Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Cautionary Notice about Forward-Looking Statements and Other Terms From time to time we have made, and in the future will make, forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements can be identified by the fact that they do not relate strictly to historical or current facts. Forward-looking statements often use words such as "believe," "expect," "anticipate," "intend," "pursue," "seek," "continue," "estimate," "project," "outlook," "forecast," "potential," "target," "objective," "trend," "plan," "goal," "initiative," "priorities," or other words of comparable meaning or future-tense or conditional verbs such as "may," "will," "should," "would," or "could." Forward-looking statements convey our expectations, intentions, or forecasts about future events, circumstances, or results. This report, including any information incorporated by reference in this report, contains forward-looking statements. We also may make forward-looking statements in other documents that are filed or furnished with theSEC . In addition, we may make forward-looking statements orally or in writing to investors, analysts, members of the media, or others. All forward-looking statements, by their nature, are subject to assumptions, risks, and uncertainties, which may change over time and many of which are beyond our control. You should not rely on any forward-looking statement as a prediction or guarantee about the future. Actual future objectives, strategies, plans, prospects, performance, conditions, or results may differ materially from those set forth in any forward-looking statement. While no list of assumptions, risks, or uncertainties could be complete, some of the factors that may cause actual results or other future events or circumstances to differ from those in forward-looking statements include: •evolving local, regional, national, or international business, economic, or political conditions; •changes in laws or the regulatory or supervisory environment, including as a result of recent financial services legislation, regulation, or policies or changes in government officials or other personnel; •changes in monetary, fiscal, or trade laws or policies, including as a result of actions by governmental agencies, central banks, or supranational authorities; •changes in accounting standards or policies; •changes in the automotive industry or the markets for new or used vehicles, including the rise of vehicle sharing and ride hailing, the development of autonomous and alternative-energy vehicles, and the impact of demographic shifts on attitudes and behaviors toward vehicle type, ownership, and use; •disruptions or shifts in investor sentiment or behavior in the securities, capital, or other financial markets, including financial or systemic shocks and volatility or changes in market liquidity, interest or currency rates, or valuations; •uncertainty about the future of LIBOR and any negative impacts that could result; •changes in business or consumer sentiment, preferences, or behavior, including spending, borrowing, or saving by businesses or households; •changes in our corporate or business strategies, the composition of our assets, or the way in which we fund those assets; •our ability to execute our business strategy forAlly Bank , including its digital focus; •our ability to optimize our automotive finance and insurance businesses and to continue diversifying into and growing other consumer and commercial business lines, including mortgage lending, point-of-sale personal lending, corporate finance, brokerage, and wealth management; •our ability to develop capital plans that will receive non-objection from the FRB and our ability to implement them, including any payment of dividends or share repurchases; •our ability to effectively manage capital or liquidity consistent with evolving business or operational needs, risk-management standards, and regulatory or supervisory requirements; •our ability to cost-effectively fund our business and operations, including through deposits and the capital markets; •changes in any credit rating assigned to Ally, includingAlly Bank ; •adverse publicity or other reputational harm to us or our senior officers; •our ability to develop, maintain, or market our products or services or to absorb unanticipated costs or liabilities associated with those products or services; •our ability to innovate, to anticipate the needs of current or future customers, to successfully compete, to increase or hold market share in changing competitive environments, or to deal with pricing or other competitive pressures; 67 -------------------------------------------------------------------------------- Table of Contents Management's Discussion and AnalysisAlly Financial Inc. • Form 10-Q •the continuing profitability and viability of our dealer-centric automotive finance and insurance businesses, especially in the face of competition from captive finance companies and their automotive manufacturing sponsors and challenges to the dealer's role as intermediary between manufacturers and purchasers; •our ability to appropriately underwrite loans that we originate or purchase and to otherwise manage credit risk; •changes in the credit, liquidity, or other financial condition of our customers, counterparties, service providers, or competitors; •our ability to effectively deal with economic, business, or market slowdowns or disruptions; •judicial, regulatory, or administrative investigations, proceedings, disputes, or rulings that create uncertainty for, or are adverse to, us or the financial services industry; •the potential outcomes of legal and regulatory proceedings and governmental and regulatory examinations, investigations, and other inquiries to which we are or may be subject at any given time, and our ability to remediate regulatory deficiencies on a timely basis and to otherwise absorb and address the heightened scrutiny and expectations generally from supervisory and other governmental authorities, the severity of remedies sought, such as enforcement proceeds, and the potential collateral consequences arising from those outcomes; •the performance and availability of third-party service providers on whom we rely in delivering products and services to our customers and otherwise conducting our business and operations; •our ability to maintain secure and functional financial, accounting, technology, data processing, or other operating systems or infrastructure, including our capacity to withstand cyberattacks; •the adequacy of our corporate governance, risk-management framework, compliance programs, or internal controls over financial reporting, including our ability to control lapses or deficiencies in financial reporting or to effectively mitigate or manage operational risk; •the efficacy of our methods or models in assessing business strategies or opportunities or in valuing, measuring, estimating, monitoring, or managing positions or risk; •our ability to keep pace with changes in technology that affect us or our customers, counterparties, service providers, or competitors; •our ability to successfully make and integrate acquisitions; •the adequacy of our succession planning for key executives or other personnel and our ability to attract or retain qualified employees; •natural or man-made disasters, calamities, or conflicts, including terrorist events and pandemics (such as adverse effects of the COVID-19 pandemic on us and our customers, counterparties, employees, and third-party service providers); •policies and other actions of governments to mitigate climate and related environmental risks, as well as associated changes in the behavior and preferences of businesses and consumers; or •other assumptions, risks, or uncertainties described in the Risk Factors (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. 68 -------------------------------------------------------------------------------- Table of Contents Management's Discussion and AnalysisAlly Financial Inc. • Form 10-Q Selected Financial Data The selected historical financial information set forth below should be read in conjunction with the MD&A, and our Condensed Consolidated Financial Statements and the notes thereto. The historical financial information presented may not be indicative of our future performance. The following table presents selected Condensed Consolidated Statement of Comprehensive Income and earnings per common share data. Three months
closed in September Nine months ended in September
30, 30,
($ in millions, except per share data; shares in
thousands) 2021 2020 2021 2020
Total financing revenue and other interest income $ 2,177 $ 2,145 $ 6,396 $ 6,674
Total interest expense 444 770 1,499 2,599
Net depreciation expense on operating lease assets 139 175 384 675
Net financing revenue and other interest income 1,594 1,200 4,513 3,400
Total other revenue 391 484 1,494 1,305
Total net revenue 1,985 1,684 6,007 4,705
Provision for credit losses 76 147 31 1,337
Total noninterest expense 1,002 905 3,020 2,810
Profit from continuing operations before tax expense
907 632 2,956 558 Income tax expense from continuing operations 195 156 549 159 Net income from continuing operations 712 476 2,407 399
Profit (loss) from discontinued operations, net of tax
- - 1 (1) Net income$ 712
Net income from continuing operations attributable to ordinary shareholders
$ 683 $ 476 $ 2,378 $ 399 Net income attributable to common stockholders$ 683 $ 476 $ 2,379 $ 398 Basic earnings per common share (a): Net income from continuing operations$ 1.90 $ 1.27 $ 6.46 $ 1.06 Net income 1.90 1.27 6.46 1.06 Weighted-average common shares outstanding 359,179 375,658 368,215 375,478 Diluted earnings per common share (a): Net income from continuing operations$ 1.89 $ 1.26 $ 6.41 $ 1.06 Net income 1.89 1.26 6.42 1.06 Weighted-average common shares outstanding 361,855 377,011 370,745 376,659 Common share information: Cash dividends declared per common share$ 0.25 $ 0.19 $ 0.63 $ 0.57 Period-end common shares outstanding 349,599 373,857 349,599 373,857 (a)Figures in the table may not recalculate exactly due to rounding. Earnings per share is calculated based on unrounded numbers. Includes shares related to share-based compensation that vested but were not yet issued. 69 -------------------------------------------------------------------------------- Table of Contents Management's Discussion and AnalysisAlly Financial Inc. • Form 10-Q The following tables present selected Condensed Consolidated Balance Sheet and ratio data. September 30, ($ in millions) 2021 2020 Selected period-end balance sheet data: Total assets$ 179,184 $ 185,270 Total deposit liabilities$ 139,444 $ 134,938 Long-term debt$ 14,946 $ 25,704 Preferred stock$ 2,324 $ - Total equity$ 17,289 $ 14,126 Three months ended September 30, Nine months ended September 30, 2021 2020 2021 2020 Financial ratios: Return on average assets (a) 1.58 % 1.02 % 1.78 % 0.29 % Return on average equity (a) 16.00 % 13.41 % 19.58 % 3.77 % Equity to assets (a) 9.85 % 7.62 % 9.10 % 7.75 % Common dividend payout ratio (b) 13.16 % 14.96 % 9.75 % 53.77 % Net interest spread (a) (c) 3.56 % 2.49 % 3.34 % 2.39 % Net yield on interest-earning assets (a) (d) 3.66 % 2.65 % 3.46 % 2.57 % (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. (c)Net interest spread represents the difference between the rate on total interest-earning assets and the rate on total interest-bearing liabilities. (d)Net yield on interest-earning assets represents annualized net financing revenue and other interest income as a percentage of total interest-earning assets. 70 -------------------------------------------------------------------------------- Table of Contents Management's Discussion and AnalysisAlly Financial Inc. • Form 10-Q We became subject toU.S. Basel III onJanuary 1, 2015 , although a number of its provisions-including capital buffers and certain regulatory capital deductions-were subject to phase-in periods. For further information onU.S. Basel III, refer to Note 17 to the Condensed Consolidated Financial Statements. The following table presents selected regulatory capital data underU.S Basel III. September 30, ($ in millions) 2021 2020 Common Equity Tier 1 capital ratio 11.20 % 10.36 % Tier 1 capital ratio 12.81 % 12.11 % Total capital ratio 14.56 % 14.05 % Tier 1 leverage ratio (to adjusted quarterly average assets) (a) 9.99 % 9.00 % Total equity$ 17,289 $ 14,126 CECL phase-in adjustment (b) 1,155 1,212 Preferred stock (c) (2,324) - Goodwill and certain other intangibles (370) (387) Deferred tax assets arising from net operating loss and tax credit carryforwards (d) (48) (17) Other adjustments (e) (32) (676) Common Equity Tier 1 capital 15,670 14,258 Preferred stock (c) 2,324 - Trust preferred securities (c) - 2,498 Other adjustments (64) (88) Tier 1 capital 17,930 16,668
Eligible subordinated debt and other instruments classified as Tier 2
830 1,035 Qualifying allowance for loan losses and other adjustments 1,615 1,634 Total capital$ 20,375 $ 19,337 Risk-weighted assets (f)$ 139,957 $ 137,594 (a)Tier 1 leverage ratio equals Tier 1 capital divided by adjusted quarterly average total assets, which both reflect adjustments for disallowed goodwill, certain intangible assets, and disallowed deferred tax assets. (b)We have elected to delay recognizing the estimated impact of CECL on regulatory capital until after a two-year deferral period, which for us extends throughDecember 31, 2021 . Beginning onJanuary 1, 2022 , we will be required to phase in 25% of the previously deferred estimated capital impact of CECL, with an additional 25% to be phased in at the beginning of each subsequent year until fully phased in by the first quarter of 2025. Refer to Note 17 to the Condensed Consolidated Financial Statements for further information. (c)In connection with our issuances of non-cumulative perpetual preferred stock in the second and third quarter of 2021, we redeemed a portion of the Series 2 TRUPS outstanding. InSeptember 2021 , we announced our intent to redeem the remaining shares of the Series 2 TRUPS outstanding without issuing a replacement capital instrument. The redemption was effectuated onOctober 15, 2021 . Refer to Note 12 to the Condensed Consolidated Financial Statements for additional details about our redemptions of Series 2 TRUPS, and Note 14 to the Condensed Consolidated Financial Statements for additional details about our issuances of non-cumulative perpetual preferred stock. (d)Contains deferred tax assets required to be deducted from capital underU.S. Basel III. (e)Primarily comprises adjustments related to our accumulated other comprehensive income opt-out election, which allows us to exclude most elements of accumulated other comprehensive income from regulatory capital. (f)Risk-weighted assets are defined by regulation and are generally determined by allocating assets and specified off-balance sheet exposures to various risk categories. 71 -------------------------------------------------------------------------------- Table of Contents Management's Discussion and AnalysisAlly Financial Inc. • Form 10-Q OverviewAlly Financial Inc. (together with its consolidated subsidiaries unless the context otherwise requires, Ally, the Company, we, us, or our) is a digital financial-services company committed to its promise to "Do It Right" for its consumer, commercial, and corporate customers. Ally is composed of an industry-leading independent automotive finance and insurance operation, an award-winning digital direct bank (Ally Bank , Member FDIC andEqual Housing Lender, which offers mortgage lending, point-of-sale personal lending, and a variety of deposit and other banking products), a corporate finance business for equity sponsors and middle-market companies, and securities brokerage and investment advisory services. A relentless ally for all things money, Ally helps people save well and earn well, so they can spend for what matters. We are aDelaware corporation and are registered as a BHC under the BHC Act, and an FHC under the GLB Act. Primary Business LinesDealer Financial Services , which includes our Automotive Finance and Insurance operations, Mortgage Finance, and Corporate Finance are our primary business lines. The following table summarizes the operating results excluding discontinued operations of each business line. Operating results for each of the business lines are more fully described in the MD&A sections that follow. Three months ended September 30, Nine months ended September 30, ($ in millions) 2021 2020 Favorable/(unfavorable) % change 2021 2020 Favorable/(unfavorable) % change Total net revenueDealer Financial Services Automotive Finance$ 1,390 $ 1,163 20$ 4,052 $ 3,279 24 Insurance 297 346 (14) 1,050 947 11 Mortgage Finance 55 66 (17) 163 163 - Corporate Finance 93 84 11 300 248 21 Corporate and Other 150 25 n/m 442 68 n/m Total$ 1,985 $ 1,684 18$ 6,007 $ 4,705 28 Income from continuing operations before income tax expenseDealer Financial Services Automotive Finance$ 825 $ 566 46$ 2,545 $ 722 n/m Insurance 24 78 (69) 252 101 150 Mortgage Finance 6 26 (77) 29 46 (37) Corporate Finance 61 60 2 209 24 n/m Corporate and Other (9) (98) 91 (79) (335) 76 Total$ 907 $ 632 44$ 2,956 $ 558 n/m n/m = not meaningful •OurDealer Financial Services business is one of the largest full-service automotive finance operations in the country and offers a wide range of financial services and insurance products to automotive dealerships and their customers.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, 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 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 company. Our success as an automotive finance provider is driven by the consistent and broad range of products and services we offer to dealers. The automotive marketplace is dynamic and evolving, including substantial investments in electrification by automobile manufacturers and suppliers. Ally remains focused on meeting the needs of both our dealer and consumer customers and continuing to strengthen and expand upon our approximate 20,400 dealer relationships. We continue to identify and cultivate relationships with automotive retailers including those with leading eCommerce platforms. We also operate Clearlane, our online direct-lending platform, which provides a digital platform for consumers seeking direct financing. We believe these actions will enable us to respond to the growing trends for a more streamlined and digital automotive financing process to serve both dealers and consumers. Our strong and expansive dealer relationships, comprehensive suite of products and services, full-spectrum financing, and depth of experience position us to evolve with future shifts in automobile technologies, including electrification. Ally provides automobile financing for hybrid and battery-electric vehicles 72 -------------------------------------------------------------------------------- Table of Contents Management's Discussion and AnalysisAlly Financial Inc. • Form 10-Q today, and is well positioned to remain a leader in automotive financing as we believe the vast majority of these vehicles will be sold through dealerships with whom we have an established relationship. The Growth channel was established to focus on developing dealer relationships beyond those relationships that primarily were developed through our previous role as a captive finance company forGM and Stellantis. The Growth channel was expanded to include direct-to-consumer financing through Clearlane and other channels and our arrangements with online automotive retailers. We have established relationships with thousands of Growth channel dealers through our customer-centric approach and specialized incentive programs designed to drive loyalty amongst dealers to our products and services. The success of the Growth channel has been a key enabler in evolving our business model from a focused captive finance company to a leading market competitor. In this channel, we currently have over 14,000 dealer relationships, of which approximately 77% are franchised dealers (including brands such as Ford, Honda, Hyundai, Kia, Nissan,Toyota , and others), or used vehicle only retailers 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 inCanada , where we serve approximately 434,000 consumers and are the VSC and protection plan provider for GM Canada and the VSC provider forSubaru Canada . As a leading provider with a focus on offering dealers a broad range of consumer F&I products, we offer VSCs, VMCs, and GAP products. We also underwrite selected commercial insurance coverages, which primarily insure dealers' wholesale vehicle inventory. Ally Premier Protection is our flagship VSC offering, which provides coverage for new and used vehicles of virtually all makes and models. We also offer ClearGuard on the SmartAuction platform, which is a protection product designed to minimize the risk to dealers from arbitration claims for eligible vehicles sold at auction. •Our Mortgage Finance operations consist of the management of held-for-investment and held-for-sale consumer mortgage loan portfolios. Our held-for-investment portfolio includes our direct-to-consumerAlly Home mortgage offering, and bulk purchases of high-quality jumbo and LMI mortgage loans originated by third parties. Through our direct-to-consumer channel, which was introduced late in 2016, we offer a variety of competitively priced jumbo and conforming fixed- and adjustable-rate mortgage products through a third-party fulfillment provider. Under our current arrangement, our direct-to-consumer conforming mortgages are originated as held for sale and sold, while jumbo and LMI mortgages are originated as held for investment. Loans originated in the direct-to-consumer channel are sourced by existing Ally customer marketing, prospect marketing on third-party websites, and email or direct mail campaigns. InApril 2019 , we announced a strategic partnership with BMC, which delivers an enhanced end-to-end digital mortgage experience for our customers through our direct-to-consumer channel. Through this partnership, BMC conducts the sales, processing, underwriting, and closing for Ally's digital mortgage offerings in a highly innovative, scalable, and cost-efficient manner, while Ally retains control of all the marketing and advertising strategies and loan pricing. During the nine months endedSeptember 30, 2021 , we originated$7.6 billion of mortgage loans through our direct-to-consumer channel. Through the bulk loan channel, we purchase loans from several qualified sellers including direct originators and large aggregators who have the financial capacity to support strong representations and warranties and the industry knowledge and experience to originate high-quality assets. Bulk purchases are made on a servicing-released basis, allowing us to directly oversee servicing activities and manage refinancing through our direct-to-consumer channel. During the nine months endedSeptember 30, 2021 , we purchased$3.1 billion of mortgage loans that were originated by third parties. Our mortgage loan purchases are held for investment. The combination of our direct-to-consumer strategy and bulk portfolio purchase program provides the capacity to expand revenue sources and further grow and diversify our finance receivable portfolio with an attractive asset class while also deepening relationships with existing Ally customers. During the third quarter of 2021, we announced the launch of RefiNow. RefiNow is available to certain borrowers with a Fannie Mae-backed mortgage and provides a home financing option to serve borrowers who may not qualify for other options. •Our Corporate Finance operations primarily provide senior secured leveraged cash flow and asset-based loans to mostlyU.S. -based middle-market companies owned by private equity sponsors, and loans to asset managers that primarily provide leveraged loans. We believe our growing deposit-based funding model coupled with our expanded product offerings and deep industry relationships provide an advantage over our competition, which includes other banks as well as publicly and privately held finance companies. While there continues to be a significant level of liquidity and competition in the middle-market lending space, we have continued to prudently grow our lending portfolio with a disciplined focus on credit quality, including a greater emphasis on asset-based loans. We seek markets and opportunities where our clients require customized, highly structured, and time-sensitive financing solutions. Our corporate-finance lending portfolio is generally composed of first-lien, first-out loans. Our focus is on businesses owned by private equity sponsors with loans typically used for leveraged buyouts, mergers and acquisitions, debt refinancing, expansions, restructurings, and working capital. Additionally, our Lender Finance business provides asset managers with partial funding for their direct-lending activities. The portfolio is well diversified across multiple industries including financials, services, manufacturing, distribution and other specialty sectors. These specialty sectors include our Healthcare and Technology Finance verticals. The Healthcare vertical provides financing across the healthcare spectrum including services, pharmaceuticals, 73 -------------------------------------------------------------------------------- Table of Contents Management's Discussion and AnalysisAlly Financial Inc. • Form 10-Q manufacturing, and medical devices and supplies. Our Technology Finance vertical provides financing solutions to venture capital-backed, technology-based companies. We also provide a commercial real estate product focused on lending to skilled nursing facilities, senior housing, medical office buildings, and hospitals. •Corporate and Other primarily consists of centralized corporate treasury activities such as management of the cash and corporate investment securities and loan portfolios, short- and long-term debt, retail and brokered deposit liabilities, derivative instruments, original issue discount, and the residual impacts of our corporate FTP and treasury ALM activities. Corporate and Other also includes activity related to certain equity investments, which primarily consist of FHLB and FRB stock as well as other strategic investments, the management of our legacy mortgage portfolio, which primarily consists of loans originated prior toJanuary 1, 2009 , CRA loans and related investments, and reclassifications and eliminations between the reportable operating segments. Corporate and Other includes the results of Ally Invest, our digital brokerage and wealth management offering, which enables us to complement our competitive deposit products with low-cost investing. The digital wealth management business aligns with our strategy to create a premier digital financial services company and provides additional sources of fee income through asset management and certain other fees, with minimal balance sheet utilization. This business also provides an additional source of low-cost deposits through arrangements with Ally Invest's clearing broker. Corporate and Other also includes the results ofAlly Lending .Ally Lending currently serves medical, retail, and home improvement service providers by enabling promotional and fixed rate installment-loan products through a digital application process at point-of-sale. The home improvement segment, which was launched in the second quarter of 2020, now represents nearly 45% of new originations, and is expected to grow. We believe the market outlook for point-of-sale lending provides attractive opportunities for future diversification, including in the automotive servicing and vehicle upfit space. Point-of-sale lending broadens our capabilities, and expands our product offering into consumer unsecured lending, all while helping to further meet the financial needs of our customers. 74
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