Leasing

9 Months Ended

Sep. 30, 2020

Leasing

Ally as the Lessee

We have operating leases for our corporate facilities, which have remaining lease terms of 4 months to 8 years. Most of the property leases have fixed payment terms with annual fixed-escalation clauses and include options to extend the leases for periods that range from 3 months to 15 years. Some of those lease agreements also include options to terminate the leases in periods that range from 2 to 6 years after the commencement of the leases. We have not included any of these term extensions or termination provisions in our estimates of the lease term, as we do not consider it reasonably certain that the options will be exercised.

We also have operating leases for a fleet of vehicles that is used by our sales force for business purposes, with noncancelable lease terms of 367 days. Thereafter, the leases are month-to-month, up to a maximum of 48 months from inception.

The following table details our total investment in operating leases.


($ in millions)	September 30, 2020		December 31, 2019
Assets
Operating lease right-of-use assets (a)	$	140	$	168


Liabilities
Operating lease liabilities (b)	$	166	$	196

(a)Included in other assets on our Condensed Consolidated Balance Sheet.

(b)Included in accrued expenses and other liabilities on our Condensed Consolidated Balance Sheet.

During both the three months and nine months ended September 30, 2020, and 2019, we paid $12 million and $37 million in cash for amounts included in the measurement of lease liabilities at September 30, 2020, and September 30, 2019, respectively. These amounts are included in net cash provided by operating activities in the Condensed Consolidated Statement of Cash Flows. During the nine months ended September 30, 2020, and September 30, 2019, we obtained $58 million and $41 million of ROU assets in exchange for new lease liabilities, respectively. As of September 30, 2020, the weighted-average remaining lease term of our operating lease portfolio was 6 years, and the weighted-average discount rate was 2.46%, compared to 7 years and 2.93% as of September 30, 2019.

The following table presents future minimum rental payments we are required to make under operating leases that have commenced as of September 30, 2020, and that have noncancelable lease terms expiring after September 30, 2020.


($ in millions)
2020	$	12
2021	45
2022	33
2023	23
2024	16
2025 and thereafter	50
Total undiscounted cash flows	179
Difference between undiscounted cash flows and discounted cash flows	(13)
Total lease liability	$	166

In addition to the above, we entered into a forward-starting lease agreement in September 2017, for a new corporate facility in Charlotte, North Carolina, where we plan to consolidate several existing facilities into that location. The lessor and their agents are currently constructing the facilities at this location, with the lease scheduled to commence in April 2021 after construction is completed. The lease agreement will have a total of $290 million in undiscounted future lease payments over the 15-year term of the lease. We also have an option to purchase this facility after construction is completed, subject to certain terms and conditions.

The following table details the components of total net operating lease expense.


	Three months ended September 30,				Nine months ended September 30,
($ in millions)	2020		2019		2020		2019
Operating lease expense	$	11	$	11	$	35	$	34

Variable lease expense	2		2		6		6

Total lease expense, net (a)	$	13	$	13	$	41	$	40

(a)Included in other operating expenses in our Condensed Consolidated Statement of Comprehensive Income.

Ally as the Lessor

Investment in Operating Leases

We purchase consumer operating lease contracts and the associated vehicles from dealerships after those contracts are executed by the dealers and the consumers. The amount we pay a dealer for an operating lease contract is based on the negotiated price for the vehicle less vehicle trade-in, down payment from the consumer, and available automotive manufacturer incentives. Under the operating lease, the consumer is obligated to make payments in amounts equal to the amount by which the negotiated purchase price of the vehicle (less any trade-in value, down payment, or available manufacturer incentives) exceeds the contract residual value (including residual support) of the vehicle at lease termination, plus operating lease rental charges. The customer can terminate the lease at any point after commencement, subject to additional charges and fees. Both the consumer and the dealership have the option to purchase the vehicle at the end of the lease term, which can range from 24 to 60 months, at the residual value of the vehicle, however it is not reasonably certain this option will be exercised and accordingly our consumer leases are classified as operating leases. In addition to the charges described above, the consumer is generally responsible for certain charges related to excess mileage or excessive wear and tear on the vehicle. These charges are deemed variable lease payments and, as these payments are not based on a rate or index, they are recognized as net depreciation expense on operating lease assets in our Condensed Consolidated Statement of Comprehensive Income as incurred. Additionally, lease modifications made related to the COVID-19 pandemic are not considered a new lease contract, and the remaining lease payments will be recorded on a straight-line basis over the modified lease term.

To support our customers and help mitigate lease residual risk, we deferred lease payments without fees for up to 120 days for any consumer requesting assistance related to the COVID-19 pandemic. Approximately 55,000 of our lease customers enrolled in this lease modification program, and approximately 60% of these customers were granted a 120-day deferral at the time of enrollment. As of September 30, 2020, substantially all of these customers had exited the program and of these approximately 2,900 had paid in full and terminated their leases. Of the customers that had exited the program with outstanding lease obligations, 94% were current on their lease obligations as of September 30, 2020. We also provided a program for and, in some cases, incentivized customers nearing their scheduled lease-end dates to extend their leases for up to an additional 180 days. Eligible customers who opted into this program during the early part of the second quarter were not charged for the first month of the extension, and the following months of the extended lease were offered under the terms of the existing lease contract. Approximately 8,500 customers had opted into an extension requiring additional payments, and as of September 30, 2020, approximately 4,500 remained enrolled in the program.

When we acquire a consumer operating lease, we assume ownership of the vehicle from the dealer. We require that property damage, bodily injury, collision, and comprehensive insurance be obtained by the lessee on all consumer operating leases. Neither the consumer nor the dealer is responsible for the value of the vehicle at the time of lease termination. When vehicles are not purchased by customers or the receiving dealer at scheduled lease termination, the vehicle is returned to us for remarketing. We generally bear the risk of loss to the extent the value of a leased vehicle upon remarketing is below the expected residual value. At termination, our actual sales proceeds from remarketing the vehicle may be higher or lower than the estimated residual value resulting in a gain or loss on remarketing, which is included in net depreciation expense on operating lease assets in our Condensed Consolidated Statement of Comprehensive Income. Excessive mileage or excessive wear and tear on the vehicle during the lease may impact the sales proceeds received upon remarketing. As of September 30, 2020, and December 31, 2019, consumer operating leases with a carrying value, net of accumulated depreciation, of $384 million and $352 million, respectively, were covered by a residual value guarantee of 15% of the manufacturer’s suggested retail price.

The following table details our investment in operating leases.



($ in millions)	September 30, 2020		December 31, 2019
Vehicles	$	11,015	$	10,426
Accumulated depreciation	(1,561)		(1,562)
Investment in operating leases, net	$	9,454	$	8,864

The following table presents future minimum rental payments we have the right to receive under operating leases with noncancelable lease terms expiring after September 30, 2020.


($ in millions)
2020	$	395
2021	1,277
2022	807
2023	365
2024	58
2025 and thereafter	4
Total lease payments from operating leases	$	2,906

We recognized operating lease revenue of $360 million and $1.1 billion and $368 million and $1.1 billion for the three months and nine months ended September 30, 2020, and 2019, respectively. Depreciation expense on operating lease assets includes remarketing gains recognized on the sale of operating lease assets. The following table summarizes the components of depreciation expense on operating lease assets.


	Three months ended September 30,				Nine months ended September 30,
($ in millions)	2020		2019		2020		2019

Depreciation expense on operating lease assets (excluding remarketing gains) (a)	$	246	$	262	$	737	$	785
Remarketing gains, net	(71)		(28)		(62)		(66)
Net depreciation expense on operating lease assets	$	175	$	234	$	675	$	719

(a)Includes variable lease payments related to excess mileage and excessive wear and tear on vehicles of $6 million and $18 million during the three months and nine months ended September 30, 2020, respectively, and $5 million and $14 million during the three months and nine months ended September 30, 2019.

Finance Leases

Our total gross investment in finance leases, which is included in finance receivables and loans, net, on our Condensed Consolidated Balance Sheet was $442 million and $472 million as of September 30, 2020, and December 31, 2019, respectively. This includes lease payment receivables of $429 million and $459 million at September 30, 2020, and December 31, 2019, respectively, and unguaranteed residual assets of $13 million at both September 30, 2020, and December 31, 2019. Interest income on finance lease receivables was $6 million and $17 million for the three and nine months ended September 30, 2020, respectively, and $7 million and $19 million for the three and nine months ended September 30, 2019, and is included in interest and fees on finance receivables and loans in our Condensed Consolidated Statement of Comprehensive Income.

The following table presents future minimum rental payments we have the right to receive under finance leases with noncancelable lease terms expiring after September 30, 2020.


($ in millions)
2020	$	39
2021	150
2022	114
2023	84
2024	51
2025 and thereafter	39
Total undiscounted cash flows	477
Difference between undiscounted cash flows and discounted cash flows	(48)
Present value of lease payments recorded as lease receivable	$	429