UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

ALLY FINANCIAL INC.

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

Ally Financial Inc. (referred to herein as(together with its consolidated subsidiaries unless the context requires otherwise, Ally, Parent,the Company, or we, our,us, or us)our) is a leading digital financial services company offering diversified financial products for consumers, businesses, automotive dealers and corporate clients. FoundedOur legacy dates back to 1919, and Ally was redesigned in 1919, we have over 95 years2009 with a distinctive brand and relentless focus on our customers. We reconverted to a Delaware corporation in 2009 and are registered as a bank holding company (BHC) under the Bank Holding Company Act of experience providing a broad array of financial products1956 as amended and services. We operate as a financial holding company (FHC) and a bank holding company (BHC).under the Gramm-Leach-Bliley Act of 1999 as amended. Our banking subsidiary, Ally Bank, is an award-winning online bank, and an indirect, wholly-owned subsidiary of Ally Financial Inc. with a distinct brandCollectively, Ally Financial Inc. and relentless focus on customers, offeringits subsidiaries offer a variety of deposit and other banking products.products including CDs, online savings, money market and checking accounts, IRA products, automotive lending products to customers and dealers, corporate finance lending, insurance products and services, a cash back credit card, mortgage lending offerings, and wealth management solutions.

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

Significant Accounting Policies

Income Taxes

Our portfolioWe securitize, transfer, and service consumer and commercial automotive loans and operating leases. Securitization transactions typically involve the use of investments includes various debtvariable interest entities (VIEs) and marketable equity securitiesare accounted for either as sales or secured borrowings. We may retain economic interests in securitized and nonmarketable equity investments. Debtsold assets, which are generally in the form of senior or subordinated interests, other residual interests, and marketable equity securities are classified based on management’s intentservicing rights.

In order to sellconclude whether or holdnot a VIE is required to be consolidated, careful consideration and judgment must be given to our continuing involvement with the security. We classify debt securities as held-to-maturity only whenvariable interest entity. In circumstances where we have both the intent and abilitypower to holddirect the securities to maturity. We classify debt and marketable equity securities as trading when the securities are acquired for the purpose of selling or holding them for a short period of time. Securities not classified as either held-to-maturity or trading are classified as available-for-sale.

In transactions where we are not determined to be other-than-temporary, an impairment chargethe primary beneficiary of the VIE, we must determine whether or not we achieve a sale for accounting purposes. In order to achieve a sale for accounting purposes, the credit component is recordedassets being transferred must be legally isolated, not be constrained by restrictions from further transfer, and be deemed to other gain (loss) on investments, net, inbe beyond our Consolidated Statementcontrol. If we were to fail any of Income, andthe three criteria for sale accounting, the accounting would be consistent with the preceding paragraph (i.e., a new cost basis in the investment is established. The noncredit loss component of a debt security is recorded in other comprehensive income (loss) when we do not intendsecured borrowing). Refer to sell the security and it is not more likely than not that we will have to sell the security priorNote 10 to the security's anticipated recovery. The credit and noncredit loss components are recorded in earnings when we intend to sell the securityCondensed Consolidated Financial Statements for discussion on VIEs.

Gains or it is more likely than not that we will have to sell the security prior to the security’s anticipated recovery. Unrealized losses that we have determined to be other-than-temporary on equity securities are recorded to other gain (loss) on investments, net in our Consolidated Statement of Income. Subsequent increases and decreases tooff-balance sheet securitizations take into consideration the fair value of available-for-sale debtany retained interests including the value of certain servicing assets or liabilities, if any, which are initially recorded at fair value at the date of sale. The estimate of the fair value of the retained interests and equity securities are included in other comprehensive income (loss), so long as they are not attributableservicing requires us to another other-than-temporary impairment.exercise significant judgment about the timing and amount of future cash flows from the interests. Refer to Note 21 to the Condensed Consolidated Financial Statements for a discussion of fair value estimates.

Realized gains andGains or losses on investment securitiesoff-balance sheet securitizations and sales are reported in gain on mortgage and automotive loans, net, in our Condensed Consolidated Statement of Comprehensive Income. Retained interests are classified as securities or as other gain (loss)assets depending on investments, net,their nature. On December 24, 2016, the risk retention rules under the Dodd-Frank Wall Street Reform and are determined using the specific identification method. For information on our debt and marketable equity securities, refer to Note 6.

Recently Adopted Accounting Standards

As of January 1,December 31, 2016, we adopted ASU (AccountingAccounting Standards Update) 2015-02.Update (ASU) 2016-09. The amendments in this update include changes to several aspects of share-based payment accounting. The amendments allow for an entity-wide accounting policy election to either account for forfeitures as they occur or estimate the number of awards that are expected to vest. We elected to account for forfeitures as they occur. The amendments modify the tax withholding requirements to allow entities to withhold an amount up to the employee’s maximum individual statutory tax rates without resulting in a liability classification of consolidation with respectthe award as opposed to entitieslimiting the withholding to the minimum statutory tax rates as required under previous accounting guidance. The amendments require that areall excess tax benefits and tax deficiencies related to share-based payment awards should be recognized in income tax expense or are similarbenefit in naturethe income statement in the period in which they occur. The adoption of these amendments did not have a material impact to limited partnerships or are variable interest entities (VIEs). For entities that are or are similarthe financial statements. The amendments also address the classification and presentation of certain items on the cash flow statement. Specifically, cash flows related to limited partnerships,excess tax benefits should be classified as an operating activity instead of a financing activity and cash flows related to cash paid to a tax authority by an employer when withholding shares from an employee’s award for tax withholding purposes should be classified as a financing activity. The adoption of the guidance clarifies the evaluation of kick-out rights, removes the presumption that the general partner will consolidate and generally states that such entities will be presumedamendment requiring excess tax benefits to be VIEs unless proven otherwise. For VIEs, the guidance modifies the analysis relatedclassified as an operating activity did not have a material impact to the evaluationour Condensed Consolidated Statement of servicing fees, excludes servicing fees that are deemed commensurate with the level of service required from the determinationCash Flows. The adoption of the primary beneficiary and clarifies certain considerations relatedamendment requiring amounts paid to the consolidation analysisa tax authority by an employer when performing a related party assessment. The amendments in this guidance did not impact our historical VIE and consolidation conclusions. No adjustmentswithholding shares from an employee’s award for tax withholding purposes to our consolidated financial statements were requiredbe classified as a resultfinancing activity resulted in the reclassification of cash flows in our Condensed Consolidated Statement of Cash Flows for the adoptionthree months ended March 31, 2016, of this guidance.$14 million from operating activities to financing activities.

Recently Issued Accounting Standards

In May 2014, the Financial Accounting Standards Board (FASB) issued ASU 2014-09. The purpose of this guidance is to streamline and consolidate existing revenue recognition principles in GAAP and to converge revenue recognition principles with International Financial Reporting Standards (IFRS). The core principle of the amendments is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled to receive in exchange for those goods or services. The amendments include a five step process for consideration of the main principle, guidance on the accounting treatment for costs associated with a contract, and disclosure requirements related to the revenue process. As originally issued, the amendments in ASU 2014-09 were to be effective beginning on January 1, 2017. However, in August 2015, the FASB issued ASU 2015-14, which deferred the effective date of the guidance until January 1, 2018, and permitted early adoption as of the original effective date in ASU 2014-09. The FASB created a transition resource group to work with stakeholders and clarify the new guidance as necessary. The FASB has issued and is anticipating issuingseveral additional ASUs to provide clarifyingclarify guidance and provide implementation support for ASU 2014-09. The clarifying guidance elaborates on the key concepts within ASU 2014-09 and clarifies how those concepts interact with other GAAP requirements. Management will considerhas considered these additional ASUs when assessing the overall impact of ASU 2014-09. The amendments to the revenue recognition principles can be applied on adoption either through a full retrospective application or on a modified basis with a cumulative effect adjustment on the date of initial adoption with certain practical expedients. A majority of our revenue streams are not within the scope of this ASU as they are governed by other accounting standards. Management has determined that certain revenue streams and contractual arrangements are in scope of this guidance, including deposit fees, premiums on certain noninsurance contracts, brokering commissions through our insurance operations, remarketing fee income through SmartAuction, and is reviewing thoseinvestment advisory fee income through TradeKing. Management does not expect these amendments to impact current revenue recognition patterns for a majority of the in scope revenue streams and contracts. However, we expect that the application of this guidance to noninsurance contracts within our insurance business will result in order to determinethe deferral of certain amounts we currently recognize as revenue upon the origination of the contract. We do not expect the impact of the adoptionnew guidance to these specific contracts to be material to the financial statements. Management continues to evaluate whether we will adopt this guidance using the full retrospective approach or the modified retrospective approach.

Financial Instruments — Recognition and Measurement of Financial Assets (ASU 2016-01)

In January 2016, the FASB issued ASU 2016-01. The amendments in this update modify the requirements related to the measurement of certain financial instruments in the statement of financial condition and results of operation.operations. For equity investments (other than investments accounted for using the equity method), entities must measure such instruments at fair value with changes in fair value recognized in net income. Changes in fair value for available-for-sale equity securities will no longer be recognized through other comprehensive income. Reporting entities may continue to elect to measure equity investments that do not have a readily determinable fair value at cost with adjustments for impairment and observable changes in price. In addition, for a liability (other than a derivative liability) that an entity measures at fair value, any change in fair value related to the instrument-specific credit risk, that is the entity’s own-credit, should be presented separately in other comprehensive income and not as a component of net income. The amendments are effective on January 1, 2018, with early adoption permitted solely for the provisions pertaining to instrument-specific credit risk for liabilities measured at fair value. The amendments must be applied on a modified retrospective basis with a cumulative effect adjustment as of the beginning of the fiscal year of initial adoption. Management is currently evaluating the impact of the amendments. However, we do expectThe amendment requiring equity investments to be measured at fair value with changes in fair value recognized in net income will create additional volatility in our consolidated results of operations as a result of the requirement to measure equity investments atsince changes in fair value with changes in the fair valuefor available-for-sale securities will be recognized in net income upon adoption.as opposed to other comprehensive income as required under existing accounting guidance. Management continues to evaluate the impact of the other amendments. However, we do not anticipate the other amendments to have a material impact to our financial statements. Management currently plans to adopt these amendments on January 1, 2018, and expects to use the modified retrospective approach as required.

Leases (ASU 2016-02)

In February 2016, the FASB issued ASU 2016-02. The amendments in this update primarily replace the existing accounting requirements for operating leases for lessees. Lessee accounting requirements for finance leases and lessor accounting requirements for both operating leases and sales type and direct financing leases (both of which were previously referred to as capital leases) are largely unchanged. The amendments require the lessee of an operating lease to record a balance sheet gross-up upon lease commencement by recognizing a right-to-useright-of-use asset and lease liability equal to the present value of the lease payments. The right-to-useright-of-use asset and lease liability should be derecognized in a manner that effectively yields a straight line lease expense over the lease term. In addition to the changes to the lessee operating lease accounting requirements, the amendments also change the types of costs that can be capitalized related to a lease agreement for both lessees and lessors for all types of leases. The amendments also require additional disclosures for all lease types for both lessees and lessors. The amendments are effective on January 1, 2019, with early adoption permitted. The amendments must be applied on a modified retrospective basis with a cumulative adjustment to the beginning of the earliest fiscal year presented in the financial statements in the period of adoption. Management is currently evaluating the impact of these amendments. Upon adoption, we expect to record a balance sheet gross up, in our consolidated statement of financial position upon adoption reflecting our right-to-useright-of-use asset and lease liability for our operating leases where we are the lessee (for example, our facility leases). We are currently reviewing our operating lease contracts where we are the lessee to determine the impact of the gross up and the changes to capitalizable costs. We are also reviewing our leases where we are the lessor to determine the impact of the changes to capitalizable costs.

Financial Instruments — Credit Losses (ASU 2016-13)

In June 2016, the FASB issued ASU 2016-13. The amendments in this update introduce a new accounting model to measure credit losses for financial assets measured at amortized cost. Credit losses for financial assets measured at amortized cost should be determined based on the total current expected credit losses over the life of the financial asset or group of financial assets. In effect, the financial asset or group of financial assets should be presented at the net amount expected to be collected. Credit losses will no longer be measured as they are incurred for financial assets measured at amortized cost. The amendments also modify the accounting for available-for-sale debt securities whereby credit losses will be recorded through an allowance for credit losses rather than a write-down to the security’s cost basis, which allows for reversals of credit losses when estimated credit losses decline. Credit losses for available-for-sale debt securities should be measured in a manner similar to current GAAP. The amendments are effective on January 1, 2020, with early adoption permitted as of January 1, 2019. The amendments must be applied using a modified retrospective approach with a cumulative-effect adjustment through retained earnings as of the beginning of the fiscal year upon adoption. The new accounting model for credit losses represents a significant departure from existing GAAP, whichand will likely materially increase the allowance for credit losses with a resulting negative adjustment to retained earnings. Management created a formal working group to govern the implementation of these amendments consisting of key stakeholders from finance, risk, and accounting and is currently evaluating the impact of the amendments. Management currently plans to adopt these amendments on January 1, 2020, and expects to use the modified retrospective approach as required.

In March 2017, the FASB issued ASU 2017-08. The amendments in this update require premiums on purchased callable debt securities to be amortized to the security’s earliest call date. Prior to this ASU, premiums and discounts on purchased callable debt securities were generally required to be amortized to the security’s maturity date. The amendments do not require an accounting change for securities held at a discount. The amendments are effective on January 1, 2019, with early adoption permitted. The amendments must be applied using a modified retrospective approach with a cumulative-effect adjustment through retained earnings as of the beginning of the fiscal year upon adoption. Management is currently evaluating the impact of these amendments.

2.    Acquisitions

On June 1, 2016, we acquired 100% of the equity of TradeKing Group, Inc. (TradeKing), a digital wealth management company with an online broker/dealer,broker-dealer, digital portfolio management platform, and educational content.content for $298 million in cash. TradeKing, will operatewhich is being rebranded as Ally Invest, operates as a wholly ownedwholly-owned subsidiary of Ally. The addition of brokerage and wealth management is a natural extension of our online banking franchise, creating a full suite of financial products for savings and investments. We applied the acquisition method of accounting to this transaction, which generally requires the initial recognition of assets acquired, including identifiable intangible assets, and liabilities assumed at their respective fair value. Goodwill is recognized as the excess of the acquisition price after the recognition of the net assets, including the identifiable intangible assets. Beginning in June 2016, financial information related to TradeKing is included within Corporate and Other.

The following table summarizes the allocation of cash consideration paid for TradeKing and the amounts of the identifiable assets acquired and liabilities assumed recognized at the acquisition date.

The goodwill of $193 million arising from the acquisition consists largely of expected growth of the business as we leverage the Ally brand and our marketing capabilities to scale the acquired technology platform and expand the suite of financial products we offer to our existing growing customer base. None of the goodwill recognized is expected to be deductible for income tax purposes. Refer to Note 1112 for a reconciliation of the carrying amount of goodwill at the beginning and end of the reporting period.

On August 1, 2016, we acquired assets that constitute a business from Blue Yield, an online automotive lender exchange, as we continue to expand our automotive finance offerings to include a direct-to-consumer model.option. We completed the acquisition for $28 million of total consideration. As a result of the purchase, we recognized $20 million of goodwill within Automotive Finance operations.

3.    Discontinued Operations

Our discontinued operations relate to previous discontinued operations for which we continue to have minimal residual costs.

4.    Other Income, Net of Losses

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

5.6.    Other Operating Expenses

Details of other operating expenses were as follows.

6.7.    Investment Securities

Our portfolio of securities includes bonds, equity securities, asset-asset-backed securities, commercial and residential mortgage-backed securities, and other investments. The cost, fair value, and gross unrealized gains and losses on investment securities were as follows.

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