Ally Bank 2014 Annual Report Download - page 38

Table of Contents
Management's Discussion and Analysis
Ally Financial Inc. • Form 10-K
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financing volume growth. The fragmented used vehicle financing market provides an attractive opportunity that we believe will further
expand and support our dealer relationships and increase our volume of retail loan originations. In addition, at December 31, 2014, our CSG
and RV channels had $5.2 billion and $1.2 billion, respectively, of retail loans outstanding.
Automotive dealers desire a full range of financial products, including new and used vehicle inventory financing, inventory insurance,
term loans including real estate and working capital loans, and vehicle remarketing services to conduct their respective businesses as well as
VSCs and GAP products to offer their customers. We have consistently provided this full suite of products to dealers.
For consumers, we provide retail automotive financing for new and used vehicles and leasing for new vehicles. In the United States,
retail financing for the purchase of vehicles takes the form of installment sales financing. During 2014, we originated a total of approximately
1.5 million automotive loans and leases totaling approximately $41.0 billion.
Our consumer automotive financing operations generate revenue through finance charges or lease payments and fees paid by customers
on the retail contracts and leases. We also recognize a gain or loss on the remarketing of the vehicles financed through lease contracts at the
end of the lease. When the lease contract is originated, we estimate the residual value of the leased vehicle at lease termination. Periodically
we revise the projected value of the leased vehicle at lease termination. Our actual sales proceeds from remarketing the vehicle may be higher
or lower than the estimated residual value.
We were previously party to separate agreements with both GM and Chrysler that provided for certain exclusivity privileges related to
subvention programs that they offered. Our agreement with Chrysler expired in April 2013. In addition, our agreement with GM expired
effective February 28, 2014. These agreements provided Ally with certain preferred provider benefits, including limiting the use of other
financing providers by GM and Chrysler for their incentive programs. We entered into a new automotive financing agreement with GM that
became effective on March 1, 2014 (the GM Agreement), which provides a general framework for dealer and consumer financing related to
GM vehicles, as well as with respect to our potential participation in GM subvention programs. The GM Agreement does not provide Ally
with any exclusivity or similar privileges related to the financing of GM vehicles, whether through subvention programs or otherwise. As a
result, the GM Agreement does not provide the economic benefits or impose the obligations that were included within our prior agreement
with GM. GM informed its dealers in early January 2015 that it intends to provide lease subvention programs for Buick, GMC, and Cadillac
products exclusively through its wholly-owned subsidiary, General Motors Financial Company, Inc. (GMF). Further, GM informed us on
February 27, 2015 that they also intend to provide lease subvention programs for Chevrolet exclusively through GMF. Ally's total originations
during 2014 of $41.0 billion included approximately $9.3 billion of GM lease originations and approximately $4.0 billion of GM subvented
loan originations. Buick, GMC, Cadillac, and Chevrolet leases combined accounted for approximately 23% of Ally’s total originations during
2014.
We continue to diversify our business mix by expanding our product offering across a broad risk spectrum, subject to our predetermined
internal risk tolerance limits and applicable regulatory approvals. Our current operating results continue to reflect higher credit quality, lower
yielding loans with lower credit loss experience; however the Non-GM/Chrysler channel has provided volume at lower credit tiers, which to
date have provided higher-yielding loans with favorable credit loss experience relative to their returns. We seek to be a meaningful lender to a
wide spectrum of borrowers. We place great emphasis on our risk management practices and risk-based pricing. We have been gradually
increasing volumes in lower credit tiers. We plan to continue to increase the proportion of our Non-GM/Chrysler business, as we focus on the
used vehicle market, as well as maintaining and growing our dealer-customer base through our full suite of products, our dealer relationships,
the scale of our platform, and our dealer-based incentive programs.
Our commercial automotive financing operations primarily fund dealer inventory purchases of new and used vehicles, commonly
referred to as wholesale or floorplan financing. This represents the largest portion of our commercial automotive financing business.
Wholesale floorplan loans are secured by vehicles financed (and all other vehicle inventory), which provide strong collateral protection in the
event of dealership default. Additional collateral (e.g., personal guarantees from dealership owners) are oftentimes obtained to further manage
credit risk. The amount we advance to dealers is equal to 100% of the wholesale invoice price of new vehicles. Interest on wholesale
automotive financing is generally payable monthly and is indexed to a floating rate benchmark. The rate for a particular dealer is based on,
among other considerations, competitive factors and the dealer's creditworthiness. During 2014, we financed an average of $30.6 billion of
dealer vehicle inventory through wholesale or floorplan financings. We also provide comprehensive automotive remarketing services,
including the use of SmartAuction, our online auction platform, which efficiently supports dealer-to-dealer and other commercial wholesale
car transactions. In 2014, we and others including dealers, fleet rental companies, financial institutions, and GM, utilized SmartAuction to sell
appoximately 373,000 vehicles to dealers and other commercial customers. SmartAuction served as the remarketing channel for 51% of Ally's
off-lease vehicles.
Insurance
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. As part of our focus on offering dealers a broad range of consumer
financial and insurance products, we provide VSCs, maintenance coverage, and GAP products. We also underwrite selected commercial
insurance coverages, which primarily insure dealers' wholesale vehicle inventory in the United States. Our Insurance operations had $7.2
billion of assets at December 31, 2014, and generated $1.2 billion of total net revenue in 2014.
Our VSCs for retail customers offer owners and lessees mechanical repair protection and roadside assistance for new and used vehicles
beyond the manufacturer's new vehicle warranty. These VSCs are marketed to the public through automotive dealerships and on a direct