Ally Bank 2012 Annual Report Download - page 23

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A loss of contractual servicing rights could have a material adverse effect on our financial condition, liquidity, and results of operations.
We are the servicer for all of the receivables we have acquired or originated and transferred to other parties in securitizations and whole-
loan sales of automotive receivables. We are paid a fee for these services, which fees in the aggregate constitute a substantial revenue stream
for us. In each case, we are subject to the risk of termination under the circumstances specified in the applicable servicing provisions.
In most securitizations and whole-loan sales, the owner of the receivables will be entitled to declare a servicer default and terminate the
servicer upon the occurrence of specified events. These events typically include a bankruptcy of the servicer, a material failure by the servicer
to perform its obligations, and a failure by the servicer to turn over funds on the required basis. The termination of these servicing rights, were
it to occur, could have a material adverse effect on our financial condition, 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. A low interest rate environment or a flat or inverted yield curve may adversely affect certain of our
businesses by compressing net interest margins or reducing the amounts we earn on our investment securities portfolio, thereby reducing our
net interest income and other revenues.
Rising interest rates could also have an adverse impact on our business as well. 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; and
• will generally reduce the value of 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, 2012, with a lower yielding profile than the prior
year. 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.
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,
employee misconduct, catastrophic events, or other 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. For example, similar to other large
financial institutions, Ally's website, ally.com, was recently the subject of cyber attacks that resulted in slow performance and unavailability
of the website for some customers. 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. 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
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Ally Financial Inc. • Form 10-K