Ally Bank 2011 Annual Report Download - page 27

Table of Contents
Ally Financial Inc. • Form 10−K
liquidity, and results of operations.
Our earnings may decrease because of decreases or increases in interest rates.
We are subject to risks from decreasing interest rates, particularly given the Federal Reserve's recent steps to keep interest rates low in an attempt to
improve economic growth. For example, a significant decrease in interest rates could increase the rate at which mortgages are prepaid, which could require
us to write down the value of our retained interests and MSRs. Moreover, if prepayments are greater than expected, the cash we receive over the life of our
held−for−investment mortgage loans and our retained interests would be reduced. Higher−than−expected prepayments could also reduce the value of our
MSRs and, to the extent the borrower does not refinance with us, the size of our servicing portfolio. Therefore, any such changes in interest rates could harm
our revenues, profitability, and financial condition.
Rising interest rates could also have an adverse impact on our business. For example, rising interest rates:
• will increase our cost of funds;
• may reduce our consumer automotive financing volume by influencing customers to pay cash for, as opposed to financing, vehicle
purchases or not to buy new vehicles;
• may negatively impact our ability to remarket off−lease vehicles;
• generally reduce our residential mortgage loan production as borrowers become less likely to refinance and the costs associated with
acquiring a new home become more expensive; and
• will generally reduce the value of mortgage and automotive financing loans and contracts and retained interests and fixed income
securities held in our investment portfolio.
Throughout 2009 and 2010 the credit risk embedded in the balance sheet was reduced as a result of asset sales, asset markdowns, and a change in the
mix of our loan assets as the legacy portfolios were replaced with assets underwritten to tighter credit standards. This reduction in risk has resulted in a mix
of assets outstanding on the balance sheet as of December 31, 2011, with a lower yielding profile than the prior−year period. During this same period of
time we experienced a significant decline in our consumer automotive operating lease portfolio that was realizing higher yields from remarketing gains due
to historically high used vehicle prices. The combination of the above factors resulted in a decline in asset yields more than the decline in liability rates, and
therefore the decline in the net interest spread on the balance sheet throughout 2010 and into 2011.
Our hedging strategies may not be successful in mitigating our risks associated with changes in interest rates and could affect our profitability and
financial condition as could our failure to comply with hedge accounting principles and interpretations.
We employ various economic hedging strategies to mitigate the interest rate and prepayment risk inherent in many of our assets and liabilities. Our
hedging strategies rely on assumptions and projections regarding our assets, liabilities, and general market factors. If these assumptions and projections
prove to be incorrect or our hedges do not adequately mitigate the impact of changes in interest rates or prepayment speeds, we may experience volatility in
our earnings that could adversely affect our profitability and financial condition. In addition, we may not be able to find market participants that are willing
to act as our hedging counterparties, which could have an adverse effect on the success of our hedging strategies.
In addition, hedge accounting in accordance with accounting principles generally accepted in the United States of America (GAAP) requires the
application of significant subjective judgments to a body of accounting concepts that is complex and for which the interpretations have continued to evolve
within the accounting profession and among the standard−setting bodies.
A failure of or interruption in, as well as, security risks of the communications and information systems on which we rely to conduct our business
could adversely affect our revenues and profitability.
We rely heavily upon communications and information systems to conduct our business. Any failure or interruption of our information systems or
the third−party information systems on which we rely as a result of inadequate or failed processes or systems, human errors, or external events could cause
underwriting or other delays and could result in fewer applications being received, slower processing of applications, and reduced efficiency in servicing. In
addition, our communication and information systems may present security risks, and could be susceptible to hacking or identity theft. The occurrence of
any of these events could have a material adverse effect on our business.
We use estimates and assumptions in determining the fair value of certain of our assets in determining lease residual values and in determining our
reserves for insurance losses and loss adjustment expenses. If our estimates or assumptions prove to be incorrect, our cash flow, profitability, financial
condition, and business prospects could be materially and adversely affected.
We use estimates and various assumptions in determining the fair value of many of our assets, including certain held−for−investment and
held−for−sale loans for which we elected fair value accounting, retained interests from securitizations of loans and contracts, MSRs, and other investments,
which do not have an established market value or are not publicly traded. We also use estimates and assumptions in determining the residual values of
leased vehicles. In addition, we use estimates and assumptions in determining our reserves for insurance losses and loss adjustment expenses which
represent the accumulation of estimates for both reported losses and those incurred, but not
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