Ally Bank 2014 Annual Report Download - page 28

Table of Contents
Ally Financial Inc. • Form 10-K
16
Significant indemnification payments or contract, lease, or loan repurchase activity of retail contracts or leases could harm our
profitability and financial condition.
We have repurchase obligations in our capacity as servicer in securitizations and whole-loan sales. If a servicer breaches a representation,
warranty, or servicing covenant with respect to an automotive receivable, the servicer may be required by the servicing provisions to
repurchase that asset from the purchaser or otherwise compensate one or more classes of investors for losses caused by the breach. If the
frequency at which repurchases of assets or other payments occurs increases substantially from its present rate, the result could be 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. 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 lead to increased consumer delinquencies;
• 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.
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, 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.
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, among others, retained interests
from securitizations of loans and contracts, loans held-for-sale, 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 legal matters, insurance losses, and loss adjustment expenses which represent the
accumulation of estimates for both reported losses and those incurred, but not reported, including claims adjustment expenses relating to
direct insurance and assumed reinsurance agreements. For further discussion related to estimates and assumptions, see MD&A — Critical
Accounting Estimates. Our assumptions and estimates may be inaccurate for many reasons, including that they often involve matters that are
inherently difficult to predict and that are beyond our control (for example, macro-economic conditions and their impact on our dealers), and
that they often involve complex interactions between a number of dependent and independent variables, factors, and other assumptions. As a
result, our actual experience may differ materially from these estimates and assumptions. A material difference between our estimates and
assumptions and our actual experience may adversely affect our cash flow, profitability, financial condition, and business prospects.
Fluctuations in valuation of investment securities or significant fluctuations in investment market prices could negatively affect revenues.
Investment market prices in general are subject to fluctuation. Consequently, the amount realized in the subsequent sale of an investment
may significantly differ from the reported market value and could negatively affect our revenues. Additionally, negative fluctuations in the
value of available-for-sale investment securities could result in unrealized losses recorded in equity. Fluctuation in the market price of a
security may result from perceived changes in the underlying economic characteristics of the investee, the relative price of alternative
investments, national and international events, and general market conditions.