UNITED STATESSECURITIES AND EXCHANGE COMMISSION
FORM 10-Q
Commission file number: 1-3754
GENERAL MOTORS ACCEPTANCE CORPORATION
200 Renaissance CenterP.O. Box 200 Detroit, Michigan48265-2000(Address of principal executive offices)(Zip Code)
(313) 556-5000(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, and (2) has been subject to such filing requirements for the past 90 days. Yes x No o
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes o No x
As of June 30, 2003, there were outstanding 10 shares of the issuer’s $.10 par value common stock.
Reduced Disclosure Format
The registrant meets the conditions set forth in General Instruction H(1)(a) and (b) of Form 10-Q and is therefore filing this Form with the reduced disclosure format.
TABLE OF CONTENTS
INDEXGeneral Motors Acceptance Corporation
* Item is omitted pursuant to the Reduced Disclosure Format, as set forth on the cover page of this filing.
2
Consolidated Statement of Income (unaudited)General Motors Acceptance Corporation
The Notes to the Consolidated Financial Statements are an integral part of these statements.
3
Consolidated Balance Sheet (unaudited)General Motors Acceptance Corporation
4
Consolidated Statement of Changes in Stockholder’s Equity (unaudited)General Motors Acceptance Corporation
5
Consolidated Statement of Cash Flows (unaudited)General Motors Acceptance Corporation
6
Notes to Consolidated Financial Statements (unaudited)General Motors Acceptance Corporation
1 Basis of Presentation
General Motors Acceptance Corporation (GMAC or the Company) is a wholly-owned subsidiary of General Motors Corporation (General Motors or GM). The consolidated financial statements include the accounts of the Company and its majority-owned subsidiaries after eliminating all significant intercompany balances and transactions.
The consolidated financial statements as of June 30, 2003 and for the second quarter and six month periods ended June 30, 2003 and 2002 are unaudited but, in management’s opinion, include all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation of the results for the interim periods. Certain prior period amounts have been reclassified to conform to the current period presentation.
The interim period consolidated financial statements, including the related notes, are condensed and do not include all disclosures required by generally accepted accounting principles in the United States of America. These interim period consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements, which are included in GMAC’s Annual Report on Form 10-K for the year ended December 31, 2002, filed with the United States Securities and Exchange Commission (SEC) on March 13, 2003.
Recently Issued Accounting Standards
SFAS No. 149 — In April 2003, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 149, Amendments of Statement 133 on Derivative Instruments and Hedging Activities. SFAS No. 149 amends and clarifies accounting for derivative instruments, including certain derivative instruments embedded in other contracts, and hedging activities under SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities. In general, the Statement is effective for contracts entered into or modified after June 30, 2003 and for hedging relationships designated after June 30, 2003. The adoption of SFAS No. 149 did not have a material impact on the Company’s financial condition or results of operations.
SFAS No. 150 — In May 2003, the FASB issued Statement No. 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity, which provides standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. The Statement is effective for financial instruments entered into or modified after May 31, 2003 and for pre-existing instruments as of the beginning of the first interim period beginning after June 15, 2003. The adoption of SFAS No. 150 did not have a material impact on the Company’s financial condition or results of operations.
FASB Interpretation No. 46 — In January 2003, the FASB issued Interpretation No. 46, Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51, Consolidated Financial Statements. FIN 46 addresses consolidation and disclosure by business enterprises of variable interest entities, representing those entities whose total equity investment at risk is not sufficient to permit the entity to finance its activities without additional subordinated financial support from other parties. More specifically, FIN 46 defines variable interest entities as those entities in which the equity investment at risk is not greater than the expected losses of the entity. FIN 46 explains how to identify variable interest entities and how an enterprise assesses its interests in a variable interest entity in order to decide whether to consolidate that entity. FIN 46 requires variable interest entities to be consolidated by the primary beneficiary if the entities do not effectively disperse risks among the parties involved. Variable interest entities that effectively disperse risks will not be consolidated unless a single party holds an interest or combination of interests that effectively recombines risks that were previously dispersed. FIN 46 does not impact the consolidation guidance for qualifying special purpose entities (QSPEs), as described in SFAS No. 140,Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities.
FIN 46 became effective July 1, 2003 for GMAC’s interests in variable interest entities in existence on January 31, 2003, and effective February 1, 2003 for variable interest entities created on or after such date. Most of the Company’s variable interests are structured as qualifying special purpose entities and, therefore, are exempt from FIN 46. For GMAC’s interests in variable interest entities, a primary beneficiary analysis was completed during the second quarter to determine whether consolidation of GMAC’s interests in such entities is required effective July 1, 2003 under FIN 46. In the course of performing this analysis, management revised GMAC’s involvement in certain of the entities which impacted the resulting consolidation treatment. Based on the results of this analysis, management has concluded that the adoption of FIN 46 will not have a material impact on the Company’s financial position, operating results, and cash flows. Due to the complexity in interpreting the new guidance and difficulties in its practical application, management continues to assess the impacts of FIN 46 on all of its interests in variable interest entities. The following summarizes the results of GMAC’s primary beneficiary analysis for the types of activities considered by management to most likely be affected by the consolidation and disclosure provisions of FIN 46.
Central Originating Lease Trust (COLT) — In analyzing FIN 46, it was determined that GMAC might have been deemed to be the primary beneficiary of COLT, a limited purpose business trust, and therefore required to consolidate COLT effective July 1, 2003. Through October 2002, COLT purchased vehicles and related consumer leases from GM franchised dealers through the issuance of secured notes, which were sold to GMAC, and through the issuance of third-party equity. In March 2003, GMAC purchased the third-party equity of COLT, resulting in its consolidation. The underlying COLT lease assets (approximately $4 billion at the time of the purchase of the third-party equity by GMAC) are now reflected as operating lease assets of the Company,
7
replacing the secured notes that were previously reported as commercial finance receivables and loans. The net impact of consolidating COLT was an increase in the Company’s consolidated total assets of $168 million, representing the third-party equity purchased.
Mortgage warehouse funding — GMAC’s Mortgage operations sell commercial and residential mortgage loans through various structured finance arrangements in order to provide funds for the origination and purchase of future loans. These structured finance arrangements include sales to off-balance sheet warehouse funding entities, including GMAC- and bank-sponsored commercial paper conduits. Transfers of assets from GMAC into each facility are accounted for as sales based on the provisions of SFAS No. 140. Certain of these warehouse funding entities represent variable interest entities under FIN 46. Assets in these facilities approximated $7.0 billion at June 30, 2003. For certain of these entities, management determined that GMAC does not have the majority of the expected losses or returns and, as such, consolidation is not appropriate under FIN 46. However, in other entities GMAC was deemed to be the primary beneficiary, and the activities of these entities were either terminated or GMAC will consolidate these entities pursuant to FIN 46. The consolidation of certain of these entities was a decision driven in part by the Company’s desire to invest in certain asset classes on the balance sheet. Had management not had any interest in investing in such assets, the Company might have restructured the entities to ensure continued off-balance sheet treatment. Based on June 30, 2003 asset levels, the expected impact of consolidating the Company’s interests in these variable interest entities is an increase in assets of $3.6 billion, with a corresponding increase in liabilities.
Collateralized debt obligations (CDOs) — GMAC’s Mortgage operations sponsor, purchase subordinate and equity interests in, and serve as collateral manager for CDOs. Under CDO transactions a trust is established that purchases a portfolio of securities and issues debt and equity certificates, representing interests in the portfolio of assets. In addition to receiving variable compensation for managing the portfolio, the Company sometimes retains equity investments in the CDOs. The majority of the CDOs sponsored by the Company were initially structured or have been restructured (with approval by the senior beneficial interest holders) as qualifying special purpose entities, therefore exempt from FIN 46. For the Company’s remaining CDOs, the results of the primary beneficiary analysis support the conclusion that consolidation is not appropriate under FIN 46, because GMAC does not have the majority of the expected losses or returns.
Guaranteed tax credit funds — The Company’s Mortgage operations sell investments in tax credit funds to unaffiliated investors and guarantee the timely payment of a specified return to those investors. Returns to investors are generated from each fund’s share of low income housing tax credits and tax losses derived from their investments in entities that develop, own, and operate affordable housing properties throughout the United States. Based on an analysis of expected losses and returns, GMAC is the primary beneficiary and will therefore consolidate these tax funds in its financial statements, pursuant to FIN 46. This treatment results from the Company’s guarantee to equity holders of a minimum return on their investment, and from the Company’s participation in any gains in the underlying real estate value, in excess of the guaranteed returns. The aggregate amount of investments in tax credit funds formed prior to February 2003 approximated $528 million at June 30, 2003. Excluded from this total are assets of $203 million related to a tax credit fund created in June 2003, which the Company consolidated upon creation, in accordance with FIN 46.
2 Mortgage Banking Income
The following table presents the components of mortgage banking income.
8
3 Finance Receivables and Loans
The composition of finance receivables and loans outstanding was as follows.
The following table presents an analysis of the activity in the allowance for credit losses on finance receivables and loans.
9
4 Mortgage Servicing Rights
The following table summarizes mortgage servicing rights activity and related amortization.
The Company has implemented risk management strategies, including the use of actively managed derivatives and a portfolio of investment securities that increase in value as interest rates decline, to protect the value of mortgage servicing rights. As the investment securities are designated as available for sale, unrealized changes in the value of these securities are reflected in accumulated other comprehensive income on the Consolidated Balance Sheet. For further description of mortgage servicing rights and the related risk management strategy, refer to Notes 1 and 10 to the 2002 Annual Report on Form 10-K.
5 Debt
Debt is presented below and is segregated between domestic and foreign based on the location of the office recording the transaction.
10
Liquidity facilitiesLiquidity facilities represent additional funding sources, if required. The financial institutions providing the uncommitted facilities are not legally obligated to fund those facilities. The following table summarizes the liquidity facilities maintained by the Company.
In June 2003, GMAC renewed its syndicated multi-currency global credit facilities, including the liquidity facility for NCAT. The syndicated multi-currency global facility includes a $4.35 billion five year facility (expires June 2008) and a $4.15 billion 364-day facility (expires June 2004). The 364-day facility includes a term loan option, which, if exercised by GMAC upon expiration, carries a one-year term. Additionally, a leverage covenant restricts the ratio of consolidated unsecured debt to total stockholder’s equity to no greater than 11:1, under certain conditions. More specifically, the covenant is only applicable on the last day of any fiscal quarter (other than the fiscal quarter during which a change in rating occurs) during such times as the Company has senior unsecured long-term debt outstanding, without third-party enhancement, which is rated BBB+ or less by Standard & Poor’s, or Baa1 or less by Moody’s. GMAC’s leverage covenant ratio was 8.6:1 at June 30, 2003, and was therefore in compliance with this covenant. The leverage covenant calculation, as modified in connection with the renewal, excludes from debt those securitization transactions that are accounted for as on-balance sheet secured financings.
6 Derivative Instruments and Hedging Activities
In managing the interest rate and foreign exchange exposures of a multinational finance entity, GMAC utilizes a variety of interest rate and currency derivative financial instruments. In accordance with SFAS No. 133, as amended, GMAC records derivative financial instruments on the balance sheet as assets or liabilities, carried at fair value. Changes in fair value are accounted for depending on the use of the derivative financial instrument and whether it qualifies for hedge accounting treatment. Refer to GMAC’s 2002 Annual Report on Form 10-K for a further description of GMAC’s use of and accounting for derivative financial instruments.
The following table presents amounts included in income and related to derivatives designated as fair value hedges.
GMAC recognized an immaterial amount of hedge ineffectiveness on cash flow hedges for the second quarter and six months ended June 30, 2003 and 2002.
11
7 Segment Information
Financial results for GMAC’s operating segments are summarized below.
12
Management’s Discussion and AnalysisGeneral Motors Acceptance Corporation
Overview
GMAC is a leading global financial services firm with over $250 billion of assets and operations in 41 countries. Founded in 1919 as a wholly-owned subsidiary of General Motors, GMAC was established to provide GM dealers with the automotive financing necessary for the dealers to acquire and maintain vehicle inventories and to provide retail customers means by which to finance vehicle purchases through GM dealers. GMAC products and services have expanded beyond automotive financing, and GMAC currently operates in three primary business segments — Financing, Mortgage and Insurance. Refer to GMAC’s Annual Report on Form 10-K for the year ended December 31, 2002 for a more complete description of the Company’s business segments, along with the products and services offered and the market competition.
Net income for GMAC’s business segments is summarized as follows.
GMAC recorded its highest quarterly earnings ever in the second quarter of 2003, in large part due to record results in Mortgage operations. Consolidated net income of $834 million was up $403 million from the $431 million earned in the same quarter of 2002.
For the quarter, net income from Financing operations totaled $396 million, up $49 million from the $347 million earned in the prior year quarter. The increase reflects lower credit loss provisions, which more than offset the unfavorable impact of lower net interest margins and continued weakness in lease termination values.
Mortgage operations achieved a record quarter with earnings of $415 million, reflecting exceptionally strong origination volume in the residential sector and continued strong results at the commercial mortgage operations. Earnings were up $357 million compared to the second quarter last year, when results were negatively impacted by considerably higher write-downs of mortgage servicing rights (MSR), net of MSR risk management activities.
Insurance operations generated net income of $23 million in the second quarter of 2003, down $3 million from the same period in 2002. While underwriting income increased, earnings were adversely affected by a write-down of certain investment securities that had not sufficiently recovered in value during the recent strengthening in equity markets.
Financing Operations
GMAC’s Financing operations offer a wide range of financial services and products (directly and indirectly) to retail automotive consumers, automotive dealerships and other commercial businesses. These products and services include the purchase of installment sales contracts and leases, the extension of term loans, dealer floorplan financing (wholesale) and other lines of credit, and the factoring of receivables. Refer to pages 10-17 of the Company’s 2002 Annual Report on Form 10-K for further discussion of the business profile of GMAC’s Financing operations.
13
The following table summarizes the operating results of the Company’s Financing operations for the periods indicated. The amounts presented are before the elimination of balances and transactions with the Company’s other operating segments.
Reflecting higher asset levels and lower loss provisions, net income at GMAC’s Financing operations increased 14% and 16% for the second quarter and first six months of 2003, respectively.
Despite lower market interest rates, total financing revenue increased due to asset growth in both the consumer and commercial loan portfolios. The consumer growth came from GM’s continued use of special rate financing incentives on retail contracts. The commercial portfolio grew due to increased wholesale finance receivables caused by higher dealer inventory levels. Negatively impacting financing revenue was deterioration in the remarketing performance of off-lease vehicles, caused by a softer used vehicle market. Prices in the used vehicle market have been negatively impacted by an excess supply of off-lease vehicles and intense price pressure in the new vehicle market. The gain on disposal of operating leases terminated in the United States (which is reflected as a component of operating lease depreciation) decreased from $416 per vehicle in the first six months of 2002 to $50 per vehicle for the same period in 2003.
Weakness in the automotive sector of the corporate bond market and concerns on the financial outlook of GM has negatively impacted the Company’s borrowing spreads. This rise in borrowing spreads has reduced GMAC’s net interest margins despite the general decrease in market rates. Refer to the Funding and Liquidity section of this MD&A for further discussion.
The provision for credit losses decreased by $184 million and $367 million for the second quarter and six months ended 2003, respectively. The decrease primarily reflects unusually high loss provisions recorded in 2002 in the Company’s non-automotive dealer portion of the commercial portfolio. In contrast, higher loss provisions have been recognized in 2003 on the international consumer portfolio. Refer to the Credit Quality section of this MD&A for further discussion of the credit performance of the Company’s financing portfolio.
Additional items impacting 2003 operating results as compared to 2002 include the expansion of the international full service leasing business into new markets, increasing related revenues (which are reflected in other income) and maintenance costs (which are reflected in noninterest expense). In addition, unfavorable market adjustments on interest rate swaps used to facilitate securitization transactions (which do not receive hedge accounting treatment), reduced other income in 2003. A decrease in interest rates and outstanding balances reduced income on loans made to GM and GMAC affiliates. Finally, higher pension and postretirement allocations from GM increased 2003 compensation expense.
14
Financing VolumeThe following table summarizes GMAC’s new vehicle consumer financing volume, the related share of GM retail sales, and GMAC’s wholesale financing of new vehicles and related share of GM sales to dealers.
GMAC’s penetration of GM volume remained consistent with the historically high levels experienced in 2002, with a continued emphasis on retail contracts. The high penetration levels and the focus on retail contracts is due to GM’s aggressive use of low rate financing incentives to market its vehicles. Wholesale financing volume was consistent with the level of GM’s wholesale sales to dealers, as GMAC continued to be the primary funding source for GM dealer inventories.
Credit QualityCredit quality information on the Company’s consumer automotive retail and commercial receivables portfolios is presented in this section. The following table summarizes the applicable allowance for credit losses as a percentage of total on-balance sheet finance receivables and loans.
15
Consumer
Consumer credit losses as a percentage of receivables increased in 2003 despite stable delinquency trends. The increase in consumer losses in the North American portfolio is primarily caused by an increase in loss severity. Softer prices in the used vehicle market have resulted in an increase in the loss per occurrence GMAC is realizing upon repossession and disposal of an underlying vehicle. The average loss incurred per contract in the United States has increased in the second quarter of 2003 to $8,186 from $7,411 in the comparable period of 2002. The increased losses in the International portfolio are the result of weakened economic conditions in certain countries.
16
Commercial
Credit losses in the commercial portfolio increased in the second quarter as certain loans in the Company’s non-automotive dealer loan portfolio that had previously been reserved were charged-off. There has not been a significant deterioration in credit quality of the commercial portfolio, as evidenced by the consistency in the level of impaired loans relative to the entire portfolio.
17
Mortgage Operations
GMAC’s Mortgage operations involve the origination, purchase, servicing, and securitization of consumer (i.e., residential) and commercial mortgage loans and mortgage related products. Typically, mortgage loans are originated and sold to investors in the secondary market. Refer to pages 17-22 of the Company’s 2002 Annual Report on Form 10-K for further discussion of the business profile of GMAC’s Mortgage operations.
The following table summarizes the operating results of the Mortgage operations for the periods indicated. The amounts presented are before the elimination of balances and transactions with the Company’s other operating segments.
Interest rates, including those on originated 15- and 30- year mortgages, continued to decline during much of the three-month period ended June 30, 2003, sustaining the mortgage refinancing boom that began in 2001. As a result, loan production at the Mortgage Group increased to a record $55.5 billion for the second quarter 2003, 62% higher than the same period in 2002 and 20% higher than the three months ended March 31, 2003. Improved pricing margins enabled by strong demand, coupled with record volume, resulted in significant year-over-year increases in gains on sales of loans for both the second quarter and six months ended June 30, 2003.
Net financing revenue, including provision for credit losses, also increased significantly year-over-year, reflecting continued growth in the balance of mortgage loans held as collateral for secured financings, which increased from $6.3 billion at June 30, 2002 to $24.8 billion at June 30, 2003. Also contributing to the increase were higher average inventories of loans held for sale.
Other income improved for the six months ended June 30, 2003, compared to the same period in 2002, primarily due to higher than usual valuation adjustments on residual interest asset- and mortgage-backed securities in 2002 and increase loan origination fees accompanying increased production volume in 2003. Noninterest expense also grew compared to the same period in 2002, reflecting increased compensation, technology and loan processing costs, all corresponding to business growth.
While positive for loan production volumes, the low interest rate environment and resulting loan refinancing activity continued to adversely impact the value of the Company’s mortgage servicing rights (MSR). Reflecting increased actual and expected loan prepayments, the net MSR balance declined from $2.7 billion at March 31, 2003 to $2.4 billion at June 30, 2003. Amortization and impairment of mortgage servicing rights decreased for the second quarter of 2003 compared to the prior year, reflecting the adverse impact from implementing an updated prepayment model in the comparable period of 2002. For the six month period ended June 30, 2003, this year-over-year decline was more than offset by increased impairment recognized during the first three months of 2003 compared to the same period in 2002.
Results from risk management activities for mortgage servicing rights improved for the six months ended June 30, 2003, compared to the same period in 2002, reflecting the ongoing impact of a modified hedging strategy implemented in the second quarter 2002. Refer to Note 4 to the Consolidated Financial Statements for further discussion.
18
Insurance Operations
GMAC Insurance insures and reinsures automobile service contracts, personal automobile insurance coverages (ranging from preferred to non-standard risks) and selected commercial insurance coverages. Refer to pages 22-24 of the Company’s 2002 Annual Report on Form 10-K for further discussion of the business profile of GMAC’s Insurance operations.
The following table summarizes the operating results of the Insurance operations for the periods indicated. The amounts presented are before the elimination of balances and transactions with the Company’s other operating segments.
Net income from Insurance operations totaled $23 million and $49 million for the second quarter and six-month periods ended June 30, 2003, respectively, compared to $26 million and $62 million for the same periods in 2002. The decreases were attributed mainly to net capital losses incurred during 2003, which included the write down of certain investment securities.
Total revenue at GMAC Insurance and its subsidiaries was $792 million and $1,571 million for the second quarter and six months ended June 30, 2003, respectively, compared to $766 million and $1,433 million for the same periods in 2002. The increases over 2002 were due primarily to a combination of higher rates and policy volume for automotive extended service contract and personal vehicle insurance businesses.
The reductions in other income were attributable principally to net capital losses of $12 million and $53 million for the second quarter and six months ended June 30, 2003, respectively. Included in these capital losses were net losses realized from sales of securities of $13 million for the first six months of 2003 as compared to net gains of $20 million realized for the same period in 2002. Despite recent strengthening in the equity markets, the Company recognized other than temporary impairment in the investment portfolio of $17 million and $41 million for the second quarter and six-months ended June 30, 2003, respectively. Management performed analyses of individual securities and concluded that those for which recovery to cost was not foreseeable were other than temporarily impaired. The carrying values of these securities were adjusted to market value, with the resulting loss recognized in earnings.
Total expenses amounted to $758 million and $1,499 million for the second quarter and six months ended June 30, 2003, respectively, compared to $728 and $1,343 million for the same periods in 2002. The increases in 2003 were primarily attributable to insurance losses and loss adjustment expenses and acquisition expenses. These components of expenses increased commensurately with increases in premiums and service revenue earned.
Critical Accounting Estimates
The Company has identified critical accounting estimates that, as a result of judgments, uncertainties, uniqueness and complexities of the underlying accounting standards and operations involved, could result in material changes to its financial condition, results of operations or cash flows under different conditions or using different assumptions. GMAC’s most critical accounting estimates are:
There have been no significant changes in the methodologies and processes used in developing these estimates from what is described in the Company’s 2002 Annual Report on Form 10-K.
19
Funding and Liquidity
Funding Sources and StrategyGMAC’s liquidity, as well as its ongoing profitability, in large part depends upon its timely access to capital and the costs associated with raising funds in different segments of the capital markets. The Company’s strategy in managing liquidity risk has been to develop diversified funding sources across a global investor base. As an important part of its overall funding and liquidity strategy, the Company maintains substantial credit facilities aggregating $53 billion, which provide “back-up” liquidity and represent additional funding sources, if required. As further discussed in Note 5 to the Consolidated Financial Statements, the Company renewed certain of these facilities in June 2003. The Funding and Liquidity section in the Company’s 2002 Annual Report on Form 10-K provides a further discussion of GMAC’s funding strategy and sources.
The following table summarizes GMAC’s funding sources for the periods indicated.
The Company’s worldwide borrowing costs (including the effects of derivatives) for the second quarter and six months ended June 30, 2003 averaged 3.73% and 3.75%, respectively, as compared to 4.33% and 4.40% for the same periods in 2002. The reduction in borrowing costs is reflective of the overall decrease in market interest rates over the past year. However, the Company is experiencing historically high unsecured borrowing spreads due to volatility in the capital markets, combined with weakness in the automotive sector of the corporate bond markets and concerns regarding the financial outlook of GM related to its overall market position in the automotive industry and its burdensome pension and retiree health care obligations. In response to this challenging environment, the Company’s funding efforts continue to utilize securitization and retail debt programs, in addition to unsecured debt sources. In an effort to further diversify its funding and liquidity sources, in June 2003 the Company sold a portfolio of retail receivables, approximating $2 billion, to a financial institution. In this portfolio loan sale, GMAC did not retain any interest in the underlying receivables, and transferred the credit risk to the purchaser. Management expects to continue to use diverse funding sources to maintain its financial flexibility and expects that access to the capital markets will be sufficient to meet the Company’s funding needs.
Credit RatingsSubstantially all of the Company’s debt has been rated by nationally recognized statistical rating organizations. As of August 8, 2003, all GMAC ratings were within the investment grade category. Concerns over the competitive and financial strength of GM, including how it will fund its pension and retiree health care liabilities, resulted in the Company experiencing a series of negative rating actions during the second quarter of 2003, as summarized in the following table.
20
Off-balance Sheet Activities
The Company uses off-balance sheet entities as part of its operating and funding activities. For further discussion of GMAC’s use of off-balance sheet entities, refer to the Off-balance Sheet Activities section of Management’s Discussion and Analysis in GMAC’s 2002 Annual Report on Form 10-K. As further discussed in Note 1 to the Consolidated Financial Statements and in the Accounting and Reporting Developments section below, amounts represented as off-balance sheet could be impacted by FASB Interpretation No. 46 (FIN 46), Consolidation of Variable Interest Entities. The following table summarizes assets carried in these entities.
Accounting and Reporting Developments
SFAS No. 149 — In April 2003, the FASB issued SFAS No. 149, Amendments of Statement 133 on Derivative Instruments and Hedging Activities. SFAS No. 149 amends and clarifies accounting for derivative instruments, including certain derivative instruments embedded in other contracts, and hedging activities under SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities. In general, the Statement is effective for contracts entered into or modified after June 30, 2003 and for hedging relationships designated after June 30, 2003. The adoption of SFAS No. 149 did not have a material impact on the Company’s financial condition or results of operations.
FASB Interpretation No. 46 — In January 2003, the FASB issued Interpretation No. 46, Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51, Consolidated Financial Statements. FIN 46 addresses consolidation and disclosure by business enterprises of variable interest entities, representing those entities whose total equity investment at risk is not sufficient to permit the entity to finance its activities without additional subordinated financial support from other parties. More specifically, FIN 46 defines variable interest entities as those entities in which the equity investment at risk is not greater than the expected losses of the entity. FIN 46 explains how to identify variable interest entities and how an enterprise assesses its interests in a variable interest entity in
21
order to decide whether to consolidate that entity. FIN 46 requires variable interest entities to be consolidated by the primary beneficiary if the entities do not effectively disperse risks among the parties involved. Variable interest entities that effectively disperse risks will not be consolidated unless a single party holds an interest or combination of interests that effectively recombines risks that were previously dispersed. FIN 46 does not impact the consolidation guidance for qualifying special purpose entities (QSPEs), as described in SFAS No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities.
Central Originating Lease Trust (COLT) — In analyzing FIN 46, it was determined that GMAC might have been deemed to be the primary beneficiary of COLT, a limited purpose business trust, and therefore required to consolidate COLT effective July 1, 2003. Through October 2002, COLT purchased vehicles and related consumer leases from GM franchised dealers through the issuance of secured notes, which were sold to GMAC, and through the issuance of third-party equity. In March 2003, GMAC purchased the third-party equity of COLT, resulting in its consolidation. The underlying COLT lease assets (approximately $4 billion at the time of the purchase of the third-party equity by GMAC) are now reflected as operating lease assets of the Company, replacing the secured notes that were previously reported as commercial finance receivables and loans. The net impact of consolidating COLT was an increase in the Company’s consolidated total assets by $168 million, representing the third-party equity purchased.
Mortgage warehouse funding — GMAC’s Mortgage operations sell commercial and residential mortgage loans through various structured finance arrangements in order to provide funds for the origination and purchase of future loans. These structured finance arrangements include sales to off-balance sheet warehouse funding entities, including GMAC- and bank-sponsored commercial paper conduits. Transfers of assets from GMAC into each facility are accounted for as sales based on the provisions of SFAS No. 140. Certain of these warehouse funding entities may be considered variable interest entities under FIN 46. Assets in these facilities approximated $7.0 billion at June 30, 2003. For certain of these entities, management determined that GMAC does not have the majority of the expected losses or returns and, as such, consolidation is not appropriate under FIN 46. However, in other entities GMAC was deemed to be the primary beneficiary, and the activities of these entities were either terminated or GMAC will consolidate these entities pursuant to FIN 46. The consolidation of certain of these entities was a decision driven in part by the Company’s desire to invest in certain asset classes on the balance sheet. Had management not had any interest in investing in such assets, the Company might have restructured the entities to ensure continued off-balance sheet treatment. Based on June 30, 2003 asset levels, the expected impact of consolidating the Company’s interests in these variable interest entities is an increase in assets of $3.6 billion, with a corresponding increase in liabilities.
Collateralized debt obligations (CDOs) — GMAC’s Mortgage operations sponsor, purchase subordinate and equity interests in, and serve as collateral manager for CDOs. Under CDO transactions a trust is established that purchases a portfolio of securities and issues debt and equity certificates, representing interests in the portfolio of assets. In addition to receiving variable compensation for managing the portfolio, the Company sometimes retains equity investments in the CDOs. The majority of the CDOs sponsored by the Company were initially structured or have been restructured (with approval by the senior beneficial interest holders) as qualifying special purpose entities, therefore exempt from FIN 46. For the Company’s remaining CDOs, the results of the primary beneficiary analysis support the conclusion that consolidation is not appropriate under FIN 46 because GMAC does not have the majority of the expected losses or returns.
Guaranteed tax credit funds — The Company’s Mortgage operations sell investments in tax credit funds to unaffiliated investors and guarantee the timely payment of a specified return to those investors. Returns to investors are generated from each fund’s share of low income housing tax credits and tax losses derived from their investments in entities that develop, own, and operate affordable housing properties throughout the United States. Based on an analysis of expected losses and returns, GMAC is the primary beneficiary and will therefore consolidate these tax funds in its financial statements, pursuant to FIN 46. This outcome results from the Company’s guarantee to equity holders a minimum return on their investment and the Company’s participation in any gains on the underlying real estate value, in excess of the guaranteed returns. The aggregate amount of investments in tax credit funds formed prior to February 2003 approximated $528 million at June 30, 2003. Excluded from this total are assets of $203 million related to a tax credit fund created in June 2003, which the Company consolidated upon creation, in accordance with FIN 46.
22
Consolidated Operating Results
The following section provides a discussion of GMAC’s consolidated results of operations as displayed in the Consolidated Statement of Income. The individual business segment sections of this MD&A provide a further discussion of the operating results.
RevenuesTotal financing revenue increased by $508 million and $771 million, respectively, in the second quarter and six months ended June 30, 2003. The primary reason for the increase was growth in the consumer automotive portfolio from GM-sponsored special rate financing programs and the increased use of secured financing structures in the Mortgage operations. Higher levels of mortgage loans held for sale also favorably impacted income. Total financing revenue was adversely affected by a reduction in net operating lease revenue attributable to a continued decrease in the Company’s average operating lease portfolio, combined with lower proceeds on vehicles from terminated leases.
Commensurate with the increase in debt to fund the growth in assets, interest and discount expense increased by $219 million and $342 million for the second quarter and six months ended June 30, 2003, respectively. The provision for credit losses decreased $182 million and $311 million in the second quarter and six months ended June 30, 2002, respectively. Lower loss provisions (primarily in the commercial financing portfolio) more than offset the increase in the provision caused by the growth in assets. A combination of volume and rate increases in the Company’s Insurance operations resulted in an increase in insurance premiums and service revenue earned in 2003, as compared to 2002.
Mortgage banking income increased significantly in 2003 (by $485 million and $797 million, respectively, for the second quarter and six months ended June 30, 2003). Increased loan production and higher pricing margins generated an increase in gains from the sale of mortgage loans. While prepayment activity negatively impacted mortgage servicing rights, this was more than offset by improved results from risk management activities on the mortgage servicing rights asset.
Investment income was primarily affected by an increase in recognized losses in the Insurance operation’s investment portfolio. Despite recent strengthening in the equity markets in 2003, GMAC recognized both net capital losses on securities sold as well as impairment charges on securities in the portfolio.
ExpensesCompensation and benefits expense increased by $103 million and $238 million, respectively, for the second quarter and six months ended June 30, 2003. The primary reason for the increase in compensation and benefits expense was higher employee costs at the Company’s Mortgage operations, consistent with the increased production levels. The increase in insurance losses and loss adjustment expenses was largely due to higher written premium and service revenue volumes.
Other operating expense increased $159 million and $314 million, respectively, for the second quarter and six months ended June 30, 2003. Contributing to the increase were higher expenses associated with the international automotive full service leasing business, as this business continues to expand geographically. In addition, other operating expenses were negatively impacted by operating costs associated with the increased loan production in the Company’s Mortgage operations. The Company’s effective tax rate was 37.3% and 37.9% for the second quarter and six months ended June 30, 2003, which was consistent with the comparable periods in 2002.
Forward Looking Statements
The foregoing Management’s Discussion and Analysis of Financial Condition and Results of Operations contains various forward-looking statements within the meaning of applicable federal securities laws that are based upon GMAC’s current expectations and assumptions concerning future events, which are subject to a number of risks and uncertainties that could cause actual results to differ materially from those anticipated.
23
Controls and ProceduresGeneral Motors Acceptance Corporation
The Company maintains disclosure controls and procedures designed to ensure that information required to be disclosed in reports filed under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the specified time periods. As of the end of the period covered by this report, GMAC’s President and GMAC’s Chief Financial Officer evaluated, with the participation of GMAC’s management, the effectiveness of the Company’s disclosure controls and procedures. Based on the evaluation, which disclosed no significant deficiencies or material weaknesses, GMAC’s President and GMAC’s Chief Financial Officer concluded that the Company’s disclosure controls and procedures are effective. There were no changes in the Company’s internal control over financial reporting that occurred during the Company’s most recent fiscal quarter that may have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
24
Other InformationGeneral Motors Acceptance Corporation
Legal Proceedings
The Company did not become a party to any material pending legal proceedings during the six-month period ended June 30, 2003, or during the period from June 30, 2003 to the filing date of this report.
Exhibits and Reports on Form 8-K
25
SignaturesGeneral Motors Acceptance Corporation
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized, this 8th day of August, 2003.
General Motors Acceptance Corporation(Registrant)
/s/ WILLIAM F. MUIRWilliam F. MuirExecutive Vice President andChief Financial Officer
/s/ LINDA K. ZUKAUCKASLinda K. ZukauckasController and Principal Accounting Officer
26
Index of ExhibitsGeneral Motors Acceptance Corporation
27
28