Ally Bank 2012 Annual Report Download - page 119

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The forecasted losses consider historical factors such as frequency (the number of contracts that we expect to default) and loss severity
(the expected loss on a per vehicle basis). The loss severity within the consumer automobile portfolio segment is impacted by the market
values of vehicles that are repossessed. Vehicle market values are affected by numerous factors including vehicles supply, the condition of the
vehicle upon repossession, the overall price and volatility of gasoline or diesel fuel, consumer preference related to specific vehicle segments,
and other factors. The historical loss experience is updated quarterly to incorporate the most recent data reflective of the current economic
environment.
The quantitative assessment component may be supplemented with qualitative reserves based on management's determination that such
adjustments provide a better estimate of credit losses. This qualitative assessment takes into consideration relevant internal and external
factors that have occurred but are not yet reflected in the forecasted losses and may affect the performance of the portfolio.
Our methodology and policies with respect to the allowance for loan losses for our consumer automobile portfolio segment did not
change during 2012.
Consumer Mortgage Portfolio Segment
The allowance for loan losses within the consumer mortgage portfolio segment is calculated by using proprietary statistical models based
on pools of loans with similar risk characteristics, including credit score, loan-to-value, loan age, documentation type, product type, and loan
purpose, to arrive at an estimate of incurred losses in the portfolio. These statistical loss forecasting models are utilized to estimate incurred
losses and consider a variety of factors including, but not limited to, historical loss experience, estimated foreclosures or defaults based on
portfolio trends, delinquencies, and general economic and business trends.
The forecasted losses are statistically derived based on a suite of behavioral based transition models. This transition framework predicts
various stages of delinquency, default, and voluntary prepayment over the course of the life of the loan. The transition probability is a function
of the loan and borrower characteristics and economic variables and considers historical factors such as frequency (the number of contracts
that we expect to default) and loss severity (the expected loss on a per loan basis). When a default event is predicted, a severity model is
applied to estimate future loan losses. Loss severity within the consumer mortgage portfolio segment is impacted by the market values of
foreclosed properties, which is affected by numerous factors, including geographic considerations and the condition of the foreclosed
property. The historical loss experience is updated quarterly to incorporate the most recent data reflective of the current economic
environment.
The quantitative assessment component is supplemented with qualitative reserves based on management's determination that such
adjustments provide a better estimate of credit losses. This qualitative assessment takes into consideration relevant internal and external
factors that have occurred but are not yet reflected in the forecasted losses and may affect the credit quality of the portfolio.
Our methodology and policies with respect to the allowance for loan losses for our consumer mortgage portfolio segment did not change
during 2012.
Commercial
The allowance for loan losses within the commercial portfolio is comprised of reserves established for specific loans evaluated as
impaired and portfolio-level reserves based on nonimpaired loans grouped into pools based on similar risk characteristics and collectively
evaluated.
A commercial loan is considered impaired when it is probable that we will be unable to collect all amounts due according to the
contractual terms of the loan agreement based on current information and events. These loans are primarily evaluated individually and are
risk-rated based on borrower, collateral, and industry-specific information that management believes is relevant in determining the occurrence
of a loss event and measuring impairment. Management establishes specific allowances for commercial loans determined to be individually
impaired based on the present value of expected future cash flows, discounted at the loan's effective interest rate, observable market price or
the fair value of collateral, whichever is determined to be the most appropriate. Estimated costs to sell or realize the value of the collateral on
a discounted basis are included in the impairment measurement, when appropriate.
Loans not identified as impaired are grouped into pools based on similar risk characteristics and collectively evaluated. Our risk rating
models use historical loss experience, concentrations, current economic conditions, and performance trends. The commercial historical loss
experience is updated quarterly to incorporate the most recent data reflective of the current economic environment. The determination of the
allowance is influenced by numerous assumptions and many factors that may materially affect estimates of loss, including volatility of loss
given default, probability of default, and rating migration. In assessing the risk rating of a particular loan, several factors are considered
including an evaluation of historical and current information involving subjective assessments and interpretations. In addition, the allowance
related to the commercial portfolio segment is influenced by estimated recoveries from automotive manufacturers relative to guarantees or
agreements with them to repurchase vehicles used as collateral to secure the loans.
The quantitative assessment component may be supplemented with qualitative reserves based on management's determination that such
adjustments provide a better estimate of credit losses. This qualitative assessment takes into consideration relevant internal and external
factors that have occurred and may affect the credit quality of the portfolio.
Our methodology and policies with respect to the allowance for loan losses for our commercial portfolio segment did not change during
2012.
Table of Contents
Notes to Consolidated Financial Statements
Ally Financial Inc. • Form 10-K