Ally Bank 2014 Annual Report Download - page 108

Table of Contents
Notes to Consolidated Financial Statements
Ally Financial Inc. • Form 10-K
96
Commercial loans are individually evaluated and where collectability of the recorded balance is in doubt are written down to the
estimated fair value of the collateral less costs to sell. Generally, all commercial loans are charged off when it becomes unlikely that the
borrower is willing or able to repay the remaining balance of the loan and any underlying collateral is not sufficient to recover the outstanding
principal. Collateral dependent loans are charged-off to the fair market value of collateral less costs to sell and non-collateral dependent loans
are fully written-off.
Allowance for Loan Losses
The allowance for loan losses ( the allowance) is management's estimate of incurred losses in the lending portfolios. We determine the
amount of the allowance required for each of our portfolio segments based on its relative risk characteristics. The evaluation of these factors
for both consumer and commercial finance receivables and loans involves quantitative analysis combined with sound management judgment.
Additions to the allowance are charged to current period earnings through the provision for loan losses; amounts determined to be
uncollectible are charged directly against the allowance, net of amounts recovered on previously charged-off accounts.
The allowance is comprised of two components: specific reserves established for individual loans evaluated as impaired and portfolio-
level reserves established for large groups of typically smaller balance homogeneous loans that are collectively evaluated for impairment. We
evaluate the adequacy of the allowance based on the combined total of these two components. Determining the appropriateness of the
allowance is complex and requires judgment by management about the effect of matters that are inherently uncertain. It is possible that others,
given the same information, may at any point in time reach different reasonable conclusions.
Measurement of impairment for specific reserves is generally determined on a loan-by-loan basis. Loans determined to be specifically
impaired are measured based on the present value of expected future cash flows discounted at the loan's effective interest rate, an observable
market price, or the estimated fair value of the collateral less estimated costs to sell, whichever is determined to be the most appropriate.
When these measurement values are lower than the carrying value of that loan, impairment is recognized. Loans that are not identified as
individually impaired are pooled with other loans with similar risk characteristics for evaluation of impairment for the portfolio-level
allowance.
For the purpose of calculating portfolio-level reserves, we have grouped our loans into three portfolio segments: consumer automotive,
consumer mortgage, and commercial. The allowance consists of the combination of a quantitative assessment component based on statistical
models, a retrospective evaluation of actual loss information to loss forecasts, and includes a qualitative component based on management
judgment. Management takes into consideration relevant qualitative factors, including external and internal trends such as the impacts of
changes in underwriting standards, collections and account management effectiveness, geographic concentrations, and economic events,
among other factors, that have occurred but are not yet reflected in the quantitative assessment component. Qualitative adjustments are
documented, reviewed, and approved through our established risk governance processes.
During 2014, we did not substantively change any material aspect of our overall approach used to determine the allowance for loan
losses for our portfolio segments. There were no material changes in criteria or estimation techniques as compared to prior periods that
impacted the determination of the current period allowance for loan losses for our portfolio segments.
Refer to Note 8 for information on the allowance for loan losses.
Consumer Loans
Our consumer automotive and consumer mortgage portfolio segments are reviewed for impairment based on an analysis of loans that are
grouped into common risk categories (i.e., loan or lease type or collateral type). We perform periodic and systematic detailed reviews of our
lending portfolios to identify inherent risks and to assess the overall collectability of those portfolios. Loss models are utilized for these
portfolios, which consider a variety of credit quality indicators including, but not limited to, historical loss experience, current economic
conditions, anticipated repossessions or foreclosures based on portfolio trends, and credit scores, and expected loss factors by loan type.
Consumer Automotive Portfolio Segment
The allowance for loan losses within the consumer automotive portfolio segment is calculated using proprietary statistical models and
other risk indicators applied to pools of loans with similar risk characteristics, including credit bureau score and loan-to-value ratios 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 defaults based on portfolio trends, and general economic
and business trends. These statistical models predict forecasted losses inherent in the portfolio.
The forecasted losses consider historical factors such as frequency (the number of contracts that we expect to default) and loss severity
(the loss amount out of the default amount). The loss severity within the consumer automotive portfolio segment is impacted by the market
values of vehicles that are repossessed. Vehicle market values are affected by numerous factors including vehicle 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 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 performance of the portfolio.