Ally Bank 2014 Annual Report Download - page 64

Table of Contents
Management's Discussion and Analysis
Ally Financial Inc. • Form 10-K
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expected mileage, seasonality, segment factors, vehicle type, economic indicators, production cycle, automotive manufacturer
incentives, and shifts in used vehicle supply. This internally-generated data is compared against third party, independent data for
reasonableness. Periodically, we revise the projected value of the lease vehicle at termination based on current market conditions
and adjust depreciation expense appropriately over the remaining life of the contract. 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 recorded
through depreciation expense. The balance sheet reflects both the lease asset as well as any associated rent receivables. The lease
rent receivable is a component of other assets. A valuation allowance representing the uncollectible portion of the lease rent
receivable is recorded directly against this receivable. The lease asset is reviewed for impairment in accordance with applicable
accounting standards.
• Serviced loans and leases — Loans that we service on behalf of our customers or another financial institution. As such, these loans
can be on or off our balance sheet. For our serviced consumer automotive loans, we do not recognize servicing assets or liabilities
because we receive a fee that adequately compensates us for the servicing costs.
Refer to Critical Accounting Estimates within this MD&A and Note 1 to the Consolidated Financial Statements for further
information.
Credit Risk Management
Credit risk is defined as the potential failure to receive payments when due from an obligor in accordance with contractual obligations.
Therefore, credit risk is a major source of potential economic loss to us. Credit risk is monitored by several groups and functions throughout
the organization, including enterprise and line of business committees and the Enterprise Risk Management organization. Together, they
oversee the credit decisioning and management processes, and monitor credit risk exposures to ensure they are managed in a safe-and-sound
manner and are within our risk appetite. In addition, our Loan Review Group provides an independent assessment of the quality of our credit
portfolios and credit risk management practices, and directly reports its findings to the Risk and Compliance Committee of the Board on a
regular basis.
To mitigate risk, we have implemented specific policies and practices across all lines of business, utilizing both qualitative and
quantitative analyses. This reflects our commitment to maintain an independent and ongoing assessment of credit risk and credit quality. Our
policies require an objective and timely assessment of the overall quality of the consumer and commercial loan and lease portfolios. This
includes the identification of relevant trends that affect the collectability of the portfolios, segments of the portfolios that are potential problem
areas, loans and leases with potential credit weaknesses, as well as stress testing and the assessment of the adequacy of internal credit risk
policies and procedures to monitor compliance with relevant laws and regulations. In addition, we maintain limits and underwriting policies
that reflect our risk appetite.
We manage credit risk based on the risk profile of the borrower, the source of repayment, the underlying collateral, and current market
conditions. We monitor the credit risk profile of individual borrowers and the aggregate portfolio of borrowers either within a designated
geographic region or a particular product or industry segment. We perform ongoing analyses of the consumer automotive, consumer
mortgage, and commercial portfolios using a range of indicators to assess the adequacy of the allowance based on historical and current
trends. Refer to Note 8 to the Consolidated Financial Statements for additional information.
Additionally, we utilize numerous collection strategies to mitigate loss and provide ongoing support to customers in financial distress.
For automotive loans, we work with customers when they become delinquent on their monthly payment. In lieu of repossessing their vehicle,
we may offer several types of assistance to aid our customers based on their willingness and ability to repay their loan. Loss mitigation may
include extension of the loan maturity date and rewriting the loan terms. For mortgage loans, as part of our participation in certain
governmental programs, we offer mortgage loan modifications to qualified borrowers. Numerous initiatives are in place to provide support to
our mortgage customers in financial distress, including principal forgiveness, maturity extensions, delinquent interest capitalization, and
changes to contractual interest rates.
Furthermore, we manage our counterparty credit exposure based on the risk profile of the counterparty. Within our policies, we have
established standards and requirements for managing counterparty risk exposures in a safe-and-sound manner. Counterparty credit risk is
derived from multiple exposure types, including derivatives, securities trading, securities financing transactions, financial futures, cash
balances (e.g., due from depository institutions, restricted accounts, and cash equivalents), and investment in debt securities. For more
information on derivative counterparty credit risk, refer to Note 22 to the Consolidated Financial Statements.
During 2014, the U.S. economy continued to expand. The labor market recovered further during the year, with nonfarm payrolls
increasing by 2.95 million and the annual unemployment rate falling to 5.6%. Within the U.S. automotive market, new light vehicle sales
continued to increase, to 16.4 million for the year ended December 31, 2014. We closely monitor macro-economic trends given the nature of
our business and the potential economic impacts on our credit risk. We continue to be cautious with the economic outlook given continued
weak global economic growth and expected higher interest rates as the Federal Reserve is expected to normalize monetary policy later in
2015.
On-balance Sheet Portfolio
Our on-balance sheet portfolio includes both finance receivables and loans and loans held-for-sale. At December 31, 2014, this primarily
included $92.1 billion of automotive finance receivables and loans and $7.9 billion of mortgage finance receivables and loans. Within our on-