Ally Bank 2014 Annual Report Download - page 73

Table of Contents
Management's Discussion and Analysis
Ally Financial Inc. • Form 10-K
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age, expected mileage, seasonality, segment factors, vehicle type, economic indicators, production cycle, automotive manufacturer
incentives, and unanticipated 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. At contract inception, we determine pricing based on projected residual value.
• Remarketing abilities — Our ability to efficiently process and effectively market off-lease vehicles affects the disposal costs and
the proceeds realized from vehicle sales. Vehicles can be remarketed through auction (internet and physical), sale to dealer, sale to
lessee, and other methods. The results within these channels vary, with physical auction typically resulting in the lowest-priced
outcome.
• Manufacturer vehicle and marketing programs — Automotive manufacturers influence lease residual results in the following
ways:
The brand image of automotive manufacturers and consumer demand for their products affect residual risk.
Automotive manufacturer marketing programs may influence the used vehicle market for those vehicles through programs
such as incentives on new vehicles, programs designed to encourage lessees to terminate their leases early in conjunction with
the acquisition of a new vehicle (referred to as pull-ahead programs), and special rate used vehicle programs.
• Used vehicle market — We have exposure to changes in used vehicle prices. General economic conditions, used vehicle supply and
demand, and new vehicle market prices heavily influence used vehicle prices.
Lease Vehicle Terminations and Remarketing
The following tables summarize the volume of Ally lease terminations and average gain per vehicle in the United States over recent
periods, as well as our methods of vehicle sales at lease termination, stated as a percentage of total lease vehicle disposals. The actual gain per
vehicle on lease terminations varies based upon the type of vehicle.
Year ended December 31, 2014 2013 2012
Off-lease vehicles terminated (in units)296,393 148,587 63,435
Average gain per vehicle ($ per unit)$ 1,461 $ 2,237 $ 1,830
Method of vehicle sales
Auction (internet and physical) 61% 47% 45%
Sale to dealer, lessee, and other 39 53 55
The number of off-lease vehicles remarketed during 2014 nearly doubled as compared to 2013, reflecting growth in lease originations
from 2010-2012 after curtailing lease originations in 2008-2009 as a result of the economic downturn. In 2015, we expect lease termination
volumes to continue to remain near the levels experienced during 2014. However, actual termination volumes may vary in the future from
forecasted volumes due to changes in new lease originations, term length mix changes, and automotive manufacturer lease pull-ahead
programs.
Average gain per vehicle decreased in 2014, primarily due to adjustments to depreciation expense as a result of revisions to the projected
value of the lease vehicle at termination based on current market conditions. This trend is expected to continue in the near term. For more
information on our investment in operating leases, refer to Note 9 to the Consolidated Financial Statements.
Lease Portfolio Mix
We monitor the concentration of our outstanding operating leases. The following table presents the mix of leased vehicles by type.
Year ended December 31, 2014 2013
Car 40% 43%
Truck 13 11
Sport utility vehicle 47 46
Market Risk
Our automotive financing, mortgage, and insurance activities give rise to market risk representing the potential loss in the fair value of
assets or liabilities and earnings caused by movements in market variables, such as interest rates, foreign-exchange rates, equity prices,
market perceptions of credit risk, and other market fluctuations that affect the value of securities, assets held-for-sale, and operating leases.
We are exposed to interest rate risk arising from changes in interest rates related to financing, investing, and cash management activities.
More specifically, we have entered into contracts to provide financing and to retain various assets related to securitization activities all of
which are exposed in varying degrees to changes in value due to movements in interest rates. Interest rate risk arises from the mismatch