51 million and $49 million, respectively. Despite this level of net charge-offs, our total commercial net charge-off ratios represented 0.2% of average commercial receivables and loans for the year ended December 31, 2020. Refer to the Risk Management section of this MD&A for further details.
The U.S. economy has started to recover from shutdowns that resulted from the COVID-19 pandemic. After peaking at 14.7%, as adjusted, in April, the unemployment rate declined to 6.7% as of December 31, 2020. As a result of the economic disruption from COVID-19, sales of light motor vehicles fell to an annual pace of 8.7 million in April, a 49-year low, before rising to a 16.3 million annual pace as of December 31, 2020. Elevated unemployment may limit further increases in used vehicle values in 2021, despite the strengthening in values in
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the second half of 2020. Additionally, used vehicle values may also be impacted by changes in customer preferences, including alternative transportation methods such as public transportation, vehicle sharing, and ride hailing.
Discontinued Operations
During 2013 and 2012, certain disposal groups met the criteria to be presented as discontinued operations. The remaining activity relates to previous discontinued operations for which we continue to have wind-down, legal, and minimal operational costs. For all periods presented, the operating results for these operations have been removed from continuing operations. The MD&A has been adjusted to exclude discontinued operations unless otherwise noted.
Dealer Financial Services
Dealer Financial Services comprises our Automotive Finance and Insurance segments. Our primary customers are automotive dealers, which are independently owned businesses. 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.
Our Dealer 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 dealer-centric 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, 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 provide U.S.-based automotive financing services to consumers, automotive dealers, other businesses, and municipalities. Our dealer-focused 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. At December 31, 2020, our Automotive Finance operations had $104.8 billion of assets and generated $4.5 billion of total net revenue in 2020. For consumers, we provide financing for new and used vehicles. In addition, our CSG provides automotive financing for small businesses and municipalities. At December 31, 2020, our CSG had $8.2 billion of loans outstanding. Through our commercial automotive financing operations, we fund dealer purchases of new and used vehicles through wholesale floorplan financing. We manage commercial account servicing on approximately 3,200 dealers that utilize our floorplan inventory lending or other commercial loans. We service an $80.2 billion consumer loan and operating lease portfolio at December 31, 2020, and our commercial automotive loan portfolio was approximately $23.1 billion at December 31, 2020. The extensive infrastructure, technology, and analytics of our servicing operations as well as the experience of our servicing personnel enhance our ability to minimize our loan losses and enable us to deliver a favorable customer experience to both our dealers and retail customers. During 2020, we continued to reposition our origination profile to focus on capital optimization and risk-adjusted returns. In 2020, total consumer automotive originations were $35.1 billion, a decrease of $1.2 billion compared to 2019. 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. The automotive marketplace is dynamic and evolving, including substantial investments in electrification by automobile manufacturers and suppliers. Ally remains focused on meeting the needs of both our dealer and consumer customers and continuing to strengthen and expand upon the 18,700 dealer relationships we have. We continue to identify and cultivate relationships with automotive retailers including those with leading eCommerce platforms. We also operate Clearlane, our online direct-lending platform, which provides a digital 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. Ally has and continues to provide automobile financing for hybrid and battery-electric vehicles today, and is well positioned to remain a leader in automotive financing as we believe the vast majority of these vehicles will be sold through dealerships with whom we have an established relationship.
The Growth channel was established to focus on developing dealer relationships beyond those relationships that primarily were developed through our previous role as a captive finance company for GM and Chrysler. The Growth channel was expanded to include direct-to-consumer financing through Clearlane and other channels and our arrangements with online automotive retailers. We have established relationships with thousands of Growth channel dealers through our customer-centric approach and specialized incentive programs designed
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to drive loyalty amongst dealers to our products and services. The success of the Growth channel has been a key enabler in evolving our business model from a focused captive finance company to a leading market competitor. In this channel, we currently have over 12,300 dealer relationships, of which approximately 86% are franchised dealers (including brands such as Ford, Nissan, Kia, Hyundai, Toyota, Honda, and others), or used vehicle only retailers with a national presence.
Over the past several years, we have continued to focus on the consumer used vehicle segment primarily through franchised dealers, which 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 over 282 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 new and used vehicles to approximately 4.5 million customers. 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 both the years ended December 31, 2020, and 2019, totaling $35.1 billion and $36.3 billion, respectively.
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 Risk Management section 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 dealer inventory purchases of new and used vehicles, 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. 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 2020, we financed an average of $19.3 billion of dealer vehicle inventory through wholesale floorplan financings. Other commercial automotive lending products, which averaged $5.7 billion during 2020, 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 2020, Ally and other parties, including dealers, fleet rental companies, and financial institutions, utilized SmartAuction to sell approximately 258,000 vehicles to dealers and other commercial customers. SmartAuction served as the remarketing channel for 53% 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 in Canada, where we serve more than 400 thousand consumers and are the VSC and other protection plan provider for GM Canada and VSC provider for Subaru Canada. Our Insurance operations had $9.1 billion of assets at December 31, 2020, and generated $1.4 billion of total net revenue during 2020. As part of our focus on offering dealers a broad range of consumer F&I products, we offer VSCs, VMCs, and GAP products. We also underwrite selected commercial insurance coverages, which primarily insure dealers’ wholesale vehicle inventory. Ally Premier Protection is our flagship VSC offering, which provides coverage for new and used vehicles of virtually all makes and models. We also offer ClearGuard on the SmartAuction platform, which is a protection product designed to minimize the risk to dealers from arbitration claims for eligible vehicles sold at auction.
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 high levels of customer satisfaction and regulatory compliance. We also advise dealers regarding necessary liability and physical damage coverages.
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Our F&I products are primarily distributed indirectly through the automotive dealer network. We have established approximately 1,600 F&I dealer relationships nationwide and 600 dealer relationships in Canada, 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 allow the recovery of a specified amount beyond the 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, Clearlane.
We have approximately 3,400 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 78%. 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-consumer Ally Home mortgage offering, and bulk purchases of high-quality jumbo and LMI mortgage loans originated by third parties. Our Mortgage Finance operations had $14.9 billion of assets at December 31, 2020, and generated $220 million of total net revenue in 2020.
Through our direct-to-consumer channel, which was introduced late in 2016, we offer a variety of competitively priced jumbo and conforming fixed- and adjustable-rate mortgage products through a third-party fulfillment provider. Under our current arrangement, our direct-to-consumer conforming mortgages are originated as held for sale and sold, while jumbo and LMI mortgages are originated as held for investment. Loans originated in the direct-to-consumer channel are sourced by existing Ally customer marketing, prospect marketing on third-party websites, and email or direct mail campaigns. In April 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. During the year ended December 31, 2020, we originated $4.7 billion of mortgage loans through our direct-to-consumer channel.
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 ended December 31, 2020, we purchased $4.2 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 provides senior secured leveraged cash flow and asset-based loans to mostly U.S.-based middle-market companies owned by private equity sponsors, and loans to asset managers that primarily provide leveraged loans. Our Corporate Finance operations had $6.1 billion of assets at December 31, 2020, and generated $344 million of total net revenue during 2020, 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. While there continues to be a significant level of liquidity and competition in the middle-market lending space, 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. 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.
Our focus is on businesses owned by private equity sponsors with loans typically used for leveraged buyouts, mergers and acquisitions, debt refinancing, expansions, restructurings, and working capital. 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, our Lender Finance business provides asset managers with facilities from $50 million to up to $500 million to partially fund their direct-lending activities. 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 limiting our risk exposure to individual borrowers. All of 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
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small equity investments in our borrowers. The portfolio is well diversified across multiple industries including manufacturing, financials, distribution, services, and other specialty sectors. These specialty sectors include our Healthcare and Technology Finance verticals. The Healthcare vertical provides financing across the healthcare spectrum including services, pharmaceuticals, manufacturing, and medical devices and supplies. We also provide a commercial real estate product focused on lending to skilled nursing facilities, senior housing, medical office buildings, and hospitals. Our Technology Finance vertical provides financing solutions to venture capital-backed, technology-based companies. Other smaller complementary product offerings that help strengthen our reputation as a full-spectrum provider of financing solutions for borrowers include selectively offering second-out loans on certain transactions and issuing letters of credit through Ally Bank.
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 strategic investments, the management of our legacy mortgage portfolio, which primarily consists of loans originated prior to January 1, 2009, the activity related to Ally Invest and Ally Lending, CRA loans and related investments, and reclassifications and eliminations between the reportable operating segments.
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 brokered deposits through arrangements with Ally Invest’s clearing broker.
Through Ally Invest, we are able to offer a broader 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 through Ally 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 state-of-the-art forex trading platform.
Ally Invest also provides digital advisory services to clients through web-based solutions, informational resources, and virtual interaction through Ally Invest Advisors, an SEC-registered investment advisor. These services have emerged as a fast-growing segment within the financial services industry over the past several years. 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. We also offer cash enhanced portfolios that incur no management fee. A number of core managed portfolios are offered, 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
Additionally, beginning in October 2019 with the acquisition of Health Credit Services, financial information related to our consumer unsecured financing is included within Corporate and Other. The Health Credit Services business has been renamed Ally Lending and currently 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 segment, which was launched in the second quarter of 2020, now represents nearly 20% of new originations, and is expected to grow. We believe the market outlook for point-of-sale lending provides attractive opportunities for future diversification, including in the automotive servicing and vehicle upfit space. 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. Refer to Note 2 for additional details on the acquisition of Ally Lending.
Corporate Treasury and ALM Activities
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 and maturity characteristics. 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, a risk-based methodology is used to allocate equity to these operations.
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Deposits
We are focused on growing and retaining a stable deposit base and deepening relationships with our 2.3 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 through internet, telephone, mobile, and mail channels. 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. Ally Bank has consistently increased its share of the direct banking deposit market and remains one of the largest direct banks in terms of retail deposit balances. Our strong customer acquisition and retention rates reflect the strength of our brand and, together with competitive deposit rates, continue to drive growth in retail deposits. At December 31, 2020, Ally Bank had $137.0 billion of total deposits—including $124.4 billion of retail deposits, which grew $20.6 billion, or 20% during 2020. 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, and Ally Lending, 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. In February 2020, we introduced a collection of smart savings tools to our online savings product, and continue to enhance our suite of online and mobile banking features. In 2020, our online savings customers created over 1 million savings buckets throughout the year within our smart savings tools. In addition, brokered deposits are obtained through third-party intermediaries.
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. Our nearly 2.3 million deposit customers and 4.5 million retail bank accounts as of December 31, 2020, reflect increases from 2.0 million and 4.0 million, respectively, as compared to December 31, 2019. 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 2020 American Bankers Association survey, 87% 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 3 percentage points, from 7% to 10%. We have received a positive response to innovative savings and other deposit products and have been named the “Best Internet Bank” by Kiplinger for the fourth consecutive year in June 2020, and for the eighth time in the last ten years, we were named “Best Online Bank” by MONEY® Magazine in October 2020. Ally Bank’s competitive direct banking includes online and mobile banking features such as electronic bill pay, remote deposit, and electronic funds transfer nationwide, with innovative interfaces such as banking through Alexa-enabled devices, 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 with Ally Bank as a catalyst for future loan and deposit growth, as well as revenue opportunities that arise from introducing Ally Bank deposit customers to our digital wealth management offering, Ally Invest.
Significant Business Developments Related to COVID-19
The spread of COVID-19 has created a global public-health crisis that has resulted in the substantial loss of life, with widespread volatility and deteriorations in household, business, economic, and market conditions, including in the United States where we conduct nearly all of our business. Although several leading measures, such as labor conditions and the rate of growth as measured by GDP, have improved since the early stages of the pandemic, COVID-19 has not yet been contained and could continue to affect significantly more households and businesses.
Many governmental and nongovernmental authorities have responded to COVID-19 by curtailing household and business activity as a containment measure while simultaneously deploying fiscal- and monetary-policy measures to partially mitigate the adverse effects on individual households and businesses. Although these responses have slowed the rate of spread of COVID-19 and supported economic stability, the number of cases has risen meaningfully at times, and the potential exists for further resurgences to occur, especially during the traditional cold-and-flu season. In addition, while monetary policy remains highly accommodative and a number of stimulative fiscal programs and actions have been deployed, the national economy and regional and local economies and markets could suffer further disruptions that are lasting.
While we have experienced improvements in our business since the early stages of the COVID-19 pandemic, it has nonetheless negatively impacted us and our customers, counterparties, employees, and third-party service providers since the spread of the disease began to accelerate in March 2020. At this time, we cannot yet be confident in the extent of this negative impact or the trajectory of the macroeconomic outlook—especially with the most recent resurgence of COVID-19 in much of the United States and ongoing uncertainties around the efficacy, availability, acceptance, and distribution of vaccines and other medical treatments—and the adverse effects on our
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business, financial position, results of operations, and prospects could be significant. For further information on these risks and uncertainties, refer to the section titled Risk Factors in Part I, Item 1A of this report.
During the pandemic, we have consistently prioritized the health and well-being of our employees, offered industry-leading support and relief to our customers, and strived to make a difference in the communities where we operate. These actions reflect our relentless “Do it Right” philosophy.
•Credit-risk management — The credit performance of our portfolio of loans has been impacted by the pandemic. Prior to the pandemic, the national unemployment rate was below 4% for an extended period and was projected to sustain those levels into the foreseeable future. Additionally, most widely available forecasts assumed that a moderate rate of growth would continue throughout 2020. The impact of the lockdowns, stay-in-place directives, and other restrictive actions issued and enforced by federal, state and local officials as a result of the pandemic, contributed to a significant increase in the national unemployment rate, which rose to a peak of 14.7%, as adjusted, in April before initially moderating at a faster-than-expected-pace to 7.9%, as adjusted, as of September 30 2020. In the fourth quarter of 2020, the national unemployment rate stabilized—particularly in November and December—ending at 6.7% as of December 31, 2020. Similarly, the rate of economic growth, as measured by GDP, declined sharply on a quarter-over-quarter seasonally adjusted annualized rate basis in the second quarter by 31.7%, and rebounded in the third and fourth quarters of 2020 as the economy grew by 33.1%, as adjusted, and 4.0%, respectively, quarter-over-quarter based on this measure. On a year-over-year basis, GDP contracted by 2.5%.
In response to the impacts caused by the COVID-19 pandemic, we have taken significant actions to support our customers with industry-leading relief programs, while prudently managing our credit risk exposure. Refer to the section titled Risk Management within this MD&A for additional details on these programs. Following the termination of these programs, we have continued to work with impacted customers in accordance with our established credit risk management policies and practices. We have invested significant resources, including introducing enhanced digital capabilities and new communication tools, to support customers who continue to experience hardships after the initial deferrals expire. Additionally, our scaled staffing model and resource capabilities have allowed for a nimble response to augment staffing to support these efforts.
In addition to the support that we have provided to our customers, governments have taken necessary and unprecedented steps to partially mitigate the adverse effects of their actions to contain the spread of COVID-19. For example, in late March 2020, the CARES Act was enacted to inject more than $2 trillion of financial assistance into the U.S. economy. One component of the CARES Act is the PPP, which is a guaranteed, unsecured loan program administered by the Small Business Administration (SBA). Loans under the PPP are made to borrowers by participating lenders, are fully guaranteed, and may be forgiven, by the SBA. PPP eligible borrowers must use loan proceeds for payroll costs and other allowable expenses, including mortgage payments, rents, and utilities. At December 31, 2020, we had loans with a principal balance of $638 million outstanding to our commercial dealer customers under the PPP. As these loans are guaranteed by the SBA, we do not maintain an allowance for loan losses under CECL for this portfolio. Among its other provisions, the CARES Act significantly expanded eligibility for, and the amount of, unemployment benefits, created and funded the advance payment of a refundable tax credit for 2020, and appropriated $500 billion to the Treasury Secretary to support U.S. air carriers and other U.S. businesses that have not otherwise received adequate economic relief as well as states and municipalities. Following the expiration of the stimulus programs under the CARES Act, the Consolidated Appropriations Act, 2021 was signed into law. This law included a $900 billion COVID-19 relief package that extended certain programs introduced in the CARES Act and included incremental funding for the PPP, enhanced unemployment benefits, and direct payments for qualifying individuals and households. We will continue to work with our commercial dealer customers that are eligible for additional assistance under the PPP program.
The deterioration and uncertainty in the macroeconomic environment experienced in 2020 from the pandemic and related mitigation efforts drove a significant increase in our allowance for loan losses and provision for credit losses. Our provision expense for credit losses increased $441 million to $1.4 billion for the year ended December 31, 2020, compared to 2019. While the macroeconomic environment rebounded significantly in the third quarter and stabilized in the fourth quarter of 2020, the increase in provision expense year-over-year reflects the significant deterioration observed since the inception of the pandemic. During the second half of March 2020, the U.S. economy experienced a significant deterioration driven by the COVID-19 pandemic, which impacted our allowance for loan losses. During the first quarter, we recorded an additional $602 million of provision expense for credit losses associated with the deterioration in the macroeconomic outlook from COVID-19. During the second quarter of 2020, we incurred total provision expense of $287 million, which included $128 million attributable to the macroeconomic environment and other factors aside from changes in portfolio size and incremental net charge-offs. During the third quarter of 2020, we incurred total provision expense of $147 million, which included a reduction in reserves of $34 million attributable to the improving macroeconomic environment—predominately the unemployment rate, and other factors aside from changes in portfolio size and incremental net charge-offs. During the fourth quarter of 2020, we recorded total provision expense of $102 million, which included a further reduction in reserves of $114 million attributable to the continued economic recovery, and other factors aside from changes in portfolio size and incremental net charge-offs. During the year ended December 31, 2020, the provision for credit losses was also impacted by the adoption of CECL, as further described in Note 1 to the Consolidated Financial Statements.
Provision expense for credit losses was favorably impacted by lower net charge-offs in our consumer automotive portfolio as losses decreased $84 million for the three months ended December 31, 2020, compared to the same period in 2019. The significant decrease in net charge-offs in our consumer automotive portfolio for the three months ended December 31, 2020, was attributable to
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strong payment performance and delinquency trends through the pandemic. Personal income and savings levels have increased as lenders, including us, have provided significant support in the form of loan modifications and fee waivers, which is in addition to the fiscal and monetary stimulus actions detailed above. Similarly, consumer discretionary spending levels have decreased significantly during the pandemic, most notably in the first and second quarters of 2020, driven by reductions in spending on services, travel, and entertainment, as a result of stay-in-place orders. Net charge-offs in our consumer automotive portfolio also continue to benefit from strong used vehicle prices. In the second half of 2020, used vehicle prices, as well as our off-lease gain per unit, reached the highest level since January 2010, which reduced the realized loss impact in instances of default. Used vehicle prices normalized modestly in the fourth quarter of 2020, but remain elevated.
While we are encouraged by the positive signs in performance observed during the second half of 2020, the degree to which our actions and those of governments and others will directly or indirectly assist our customers, and the economy generally, is not yet clear.
•Liquidity management, funding, and capital markets — Our retail deposit business has remained a source of strength for us through the pandemic. To support our retail deposit customers, we waived fees for overdrafts, and excessive transactions, and expedited shipping of checks and debit cards through July 31, 2020. Through December 31, 2020, we refunded fees of approximately $7 million on excess transactions and overdrafts. For our brokerage customers, we waived fees for broker-assisted trades, paper statements, and overnight outbound check processing through July 31, 2020. In our retail deposits business, we continue to monitor several key items in light of a highly uncertain macroeconomic outlook, including elevated competitive pressures on the direct-banking industry given the low rate environment, overall financial health of the U.S. consumer and potential impacts of the pandemic, uncertainty around further stimulus measures, and how customers deploy elevated savings levels over time. Our deposits franchise recorded strong growth in retail deposits during the year ended December 31, 2020. During the year ended December 31, 2020, we grew retail deposits by approximately $20.6 billion to $124.4 billion, representing 20% growth year-over-year, despite declines in online savings and CD product yields. Our retail deposit customer retention rate remained steady through 2020 at approximately 96% while we grew our mix of total deposit funding to 85%, with the remainder of liability-based funding through secured, unsecured, and FHLB borrowings. For additional discussions surrounding our liquidity positions and related risks, refer to the section titled Liquidity Management, Funding, and Regulatory Capital in this MD&A.
In addition to the significant injection of fiscal stimulus by the federal government throughout 2020, the FRB has taken decisive and sweeping actions. Since March 15, 2020, these actions have included a reduction in the target range for the federal funds rate to zero to 0.25 percent, a program to purchase an indeterminate amount of Treasury securities and agency mortgage-backed securities, and numerous facilities to support the flow of credit to households and businesses, such as the Municipal Liquidity Facility, the Main Street Lending Program, the Primary Market Corporate Credit Facility, the Secondary Market Corporate Credit Facility, the Term Asset-Backed Securities Loan Facility, the Money Market Mutual Fund Liquidity Facility, and the Commercial Paper Funding Facility. During 2020, we executed opportunistic liability management actions and secured additional liquidity at Ally Financial Inc. through the unsecured debt capital markets. On April 6, 2020, we issued $750 million aggregate principal amount of 5.8% senior unsecured notes due 2025. On June 1 2020, we issued $800 million aggregate principal amount of 3.05% senior unsecured notes due 2023. On September 16, 2020, and December 1, 2020, we issued $750 million and $450 million, respectively, aggregate principal amounts of 1.45% senior unsecured notes due 2023. To more cost-effectively manage liquidity at Ally Bank, we elected to prepay and early terminate 25 FHLB advances with an aggregate principal balance of $4.3 billion during the year ended December 31, 2020. In doing so, we recognized losses on the early repayments of FHLB borrowings of $99 million. We continue to assess liability management opportunities utilizing our deposit funding at Ally Bank.
Public equity markets have experienced significant volatility as a result of the pandemic, which has impacted our investment securities portfolio. For the year ended December 31, 2020, we recognized net realized and unrealized gains on equity securities of $107 million and $29 million, respectively. Given the unpredictability of COVID-19 and its direct and indirect effects on market conditions, it is possible that unusual volatility in the equity markets could positively or negatively impact our results.
•Regulatory capital and stress testing — We continue to carefully monitor our capital and liquidity positions. On March 17, 2020, in order to support the FRB’s effort to mitigate the impact of the COVID-19 pandemic on the U.S. economy and the financial system, we announced the voluntary suspension of our stock-repurchase program through its termination on June 30, 2020. Consistent with the FRB’s restrictions on common-stock repurchases by large firms such as Ally, described below, we did not implement a new stock-repurchase program or repurchase shares of our common stock, except in connection with compensation plans, for the remainder of 2020.
We have elected to phase the estimated impact of CECL into regulatory capital in accordance with the interim final rule of the FRB and other U.S. banking agencies that became effective on March 31, 2020, and that was subsequently clarified and adjusted in a final rule effective September 30, 2020. As further described in Note 20 to the Consolidated Financial Statements, we will delay recognizing the estimated impact of CECL on regulatory capital until after a two-year deferral period, which for us extends through December 31, 2021. Beginning on January 1, 2022, we will be required to phase 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. As of December 31, 2020, the total deferred impact on Common Equity Tier 1 capital related to our adoption of CECL was $1.2 billion.
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We submitted our 2020 capital plan to the FRB in April 2020. In June 2020, the FRB provided us with the results of the supervisory stress test, additional industry-wide sensitivity analyses conducted in light of the COVID-19 pandemic, and our preliminary stress capital buffer requirement. At the same time, the FRB announced its determination that changes in financial markets or the macroeconomic outlook could have a material effect on the risk profiles and financial conditions of firms subject to the capital-plan rule and that, as a result, the firms (including Ally) would be required to resubmit capital plans to the FRB within 45 days after receiving updated stress scenarios from the FRB. Also at the same time, the FRB announced the suspension of nearly all common-stock repurchases and restrictions on common-stock dividends for large firms such as Ally during the third quarter of 2020. In September 2020, the FRB released its updated scenarios and extended the limitations on common-stock repurchases and common-stock dividends for the fourth quarter of 2020. We updated our capital plan in light of firm-specific baseline and stress scenarios, as required, and submitted our updated plan to the FRB on November 2, 2020. In December 2020, the FRB publicly disclosed summary results of its second round of supervisory stress testing and extended the deadline by which firms will be notified about whether their stress capital buffer requirements will be recalculated to March 31, 2021. At the same time, the FRB extended and modified its restrictions on common-stock repurchases and common-stock dividends for the first quarter of 2021, limiting such distributions to an amount equal to the average of the firm’s net income for the four preceding calendar quarters. In January 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. Refer to Note 20 to the Consolidated Financial Statements for further discussion about regulatory capital, capital planning, and stress testing.
At December 31, 2020, Ally and Ally Bank were “well-capitalized” and met all applicable regulatory capital requirements, with Common Equity Tier 1 capital ratios of 10.64% and 13.38%, respectively. We continue to anticipate that we will have sufficient capital levels to meet all of these requirements.
•Dealer Financial Services — Our lending and finance receivable balances have been impacted by the COVID-19 pandemic. Through the second quarter of 2020, as governments acted to temporarily close or restrict the operations of businesses, including automotive dealers, and as many consumers and businesses changed their behavior in response to governmental mandates and advisories to sharply restrain commercial and social interactions, we experienced significant reductions in our consumer automotive loan applications. In addition, we took actions at the beginning of the second quarter of 2020 to mitigate credit risk exposure on net originations by systematically reducing approval rates on high-risk application segments and increasing the scope of manual underwriter reviews, with a heightened emphasis on income and employment verifications. Furthermore, we observed downward pressure on the automotive sales and other operating results of our dealer customers, on their capacity to accept the return of leased vehicles, and on used-vehicle auction activity and values. Many automotive manufacturers and their suppliers also had taken measures to slow or shut down production in response to the pandemic, which negatively affected dealer inventory levels and sales and significantly reduced wholesale floorplan lending business to dealers. As consumers and businesses adapted to changed conditions and many governmental authorities relaxed their restrictions later in the second quarter, we began to observe a recovery in loan application volume and resulting booked originations. As the outlook for national unemployment improved from peak levels, we also methodically eased certain credit underwriting restrictions that were enacted at the start of the pandemic. Additionally, automotive manufacturers and suppliers restarted production, albeit at reduced levels, and in August 2020 we experienced our first month-over-month increase in wholesale floorplan balances since the pandemic was declared. This modest recovery in wholesale floorplan balances continued through December 31, 2020. Since declining $9.7 billion in the second quarter of 2020, our commercial automotive assets increased $146 million and $1.3 billion in the third and fourth quarters of 2020, respectively. In the second, third, and fourth quarters of 2020, we decisioned 3.1 million, 3.2 million, and 2.8 million of consumer automotive financing applications, respectively, compared to 3.3 million, 3.2 million, and 2.9 million in the same periods of 2019. These applications resulted in funded balances of approximately $7.2 billion, $9.8 billion, and $9.1 billion, in the second, third, and fourth quarters of 2020, respectively, as compared to $9.7 billion, $9.3 billion, and $8.1 billion in the same periods of 2019. Booked contracts from our used segment totaled over $19.3 billion in 2020. The carrying value of our consumer automotive used vehicle loans before allowance for loan losses was 58.3% of our total consumer automotive loans at December 31, 2020, as compared to 54.9% of our total consumer automotive loans at December 31, 2019. Refer to the section titled Automotive Financing Volume in this MD&A for a further discussion regarding the impacts of COVID-19 on our business.
In our Insurance operations, we similarly experienced significantly reduced F&I written premiums in late March and early in the second quarter, followed by a recovery through the end of 2020. Total F&I written premiums were $236 million, $269 million, and $242 million in the second, third, and fourth quarters of 2020, compared to $270 million, $274 million, and $250 million during the same periods in the prior year. Written insurance premiums from our property and casualty business declined during the year ended December 31, 2020, as a result of lower vehicle inventory levels due primarily to impacts of COVID-19.
•Other consumer and commercial products — Within our Corporate Finance business, we experienced higher draws on commercial customer lines of credit during the second half of March 2020, but this trend abated in April. Through the remainder of 2020, we experienced significant pay-downs on draws that had been taken at the outset of the pandemic. Our balance of unfunded commitments increased from $2.5 billion at the end of the first quarter of 2020 to $3.5 billion, $3.8 billion, and $4.2 billion at the end of the second, third, and fourth quarters, respectively.
In our Mortgage Finance business, refinance volume and prepayment activity increased through the end of 2020, driven by lower market interest rates.
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In Ally Invest, we observed a significant increase in the number of self-directed accounts to 406,000 through the fourth quarter of 2020, up 17% year-over-year. While we experienced a significant outflow of deposits to brokerage accounts after the pandemic had been declared, Ally Invest was able to capture approximately one-third of these outflows. Net customer assets reached $13.4 billion as of December 31, 2020, and we experienced higher than usual daily trade volume throughout the pandemic.
In our point-of-sale personal lending business, we originated $503 million of personal loans during the year ended December 31, 2020, as we continue to grow Ally Lending.
•General operations — The COVID-19 pandemic and related governmental mandates and advisories have necessitated changes in the way we operate our business. We activated our business continuity plan in late February 2020 and, since then, have migrated nearly all our workforce off-site or to work-from-home arrangements to mitigate health risks. We are also carefully monitoring the activities of our vendors and other third-party service providers to manage the risks associated with any potential service disruptions. The length of time we may be required to operate under these circumstances, as well as the potential for them to worsen or for significant disruptions to occur, remains uncertain. While we have not yet experienced material adverse disruptions to our internal operations or third-party services due to the COVID-19 pandemic, we continue to review evolving risks and developments.
•Employees and communities — To support our employees during the pandemic, we have provided a range of financial-assistance offerings and enhanced benefits, including a $1,200 payment for those earning less than $100,000. In May, we launched the Ally Employee Relief Fund with a $250,000 contribution. Including matching contributions by Ally, this fund has been augmented by over $160,000 in additional donations and has helped over 500 of our employees. In August, recognizing the continuing difficulties caused by the pandemic, we paid 50% of the 2020 incentive-compensation targets for most of our non-executive employees. These payments were not incremental but rather were an advance of expected year-end amounts.
Consistent with our culture and “Do it Right” philosophy, we have pledged financial support to our communities for emergency needs, such as food, health care, emergency housing, and childcare. For example, on September 24, 2020, we announced our commitment to invest $30 million in communities across our geographic footprint over the next three years. We also announced the creation of the Ally Charitable Foundation, which will deploy grants to support economic mobility in the communities we serve with a focus on affordable housing, financial literacy, workplace preparedness, and other initiatives. In December 2020, we contributed $34 million to the Ally Charitable Foundation.
We are committed to driving financial and social inclusion as part of our ‘Do it Right’ philosophy. This means engaging with stakeholders—including our customers, communities, employees, and suppliers— to improve economic mobility. In January 2020, Ally launched its Supplier Diversity program to focus on diversity and inclusion among its supplier base. The Supplier Diversity program includes a proactive business strategy encouraging the use of suppliers owned by U.S.-based minorities, women, LGBTQ, veterans, service-disabled veterans and those with disabilities, and small or disadvantaged businesses defined by local, state, or federal classifications. The program also encourages all Ally third-party suppliers to utilize diverse-owned suppliers and small businesses on a second-tier basis. During 2020, we initiated a second-tier reporting program to capture additional diverse spend associated with Ally’s prime suppliers that are utilizing minority, women, LGBTQ, veteran, disability-owned, and small or disadvantaged businesses to help support Ally. Additionally, in January 2021, Ally hosted its inaugural Supplier Diversity Symposium, engaging more than 40 diverse suppliers in a company-wide networking event with our CEO and other Ally business executives to build relationships and explore opportunities to expand our spend with diverse suppliers.
In 2020, we hosted our second annual Moguls in the Making competition, which was held virtually with 50 students working in teams to develop a business plan that took into account COVID-19 and social equity. These experiences help develop skills for future careers, including for the over 20 students who have been offered internships with Ally in 2020. In early 2021, we took additional steps to address inequality of access to careers with long-term growth potential with a $1.3 million commitment in scholarships and programs in partnership with the Congressional Black Caucus Foundation, TMCF, and other professional university groups.
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.
Prudent expansion of asset originations at Ally Bank and continued growth of a stable deposit base continue to be the cornerstone of our long-term liquidity strategy. Retail deposits provide a low-cost source of funds that are less sensitive to interest rate changes, market volatility, or changes in our credit ratings than other funding sources. At December 31, 2020, deposit liabilities totaled $137.0 billion, which reflects an increase of $16.3 billion as compared to December 31, 2019. Deposits as a percentage of total liability-based funding increased ten percentage points to 85% at December 31, 2020, as compared to December 31, 2019.
In addition to building a larger deposit base, we maintain a presence in the securitization markets to finance our automotive loan portfolios. Securitizations continue to be a reliable and cost-effective source of funding due to structural efficiencies and the established market. Additionally, for retail loans, the term structure of the transaction locks in funding for a specified pool of loans. Once a pool of consumer automotive loans is selected and placed into a securitization, the underlying assets and corresponding debt amortize simultaneously
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resulting in committed and matched funding for the life of the asset. We manage the execution risk arising from securitizations by maintaining a diverse domestic and foreign investor base and committed secured credit facilities.
As we continue to migrate assets to Ally Bank and grow our bank funding capabilities, our need for funding at the parent company has been reduced. At December 31, 2020, 94% of Ally’s total assets were within Ally Bank. This compares to approximately 93% as of December 31, 2019. Longer-term unsecured debt is the primary funding source utilized at the parent company. At December 31, 2020, we had $702 million and $1.1 billion of unsecured long-term debt principal maturing in 2021 and 2022, respectively. We plan to reduce our reliance on market-based funding by continuing to focus on stable, lower cost retail deposit funding.
The strategies outlined above have allowed us to build and maintain a conservative liquidity position. Total available liquidity at December 31, 2020, was $40.3 billion. Absolute levels of liquidity increased during 2020 primarily as a result of increased liquid cash and equivalents. Refer to the section below titled Liquidity Management, Funding, and Regulatory 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. 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 Ally’s 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 Automotive Finance operations, we target 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. The carrying value of our nonprime consumer automotive loans before allowance for loan losses, as of December 31, 2020, was approximately 11.7% of our total consumer automotive loans at December 31, 2020. During 2020, 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 toward our Growth channel including used vehicle financings.
The mortgage-finance team focuses on applicants with stronger credit profiles and with 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 financial wherewithal to support their representations and warranties and the experience to originate high-quality loans.
Additionally, on October 1, 2019, we acquired Health Credit Services which we renamed Ally Lending, a digital payment provider that offers point-of-sale financing to consumers. This expansion into digital point-of-sale lending further broadens our product portfolio to unsecured consumer financing. As of December 31, 2020, the amortized cost of our finance receivables related to Ally Lending was $407 million.
Within our commercial lending portfolios, Corporate Finance operations primarily provide senior secured leveraged cash flow and asset-based loans to mostly U.S.-based middle-market companies. Throughout 2020, we continued to prudently grow this portfolio with a disciplined and selective approach to credit quality, which has generally included the avoidance of covenant-light lending arrangements. This includes growth of our lender finance vertical launched in 2019, 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 that primarily relate to floorplan financing and term loans. These commercial products are an important aspect of our dealer relationships and offer a secured lending arrangement with strong collateral protections in the event of dealer default. The performance of our commercial credit portfolios continues to remain strong, as nonperforming finance receivables and loans decreased $54 million from December 31, 2019, to $161 million at December 31, 2020. During the years ended December 31, 2020, and 2019, our total net charge-offs within our commercial lending portfolio remained stable at $51 million and $49 million, respectively. Despite this level of net charge-offs, our total commercial net charge-off ratios represented 0.2% of average commercial receivables and loans for the year ended December 31, 2020. Refer to the Risk Management section of this MD&A for further details.
The U.S. economy has started to recover from shutdowns that resulted from the COVID-19 pandemic. After peaking at 14.7%, as adjusted, in April, the unemployment rate declined to 6.7% as of December 31, 2020. As a result of the economic disruption from COVID-19, sales of light motor vehicles fell to an annual pace of 8.7 million in April, a 49-year low, before rising to a 16.3 million annual pace as of December 31, 2020. Elevated unemployment may limit further increases in used vehicle values in 2021, despite the strengthening in values in
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the second half of 2020. Additionally, used vehicle values may also be impacted by changes in customer preferences, including alternative transportation methods such as public transportation, vehicle sharing, and ride hailing.
Discontinued Operations
During 2013 and 2012, certain disposal groups met the criteria to be presented as discontinued operations. The remaining activity relates to previous discontinued operations for which we continue to have wind-down, legal, and minimal operational costs. For all periods presented, the operating results for these operations have been removed from continuing operations. The MD&A has been adjusted to exclude discontinued operations unless otherwise noted.
Primary Business Lines
Dealer Financial Services, which includes our Automotive Finance and Insurance operations, Mortgage Finance, and Corporate Finance are our primary business lines. The following table summarizes the operating results excluding discontinued operations of each business line. Operating results for each of the business lines are more fully described in the MD&A sections that follow.
Year ended December 31, ($ in millions) | 2020 | 2019 | 2018 | Favorable/(unfavorable) 2020–2019 % change | Favorable/(unfavorable) 2019–2018 % change | |||||||||||||||||||||||||||||||||||||||||||||
| Total net revenue | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Dealer Financial Services | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Automotive Finance | $ | 4,488 | $ | 4,390 | $ | 4,038 | 2 | 9 | ||||||||||||||||||||||||||||||||||||||||||
| Insurance | 1,376 | 1,328 | 1,035 | 4 | 28 | |||||||||||||||||||||||||||||||||||||||||||||
| Mortgage Finance | 220 | 193 | 186 | 14 | 4 | |||||||||||||||||||||||||||||||||||||||||||||
| Corporate Finance | 344 | 284 | 242 | 21 | 17 | |||||||||||||||||||||||||||||||||||||||||||||
| Corporate and Other | 258 | 199 | 303 | 30 | (34) | |||||||||||||||||||||||||||||||||||||||||||||
| Total | $ | 6,686 | $ | 6,394 | $ | 5,804 | 5 | 10 | ||||||||||||||||||||||||||||||||||||||||||
| Income from continuing operations before income tax expense | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Dealer Financial Services | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Automotive Finance | $ | 1,285 | $ | 1,618 | $ | 1,368 | (21) | 18 | ||||||||||||||||||||||||||||||||||||||||||
| Insurance | 284 | 315 | 80 | (10) | n/m | |||||||||||||||||||||||||||||||||||||||||||||
| Mortgage Finance | 53 | 40 | 45 | 33 | (11) | |||||||||||||||||||||||||||||||||||||||||||||
| Corporate Finance | 88 | 153 | 144 | (42) | 6 | |||||||||||||||||||||||||||||||||||||||||||||
| Corporate and Other | (296) | (159) | (15) | (86) | n/m | |||||||||||||||||||||||||||||||||||||||||||||
| Total | $ | 1,414 | $ | 1,967 | $ | 1,622 | (28) | 21 | ||||||||||||||||||||||||||||||||||||||||||
n/m = not meaningful
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Consolidated Results of Operations
The following table summarizes our consolidated operating results excluding discontinued operations for the periods shown. Refer to the operating segment sections of the MD&A that follows for a more complete discussion of operating results by business line. For a discussion of our fiscal 2019 results compared to fiscal 2018, refer to Part II, Item 7. Management Discussion and Analysis of Financial Condition and Results of Operations in our 2019 Annual Report on Form 10-K.
Year ended December 31, ($ in millions) | 2020 | 2019 | 2018 | Favorable/(unfavorable) 2020–2019 % change | Favorable/(unfavorable) 2019–2018 % change | |||||||||||||||||||||||||||||||||||||||||||||
| Net financing revenue and other interest income | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Total financing revenue and other interest income | $ | 8,797 | $ | 9,857 | $ | 9,052 | (11) | 9 | ||||||||||||||||||||||||||||||||||||||||||
| Total interest expense | 3,243 | 4,243 | 3,637 | 24 | (17) | |||||||||||||||||||||||||||||||||||||||||||||
| Net depreciation expense on operating lease assets | 851 | 981 | 1,025 | 13 | 4 | |||||||||||||||||||||||||||||||||||||||||||||
| Net financing revenue and other interest income | 4,703 | 4,633 | 4,390 | 2 | 6 | |||||||||||||||||||||||||||||||||||||||||||||
| Other revenue | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Insurance premiums and service revenue earned | 1,103 | 1,087 | 1,022 | 1 | 6 | |||||||||||||||||||||||||||||||||||||||||||||
| Gain on mortgage and automotive loans, net | 110 | 28 | 25 | n/m | 12 | |||||||||||||||||||||||||||||||||||||||||||||
| Loss on extinguishment of debt | (102) | (2) | (1) | n/m | 100 | |||||||||||||||||||||||||||||||||||||||||||||
| Other gain on investments, net | 307 | 243 | (50) | 26 | n/m | |||||||||||||||||||||||||||||||||||||||||||||
| Other income, net of losses | 565 | 405 | 418 | 40 | (3) | |||||||||||||||||||||||||||||||||||||||||||||
| Total other revenue | 1,983 | 1,761 | 1,414 | 13 | 25 | |||||||||||||||||||||||||||||||||||||||||||||
| Total net revenue | 6,686 | 6,394 | 5,804 | 5 | 10 | |||||||||||||||||||||||||||||||||||||||||||||
| Provision for credit losses | 1,439 | 998 | 918 | (44) | (9) | |||||||||||||||||||||||||||||||||||||||||||||
| Noninterest expense | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Compensation and benefits expense | 1,376 | 1,222 | 1,155 | (13) | (6) | |||||||||||||||||||||||||||||||||||||||||||||
| Insurance losses and loss adjustment expenses | 363 | 321 | 295 | (13) | (9) | |||||||||||||||||||||||||||||||||||||||||||||
| Goodwill impairment | 50 | — | — | n/m | — | |||||||||||||||||||||||||||||||||||||||||||||
| Other operating expenses | 2,044 | 1,886 | 1,814 | (8) | (4) | |||||||||||||||||||||||||||||||||||||||||||||
| Total noninterest expense | 3,833 | 3,429 | 3,264 | (12) | (5) | |||||||||||||||||||||||||||||||||||||||||||||
| Income from continuing operations before income tax expense | 1,414 | 1,967 | 1,622 | (28) | 21 | |||||||||||||||||||||||||||||||||||||||||||||
| Income tax expense from continuing operations | 328 | 246 | 359 | (33) | 31 | |||||||||||||||||||||||||||||||||||||||||||||
| Net income from continuing operations | $ | 1,086 | $ | 1,721 | $ | 1,263 | (37) | 36 | ||||||||||||||||||||||||||||||||||||||||||
n/m = not meaningful
2020 Compared to 2019
We earned net income from continuing operations of $1.1 billion for the year ended December 31, 2020, compared to $1.7 billion for the year ended December 31, 2019. During the year ended December 31, 2020, results were unfavorably impacted by lower total financing revenue and other interest income driven by decreases in our commercial automotive revenue due to lower outstanding floorplan assets and lower benchmark interest rates, lower income from cash balances and investment securities, and higher prepayment activity within our Mortgage Finance operations. Results were also unfavorably impacted by higher provision for credit losses, driven by economic disruption as a result of the COVID-19 pandemic, as well as higher noninterest expense.
Net financing revenue and other interest income increased $70 million for the year ended December 31, 2020, as compared to the year ended December 31, 2019. The increase in net financing revenue and other interest income during the year ended December 31, 2020, as compared to the same period in 2019, was driven by lower market interest rates, which drove a decrease in our deposit rates, and our continued shift to more cost-efficient deposit funding. Our total deposit liabilities increased $16.3 billion to $137.0 billion as of December 31, 2020, as compared to December 31, 2019. This was partially offset by a decrease of $728 million in our commercial automotive financing revenue, primarily due to lower outstanding floorplan assets as a result of vehicle inventory declines that have resulted from lower automotive production levels due to COVID-19 and as a result of lower benchmark interest rates.
The loss on extinguishment of debt increased $100 million for the year ended December 31, 2020, as compared to the year ended December 31, 2019. During the year ended December 31, 2020, we recognized losses on the early repayments of FHLB borrowings of $99 million, as we elected to prepay and early terminate 25 FHLB advances with an aggregate principal balance of $4.3 billion during the year ended December 31, 2020, to more cost-effectively manage liquidity at Ally Bank.
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Other gain on investments was $307 million for the year ended December 31, 2020, compared to $243 million for the year ended December 31, 2019. The increase in gain on investments for the year ended December 31, 2020, was primarily driven by favorable equity markets conditions during the year.
Other income, net of losses increased $160 million for the year ended December 31, 2020, as compared to the year ended December 31, 2019. The increase for the year ended December 31, 2020, was primarily due to $105 million of upward adjustments related to equity securities without a readily determinable fair value, driven primarily by an investment in one entity for which there was a subsequent funding round at a higher valuation during the year, resulting in an observable price change. Refer to Note 13 to the Consolidated Financial Statements for further information.
The provision for credit losses was $1.4 billion for the year ended December 31, 2020, compared to $998 million for the year ended December 31, 2019. The increase in provision for credit losses for the year ended December 31, 2020, was primarily driven by reserve increases associated with the broad macroeconomic impact resulting from the COVID-19 pandemic. Additionally, the provision for credit losses for the year ended December 31, 2020, increased as a result of higher provisions for specific loan exposures within our Corporate Finance operations. Refer to the Risk Management section of this MD&A for further discussion on our provision for credit losses. During the year ended December 31, 2020, the provision for credit losses was also impacted by the adoption of CECL, as further described in Note 1 to the Consolidated Financial Statements.
Noninterest expense increased $404 million for the year ended December 31, 2020, as compared to the year ended December 31, 2019. The increase for the year ended December 31, 2020, was driven by increased expenses to support the growth of our consumer product suite, as we continue to make investments in our technology platform to enhance the customer experience and expand our digital capabilities and portfolio of products. The increase for the year ended December 31, 2020, was also driven by an impairment charge of $50 million related to the goodwill at Ally Invest. The recognition of this impairment was the result of certain business developments that impacted the expected growth and timing of revenue at Ally Invest. Refer to Note 13 to the Consolidated Financial Statements for further information.
We recognized total income tax expense from continuing operations of $328 million for the year ended December 31, 2020, compared to $246 million for the same period in 2019. The increase in income tax expense for the year ended December 31, 2020, compared to the same period in 2019, was primarily due to a release of valuation allowance on foreign tax credit carryforwards during the second quarter of 2019, offset by the tax effects of a decrease in 2020 pretax earnings. The valuation allowance release was primarily driven by our capacity to engage in certain foreign securitization transactions and the market demand from investors related to these transactions, coupled with the anticipated timing of the forecasted expiration of certain foreign tax credit carryforwards. The valuation allowance release resulted in a significant variation in the customary relationship between pretax income and income tax expense for the year ended December 31, 2019.
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Dealer Financial Services
Results for Dealer Financial Services are presented by reportable segment, which includes our Automotive Finance and Insurance operations.
Automotive Finance
Results of Operations
The following table summarizes the operating results of our Automotive Finance operations. The amounts presented are before the elimination of balances and transactions with our other reportable segments.
Year ended December 31, ($ in millions) | 2020 | 2019 | 2018 | Favorable/(unfavorable) 2020–2019 % change | Favorable/(unfavorable) 2019–2018 % change | |||||||||||||||||||||||||||||||||||||||||||||
| Net financing revenue and other interest income | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Consumer | $ | 4,931 | $ | 4,775 | $ | 4,287 | 3 | 11 | ||||||||||||||||||||||||||||||||||||||||||
| Commercial | 833 | 1,561 | 1,516 | (47) | 3 | |||||||||||||||||||||||||||||||||||||||||||||
| Loans held-for-sale | — | — | 3 | — | (100) | |||||||||||||||||||||||||||||||||||||||||||||
| Operating leases | 1,435 | 1,470 | 1,489 | (2) | (1) | |||||||||||||||||||||||||||||||||||||||||||||
| Other interest income | 5 | 8 | 7 | (38) | 14 | |||||||||||||||||||||||||||||||||||||||||||||
| Total financing revenue and other interest income | 7,204 | 7,814 | 7,302 | (8) | 7 | |||||||||||||||||||||||||||||||||||||||||||||
| Interest expense | 2,069 | 2,692 | 2,508 | 23 | (7) | |||||||||||||||||||||||||||||||||||||||||||||
| Net depreciation expense on operating lease assets (a) | 851 | 981 | 1,025 | 13 | 4 | |||||||||||||||||||||||||||||||||||||||||||||
| Net financing revenue and other interest income | 4,284 | 4,141 | 3,769 | 3 | 10 | |||||||||||||||||||||||||||||||||||||||||||||
| Other revenue | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Gain on automotive loans, net | — | 8 | 22 | (100) | (64) | |||||||||||||||||||||||||||||||||||||||||||||
| Other income | 204 | 241 | 247 | (15) | (2) | |||||||||||||||||||||||||||||||||||||||||||||
| Total other revenue | 204 | 249 | 269 | (18) | (7) | |||||||||||||||||||||||||||||||||||||||||||||
| Total net revenue | 4,488 | 4,390 | 4,038 | 2 | 9 | |||||||||||||||||||||||||||||||||||||||||||||
| Provision for credit losses | 1,236 | 962 | 920 | (28) | (5) | |||||||||||||||||||||||||||||||||||||||||||||
| Noninterest expense | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Compensation and benefits expense | 549 | 524 | 505 | (5) | (4) | |||||||||||||||||||||||||||||||||||||||||||||
| Other operating expenses | 1,418 | 1,286 | 1,245 | (10) | (3) | |||||||||||||||||||||||||||||||||||||||||||||
| Total noninterest expense | 1,967 | 1,810 | 1,750 | (9) | (3) | |||||||||||||||||||||||||||||||||||||||||||||
| Income from continuing operations before income tax expense | $ | 1,285 | $ | 1,618 | $ | 1,368 | (21) | 18 | ||||||||||||||||||||||||||||||||||||||||||
| Total assets | $ | 104,794 | $ | 113,863 | $ | 117,304 | (8) | (3) | ||||||||||||||||||||||||||||||||||||||||||
Year ended December 31, ($ in millions) | 2019 | 2018 | 2017 | Favorable/(unfavorable) 2019–2018 % change | Favorable/(unfavorable) 2018–2017 % change | ||||||||||
| Net financing revenue and other interest income | |||||||||||||||
| Consumer | $ | 4,775 | $ | 4,287 | $ | 3,882 | 11 | 10 | |||||||
| Commercial | 1,561 | 1,516 | 1,306 | 3 | 16 | ||||||||||
| Loans held-for-sale | — | 3 | — | (100) | n/m | ||||||||||
| Operating leases | 1,470 | 1,489 | 1,867 | (1) | (20) | ||||||||||
| Other interest income | 8 | 7 | 6 | 14 | 17 | ||||||||||
| Total financing revenue and other interest income | 7,814 | 7,302 | 7,061 | 7 | 3 | ||||||||||
| Interest expense | 2,692 | 2,508 | 2,104 | (7) | (19) | ||||||||||
| Net depreciation expense on operating lease assets | 981 | 1,025 | 1,244 | 4 | 18 | ||||||||||
| Net financing revenue and other interest income | 4,141 | 3,769 | 3,713 | 10 | 2 | ||||||||||
| Other revenue | |||||||||||||||
| Gain on automotive loans, net | 8 | 22 | 76 | (64) | (71) | ||||||||||
| Other income | 241 | 247 | 279 | (2) | (11) | ||||||||||
| Total other revenue | 249 | 269 | 355 | (7) | (24) | ||||||||||
| Total net revenue | 4,390 | 4,038 | 4,068 | 9 | (1) | ||||||||||
| Provision for loan losses | 962 | 920 | 1,134 | (5) | 19 | ||||||||||
| Noninterest expense | |||||||||||||||
| Compensation and benefits expense | 524 | 505 | 510 | (4) | 1 | ||||||||||
| Other operating expenses | 1,286 | 1,245 | 1,204 | (3) | (3) | ||||||||||
| Total noninterest expense | 1,810 | 1,750 | 1,714 | (3) | (2) | ||||||||||
| Income from continuing operations before income tax expense | $ | 1,618 | $ | 1,368 | $ | 1,220 | 18 | 12 | |||||||
| Total assets | $ | 113,863 | $ | 117,304 | $ | 114,089 | (3) | 3 | |||||||
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Year ended December 31, ($ in millions) | 2019 | 2018 | 2017 | Favorable/(unfavorable) 2019–2018 % change | Favorable/(unfavorable) 2018–2017 % change | ||||||||||
| Net operating lease revenue | |||||||||||||||
| Operating lease revenue | $ | 1,470 | $ | 1,489 | $ | 1,867 | (1) | (20) | |||||||
| Depreciation expense | |||||||||||||||
| Depreciation expense on operating lease assets (excluding remarketing gains) | 1,050 | 1,115 | 1,368 | 6 | 18 | ||||||||||
| Remarketing gains, net | (69 | ) | (90 | ) | (124 | ) | (23) | (27) | |||||||
| Net depreciation expense on operating lease assets | 981 | 1,025 | 1,244 | 4 | 18 | ||||||||||
| Total net operating lease revenue | $ | 489 | $ | 464 | $ | 623 | 5 | (26) | |||||||
| Investment in operating leases, net | $ | 8,864 | $ | 8,417 | $ | 8,741 | 5 | (4) | |||||||
The following table presents the average balance and yield of the loan and operating lease portfolios of our Automotive Financing operations.
| 2020 | 2019 | 2018 | |||||||||||||||||||||||||||||||||||||||||||||
Year ended December 31, ($ in millions) | Average balance (a) | Yield | Average balance (a) | Yield | Average balance (a) | Yield | |||||||||||||||||||||||||||||||||||||||||
| Finance receivables and loans, net (b) | |||||||||||||||||||||||||||||||||||||||||||||||
| Consumer automotive (c) | $ | 72,805 | 6.54 | % | $ | 72,268 | 6.60 | % | $ | 69,804 | 6.14 | % | |||||||||||||||||||||||||||||||||||
| Commercial | |||||||||||||||||||||||||||||||||||||||||||||||
| Wholesale floorplan (d) | 19,308 | 3.45 | 28,200 | 4.60 | 29,455 | 4.21 | |||||||||||||||||||||||||||||||||||||||||
| Other commercial automotive (e) | 5,740 | 4.21 | 5,663 | 4.65 | 6,038 | 4.55 | |||||||||||||||||||||||||||||||||||||||||
| Investment in operating leases, net (f) | 9,264 | 6.30 | 8,509 | 5.74 | 8,590 | 5.40 | |||||||||||||||||||||||||||||||||||||||||
| 2019 | 2018 | 2017 | |||||||||||||||
Year ended December 31, ($ in millions) | Average balance (a) | Yield | Average balance (a) | Yield | Average balance (a) | Yield | |||||||||||
| Finance receivables and loans, net (b) | |||||||||||||||||
| Consumer automotive (c) | $ | 72,268 | 6.60 | % | $ | 69,804 | 6.14 | % | $ | 66,502 | 5.80 | % | |||||
| Commercial | |||||||||||||||||
| Wholesale floorplan | 28,200 | 4.60 | 29,455 | 4.21 | 31,586 | 3.37 | |||||||||||
| Other commercial automotive (d) | 5,663 | 4.65 | 6,038 | 4.55 | 5,802 | 4.15 | |||||||||||
| Investment in operating leases, net (e) | 8,509 | 5.74 | 8,590 | 5.40 | 9,791 | 6.36 | |||||||||||
(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 6.77%, 6.61%, and 6.14% for the years ended December 31, 2020, 2019, and 2018, 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 3.07%, 4.60%, and 4.21% for the years ended December 31, 2020, 2019, and 2018, respectively.
(e)Consists primarily of automotive dealer term loans, including those to finance dealership land and buildings, and dealer fleet financing.
(f)Yield includes gains on the sale of off-lease vehicles of $127 million, $69 million, and $90 million for the years ended December 31, 2020, 2019, and 2018, respectively. Excluding these gains on sale, the yield was 4.93% for both the years ended December 31, 2020, and 2019, and 4.35% for the year ended December 31, 2018.
2020 Compared to 20182019
Our Automotive Finance operations earned income from continuing operations before income tax expense of $1.3 billion for the year ended December 31, 2020, compared to $1.6 billion for the year ended December 31, 2019, compared to $1.4 billion for2019. For the year ended December 31, 2018. During2020, the decrease was due primarily to higher provision for credit losses and noninterest expense, partially offset by higher net financing revenue. For the year ended December 31, 2019, we continued to focus on driving capital optimization and expanding risk-adjusted returns. As a result, we experienced2020, the higher consumer loan financing revenue,provision for credit losses was primarily due to an increase in consumer loan portfolio yields and asset levels. We also experienced higher commercial financing revenue due to higher yields resulting from higher average benchmark interest rates. Growth in finance revenue for the year ended December 31, 2019, was partially offset by higher interest expense driven by higher funding costs and growth in our consumer loan portfolio as well as an increase in provision for loan losses.reserve increases associated with macroeconomic deterioration from the COVID-19 pandemic.
Consumer automotive loan financing revenue increased $488$156 million for the year ended December 31, 2019,2020, compared to 2018. The2019. For the year ended December 31, 2020, higher average consumer assets and higher portfolio yields, excluding the unfavorable impact of hedges, contributed to the increase was primarily due to improved portfolio yieldsin revenue as a result of our continued focus on expanding risk-adjusted returns, and higher average consumer asset levels resulting from sustained asset growth, including a continued focus on the used-vehicle portfolio primarily through franchised dealers and growth in application volume from our dealer network. Through these actions, we continue to optimize our origination mix and achieve greater portfolio diversification.
Commercial loan financing revenue increased $45decreased $728 million for the year ended December 31, 2019,2020, compared to 2018.2019. The increasedecrease was primarily due to higherlower outstanding floorplan assets as a result of vehicle inventory declines that have resulted from lower automotive production levels due to COVID-19. The decrease was also due to lower yields resulting from higherlower average benchmark interest rates. The increase was partially offset by a decrease in average outstanding floorplan assets compared to 2018.
Interest expense was $2.1 billion for the year ended December 31, 2020, compared to $2.7 billion for the year ended December 31, 2019, compared to $2.5 billion for the year in 2018.2019. The increasedecrease was primarily due to higherlower market interest rates, which drove a decrease in our deposit rates, and our continued shift to more cost-efficient deposit funding. The decrease was also due to lower funding costs and growth in our consumer automotive loan portfolio.due to lower asset levels.
Total net operating lease revenue increased $25$95 million for the year ended December 31, 2019,2020, compared to 2018. The2019. We recognized remarketing gains of $127 million for the year ended December 31, 2020, compared to $69 million in 2019. For the year ended December 31, 2020, the increase was primarily due todriven by favorable performance and mix in our outstanding lease portfolio. Additionally, we recognized lower remarketing gainsportfolio, new vehicle supply constraints and an increase in demand for used vehicles during the second half of $69the year, and asset growth. Refer to the Operating Lease Residual Risk Management section of this MD&A for further discussion.
The provision for credit losses was $1.2 billion for the year ended December 31, 2020, compared to $962 million for the year ended December 31, 2019, compared to $90 million2019. For the year ended December 31, 2020, the increases in 2018. The decrease wasprovision expense in our consumer and commercial automotive portfolios were primarily due to adriven by the reserve increases associated with macroeconomic deterioration from the COVID-19 pandemic, which were partially offset by lower numbernet charge-offs in the consumer automotive portfolio and by reserve decreases in the commercial automotive portfolio driven by $9.3 billion of terminated units and lower gain per unit. The lower number of terminated units wasassets primarily due to the runoff ofwithin our legacy GM operating lease portfolio, which was substantially wound-down as of June 30, 2018.floorplan balances. Refer to the Operating Lease Residual Risk Management section of this MD&A for further discussion.
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Other operating expenses were $1.4 billion for the year ended December 31, 2019, respectively,2020, compared to $920 million$1.3 billion in 2018.2019. For the year ended December 31, 2019,2020, the increase in provision for loan losses was primarily driven by reserve reductionshigher operating expense is due to higher legal reserves and costs associated with the implementation of our new technology platform during the year ended December 31, 2018, associated with hurricane activity experienced during 2017 infirst quarter of 2020 for our consumer automotive loan portfolio. We continue to experience strong overall credit performance driven by favorable macroeconomic conditions including low unemployment, as well as continued disciplined underwriting,loans and higher recoveries. Refer to the Risk Management section of this MD&A for further discussion.operating leases.
Automotive Financing Volume
Our Automotive Finance operations provide automotive financing services to consumers and automotive dealers. 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. WeContinued advancements in our data-driven risk assessment process have developed anallowed us to methodically increase our use of automated process to expeditecredit decisioning in recent years. This increase in automated decisioning has enhanced the review of applications with various combinations ofbuying experience for our dealer and consumer customers through improved response times, and more consistent credit factors that we have observed over time to substantially outperform or underperform in terms of net credit losses. As a result, automated decisions are based on many clusters of credit factors rather than a small set of benchmark characteristics. Automated approvals are primarily limited to the higher-quality credit tiers and automated rejections to lower-quality credit tiers.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.
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.
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
56
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. 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 1.34%1.09% and 1.48%1.34% of the portfolio at December 31, 2019,2020, and 2018,2019, 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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Management’s Discussion and Analysis
Ally Financial Inc. • Form 10-K
The following table presents retail loan originations by credit tier and product type.
| Used retail | New retail | |||||||||||||||||||||||||||||||||||||
| Credit Tier (a) | Volume ($ in billions) | % Share of volume | Average FICO® | Volume ($ in billions) | % Share of volume | Average FICO® | ||||||||||||||||||||||||||||||||
| 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 | ||||||||||||||||||||||||||||||
| Year ended December 31, 2019 | ||||||||||||||||||||||||||||||||||||||
| S | $ | 4.9 | 26 | 739 | $ | 6.0 | 46 | 744 | ||||||||||||||||||||||||||||||
| A | 8.0 | 42 | 678 | 4.9 | 38 | 676 | ||||||||||||||||||||||||||||||||
| B | 4.6 | 24 | 645 | 1.6 | 13 | 643 | ||||||||||||||||||||||||||||||||
| C | 1.4 | 7 | 613 | 0.4 | 3 | 613 | ||||||||||||||||||||||||||||||||
| D | 0.1 | 1 | 568 | — | — | 569 | ||||||||||||||||||||||||||||||||
| Total retail originations | $ | 19.0 | 100 | 681 | $ | 12.9 | 100 | 700 | ||||||||||||||||||||||||||||||
| Year ended December 31, 2018 | ||||||||||||||||||||||||||||||||||||||
| S | $ | 5.0 | 27 | 739 | $ | 6.2 | 47 | 746 | ||||||||||||||||||||||||||||||
| A | 7.8 | 43 | 675 | 4.8 | 37 | 676 | ||||||||||||||||||||||||||||||||
| B | 4.3 | 24 | 644 | 1.8 | 14 | 645 | ||||||||||||||||||||||||||||||||
| C | 1.1 | 6 | 611 | 0.3 | 2 | 613 | ||||||||||||||||||||||||||||||||
| Total retail originations | $ | 18.2 | 100 | 682 | $ | 13.1 | 100 | 701 | ||||||||||||||||||||||||||||||
| Used retail | New retail | ||||||||||||||||||
| Credit Tier (a) | Volume ($ in billions) | % Share of volume | Average FICO® | Volume ($ in billions) | % Share of volume | Average FICO® | |||||||||||||
| Year ended December 31, 2019 | |||||||||||||||||||
| S | $ | 4.9 | 26 | 739 | $ | 6.0 | 46 | 744 | |||||||||||
| A | 8.0 | 42 | 678 | 4.9 | 38 | 676 | |||||||||||||
| B | 4.6 | 24 | 645 | 1.6 | 13 | 643 | |||||||||||||
| C | 1.4 | 7 | 613 | 0.4 | 3 | 613 | |||||||||||||
| D | 0.1 | 1 | 568 | — | — | 569 | |||||||||||||
| Total retail originations | $ | 19.0 | 100 | 681 | $ | 12.9 | 100 | 700 | |||||||||||
| Year ended December 31, 2018 | |||||||||||||||||||
| S | $ | 5.0 | 27 | 739 | $ | 6.2 | 47 | 746 | |||||||||||
| A | 7.8 | 43 | 675 | 4.8 | 37 | 676 | |||||||||||||
| B | 4.3 | 24 | 644 | 1.8 | 14 | 645 | |||||||||||||
| C | 1.1 | 6 | 611 | 0.3 | 2 | 613 | |||||||||||||
| Total retail originations | $ | 18.2 | 100 | 682 | $ | 13.1 | 100 | 701 | |||||||||||
| Year ended December 31, 2017 | |||||||||||||||||||
| S | $ | 4.1 | 26 | 749 | $ | 6.8 | 46 | 757 | |||||||||||
| A | 7.0 | 45 | 666 | 5.4 | 37 | 670 | |||||||||||||
| B | 3.8 | 24 | 640 | 2.1 | 14 | 641 | |||||||||||||
| C | 0.8 | 5 | 606 | 0.4 | 3 | 610 | |||||||||||||
| Total retail originations | $ | 15.7 | 100 | 679 | $ | 14.7 | 100 | 702 | |||||||||||
| (a)Represents Ally’s internal credit score, incorporating numerous borrower and structure attributes including: severity and aging |
The following table presents the percentage of total retail loan originations, in dollars, by the loan term in months.
| Year ended December 31, | 2020 | 2019 | 2018 | |||||||||||||||||||||||||||||
| 0–71 | 19 | % | 20 | % | 20 | % | ||||||||||||||||||||||||||
| 72–75 | 64 | 65 | 67 | |||||||||||||||||||||||||||||
| 76 + | 17 | 15 | 13 | |||||||||||||||||||||||||||||
| Total retail originations (a) | 100 | % | 100 | % | 100 | % | ||||||||||||||||||||||||||
| Year ended December 31, | 2019 | 2018 | 2017 | |||||
| 0–71 | 20 | % | 20 | % | 20 | % | ||
| 72–75 | 65 | 67 | 66 | |||||
| 76 + | 15 | 13 | 14 | |||||
| Total retail originations (a) | 100 | % | 100 | % | 100 | % | ||
Retail originations with a term of 76 months or more represented 15%17% of total retail originations for the year ended December 31, 2019, respectively,2020, compared to 15% for the year ended December 31, 2019, and 13% for the year ended December 31, 2018, and 14% for the year ended December 31, 2017.2018. Substantially all of the loans originated with a term of 76 months or more during the years ended December 31, 2020, 2019, 2018, and 2017,2018, were considered to be prime and in credit tiers S, A, or B. We define prime consumer automotive loans primarily as those loans with a FICO® Score (or an equivalent score) at origination of 620 or greater.
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The following table presents the percentage of total outstanding retail loans by origination year.
| December 31, | 2019 | 2018 | 2017 | December 31, | 2020 | 2019 | 2018 | ||||||||||||||||||||||
| Pre-2015 | 2 | % | 5 | % | 11 | % | |||||||||||||||||||||||
| 2015 | 5 | 11 | 19 | ||||||||||||||||||||||||||
| Pre-2016 | Pre-2016 | 3 | % | 7 | % | 16 | % | ||||||||||||||||||||||
| 2016 | 10 | 18 | 30 | 2016 | 5 | 10 | 18 | ||||||||||||||||||||||
| 2017 | 17 | 27 | 40 | 2017 | 10 | 17 | 27 | ||||||||||||||||||||||
| 2018 | 27 | 39 | — | 2018 | 18 | 27 | 39 | ||||||||||||||||||||||
| 2019 | 39 | — | — | 2019 | 27 | 39 | — | ||||||||||||||||||||||
| 2020 | 2020 | 37 | — | — | |||||||||||||||||||||||||
| Total | 100 | % | 100 | % | 100 | % | Total | 100 | % | 100 | % | 100 | % | ||||||||||||||||
The 2020, 2019, 2018, and 20172018 vintages compose 83%82% of the overall retail portfolio as of December 31, 2019,2020, and have higher average buy rates than older vintages.
The following tables present the total retail loan and operating lease origination dollars and percentage mix by product type and by channel.
| Consumer automotive financing originations | % Share of Ally originations | |||||||||||||||||||||||||||||||||||||
Year ended December 31, ($ in millions) | 2020 | 2019 | 2018 | 2020 | 2019 | 2018 | ||||||||||||||||||||||||||||||||
| Used retail | $ | 19,312 | $ | 18,968 | $ | 18,239 | 55 | 52 | 52 | |||||||||||||||||||||||||||||
| New retail standard | 11,075 | 12,717 | 12,752 | 32 | 35 | 36 | ||||||||||||||||||||||||||||||||
| Lease | 4,618 | 4,371 | 4,058 | 13 | 12 | 11 | ||||||||||||||||||||||||||||||||
| New retail subvented | 110 | 221 | 330 | — | 1 | 1 | ||||||||||||||||||||||||||||||||
| Total consumer automotive financing originations (a) | $ | 35,115 | $ | 36,277 | $ | 35,379 | 100 | 100 | 100 | |||||||||||||||||||||||||||||
| Consumer automotive financing originations | % Share of Ally originations | |||||||||||||||||
Year ended December 31, ($ in millions) | 2019 | 2018 | 2017 | 2019 | 2018 | 2017 | ||||||||||||
| Used retail | $ | 18,968 | $ | 18,239 | $ | 15,698 | 52 | 52 | 45 | |||||||||
| New retail standard | 12,717 | 12,752 | 14,587 | 35 | 36 | 42 | ||||||||||||
| Lease | 4,371 | 4,058 | 4,237 | 12 | 11 | 12 | ||||||||||||
| New retail subvented | 221 | 330 | 163 | 1 | 1 | 1 | ||||||||||||
| Total consumer automotive financing originations (a) | $ | 36,277 | $ | 35,379 | $ | 34,685 | 100 | 100 | 100 | |||||||||
| (a)Includes CSG originations of $3.8 billion, $4.0 billion, and $3.7 billion for the years ended December 31, 2020, 2019, and |
| Consumer automotive financing originations | % Share of Ally originations | |||||||||||||||||
Year ended December 31, ($ in millions) | 2019 | 2018 | 2017 | 2019 | 2018 | 2017 | ||||||||||||
| Growth channel | $ | 17,195 | $ | 16,190 | $ | 13,767 | 47 | 46 | 40 | |||||||||
| Chrysler dealers | 9,692 | 9,511 | 9,953 | 27 | 27 | 28 | ||||||||||||
| GM dealers | 9,390 | 9,678 | 10,965 | 26 | 27 | 32 | ||||||||||||
| Total consumer automotive financing originations | $ | 36,277 | $ | 35,379 | $ | 34,685 | 100 | 100 | 100 | |||||||||
| Consumer automotive financing originations | % Share of Ally originations | |||||||||||||||||||||||||||||||||||||
Year ended December 31, ($ in millions) | 2020 | 2019 | 2018 | 2020 | 2019 | 2018 | ||||||||||||||||||||||||||||||||
| Growth channel | $ | 17,460 | $ | 17,195 | $ | 16,190 | 50 | 47 | 46 | |||||||||||||||||||||||||||||
| Chrysler dealers | 9,745 | 9,692 | 9,511 | 28 | 27 | 27 | ||||||||||||||||||||||||||||||||
| GM dealers | 7,910 | 9,390 | 9,678 | 22 | 26 | 27 | ||||||||||||||||||||||||||||||||
| Total consumer automotive financing originations | $ | 35,115 | $ | 36,277 | $ | 35,379 | 100 | 100 | 100 | |||||||||||||||||||||||||||||
Total consumer automotive loan and operating lease originations increased $898 million,decreased $1.2 billion for the year ended December 31, 2020, compared to 2018.2019. The increasedecrease for the year ended December 31, 2020, compared to prior year, was primarily due to increased originations from the Growth channel, which was partially offsetimpacts of the COVID-19 pandemic, including the temporary shutdown or restriction of front end operations of automotive dealers during the second quarter of 2020. These restrictions, along with the industry-wide halt of new vehicle production, drove a significant decrease in industry automotive light vehicle sales.
Our lending and finance receivable balances have been impacted by lower originations from the GM channel. OverCOVID-19 pandemic. Through the past several yearssecond quarter of 2020, as governments acted to temporarily close or restrict the operations of businesses, including automotive dealers, and as many consumers and businesses changed their behavior in response to governmental mandates and advisories to sharply restrain commercial and social interactions, we have continuedexperienced significant reductions in our consumer automotive loan applications. As consumers and businesses adapted to diversify our portfolio throughchanged conditions and many governmental authorities relaxed their restrictions later in the Growth channel, including increased levelssecond quarter, we began to observe a recovery in loan application volume and resulting booked originations. In the second, third, and fourth quarters of used vehicle loan volume, which2020, we viewdecisioned 3.1 million, 3.2 million, and 2.8 million of consumer automotive financing applications, respectively, compared to 3.3 million, 3.2 million, and 2.9 million in the same periods of 2019. These applications resulted in funded balances of approximately $7.2 billion, $9.8 billion, and $9.1 billion, in the second, third, and fourth quarters of 2020, respectively, as an attractive asset class consistent with our continued focus on obtaining appropriate risk-adjusted returns.
We have included origination metrics by loan term and FICO® Score within this MD&A. However, thewe employ our own risk evaluation, including proprietary way we evaluate risk is based on multiple inputsmodels, in evaluating credit risk, as described in the section above titled Acquisition and Underwriting.
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The following table presents the percentage of retail loan and operating lease originations, in dollars, by FICO® Score and product type.
| Used retail | New retail | Lease | ||||||||||||||||||
| Year ended December 31, 2020 | ||||||||||||||||||||
| 740 + | 19 | % | 21 | % | 46 | % | ||||||||||||||
| 660–739 | 40 | 38 | 37 | |||||||||||||||||
| 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 | % | ||||||||||||||
| Year ended December 31, 2019 | ||||||||||||||||||||
| 740 + | 18 | % | 24 | % | 47 | % | ||||||||||||||
| 660–739 | 39 | 34 | 35 | |||||||||||||||||
| 620–659 | 25 | 19 | 11 | |||||||||||||||||
| 540–619 | 13 | 7 | 5 | |||||||||||||||||
| < 540 | 1 | 1 | — | |||||||||||||||||
| Unscored (a) | 4 | 15 | 2 | |||||||||||||||||
| Total consumer automotive financing originations | 100 | % | 100 | % | 100 | % | ||||||||||||||
| Year ended December 31, 2018 | ||||||||||||||||||||
| 740 + | 19 | % | 25 | % | 49 | % | ||||||||||||||
| 660–739 | 39 | 34 | 34 | |||||||||||||||||
| 620–659 | 27 | 21 | 10 | |||||||||||||||||
| 540–619 | 12 | 6 | 5 | |||||||||||||||||
| < 540 | 1 | 1 | — | |||||||||||||||||
| Unscored (a) | 2 | 13 | 2 | |||||||||||||||||
| Total consumer automotive financing originations | 100 | % | 100 | % | 100 | % | ||||||||||||||
| Used retail | New retail | Lease | |||||||
| Year ended December 31, 2019 | |||||||||
| 740 + | 18 | % | 24 | % | 47 | % | |||
| 660–739 | 39 | 34 | 35 | ||||||
| 620–659 | 25 | 19 | 11 | ||||||
| 540–619 | 13 | 7 | 5 | ||||||
| < 540 | 1 | 1 | — | ||||||
| Unscored (a) | 4 | 15 | 2 | ||||||
| Total consumer automotive financing originations | 100 | % | 100 | % | 100 | % | |||
| Year ended December 31, 2018 | |||||||||
| 740 + | 19 | % | 25 | % | 49 | % | |||
| 660–739 | 39 | 34 | 34 | ||||||
| 620–659 | 27 | 21 | 10 | ||||||
| 540–619 | 12 | 6 | 5 | ||||||
| < 540 | 1 | 1 | — | ||||||
| Unscored (a) | 2 | 13 | 2 | ||||||
| Total consumer automotive financing originations | 100 | % | 100 | % | 100 | % | |||
| Year ended December 31, 2017 | |||||||||
| 740 + | 18 | % | 28 | % | 46 | % | |||
| 660–739 | 37 | 32 | 38 | ||||||
| 620–659 | 29 | 21 | 10 | ||||||
| 540–619 | 13 | 7 | 4 | ||||||
| < 540 | 1 | 1 | — | ||||||
| Unscored (a) | 2 | 11 | 2 | ||||||
| Total consumer automotive financing originations | 100 | % | 100 | % | 100 | % | |||
Originations with a FICO® Score of less than 620 (considered nonprime) represented 11%10% of total consumer loan and operating lease originations for the year ended December 31, 2019,2020, compared to 11% for the year ended December 31, 2019, and 10% for the year ended December 31, 2018. Consumer loans and operating leases with FICO® Scores of less than 540 continued to compose only 1% of total originations for the year ended December 31, 2019.2020. Nonprime applications that are not automatically declined by our proprietary credit-scoring models for risk reasons are manually reviewed and decisioned by an experienced underwriting team. Nonprime applications are subject to more stringent underwriting criteria (for example, minimum payment-to-income ratio and vehicle mileage, and maximum amount financed), and our nonprime loan portfolio generally does not include any loans with a term of 76 months or more. For discussion of our credit-risk-management practices and performance, refer to the section titled Risk Management.
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 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
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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. However, our expansion into direct-to-consumer lending and other relationships have resulted in the employment of third-party servicers for a small portion of the portfolio. 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.
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 207 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. To support our customers from the impacts caused by the COVID-19 pandemic, we implemented a broad relief program, as further described in the section titled Risk Management of this MD&A. 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, extending the term and lowering the scheduled monthly payment. In those cases, 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. Generally,Excluding extensions provided to borrowers that received COVID-19 related relief, 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 Troubled Debt Restructuring (TDR).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. At December 31, 2019, 10.6%2020, 30.9% of the total amount outstanding in the servicing portfolio had been granted an extension or was rewritten, compared to 11.3%10.6% at December 31, 2018.2019, largely due to the impacts caused by the COVID-19 pandemic and our related relief-programs to support our customers.
Subject to legal considerations, we normallygenerally begin repossession activity once an account is at least eighty-five90 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. Approved third-party repossession vendors handle the repossession activity. 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. IfGenerally, 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 serviced portfolio was $80.6$80.2 billion and $79.7$80.6 billion at December 31, 2019,2020, and 2018,2019, respectively, compared to our consumer automotive on-balance-sheet serviced portfolio of $80.0$80.2 billion and $77.8$80.0 billion.
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. 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 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. |
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•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 2019,2020, approximately 270,000258,000 vehicles were sold through SmartAuction.
•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.
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. 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 London interbank offered rate (LIBOR)LIBOR or the Prime Rate. We have established an enterprise-wide LIBOR transition program to manage the discontinuance of LIBOR. Refer to the section titled LIBOR Transition within this 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 creditpay 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 | |||||||||||||||||||||||||||||||||||||||||||
| Average balance | |||||||||||||||||||||||||||||||||||||||||||
Year ended December 31, ($ in millions) | 2019 | 2018 | 2017 | Year ended December 31, ($ in millions) | 2020 | 2019 | 2018 | ||||||||||||||||||||||||||||||||||||
| GM new vehicles | 40 | % | 42 | % | 50 | % | GM new vehicles | 33 | % | 40 | % | 42 | % | ||||||||||||||||||||||||||||||
| Chrysler new vehicles | 33 | 31 | 25 | Chrysler new vehicles | 33 | 33 | 31 | ||||||||||||||||||||||||||||||||||||
| Growth new vehicles | 13 | 14 | 13 | Growth new vehicles | 16 | 13 | 14 | ||||||||||||||||||||||||||||||||||||
| Used vehicles | 14 | 13 | 12 | Used vehicles | 18 | 14 | 13 | ||||||||||||||||||||||||||||||||||||
| Total | 100 | % | 100 | % | 100 | % | Total | 100 | % | 100 | % | 100 | % | ||||||||||||||||||||||||||||||
| Total commercial wholesale finance receivables | $ | 28,200 | $ | 29,455 | $ | 31,586 | Total commercial wholesale finance receivables | $ | 19,308 | $ | 28,200 | $ | 29,455 | ||||||||||||||||||||||||||||||
Average commercial wholesale financing receivables outstanding decreased $1.3$8.9 billion during the year ended December 31, 2019,2020, compared to 2018.2019. The decrease was primarily due to lower dealer inventory levels, driven by lower automotive production levels due to
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COVID-19. The declines were also impacted by a reduction in the number of GM dealer relationships due to the competitive environment across the automotive lending market and reduced dealer inventory levels, partially offset by higher average vehicle prices.market. Dealer inventory levels are dependent on a number of factors, including manufacturer production schedules and vehicle mix, sales incentives, and industry sales—all of which can influence future wholesale balances.sales. Manufacturer production and corresponding dealer stock levels, as well as dealer penetration levels, may continue to influence our future wholesale balances during 2020.
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, wethese loans generally also haveinclude cross-collateral and cross-default provisions in place with dealers.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 6% to $5.7 billionincreased $77 million for the year ended December 31, 2019,2020, compared to the year ended December 31, 2018.2019, to an average of $5.7 billion.
Servicing and Monitoring
We service all of the wholesale credit lines in our portfolio and the wholesale automotive finance receivables that we have securitized. A statement setting forth billing and account information is distributed on a monthly basis to each dealer. Interest and other nonprincipal charges are billed in arrears and are required to be paid immediately upon receipt of the monthly billing statement. Generally, dealers remit payments to us through ACH transactions initiated by the dealer through a secure web application.
We manage risk related to wholesale floorplan financing by assessing dealership borrowers using a proprietary model based on various factors, including their capital sufficiency, operating performance, and credit and payment history. This model assigns dealership borrowers a risk rating that affects the amount of the line of credit and the ongoing risk management of the account. We monitor the level of borrowing under each dealer’s credit line daily. We may adjust the dealer’s credit line if warranted, based on the dealership’s vehicle sales rate, and temporarily suspend the granting of additional credit, or take other actions following evaluation and analysis of the dealer’s financial condition.
We periodically inspect and verify the existence of dealer vehicle inventories. The timing of these collateral audits varies, and no advance notice is given to the dealer. Among other things, audits are intended to assess dealer compliance with the financing agreement and confirm the status of our collateral.
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Insurance
Results of Operations
The following table summarizes the operating results of our Insurance operations. The amounts presented are before the elimination of balances and transactions with our other reportable segments.
Year ended December 31, ($ in millions) | 2019 | 2018 | 2017 | Favorable/(unfavorable) 2019–2018 % change | Favorable/(unfavorable) 2018–2017 % change | Year ended December 31, ($ in millions) | 2020 | 2019 | 2018 | Favorable/(unfavorable) 2020-2019 % change | Favorable/(unfavorable) 2019–2018 % change | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Insurance premiums and other income | Insurance premiums and other income | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Insurance premiums and service revenue earned | $ | 1,087 | $ | 1,022 | $ | 973 | 6 | 5 | Insurance premiums and service revenue earned | $ | 1,103 | $ | 1,087 | $ | 1,022 | 1 | 6 | ||||||||||||||||||||||||||||||||||||||||||||||||
| Interest and dividends on investment securities and cash and cash equivalents, net (a) | 54 | 54 | 59 | — | (8) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Interest and dividends on investment securities, cash and cash equivalents, and other earning assets, net (a) | Interest and dividends on investment securities, cash and cash equivalents, and other earning assets, net (a) | 42 | 54 | 54 | (22) | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Other gain (loss) on investments, net (b) | 175 | (51 | ) | 78 | n/m | (165) | Other gain (loss) on investments, net (b) | 220 | 175 | (51) | 26 | n/m | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Other income | 12 | 10 | 8 | 20 | 25 | Other income | 11 | 12 | 10 | (8) | 20 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Total insurance premiums and other income | 1,328 | 1,035 | 1,118 | 28 | (7) | Total insurance premiums and other income | 1,376 | 1,328 | 1,035 | 4 | 28 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Expense | Expense | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Insurance losses and loss adjustment expenses | 321 | 295 | 332 | (9) | 11 | Insurance losses and loss adjustment expenses | 363 | 321 | 295 | (13) | (9) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Acquisition and underwriting expense | Acquisition and underwriting expense | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Compensation and benefits expense | 80 | 75 | 73 | (7) | (3) | Compensation and benefits expense | 82 | 80 | 75 | (3) | (7) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Insurance commissions expense | 475 | 440 | 415 | (8) | (6) | Insurance commissions expense | 517 | 475 | 440 | (9) | (8) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Other expenses | 137 | 145 | 130 | 6 | (12) | Other expenses | 130 | 137 | 145 | 5 | 6 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Total acquisition and underwriting expense | 692 | 660 | 618 | (5) | (7) | Total acquisition and underwriting expense | 729 | 692 | 660 | (5) | (5) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Total expense | 1,013 | 955 | 950 | (6) | (1) | Total expense | 1,092 | 1,013 | 955 | (8) | (6) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Income from continuing operations before income tax expense | $ | 315 | $ | 80 | $ | 168 | n/m | (52) | Income from continuing operations before income tax expense | $ | 284 | $ | 315 | $ | 80 | (10) | n/m | ||||||||||||||||||||||||||||||||||||||||||||||||
| Total assets | $ | 8,547 | $ | 7,734 | $ | 7,464 | 11 | 4 | Total assets | $ | 9,137 | $ | 8,547 | $ | 7,734 | 7 | 11 | ||||||||||||||||||||||||||||||||||||||||||||||||
| Insurance premiums and service revenue written | $ | 1,310 | $ | 1,174 | $ | 996 | 12 | 18 | Insurance premiums and service revenue written | $ | 1,229 | $ | 1,310 | $ | 1,174 | (6) | 12 | ||||||||||||||||||||||||||||||||||||||||||||||||
| Combined ratio (c) | 92.2 | % | 92.6 | % | 96.8 | % | Combined ratio (c) | 98.0 | % | 92.2 | % | 92.6 | % | ||||||||||||||||||||||||||||||||||||||||||||||||||||
n/m = not meaningful
(a)Includes interest expense of $80 million, $79 million, and $67 million for the years ended December 31, 2020, 2019, and 2018, respectively.
(b)Includes net unrealized gains on equity securities of $31 million and $88 million for the years ended December 31, 2020, and 2019, respectively, and net unrealized losses of $112 million for the year ended December 31, 2018.
(c)Management uses a combined ratio as a primary measure of underwriting profitability. Underwriting profitability is indicated by a combined ratio under 100% and is calculated as the sum of all incurred losses and expenses (excluding interest and income tax expense) divided by the total of premiums and service revenues earned and other income.
2020 Compared to 20182019
Our Insurance operations earned income from continuing operations before income tax expense of $284 million for the year ended December 31, 2020, compared to $315 million for the year ended December 31, 2019, compared to $80 million2019. The decrease for the year ended December 31, 2018. The increase for the year ended December 31, 2019,2020, was primarily driven by $88a $42 million ofincrease in insurance losses and loss adjustment expenses primarily driven by higher weather-related losses within our P&C business, and lower earned premiums from our P&C business driven by lower dealer vehicle inventory levels. The decline was partially offset by a $45 million increase in net unrealized gains on investments due to favorable market conditions withinand higher earned premiums from our equity portfolio, compared to net unrealized losses of $112 million for the year ended December 31, 2018.F&I business.
Insurance premiums and service revenue earned was $1.1 billion for both the yearyears ended December 31, 2019, compared to $1.0 billion2020, and 2019. The activity for the year ended December 31, 2018.2020, included $50 million in higher earned revenue from our F&I products, as revenue is earned over the life of the contracts on a basis proportionate to the anticipated loss pattern. The increase was partially offset by $35 million in lower earned premiums from our P&C products, driven by lower dealer vehicle inventory levels.
Other gains on investments, net was $220 million for the year ended December 31, 2019,2020, compared to $175 million for the same period in 2019. The increase was primarily due to vehicle inventory insurancedriven by favorable performance of our investment securities portfolio, growthwhich included higher realized capital gains on debt and rate increases.equity securities during a period of elevated market volatility.
Insurance losses and loss adjustment expenses totaled $321$363 million for the year ended December 31, 2019,2020, compared to $295 million in 2018. The increase for the year ended December 31, 2019, was primarily driven by vehicle inventory insurance portfolio growth and higher VSC, GAP, and other policies in force. Total acquisition and underwriting expense increased $32$321 million for the year ended December 31,same period in 2019. The increase for the year ended December 31, 2019,2020, was primarily driven by higher weather-related losses. Total acquisition and underwriting expense increased $37 million for the year ended December 31, 2020, as compared to the same period in 2019. This increase was primarily due to an increase in insurance commissions expense, commensurate with higher earned premiums from our F&I products, which was partially offset by lower operating expenses driven primarily by growth in our written insurance premiumslower travel and service revenue. Growth in insurance premiums and service revenue earned outpaced expense increases, which led to a decrease in the combined ratio to 92.2% for the year ended December 31, 2019, compared to 92.6% for the year ended December 31, 2018. In April 2019, we renewed our annual reinsurance program and continue to utilize this coverage to manage our risk of weather-related loss.
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Premium and Service Revenue Written
The following table summarizes premium and service revenue written by product, net of premiums ceded to reinsurers. VSC and GAP revenue are earned over the life of the service contract on a basis proportionate to the anticipated costloss pattern. Refer to Note 3 to the Consolidated Financial Statements for further discussion of this revenue stream.
Year ended December 31, ($ in millions) | 2020 | 2019 | 2018 | |||||||||||||||||||||||||||||||||||
| Finance and insurance products | ||||||||||||||||||||||||||||||||||||||
| Vehicle service contracts | $ | 850 | $ | 901 | $ | 856 | ||||||||||||||||||||||||||||||||
| Guaranteed asset protection and other finance and insurance products (a) | 137 | 121 | 101 | |||||||||||||||||||||||||||||||||||
| Total finance and insurance products | 987 | 1,022 | 957 | |||||||||||||||||||||||||||||||||||
| Property and casualty insurance (b) | 242 | 288 | 217 | |||||||||||||||||||||||||||||||||||
| Total | $ | 1,229 | $ | 1,310 | $ | 1,174 | ||||||||||||||||||||||||||||||||
Year ended December 31, ($ in millions) | 2019 | 2018 | 2017 | ||||||||
| Finance and insurance products | |||||||||||
| Vehicle service contracts | $ | 901 | $ | 856 | $ | 711 | |||||
| Guaranteed asset protection and other finance and insurance products (a) | 121 | 101 | 94 | ||||||||
| Total finance and insurance products | 1,022 | 957 | 805 | ||||||||
| Property and casualty insurance (b) | 288 | 217 | 191 | ||||||||
| Total | $ | 1,310 | $ | 1,174 | $ | 996 | |||||
(b)P&C insurance include vehicle inventory insurance and dealer ancillary products.
Insurance premiums and service revenue written was $1.3$1.2 billion for the year ended December 31, 2019,2020, compared to $1.2$1.3 billion for the same period in 2018.2019. The increasedecrease for the year ended December 31, 2019,2020, was primarily due to lower F&I volume and lower dealer vehicle inventory insurance portfolio growthlevels from our P&C products due to the economic impact of COVID-19, as further described in the section titled Significant Business Developments Related to COVID-19 within the MD&A. While this significantly reduced our F&I written premiums in late March and rate increases, and higher vehicle service contract volume.early in the second quarter, we have experienced gradual recoveries since that time.
Cash and Investments
A significant aspect of our Insurance operations is the investment of proceeds from premiums and other revenue sources. We use these investments to satisfy our obligations related to future claims at the time these claims are settled. Our Insurance operations have an Investment Committee, which develops guidelines and strategies for these investments. The guidelines established by this committee reflect our risk appetite, liquidity requirements, regulatory requirements, and rating agency considerations, among other factors.
The following table summarizes the composition of our Insurance operations cash and investment portfolio at fair value.
December 31, ($ in millions) | 2020 | 2019 | ||||||||||||
| Cash and cash equivalents | ||||||||||||||
| Noninterest-bearing cash | $ | 189 | $ | 95 | ||||||||||
| Interest-bearing cash | 579 | 1,230 | ||||||||||||
| Total cash and cash equivalents | 768 | 1,325 | ||||||||||||
| Equity securities | 1,064 | 608 | ||||||||||||
| Available-for-sale securities | ||||||||||||||
| Debt securities | ||||||||||||||
| U.S. Treasury and federal agencies | 56 | 528 | ||||||||||||
| U.S. States and political subdivisions | 680 | 530 | ||||||||||||
| Foreign government | 176 | 186 | ||||||||||||
| Agency mortgage-backed residential | 719 | 1,132 | ||||||||||||
| Mortgage-backed residential | 44 | 70 | ||||||||||||
| Corporate debt | 1,914 | 1,363 | ||||||||||||
| Total available-for-sale securities | 3,589 | 3,809 | ||||||||||||
| Total cash, cash equivalents, and securities | $ | 5,421 | $ | 5,742 | ||||||||||
In addition to these cash and investment securities, in the fourth quarter of 2020, the Insurance segment entered into an interest-bearing intercompany arrangement with the Corporate segment, callable on demand. At December 31, 2020, the intercompany loan balance due to Insurance was $830 million, and $1 million in interest income was recognized for the year ended December 31, 2020.
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December 31, ($ in millions) | 2019 | 2018 | ||||||
| Cash | ||||||||
| Noninterest-bearing cash | $ | 95 | $ | 252 | ||||
| Interest-bearing cash | 1,230 | 644 | ||||||
| Total cash | 1,325 | 896 | ||||||
| Equity securities | 608 | 766 | ||||||
| Available-for-sale securities | ||||||||
| Debt securities | ||||||||
| U.S. Treasury and federal agencies | 528 | 460 | ||||||
| U.S. States and political subdivisions | 530 | 691 | ||||||
| Foreign government | 186 | 145 | ||||||
| Agency mortgage-backed residential | 1,132 | 758 | ||||||
| Mortgage-backed residential | 70 | 135 | ||||||
| Corporate debt | 1,363 | 1,241 | ||||||
| Total available-for-sale securities | 3,809 | 3,430 | ||||||
| Total cash and securities | $ | 5,742 | $ | 5,092 | ||||
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.
Year ended December 31, ($ in millions) | 2019 | 2018 | 2017 | Favorable/(unfavorable) 2019–2018 % change | Favorable/(unfavorable) 2018–2017 % change | Year ended December 31, ($ in millions) | 2020 | 2019 | 2018 | Favorable/(unfavorable) 2020-2019 % change | Favorable/(unfavorable) 2019–2018 % change | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Net financing revenue and other interest income | Net financing revenue and other interest income | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Total financing revenue and other interest income | $ | 577 | $ | 483 | $ | 308 | 19 | 57 | Total financing revenue and other interest income | $ | 487 | $ | 577 | $ | 483 | (16) | 19 | ||||||||||||||||||||||||||||||||||||||||||||||||
| Interest expense | 406 | 304 | 176 | (34) | (73) | Interest expense | 369 | 406 | 304 | 9 | (34) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Net financing revenue and other interest income | 171 | 179 | 132 | (4) | 36 | Net financing revenue and other interest income | 118 | 171 | 179 | (31) | (4) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Gain on mortgage loans, net | 20 | 5 | 3 | n/m | 67 | Gain on mortgage loans, net | 93 | 20 | 5 | n/m | n/m | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Other income, net of losses | 2 | 2 | 1 | — | 100 | Other income, net of losses | 9 | 2 | 2 | n/m | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Total other revenue | 22 | 7 | 4 | n/m | 75 | Total other revenue | 102 | 22 | 7 | n/m | n/m | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Total net revenue | 193 | 186 | 136 | 4 | 37 | Total net revenue | 220 | 193 | 186 | 14 | 4 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Provision for loan losses | 5 | 1 | 8 | n/m | 88 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Provision for credit losses | Provision for credit losses | 7 | 5 | 1 | (40) | n/m | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Noninterest expense | Noninterest expense | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Compensation and benefits expense | 31 | 32 | 23 | 3 | (39) | Compensation and benefits expense | 22 | 31 | 32 | 29 | 3 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Other operating expenses | 117 | 108 | 85 | (8) | (27) | Other operating expenses | 138 | 117 | 108 | (18) | (8) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Total noninterest expense | 148 | 140 | 108 | (6) | (30) | Total noninterest expense | 160 | 148 | 140 | (8) | (6) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Income from continuing operations before income tax expense | $ | 40 | $ | 45 | $ | 20 | (11) | 125 | Income from continuing operations before income tax expense | $ | 53 | $ | 40 | $ | 45 | 33 | (11) | ||||||||||||||||||||||||||||||||||||||||||||||||
| Total assets | $ | 16,279 | $ | 15,211 | $ | 11,708 | 7 | 30 | Total assets | $ | 14,889 | $ | 16,279 | $ | 15,211 | (9) | 7 | ||||||||||||||||||||||||||||||||||||||||||||||||
n/m = not meaningful
Our Mortgage Finance operations earned income from continuing operations before income tax expense of $53 million for the year ended December 31, 2020, compared to $40 million for the year ended December 31, 2019, compared to $45 million2019. The increase for the year ended December 31, 2018. The decrease for the year ended December 31, 2019,2020, was primarily due to higher net gains on the sale of mortgage loans, which was partially offset by lower net financing revenue and other interest income, which was driven by higher prepayment activity, an increase in noninterest expense, and higher provision for loan losses, and higher noninterest expense driven primarily by continued asset growth. The decrease was partially offset by growth in our mortgage loan portfolio and an increase in the net gain on sale of mortgage loans.credit losses.
Net financing revenue and other interest income was $118 million for the year ended December 31, 2020, compared to $171 million for the year ended December 31, 2019, compared to $179 million for the year ended December 31, 2018.2019. The decrease in net financing revenue and other interest income for the year ended December 31, 2019,2020, was primarily due to accelerated premium amortization on purchased loans due to higher prepayment activity, driven by a lower interest rate environment, partially offset by increased loan balances as a resultenvironment. Premium amortization of bulk purchases of high-quality jumbo and LMI mortgagepurchased loans and direct-to-consumer originations.was $123 million for the year ended December 31, 2020, compared to $67 million for the year ended December 31, 2019. During the year ended December 31, 2019,2020, we purchased $3.5$4.2 billion of mortgage loans that were originated by third parties and originated $2.0 billion of mortgage loans held-for-investment, compared to $4.4$3.5 billion and $401 million,$2.0 billion, respectively, during the year ended December 31, 2018.2019.
Gain on sale of mortgage loans, net, was $93 million for the year ended December 31, 2020, compared to $20 million for the year ended December 31, 2019, compared to $5 million for the year ended December 31, 2018.2019. The increase was driven by higher direct-to-consumer mortgage originations and the subsequent sale of these loans to our fulfillment provider, and the execution of whole-loan sales during the year ended December 31, 2019.2020. During the year ended December 31, 2019,2020, we originated $738 million$2.7 billion of loans held-for-sale, compared to $302$738 million during the year ended December 31, 2018.2019.
The provision for loancredit losses increased $4$2 million for the year ended December 31, 2019,2020, compared to the year ended December 31, 2018,2019. The increase in provision expense was primarily driven by reserve increases associated with broad macroeconomic impacts resulting from the COVID-19 pandemic and higher net charge-offs. During the year ended December 31, 2020, the provision for credit losses was also impacted by the adoption of CECL, as a result of reserve releasesfurther described in Note 1 to the Consolidated Financial Statements.
Total noninterest expense was $160 million for the year ended December 31, 2018, that did not reoccur.
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The following table presents the total unpaid principal balance (UPB)UPB of purchases and originations of consumer mortgages held-for-investment, by FICO® Score at the time of acquisition.
| FICO® Score | FICO® Score | Volume ($ in millions) | % Share of volume | ||||||||||||||||||||||||||||||||||||||
| FICO® Score | Volume ($ in millions) | % Share of volume | |||||||||||||||||||||||||||||||||||||||
| Year ended December 31, 2020 | Year ended December 31, 2020 | ||||||||||||||||||||||||||||||||||||||||
| 740 + | 740 + | $ | 5,151 | 83 | |||||||||||||||||||||||||||||||||||||
| 720–739 | 720–739 | 580 | 9 | ||||||||||||||||||||||||||||||||||||||
| 700–719 | 700–719 | 362 | 6 | ||||||||||||||||||||||||||||||||||||||
| 680–699 | 680–699 | 67 | 1 | ||||||||||||||||||||||||||||||||||||||
| 660–679 | 660–679 | 27 | 1 | ||||||||||||||||||||||||||||||||||||||
| < 660 | < 660 | 20 | — | ||||||||||||||||||||||||||||||||||||||
| Total consumer mortgage financing volume | Total consumer mortgage financing volume | $ | 6,207 | 100 | |||||||||||||||||||||||||||||||||||||
| Year ended December 31, 2019 | Year ended December 31, 2019 | ||||||||||||||||||||||||||||||||||||||||
| 740 + | $ | 4,462 | 83 | 740 + | $ | 4,462 | 83 | ||||||||||||||||||||||||||||||||||
| 720–739 | 520 | 10 | 720–739 | 520 | 10 | ||||||||||||||||||||||||||||||||||||
| 700–719 | 397 | 7 | 700–719 | 397 | 7 | ||||||||||||||||||||||||||||||||||||
| 680–699 | 27 | — | 680–699 | 27 | — | ||||||||||||||||||||||||||||||||||||
| Total consumer mortgage financing volume | $ | 5,406 | 100 | Total consumer mortgage financing volume | $ | 5,406 | 100 | ||||||||||||||||||||||||||||||||||
| Year ended December 31, 2018 | Year ended December 31, 2018 | ||||||||||||||||||||||||||||||||||||||||
| 740 + | $ | 3,861 | 80 | 740 + | $ | 3,861 | 80 | ||||||||||||||||||||||||||||||||||
| 720–739 | 520 | 11 | 720–739 | 520 | 11 | ||||||||||||||||||||||||||||||||||||
| 700–719 | 391 | 8 | 700–719 | 391 | 8 | ||||||||||||||||||||||||||||||||||||
| 680–699 | 74 | 1 | 680–699 | 74 | 1 | ||||||||||||||||||||||||||||||||||||
| 660–679 | 1 | — | 660–679 | 1 | — | ||||||||||||||||||||||||||||||||||||
| Total consumer mortgage financing volume | $ | 4,847 | 100 | Total consumer mortgage financing volume | $ | 4,847 | 100 | ||||||||||||||||||||||||||||||||||
| Year ended December 31, 2017 | |||||||||||||||||||||||||||||||||||||||||
| 740 + | $ | 3,831 | 83 | ||||||||||||||||||||||||||||||||||||||
| 720–739 | 478 | 10 | |||||||||||||||||||||||||||||||||||||||
| 700–719 | 288 | 6 | |||||||||||||||||||||||||||||||||||||||
| 680–699 | 22 | 1 | |||||||||||||||||||||||||||||||||||||||
| 660–679 | 10 | — | |||||||||||||||||||||||||||||||||||||||
| Total consumer mortgage financing volume | $ | 4,629 | 100 | ||||||||||||||||||||||||||||||||||||||
The following table presents the net UPB, net UPB as a percentage of total, weighted-average coupon (WAC),WAC, premium net of discounts, LTV, and FICO® Scores for the products in our Mortgage Finance held-for-investment loan portfolio.
| Product | Net UPB (a) ($ in millions) | % of total net UPB | WAC | Net premium ($ in millions) | Average refreshed LTV (b) | Average refreshed FICO® (c) | ||||||||||||||||||||||||||||||||
| December 31, 2020 | ||||||||||||||||||||||||||||||||||||||
| Adjustable-rate | $ | 927 | 6 | 3.31 | % | $ | 11 | 49.24 | % | 773 | ||||||||||||||||||||||||||||
| Fixed-rate | 13,516 | 94 | 3.85 | 178 | 60.89 | 776 | ||||||||||||||||||||||||||||||||
| Total | $ | 14,443 | 100 | 3.81 | $ | 189 | 60.15 | 776 | ||||||||||||||||||||||||||||||
| December 31, 2019 | ||||||||||||||||||||||||||||||||||||||
| Adjustable-rate | $ | 1,715 | 11 | 3.46 | % | $ | 22 | 51.59 | % | 774 | ||||||||||||||||||||||||||||
| Fixed-rate | 14,200 | 89 | 4.07 | 244 | 61.39 | 774 | ||||||||||||||||||||||||||||||||
| Total | $ | 15,915 | 100 | 4.01 | $ | 266 | 60.33 | 774 | ||||||||||||||||||||||||||||||
(a)Represents UPB, net of charge-offs.
(b)Updated home values were derived using a combination of appraisals, broker price opinions, automated valuation models, and metropolitan statistical area level house price indices.
(c)Updated to reflect changes in credit score since loan origination.
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| Product | Net UPB (a) ($ in millions) | % of total net UPB | WAC | Net premium ($ in millions) | Average refreshed LTV (b) | Average refreshed FICO® (c) | |||||||||||||
| December 31, 2019 | |||||||||||||||||||
| Adjustable-rate | $ | 1,715 | 11 | 3.46 | % | $ | 22 | 51.59 | % | 774 | |||||||||
| Fixed-rate | 14,200 | 89 | 4.07 | 244 | 61.39 | 774 | |||||||||||||
| Total | $ | 15,915 | 100 | 4.01 | $ | 266 | 60.33 | 774 | |||||||||||
| December 31, 2018 | |||||||||||||||||||
| Adjustable-rate | $ | 2,828 | 19 | 3.40 | % | $ | 37 | 53.69 | % | 775 | |||||||||
| Fixed-rate | 12,042 | 81 | 4.15 | 248 | 60.97 | 774 | |||||||||||||
| Total | $ | 14,870 | 100 | 4.01 | $ | 285 | 59.58 | 774 | |||||||||||
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.
Year ended December 31, ($ in millions) | 2019 | 2018 | 2017 | Favorable/(unfavorable) 2019–2018 % change | Favorable/(unfavorable) 2018–2017 % change | Year ended December 31, ($ in millions) | 2020 | 2019 | 2018 | Favorable/(unfavorable) 2020-2019 % change | Favorable/(unfavorable) 2019–2018 % change | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Net financing revenue and other interest income | Net financing revenue and other interest income | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Interest and fees on finance receivables and loans | $ | 363 | $ | 321 | $ | 256 | 13 | 25 | Interest and fees on finance receivables and loans | $ | 349 | $ | 363 | $ | 321 | (4) | 13 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Interest on loans held-for-sale | 10 | 10 | — | — | n/m | Interest on loans held-for-sale | 11 | 10 | 10 | 10 | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Interest expense | 134 | 127 | 89 | (6) | (43) | Interest expense | 61 | 134 | 127 | 54 | (6) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Net financing revenue and other interest income | 239 | 204 | 167 | 17 | 22 | Net financing revenue and other interest income | 299 | 239 | 204 | 25 | 17 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Total other revenue | 45 | 38 | 45 | 18 | (16) | Total other revenue | 45 | 45 | 38 | — | 18 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Total net revenue | 284 | 242 | 212 | 17 | 14 | Total net revenue | 344 | 284 | 242 | 21 | 17 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Provision for loan losses | 36 | 12 | 22 | n/m | 45 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Provision for credit losses | Provision for credit losses | 149 | 36 | 12 | n/m | n/m | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Noninterest expense | Noninterest expense | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Compensation and benefits expense | 58 | 53 | 47 | (9) | (13) | Compensation and benefits expense | 62 | 58 | 53 | (7) | (9) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Other operating expenses | 37 | 33 | 29 | (12) | (14) | Other operating expenses | 45 | 37 | 33 | (22) | (12) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Total noninterest expense | 95 | 86 | 76 | (10) | (13) | Total noninterest expense | 107 | 95 | 86 | (13) | (10) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Income from continuing operations before income tax expense | $ | 153 | $ | 144 | $ | 114 | 6 | 26 | Income from continuing operations before income tax expense | $ | 88 | $ | 153 | $ | 144 | (42) | 6 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Total assets | $ | 5,787 | $ | 4,670 | $ | 3,979 | 24 | 17 | Total assets | $ | 6,108 | $ | 5,787 | $ | 4,670 | 6 | 24 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
n/m = not meaningful
Our Corporate Finance operations earned income from continuing operations before income tax expense of $88 million for the year ended December 31, 2020, compared to income earned of $153 million for the year ended December 31, 2019, compared to $144 million2019. The decrease for the year ended December 31, 2018. The increase was2020, is due primarily to incremental reserves recorded for expected credit losses related to COVID-19, partially offset by higher net financing revenue and other interest income resulting from higher asset levels, partially offset by higher provision for loan losses recognized during the first quarter of 2019.growth.
Net financing revenue and other interest income was $299 million for the year ended December 31, 2020, compared to $239 million for the year ended December 31, 2019, respectively,2019. The increase was due to higher average assets from continued growth in the portfolio and lower interest expense as benchmark interest rates decreased as compared to $204the prior year. The decrease in benchmark interest rates also drove a decline in interest and fees on finance receivables and loans, which was partially mitigated by LIBOR base rate floors on the majority of the portfolio.
The provision for credit losses increased $113 million for the year ended December 31, 2018.2020, compared to the year ended December 31, 2019. The increase was primarily due toin provision for the growth of our loan portfolio, represented by a 23% increase in the gross carrying value of finance receivables and loans. Growth in the portfolioyear ended December 31, 2020, was primarily driven by asset-based lending, including$71 million of incremental reserves associated with the broad macroeconomic impact resulting from the COVID-19 pandemic and higher provisions for specific loan exposures. During the year ended December 31, 2020, the provision for credit losses was also impacted by the adoption of CECL, as further described in Note 1 to the Consolidated Financial Statements. Refer to the Risk Management section of this MD&A for further discussion on our lender finance vertical, which provides asset managers with partial fundingprovision for their direct lending activities.credit losses.
Credit Portfolio
The following table presents loans held-for-sale, the gross carrying valueamortized cost of finance receivables and loans outstanding, unfunded commitments to lend, and total serviced loans of our Corporate Finance operations.
December 31, ($ in millions) | 2020 | 2019 | ||||||||||||
| Loans held-for-sale, net | $ | 205 | $ | 100 | ||||||||||
| Finance receivables and loans | $ | 6,006 | $ | 5,688 | ||||||||||
| Unfunded lending commitments (a) | $ | 4,193 | $ | 2,682 | ||||||||||
| Total serviced loans | $ | 8,455 | $ | 6,380 | ||||||||||
December 31, ($ in millions) | 2019 | 2018 | ||||||
| Loans held-for-sale, net | $ | 100 | $ | 47 | ||||
| Finance receivables and loans | $ | 5,688 | $ | 4,636 | ||||
| Unfunded lending commitments (a) | $ | 2,682 | $ | 2,141 | ||||
| Total serviced loans | $ | 6,380 | $ | 5,501 | ||||
The following table presents the percentage of total finance receivables and loans of our Corporate Finance operations by industry concentration. The finance receivables and loans are reported at gross carrying value.amortized cost.
| December 31, | 2020 | 2019 | ||||||||||||
| Industry | ||||||||||||||
| Financial services | 22.8 | % | 13.0 | % | ||||||||||
| Health services | 22.1 | 25.8 | ||||||||||||
| Services | 19.6 | 19.8 | ||||||||||||
| Automotive and transportation | 10.1 | 11.4 | ||||||||||||
| Chemicals and metals | 5.9 | 5.9 | ||||||||||||
| Machinery, equipment, and electronics | 5.8 | 7.0 | ||||||||||||
| Other manufactured products | 3.1 | 3.1 | ||||||||||||
| Lumber and wood | 2.4 | 1.1 | ||||||||||||
| Wholesale | 2.3 | 3.4 | ||||||||||||
| Food and beverages | 2.0 | 3.9 | ||||||||||||
| Construction | 1.1 | 1.3 | ||||||||||||
| Retail trade | 1.1 | 1.3 | ||||||||||||
| Other | 1.7 | 3.0 | ||||||||||||
| Total finance receivables and loans | 100.0 | % | 100.0 | % | ||||||||||
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| December 31, | 2019 | 2018 | ||||
| Industry | ||||||
| Health services | 25.8 | % | 24.5 | % | ||
| Services | 19.8 | 25.6 | ||||
| Financial services | 13.0 | — | ||||
| Automotive and transportation | 11.4 | 12.3 | ||||
| Machinery, equipment, and electronics | 7.0 | 6.0 | ||||
| Chemicals and metals | 5.9 | 4.9 | ||||
| Food and beverages | 3.9 | 5.0 | ||||
| Wholesale | 3.4 | 7.5 | ||||
| Other manufactured products | 3.1 | 4.7 | ||||
| Paper, printing, and publishing | 1.7 | 2.8 | ||||
| Retail trade | 1.3 | 1.3 | ||||
| Other | 3.7 | 5.4 | ||||
| Total finance receivables and loans | 100.0 | % | 100.0 | % | ||
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, the management of our legacy mortgage portfolio, which primarily consists of loans originated prior to January 1, 2009, the activity related to Ally Invest and Ally Lending, CRA loans and related investments, and reclassifications and eliminations between the reportable operating segments.
Year ended December 31, ($ in millions) | 2019 | 2018 | 2017 | Favorable/(unfavorable) 2019–2018 % change | Favorable/(unfavorable) 2018–2017 % change | Year ended December 31, ($ in millions) | 2020 | 2019 | 2018 | Favorable/(unfavorable) 2020-2019 % change | Favorable/(unfavorable) 2019–2018 % change | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Net financing revenue and other interest income | Net financing revenue and other interest income | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Interest and fees on finance receivables and loans (a) | $ | 69 | $ | 83 | $ | 68 | (17) | 22 | Interest and fees on finance receivables and loans (a) | $ | (15) | $ | 69 | $ | 83 | (122) | (17) | ||||||||||||||||||||||||||||||||||||||||||||||||
| Interest on loans held-for-sale | 2 | 2 | — | — | n/m | Interest on loans held-for-sale | 4 | 2 | 2 | 100 | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Interest and dividends on investment securities and other earning assets | 842 | 677 | 497 | 24 | 36 | Interest and dividends on investment securities and other earning assets | 629 | 842 | 677 | (25) | 24 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Interest on cash and cash equivalents | 58 | 62 | 30 | (6) | 107 | Interest on cash and cash equivalents | 14 | 58 | 62 | (76) | (6) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Other, net | (11 | ) | (9 | ) | (7 | ) | (22) | (29) | Other, net | (8) | (11) | (9) | 27 | (22) | |||||||||||||||||||||||||||||||||||||||||||||||||||
| Total financing revenue and other interest income | 960 | 815 | 588 | 18 | 39 | Total financing revenue and other interest income | 624 | 960 | 815 | (35) | 18 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Interest expense | Interest expense | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Original issue discount amortization (b) | 42 | 101 | 90 | 58 | (12) | Original issue discount amortization (b) | 47 | 42 | 101 | (12) | 58 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Other interest expense (c) | 890 | 530 | 348 | (68) | (52) | Other interest expense (c) | 617 | 890 | 530 | 31 | (68) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Total interest expense | 932 | 631 | 438 | (48) | (44) | Total interest expense | 664 | 932 | 631 | 29 | (48) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Net financing revenue and other interest income | 28 | 184 | 150 | (85) | 23 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Net financing (loss) revenue and other interest income | Net financing (loss) revenue and other interest income | (40) | 28 | 184 | n/m | (85) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Other revenue | Other revenue | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Loss on mortgage and automotive loans, net | — | (2 | ) | (11 | ) | 100 | 82 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Gain (loss) on mortgage and automotive loans, net | Gain (loss) on mortgage and automotive loans, net | 17 | — | (2) | n/m | 100 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Loss on extinguishment of debt | Loss on extinguishment of debt | (102) | (2) | (1) | n/m | (100) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Other gain on investments, net | 63 | 8 | 24 | n/m | (67) | Other gain on investments, net | 88 | 63 | 8 | 40 | n/m | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Other income, net of losses | 108 | 113 | 68 | (4) | 66 | Other income, net of losses | 295 | 110 | 114 | 168 | (4) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Total other revenue | 171 | 119 | 81 | 44 | 47 | Total other revenue | 298 | 171 | 119 | 74 | 44 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Total net revenue | 199 | 303 | 231 | (34) | 31 | Total net revenue | 258 | 199 | 303 | 30 | (34) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Provision for loan losses | (5 | ) | (15 | ) | (16 | ) | (67) | (6) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Provision for credit losses | Provision for credit losses | 47 | (5) | (15) | n/m | (67) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Total noninterest expense (d) | 363 | 333 | 262 | (9) | (27) | Total noninterest expense (d) | 507 | 363 | 333 | (40) | (9) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Loss from continuing operations before income tax expense | $ | (159 | ) | $ | (15 | ) | $ | (15 | ) | n/m | — | Loss from continuing operations before income tax expense | $ | (296) | $ | (159) | $ | (15) | (86) | n/m | |||||||||||||||||||||||||||||||||||||||||||||
| Total assets | $ | 36,168 | $ | 33,950 | $ | 29,908 | 7 | 14 | Total assets | $ | 47,237 | $ | 36,168 | $ | 33,950 | 31 | 7 | ||||||||||||||||||||||||||||||||||||||||||||||||
n/m = not meaningful
(a)Primarily related to impacts associated with hedging activities within our automotive loan portfolio, consumer unsecured 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 $986 million, $899 million, and $854 million for the years ended December 31, 2020, 2019, and 2018, respectively, related to the allocation of corporate overhead expenses to other segments. The receiving segments record their allocation of corporate overhead expense within other operating expense.
The following table presents the scheduled remaining amortization of the original issue discount at December 31, 2019.2020.
Year ended December 31, ($ in millions) | 2021 | 2022 | 2023 | 2024 | 2025 | 2026 and thereafter (a) | Total | |||||||||||||||||||||||||||||||||||||
| Original issue discount | ||||||||||||||||||||||||||||||||||||||||||||
| Outstanding balance at year end | $ | 1,012 | $ | 956 | $ | 894 | $ | 825 | $ | 751 | $ | — | ||||||||||||||||||||||||||||||||
| Total amortization (b) | 52 | 56 | 62 | 69 | 74 | 751 | $ | 1,064 | ||||||||||||||||||||||||||||||||||||
(a)The maximum annual scheduled amortization for any individual year is $143 million in 2030.
(b)The amortization is included as interest on long-term debt in the Consolidated Statement of Income.
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Year ended December 31, ($ in millions) | 2020 | 2021 | 2022 | 2023 | 2024 | 2025 and thereafter | Total | |||||||||||||||||||||
| Original issue discount | ||||||||||||||||||||||||||||
| Outstanding balance at year end | $ | 1,056 | $ | 1,009 | $ | 957 | $ | 898 | $ | 833 | $ | — | ||||||||||||||||
| Total amortization (b) | 44 | 47 | 52 | 59 | 65 | 833 | $ | 1,100 | ||||||||||||||||||||
Corporate and Other incurred a loss from continuing operations before income tax expense of $296 million for the year ended December 31, 2020, compared to a loss of $159 million for the year ended December 31, 2019, compared to2019. The increase in loss was primarily driven by a loss of $15 million for the year ended December 31, 2018. The increasedecrease in total financing revenue and other interest income resulting from our investment securities portfolioa lower interest rate environment, and higher other revenue was more thanloss on extinguishment of debt from the early repayment of FHLB debt, partially offset by higher funding costs from higher market rateslower interest expense. The increase in loss was also attributable to a $50 million goodwill impairment at Ally Invest that occurred in the second quarter of 2020 and deposit growth.incremental reserves associated with Ally Lending.
Financing revenue and other interest income was $624 million for the year ended December 31, 2020, compared to $960 million for the year ended December 31, 2019, compared to $8152019. The decrease was primarily driven by the impacts of a lower interest rate environment on the investment securities portfolio and hedging activities.
Total interest expense decreased $268 million for the year ended December 31, 2018.2020, compared to the year ended December 31, 2019. The increasedecrease was primarily driven by growthlower market interest rates, which drove a decrease in the size of the investment portfolioour deposit rates, and higher interest and dividends from investment securities, primarily as a result of higher balances.our continued shift to more cost-efficient deposit funding.
Total interest expenseother revenue was $932$298 million for the year ended December 31, 2019,2020, compared to $631 million for the year ended December 31, 2018. The increase was primarily driven by increased interest on deposits resulting from higher market rates and deposit growth, partially offset by a decrease in higher-cost secured and unsecured debt borrowings.
The provision for credit losses increased $52 million for the year ended December 31, 2018.2020, compared to the year ended December 31, 2019. The increase in provision expense for the year ended December 31, 2020, was primarily duedriven by reserve increases in the Ally Lending portfolio primarily driven by continued growth within the portfolio, as well as higher reserves associated with the broad macroeconomic impact resulting from the COVID-19 pandemic. During the year ended December 31, 2020, the provision for credit losses was also impacted by the adoption of CECL, as further described in Note 1 to the Consolidated Financial Statements. Refer to the Risk Management section of this MD&A for further discussion on our provision for credit losses.
Noninterest expense increased realized investment gains, partially offset$144 million for the year ended December 31, 2020, as compared to the year ended December 31, 2019. The increase for the year ended December 31, 2020, was driven by lower incomeincreased expenses to support the growth of our consumer product suite, as we continue to make investments in our technology platform to enhance the customer experience and expand our digital capabilities and portfolio of products. The increase for the year ended December 31, 2020, was also driven by an impairment charge of $50 million related to certain equity hedges, and lower commission revenues.the goodwill at Ally Invest.
Total assets were $47.2 billion as of December 31, 2020, compared to $36.2 billion as of December 31, 2019, compared to $34.0 billion as of December 31, 2018.2019. This increase was primarily the result of growth in our available-for-sale securities portfolio.interest-bearing cash and cash equivalents. The increase was partially offset by a decline in our available-for-sale and held-to-maturity securities portfolio and the continued runoff of our legacy mortgage portfolio. At December 31, 2019,2020, the gross carrying valueamortized cost of the legacy mortgage portfolio was $1.1 billion,$495 million, compared to $1.5$1.1 billion at December 31, 2018.2019.
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Cash and Securities
The following table summarizes the composition of the cash and securities portfolio at fair value for Corporate and Other.
December 31, ($ in millions) | 2019 | 2018 | ||||||
| Cash | ||||||||
| Noninterest-bearing cash | $ | 501 | $ | 535 | ||||
| Interest-bearing cash | 1,706 | 3,083 | ||||||
| Total cash | 2,207 | 3,618 | ||||||
| Available-for-sale securities | ||||||||
| Debt securities | ||||||||
| U.S. Treasury and federal agencies | 1,520 | 1,391 | ||||||
| U.S. States and political subdivisions | 111 | 111 | ||||||
| Agency mortgage-backed residential | 20,272 | 16,380 | ||||||
| Mortgage-backed residential | 2,780 | 2,551 | ||||||
| Agency mortgage-backed commercial | 1,382 | 3 | ||||||
| Mortgage-backed commercial | 42 | 714 | ||||||
| Asset-backed | 368 | 723 | ||||||
| Total available-for-sale securities | 26,475 | 21,873 | ||||||
| Held-to-maturity securities | ||||||||
| Debt securities | ||||||||
| Agency mortgage-backed residential | 1,579 | 2,264 | ||||||
| Asset-backed retained notes | 21 | 43 | ||||||
| Total held-to-maturity securities | 1,600 | 2,307 | ||||||
| Total cash and securities | $ | 30,282 | $ | 27,798 | ||||
December 31, ($ in millions) | 2020 | 2019 | ||||||||||||
| Cash and cash equivalents | ||||||||||||||
| Noninterest-bearing cash | $ | 512 | $ | 501 | ||||||||||
| Interest-bearing cash | 14,318 | 1,706 | ||||||||||||
| Total cash and cash equivalents | 14,830 | 2,207 | ||||||||||||
| Available-for-sale securities | ||||||||||||||
| Debt securities | ||||||||||||||
| U.S. Treasury and federal agencies | 747 | 1,520 | ||||||||||||
| U.S. States and political subdivisions | 415 | 111 | ||||||||||||
| Agency mortgage-backed residential | 17,869 | 20,272 | ||||||||||||
| Mortgage-backed residential | 2,596 | 2,780 | ||||||||||||
| Agency mortgage-backed commercial | 4,189 | 1,382 | ||||||||||||
| Mortgage-backed commercial | — | 42 | ||||||||||||
| Asset-backed | 425 | 368 | ||||||||||||
| Total available-for-sale securities | 26,241 | 26,475 | ||||||||||||
| Held-to-maturity securities | ||||||||||||||
| Debt securities | ||||||||||||||
| Agency mortgage-backed residential | 1,331 | 1,579 | ||||||||||||
| Asset-backed retained notes | — | 21 | ||||||||||||
| Total held-to-maturity securities | 1,331 | 1,600 | ||||||||||||
| Total cash, cash equivalents, and securities | $ | 42,402 | $ | 30,282 | ||||||||||
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.
| 4th quarter 2020 | 3rd quarter 2020 | 2nd quarter 2020 | 1st quarter 2020 | 4th quarter 2019 | |||||||||||||||||||||||||
| Trading days (a) | 63.0 | 64.0 | 63.0 | 62.0 | 63.0 | ||||||||||||||||||||||||
Average customer trades per day (in thousands) | 60.1 | 58.7 | 60.7 | 43.9 | 21.2 | ||||||||||||||||||||||||
Funded accounts (b) (in thousands) | 406 | 400 | 388 | 373 | 347 | ||||||||||||||||||||||||
Total net customer assets ($ in millions) | $ | 13,445 | $ | 11,061 | $ | 9,603 | $ | 7,489 | $ | 7,850 | |||||||||||||||||||
Total customer cash balances ($ in millions) | $ | 2,085 | $ | 1,882 | $ | 1,891 | $ | 1,856 | $ | 1,376 | |||||||||||||||||||
| 4th quarter 2019 | 3rd quarter 2019 | 2nd quarter 2019 | 1st quarter 2019 | 4th quarter 2018 | |||||||||||||||
| Trading days (a) | 63.0 | 63.5 | 63.0 | 61.0 | 62.0 | ||||||||||||||
Average customer trades per day (in thousands) | 21.2 | 17.7 | 18.3 | 19.5 | 19.6 | ||||||||||||||
Funded accounts (b) (in thousands) | 347 | 346 | 337 | 320 | 302 | ||||||||||||||
Total net customer assets ($ in millions) | $ | 7,850 | $ | 7,151 | $ | 7,149 | $ | 6,796 | $ | 5,804 | |||||||||
Total customer cash balances ($ in millions) | $ | 1,376 | $ | 1,272 | $ | 1,229 | $ | 1,209 | $ | 1,159 | |||||||||
(b)Represents open and funded brokerage accounts.
During the year ended December 31, 2020, market volatility resulting from the COVID-19 pandemic and U.S. presidential election generated increased trade activity. Total funded accounts were flatincreased 17% from the prior quarter, and increased 15% from the fourth quarter of 2018, as our expenditures with third party marketing channels moderated during the fourth quarter of 2019. Average customer trades per day increased 183% from the priorfourth quarter of 2019, driven primarily due to customer behavior trends andby market dynamics.volatility. Additionally, net customer assets increased in71% from the fourth quarter of 2019, as a result of equity market appreciation.
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Risk Management
Managing the risk/reward trade-off is a fundamental component of operating our businesses, and all employees are responsible for managing risk. We use multiple layers of defense to identify, monitor, and manage current and emerging risks.
•Business lines — Responsible for owning and managing all of the risks that emanate from their risk-taking activities, including business units and support functions. •Independent risk management — 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 of the effectiveness of our risk management, internal controls, and governance; and independent assessments regarding the quality of our loan portfolios. Internal audit includes Audit Services and the Loan Review Group. |
Our risk-management framework is overseen by the Risk Committee (RC)RC of the Ally Board of Directors (our Board).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 risk 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, and Regulatory 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 Ally’s risk-generating activities. •Information technology/security 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. •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 policies.risk-management. In addition, the Enterprise Risk Management Committee (ERMC)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 Chief Executive Officer.
All business lines are subject to full and unrestricted audits by Audit Services. The Chief Audit Executive reports to the Audit Committee of our Board (AC),AC, as well as administratively to the Chief Executive Officer, and is primarily responsible for assisting the AC in fulfilling its governance and oversight
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responsibilities. Audit Services is granted free and unrestricted access to any and all of our records, physical properties, technologies, management, and employees.
In addition, our Loan 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 the Loan 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.
Loan and Operating Lease Exposure
The following table summarizes the exposures from our loan and operating-lease activities.
December 31, ($ in millions) | 2020 | 2019 | ||||||||||||
| Finance receivables and loans | ||||||||||||||
| Automotive Finance | $ | 96,809 | $ | 104,880 | ||||||||||
| Mortgage Finance | 14,632 | 16,181 | ||||||||||||
| Corporate Finance | 6,006 | 5,688 | ||||||||||||
| Corporate and Other (a) | 1,087 | 1,482 | ||||||||||||
| Total finance receivables and loans | 118,534 | 128,231 | ||||||||||||
| Loans held-for-sale | ||||||||||||||
| Mortgage Finance (b) | 91 | 28 | ||||||||||||
| Corporate Finance | 205 | 100 | ||||||||||||
| Corporate and Other | 110 | 30 | ||||||||||||
| Total loans held-for-sale | 406 | 158 | ||||||||||||
| Total on-balance-sheet loans | 118,940 | 128,389 | ||||||||||||
| Off-balance-sheet securitized loans | ||||||||||||||
| Automotive Finance (c) | — | 417 | ||||||||||||
| Whole-loan sales | ||||||||||||||
| Automotive Finance (c) | — | 207 | ||||||||||||
| Total off-balance-sheet loans | — | 624 | ||||||||||||
| Operating lease assets | ||||||||||||||
| Automotive Finance | 9,639 | 8,864 | ||||||||||||
| Total loan and operating lease exposure | $ | 128,579 | $ | 137,877 | ||||||||||
December 31, ($ in millions) | 2019 | 2018 | ||||||
| Finance receivables and loans | ||||||||
| Automotive Finance | $ | 104,880 | $ | 108,463 | ||||
| Mortgage Finance | 16,181 | 15,155 | ||||||
| Corporate Finance | 5,688 | 4,636 | ||||||
| Corporate and Other (a) | 1,482 | 1,672 | ||||||
| Total finance receivables and loans | 128,231 | 129,926 | ||||||
| Loans held-for-sale | ||||||||
| Automotive Finance | — | 210 | ||||||
| Mortgage Finance (b) | 28 | 8 | ||||||
| Corporate Finance | 100 | 47 | ||||||
| Corporate and Other | 30 | 49 | ||||||
| Total loans held-for-sale | 158 | 314 | ||||||
| Total on-balance-sheet loans | 128,389 | 130,240 | ||||||
| Off-balance-sheet securitized loans | ||||||||
| Automotive Finance (c) | 417 | 1,235 | ||||||
| Whole-loan sales | ||||||||
| Automotive Finance (c) | 207 | 634 | ||||||
| Total off-balance-sheet loans | 624 | 1,869 | ||||||
| Operating lease assets | ||||||||
| Automotive Finance | 8,864 | 8,417 | ||||||
| Total loan and operating lease exposure | $ | 137,877 | $ | 140,526 | ||||
(b)Represents the current balance of conforming mortgages originated directly to the held-for-sale portfolio.
(c)Represents the current unpaid principal balance of outstanding loans, which are subject to our customary representation, warranty, and covenant provisions.
The risks inherent in our loan and operating lease exposures are largely driven by changes in the overall economy, used vehicle and housing prices, unemployment levels, and their impact on our borrowers. The potential financial statement impact of these exposures varies depending on the accounting classification and future expected disposition strategy. We retain the majoritymost of our consumer automotive loans as they complement our core business model, but we do sell loans from time to time on an opportunistic basis. We ultimately manage the associated risks based on the underlying economics of the exposure. Our operating lease residual risk 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.
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 charge-offs. We refer to the amortized cost basis less the allowance for loan loss 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.
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Management’s Discussion and Analysis
Ally Financial Inc. • Form 10-K
•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.
•Off-balance-sheet securitized loans — Loans that we transfer off-balance sheet to nonconsolidated VIEs. 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. During the year ended December 31, 2020, we indicated our intent to exercise the clean-up call option related to the remaining nonconsolidated securitization-related VIE. As a result of this event, we became the primary beneficiary of the VIE and consolidated the VIE on our Consolidated Balance Sheet.
•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. During the year ended December 31, 2020, we entered into an agreement to repurchase the remaining assets and terminate the last outstanding whole-loan sales.
•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 as such 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 risk committees,RCs, executive leadership team, and our associates. Together, they oversee credit decisioning, account servicing activities, and credit-risk-management processes, and manage credit risk exposures within our risk appetite. In addition, our Loan Review Group provides an independent assessment of the quality of our credit portfolios and credit-risk-management practices and reports its findings to the RC on a regular basis.
To mitigate risk, we have implemented specific policies and practices across business lines, utilizing both qualitative and quantitative analyses. This reflects our commitment to maintaining an independent and ongoing assessment of credit risk and credit quality. Our policies require an objective and timely assessment of the overall quality of the consumer and commercial loan and operating lease portfolios. This includes the identification of relevant trends that affect the collectability of the portfolios, segments of the portfolios that are potential problem areas, loans and operating leases with potential credit weaknesses, and the assessment of the adequacy of internal credit risk policies and procedures. Our consumer and commercial loan and operating lease portfolios are subject to regular stress tests that are based on plausible, but unexpected, economic scenarios to assess how the portfolios may perform in a severe economic downturn. In addition, we establish and maintain underwriting policies and limits across our portfolios and higher risk segments (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.
We manage credit risk based on the risk profile of the borrower, the source of repayment, the underlying collateral, and current market conditions. We monitor the credit risk profile of individual borrowers, 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 using a range of indicators to assess the adequacy of the allowance for loan losses based on historical and current 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. For consumer automotive loans, we work with customers when they become delinquent on their monthly payment. In lieu of repossessing
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their vehicle, we may offer several types of assistance to aid our customers based on their willingness and ability to repay their loan. Loss mitigation may include payment extensions and rewrites of the loan terms. For mortgage loans, as part of certain programs, we offer mortgage loan modifications to qualified borrowers. These programs are in place to provide support to our mortgage customers in financial distress, including principal forgiveness, maturity extensions, delinquent interest capitalization, and changes to contractual interest rates.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, financial futures,and certain cash balances (for example, due from depository institutions, restricted accounts, and cash equivalents), and investment in debt securities.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. During 2019, theThe U.S. economy continuedhas started to modestly expand, led by consumer spending. The labor market remained robust duringrecover from shutdowns that resulted from the year, withCOVID-19 pandemic. After peaking at 14.7%, as adjusted, in April, the unemployment rate at 3.5%declined to 6.7% as of December 31, 2019. Within2020. As a result of the U.S. automotive market, neweconomic disruption from COVID-19, sales of light vehicle sales have moderated from both historic highs and year-over-yearmotor vehicles fell to an annual pace of 8.7 million in April, a 49-year low, before rising to a total16.3 million annual pace as of 17.0 million for the year ended December 31, 2019. We expect to experience modest downward pressure on2020. Elevated unemployment may limit further increases in used vehicle values duringin 2021, despite the strengthening in values in the second half of 2020. Additionally, used vehicle values may also be impacted by changes in customer preferences, including alternative transportation methods such as public transportation, vehicle sharing, and ride hailing.
Consumer Credit Portfolio
Our consumer loan portfolio primarily consists of automotive loans, first-lien mortgages, home equity loans and personal loans. Loan losses in our consumer loan portfolio are influenced by general business and economic conditions including unemployment rates, bankruptcy filings, and home and used vehicle prices. 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 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.
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 ended December 31, 2019,2020, 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, as well as high-quality jumbo and LMI mortgage loans that are acquired through bulk loan purchases and direct-to-consumer mortgage originations. We also further diversified our consumer portfolio to include point-of-sale personal lending through the acquisition of Health Credit Services duringAlly Lending, beginning in the fourth quarter of 2019. The carrying value of our nonprime consumer automotive loans before allowance for loan losses represented approximately 11.7% and 11.6% of our total consumer automotive loans at December 31, 2019, compared to approximately 11.7% at2020, and December 31, 2018.2019, 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.
The following table includes consumer finance receivables and loans recorded at gross carrying value.amortized cost.
| Outstanding | Nonperforming (a) | Accruing past due 90 days or more (b) | ||||||||||||||||||||||||||||||||||||
December 31, ($ in millions) | 2020 | 2019 | 2020 | 2019 | 2020 | 2019 | ||||||||||||||||||||||||||||||||
| Consumer automotive (c) (d) | $ | 73,668 | $ | 72,390 | $ | 1,256 | $ | 762 | $ | — | $ | — | ||||||||||||||||||||||||||
| Consumer mortgage | ||||||||||||||||||||||||||||||||||||||
| Mortgage Finance | 14,632 | 16,181 | 67 | 17 | — | — | ||||||||||||||||||||||||||||||||
| Mortgage — Legacy | 495 | 1,141 | 35 | 40 | — | — | ||||||||||||||||||||||||||||||||
| Total consumer mortgage | 15,127 | 17,322 | 102 | 57 | — | — | ||||||||||||||||||||||||||||||||
| Consumer other (e) | 399 | 201 | 3 | 2 | — | — | ||||||||||||||||||||||||||||||||
| Total consumer finance receivables and loans | $ | 89,194 | $ | 89,913 | $ | 1,361 | $ | 821 | $ | — | $ | — | ||||||||||||||||||||||||||
| Outstanding | Nonperforming (a) | Accruing past due 90 days or more (b) | |||||||||||||||||||||
December 31, ($ in millions) | 2019 | 2018 | 2019 | 2018 | 2019 | 2018 | |||||||||||||||||
| Consumer automotive (c) (d) | $ | 72,390 | $ | 70,539 | $ | 762 | $ | 664 | $ | — | $ | — | |||||||||||
| Consumer mortgage | |||||||||||||||||||||||
| Mortgage Finance | 16,181 | 15,155 | 17 | 9 | — | — | |||||||||||||||||
| Mortgage — Legacy | 1,141 | 1,546 | 40 | 70 | — | — | |||||||||||||||||
| Total consumer mortgage | 17,322 | 16,701 | 57 | 79 | — | — | |||||||||||||||||
| Consumer other (e) | 201 | — | 2 | — | — | — | |||||||||||||||||
| Total consumer finance receivables and loans | $ | 89,913 | $ | 87,240 | $ | 821 | $ | 743 | $ | — | $ | — | |||||||||||
(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 $8.2 billion at both December 31, 2020, and December 31, 2019, and RV loans of $1.1 billion and $1.3 billion at December 31, 2020, and December 31, 2019. (e)Excludes finance receivables of $8 million and $11 million at December 31, 2020, and December 31, 2019, for which we have elected the fair value option. |
Total consumer finance receivables and loans increased $2.7 billiondecreased $719 million at December 31, 2019,2020, compared with December 31, 2018.2019. The increasedecrease consists of $1.9$2.2 billion of consumer mortgage finance receivables and loans, partially offset by increases of $1.3 billion of consumer automotive finance receivables and loans $621 million of consumer mortgage finance receivables and loans, and $201$198 million of consumer other finance receivables and loans. The decrease was primarily due to lower consumer mortgage finance receivables and loans as a result of loan pay-offs which exceeded bulk loan purchases and direct-to-consumer origination volume, and a loan sale within our legacy mortgage portfolio. This decrease was partially offset by an increase in consumer automotive finance receivables and loans was primarily related to continued momentum in our used vehicle lending. The increase in consumer mortgage finance receivables and loans was primarily due to the execution of bulk loan purchases totaling $3.5 billion and direct-to-consumer held-for-investment originations of $2.0 billion during the year ended December 31, 2019. These increases were partially offset by portfolio run-off and the transfer of $940 million of consumer mortgage finance receivables and loans to held-for-sale, of which $864 million were sold during the year ended December 31, 2019. Thelending, as well as an increase in consumer other finance receivables and loans was dueprimarily related to the acquisition of Health Credit Services during the fourth quarter of 2019.Ally Lending loan originations which outpaced portfolio runoff.
Total consumer nonperforming finance receivables and loans at December 31, 2019,2020, increased $78$540 million to $821 million$1.4 billion from December 31, 2018, reflecting an increase of $98 million of consumer automotive finance receivables and loans and a decrease of $22 million of consumer mortgage nonperforming finance receivables and loans.2019. The increase in nonperforming consumer automotive finance receivables and loans was primarily due to higher delinquency rates as part of our continued diversification strategyconsumer automotive and consumer mortgage loan portfolios as a result of portfolio growth. The increase was also modestly impacted by a brief scheduled moratorium on all collections and repossession activities at the end of 2019 prior to the conversion to a new servicing and accounting technology platform during the first quarter of 2020. The decrease in nonperforming consumer mortgage finance receivables and loans was driven by the continued run-off of our legacy mortgage portfolio.COVID-19 pandemic. 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 1.5% at December 31, 2020, and 0.9% at both December 31, 2019, and December 31, 2018.2019.
Total consumer TDRs outstanding at December 31, 2019,2020, increased $20 million$1.2 billion since December 31, 2018,2019, to $746 million.$2.0 billion. Results primarily reflect a $42 million$1.3 billion increase in our consumer automotive loan portfolio, largely offset by a $22 million decrease in our consumer mortgage loan portfolio,portfolio. This increase is driven by the impact of our legacy mortgage portfolio.loan modification program offered to borrowers affected by the COVID-19 pandemic, as well as an increase in deferrals offered through our established risk management policies and practices to customers subsequent to a COVID-19 deferral, where the loan modification in connection with other factors resulted in a TDR classification. Refer to Note 9 to the Consolidated Financial Statements for additional information.
Consumer automotive loans accruing and past due 30 days or more increased $115decreased $782 million to $2.6$1.8 billion at December 31, 2019,2020, compared to December 31, 2018,2019, driven primarily by growth in the overall sizeimpact of our loan modification program offered to borrowers affected by the COVID-19 pandemic. We experienced a higher level of borrowers who entered nonaccrual status as result of a TDR classification primarily based on our evaluation of the consumer automotive loan portfolio, as well as higher delinquency rates as partunder our TDR framework which included a number of our continued diversification strategy.
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•In our consumer automotive loan portfolio, existing customers had the option to elect to defer their payments for up to 120 days without late fees being incurred, but with finance charges continuing to accrue. This program was made available to all consumer automotive loan customers beginning March 18, 2020, through June 21, 2020.
•In our consumer mortgage portfolio, existing customers experiencing financial hardship due to an interruption of income related to the COVID-19 pandemic were afforded the opportunity to defer their loan payments for up to 120 days, with an option for an additional 60 days, without late fees being incurred but with interest continuing to accrue. This program was made available to mortgage-lending customers from March 18, 2020, through July 31, 2020.
•In our consumer other portfolio, existing point-of-sale personal-lending customers experiencing financial hardship due to the COVID-19 pandemic had the opportunity to elect to defer their loan payments for up to 120 days without late fees being incurred or finance charges continuing to accrue. In addition to this program, we temporarily suspended late fees for all customers with current accounts. The loan-deferral program was made available to point-of-sale personal-lending customers from March 23, 2020, through June 30, 2020.
The participation of these programs and their status as of December 31, 2020, is summarized below.
December 31, 2020 (number of loans, units in thousands) | Consumer automotive | Consumer mortgage | Consumer other | |||||||||||||||||
| Requests for loan deferral | 1,254 | 2 | 6 | |||||||||||||||||
| Less: Cancellations | — | (1) | — | |||||||||||||||||
| Loans participating in COVID-19 deferral program, net (a) | 1,254 | 1 | 6 | |||||||||||||||||
| Loans remaining in COVID-19 deferral program at end of year | — | % | 4 | % | — | % | ||||||||||||||
| Delinquency status of loans that have exited the deferral period and remain outstanding (b) (c) | ||||||||||||||||||||
| Current | 90 | % | 85 | % | 83 | % | ||||||||||||||
| 30–59 days past due | 6 | 3 | 4 | |||||||||||||||||
| 60–89 days past due | 3 | 1 | 7 | |||||||||||||||||
| 90 or more days past due | 1 | 11 | 6 | |||||||||||||||||
| Total | 100 | % | 100 | % | 100 | % | ||||||||||||||
(a)Amounts include160 thousand consumer automotive loans and 1 thousand consumer other loans have subsequently paid-in-full, and 15 thousand consumer automotive loans that have subsequently been charged off.
(b)Amounts include 44 thousand consumer automotive loans that were subsequently modified and remain in an active modification programs. Amounts also include 1 thousand consumer mortgage loans that were subsequently modified for borrowers experiencing financial difficulties.
(c)Includes loans that have been modified that are considered to be a TDR. Refer to Note 1 to the Consolidated Financial Statements for additional information on our accounting policies for TDRs.
Substantially all of our customers with consumer loans that enrolled in our COVID-19 deferral programs have exited their deferral period at December 31, 2020. We continue to monitor the performance of these loans, and provide loan modifications to support the customer and reduce credit risk, as applicable, in line with our business practices. Refer to Note 1 to the Consolidated Financial Statements for additional information on our accounting policies for TDRs.
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For all borrowers who enroll in loan modification programs offered as a result of COVID-19, the delinquency status of the borrowers is frozen as of the date immediately preceding the commencement of the program, which resulted in a static delinquency metric during the deferral period. Upon exiting the deferral program, the measurement of loan delinquency resumes where it had left off upon entry into the program. The following table presents the delinquency status for outstanding consumer automotive loans that have exited the COVID-19 deferral program as of December 31, 2020, as compared to the delinquency status of the borrowers that were frozen as of the date immediately preceding the commencement of the program and reported as such during the deferral period.
Delinquency status as of December 31, 2020 (units in thousands) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Current | 30–59 days past due | 60–89 days past due | 90 or more days past due | Total | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Delinquency status during deferral period | Units | % of total | Units | % of total | Units | % of total | Units | % of total | Units | % of total | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Consumer automotive | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Current | 899 | 92 | 47 | 5 | 16 | 2 | 8 | 1 | 970 | 100 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| 30–59 days past due | 51 | 68 | 15 | 20 | 6 | 8 | 3 | 4 | 75 | 100 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| 60–89 days past due | 10 | 56 | 4 | 22 | 3 | 17 | 1 | 5 | 18 | 100 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| 90 or more days past due | 2 | 50 | 1 | 25 | — | — | 1 | 25 | 4 | 100 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Total consumer automotive (a) | 962 | 67 | 25 | 13 | 1,067 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
(a)As of December 31, 2020, 5% of all loans that have exited the COVID-19 deferral program have been written down to estimated collateral value, less costs to sell. Refer to Note 1 to the Consolidated Financial Statements for more information regarding our charge-off policies.
We continue to carefully monitor the performance of our borrowers and have taken proactive steps to expand staffing levels and have implemented digital tools in order to maximize collections and work with borrowers who may not be able to make their contractual payments upon exiting the deferral program. To date, current behaviors and payment activity have outperformed our initial expectations as well as historical payment performance for accounts with previously deferred payments. The future performance of these loans will be subject to a number of factors, including future economic conditions, the amount of additional Federal stimulus provided, and the level of impact that the COVID-19 pandemic may have.
The following table includes consumer net charge-offs from finance receivables and loans at gross carrying valueamortized cost and related ratios.
| Net charge-offs (recoveries) | Net charge-off ratios (a) | |||||||||||||||||||||||||||||||||||||||||||||||||
Year ended December 31, ($ in millions) | 2020 | 2019 | 2020 | 2019 | ||||||||||||||||||||||||||||||||||||||||||||||
| Consumer automotive | $ | 702 | $ | 930 | 1.0 | % | 1.3 | % | ||||||||||||||||||||||||||||||||||||||||||
| Consumer mortgage | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Mortgage Finance | 3 | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||
| Mortgage — Legacy | (6) | (8) | (0.6) | (0.6) | ||||||||||||||||||||||||||||||||||||||||||||||
| Total consumer mortgage | (3) | (8) | — | — | ||||||||||||||||||||||||||||||||||||||||||||||
| Consumer other | 14 | 5 | 5.3 | 9.6 | ||||||||||||||||||||||||||||||||||||||||||||||
| Total consumer finance receivables and loans | $ | 713 | $ | 927 | 0.8 | 1.0 | ||||||||||||||||||||||||||||||||||||||||||||
| Net charge-offs (recoveries) | Net charge-off ratios (a) | ||||||||||||
Year ended December 31, ($ in millions) | 2019 | 2018 | 2019 | 2018 | |||||||||
| Consumer automotive | $ | 930 | $ | 927 | 1.3 | % | 1.3 | % | |||||
| Consumer mortgage | |||||||||||||
| Mortgage Finance | — | 3 | — | — | |||||||||
| Mortgage — Legacy | (8 | ) | 7 | (0.6 | ) | 0.4 | |||||||
| Total consumer mortgage | (8 | ) | 10 | — | 0.1 | ||||||||
| Consumer other | 5 | — | 9.6 | — | |||||||||
| Total consumer finance receivables and loans | $ | 927 | $ | 937 | 1.0 | 1.1 | |||||||
Our net charge-offs from total consumer finance receivables and loans were $713 million for the year ended December 31, 2020, compared to $927 million for the year ended December 31, 2019, compared to $9372019. Net charge-offs for our consumer automotive portfolio decreased by $228 million for the year ended December 31, 2018.2020. The decrease in net charge-offs for the year ended December 31, 2019, was primarily driven by strong payment performance and delinquency trends through the pandemic, as well as a lower number of loans migrating to charge-off as a result of the COVID-19 loan deferral program. In addition, our consumer mortgage loan portfolio where we experienced strong credit performance as the legacy mortgage portfolio continues to run-off and wenet charge-offs continue to grow our Mortgage Finance business. Net charge-offs for our consumer automotive portfolio increased slightly by $3 million forbenefit from strong used vehicle prices which has reduced the year ended December 31, 2019. Results were primarily driven byrealized loss impact in instances of default. Through much of the relatively consistent credit profile offirst quarter, our consumer automotive loan portfolio which experienced strong overall credit performance, driven by favorable macroeconomic conditions including low unemployment as well asand continued disciplined underwriting underwriting. During the second half of March 2020 and continuing into the second quarter economic conditions deteriorated as a result of COVID-19. While economic conditions have improved throughout the second half of the year, and we have taken a number of actions including the utilization of loan modification programs to support our customers and manage credit risk, we may incur higher recoveries. Additionally, we experiencedcharge-offs in future periods as a modest reduction in net charge-offs due to a brief scheduled moratorium on all collectionsresult of continued economic dislocation resulting from the impacts of COVID-19.
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Management’s Discussion and repossession activities at the end of 2019 prior to the conversion to a new servicing and accounting technology platform during the first quarter of 2020.Analysis
Ally Financial Inc. • Form 10-K
The following table summarizes total consumer loan originations for the periods shown. Total consumer loan originations include loans classified as finance receivables and loans and loans held-for-sale during the period.
Year ended December 31, ($ in millions) | 2020 | 2019 | ||||||||||||||||||||||||
| Consumer automotive | $ | 30,497 | $ | 31,906 | ||||||||||||||||||||||
| Consumer mortgage (a) | 4,688 | 2,693 | ||||||||||||||||||||||||
| Consumer other (b) | 503 | 67 | ||||||||||||||||||||||||
| Total consumer loan originations | $ | 35,688 | $ | 34,666 | ||||||||||||||||||||||
Year ended December 31, ($ in millions) | 2019 | 2018 | ||||||
| Consumer automotive | $ | 31,906 | $ | 31,321 | ||||
| Consumer mortgage (a) | 2,693 | 703 | ||||||
| Consumer other (b) | 67 | — | ||||||
| Total consumer loan originations | $ | 34,666 | $ | 32,024 | ||||
(b)Amounts relate to originations from Ally Lending, which began in the fourth quarter of 2019.
Total consumer loan originations increased $2.6$1.0 billion for the year ended December 31, 2019,2020, compared to the year ended December 31, 2018, reflecting an increase of $2.0 billion of consumer mortgage loans and an increase of $585 million of consumer automotive loans.2019. The increase in consumer mortgage loan originations for the year ended December 31, 2019,2020, was primarily due to growth in the direct-to-consumer mortgage business. The increase inbusiness driven by the lower interest rate environment, as well as origination volume from Ally Lending. These increases were partially offset by lower consumer automotive loan originations fordriven by the year ended December 31, 2019, was primarily due to higher usedimpacts from the COVID-19 pandemic, including the temporary shutdown or restriction of front end operations of automotive dealers during the second quarter of 2020. These restrictions, along with the industry-wide halt of new vehicle volume.
The following table shows the percentage of consumer automotive and consumer mortgage finance receivables and loans by state concentration based on gross carrying value.amortized cost. Total consumer automotive loans were $72.4$73.7 billion and $70.5$72.4 billion at December 31, 2019,2020, and December 31, 2018,2019, respectively. Total consumer mortgage loans were $17.3$15.1 billion and $16.7$17.3 billion at December 31, 2019,2020, and December 31, 2018,2019, respectively.
| 2020 (a) | 2019 | |||||||||||||||||||||||||||||||
| December 31, | Consumer automotive | Consumer mortgage | Consumer automotive | Consumer mortgage | ||||||||||||||||||||||||||||
| California | 8.6 | % | 34.3 | % | 8.5 | % | 35.1 | % | ||||||||||||||||||||||||
| Texas | 12.5 | 8.0 | 12.4 | 6.5 | ||||||||||||||||||||||||||||
| Florida | 8.8 | 5.5 | 8.8 | 5.1 | ||||||||||||||||||||||||||||
| Pennsylvania | 4.5 | 2.0 | 4.6 | 1.9 | ||||||||||||||||||||||||||||
| Illinois | 4.0 | 3.0 | 4.1 | 2.6 | ||||||||||||||||||||||||||||
| North Carolina | 4.1 | 2.3 | 4.0 | 2.0 | ||||||||||||||||||||||||||||
| Georgia | 3.9 | 3.1 | 3.9 | 2.8 | ||||||||||||||||||||||||||||
| New York | 3.2 | 3.4 | 3.1 | 3.0 | ||||||||||||||||||||||||||||
| Ohio | 3.5 | 0.5 | 3.6 | 0.5 | ||||||||||||||||||||||||||||
| New Jersey | 2.9 | 2.2 | 2.8 | 2.3 | ||||||||||||||||||||||||||||
| Other United States | 44.0 | 35.7 | 44.2 | 38.2 | ||||||||||||||||||||||||||||
| Total consumer loans | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | ||||||||||||||||||||||||
| 2019 (a) | 2018 | ||||||||||
| December 31, | Consumer automotive | Consumer mortgage | Consumer automotive | Consumer mortgage | |||||||
| California | 8.5 | % | 35.1 | % | 8.4 | % | 36.9 | % | |||
| Texas | 12.4 | 6.5 | 12.8 | 6.2 | |||||||
| Florida | 8.8 | 5.1 | 8.8 | 4.7 | |||||||
| Pennsylvania | 4.6 | 1.9 | 4.5 | 1.4 | |||||||
| Illinois | 4.1 | 2.6 | 4.1 | 3.0 | |||||||
| Georgia | 3.9 | 2.8 | 4.1 | 2.8 | |||||||
| North Carolina | 4.0 | 2.0 | 3.9 | 1.7 | |||||||
| New York | 3.1 | 3.0 | 3.1 | 2.4 | |||||||
| Ohio | 3.6 | 0.5 | 3.5 | 0.4 | |||||||
| New Jersey | 2.8 | 2.3 | 2.7 | 2.1 | |||||||
| Other United States | 44.2 | 38.2 | 44.1 | 38.4 | |||||||
| Total consumer loans | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | |||
We monitor our consumer loan portfolio for concentration risk across the states in which we lend. The highest concentrations of consumer loans are in California and Texas, which represented an aggregate of 24.9%24.7% and 25.4%24.9% of our total outstanding consumer finance receivables and loans at December 31, 2020, and December 31, 2019,, and December 31, 2018, respectively. Our consumer mortgage loan portfolio concentration within California, which is primarily composed of high-quality jumbo mortgage loans, generally aligns to the California share of jumbo mortgages nationally.
Repossessed and Foreclosed Assets
We classify an asset as repossessed or foreclosed, which is included in other assets on our 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 increased $11$39 million from December 31, 2018,2019, to $147$186 million at December 31, 2019.2020. Foreclosed mortgage assets decreased $2$7 million from December 31, 2018,2019, to $9$2 million at December 31, 2019.2020, primarily due to the foreclosure moratorium that was in effect through the end of the year.
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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 includingfrom our Corporate Finance lending portfolio.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 ended December 31, 2019,2020, the credit performance of the commercial portfolio remained strongstable as nonperforming finance receivables and loans decreased, and our net charge-offs remained low. For information on our commercial credit risk practices and policies regarding delinquencies, nonperforming status, and charge-offs, refer to Note 1 to the Consolidated Financial Statements.
The following table includes total commercial finance receivables and loans reported at gross carrying value.amortized cost.
| Outstanding | Nonperforming (a) | Accruing past due 90 days or more (b) | |||||||||||||||||||||||||||||||||
December 31, ($ in millions) | 2020 | 2019 | 2020 | 2019 | 2020 | 2019 | |||||||||||||||||||||||||||||
| Commercial and industrial | |||||||||||||||||||||||||||||||||||
| Automotive | $ | 19,082 | $ | 28,332 | $ | 40 | $ | 73 | $ | — | $ | — | |||||||||||||||||||||||
| Other (c) | 5,242 | 5,014 | 116 | 138 | — | — | |||||||||||||||||||||||||||||
| Commercial real estate | 5,008 | 4,961 | 5 | 4 | — | — | |||||||||||||||||||||||||||||
| Total commercial finance receivables and loans | $ | 29,332 | $ | 38,307 | $ | 161 | $ | 215 | $ | — | $ | — | |||||||||||||||||||||||
| Outstanding | Nonperforming (a) | Accruing past due 90 days or more (b) | |||||||||||||||||||||
December 31, ($ in millions) | 2019 | 2018 | 2019 | 2018 | 2019 | 2018 | |||||||||||||||||
| Commercial and industrial | |||||||||||||||||||||||
| Automotive | $ | 28,332 | $ | 33,672 | $ | 73 | $ | 203 | $ | — | $ | — | |||||||||||
| Other (c) | 5,014 | 4,205 | 138 | 142 | — | — | |||||||||||||||||
| Commercial real estate | 4,961 | 4,809 | 4 | 4 | — | — | |||||||||||||||||
| Total commercial finance receivables and loans | $ | 38,307 | $ | 42,686 | $ | 215 | $ | 349 | $ | — | $ | — | |||||||||||
(a)Includes nonaccrual TDR loans of $125 million and $114 million at December 31, 2020, and |
(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 decreased$4.4 $9.0 billion from December 31, 2018, to $38.3 billion at December 31, 2019,. The to $29.3 billion at December 31, 2020. Results primarily reflect a $9.3 billion decrease was primarilyin our commercial automotive loan portfolio due to lower dealer inventory levels, driven by a reduction in the number of GM dealer relationshipslower automotive production levels due to the competitive environment across the automotive lending market and reduced dealer inventory levels.COVID-19. This decrease was partially offset by growth in our Corporate Financea $228 million increase to commercial other loans within the commercial and industrial portfolio that wasclass, driven primarily driven by asset-based lending, includingmostly through our lender finance vertical, which provides asset managers with partial funding for their direct lending activities. This decrease was also partially offset by $47 million increase in our commercial real estate portfolio.
Total commercial nonperforming finance receivables and loans were $215$161 million at December 31, 2019,2020, reflecting a decrease of $134$54 million when compared to December 31, 2018.2019. The decrease was primarily due to reducedlower dealer inventory levels and a lower number of impaired accounts within the commercial automotive portfolio, as well as the upgrade of one exposure to one large automotive dealer group that was placed into defaultaccrual status within commercial other in the fourth quarter of 2018.our commercial and industrial portfolio class. Nonperforming commercial finance receivables and loans as a percentage of outstanding commercial finance receivables and loans decreased to 0.5% at December 31, 2020, compared to 0.6% at December 31, 2019, compared2019.
In response to 0.8%the impacts caused by the COVID-19 pandemic, commercial automotive dealer customers that were current on all payment obligations were offered a waiver of curtailments on wholesale floorplan loans, an increase in floorplan advance rates, a deferral of interest and insurance charges on wholesale borrowings, and a deferral of term loan payments from April through July 2020. Approximately 2,290 or 73% of eligible dealers requested at least one form of this assistance for at least one month as part of this program. Dealers that elected to defer wholesale interest and insurance payments were provided with the option to repay such balances over a 4- or 12-month period without additional interest charges or fees. As of December 31, 2018.2020, we have collected approximately 63% of all deferred wholesale interest and insurance charges, 100% of dealers are current on their repayment terms, and in the aggregate, remittances from dealers exceed their scheduled repayment obligations.
Total commercial TDRs outstanding at December 31, 2019,2020, increased $35$82 million since December 31, 2018,2019, to $121 million, reflecting an increase of $20 million in our Corporate Finance portfolio and an increase of $15 million in our commercial automotive portfolio.$203 million. The increase in our Corporate Finance portfolio was primarily driven by the restructuring of three accounts being classified as TDRs, partially offset by the partial liquidation and charge-off of two accounts. The increaseexposures within commercial other in our commercial automotiveand industrial portfolio was primarily driven by TDRs involving one large automotive dealer group that was placed into default in the fourth quarter of 2018.class. Refer to Note 9 to the Consolidated Financial Statements for additional information.
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The following table includes total commercial net charge-offs from finance receivables and loans at gross carrying valueamortized cost and related ratios.
| Net charge-offs | Net charge-off ratios (a) | |||||||||||||||||||||||||||||||||||||||||||||||||
Year ended December 31, ($ in millions) | 2020 | 2019 | 2020 | 2019 | ||||||||||||||||||||||||||||||||||||||||||||||
| Commercial and industrial | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Automotive | $ | 13 | $ | 12 | 0.1 | % | — | % | ||||||||||||||||||||||||||||||||||||||||||
| Other | 37 | 37 | 0.7 | 0.8 | ||||||||||||||||||||||||||||||||||||||||||||||
| Commercial real estate | 1 | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||
| Total commercial finance receivables and loans | $ | 51 | $ | 49 | 0.2 | 0.1 | ||||||||||||||||||||||||||||||||||||||||||||
| Net charge-offs | Net charge-off ratios (a) | |||||||||||||
Year ended December 31, ($ in millions) | 2019 | 2018 | 2019 | 2018 | ||||||||||
| Commercial and industrial | ||||||||||||||
| Automotive | $ | 12 | $ | 5 | — | % | — | % | ||||||
| Other | 37 | 3 | 0.8 | 0.1 | ||||||||||
| Total commercial finance receivables and loans | $ | 49 | $ | 8 | 0.1 | — | ||||||||
Our net charge-offs from total commercial finance receivables and loans were $51 million for the year ended December 31, 2020, compared to net charge-offs of $49 million for the year ended December 31, 2019, compared to net charge-offs of $8 million for the year ended December 31, 2018. The increase for the year ended December 31, 2019, was primarily driven by partial charge-offs of four exposures within our Corporate Finance portfolio, as well as three accounts within our commercial automotive portfolio.2019. Charge-off activity during 2019remained stable year-over-year and was in line with expectations for these businesses.
Commercial Real Estate
The commercial real estate portfolio consists of finance receivables and loans issued primarily to automotive dealers. Commercial real estate finance receivables and loans were $5.0 billion and $4.8 billion at both December 31, 2019,2020, and December 31, 2018, respectively.
The following table presents the percentage of total commercial real estate finance receivables and loans by state concentration based on gross carrying value.amortized cost.
| December 31, | 2019 | 2018 | December 31, | 2020 | 2019 | ||||||||||||||
| Florida | Florida | 13.3 | % | 11.6 | % | ||||||||||||||
| Texas | 15.0 | % | 15.5 | % | Texas | 13.0 | 15.0 | ||||||||||||
| Florida | 11.6 | 11.6 | |||||||||||||||||
| California | California | 7.9 | 7.2 | ||||||||||||||||
| Michigan | 8.2 | 6.8 | Michigan | 7.7 | 8.2 | ||||||||||||||
| California | 7.2 | 8.3 | |||||||||||||||||
| New York | 5.9 | 4.8 | New York | 5.6 | 5.9 | ||||||||||||||
| North Carolina | 4.6 | 3.6 | North Carolina | 5.5 | 4.6 | ||||||||||||||
| Georgia | 3.5 | 4.0 | Georgia | 3.6 | 3.5 | ||||||||||||||
| New Jersey | 2.9 | 3.1 | |||||||||||||||||
| Utah | Utah | 3.0 | 2.3 | ||||||||||||||||
| Illinois | Illinois | 2.8 | 2.4 | ||||||||||||||||
| South Carolina | 2.8 | 3.4 | South Carolina | 2.5 | 2.8 | ||||||||||||||
| Illinois | 2.4 | 2.0 | |||||||||||||||||
| Other United States | 35.9 | 36.9 | Other United States | 35.1 | 36.5 | ||||||||||||||
| Total commercial real estate finance receivables and loans | 100.0 | % | 100.0 | % | 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 $251decreased $236 million from December 31, 2018,2019, to $4.2$4.0 billion at December 31, 2019.2020. The increasedecrease was primarily due to lower dealer inventory levels in our commercial automotive portfolio driven by COVID-19-related production shutdowns during the downgradesecond quarter of two dealership groups2020, as well as continued lower production levels as automotive manufacturers work to return to pre-pandemic levels. This decrease was partially offset by an increase in December.special mention accounts within commercial other in our commercial and industrial receivable class. The increase was mainly driven by the impact of COVID-19 on the operations of borrowers in several different industries.
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The following table presents the percentage of total commercial criticized finance receivables and loans by industry concentration based on gross carrying value.amortized cost.
| December 31, | 2019 | 2018 | December 31, | 2020 | 2019 | ||||||||||||||
| Industry | Industry | ||||||||||||||||||
| Automotive | 81.7 | % | 80.6 | % | Automotive | 67.7 | % | 81.7 | % | ||||||||||
| Health/Medical | Health/Medical | 7.3 | 2.9 | ||||||||||||||||
| Services | 5.4 | 5.0 | Services | 5.8 | 5.4 | ||||||||||||||
| Electronics | 3.7 | 2.3 | |||||||||||||||||
| Other | 9.2 | 12.1 | Other | 19.2 | 10.0 | ||||||||||||||
| Total commercial criticized finance receivables and loans | 100.0 | % | 100.0 | % | Total commercial criticized finance receivables and loans | 100.0 | % | 100.0 | % | ||||||||||
Selected Loan Maturity and Sensitivity Data
The table below shows the maturity of the commercial finance receivables and loans portfolio and the distribution between fixed and floating interest rates based on the stated terms of the commercial loan agreements. This portfolio is reported at gross carrying value.based on amortized cost.
December 31, 2020 ($ in millions) | Due in one year or less (a) | Due after one year through five years | Due after five years | Total (b) | ||||||||||||||||||||||
| Commercial and industrial | $ | 17,855 | $ | 5,624 | $ | 845 | $ | 24,324 | ||||||||||||||||||
| Commercial real estate | 352 | 1,975 | 2,681 | 5,008 | ||||||||||||||||||||||
| Total commercial finance receivables and loans | $ | 18,207 | $ | 7,599 | $ | 3,526 | $ | 29,332 | ||||||||||||||||||
| Loans at fixed interest rates | $ | 2,171 | $ | 2,881 | ||||||||||||||||||||||
| Loans at variable interest rates | 5,428 | 645 | ||||||||||||||||||||||||
| Total commercial finance receivables and loans | $ | 7,599 | $ | 3,526 | ||||||||||||||||||||||
December 31, 2019 ($ in millions) | Due in one year or less (a) | Due after one year through five years | Due after five years | Total (b) | ||||||||||||
| Commercial and industrial | $ | 27,762 | $ | 4,693 | $ | 891 | $ | 33,346 | ||||||||
| Commercial real estate | 368 | 2,001 | 2,592 | 4,961 | ||||||||||||
| Total commercial finance receivables and loans | $ | 28,130 | $ | 6,694 | $ | 3,483 | $ | 38,307 | ||||||||
| Loans at fixed interest rates | $ | 1,504 | $ | 2,765 | ||||||||||||
| Loans at variable interest rates | 5,190 | 718 | ||||||||||||||
| Total commercial finance receivables and loans | $ | 6,694 | $ | 3,483 | ||||||||||||
Allowance for Loan Losses
| ($ in millions) | Consumer automotive | Consumer mortgage | Consumer other | Total consumer | Commercial | Total | ||||||||||||||||||
| Allowance at January 1, 2019 | $ | 1,048 | $ | 53 | $ | — | $ | 1,101 | $ | 141 | $ | 1,242 | ||||||||||||
| Charge-offs (a) | (1,423 | ) | (13 | ) | (5 | ) | (1,441 | ) | (49 | ) | (1,490 | ) | ||||||||||||
| Recoveries | 493 | 21 | — | 514 | — | 514 | ||||||||||||||||||
| Net charge-offs | (930 | ) | 8 | (5 | ) | (927 | ) | (49 | ) | (976 | ) | |||||||||||||
| Provision for loan losses | 957 | (13 | ) | 14 | 958 | 40 | 998 | |||||||||||||||||
| Other | — | (2 | ) | — | (2 | ) | 1 | (1 | ) | |||||||||||||||
| Allowance at December 31, 2019 | $ | 1,075 | $ | 46 | $ | 9 | $ | 1,130 | $ | 133 | $ | 1,263 | ||||||||||||
| Allowance for loan losses to finance receivables and loans outstanding at December 31, 2019 (b) | 1.5 | % | 0.3 | % | 4.6 | % | 1.3 | % | 0.3 | % | 1.0 | % | ||||||||||||
| Net charge-offs to average finance receivables and loans outstanding for the year ended December 31, 2019 (c) | 1.3 | % | — | % | 9.6 | % | 1.0 | % | 0.1 | % | 0.8 | % | ||||||||||||
| Allowance for loan losses to total nonperforming finance receivables and loans at December 31, 2019 (b) | 141.1 | % | 80.5 | % | 606.8 | % | 137.8 | % | 61.6 | % | 121.9 | % | ||||||||||||
| Ratio of allowance for loan losses to net charge-offs at December 31, 2019 (c) | 1.2 | (5.9 | ) | 0.5 | 1.2 | 2.7 | 1.3 | |||||||||||||||||
| ($ in millions) | Consumer automotive | Consumer mortgage | Total consumer | Commercial | Total | |||||||||||||||
| Allowance at January 1, 2018 | $ | 1,066 | $ | 79 | $ | 1,145 | $ | 131 | $ | 1,276 | ||||||||||
| Charge-offs (a) | (1,383 | ) | (35 | ) | (1,418 | ) | (15 | ) | (1,433 | ) | ||||||||||
| Recoveries | 456 | 25 | 481 | 7 | 488 | |||||||||||||||
| Net charge-offs | (927 | ) | (10 | ) | (937 | ) | (8 | ) | (945 | ) | ||||||||||
| Provision for loan losses | 911 | (15 | ) | 896 | 22 | 918 | ||||||||||||||
| Other (b) | (2 | ) | (1 | ) | (3 | ) | (4 | ) | (7 | ) | ||||||||||
| Allowance at December 31, 2018 | $ | 1,048 | $ | 53 | $ | 1,101 | $ | 141 | $ | 1,242 | ||||||||||
| Allowance for loan losses to finance receivables and loans outstanding at December 31, 2018 (c) | 1.5 | % | 0.3 | % | 1.3 | % | 0.3 | % | 1.0 | % | ||||||||||
| Net charge-offs to average finance receivables and loans outstanding for the year ended December 31, 2018 | 1.3 | % | 0.1 | % | 1.1 | % | — | % | 0.8 | % | ||||||||||
| Allowance for loan losses to total nonperforming finance receivables and loans at December 31, 2018 (c) | 157.8 | % | 67.3 | % | 148.2 | % | 40.5 | % | 113.8 | % | ||||||||||
| Ratio of allowance for loan losses to net charge-offs at December 31, 2018 | 1.1 | 5.3 | 1.2 | 16.7 | 1.3 | |||||||||||||||
| 2019 | 2018 | |||||||||||||||||||
December 31, ($ in millions) | Allowance for loan losses | Allowance as a % of loans outstanding | Allowance as a % of total allowance for loan losses | Allowance for loan losses | Allowance as a % of loans outstanding | Allowance as a % of total allowance for loan losses | ||||||||||||||
| Consumer | ||||||||||||||||||||
| Consumer automotive | $ | 1,075 | 1.5 | % | 85.1 | % | $ | 1,048 | 1.5 | % | 84.3 | % | ||||||||
| Consumer mortgage | ||||||||||||||||||||
| Mortgage Finance | 19 | 0.1 | 1.5 | 16 | 0.1 | 1.3 | ||||||||||||||
| Mortgage — Legacy | 27 | 2.3 | 2.2 | 37 | 2.4 | 3.0 | ||||||||||||||
| Total consumer mortgage | 46 | 0.3 | 3.7 | 53 | 0.3 | 4.3 | ||||||||||||||
| Consumer other | 9 | 4.6 | 0.7 | — | — | — | ||||||||||||||
| Total consumer loans | 1,130 | 1.3 | 89.5 | 1,101 | 1.3 | 88.6 | ||||||||||||||
| Commercial | ||||||||||||||||||||
| Commercial and industrial | ||||||||||||||||||||
| Automotive | 31 | 0.1 | 2.5 | 36 | 0.1 | 2.9 | ||||||||||||||
| Other | 78 | 1.5 | 6.1 | 77 | 1.8 | 6.2 | ||||||||||||||
| Commercial real estate | 24 | 0.5 | 1.9 | 28 | 0.6 | 2.3 | ||||||||||||||
| Total commercial loans | 133 | 0.3 | 10.5 | 141 | 0.3 | 11.4 | ||||||||||||||
| Total allowance for loan losses | $ | 1,263 | 1.0 | 100.0 | % | $ | 1,242 | 1.0 | 100.0 | % | ||||||||||
Year ended December 31, ($ in millions) | 2019 | 2018 | 2017 | |||||||||
| Consumer | ||||||||||||
| Consumer automotive | $ | 957 | $ | 911 | $ | 1,127 | ||||||
| Consumer mortgage | ||||||||||||
| Mortgage Finance | 5 | 1 | 8 | |||||||||
| Mortgage — Legacy | (18 | ) | (16 | ) | (15 | ) | ||||||
| Total consumer mortgage | (13 | ) | (15 | ) | (7 | ) | ||||||
| Consumer other | 14 | — | — | |||||||||
| Total consumer loans | 958 | 896 | 1,120 | |||||||||
| Commercial | ||||||||||||
| Commercial and industrial | ||||||||||||
| Automotive | 8 | 8 | 6 | |||||||||
| Other | 36 | 12 | 21 | |||||||||
| Commercial real estate | (4 | ) | 2 | 1 | ||||||||
| Total commercial loans | 40 | 22 | 28 | |||||||||
| Total provision for loan losses | $ | 998 | $ | 918 | $ | 1,148 | ||||||
Implementation of CECL
We planhave elected to phase inphase-in the day-oneestimated impact of CECL into regulatory capital in accordance with the interim final rule of the FRB and other U.S. banking agencies that became effective on March 31, 2020, and was subsequently clarified and adjusted in a final rule that became effective September 30, 2020. As a result, we will delay recognizing the estimated impact of CECL on regulatory capital rulesuntil after a two-year deferral period, which permitfor us extends through December 31, 2021. Beginning on January 1, 2022, we will be required to phase in 25% of the previously deferred estimated capital impact of CECL, in 2020 andwith an additional 25% to be phased in at the beginning of each subsequent year until fully phased in by the first quarter of 2023. We estimate that2025. Refer to Note 20 to the implementationConsolidated Financial Statements for further details about the impact of CECL will reduce our Common Equity Tier 1 capital ratio by 17on regulatory capital.
The CECL standard introduced a new accounting model to 19 basis points duringmeasure credit losses for financial assets measured at amortized costs. In contrast to the first quarterprevious 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 2020.the financial asset or group of assets.
Under CECL, our modeling process willprocesses incorporate the following considerations:
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, macroeconomic variables that our consumer automotive allowance for loan losses is most sensitive to include national and state unemployment levels. 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
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allowance for loan losses, we also incorporate qualitative adjustments that may relate to idiosyncratic risks, changes in current economic conditions that may not be reflected in quantitatively derived results such as the impacts associated with COVID-19. 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.
COVID-19 Impacts
During the second half of March 2020, the economy experienced a significant deterioration in the macroeconomic environment driven by the COVID-19 pandemic resulting in notable adverse changes to forecasted economic variables that are utilized in our modeling processes. Given the fact that the macroeconomic information utilized in our quantitative allowance processes did not fully reflect the rapidly evolving economic changes resulting from the COVID-19 pandemic, we utilized our qualitative allowance framework to ensure the total reserve under CECL reflected the most current forecast of the broader macroeconomic environment.
To help inform our forecast, we considered publicly published, broadly available stressed macroeconomic data including the Moody’s forecast from March 27, 2020, that reflected the most recent available information that considered the evolving impacts of developments from the COVID-19 pandemic as of March 31, 2020, in order to support the qualitative adjustments incorporated into our total allowance. Stressed macroeconomic variables that we utilized as of March 31, 2020, include the following, among others: unemployment rate approaching 10%, significant GDP contraction quarter-over-quarter, and declining new light vehicle sales. Our qualitatively determined allowance associated with deterioration in the macroeconomic outlook from COVID-19 resulted in provision expense of $602 million which was incremental to our modeled reserves.
Through June 2020, forecasted economic variables utilized in our allowance modeling processes were updated to reflect the current macroeconomic environment and our future expectations which included (but were not limited to) the following: the unemployment rate rising to a peak of approximately 14%, declining to approximately 9% by the end of 2020, before subsequently migrating to our historical mean of approximately 6% by the middle of 2023, significant near-term GDP contraction, and a continuation of lower levels of new light vehicle sales. The updated economic forecast resulted in an increase in the allowance for loan losses informed through our modeling process as compared to the period ending March 31, 2020. Using our qualitative allowance framework, we reassessed and adjusted levels to reflect our current estimate of credit losses in our portfolios which considered among other things, idiosyncratic risks as well as performance of our portfolio subject to our deferral programs.
Through September 2020, forecasted economic variables utilized in our allowance modeling processes were updated to reflect the current macroeconomic environment and our future expectations which included (but were not limited to) the following: the unemployment rate moderating to approximately 9% in September 2020 after reaching year-to-date highs of nearly 15% in April 2020, declining to approximately 8% by the end of 2020, before migrating downward to our historical mean of approximately 7% by the third quarter of 2023, a significant near term recovery in GDP as measured on a quarter-over-quarter seasonally adjusted annualized rate basis, and a recovery of new light vehicle sales on a seasonally adjusted annualized rate basis of approximately 15 million units by the end of 2020. In addition to updating the macroeconomic variables for our quantitative processes, we reassessed reserves under our qualitative framework for potential adjustment during the quarter ended September 30, 2020. The improvement in the macroeconomic outlook through our modeling processes resulted in a decrease in reserves that was more than offset by other factors, specifically the significant increase in end of period balances in our consumer automotive portfolio.
Through December 2020, forecasted economic variables utilized in our quantitative allowance processes were updated to reflect the current macroeconomic environment and our future expectations which included (but were not limited to) the following: the unemployment rate declining to approximately 7% by the end of 2021, which is consistent with our historical mean of approximately 7% starting in the fourth quarter of 2023, stable GDP growth over 2021 as measured on a quarter-over-quarter seasonally adjusted annualized rate basis, and increases in new light vehicle sales on a seasonally adjusted annualized rate basis to approximately 16 million units by the end of 2021. Given the overall improvement in the macroeconomic variables quarter-over-quarter, it resulted in a decrease in the allowance for loan losses through our quantitative reserving process. Using our qualitative allowance framework, we reassessed and adjusted levels by incorporating uncertainty and volatility in the macroeconomic environment due to the COVID-19 pandemic, which partially offset the decreases in reserves from our quantitative process. As a result, our overall allowance for loan losses decreased $96 million from the prior quarter to $3.3 billion at December 31, 2020, representing 2.8% as a percentage of total finance receivables as of December 31, 2020, compared to 2.9% as of September 30, 2020, 2.8% as of June 30, 2020, and 2.5% as of March 31, 2020.
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The following table presents an analysis of the activity in the allowance for loan losses on finance receivables and loans for the year ended December 31, 2020, and includes the cumulative effect of adopting CECL.
| ($ in millions) | Consumer automotive | Consumer mortgage | Consumer other | Total consumer | Commercial | Total | ||||||||||||||||||||||||||||||||
| Allowance at December 31, 2019 | $ | 1,075 | $ | 46 | $ | 9 | $ | 1,130 | $ | 133 | $ | 1,263 | ||||||||||||||||||||||||||
| Cumulative effect of the adoption of Accounting Standards Update 2016-13 | 1,334 | (6) | 16 | 1,344 | 2 | 1,346 | ||||||||||||||||||||||||||||||||
| Allowance at January 1, 2020 | $ | 2,409 | $ | 40 | $ | 25 | $ | 2,474 | $ | 135 | $ | 2,609 | ||||||||||||||||||||||||||
| Charge-offs (a) | (1,244) | (13) | (15) | (1,272) | (54) | (1,326) | ||||||||||||||||||||||||||||||||
| Recoveries | 542 | 16 | 1 | 559 | 3 | 562 | ||||||||||||||||||||||||||||||||
| Net charge-offs | (702) | 3 | (14) | (713) | (51) | (764) | ||||||||||||||||||||||||||||||||
| Provision due to change in portfolio size | 47 | (6) | 39 | 80 | (9) | 71 | ||||||||||||||||||||||||||||||||
| Provision due to incremental charge-offs | 702 | (3) | 14 | 713 | 51 | 764 | ||||||||||||||||||||||||||||||||
| Provision due to all other factors (b) | 445 | (1) | 9 | 453 | 151 | 604 | ||||||||||||||||||||||||||||||||
| Total provision for credit losses (c) | 1,194 | (10) | 62 | 1,246 | 193 | 1,439 | ||||||||||||||||||||||||||||||||
| Other | 1 | — | — | 1 | (2) | (1) | ||||||||||||||||||||||||||||||||
| Allowance at December 31, 2020 | $ | 2,902 | $ | 33 | $ | 73 | $ | 3,008 | $ | 275 | $ | 3,283 | ||||||||||||||||||||||||||
| Allowance for loan losses to finance receivables and loans outstanding (d) | 3.9 | % | 0.2 | % | 18.4 | % | 3.4 | % | 0.9 | % | 2.8 | % | ||||||||||||||||||||||||||
| Net charge-offs to average finance receivables and loans outstanding for the year ended December 31, 2020 | 1.0 | % | — | % | 5.3 | % | 0.8 | % | 0.2 | % | 0.6 | % | ||||||||||||||||||||||||||
| Allowance for loan losses to total nonperforming finance receivables and loans (d) | 231.1 | % | 32.7 | % | n/m | 221.1 | % | 171.0 | % | 215.8 | % | |||||||||||||||||||||||||||
| Ratio of allowance for loan losses to net charge-offs at December 31, 2020 | 4.1 | (13.1) | 5.2 | 4.2 | 5.4 | 4.3 | ||||||||||||||||||||||||||||||||
n/m = not meaningful
(a)Refer to Note 1 to the Consolidated Financial Statements for information regarding our charge-off policies.
(b)Amounts include provision expense associated with the impacts of COVID-19, as further described in the section above.
(c)Consumer mortgage provision expense includes $7 million related to Mortgage Finance and a provision benefit of $17 million related to our legacy mortgage portfolio. Commercial provision expense includes $28 million related to commercial automotive and $150 million related to commercial other within the commercial and industrial portfolio class, and $15 million related to commercial real estate.
(d)Coverage percentages are based on the allowance for loan losses related to finance receivables and loans excluding those loans held at fair value as a percentage of the amortized cost.
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The following table presents an analysis of the activity in the allowance for loan losses on finance receivables and loans for the year ended December 31, 2019, prior to the adoption of CECL, as defined by the previous accounting guidance in effect at that time.
| ($ in millions) | Consumer automotive | Consumer mortgage | Consumer other | Total consumer | Commercial | Total | ||||||||||||||||||||||||||||||||||||||
| Allowance at January 1, 2019 | $ | 1,048 | $ | 53 | $ | — | $ | 1,101 | $ | 141 | $ | 1,242 | ||||||||||||||||||||||||||||||||
| Charge-offs (a) | (1,423) | (13) | (5) | (1,441) | (49) | (1,490) | ||||||||||||||||||||||||||||||||||||||
| Recoveries | 493 | 21 | — | 514 | — | 514 | ||||||||||||||||||||||||||||||||||||||
| Net charge-offs | (930) | 8 | (5) | (927) | (49) | (976) | ||||||||||||||||||||||||||||||||||||||
| Provision for credit losses (b) | 957 | (13) | 14 | 958 | 40 | 998 | ||||||||||||||||||||||||||||||||||||||
| Other | — | (2) | — | (2) | 1 | (1) | ||||||||||||||||||||||||||||||||||||||
| Allowance at December 31, 2019 | $ | 1,075 | $ | 46 | $ | 9 | $ | 1,130 | $ | 133 | $ | 1,263 | ||||||||||||||||||||||||||||||||
| Allowance for loan losses to finance receivables and loans outstanding (c) | 1.5 | % | 0.3 | % | 4.6 | % | 1.3 | % | 0.3 | % | 1.0 | % | ||||||||||||||||||||||||||||||||
| Net charge-offs to average finance receivables and loans outstanding for the year ended December 31, 2019 | 1.3 | % | — | % | 9.6 | % | 1.0 | % | 0.1 | % | 0.8 | % | ||||||||||||||||||||||||||||||||
| Allowance for loan losses to total nonperforming finance receivables and loans (c) | 141.1 | % | 80.5 | % | n/m | 137.8 | % | 61.6 | % | 121.9 | % | |||||||||||||||||||||||||||||||||
| Ratio of allowance for loan losses to net charge-offs at December 31, 2019 | 1.2 | (5.9) | 0.5 | 1.2 | 2.7 | 1.3 | ||||||||||||||||||||||||||||||||||||||
n/m = not meaningful
(a)Refer to Note 1 to the Consolidated Financial Statements for information regarding our charge-off policies.
(b)Consumer mortgage provision expense includes $5 million related to Mortgage Finance and a provision benefit of $18 million related to our legacy mortgage portfolio. Commercial provision expense includes $8 million related to commercial automotive and $36 million related to commercial other within the commercial and industrial portfolio class, and $4 million in provision benefit related to commercial real estate.
(c)Coverage percentages are based on the allowance for loan losses related to finance receivables and loans excluding those loans held at fair value as a percentage of the gross carrying value.
The allowance for consumer loan losses at December 31, 2020, increased $1.9 billion compared to December 31, 2019, reflecting increases of $1.8 billion in the consumer automotive allowance and $64 million in the consumer other allowance, partially offset by a decrease of $13 million in the consumer mortgage allowance. The increase in our consumer allowance was primarily driven by our adoption of CECL, which resulted in a $1.3 billion increase to the allowance for loan losses. Additionally, our consumer allowance for loan losses increased as a result of the broad macroeconomic impact resulting from the COVID-19 pandemic. The decrease in the consumer mortgage allowance was primarily driven by the decrease in finance receivables of $2.2 billion at December 31, 2020, compared to December 31, 2019.
The allowance for commercial loan losses increased $142 million at December 31, 2020, compared to December 31, 2019. The increase was primarily driven by higher reserves in our commercial other portfolio within the commercial and industrial portfolio class, as well as reserve increases in commercial real estate associated with higher expected losses due to COVID-19 driven market deterioration.
The provision for consumer loan losses was $1.2 billion for the year ended December 31, 2020, compared to $958 million for the year ended December 31, 2019. For the year ended December 31, 2020, the increase in provision for credit losses was primarily driven by consumer automotive reserve increases associated with higher expected losses due to the broad macroeconomic impact resulting from the COVID-19 pandemic, which were partially offset by lower net charge-offs within our consumer automotive portfolio. During the year ended December 31, 2020, the provision for credit losses was also impacted by the adoption of CECL, as further described in Note 1 to the Consolidated Financial Statements.
The provision for commercial loan losses increased $153 million for the year ended December 31, 2020, compared to the year ended December 31, 2019. The increase in provision expense for the year ended December 31, 2020, was primarily driven by reserve increases in our commercial portfolios associated with the broad macroeconomic impact resulting from the COVID-19 pandemic, which were partially offset by reserve decreases driven by $9.3 billion of lower commercial automotive assets primarily within our floorplan balances. Additionally, provision expense increased as a result of higher provision for specific loan exposures in our commercial other portfolio within the commercial and industrial portfolio class.
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Allowance for Loan Losses by Type
The following table summarizes the allocation of the allowance for loan losses by product type.
| 2020 | 2019 | |||||||||||||||||||||||||||||||||||||
December 31, ($ in millions) | Allowance for loan losses | Allowance as a % of loans outstanding | Allowance as a % of total allowance for loan losses | Allowance for loan losses | Allowance as a % of loans outstanding | Allowance as a % of total allowance for loan losses | ||||||||||||||||||||||||||||||||
| Consumer | ||||||||||||||||||||||||||||||||||||||
| Consumer automotive | $ | 2,902 | 3.9 | % | 88.4 | % | $ | 1,075 | 1.5 | % | 85.1 | % | ||||||||||||||||||||||||||
| Consumer mortgage | ||||||||||||||||||||||||||||||||||||||
| Mortgage Finance | 21 | 0.1 | 0.6 | 19 | 0.1 | 1.5 | ||||||||||||||||||||||||||||||||
| Mortgage — Legacy | 12 | 2.4 | 0.4 | 27 | 2.3 | 2.2 | ||||||||||||||||||||||||||||||||
| Total consumer mortgage | 33 | 0.2 | 1.0 | 46 | 0.3 | 3.7 | ||||||||||||||||||||||||||||||||
| Consumer other | 73 | 18.4 | 2.2 | 9 | 4.6 | 0.7 | ||||||||||||||||||||||||||||||||
| Total consumer loans | 3,008 | 3.4 | 91.6 | 1,130 | 1.3 | 89.5 | ||||||||||||||||||||||||||||||||
| Commercial | ||||||||||||||||||||||||||||||||||||||
| Commercial and industrial | ||||||||||||||||||||||||||||||||||||||
| Automotive | 42 | 0.2 | 1.3 | 31 | 0.1 | 2.5 | ||||||||||||||||||||||||||||||||
| Other | 190 | 3.6 | 5.8 | 78 | 1.5 | 6.1 | ||||||||||||||||||||||||||||||||
| Commercial real estate | 43 | 0.9 | 1.3 | 24 | 0.5 | 1.9 | ||||||||||||||||||||||||||||||||
| Total commercial loans | 275 | 0.9 | 8.4 | 133 | 0.3 | 10.5 | ||||||||||||||||||||||||||||||||
| Total allowance for loan losses | $ | 3,283 | 2.8 | 100.0 | % | $ | 1,263 | 1.0 | 100.0 | % | ||||||||||||||||||||||||||||
Insurance/Underwriting Risk
The underwriting of our VSCs, VMCs, GAP, and insurance policiesproducts 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. With respect to VSCs, considerations include the quality of the vehicles produced, the price of replacement parts, repair labor rates, and new model introductions. Insurance risk also includes event risk, which is synonymous with pure risk, hazard risk, or insurance risk, and presents no chance of gain, only of loss.
We mitigate 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.
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 excess-of-loss protection, including catastrophe coverage for weather-related events. In addition, loss control techniques such as storm path monitoring to assist dealers in preparing for severe weather help to mitigate loss potential.
In accordance with industry and accounting practices and applicable insurance laws and regulatory requirements, we maintain reserves for reported losses, losses incurred but not reported, losses expected to be incurred in the future for contracts in force and loss adjustment expenses. The estimated values of our prior reported loss reserves and changes to the estimated values are routinely monitored by credentialed actuaries. Our reserve estimates are regularly reviewed by management; however, since the reserves are based on estimates and 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, credit spreads, foreign-exchange rates, equity prices, and off-lease vehicle prices.
The impact of changes in benchmark interest rates on our assets and liabilities (interest rate risk) represents an exposure to market risk.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.
The fair value of our credit-sensitive assets is also exposed to credit spread risk. Credit spread is the amount of additional return over the benchmark interest rates that an investor would demand for taking exposure to the credit risk of an instrument. Generally, an increase in credit spreads would result in a decrease in a fair value measurement.