Ally Financial Inc.: Form 10-Q for the period ended Sep 30, 2023

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 financial-services legislation, regulation, or policies or changes in government officials or other personnel;
• changes in monetary, fiscal, or trade laws or policies, including as a result of actions by governmental agencies, central banks, or supranational authorities;
• changes in accounting standards or policies;
• changes in the automotive industry or the markets for new or used vehicles, including the rise of vehicle sharing and ride hailing, the development of autonomous and alternative-energy vehicles, and the impact of demographic shifts on attitudes and behaviors toward vehicle type, ownership, and use;
• any instability or breakdown in the financial system, including as a result of the failure of a financial institution or other participant in it;
• disruptions or shifts in investor sentiment or behavior in the securities, capital, or other financial markets, including financial or systemic shocks and volatility or changes in market liquidity, interest or currency rates, or valuations;
• the discontinuation of LIBOR and any negative impacts that could result;
• changes in business or consumer sentiment, preferences, or behavior, including spending, borrowing, or saving by businesses or households;
• changes in our corporate or business strategies, the composition of our assets, or the way in which we fund those assets;
• our ability to execute our business strategy for 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, credit cards, corporate finance, brokerage, and personal advice;
• our ability to develop capital plans acceptable to the FRB and our ability to implement them, including any payment of dividends or share repurchases;
• our ability to conduct appropriate stress tests and effectively plan for and manage capital or liquidity consistent with evolving business or operational needs, risk-management standards, and regulatory or supervisory requirements or expectations;
• our ability to cost-effectively fund our business and operations, including through deposits and the capital markets;
• changes in any credit rating assigned to Ally, including Ally Bank;
• adverse publicity or other reputational harm to us, our service providers, or our senior officers;
• our ability to develop, maintain, or market our products or services or to absorb unanticipated costs or liabilities associated with those products or services;
• our ability to innovate, to anticipate the needs of current or future customers, to successfully compete, to increase or hold market share in changing competitive environments, or to deal with pricing or other competitive pressures;
• the continuing profitability and viability of our dealer-centric automotive finance and insurance businesses, especially in the face of competition from captive finance companies and their automotive manufacturing sponsors and challenges to the dealer’s role as intermediary between manufacturers and purchasers;
• our ability to appropriately underwrite loans that we originate or purchase and to otherwise manage credit risk;
• changes in the credit, liquidity, or other financial condition of our customers, counterparties, service providers, or competitors;
• our ability to effectively deal with economic, business, or market slowdowns or disruptions;
• our ability to address heightened scrutiny and expectations from supervisory or other governmental authorities and to timely and credibly remediate related concerns or deficiencies;
• judicial, regulatory, or administrative inquiries, examinations, investigations, proceedings, disputes, or rulings that create uncertainty for, or are adverse to, us or the financial services industry;
• the potential outcomes of judicial, regulatory, or administrative inquiries, examinations, investigations, proceedings, or disputes to which we are or may be subject, and our ability to absorb and address any damages or other remedies that are sought or awarded, and any collateral consequences;
• the performance and availability of third-party service providers on whom we rely in delivering products and services to our customers and otherwise conducting our business and operations;
• our ability to manage and mitigate security risks, including our capacity to withstand cyberattacks;
• our ability to maintain secure and functional financial, accounting, technology, data processing, or other operating systems or infrastructure;
• the adequacy of our corporate governance, risk-management framework, compliance programs, or internal controls over financial reporting, including our ability to control lapses or deficiencies in financial reporting or to effectively mitigate or manage operational risk;
• the efficacy of our methods or models in assessing business strategies or opportunities or in valuing, measuring, estimating, monitoring, or managing positions or risk;
• our ability to keep pace with changes in technology that affect us or our customers, counterparties, service providers, or competitors or to maintain rights or interests in associated intellectual property;
• our ability to successfully make and integrate acquisitions;
• the adequacy of our succession planning for key executives or other personnel and our ability to attract or retain qualified employees;
• natural or man-made disasters, calamities, or conflicts, including terrorist events, cyber-warfare, and pandemics (such as adverse effects of the COVID-19 pandemic on us and our customers, counterparties, employees, and service providers);
• our ability to maintain appropriate ESG practices, oversight, and disclosures;
• policies and other actions of governments to manage and mitigate climate and related environmental risks, and the effects of climate change or the transition to a lower-carbon economy on our business, operations, and reputation; or
• other assumptions, risks, or uncertainties described in the Risk Factors (Part II, Item 1A herein), Management’s Discussion and Analysis of Financial Condition and Results of Operations (Part I, Item 2 herein), or the Notes to the Condensed Consolidated Financial Statements (Part I, Item 1 herein) in this Quarterly Report on Form 10-Q or described in any of the Company’s annual, quarterly or current reports.

Any forward-looking statement made by us or on our behalf speaks only as of the date that it was made. We do not undertake to update any forward-looking statement to reflect the impact of events, circumstances, or results that arise after the date that the statement was made, except as required by applicable securities laws. You, however, should consult further disclosures (including disclosures of a forward-looking nature) that we may make in any subsequent Annual Report on Form 10-K, Quarterly Report on Form 10-Q, or Current Report on Form 8-K.

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

Overview

Ally Financial Inc. (together with its consolidated subsidiaries unless the context otherwise requires, Ally, the Company, we, us, or our) is a financial-services company with the nation’s largest all-digital bank and an industry-leading automotive financing and insurance business, driven by a mission to “Do It Right” and be a relentless ally for customers and communities. The Company serves customers through a full range of online banking services (including deposits, mortgage lending, point-of-sale personal lending and credit-card products) and securities brokerage and investment advisory services. The Company also includes a corporate finance business that offers capital for equity sponsors and middle-market companies. Ally is a Delaware corporation and is registered as a BHC under the BHC Act and an FHC under the GLB Act.

Primary Business Lines

Dealer Financial Services, which includes our Automotive Finance and Insurance operations, Mortgage Finance, and Corporate Finance are our primary business lines. The remaining activity is reported in Corporate and Other, which primarily consists of centralized treasury activities as well as Ally Invest, our digital brokerage and personal advice offering, Ally Lending, our point-of-sale financing business, Ally Credit Card, CRA loans and investments, and certain strategic investments. The following table summarizes the operating results excluding discontinued operations of each business line. Operating results for each of the business lines are more fully described in the MD&A sections that follow.

($ in millions)

n/m = not meaningful

• 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. Dealer Financial Services comprises our Automotive Finance and Insurance segments.

Our Automotive Finance operations include purchasing retail installment sales contracts and operating leases from dealers and automotive retailers, extending automotive loans directly to consumers, offering term loans to dealers, financing dealer floorplans and providing other lines of credit to dealers, supplying warehouse lines to automotive retailers, offering automotive-fleet financing, providing financing to companies and municipalities for the purchase or lease of vehicles, and supplying vehicle-remarketing services. Our success as an automotive-finance provider is driven by the consistent and broad range of products and services we offer to dealers and automotive retailers. The automotive marketplace is dynamic and evolving, including substantial investments in electrification by automobile manufacturers and suppliers. We continue to identify and cultivate relationships with automotive retailers, including those with leading e-commerce platforms. We also operate an online direct-lending platform for consumers seeking direct financing. We believe these actions will enable us to respond to the growing trends for a more streamlined and digital automotive financing process to serve both dealers and consumers. Additionally, we 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. Furthermore, our strong and expansive dealer relationships, comprehensive suite of products and services, full-spectrum financing, and depth of experience position us to evolve with future shifts in automobile technologies, including electrification. We have provided and continue to provide automobile financing for battery-electric and plug-in hybrid vehicles, including brands such as Jeep, Tesla, Ford, and BMW. This positions us to remain a leader in automotive financing as we believe the majority of these vehicles will be sold through dealerships and automotive retailers with whom we have an established relationship. During the nine months ended September 30, 2023, $606 million of our consumer automotive retail loan originations and purchases, and $482 million of our operating lease originations and purchases, were for battery-electric and plug-in hybrid vehicles. As of September 30, 2023, $1.1 billion of our consumer automotive finance receivables and loans had battery-electric or plug-in hybrid vehicles as the underlying collateral, and $797 million of our investment in operating leases were battery-electric or plug-in hybrid vehicles.

We have focused on developing dealer relationships beyond those relationships that primarily were developed through our previous role as a captive finance company for GM and Stellantis. We have established relationships with thousands of automotive dealers through our customer-centric approach and specialized incentive programs designed to drive loyalty amongst dealers to our products and services. Our Growth channel includes brands such as Ford, Toyota, Hyundai, Kia, Nissan, and Honda, as well as used-vehicle-only retailers with a national presence and online-only automotive retailers. As of September 30, 2023, approximately 71% of our Growth channel dealer relationships were with franchised dealers and dealers with a national presence.

Our Insurance operations offer both consumer finance protection and insurance products sold primarily through the automotive dealer channel, and commercial insurance products sold directly to dealers. We serve approximately 2.5 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 preferred VSC and other protection plan provider for GM Canada and VSC provider for Subaru Canada. In 2022, we entered into a long-term commitment to continue as the preferred VSC and other protection plan provider for GM Canada.

As part of our focus on offering dealers a broad range of consumer F&I products, we offer VSCs, VMCs, and GAP products. Ally Premier Protection is our flagship VSC offering, which provides coverage for new and used vehicles of virtually all makes and models. We also underwrite 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. Additionally, we underwrite selected commercial insurance coverages, which primarily insure dealers’ wholesale vehicle inventory, and offer additional products to protect a dealer’s business, including property and liability coverage that is underwritten by a third-party carrier with a portion of the insurance risk assumed through a quota share agreement. On a smaller scale, we also periodically assume other insurance risks through quota share arrangements and perform services as an underwriting carrier for an insurance program managed by a third-party where we cede the majority of such business to external reinsurance markets.

Our dealer-centric business model, value-added products and services, full-spectrum financing, and business expertise proven over many credit cycles, make us a premier automotive finance and insurance company ready to support and strengthen our approximately 22,300 active dealer relationships as of September 30, 2023. A dealer is considered to have an active relationship with us if we provided automotive financing, remarketing, or insurance services during the three months ended September 30, 2023.

• 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.

Through our direct-to-consumer channel, we offer a variety of competitively priced jumbo and conforming fixed- and adjustable-rate mortgage products through a third party. Under our current arrangement, our direct-to-consumer conforming mortgages are originated as held-for-sale and sold, while jumbo and LMI mortgages are originated as held-for-investment and subserviced by a third party. Loans originated in the direct-to-consumer channel are sourced by existing Ally customer marketing, prospect marketing on third-party websites, and email or direct mail campaigns. 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. This partnership with BMC limits operational volatility as the mortgage industry continues to evolve in the current interest rate environment. During the nine months ended September 30, 2023, we originated $731 million of mortgage loans through our direct-to-consumer channel. During 2018, we made a strategic equity investment in the parent of BMC (BMC Holdco) that was subsequently increased in 2019 and 2020. The carrying value of this investment was $9 million as of September 30, 2023, is within equity securities on our Condensed Consolidated Balance Sheet and is included in Corporate and Other. Refer to Note 10 to the Condensed Consolidated Financial Statements for further information.

Through the bulk loan channel, we purchase loans from several qualified sellers, including direct originators and large aggregators who have the financial capacity to support strong representations and warranties, and the industry knowledge and experience to originate high-quality assets. Bulk purchases are made on a servicing-released basis, allowing us to directly oversee servicing activities and manage refinancing through our direct-to-consumer channel. During the nine months ended September 30, 2023, we purchased $14 million 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.

• Our Corporate Finance operations primarily offer senior-secured loans to private equity sponsor-owned U.S.-based middle-market companies and to well-established asset managers that mostly provide leveraged loans. The portfolio is composed of floating-rate leveraged asset-based and cash flow/enterprise value loans. Our Sponsor Finance business focuses on companies owned by private-equity sponsors with loans typically used for leveraged buyouts, refinancing and recapitalizations, mergers and acquisitions, growth, turnarounds, and debtor-in-possession financings. Additionally, our Lender Finance business provides asset managers with facilities to partially fund their direct-lending activities. We also provide a commercial real estate product, currently focused on lending to skilled nursing facilities, senior housing, and medical office buildings.
• Corporate and Other primarily consists of centralized corporate treasury activities such as management of the cash and corporate investment securities and loan portfolios, short- and long-term debt, retail and brokered deposit liabilities, derivative instruments, original issue discount, and the residual impacts of our corporate FTP and treasury ALM activities. Corporate and Other also includes activity related to certain equity investments, which primarily consist of FHLB and FRB stock, as well as other equity investments through Ally Ventures, our strategic investment business. Additionally, Corporate and Other includes the management of our legacy mortgage portfolio, which primarily consists of loans originated prior to January 1, 2009, CRA loans and investments, and reclassifications and eliminations between the reportable operating segments. Costs that are not allocated to our reportable operating segments as part of our COH methodology, which involves management judgment, are also included in Corporate and Other.

Corporate and Other includes the results of Ally Invest, our digital brokerage and personal advice offering, which enables us to complement our competitive deposit products with low-cost investing. The digital personal advice business aligns with our strategy to create a premier digital financial services company and provides additional sources of fee income through asset management and certain other fees, with minimal balance sheet utilization. This business also provides an additional source of low-cost deposits through arrangements with Ally Invest’s clearing broker.

Information related to our point-of-sale financing business, Ally Lending, is also included within Corporate and Other. Ally Lending primarily serves home improvement and medical service providers by enabling promotional and fixed rate installment-loan products through a digital application process at point-of-sale. The home improvement vertical had originations of $851 million during the nine months ended September 30, 2023, and now represents approximately 68% of originations. Point-of-sale lending broadens our capabilities, and expands our product offering into consumer unsecured personal lending, all while helping to further meet the financial needs of our customers.

Financial information related to our credit card business, Ally Credit Card, is included within Corporate and Other. Ally Credit Card is our scalable, digital-first credit card platform and features leading-edge technology, and a proprietary, analytics-based underwriting model. We believe Ally Credit Card enhances our ability to grow and deepen both new and existing customer relationships.

On October 24, 2023, the U.S. banking agencies issued a final rule that significantly amends their CRA regulations. Although the effective date of the rule is April 1, 2024, the applicability date for the majority of its provisions is January 1, 2026. We are still evaluating the rule and its impact, but our CRA strategy and program may be adversely affected by it.

Consolidated Results of Operations

The following table summarizes our consolidated operating results for the periods shown. Refer to the reportable operating segment sections of the MD&A that follows for a more complete discussion of operating results by business line.

($ in millions)

n/m = not meaningful

(a) The ratios were based on average assets and average total equity using an average daily balance methodology.

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

We earned net income from continuing operations of $296 million and $945 million for the three months and nine months ended September 30, 2023, respectively, compared to $300 million and $1.4 billion for the three months and nine months ended September 30, 2022. During the three months and nine months ended September 30, 2023, results were favorably impacted by higher total financing revenue and other interest income, and a decrease in income tax expense from continuing operations. These items were more than offset by higher interest expense, provision for credit losses, and noninterest expense for the three months and nine months ended September 30, 2023. During the nine months ended September 30, 2023, results were also favorably impacted by other gain on investments, net.

Net financing revenue and other interest income decreased $186 million and $468 million for the three months and nine months ended September 30, 2023, respectively, as compared to the three months and nine months ended September 30, 2022. Consumer automotive revenue increased as higher portfolio yields resulting from pricing actions contributed to the increases in revenue. We continue to opportunistically adjust pricing in response to rising benchmark interest rates. The increases were also impacted by higher average consumer assets resulting from growth in the used-vehicle portfolio, primarily through franchised dealers and national retailers. Commercial automotive revenue increased due to higher yields from higher benchmark interest rates, as our commercial automotive loans are generally variable-rate. Additionally, the increases were impacted by higher asset balances resulting from improvements in new vehicle supply. These increases were more than offset by higher interest expense. We experienced higher interest expense for the three months and nine months ended

September 30, 2023, as compared to the same periods in 2022, in response to higher benchmark interest rates, which increased our cost of funds associated with our deposit liabilities.

Insurance premiums and service revenue earned was $320 million and $936 million for the three months and nine months ended September 30, 2023, respectively, compared to $289 million and $849 million for the three months and nine months ended September 30, 2022. The increases for the three months and nine months ended September 30, 2023, were primarily driven by higher P&C earned premium from higher dealer inventory levels, growth in other dealer-related protection products, and higher other premium and service revenue written from non-automotive assumed reinsurance business.

Other loss on investments, net, was $41 million for the three months ended September 30, 2023, and other gain on investments, net was $59 million for the nine months ended September 30, 2023, compared to other loss on investments, net of $54 million and $173 million for the three months and nine months ended September 30, 2022, respectively. The increases for the three months and nine months ended September 30, 2023, compared to the same periods in 2022, were primarily attributable to the performance of equity securities, consistent with broader stock market performance. The increase for the nine months ended September 30, 2023, was partially offset by realized gains from the sale of available-for-sale securities and equity securities during the nine months ended September 30, 2022, that did not reoccur.

Other income, net of losses increased $100 million and $84 million for the three months and nine months ended September 30, 2023, respectively, compared to the same periods in 2022. The increases were primarily driven by net downward adjustments of $10 million related to equity securities without a readily determinable fair value for the nine months ended September 30, 2023, compared to net downward adjustments (including impairment) of $137 million and $139 million during the three months and nine months ended September 30, 2022. Additionally, the increases for the three months and nine months ended September 30, 2023, were driven by increased late charges and other administrative fees, as delinquencies have increased amid deterioration in macroeconomic conditions, driven by persistent inflation. During the nine months ended September 30, 2023, we observed a slowing rate of increase in delinquency trends within our consumer automotive loan portfolio, as compared to the nine months ended September 30, 2022.

The provision for credit losses increased $70 million and $472 million for the three months and nine months ended September 30, 2023, respectively, compared to the three months and nine months ended September 30, 2022. The increases in provision for credit losses for the three months and nine months ended September 30, 2023, were primarily driven by higher net charge-offs across our consumer portfolios. Refer to the Risk Management section of this MD&A for further discussion on our provision for credit losses.

Noninterest expense was $1.2 billion and $3.7 billion for the three months and nine months ended September 30, 2023, respectively, compared to $1.2 billion and $3.4 billion for the three months and nine months ended September 30, 2022. The increases for the three months and nine months ended September 30, 2023, were driven by increased expenses to support the growth of our consumer product suite and expand our digital capabilities and portfolio of products and we incurred higher collection and repossession costs. Additionally, insurance losses and loss adjustment expenses increased for the three months and nine months ended September 30, 2023, as compared to the same periods in 2022, primarily due to increased losses from our vehicle inventory insurance program attributable to higher weather frequency and severity, growing dealer inventory levels, and higher insured values for non-weather losses. The increases were also driven by restructuring charges associated with a workforce reduction during the three months and nine months ended September 30, 2023.

We recognized total income tax benefit from continuing operations of $68 million and income tax expense from continuing operations of $74 million for the three months and nine months ended September 30, 2023, respectively, compared to income tax expense of $117 million and $460 million for the same periods in 2022. The decrease in income tax expense for the three months ended September 30, 2023, compared to the same period in 2022, was primarily due to adjustments to the valuation allowance on foreign tax credit carryforwards as well as the tax effects of a decrease in pretax earnings. The decrease in income tax expense for the nine months ended September 30, 2023, compared to the same period in 2022, was primarily due to the tax effects of a decrease in pretax earnings, adjustments to the valuation allowance on foreign tax credit carryforwards, and an increase in qualified clean vehicle tax credits for purchased plug-in electric vehicles or fuel cell vehicles. The release of valuation allowance resulted in a significant variation in the customary relationship between pretax income and income tax expense for the three months and nine months ended September 30, 2023. Refer to Note 19 to the Condensed Consolidated Financial Statements for further discussion.

Dealer Financial Services

Results for Dealer Financial Services are presented by reportable operating segment, which includes our Automotive Finance and Insurance operations.

Automotive Finance

Results of Operations

The following table summarizes the operating results of our Automotive Finance operations. The amounts presented are before the elimination of balances and transactions with our other reportable operating segments.

($ in millions)

n/m = not meaningful

(a) Includes net remarketing gains of $57 million and $174 million for the three months and nine months ended September 30, 2023, respectively, compared to $39 million and $139 million for the three months and nine months ended September 30, 2022.

Our Automotive Finance operations earned income from continuing operations before income tax expense of $377 million and $1.3 billion for the three months and nine months ended September 30, 2023, respectively, compared to $488 million and $1.8 billion for the three months and nine months ended September 30, 2022. For the three months and nine months ended September 30, 2023, the decreases were primarily due to higher interest expense and higher provision for credit losses, partially offset by higher financing revenue and other interest income.

Consumer automotive loan financing revenue and other interest income increased $287 million and $848 million for the three months and nine months ended September 30, 2023, respectively, compared to the same periods in 2022. Higher portfolio yields resulting from pricing actions contributed to the increases in revenue. We continue to opportunistically adjust pricing in response to rising benchmark interest rates. The increases were also impacted by higher average consumer assets resulting from growth in the used-vehicle portfolio, primarily through franchised dealers and national retailers.

Commercial loan financing revenue and other interest income increased $175 million and $538 million for the three months and nine months ended September 30, 2023, respectively, compared to the three months and nine months ended September 30, 2022. The increases were primarily due to higher yields from higher benchmark interest rates, as our commercial automotive loans are generally variable-rate. Additionally, the increases were impacted by higher asset balances resulting from improvements in new vehicle supply.

Interest expense was $927 million and $2.5 billion for the three months and nine months ended September 30, 2023, respectively, compared to $506 million and $1.2 billion for the three months and nine months ended September 30, 2022. The increases for the three months and nine months ended September 30, 2023, were primarily driven by a higher interest rate environment, resulting in higher funding costs.

Total net operating lease revenue increased $14 million and $19 million for the three months and nine months ended September 30, 2023, respectively, compared to the same periods in 2022. The increases in net operating lease revenue were driven by higher remarketing gains on off-lease vehicles, primarily due to normalizing volume trends in the contractually priced buyout channels. Refer to the Operating Lease Residual Risk Management section of this MD&A for further discussion.

Total other revenue increased $5 million and $25 million for the three months and nine months ended September 30, 2023, respectively, compared to the same periods in 2022. The increases were primarily due to an increase in servicing fees, remarketing fee income, and late charges. The increases in servicing fees are due to the growth in financial assets transferred to a nonconsolidated SPE for which we retain the ongoing right to service the assets. The increases in remarketing fee income are primarily due to increases in remarketing transaction volume through our SmartAuction platform. The increases in late charges are due to higher delinquencies amid deterioration in macroeconomic conditions, driven by persistent inflation. During the nine months ended September 30, 2023, we observed a slowing rate of increase in delinquency trends within our consumer automotive loan portfolio, as compared to the nine months ended September 30, 2022. Refer to Note 9 to the Condensed Consolidated Financial Statements for additional information regarding assets sold to nonconsolidated SPEs.

The provision for credit losses increased $116 million and $466 million for the three months and nine months ended September 30, 2023, respectively, compared to the three months and nine months ended September 30, 2022. The increases in provision for credit losses were primarily driven by higher net charge-offs during the three months and nine months ended September 30, 2023. Refer to the Risk Management section of this MD&A for further discussion on our provision for credit losses.

Total noninterest expense increased $57 million and $184 million for the three months and nine months ended September 30, 2023, respectively, compared to the same periods in 2022. The increases were primarily due to expenses to support the growth of our consumer product suite and expand our digital capabilities and portfolio of products. Additionally, we incurred higher collection and repossession costs in the three months and nine months ended September 30, 2023, as compared to the same periods in 2022.

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

($ in millions)

(a) Average balances are calculated using an average daily balance methodology.

(b) Nonperforming finance receivables and loans are included in the average balances. For information on our accounting policies regarding nonperforming status, refer to Note 1 to the Condensed Consolidated Financial Statements.

(c) Excludes the effects of derivative financial instruments designated as hedges, which is included within Corporate and Other. Including the impact of hedging activities, the yield was 8.90% and 8.73% for the three months and nine months ended September 30, 2023, respectively, and 7.29% and 6.92% for the three months and nine months ended September 30, 2022.

(d) Excludes the effects of derivative financial instruments designated as hedges, which is included within Corporate and Other. Including the impact of hedging activities, the yield was 7.88% and 7.64% for the three months and nine months ended September 30, 2023, respectively, and 5.03% and 3.80% for the three months and nine months ended September 30, 2022.

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

(f) Yield includes net gains on the sale of off-lease vehicles of $57 million and $174 million for the three months and nine months ended September 30, 2023, respectively, compared to $39 million and $139 million for the three months and nine months ended September 30, 2022. Excluding these gains on sale, the yield was 4.69% and 4.85% for the three months and nine months ended September 30, 2023, respectively, compared to 4.52% and 4.80% for the three months and nine months ended September 30, 2022.

During the three months and nine months ended September 30, 2023, our portfolio yield for consumer automotive loans, excluding the impact of hedging activities, increased 113 and 101 basis points, respectively, as compared to the same periods in 2022. The increases for the three months and nine months ended September 30, 2023, were primarily driven by higher portfolio yields resulting from pricing actions. We continue to opportunistically adjust pricing in response to rising benchmark interest rates. Our portfolio yield for consumer automotive loans, including the effects of derivative financial instruments designated as hedges, was 78 and 87 basis points higher than our portfolio yield for consumer automotive loans excluding the effects of derivative financial instruments designated as hedges for the three months and nine months ended September 30, 2023, respectively. This is attributable to the execution of hedging strategies that are used to mitigate interest rate risks. Refer to Note 18 to the Condensed Consolidated Financial Statements for further discussion.

Our portfolio yield for investment in operating leases, net, including net gains on the sale of off-lease vehicles, was 7.00% and 7.15% for the three months and nine months ended September 30, 2023, respectively, compared to 5.98% and 6.54% for the three months and nine months ended September 30, 2022. The increases were due to higher remarketing gains on off-lease vehicles. Refer to the section titled Operating Lease Residual Risk Management within this MD&A for additional information.

Automotive Financing Volume

Consumer Automotive Financing

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

(a) Represents Ally’s internal credit score, incorporating numerous borrower and structure attributes including: severity and aging of delinquency; number of credit inquiries; LTV ratio; term; and payment-to-income ratio. We periodically update our underwriting scorecard, which can have an impact on our credit tier scoring.

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

Retail originations with a term of 76 months or more represented 24% and 23% of total retail originations for the three months and nine months ended September 30, 2023, respectively, compared to 23% and 21% for the three months and nine months ended September 30, 2022. Substantially all the loans originated with a term of 76 months or more during both the three months and nine months ended September 30, 2023, and 2022, were considered to be prime and in credit tiers S, A, or B. Our underwriting processes are designed to consider various deal structure variables—such as payment-to-income, LTV, debt-to-income, and FICO® score—that compensate for longer loan terms and mitigate underwriting risk.

During the three months ended September 30, 2023, approximately 84% of our used retail originations were for vehicles with a model year of 2017 or newer. According to the Bureau of Transportation Statistics, the average age of light vehicles in operation in the United States during 2022 was approximately 12 years. Substantially all used retail originations with a term of 76 months or more during the three months ended September 30, 2023, were for vehicles with a model year of 2017 or newer.

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

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

(a) Includes CSG originations of $1.2 billion and $1.5 billion for the three months ended September 30, 2023, and 2022, respectively.

(a) Includes CSG originations of $3.8 billion and $4.2 billion for the nine months ended September 30, 2023, and 2022, respectively.

Ally Financial Inc. • Form 10-Q

Total consumer automotive loan and operating lease originations decreased $1.8 billion and $6.7 billion for the three months and nine months ended September 30, 2023, respectively, compared to the same periods in 2022. The decreases were primarily driven by our dynamic underwriting strategies, including strategic pricing and curtailment actions to optimize our risk appetite and returns.

We have included origination metrics by loan term and FICO® Score within this MD&A. In addition, we employ our own risk evaluation, including proprietary risk models, in evaluating credit risk, as described in the section titled Automotive Financing Volume—Acquisition and Underwriting within the MD&A in our 2022 Annual Report on Form 10-K.

The following tables present the percentage of retail loan and operating lease originations and purchases, in dollars, by FICO® Score and product type. We define prime consumer automotive loans primarily as those loans with a FICO® Score at origination of 620 or greater.

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

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

Originations with a FICO® Score of less than 620 (considered nonprime) represented 8% and 9% of total consumer loan and operating lease originations for the three months and nine months ended September 30, 2023, respectively, compared to 9% for both the three months and nine months ended September 30, 2022. Consumer loans and operating leases with FICO® Scores of less than 540 represented 2% of total originations for both the three months and nine months ended September 30, 2023, compared to 2% and 1% for the three months and nine months ended September 30, 2022, respectively. Nonprime applications are subject to more stringent underwriting criteria (for example, minimum payment-to-income ratio, maximum debt-to-income ratio, and maximum amount financed), and our nonprime loan portfolio generally does not include any loans with a term of 76 months or more. The carrying value of our held-for-investment, nonprime consumer automotive loans before allowance for loan losses was $8.8 billion at both September 30, 2023, and December 31, 2022, or approximately 10.3% and 10.6% of our total consumer automotive loans at September 30, 2023, and December 31, 2022, respectively. For discussion of our credit-risk-management practices and performance, refer to the section titled Risk Management.

During the first quarter of 2023, we amended our relationship with Carvana, a leading e-commerce platform for buying and selling used vehicles. Specifically, we decreased our committed facility from a maximum of $5.0 billion to a maximum of $4.0 billion to support our continued efforts to optimize risk-adjusted returns. This commitment is effective for 364 days. As part of the agreement, we purchase finance receivables meeting certain prescribed eligibility requirements on a periodic basis from Carvana. We also have the opportunity to purchase additional contracts from Carvana on an ad-hoc basis that may fall outside of the prescribed eligibility requirements utilized within the recurring pools. The risk profile of the contractual purchases is similar to the volume we fund through other dealer-facing channels. All the finance receivables purchased through this channel are used vehicles, and are included in Growth channel in our consumer origination metrics. While different vintages exhibit varying performance, collectively to date, finance receivables purchased from Carvana have exhibited consistent delinquency and loss performance compared to loans with similar credit characteristics acquired through our indirect dealer channel. Consumer finance receivables and loans sourced from Carvana represented 7.7% of our total consumer automotive finance receivables and loans as of September 30, 2023. During both the three months and nine months ended September 30, 2023, loan purchases from Carvana were 9% of our total consumer automotive financing originations.

For discussion of manufacturer marketing incentives, refer to the section titled Automotive Financing Volume—Manufacturer Marketing Incentives within the MD&A in our 2022 Annual Report on Form 10-K.

Commercial Wholesale Financing Volume

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

($ in millions)

Average commercial wholesale financing receivables outstanding increased $3.6 billion and $2.4 billion during the three months and nine months ended September 30, 2023, respectively, as compared to the same periods in 2022. The increases for the three months and nine months ended September 30, 2023, as compared to the same periods in 2022, were primarily due to increased industry-wide new vehicle inventory levels. This was partially offset by reduced used vehicle inventory levels across the automotive industry.

Carvana’s commercial line of credit totals $2.0 billion, with a scheduled maturity in the first quarter of 2024. The line of credit represents a commitment to fund Carvana’s wholesale floorplan financing of used vehicles and is consistent in form and structure with our other wholesale floorplan financing arrangements. This includes the line of credit being fully collateralized to mitigate counterparty credit risk in the event of a default. On August 31, 2023, Carvana announced the following final results of its previously announced debt exchange offers: reduction in total debt by over $1.3 billion, extension of maturities, and lowering of near-term cash interest expense by more than $455 million each year for the next two years. Prior to that announcement, Carvana had asked us to consent to Carvana offering a second-priority lien on much of our collateral in connection with the debt exchange offers described in the August 31, 2023 announcement and other debt exchange offers contemplated in prior Carvana announcements. On September 1, 2023, we consented to this request in the context of our long-standing business relationship with Carvana and on terms that maintain our collateral position. At September 30, 2023, Carvana’s gross wholesale floorplan assets outstanding balance was $117 million.

Other Commercial Automotive Financing

We also provide other forms of commercial financing for the automotive industry including automotive dealer term and revolving loans and automotive fleet financing. Automotive dealer term and revolving loans are loans that we make to dealers to finance other aspects of the dealership business, including acquisitions. These loans are usually secured by real estate or other dealership assets and are typically personally guaranteed by the individual owners of the dealership. Additionally, these loans generally include cross-collateral and cross-default provisions. Automotive fleet financing credit lines may be obtained by dealers, their affiliates, and other independent companies that are used to purchase vehicles, which they lease or rent to others. The average balances of other commercial automotive loans increased $1.0 billion for both the three months and nine months ended September 30, 2023, compared to the same periods in 2022, to an average of $6.0 billion and $5.9 billion for the three months and nine months ended September 30, 2023, respectively.

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.

($ in millions)

(a) Includes interest expense of $8 million and $23 million for the three months and nine months ended September 30, 2023, respectively, and $7 million and $30 million for the three months and nine months ended September 30, 2022.

(b) Includes net unrealized losses on equity securities of $47 million for the three months ended September 30, 2023, and gains of $42 million for the nine months ended September 30, 2023, and net unrealized losses on equity securities of $62 million and $259 million for the three months and nine months ended September 30, 2022, respectively.

(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 revenue earned and other income (excluding interest, dividends, and other investment activity).

Our Insurance operations incurred a loss from continuing operations before income tax expense of $16 million for the three months ended September 30, 2023, and earned income of $84 million for the nine months ended September 30, 2023, compared to losses of $30 million and $139 million for the three months and nine months ended September 30, 2022, respectively. The increases in income for the three months and nine months ended September 30, 2023, were primarily driven by increases in insurance premiums and service revenue earned and higher net investment gains, which were partially offset by increases in insurance losses and loss adjustment expenses. The three-month period change was affected by a decrease in loss on investments, net; while the nine month period change was impacted by an increase in gain on investments.

Insurance premiums and service revenue earned was $320 million and $936 million for the three months and nine months ended September 30, 2023, respectively, compared to $289 million and $849 million for the three months and nine months ended September 30, 2022. The increases for the three months and nine months ended September 30, 2023, were primarily driven by higher P&C earned premium from higher dealer inventory levels, growth in other dealer-related protection products, and higher other premium and service revenue written from non-automotive assumed reinsurance business.

Other loss on investments, net was $31 million for the three months ended September 30, 2023, and other gain on investments, net was $66 million for the nine months ended September 30, 2023, compared to other loss on investments, net of $56 million and $197 million for the same periods in 2022, respectively. The increases for the three months and nine months ended September 30, 2023, were primarily attributable to the performance of equity securities, consistent with broader stock market performance.

Insurance losses and loss adjustment expenses totaled $107 million and $329 million for the three months and nine months ended September 30, 2023, respectively, compared to $70 million and $217 million for the same periods in 2022. Loss and loss adjustment expenses for the three months and nine months ended September 30, 2023, increased primarily due to increased losses from our vehicle inventory insurance program attributable to higher weather frequency and severity, growing dealer inventory levels, and higher insured values for non-weather losses. During the three months and nine months ended September 30, 2023, weather-related loss and loss adjustment expenses from our vehicle inventory insurance program was $22 million and $87 million, respectively, compared to $8 million and $36 million during the same periods in 2022. We utilized our excess of loss reinsurance and ceded weather-related losses on our vehicle inventory insurance program for the first and third quarters of 2023 as losses exceeded the retention limits of $14 million and $21 million, respectively. In April 2023, we renewed our annual excess of loss reinsurance agreement and continue to utilize this coverage for our vehicle inventory insurance to manage our risk of weather-related losses under which retention limits vary for each quarter. Additionally, higher GAP losses for the three months and nine months ended September 30, 2023, were primarily driven by higher loss frequency and severity following elevated used vehicle values during 2022 that reduced losses in the prior year. Losses also increased commensurate with portfolio growth from other dealer-related protection products in our P&C business and growth in non-automotive assumed reinsurance business.

Our combined ratio was 104.3% and 107.0% for the three months and nine months ended September 30, 2023, respectively, compared to 98.7% and 100.3% for the three months and nine months ended September 30, 2022. The increases were primarily driven by an increase in insurance losses and loss adjustment expenses during the three months and nine months ended September 30, 2023, partially offset by higher earned premiums.

Premium and Service Revenue Written

The following table summarizes premium and service revenue written by product, net of premiums ceded to reinsurers, and premiums and service revenue assumed from third-parties. VSC and GAP revenue are earned over the life of the service contract on a basis proportionate to the anticipated loss pattern. Refer to Note 3 to the Consolidated Financial Statements in our 2022 Annual Report on Form 10-K for further discussion of this revenue stream.

($ in millions)

(a) Other financial and insurance products include VMCs, ClearGuard, and other ancillary products.

(b) P&C insurance includes vehicle inventory insurance and dealer ancillary products including property and liability coverage underwritten by a third-party carrier earned on a straight line basis.

(c) Primarily includes non-automotive assumed reinsurance and revenue associated with performing services as an underwriting carrier.

Insurance premiums and service revenue written was $335 million and $941 million for the three months and nine months ended September 30, 2023, respectively, compared to $291 million and $818 million for the same periods in 2022. The increases were primarily due to higher F&I premiums for other ancillary products in the U.S. and higher volume in Canada, partially offset by a continued shift in VSC product mix toward dealer reinsurance structures, where we earn a fee to administer the contract and cede premium and losses from the contract to the dealer’s reinsurance company. Additionally, there were increases in written premiums from our P&C business primarily from rising dealer inventory levels and growth in other dealer property and liability products, as well as, growth in other premium and service revenue written from non-automotive assumed reinsurance business.

Cash and Investments

A significant aspect of our Insurance operations is the investment of proceeds from premiums and other revenue sources. We use these investments to satisfy our obligations related to future claims at the time these claims are settled. Our Insurance operations have an Investment Committee, which develops guidelines and strategies for these investments. The guidelines established by this committee reflect our risk appetite, liquidity requirements, regulatory requirements, and rating agency considerations, among other factors.

The following table summarizes the composition of our Insurance operations cash and investment portfolio at fair value.

($ in millions)

In addition to these cash and investment securities, the Insurance segment has interest-bearing intercompany arrangements with Corporate and Other, callable on demand. The intercompany loan balance due to Insurance was $547 million and $417 million at September 30, 2023, and December 31, 2022, respectively. Related interest income of $2 million and $7 million was recognized for both the three months and nine months ended September 30, 2023, and 2022.

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.

($ in millions)

n/m = not meaningful

Our Mortgage Finance operations earned income from continuing operations before income tax expense of $26 million and $68 million for the three months and nine months ended September 30, 2023, respectively, compared to $19 million and $36 million for the three months and nine months ended September 30, 2022. The increases for the three months and nine months ended September 30, 2023, were primarily driven by lower noninterest expense, partially offset by lower net gains on the sale of mortgage loans.

Net financing revenue and other interest income was $53 million and $160 million for the three months and nine months ended September 30, 2023, respectively, compared to $57 million and $166 million for the three months and nine months ended September 30, 2022. The decreases in net financing revenue and other interest income for the three months and nine months ended September 30, 2023, were primarily driven by a higher interest rate environment, which resulted in a decrease in asset balances and an increase in the cost of funds. This was partially offset by lower prepayment activity, which resulted in lower premium amortization. Premium amortization was $1 million and $3 million for the three months and nine months ended September 30, 2023, respectively, compared to $3 million and $17 million for the three months and nine months ended September 30, 2022. During the three months and nine months ended September 30, 2023, we purchased $7 million and $14 million of mortgage loans that were originated by third parties, respectively, compared to $1.1 billion and $2.8 billion during the three months and nine months ended September 30, 2022. We originated $46 million and $102 million of mortgage loans held-for-investment during the three months and nine months ended September 30, 2023, respectively, compared to $105 million and $1.1 billion during the three months and nine months ended September 30, 2022.

Gain on sale of mortgage loans, net, was $4 million and $13 million for the three months and nine months ended September 30, 2023, respectively, compared to $7 million and $25 million for the three months and nine months ended September 30, 2022. The decreases for the three months and nine months ended September 30, 2023, were attributable to lower volume on direct-to-consumer mortgage originations and the subsequent sale of these loans to BMC. We originated $221 million and $629 million of loans held-for-sale during the three months and nine months ended September 30, 2023, respectively, compared to $415 million and $2.0 billion during the three months and nine months ended September 30, 2022.

The provision for credit losses decreased $4 million and $5 million for the three months and nine months ended September 30, 2023, respectively, compared to the three months and nine months ended September 30, 2022. The decreases in provision for credit losses for the three months and nine months ended September 30, 2023, were primarily driven by a decrease in asset balances. Refer to the Risk Management section of this MD&A for further discussion on our provision for credit losses.

Total noninterest expense was $33 million and $108 million for the three months and nine months ended September 30, 2023, respectively, compared to $43 million and $153 million for the same periods in 2022. The decreases for the three months and nine months ended September 30, 2023, were primarily driven by lower operating expenses due to lower origination volumes. These costs are generally scalable with our origination volume as a result of our strategic partnership with BMC.

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

During both the three months and nine months ended September 30, 2023, we purchased and originated fewer consumer mortgage held-for-investment loans, as compared to the same periods in 2022. The decreases were primarily driven by the elevated interest rate environment. When interest rates rise, the likelihood of refinancing decreases and origination volumes tend to decrease

The following table presents the net UPB, net UPB as a percentage of total, WAC, premium net of discounts, LTV, and FICO® Scores for the products in our Mortgage Finance held-for-investment loan portfolio.

(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.

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.

($ in millions)

n/m = not meaningful

Our Corporate Finance operations earned income from continuing operations before income tax expense of $84 million and $228 million for the three months and nine months ended September 30, 2023, respectively, compared to income earned of $91 million and $215 million for the three months and nine months ended September 30, 2022. The decrease for the three months ended September 30, 2023, was primarily driven by lower total other revenue, partially offset by an increase in net financing revenue and other interest income, as compared to the three months ended September 30, 2022. The increase for the nine months ended September 30, 2023, was primarily due to higher net financing revenue and other interest income, partially offset by lower total other revenue and higher noninterest expense, as compared to the nine months ended September 30, 2022.

Net financing revenue and other interest income was $97 million and $292 million for the three months and nine months ended September 30, 2023, respectively, compared to $80 million and $240 million for the three months and nine months ended September 30, 2022. The increases for the three months and nine months ended September 30, 2023, were primarily due to higher average assets from continued growth in the portfolio, as well as higher interest income resulting from higher rates and all loans in the portfolio being variable rate. This was partially offset by an increase in interest expense as benchmark interest rates continued to rise.

Other revenue decreased $30 million and $16 million for the three months and nine months ended September 30, 2023, respectively, compared to the three months and nine months ended September 30, 2022. The decreases were primarily due to lower net investment gains, driven by a gain from the sale of a previously restructured exposure recognized during the three months and nine months ended September 30, 2022. The decreases were partially offset by higher syndication and fee income for the three months and nine months ended September 30, 2023, as compared to the same periods in 2022.

The provision for credit losses decreased $8 million for the three months ended September 30, 2023, primarily driven by lower specific reserve activity, compared to the three months ended September 30, 2022. The provision for credit losses increased $8 million for the nine months ended September 30, 2023, compared to the nine months ended September 30, 2022. The increase was driven by reserve reductions in the nine months ended September 30, 2022, related to qualitative reserves established at the onset of the COVID-19 pandemic, partially offset by lower specific reserve activity during the nine months ended September 30, 2023, and lower portfolio loan growth as compared to the same period in 2022. Refer to the Risk Management section of this MD&A for further discussion on our provision for credit losses.

Total noninterest expense increased $2 million and $15 million for the three months and nine months ended September 30, 2023, respectively, compared to the three months and nine months ended September 30, 2022. The increases were primarily due to higher direct and allocated expenses related to the growth of the business.

Credit Portfolio

The following table presents loans held-for-sale, the amortized cost of finance receivables and loans outstanding, unfunded commitments to lend, and total serviced loans of our Corporate Finance operations. As of September 30, 2023, 61.2% of our loans and lending commitments were asset-based, with 99.9% in a first-lien position.

($ in millions)

(a) Includes $9.2 billion and $9.0 billion of commercial and industrial loans at September 30, 2023, and December 31, 2022, respectively, and $1.4 billion and $1.1 billion of commercial real estate loans at September 30, 2023, and December 31, 2022. Our commercial real estate loans are currently focused on lending to skilled nursing facilities, senior housing, and medical office buildings.

(b) Includes unused revolving credit line commitments for loans held-for-sale and finance receivables and loans, signed commitment letters, and standby letter of credit facilities, which are issued on behalf of clients and may contingently require us to make payments to a third-party beneficiary in the event of a draw by the beneficiary thereunder. As many of these commitments are subject to borrowing base agreements and other restrictive covenants or may expire without being fully drawn, the stated amounts of these unfunded commitments are not necessarily indicative of future cash requirements.

The following table presents the percentage of total finance receivables and loans of our Corporate Finance operations by industry concentration. The finance receivables and loans are reported at amortized cost.

95

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 through Ally Ventures, the management of our legacy mortgage portfolio, which primarily consists of loans originated prior to January 1, 2009, the activity related to Ally Invest, Ally Lending, Ally Credit Card, CRA loans and investments, and reclassifications and eliminations between the reportable operating segments. Additionally, Corporate and Other includes costs that are not allocated to our reportable operating segments as part of our COH methodology, which involves management judgment. Refer to Note 22 to the Condensed Consolidated Financial Statements for more information.

($ in millions)

n/m = not meaningful

(a) Includes impacts associated with hedging activities within our automotive loan portfolio, consumer other lending activity, and financing revenue from our legacy mortgage portfolio.

(b) Includes impacts associated with hedging activities of our available-for-sale securities.

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

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

(e) Includes reductions of $348 million and $1.0 billion for the three months and nine months ended September 30, 2023, respectively, and $321 million and $938 million for the three months and nine months ended September 30, 2022, related to the allocation of COH expenses to other segments. The receiving segments record their allocation of COH expense within other operating expense.

The following table presents the scheduled remaining amortization of the original issue discount at September 30, 2023.

(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 Condensed Consolidated Statement of Comprehensive Income.

Corporate and Other incurred a loss from continuing operations before income tax expense of $243 million and $681 million for the three months and nine months ended September 30, 2023, respectively, compared to a loss of $151 million and $28 million for the three months and nine months ended September 30, 2022. The decreases in income for the three months and nine months ended September 30, 2023, were primarily driven by an increase in interest expense due to a higher interest rate environment, partially offset by an increase in total financing revenue and other interest income and total other revenue.

Total financing revenue and other interest income was $662 million and $1.9 billion for the three months and nine months ended September 30, 2023, respectively, compared to $384 million and $883 million for the three months and nine months ended September 30, 2022. The increases were primarily driven by the impacts of a higher interest rate environment on the investment securities portfolio and hedging activities, in addition to higher interest associated with cash and cash equivalents and growth within unsecured lending.

Total interest expense increased $539 million and $1.7 billion for the three months and nine months ended September 30, 2023, respectively, compared to the three months and nine months ended September 30, 2022. The increases were primarily driven by a higher interest rate environment, resulting in higher funding costs.

Total other revenue increased $109 million and $44 million for the three months and nine months ended September 30, 2023, respectively, compared to the three months and nine months ended September 30, 2022. The increases for the three months and nine months ended September 30, 2023, were primarily driven by net downward adjustments (including impairment) related to equity investments without a readily determinable fair value during the three months and nine months ended September 30, 2022, respectively, that did not reoccur during the current periods.

The provision for credit losses decreased $34 million for the three months ended September 30, 2023, and increased $3 million for the nine months ended September 30, 2023, compared to the three months and nine months ended September 30, 2022, respectively. For the three months ended September 30, 2023, the decrease in provision for credit losses was primarily driven by lower portfolio growth within Ally Credit Card and Ally Lending, as compared to the three months ended September 30, 2022. This decrease was partially offset by higher net charge-offs in Ally Lending and Ally Credit Card. For the nine months ended September 30, 2023, the increase in provision for credit losses was primarily driven by higher net charge-offs within Ally Credit Card and Ally Lending, partially offset by lower portfolio growth in Ally Credit Card and Ally Lending as compared to the nine months ended September 30, 2022. Refer to the Risk Management section of this MD&A for further discussion on our provision for credit losses.

Noninterest expense decreased $26 million for the three months ended September 30, 2023, and increased $25 million for the nine months ended September 30, 2023, as compared to the three months and nine months ended September 30, 2022, respectively. For the three months ended September 30, 2023, the decrease was primarily driven by lower marketing expenses and other operating expenses, partially offset by restructuring charges associated with a workforce reduction of $30 million. For the nine months ended September 30, 2023, the increase was primarily driven by increased compensation and benefits expense inclusive of the aforementioned restructuring charges associated with a workforce reduction as well as other operating expenses.

Total assets were $42.7 billion as of September 30, 2023, compared to $41.3 billion as of September 30, 2022. This increase was primarily driven by an increase in our cash and cash equivalents balance within our investment portfolios, along with growth in consumer loans associated with Ally Lending and Ally Credit Card. Additionally, as of September 30, 2023, the amortized cost of the legacy mortgage portfolio was $238 million, compared to $306 million at September 30, 2022, which partially offset the increase.

Cash and Securities

The following table summarizes the composition of the cash and securities portfolio at fair value for Corporate and Other.

($ in millions)

(a) Includes a $9 million investment in BHF as of September 30, 2023, which was recorded as a nonmarketable equity investment as of December 31, 2022 on the Condensed Consolidated Balance Sheet.

Other Investments

The following table summarizes other investments at carrying value for Corporate and Other. Refer to Note 1 to the Consolidated Financial Statements in our 2022 Annual Report on Form 10-K for further information on these investments.

($ in millions)

(a) Includes a $19 million investment in BMC Holdco as of December 31, 2022, which was transferred to equity securities on the Condensed Consolidated Balance Sheet as of September 30, 2023.

(b) Primarily comprises 59 and 55 investments made in connection with our CRA program at September 30, 2023, and December 31, 2022, respectively. The carrying value of these investments was $584 million and $557 million at September 30, 2023, and December 31, 2022, respectively.

Nonmarketable equity investments and equity-method investments include strategic investments made through Ally Ventures. Ally Ventures identifies, invests in, and builds relationships with key startups. At September 30, 2023, the carrying value of investments made through Ally Ventures was $49 million, comprising 18 investments, as compared to $81 million comprising 18 investments at December 31, 2022. Refer to Note 10 to the Condensed Consolidated Financial Statements for additional information.

Ally Invest

Ally Invest is our digital brokerage and personal advice 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.

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

(b) Represents activity across the brokerage, robo, and personal advice portfolios.

During the three months ended September 30, 2023, total funded accounts increased 1% from both the prior quarter and the third quarter of 2022. Average customer trades per day decreased 5% from the prior quarter and decreased 14% from the third quarter of 2022, driven by continued lower customer engagement. Additionally, net customer assets decreased 6% from the prior quarter and increased 7% from the third quarter of 2022, consistent with changes in equity market valuations.

Ally Lending

Ally Lending is our unsecured personal lending offering, which primarily serves home improvement and medical service providers by enabling promotional and fixed rate installment-loan products through a digital application process at point-of-sale. Active merchants totaled approximately 2,900 as of September 30, 2023. Active borrowers totaled approximately 500,000 as of September 30, 2023, reflecting an increase of 11% compared to September 30, 2022.

The following table presents personal lending originations by average FICO® Score.

($ in millions)

(a) Includes loans for which we have elected the fair value option measurement during the three months and nine months ended September 30, 2022.

During the three months and nine months ended September 30, 2023, respectively, personal lending originations decreased $217 million and $374 million to $382 million and $1.3 billion, as compared to the three months and nine months ended September 30, 2022.

The carrying value of our personal lending portfolio was $2.2 billion at September 30, 2023, compared to $1.8 billion at September 30, 2022, while the associated yield was 9.9% and 10.0% for the three months and nine months ended September 30, 2023, respectively, as compared to 11.0% and 11.8% for the three months and nine months ended September 30, 2022. The decreases in associated yield for the three months and nine months ended September 30, 2023, as compared to the same periods in 2022, were due to increased originations in the home improvement vertical, as well as a shift in origination mix to customers with higher average FICO® scores.

The following table presents the percentage of total finance receivables and loans of Ally Lending by vertical. The finance receivables and loans are reported at amortized cost.

(a) Includes loans for which we have elected the fair value option measurement.

Ally Credit Card

Ally Credit Card is our scalable, digital-first credit card platform that features leading-edge technology, and a proprietary, analytics-based underwriting model. The following table presents total active cardholders and finance receivables and loans.

100

Risk Management

Managing the risk/reward trade-off is a fundamental component of operating our businesses, and all employees are responsible for managing risk. We use multiple layers of defense to identify, monitor, and manage current and emerging risks.

• Business lines — Responsible for owning and managing all the risks that emanate from their risk-taking activities, including business units and support functions.
• Independent risk management — Operates independent of the business lines and is responsible for establishing and maintaining our risk-management framework and promulgating it enterprise-wide. Independent risk management also provides an objective, critical assessment of risks and—through oversight, effective challenge, and other means—evaluates whether Ally remains aligned with its risk appetite.
• Internal audit — Provides its own independent assessments regarding the quality of our loan portfolios as well as the effectiveness of our risk management, internal controls, and governance. Internal audit includes Audit Services and the Loan Review Group.

Our risk-management framework is overseen by the RC. The RC sets the risk appetite across our company while risk-oriented management committees, the executive leadership team, and our associates identify and monitor current and emerging risks and manage those risks within our risk appetite. Our primary types of risks include credit risk, insurance/underwriting risk, liquidity risk, market risk, business/strategic risk, reputation risk, operational risk, information technology/cybersecurity risk, compliance risk, and conduct risk. For more information on our risk management process, refer to the Risk Management MD&A section of our 2022 Annual Report on Form 10-K.

In addition to the primary risks that we manage, climate-related risk has been identified as an emerging risk. Climate-related risk refers to the risk of loss or change in business activities arising from climate change and represents a transverse risk that could impact other risks within Ally’s risk-management framework, such as credit risk from negatively impacted borrowers, reputation risk from increased stakeholder concerns, and operational risk from physical climate risks. Refer to section titled Climate-Related Risk within this section for more information.

Loan and Operating Lease Exposure

The following table summarizes the exposures from our loan and operating-lease activities based on our reportable operating segments.

($ in millions)

(a) Includes a liability of $358 million and $617 million associated with fair value hedging adjustments at September 30, 2023, and December 31, 2022, respectively. Refer to Note 18 to the Condensed Consolidated Financial Statements for additional information.

(b) Includes $238 million and $290 million of consumer mortgage loans in our legacy mortgage portfolio at September 30, 2023, and December 31, 2022, respectively.

(c) Represents the current balance of conforming mortgages originated directly to the held-for-sale portfolio.

(d) Represents the current unpaid principal balance of outstanding loans based on our customary representation and warranty provisions.

The risks inherent in our loan and operating lease exposures are largely driven by changes in the overall economy (including GDP trends and inflationary pressures), used vehicle and housing prices, unemployment levels, real personal income, household savings, and their impact on our borrowers. The potential financial statement impact of these exposures varies depending on the accounting classification and future expected disposition strategy. We retain most of our consumer automotive and credit card loans as they complement our core business model, but we do sell loans from time to time on an opportunistic basis. We ultimately manage the associated risks based on the underlying economics of the exposure. Our operating lease residual risk may be more volatile than credit risk in stressed macroeconomic scenarios. While all operating leases are exposed to potential reductions in used vehicle values, only loans where we take possession of the vehicle are affected by potential reductions in used vehicle values.

Credit Risk

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

Credit risk is a major source of potential economic loss to us. Credit risk is monitored by the executive leadership team and our associates, and is regularly reported to and reviewed with the RC. Management oversees credit decisioning, account servicing activities, and credit-risk-management processes, and manages credit risk exposures within our risk appetite. In addition, 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, microsegments of the portfolios that are potential problem areas, loans and operating leases with potential credit weaknesses, and the assessment of the adequacy of internal credit risk policies and procedures. Our consumer and commercial loan and operating lease portfolios are subject to periodic stress tests, which include economic scenarios whose severity mirrors those developed and distributed by the FRB to assess how the portfolios may perform in a severe economic downturn. In addition, we establish and maintain underwriting policies and limits across our portfolios and higher risk segments (for example, nonprime) based on our risk appetite.

Another important aspect to managing credit risk involves the need to carefully monitor and manage the performance and pricing of our loan products with the aim of generating appropriate risk-adjusted returns. When considering pricing, various granular risk-based factors are considered such as expected loss rates, loss volatility, anticipated operating costs, and targeted returns on equity. We carefully monitor credit losses and trends in credit losses relative to expected credit losses at contract inception. We closely monitor our loan performance and profitability in light of forecasted economic conditions and manage credit risk and expectations of losses in the portfolio.

We manage credit risk based on the risk profile of the borrower, the source of repayment, the underlying collateral, and current market and economic conditions. We monitor the credit risk profile of individual borrowers, various segmentations (for example, geographic region, product type, industry segment), as well as the aggregate portfolio. We perform quarterly analyses of the consumer automotive, consumer mortgage, consumer other, and commercial portfolios to assess the adequacy of the allowance for loan losses based on historical, current, and anticipated trends. Refer to Note 7 to the Condensed Consolidated Financial Statements for additional information.

Additionally, we utilize numerous collection strategies to mitigate loss and provide ongoing support to customers in financial distress. We have enhanced our collection strategies to include customized messaging, digital communication, and proactive monitoring of vendor performance. We may offer several types of assistance to aid our customers based on their willingness and ability to repay their loan. As part of certain programs, we offer loan modifications to qualified borrowers, including payment extensions, interest rate concessions, and principal forgiveness.

Furthermore, we manage our credit exposure to financial counterparties based on the risk profile of the counterparty. Within our policies we have established standards and requirements for managing counterparty risk exposures in a safe and sound manner. Counterparty credit risk is derived from multiple exposure types including derivatives, securities trading, securities financing transactions, lending arrangements, and certain cash balances. For more information on derivative counterparty credit risk, refer to Note 18 to the Condensed Consolidated Financial Statements.

We employ an internal team of economists to enhance our planning and forecasting capabilities. This team conducts industry and market research, monitors economic risks, and helps support various forms of scenario planning. This group closely monitors macroeconomic trends given the nature of our business and the potential impacts on our exposure to credit risk. The unemployment rate remained low at 3.8% as of September 30, 2023. Sales of new light vehicles remained at an average annual rate of 15.6 million during the third quarter of 2023. Sales of new light motor vehicles remain below the pre-pandemic annual pace of 17.0 million in 2019, driving an increase in used vehicle values, as further described in the section below titled Operating Lease Vehicle Terminations and Remarketing. Additionally, used vehicle values may also be impacted by availability, the price of new vehicles, or changes in customer preferences. However, macroeconomic risks remain elevated.

Consumer Credit Portfolio

During the three months and nine months ended September 30, 2023, the credit performance of the consumer loan portfolio reflected our underwriting strategy to originate a diversified portfolio of consumer automotive loan assets, including new, used, prime and nonprime finance receivables and loans, high-quality jumbo and LMI mortgage loans that are obtained through bulk loan purchases and direct-to-consumer mortgage originations, as well as point-of-sale personal lending through Ally Lending. We also offer revolving, unsecured loans through Ally Credit Card. The carrying value of our nonprime held-for-investment consumer automotive loans before allowance for loan losses represented approximately 10.3% and 10.6% of our total consumer automotive loans at September 30, 2023, and December 31, 2022, 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 in our 2022 Annual Report on Form 10-K.

The following table includes consumer finance receivables and loans recorded at amortized cost.

($ in millions)

(a) Includes nonaccrual TDR loans of $684 million at December 31, 2022. Refer to Note 1 to the Condensed Consolidated Financial Statements for information of the elimination of TDR recognition in conjunction with the adoption of ASU 2022-02.

(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 for additional information on our accounting policy for finance receivables and loans on nonaccrual status.

(c) Certain finance receivables and loans are included in fair value hedging relationships. Refer to Note 18 to the Condensed Consolidated Financial Statements for additional information.

(d) Includes outstanding CSG loans of $10.3 billion and $10.0 billion at September 30, 2023, and December 31, 2022, respectively, and RV loans of $486 million and $578 million at September 30, 2023, and December 31, 2022.

(e) Excludes finance receivables of $3 million at December 31, 2022, for which we have elected the fair value option.

Total consumer finance receivables and loans increased $1.7 billion at September 30, 2023, compared with December 31, 2022. The increase consists of $2.1 billion of consumer automotive finance receivables and loans and $492 million of consumer other finance receivables and loans, primarily due to loan originations outpacing portfolio runoff. These increases were partially offset by a decrease of $840 million of consumer mortgage finance receivables and loans, which resulted from portfolio runoff outpacing originations and purchases. When interest rates rise, the likelihood of refinancing decreases and origination volumes tend to decrease.

Total consumer nonperforming finance receivables and loans at September 30, 2023, decreased $50 million to $1.2 billion from December 31, 2022. Refer to Note 7 to the Condensed Consolidated Financial Statements for additional information. Nonperforming consumer finance receivables and loans as a percentage of total outstanding consumer finance receivables and loans were 1.1% and 1.2% at September 30, 2023, and December 31, 2022, respectively.

Consumer automotive loans accruing and past due 30 days or more increased $328 million at September 30, 2023, compared with December 31, 2022, as delinquencies have increased amid deterioration in macroeconomic conditions, driven by persistent inflation. During the nine months ended September 30, 2023, we observed a slowing rate of increase in delinquency trends within our consumer automotive loan portfolio, as compared to the nine months ended September 30, 2022.

The following table includes consumer net charge-offs from finance receivables and loans at amortized cost and related ratios.

($ in millions)

(a) Net charge-off ratios are calculated as net charge-offs divided by average outstanding finance receivables and loans excluding loans measured at fair value and loans held-for-sale during the period for each loan category.

Our net charge-offs from total consumer finance receivables and loans were $459 million and $1.2 billion for the three months and nine months ended September 30, 2023, respectively, compared to net charge-offs of $245 million and $507 million for the three months and nine months ended September 30, 2022. Net charge-offs for our consumer automotive portfolio increased by $176 million and $583 million for the three months and nine months ended September 30, 2023, respectively, compared to the same periods in 2022, as delinquencies have increased amid deterioration in macroeconomic conditions, driven by persistent inflation. During the nine months ended September 30, 2023, we observed a slowing rate of increase in delinquency trends within our consumer automotive loan portfolio, as compared to the nine months ended September 30, 2022.

The following table summarizes total consumer loan originations for the periods shown. Total consumer loan originations include loans classified as finance receivables and loans held-for-sale during the period.

($ in millions)

(a) Includes loans purchased under forward flow agreements with automotive retailers, as well as $224 million and $694 million of loans originated as held-for-sale for the three months and nine months ended September 30, 2023, respectively, and $63 million for both the three months and nine months ended September 30, 2022.

(b) Excludes bulk loan purchases associated with our Mortgage Finance operations, and includes $221 million and $629 million of loans originated as held-for-sale for the three months and nine months ended September 30, 2023, respectively, and $415 million and $2.0 billion for the three months and nine months ended September 30, 2022.

(c) Includes loans related to our Ally Lending business for which we have elected the fair value option measurement during the three months and nine months ended September 30, 2022.

(d) Excludes credit card loans which are revolving in nature.

Total consumer loan originations decreased $1.7 billion and $8.1 billion for the three months and nine months ended September 30, 2023, respectively, compared to the three months and nine months ended September 30, 2022. The decreases were primarily due to decreased loan originations within the consumer automotive portfolio, as a result of our dynamic underwriting strategies, including strategic pricing and curtailment actions to optimize our risk appetite and returns. The decreases were also impacted by decreased loan originations within the consumer mortgage portfolio, due to a higher interest rate environment.

The following table shows the percentage of consumer finance receivables and loans by state concentration based on amortized cost.

(a) Presentation is in descending order as a percentage of total consumer finance receivables and loans at September 30, 2023.

(b) Excludes $3 million of finance receivables at December 31, 2022, for which we have elected the fair value option.

We monitor our consumer loan portfolio for concentration risk across the states in which we lend. The highest concentrations of consumer loans are in California and Texas, which represented an aggregate of 26.1% and 26.5% of our total outstanding consumer finance receivables and loans at September 30, 2023, and December 31, 2022, respectively. Our consumer mortgage loan portfolio concentration within California, which is primarily composed of high-quality jumbo mortgage loans, generally aligns to the California share of jumbo mortgages nationally.

Repossessed and Foreclosed Assets

We classify a repossessed or foreclosed asset as held-for-sale, which is included in other assets on our Condensed Consolidated Balance Sheet, when physical possession of the collateral is taken. We dispose of the acquired collateral in a timely fashion in accordance with regulatory requirements. For more information on repossessed and foreclosed assets, refer to Note 1 to the Consolidated Financial Statements in our 2022 Annual Report on Form 10-K.

Repossessed automotive loan assets in our Automotive Finance operations were $207 million and $183 million at September 30, 2023, and December 31, 2022, respectively, and foreclosed mortgage assets were $1 million and $2 million at September 30, 2023, and December 31, 2022.

Commercial Credit Portfolio

During the three months and nine months ended September 30, 2023, the credit performance of the commercial portfolio remained strong. For information on our commercial credit risk practices and policies regarding delinquencies, nonperforming status, and charge-offs, refer to Note 1 to the Consolidated Financial Statements in our 2022 Annual Report on Form 10-K.

The following table includes total commercial finance receivables and loans reported at amortized cost.

($ in millions)

(a) Includes nonaccrual TDR loans of $157 million at December 31, 2022. Refer to Note 1 to the Condensed Consolidated Financial Statements for information of the elimination of TDR recognition in conjunction with the adoption of ASU 2022-02.

(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 for additional information on our accounting policy for finance receivables and loans on nonaccrual status.

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

Total commercial finance receivables and loans outstanding increased $2.8 billion from December 31, 2022, to $31.9 billion at September 30, 2023. Results were driven by a $2.3 billion increase in our Automotive Finance segment, primarily within the commercial and industrial receivables class.

Total commercial nonperforming finance receivables and loans were $258 million at September 30, 2023, reflecting an increase of $96 million compared to December 31, 2022. Nonperforming commercial finance receivables and loans as a percentage of outstanding commercial finance receivables and loans was 0.8% and 0.6% at September 30, 2023, and December 31, 2022, respectively.

The following table includes total commercial net charge-offs from finance receivables and loans at amortized cost and related ratios.

($ in millions)

(a) Net charge-off ratios are calculated as net charge-offs divided by average outstanding finance receivables and loans excluding loans measured at fair value and loans held-for-sale during the period for each loan category.

We had net recoveries of $3 million and net charge-offs of $57 million from total commercial finance receivables and loans for the three months and nine months ended September 30, 2023, respectively, compared to net charge-offs of $31 million and $55 million for the three months and nine months ended September 30, 2022. The decrease for the three months ended September 30, 2023, was primarily driven by a partial charge-off of one exposure in our Corporate Finance operations during the three months ended September 30, 2022.

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 $5.9 billion and $5.4 billion at September 30, 2023, and December 31, 2022, respectively, which represented 4.2% and 4.0% of total outstanding finance receivables and loans at September 30, 2023, and December 31, 2022. There were $4.5 billion and $4.2 billion of commercial real estate loans included in the Automotive Finance segment at September 30, 2023, and December 31, 2022, respectively, and $1.4 billion and $1.1 billion of commercial real estate loans included in the Corporate Finance segment at September 30, 2023, and December 31, 2022.

The following table presents the percentage of total commercial real estate finance receivables and loans by state concentration based on amortized cost.

Commercial Criticized Exposure

Finance receivables and loans classified as special mention, substandard, or doubtful are reported as criticized. These classifications are based on regulatory definitions and generally represent finance receivables and loans within our portfolio that have a higher default risk or have already defaulted. These finance receivables and loans require additional monitoring and review including specific actions to mitigate our potential loss.

Total criticized exposures decreased $437 million from December 31, 2022, to $2.2 billion at September 30, 2023. The decrease in total criticized exposures was primarily driven by a decrease in Special Mention loans within the commercial and industrial portfolio class of our Automotive Finance operations. Total criticized exposures were 6.9% and 9.1% of total commercial finance receivables and loans at September 30, 2023, and December 31, 2022, respectively, representing strong overall credit performance as the commercial loan portfolio continues to grow.

The following table presents the percentage of total commercial criticized finance receivables and loans by industry concentration based on amortized cost.

Allowance for Loan Losses

Our quantitatively determined allowance under CECL is impacted by certain forecasted economic factors as further described in Note 1 to the Consolidated Financial Statements in our 2022 Annual Report on Form 10-K. For example, our consumer automotive allowance for loan losses is most sensitive to state-level unemployment rates. Our process for determining the allowance for loan losses considers a borrower’s willingness and ability to pay and considers other factors, including loan modification programs. In addition to our quantitative allowance for loan losses, we also incorporate qualitative adjustments that may relate to idiosyncratic risks, weather-related events, changes in current economic conditions that may not be reflected in quantitatively derived results, and other macroeconomic uncertainty. We also monitor model performance, using model error and related assessments, and we may incorporate qualitative reserves to adjust our quantitatively determined allowance if we observe deterioration in model performance. Additionally, we perform a sensitivity analysis of our allowance utilizing varying macroeconomic scenarios, as described further within Critical Accounting Estimates — Allowance for Credit Losses within the MD&A in our 2022 Annual Report on Form 10-K.

Through September 30, 2023, forecasted economic variables incorporated into our quantitative allowance processes were updated to include the current macroeconomic environment and our future expectations reflecting slow GDP growth in the near term. This included (but were not limited to) the following: the unemployment rate rising to approximately 4.3% in the third quarter of 2024, before reverting to the historical mean of approximately 6.2% by the third quarter of 2026, GDP growth slowing as measured on a quarter-over-quarter seasonally adjusted annualized rate basis through the first quarter of 2024, before reverting to the historical mean of approximately 1.9% by the third quarter of 2026, and increases in new light vehicle sales on a seasonally adjusted annualized rate basis of approximately 16 million units by the third quarter of 2024, before reverting to the historical mean of 15 million units by the third quarter of 2026. Additionally, we maintain a qualitative allowance framework to account for ongoing uncertainty and volatility in the macroeconomic environment (including the impact of inflationary pressures) that could adversely impact frequency of loss and LGD. Our overall allowance for loan losses increased $56 million from the prior quarter to $3.8 billion at September 30, 2023, representing 2.7% as a percentage of total finance receivables at both September 30, 2023, and December 31, 2022.

The following tables present an analysis of the activity in the allowance for loan losses on finance receivables and loans for the three months and nine months ended September 30, 2023, and September 30, 2022, respectively.

(a) Refer to Note 1 to the Consolidated Financial Statements in our 2022 Annual Report on Form 10-K for information regarding our charge-off policies.

(b) Excludes $4 million of benefit for credit losses related to our reserve for unfunded commitments. The liability related to the reserve for unfunded commitments is included in accrued expenses and other liabilities on our Condensed Consolidated Balance Sheet.

Ally Financial Inc. • Form 10-Q

(a) Refer to Note 1 to the Consolidated Financial Statements in our 2022 Annual Report on Form 10-K for information regarding our charge-off policies.

(b) Excludes $9 million of benefit for credit losses related to our reserve for unfunded commitments. The liability related to the reserve for unfunded commitments is included in accrued expenses and other liabilities on our Condensed Consolidated Balance Sheet.

(a) Refer to Note 1 to the Consolidated Financial Statements in our 2022 Annual Report on Form 10-K for information regarding our charge-off policies.

Ally Financial Inc. • Form 10-Q

(a) Refer to Note 1 to the Consolidated Financial Statements in our 2022 Annual Report on Form 10-K for information regarding our charge-off policies.

(b) Excludes $2 million of provision for credit losses related to our reserve for unfunded commitments. The liability related to the reserve for unfunded commitments is included in accrued expenses and other liabilities on our Condensed Consolidated Balance Sheet.

($ in millions)

n/m = not meaningful

(a) Coverage percentages are based on the allowance for loan losses related to finance receivables and loans excluding those loans held at fair value as a percentage of the amortized cost.

The allowance for consumer loan losses as of September 30, 2023, increased $208 million compared to September 30, 2022, reflecting an increase of $111 million in the consumer automotive allowance, along with an increase of $102 million in the consumer other allowance, partially offset by a decrease of $5 million in our consumer mortgage allowance. The increase in our consumer automotive allowance was primarily driven by portfolio growth and a higher coverage rate. The increase in the consumer other allowance was primarily driven by continued portfolio growth in Ally Lending and Ally Credit Card.

The allowance for commercial loan losses as of September 30, 2023, increased $18 million compared to September 30, 2022. The increase was primarily driven by higher severity of recent defaults in the commercial and industrial portfolio class of our Automotive Finance operations and specific reserve builds in our Corporate Finance operations.

Provision for Loan Losses

The following table summarizes the provision for loan losses by loan portfolio class.

($ in millions)

(a) Excludes $4 million and $9 million of benefit for credit losses related to our reserve for unfunded commitments during the three months and nine months ended September 30, 2023, respectively, and $2 million of provision for credit losses related to our reserve for unfunded commitments during the nine months ended September 30, 2022.

The provision for consumer credit losses increased $73 million and $452 million for the three months and nine months ended September 30, 2023, respectively, compared to the three months and nine months ended September 30, 2022. The increases in provision for consumer credit losses for the three months and nine months ended September 30, 2023, were primarily driven by higher net charge-offs across our consumer portfolios.

The provision for commercial credit losses increased $1 million and $31 million for the three months and nine months ended September 30, 2023, respectively, compared to the three months and nine months ended September 30, 2022. The increases in provision for commercial credit losses during the nine months ended September 30, 2023, were primarily driven by reserve reductions in the nine months ended September 30, 2022, related to qualitative reserves established at the onset of the COVID-19 pandemic within our Corporate Finance operations, in addition to higher provisions on specific exposures within our Automotive Finance operations during the nine months ended September 30, 2023.

Allowance for Loan Losses by Type

The following table summarizes the allocation of the allowance for loan losses by loan portfolio class.

Market Risk

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

The impact of changes in benchmark interest rates on our assets and liabilities (interest rate risk) represents an exposure to market risk and can affect interest rate sensitivities and cash flows when compared to our expectations. We primarily use interest rate derivatives to manage our interest rate risk exposure.

During the nine months ended September 30, 2023, the Federal Reserve increased the federal funds target range to 5.25–5.50% to address the elevated inflation levels, with future rate increases still possible. Refer to the section below titled Net Financing Revenue Sensitivity Analysis for additional information on how future rate changes may impact net financing revenue.

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

We are also exposed to foreign-currency risk primarily from Canadian denominated assets and liabilities. We enter into foreign currency hedges to mitigate foreign exchange risk.

We have exposure to changes in the value of equity securities. We have exposure to equity securities with readily determinable fair values primarily related to our Insurance operations. For such equity securities, we use equity derivatives to manage our exposure to equity price fluctuations.

As part of our CRA program, we make investments in CRA-eligible funds that do not qualify for LIHTCs. Many of these CRA funds feature private equity or venture capital structures, and are accounted for using the equity method of accounting. We recognize our share of the investee’s earnings based on the performance of the funds. During the three months and nine months ended September 30, 2023, we recognized losses of $1 million and $18 million, respectively, related to these investments. The losses for the three months and nine months ended September 30, 2023, were primarily due to broader real estate market trends adversely impacting certain funds. There were no indications of impairment within our portfolio of CRA-eligible funds as of September 30, 2023.

In addition, we are exposed to changes in the value of other nonmarketable equity investments without readily determinable fair market values, which may cause volatility in our earnings.

As of September 30, 2023, we had $4.8 billion of cumulative net unrealized losses on our available-for-sale securities. During the three months and nine months ended September 30, 2023, we recorded $886 million and $672 million of net unrealized losses, respectively, on our available-for-sale securities. Unrealized gains and losses are recorded in other comprehensive income within our Condensed Consolidated Statement of Comprehensive Income, and are generally not realized unless we sell the securities prior to their stated maturity date. As of September 30, 2023, and December 31, 2022, we did not have the intent to sell the available-for-sale securities with an unrealized loss position and we do not believe it is more likely than not that we will be required to sell these securities before recovery of their amortized cost basis. For the three months and nine months ended September 30, 2023, management determined that there were no expected credit losses for securities in an unrealized loss position. Refer to Note 6 and Note 15 to the Condensed Consolidated Financial Statements for additional information.

The composition of our balance sheet, including shorter-duration consumer automotive loans and variable-rate commercial loans, along with our primary funding source of retail deposits, partially mitigates market risk. Additionally, we maintain risk-management controls that measure and monitor market risk using a variety of analytical techniques including market value and sensitivity analysis. Refer to Note 18 to the Condensed Consolidated Financial Statements for additional information. For information regarding our insured and uninsured deposit liabilities, refer to the section below titled Response to Banking Industry Failures.

LIBOR Transition

In recognition of the significance of LIBOR cessation, in July 2018, Ally formed an enterprise-wide LIBOR transition program that devotes numerous resources throughout all levels of the organization to facilitate the transition to alternative reference rates. Our program spans impacted business lines and functions to evaluate risks associated with the transition, while taking into account specific considerations related to our customers, products and instruments, and counterparty exposures. Through this program, we planned for and guided the transition away from LIBOR to alternative reference rates, and continue to evaluate the impacts and potential impacts to our existing and future contracts with customers and counterparties, financial forecasts, operational processes, technology, modeling, and vendor relationships. Our program is also subject to the governance and oversight of our Board through the RC and certain executive committees, including the ALCO and the ERMC. For a more detailed discussion of our transition away from LIBOR, refer to the section titled Risk Management—LIBOR Transition in our 2022 Annual Report on Form 10-K.

The publication of the 1-week and 2-month U.S. dollar LIBOR settings ceased to be provided or ceased to be representative as of December 31, 2021. The remaining U.S. dollar LIBOR settings ceased to be provided or ceased to be representative as of June 30, 2023. Our transition efforts included developing new products and agreements that utilize alternative reference rates, such as Prime and SOFR, and engaging our commercial customers with transitioning their existing financing agreements from LIBOR to alternative rates, as appropriate. Since the end of 2021, we have not entered into new contracts that use U.S. dollar LIBOR as a reference rate, in alignment with guidance from U.S. banking regulators. Except for certain adjustable-rate mortgage loans described in the following paragraph, we transitioned all remaining contracts away from LIBOR during the first half of 2023.

The LIBOR Act, enacted in March 2022, provides a uniform approach for replacing LIBOR as a reference interest rate in tough legacy contracts—that is, contracts that do not include effective fallback provisions—when LIBOR is no longer published or is no longer representative. Under the LIBOR Act, references to the most common tenors of LIBOR in these contracts will be replaced as a matter of law, without the need to be amended by the parties, to instead reference benchmark interest rates based on SOFR that will be identified by the FRB. The FRB issued a final rule effective February 2023, to implement the LIBOR Act. We plan to rely on the LIBOR Act and the FRB’s final rule on our LIBOR-linked contracts for a smaller portfolio of adjustable-rate mortgage loans that utilize contracts containing LIBOR-based reference rates still remaining as of September 30, 2023.

Net Financing Revenue Sensitivity Analysis

Interest rate risk represents one of our most significant exposures to market risk. We actively monitor the level of exposure to movements in interest rates and take actions to mitigate adverse impacts these movements may have on future earnings. We use a sensitivity analysis of net financing revenue as our primary metric to measure and manage the interest rate risk of our financial instruments.

The execution of our current business strategy generally results in shorter-duration, fixed-rate consumer automotive loans comprising the majority of our assets and liquid, floating-rate retail deposits comprising the majority of our liabilities. This, in turn, results in a structurally liability sensitive balance sheet as our floating-rate retail deposits reprice faster than our fixed-rate consumer automotive loans when interest rates change. We prepare forward-looking baseline forecasts of pretax net financing revenue as well as anticipated future business growth, actions to alter our asset/liability positioning, and interest rates based on the implied forward curve. The analysis is highly dependent upon a variety of assumptions, one of the most significant being the repricing characteristics of retail deposits with both contractual and non-contractual maturities. We monitor industry and competitive repricing activity along with other business and market factors when developing deposit pricing assumptions.

Modeled simulations are then used to assess changes in pretax net financing revenue in multiple interest rate scenarios relative to the baseline forecast. The changes in net financing revenue relative to the baseline are defined as the sensitivity. Our simulations incorporate contractual cash flows and assumed repricing characteristics for assets, liabilities, and off-balance sheet exposures and incorporate the assumed effects of changing interest rates on the prepayment and attrition rates of certain assets and liabilities. Our simulations do not assume any specific future actions are taken to mitigate the impacts of changing interest rates.

These simulations measure the potential changes in our pretax net financing revenue over the following 12 months. We test a number of alternative rate scenarios, including immediate and gradual parallel shocks to the implied forward curve. We also evaluate nonparallel shocks to interest rates and stresses to certain term points on the yield curve in isolation to capture and monitor a variety of risks.

Simulation results are driven by underlying models and assumptions that are based on trend behavior and other historical information. The underlying models and assumptions, including retail deposit pricing, are regularly monitored, evaluated, and may be updated accordingly as observed trends materialize. As a result, if future trends or behaviors deviate from those reflected in the models, actual sensitivities may vary—perhaps significantly—from those that are modeled. For example, the pace and magnitude of changes in the federal-funds rate during the last two years has challenged models like ours whose historical data is largely derived from a more stable rate environment. Actual sensitivities may differ for other reasons as well, including unplanned changes in balance sheet composition, timing of asset and liability repricing, the yield curve, customer behavior, macroeconomic conditions, the competitive environment, and management strategies. Accordingly, we do not treat the sensitivities as forecasts of net financing revenue but instead use them as a tool in managing interest rate risk.

In a stable rate scenario that assumes spot rates as of September 30, 2023, remain constant through the simulation, net financing revenue over the next 12 months is expected to increase by $41 million versus the baseline forecast, due to the shape of the implied forward curve.

The following table presents the pretax dollar impact to baseline forecasted net financing revenue over the next 12 months assuming various parallel shocks to the implied forward curve as of September 30, 2023, and December 31, 2022.

($ in millions)

($ in millions)

(a) Gradual changes in interest rates are recognized over 12 months.

Since December 31, 2022, the implied forward curve has increased and steepened modestly. During the first three quarters of 2023, our floating-rate commercial balances and cash balances increased, and we saw a shift from liquid deposits to CDs, increased our pay-fixed swap position, and incrementally added interest rate floor contracts that will provide benefit in certain lower-rate scenarios. The impact of these changes is reflected in our baseline net financing revenue forecast. As of September 30, 2023, we expect to modestly benefit in the near-term if rates were to move higher than the forward curve implies. This short-term asset sensitivity is the result of the assumed repricing of our assets and pay-fixed swap position outpacing the assumed repricing of our liabilities. Within the 12-month horizon, we expect a reversion to liability sensitivity and, as a result, a negative effect on net financing revenue.

Our interest-rate risk position is influenced by the impact of hedging activity, which primarily consists of interest rate swaps designated as fair value hedges of certain fixed-rate assets and fixed-rate debt instruments. Additionally, we use interest rate floor contracts designated as cash flow hedges on certain floating-rate assets. The size, maturity, and mix of our hedging activities are adjusted as our balance sheet, ALM objectives, and the interest rate environment evolve over time. Our hedging strategies, however, are not designed to eliminate all interest-rate risk, and we were adversely affected from rising interest rates in 2022 and 2023.

Operating Lease Residual Risk Management

We are exposed to residual risk on vehicles in the consumer operating lease portfolio. This operating lease residual risk represents the possibility that the actual proceeds realized upon the sale of returned vehicles will be lower than the projection of these values used in establishing the pricing at lease inception. Our operating lease portfolio, net of accumulated depreciation was $9.6 billion and $10.4 billion as of September 30, 2023, and December 31, 2022, respectively. The expected lease residual value of our operating lease portfolio at scheduled termination was $7.7 billion and $8.3 billion as of September 30, 2023, and December 31, 2022, respectively. For information on our valuation of automotive operating lease residuals including periodic revisions through adjustments to depreciation expense based on current and forecasted market conditions, refer to the section titled Critical Accounting Estimates—Valuation of Automotive Operating Lease Assets and Residuals within the MD&A in our 2022 Annual Report on Form 10-K.

Operating Lease Vehicle Terminations and Remarketing

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

We recognized an average gain per vehicle of $1,944 and $2,080 for the three months and nine months ended September 30, 2023, respectively, compared to an average gain per vehicle of $1,325 and $1,547 for the same periods in 2022. The increases in remarketing performance during the three months and nine months ended September 30, 2023, were primarily due to normalizing volume trends in the contractually priced buyout channels. Off-lease vehicles sold to lessees and dealers decreased 13% and 11% for the three months and nine months ended September 30, 2023, respectively, as compared to the same periods in 2022. The number of off-lease vehicles remarketed during the nine months ended September 30, 2023, decreased 7% compared to the same period in 2022, due to lower termination volume, in alignment with lower lease origination volume during the first half of 2020 resulting from the COVID-19 pandemic.

Operating Lease Portfolio Mix

We monitor the concentration of our outstanding operating leases. Our exposure to Stellantis vehicles represented approximately 78% of our operating lease units as of both September 30, 2023, and 2022.

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

Climate-Related Risk

We have identified and defined climate-related risk as an emerging risk. Pursuant to our risk-management framework, emerging risks include those that have yet to create a material impact or would only arise during stressful or unlikely circumstances. Refer to the section titled Risk Factors in Part I, Item 1A of our 2022 Annual Report on Form 10-K for information on climate-related risks.

Climate-related risk is generally categorized into two major categories: (1) risk related to the transition to a lower-carbon economy (transition risk) and (2) risk related to the physical impacts of climate change. Transition risk considers how changes in policy, technology, and market preference could pose operational, financial, and reputational risk to companies. Physical risk from climate change can be acute or chronic. Acute physical risk refers to risks that are event-driven such as increased severity of extreme weather events, including tornadoes, hurricanes, or floods. Chronic physical risks refer to long-term shifts in climate patterns, such as sustained higher temperatures, that may, for example, cause sea levels to rise. We manage risks related to the physical impacts of climate change through the active engagement of our business continuity program, which is intended to limit disruptions during acute climate-related events. Additionally, we use excess of loss reinsurance to help mitigate risk of weather losses within our P&C business for our vehicle inventory program. We also use loss control techniques such as storm path monitoring to assist dealers in preparing for severe weather help to mitigate loss potential.

As the impacts of climate change become more evident, we have recognized (1) the importance of understanding, preparing for and taking timely preventive action against potentially material climate-change impacts, (2) increasing investor demand for consistent and comparable climate-change risk data, (3) changing federal policy focus as a result of rejoining the Paris Climate Agreement and an increase in regulatory discussion about potential requirements and oversight, and (4) that Ally’s commitment to “Do It Right” extends to the conservation of environmental resources to promote a sustainable future for our customers, employees, stockholders, and the communities in which we live and operate. For additional information, refer to the Risk Management MD&A section of our 2022 Annual Report on Form 10-K.

Liquidity Management, Funding, and Regulatory Capital

Overview

The purpose of liquidity management is to enable us to meet loan and operating lease demand, debt maturities, deposit withdrawals, and other cash commitments under both normal operating conditions as well as periods of economic or financial stress. Our primary objective is to maintain cost-effective, stable and diverse sources of funding capable of sustaining the organization throughout all market cycles. Sources of funding include both retail and brokered deposits and secured and unsecured market-based funding across various maturity, interest rate, and investor profiles. Additional liquidity is available through a pool of unencumbered highly liquid securities, repurchase agreements, and advances from the FHLB of Pittsburgh.

We define liquidity risk as the risk that an institution’s financial condition or overall safety and soundness is adversely affected by the actual or perceived inability to liquidate assets or obtain adequate funding or to easily unwind or offset specific exposures without significantly lowering market prices because of inadequate market depth or market disruptions. Liquidity risk can arise from a variety of institution-specific or market-related events that could have a negative impact on cash flows available to the organization. Effective management of liquidity risk positions an organization to meet cash flow obligations caused by unanticipated events. Managing liquidity needs and contingent funding exposures has proven essential to the solvency of financial institutions.

The ALCO, chaired by the Corporate Treasurer, is responsible for overseeing our funding and liquidity strategies. Corporate Treasury is responsible for managing our liquidity positions within limits approved by ALCO, the ERMC, and the RC. As part of managing liquidity risk, Corporate Treasury prepares monthly forecasts depicting anticipated funding needs and sources of funds, executes our funding strategies, and manages liquidity under normal as well as more severely stressed macroeconomic environments. Oversight and monitoring of liquidity risk are provided by Independent Risk Management.

The monthly liquidity forecasts demonstrate our ability to generate and obtain adequate amounts of cash to meet loan and operating lease demand, debt maturities, deposit withdrawals, and other cash commitments under normal operating conditions throughout the forecast horizon (currently through December 2026). Refer to Note 12 to the Condensed Consolidated Financial Statements for a summary of the scheduled maturity of long-term debt as of September 30, 2023. In recent years, we have become less reliant on market-based funding, reducing our exposure to disruptions in wholesale funding markets.

Funding Strategy

Liquidity and ongoing profitability are largely dependent on the timely and cost-effective access to retail deposits and funding in various segments of the capital markets. We focus on maintaining diversified funding sources across a broad base of depositors, lenders, and investors to meet liquidity needs throughout different economic cycles, including periods of financial distress. These funding sources include retail and brokered deposits, public and private asset-backed securitizations, unsecured debt, FHLB advances, and repurchase agreements. Our access to diversified funding sources enhances funding flexibility and results in a more cost-effective funding strategy over the long term. We evaluate funding markets on an ongoing basis to achieve an appropriate balance of unsecured and secured funding sources and maturity profiles.

We manage our funding to achieve a well-balanced portfolio across a spectrum of risk, maturity, and cost-of-funds characteristics. Optimizing funding at Ally Bank continues to be a key part of our long-term liquidity strategy. We optimize our funding sources at Ally Bank by prioritizing retail deposits, maintaining an active securitization program, managing the maturity profile of our brokered deposit portfolio, utilizing repurchase agreements, and continuing to access funds from the FHLB.

Assets are primarily originated by Ally Bank to reduce parent company exposures and funding requirements, and to utilize our growing consumer deposit-taking capabilities. This allows us to use bank funding for substantially all our automotive finance and other assets and to provide a sustainable long-term funding channel for the business, while also improving the cost of funds for the enterprise.

Liquidity Risk Management

Multiple metrics are used to measure liquidity risk, manage the liquidity position, identify related trends, and monitor these trends and metrics against established limits. These metrics include comprehensive stress tests that measure the sufficiency of the liquidity portfolio over stressed horizons ranging from overnight to 12 months, stability ratios that measure longer-term structural liquidity, and concentration ratios that enable prudent funding diversification. In addition, we have established internal management routines designed to review all aspects of liquidity and funding plans, evaluate the adequacy of liquidity buffers, review stress testing results, and assist management in the execution of its funding strategy and risk-management accountabilities.

Our liquidity stress testing is designed to allow us to operate our businesses and to meet our contractual and contingent obligations, including unsecured debt maturities, for at least 12 months, assuming our normal access to funding is disrupted by severe market-wide and enterprise-specific events. We maintain available liquidity in the form of cash, unencumbered highly liquid securities, available FHLB capacity, and available FRB Discount Window capacity. This available liquidity is held at various legal entities and is subject to regulatory restrictions and tax implications that may limit our ability to transfer funds across entities.

The following table summarizes our total available liquidity.

($ in millions)

(a) Excludes restricted cash and foreign currency cash balances.

(b) Pledged assets are primarily composed of consumer mortgage finance receivables and loans, as well as real-estate-backed loans within our Automotive Finance and Corporate Finance businesses, and non-agency mortgage-backed securities.

(c) Includes unencumbered U.S. federal government, U.S. agency, and highly liquid corporate debt securities.

(d) Pledged assets are composed of consumer automotive finance receivables and loans. Refer to Note 12 to the Condensed Consolidated Financial Statements for information on assets pledged to the FRB.

Recent Funding and Liquidity Developments

Key funding highlights from January 1, 2023, to date were as follows:

• In February 2023, Ally Financial Inc. accessed the unsecured debt capital markets and raised $500 million through the issuance of subordinated notes. In June 2023, Ally Financial Inc. raised $850 million through the issuance of unsecured senior notes. Based on the proposed rule requiring Category II, III, and IV firms to maintain minimum amounts of eligible long-term debt, we would expect both issuances to qualify under the requirement for covered bank holding companies. Refer to the section below titled Response to Banking Industry Failures for more information about the proposed rule.
• We raised $1.6 billion through the completion of term securitization transactions backed by consumer automotive loans.
• We issued $9.7 billion of brokered CDs.
• We increased our total available funding capacity through the FRB Discount Window by $23.5 billion during the nine months ended September 30, 2023, to $25.6 billion as of September 30, 2023. The increase in FRB Discount Window capacity reflects our strategy to maintain increased contingent liquidity following the bank failures of early 2023 and to further align with the Addendum to the Interagency Policy Statement on Funding and Liquidity Risk Management: Importance of Contingency Funding Plans released in July 2023.
• We increased and diversified repurchase agreement transaction funding with our counterparties.

Response to Banking Industry Failures

In March 2023, the FDIC was appointed as receiver for SVB and Signature after they experienced runs on deposits and other liquidity constraints. At the time, SVB and Signature were the 16th and 29th largest banks in the United States, respectively, as measured by total assets as of December 31, 2022. Also during March 2023, UBS Group AG announced the acquisition of Credit Suisse Group AG, with the support of the Swiss government.

Our liquidity position fundamentally differs from those of SVB and Signature before their failures. For example, more than 92% of deposits at Ally Bank were FDIC-insured as of September 30, 2023, compared to 12% for SVB and 10% for Signature as of December 31, 2022. Additionally, our deposit portfolio is primarily composed of granular and diversified retail customer accounts, as opposed to SVB and Signature who had large uninsured commercial deposits. Because of the market turbulence and uncertainty, however, we activated existing internal incident response procedures specifically designed to increase governance and monitoring of Ally Bank’s depositor behavior, liquidity position, and risk exposure, including frequent ongoing dialogue with the Board and supervisory authorities.

We also took specific funding actions. Even before these failures, in response to the unprecedented pace of monetary tightening in 2022 and the resultant macroeconomic uncertainty, we had increased cash and available liquidity. Refer to the section above titled Recent Funding Developments. After the failures, we continued to do so by optimizing brokered CD issuances, borrowing from the FHLB, managing securities collateral pledged to the FHLB, maintaining competitive retail deposit pricing, and managing new loan origination volumes. We had $64.1 billion of total available liquidity as of September 30, 2023, which included $11.0 billion of available FHLB capacity and $25.6 billion of available FRB Discount Window capacity. Refer to the section above titled Liquidity Risk Management. FHLB funding provides us with a stable funding source, and can be drawn upon on a same-day basis if sufficiently secured with available collateral.

In support of American businesses and households, the FRB created the BTFP in March 2023 to make additional funding available to eligible depository institutions in order to help assure that banks have the ability to meet the needs of all of their depositors. The BTFP is a further source of liquidity against high-quality securities and contributes to financial stability by eliminating a bank’s need to quickly sell those securities in times of stress. Under the BTFP, depository institutions may borrow funds by pledging collateral eligible for purchase by the FRB in open market operations, such as U.S. Treasuries and agency debt and mortgage-backed securities, in each case valued at par. We did not borrow from the BTFP through September 30, 2023. As of September 30, 2023, we had $25.6 billion in total available funding capacity through the FRB Discount Window, with no debt outstanding during the nine months ended September 30, 2023.

Following the failures of SVB and Signature, on May 1, 2023, First Republic Bank was closed by the California Department of Financial Protection and Innovation, which appointed the FDIC as receiver. The FDIC entered into a purchase and assumption agreement with JPMorgan Chase Bank to assume all the deposits and substantially all the assets of First Republic Bank. We continue to monitor and assess the impact of these failures on Category IV firms like Ally.

In April 2023, in a statement accompanying the review of the FRB’s supervision and regulation of SVB, FRB Vice Chair for Supervision Barr highlighted a plan to revisit the Tailoring Rules and develop stronger capital, liquidity, stress-testing, and other standards for Category IV firms like Ally. In July 2023, the U.S. banking agencies issued a proposed rule to customize and implement revisions to the global Basel III capital framework that had been approved by the Basel Committee in December 2017 (commonly known as the Basel III endgame or as Basel IV). For regulatory capital, the proposed rule would eliminate the effect of the Tailoring Rules by requiring the recognition of most elements of accumulated other comprehensive income and loss and the application of deductions, limitations, and criteria for specified capital investments, minority interests, and TLAC holdings. For each of the risk-based capital ratios, a large banking organization like Ally would calculate and be bound by the lower of two alternatives: one version of the ratio based on an expanded risk-based approach prescribed in the proposed rule and one version of the ratio based on the standardized approach as modified by the proposed rule. All capital buffer requirements, including the stress capital buffer requirement, would apply regardless of whether the expanded risk-based approach or the standardized approach produces the lower ratio. Under the expanded risk-based approach, total RWAs would equal the sum of the RWAs for credit risk, equity risk, operational risk, market risk, and CVA risk as set forth in the proposed rule minus any amount of the banking organization’s adjusted allowance for credit losses that is not included in Tier 2 capital and any amount of allocated transfer risk reserves. Under the standardized approach, total RWAs would be calculated using the existing rules with a revised methodology for determining market risk-weighted assets and a required application of the standardized approach for counterparty credit risk for derivative exposures. Category IV firms would be further required under the proposed rule to project their risk-based capital ratios under baseline conditions in their capital plans and related reports using the RWA-calculation approach that results in their binding risk-based capital ratios as of the start of the projection horizon. The proposed rule also would roll back additional elements of the Tailoring Rules by applying to Category IV firms the supplementary leverage ratio, the countercyclical capital buffer, and enhanced public disclosure and reporting requirements. Under the proposed rule, a three-year transition period from July 1, 2025, to June 30, 2028, would apply to the recognition of accumulated other comprehensive income and loss in regulatory capital and the use of the expanded risk-based approach. The phase-in of accumulated other comprehensive income and loss is expected to significantly affect our levels of regulatory capital. While we believe that this would be manageable, we also anticipate that our levels of regulatory capital would need to be gradually increased in advance of and during the proposed transition period. As for the proposed changes to RWAs, while we continue to evaluate the effects of individual provisions and the interplay among them as well as potential management actions in response, the impact is not currently expected to be significant in the aggregate if the proposed rule were adopted in its existing form. We are actively engaged with research and advocacy groups to inform the rulemaking process and better understand the impacts of the proposed rule on banking organizations of various sizes and complexities—as well as the competitive environment more broadly—and likewise encourage the U.S. banking agencies to closely study these impacts and their wider implications.

In August 2023, the U.S. banking agencies issued two proposed rules to improve the resolvability of Category IV firms like Ally. The first proposed rule would require Category II, III, and IV firms, their large consolidated banks, and other institutions to issue and maintain minimum amounts of eligible long-term debt in an amount that is the greater of (i) 6 percent of total RWAs, (ii) 3.5 percent of average total consolidated assets, and (iii) 2.5 percent of total leverage exposure. Covered insured depository institutions, like Ally Bank, that are consolidated subsidiaries of covered entities, like Ally, would be required to issue eligible long-term debt internally to a company that consolidates the covered insured depository institution, which would in turn be required to purchase that long-term debt. Only long-term debt instruments that are most readily able to absorb losses in a resolution proceeding would qualify, and the operations of covered entities would be subject to clean-holding-company requirements such as prohibitions and limitations on their liabilities to unaffiliated entities. Under the proposed rule, a transition period would apply with 25, 50, and 100 percent of the long-term-debt requirements coming into effect by the end of the first, second, and third years, respectively, after finalization of the rule. The second proposed rule, which was issued solely by the FDIC, would require each insured depository institution with $100 billion or more in total assets, like Ally Bank, to submit a full resolution plan with an identified strategy for ensuring timely access to insured deposits, maximizing value from the disposition of assets, minimizing any losses realized by creditors, and addressing potential financial-stability risks. Each resolution plan also would be subject to more stringent standards on its assumptions, content, and reviews. Covered insured depository institutions would need to submit a full resolution plan every two years with interim supplements in non-submission years. We are still assessing the impact of these two proposed rules but, due to the current structure and amount of debt instruments issued by Ally and Ally Bank, expect the long-term-debt rule in particular to significantly affect us.

Whether and when final rules related to these proposals may be adopted and take effect, as well as what changes to the proposed rules may be reflected in any final rules after the comment periods, remain unclear. Also, beyond these proposed rules, more stringent and less tailored liquidity, stress-testing, and other standards for Category IV firms like Ally may be forthcoming, including those that may reinstate the LCR, require more rigorous liquidity stress testing, and return Ally to supervisory stress testing on an annual cycle. Refer to Note 17 to the Condensed Consolidated Financial Statements for additional information.

In August 2023, citing macroeconomic trends impacting the banking industry, such as increased costs of funding and rapid tightening in monetary policy, Moody’s downgraded the credit ratings of a number of banks. Additionally, Moody’s downgraded the outlook of a number of banks, including Ally, where the outlook was lowered from Stable to Negative. Refer to the section below titled Credit Ratings for additional information.

Funding Sources

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

($ in millions)

(a) Includes hedge basis adjustments as described in Note 18 to the Condensed Consolidated Financial Statements.

Refer to Note 12 to the Condensed Consolidated Financial Statements for a summary of the scheduled maturity of long-term debt at September 30, 2023.

Deposits

Ally Bank is a digital direct bank with no branch network that obtains retail deposits directly from customers. We offer competitive rates and fees on a full spectrum of retail deposit products, including savings accounts, money-market demand accounts, CDs, interest-bearing spending accounts, trust accounts, and IRAs. Our primary funding source is retail deposits, which we believe at scale are the most efficient and stable source of funding for us when compared to other funding sources. Retail deposits constituted 80% of our total funding sources at September 30, 2023. In addition, we utilize brokered deposits, which are obtained through third-party intermediaries.

As of September 30, 2023, and December 31, 2022, we had $11.4 billion and $15.2 billion, respectively, of deposit liabilities that are uninsured by the FDIC, excluding affiliate and intercompany deposits.

The following table shows Ally Bank’s total primary retail deposit customers and deposit balances as of the end of each of the last five quarters.

(a) Other deposits include mortgage escrow deposits. Other deposits also include a deposit related to Ally Invest customer cash balances deposited at Ally Bank by a third party of $1.3 billion as of September 30, 2023, $1.5 billion as of both June 30, 2023 and March 31, 2023, $1.8 billion as of December 31, 2022, and $2.0 billion as of September 30, 2022.

During the nine months ended September 30, 2023, our total deposit base increased $538 million, and we added approximately 307,000 retail deposit customers, ending with approximately 3.0 million retail deposit customers as of September 30, 2023. Total retail deposits increased $2.4 billion during the nine months ended September 30, 2023, bringing the total retail deposits portfolio to $140.1 billion as of September 30, 2023, primarily driven by an increase in retail deposit customers. We have maintained competitive deposit rates in response to higher benchmark interest rates and changes in product offerings by banks and nonbanks. Additionally, brokered deposits decreased $1.3 billion during the nine months ended September 30, 2023. During the nine months ended September 30, 2023, our CD deposit liabilities increased $12.2 billion and our savings, money market, and spending account deposit liabilities decreased $11.6 billion. This trend was primarily due to customer migration from liquid savings to fixed-rate CDs, as observed across the industry. Overall, strong customer acquisition and retention rates continue to deliver a favorable funding mix.

Following the failures of SVB and Signature, we briefly experienced elevated two-way deposit flows. Uninsured deposit outflows were more than offset by inflows from new and existing customers. Approximately 92% of retail deposits at Ally Bank were FDIC-insured as of September 30, 2023. Our total available liquidity exceeded our uninsured deposit liabilities by $52.8 billion as of September 30, 2023.

We continue to advance our digital capabilities and deliver incremental value to our retail deposit customers beyond competitive rates and low fees. Notably, our digital tools (e.g. Savings & Spend Buckets) improve the digital banking experience across the entire customer journey, and additional account features like CoverDraft and early direct deposit further bolster our “Do It Right” commitment for our customers.

We continue to be recognized for the totality of experience and value we provide our customers. In April 2023, Forbes again named Ally to its “World’s Best Banks” list followed by The Wall Street Journal’s BuySide recognition of Ally Bank as the “Best Online Bank of 2023.” In October 2023, MONEY® Magazine named Ally to its “Best Online Bank” list for the sixth consecutive year, as well as the eleventh time in the past thirteen years. In January 2023, Bankrate named Ally Bank the “Best Bank Overall.” For additional information on our deposit funding by type, refer to Note 11 to the Condensed Consolidated Financial Statements.

Securitizations and Secured Financings

In addition to building a larger deposit base in recent years, we maintain a presence in the securitization markets to finance our automotive loan portfolios. Securitizations and secured funding transactions, collectively referred to as securitization transactions due to their similarities, allow us to convert our automotive-finance receivables into cash earlier than what would have occurred in the normal course of business. For additional details surrounding our securitization activities, refer to the section titled Liquidity Management, Funding, and Regulatory Capital in our 2022 Annual Report on Form 10-K.

During the nine months ended September 30, 2023, we raised $1.6 billion through the completion of term securitization transactions backed by consumer automotive loans.

We have access to funding through advances with the FHLB. These advances are primarily secured by consumer and commercial mortgage finance receivables and loans and investment securities. As of September 30, 2023, we had pledged $27.9 billion of assets to the FHLB resulting in $18.8 billion in total funding capacity with $7.8 billion of debt outstanding.

At September 30, 2023, $72.1 billion of our total assets were restricted as collateral for the payment of debt obligations accounted for as secured borrowings. Refer to Note 12 to the Condensed Consolidated Financial Statements for further discussion.

Unsecured Financings

We have short-term and long-term unsecured debt outstanding from retail term note programs. These programs are composed of callable fixed-rate instruments with fixed maturity dates. There were $563 million of retail term notes outstanding at September 30, 2023. The remainder of our unsecured debt is composed of institutional term debt. In February 2023, we accessed the unsecured debt capital markets and raised $500 million through the issuance of subordinated notes. In June 2023, we raised $850 million through the issuance of unsecured senior notes. Refer to Note 12 to the Condensed Consolidated Financial Statements for additional information about our outstanding short-term borrowings and long-term unsecured debt.

Other Secured and Unsecured Short-term Borrowings

We have access to repurchase agreements. A repurchase agreement is a transaction in which the firm sells financial instruments to a buyer, typically in exchange for cash, and simultaneously enters into an agreement to repurchase the same or substantially the same financial instruments from the buyer at a stated price plus accrued interest at a future date. The securities sold in repurchase agreements include U.S. government and federal agency obligations. As of September 30, 2023, we had $735 million debt outstanding under repurchase agreements.

Additionally, we have access to the FRB Discount Window and can borrow funds to meet short-term liquidity demands. The FRB, however, is not a primary source of funding for day-to-day business. Instead, it is a liquidity source that can be accessed in stressed environments or periods of market disruption. As of September 30, 2023, we had assets pledged and restricted as collateral to the FRB totaling $34.0 billion, resulting in $25.6 billion in total funding capacity with no debt outstanding. For information on our ability to access the BTFP, refer to the section above titled Response to Banking Industry Failures.

Guaranteed Securities

Certain senior notes (collectively, the Guaranteed Notes) issued by Ally Financial Inc. (referred to within this section as the Parent) are unconditionally guaranteed on a joint and several basis by IB Finance, a subsidiary of the Parent and the direct parent of Ally Bank, and Ally US LLC, a subsidiary of the Parent (together, the Guarantors, and the guarantee provided by each such Guarantor, the Note Guarantees). The Guarantors are primary obligors with respect to payment when due, whether at maturity, by acceleration or otherwise, of all payment obligations of the Parent in respect of the Guaranteed Notes pursuant to the terms of the applicable indenture. At both September 30, 2023, and December 31, 2022, the outstanding principal balance of the Guaranteed Notes was $2.0 billion, with the last scheduled maturity to take place in 2031.

The Note Guarantees rank equally in right of payment with the applicable Guarantor’s existing and future unsubordinated unsecured indebtedness and are subordinate to any secured indebtedness of the applicable Guarantor to the extent of the value of the assets securing such indebtedness. The Note Guarantees are structurally subordinate to indebtedness and other liabilities (including trade payables and lease obligations, and in the case of Ally Bank, its deposits) of any nonguarantor subsidiaries of the applicable Guarantor to the extent of the value of the assets of such subsidiaries.

The Note Guarantees and all other obligations of the Guarantors will terminate and be of no further force or effect (i) upon a permissible sale, disposition, or other transfer (including through merger or consolidation) of a majority of the equity interests (including any sale, disposition or other transfer following which the applicable Guarantor is no longer a subsidiary of the Parent), of the applicable Guarantor, or (ii) upon the discharge of the Parent’s obligations related to the Guaranteed Notes.

The following tables present summarized financial data for the Parent and the Guarantors on a combined basis. The Guarantors, both of which the Parent is deemed to possess control over, are fully consolidated after eliminating intercompany balances and transactions. Summarized financial data for nonguarantor subsidiaries is excluded.

($ in millions)

(a) Net financing loss and other interest income is primarily driven by interest expense on long-term debt. Refer to Note 12 to the Condensed Consolidated Financial Statements for further discussion.

(b) There is a significant variation in the customary relationship between pretax income and income tax benefit due to our accounting policy elections and consolidated tax adjustments. The income tax benefit excludes tax effects on dividends from subsidiaries.

(c) Excludes the Parent’s and Guarantors’ share of income of all nonguarantor subsidiaries.

($ in millions)

(a) Excludes investments in all nonguarantor subsidiaries.

Cash Flows

The following summarizes the activity reflected in the Condensed Consolidated Statement of Cash Flows. While this information may be helpful to highlight certain macro trends and business strategies, the cash flow analysis may not be as helpful when analyzing changes in our net earnings and net assets. We believe that in addition to the traditional cash flow analysis, the discussion related to liquidity, dividends, and ALM herein may provide more useful context in evaluating our liquidity position and related activity.

Net cash provided by operating activities was $4.7 billion and $5.1 billion for the nine months ended September 30, 2023, and 2022, respectively. Operating cash inflows were lower versus the prior year due to unfavorable market conditions as a result of the current macroeconomic environment. Refer to the Consolidated Results of Operations section of this MD&A for further discussion.

Net cash used in investing activities was $4.2 billion and $13.9 billion for the nine months ended September 30, 2023, and 2022, respectively. The change was primarily due to a $5.8 billion increase in net cash inflows related to loans held-for-investment and a $3.4 billion increase in net cash inflows related to available-for-sale securities.

Net cash provided by financing activities for the nine months ended September 30, 2023, was $2.4 billion, compared to $8.9 billion for the same period in 2022. The change was primarily attributable to a decrease in net cash inflows of $7.2 billion related to short-term borrowings and a decrease in deposits of $3.6 billion. The decrease was partially offset by decreases in cash outflows, including lower repayments of long-term debt of $2.7 billion and lower repurchases of common stock of $1.6 billion.

Capital Planning and Stress Tests

Under the Tailoring Rules, we are generally subject to supervisory stress testing on a two-year cycle and exempted from mandated company-run capital stress testing requirements. We are also required to submit an annual capital plan to the FRB. Our annual capital plan must include an assessment of our expected uses and sources of capital and a description of all planned capital actions over a nine-quarter planning horizon, including any issuance of a debt or equity capital instrument, any dividend or other capital distribution, and any similar action that the FRB determines could have an impact on our capital. The plan must also include a detailed description of our process for assessing capital adequacy, including a discussion of how we, under expected and stressful conditions, will maintain capital commensurate with our risks and above the minimum regulatory capital ratios, will serve as a source of strength to Ally Bank, and will maintain sufficient capital to continue our operations by maintaining ready access to funding, meeting our obligations to creditors and other counterparties, and continuing to serve as a credit intermediary.

The Tailoring Rules align capital planning, supervisory stress testing, and stress capital buffer requirements for large banking organizations like Ally. As a Category IV firm, Ally is expected to have the ability to elect to participate in the supervisory stress test—and receive a correspondingly updated stress capital buffer requirement—in a year in which Ally would not generally be subject to the supervisory stress test. Refer to the section titled Basel Capital Framework in Note 17 to the Condensed Consolidated Financial Statements for further discussion about our stress capital buffer requirements. During a year in which Ally does not undergo a supervisory stress test, we would receive an updated stress capital buffer requirement only to reflect our updated planned common-stock dividends. Ally was subject to the 2022 supervisory stress test and did not elect to participate in the 2023 supervisory stress test.

On January 10, 2022, our Board authorized a stock-repurchase program, permitting us to repurchase up to $2.0 billion of our common stock from time to time from the first quarter of 2022 through the fourth quarter of 2022 subject to restrictions imposed by the FRB, and an increase in our cash dividend on common stock from $0.25 per share for the fourth quarter of 2021 to $0.30 per share for the first quarter of 2022. During the year ended December 31, 2022, we repurchased $1.65 billion of common stock under our stock-repurchase program. Since the commencement of our initial stock-repurchase program in the third quarter of 2016, we have reduced the number of outstanding shares of our common stock by 38%, from 484 million as of June 30, 2016, to 302 million as of September 30, 2023. At this time, the Board has not authorized a stock-repurchase program for 2023 or 2024.

We submitted our 2022 capital plan to the FRB on April 5, 2022. Ally received an updated preliminary stress capital buffer requirement from the FRB in June 2022, which was determined to be 2.5% and reflected a decline of 100 basis points relative to our prior requirement. The updated 2.5% stress capital buffer requirement was finalized in August 2022 and became effective on October 1, 2022. In February 2023, we accessed the unsecured debt capital markets and issued $500 million of additional subordinated notes, which qualify as Tier 2 capital for Ally under U.S. Basel III. We submitted our 2023 capital plan to the FRB on April 5, 2023, and received in June 2023 an updated preliminary stress capital buffer requirement that remained unchanged at 2.5%. The 2.5% stress capital buffer requirement was finalized in July 2023 and became effective on October 1, 2023.

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 and any changes to capital, liquidity, and other regulatory requirements that may be proposed or adopted by the U.S. banking agencies), the taxation of share repurchases, financial and operational performance, alternative uses of capital, common-stock price, and general market conditions, and may be extended, modified, or discontinued at any time.

Regulatory Capital

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 phase-in periods. For further information on U.S. Basel III, refer to Note 17 to the Condensed Consolidated Financial Statements. The following table presents selected regulatory capital data under U.S Basel III.

($ in millions)

(a) Tier 1 leverage ratio equals Tier 1 capital divided by adjusted quarterly average total assets, which both reflect adjustments for disallowed goodwill, certain intangible assets, and disallowed deferred tax assets.

(b) We elected to delay recognizing the estimated impact of CECL on regulatory capital until after a two-year deferral period, which for us extended through December 31, 2021. Beginning on January 1, 2022, we phased in 25% of the previously deferred estimated capital impact of CECL, with an additional 25% to be phased in at the beginning of each subsequent year until fully phased in by the first quarter of 2025. Refer to Note 17 to the Condensed Consolidated Financial Statements for further information.

(c) Refer to Note 14 to the Condensed Consolidated Financial Statements for additional details about our non-cumulative perpetual preferred stock.

(d) Contains deferred tax assets required to be deducted from capital under U.S. Basel III.

(e) Comprises adjustments related to our accumulated other comprehensive income opt-out election, which allows us to exclude most elements of accumulated other comprehensive income from regulatory capital.

(f) Risk-weighted assets are defined by regulation and are generally determined by allocating assets and specified off-balance sheet exposures to various risk categories.

Credit Ratings

The cost and availability of unsecured financing are influenced by credit ratings, which are intended to be an indicator of the creditworthiness of a particular company, security, or obligation. Lower ratings result in higher borrowing costs and reduced access to capital markets. This is particularly true for certain institutional investors whose investment guidelines require investment-grade ratings on term debt and the two highest rating categories for short-term debt (particularly money-market investors).

Nationally recognized statistical rating organizations rate substantially all our debt. The following table summarizes our current ratings and outlook by the respective nationally recognized rating agencies.

(a) Fitch affirmed our senior unsecured debt rating of BBB-, short-term rating of F3, and affirmed the outlook of Stable on March 20, 2023.

(b) Moody’s affirmed our senior unsecured rating of Baa3, affirmed our short-term rating of P-3, and changed our outlook to Negative from Stable on August 7, 2023.

(c) Standard & Poor’s affirmed our senior unsecured debt rating of BBB-, affirmed our short-term rating of A-3, and changed the outlook to Stable from Negative on March 25, 2021.

(d) DBRS upgraded our senior unsecured debt rating to BBB from BBB (Low), upgraded our short-term rating to R-2 (high) from R-3, and affirmed the outlook of Stable on March 6, 2023.

As illustrated by the issuer ratings above, as of September 30, 2023, Ally holds an investment-grade rating from all the respective nationally recognized rating agencies.

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

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

Critical Accounting Estimates

We identified critical accounting estimates that, as a result of judgments, uncertainties, uniqueness, and complexities of the underlying accounting standards and operations involved could result in material changes to our financial condition, results of operations, or cash flows under different conditions or using different assumptions.

Our most critical accounting estimates are as follows:

• Allowance for loan losses
• Valuation of automotive lease assets and residuals
• Fair value of financial instruments
• Determination of provision for income taxes

We did not substantively change any material aspect of our methodologies and processes used in developing any of the estimates described above from what was described in the Consolidated Financial Statements in our 2022 Annual Report on Form 10-K.

Refer to Note 1 to the Condensed Consolidated Financial Statements for further discussion regarding the methodology used in calculating the provision for income taxes for interim financial reporting.

Statistical Table

The accompanying supplemental information should be read in conjunction with the more detailed information, including our Condensed Consolidated Financial Statements and the notes thereto, which appears elsewhere in this Quarterly Report.

Net Interest Margin Table

The following tables present an analysis of net yield on interest-earning assets (or net interest margin) excluding discontinued operations for the periods shown.

(a) Average balances are calculated using an average daily balance methodology.

(b) Includes the effects of derivative financial instruments designated as hedges. Refer to Note 18 to the Condensed Consolidated Financial Statements for further information about the effects of our hedging activities.

(c) Nonperforming finance receivables and loans are included in the average balances. For information on our accounting policies regarding nonperforming status, refer to Note 1 to the Condensed Consolidated Financial Statements.

(d) Yield includes gains on the sale of off-lease vehicles of $57 million and $39 million for the three months ended September 30, 2023, and 2022, respectively. Excluding these gains on sale, the annualized yield was 4.69% and 4.52% for the three months ended September 30, 2023, and 2022, respectively.

(e) Represents interest expense on tax liabilities included in other liabilities on the Condensed Consolidated Balance Sheet. The interest expense on tax liabilities is included in the net yield on interest-earning assets and excluded from the interest spread. For more information on our accounting policies regarding income taxes, refer to Note 1 to the Consolidated Financial Statements in our 2022 Annual Report on Form 10-K.

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

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

Ally Financial Inc. • Form 10-Q

n/m = not meaningful

(a) Average balances are calculated using an average daily balance methodology.

(b) Includes the effects of derivative financial instruments designated as hedges. Refer to Note 18 to the Condensed Consolidated Financial Statements for further information about the effects of our hedging activities.

(c) Nonperforming finance receivables and loans are included in the average balances. For information on our accounting policies regarding nonperforming status, refer to Note 1 to the Condensed Consolidated Financial Statements.

(d) Yield includes gains on the sale of off-lease vehicles of $174 million and $139 million for the nine months ended September 30, 2023, and 2022, respectively. Excluding these gains on sale, the annualized yield was 4.85% and 4.80% for the nine months ended September 30, 2023, and 2022, respectively.

(e) Represents interest expense on tax liabilities included in other liabilities on the Condensed Consolidated Balance Sheet. The interest expense on tax

liabilities is included in the net yield on interest-earning assets and excluded from the interest spread. For more information on our accounting policies

regarding income taxes, refer to Note 1 to the Consolidated Financial Statements in our 2022 Annual Report on Form 10-K.

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

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

Recently Issued Accounting Standards

Refer to Note 1 to the Condensed Consolidated Financial Statements.

Quantitative and Qualitative Disclosures about Market Risk

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

Controls and Procedures

Evaluation of Disclosure Controls and Procedures

We maintain disclosure controls and procedures, as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended (the Exchange Act), designed to ensure that information required to be disclosed in reports filed under the Exchange Act is recorded, processed, summarized, and reported within the specified time periods. Our disclosure controls and procedures are also designed to ensure that information required to be disclosed in the reports we file and submit under the Exchange Act is accumulated and communicated to management, including our Chief Executive Officer (Principal Executive Officer) and Chief Financial Officer (Principal Financial Officer), to allow for timely decisions regarding required disclosure. There are inherent limitations to the effectiveness of any system of internal control including the possibility of human error or the circumvention or overriding of controls through individual actions or collusion. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system’s objectives will be met.

As of the end of the period covered by this report, our Principal Executive Officer and Principal Financial Officer evaluated, with the participation of our management, the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act) and concluded that our disclosure controls and procedures were effective.

Changes in Internal Control over Financial Reporting

In the normal course of business, we review our controls and procedures and make enhancements or modifications intended to support the quality of our financial reporting. There were no changes in our internal control over financial reporting (as defined in Rule 13a-15(f) of the Exchange Act) that occurred during the quarter ended September 30, 2023, that have materially affected, or were reasonably likely to materially affect, our internal control over financial reporting.