Ally Bank 2014 Annual Report Download - page 66

Table of Contents
Management's Discussion and Analysis
Ally Financial Inc. • Form 10-K
54
The following table includes consumer and commercial net charge-offs from finance receivables and loans at historical cost and related
ratios reported at carrying value before allowance for loan losses.
Net charge-offs (recoveries) Net charge-off ratios (a)
Year ended December 31, ($ in millions)2014 2013 2014 2013
Consumer
Finance receivables and loans at historical cost $ 544 $ 477 0.8% 0.7%
Commercial
Finance receivables and loans at historical cost (7) (5) ——
Total finance receivables and loans at historical cost $ 537 $ 472 0.5% 0.5%
(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 year for each loan category.
Net charge-offs were $537 million for the year ended December 31, 2014, compared to $472 million for the year ended December 31,
2013. The increase in the consumer portfolio during the year ended December 31, 2014 was driven primarily by the change in our portfolio
composition as we continued the execution of our underwriting strategy to originate consumer automotive assets across a broad risk spectrum.
Loans held-for-sale are accounted for at the lower-of-cost or fair value and, therefore, we do not record charge-offs for these loans.
The Consumer Credit Portfolio and Commercial Credit Portfolio discussions that follow relate to consumer and commercial finance
receivables and loans recorded at historical cost. Finance receivables and loans recorded at historical cost have an associated allowance for
loan losses. Finance receivables and loans measured at fair value were excluded from these discussions since those exposures are not
accounted for within our allowance for loan losses.
Consumer Credit Portfolio
Our consumer portfolio primarily consists of automotive loans, first mortgages, and home equity loans. Loan losses in our consumer
portfolio are influenced by general business and economic conditions including unemployment rates, bankruptcy filings, and home and used
vehicle prices. Additionally, our consumer credit exposure is significantly concentrated in automotive lending, largely through GM and
Chrysler dealerships; however, due to our continued strategic focus on diversification, the proportion of Non-GM/Chrysler new and used
portfolios has continued to grow.
Credit risk management for the consumer portfolio begins with the initial underwriting and continues throughout a borrower's credit
cycle. We manage consumer credit risk through our loan origination and underwriting policies, credit approval process, and servicing
capabilities. We use proprietary credit-scoring models to differentiate the expected default rates of credit applicants enabling us to better
evaluate credit applications for approval and to tailor the pricing and financing structure according to this assessment of credit risk. We
regularly review the performance of the credit scoring models and update them for historical information and current trends. These and other
actions mitigate but do not eliminate credit risk. Improper evaluations of a borrower's creditworthiness, fraud, and/or changes in the
applicant's financial condition after approval could negatively affect the quality of our portfolio, resulting in loan losses.
Our servicing activities are another key factor in managing consumer credit risk. Servicing activities consist largely of collecting and
processing customer payments, responding to customer inquiries such as requests for payoff quotes, and processing customer requests for
account revisions (such as payment extensions and refinancings). Servicing activities are generally consistent across our operations; however,
certain practices may be influenced by local laws and regulations.
During the year ended December 31, 2014, the credit performance of the consumer portfolio remained strong and reflects the continued
execution of our underwriting strategy to originate consumer automotive assets across a broad risk spectrum, including used, nonprime,
extended term, Non-GM/Chrysler, and non-subvented finance receivables and loans. 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.