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 March 31, 2005, 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.
* Item is omitted pursuant to the Reduced Disclosure Format, as set forth on the cover page of this filing.
Condensed Consolidated Statement of Income (unaudited)
The Notes to the Condensed Consolidated Financial Statements are an integral part of these statements.
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Condensed Consolidated Balance Sheet (unaudited)
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Condensed Consolidated Statement of Changes in Stockholder’s Equity (unaudited)
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Condensed Consolidated Statement of Cash Flows (unaudited)
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Notes to Condensed Consolidated Financial Statements (unaudited)
General Motors Acceptance Corporation (GMAC or the Company) is a wholly-owned subsidiary of General Motors Corporation (General Motors or GM). The condensed consolidated financial statements include the accounts of the Company and its majority-owned subsidiaries and those variable interest entities (VIEs) where GMAC is the primary beneficiary, after eliminating all significant intercompany balances and transactions.
The condensed consolidated financial statements as of March 31, 2005 and for the three months ended March 31, 2005 and 2004 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 most significant reclassification relates to depreciation expense on operating lease assets, which was previously netted against operating lease revenue and now is reflected as a separate component of noninterest expense.
The interim period consolidated financial statements, including the related notes, are condensed and in accordance with interim generally accepted accounting principles in the United States of America (GAAP). These interim period condensed 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, 2004, filed with the United States Securities and Exchange Commission (SEC).
As disclosed in GMAC’s 2004 Annual Report on Form 10-K, GMAC’s quarterly information for the three months ended March 31, 2004 has been restated from previously reported results to adjust for certain amounts that were recognized in the incorrect 2004 quarterly period. These adjustments did not impact GMAC’s 2004 annual results, financial condition as of December 31, 2004 or cash flows for the year ended December 31, 2004, nor were these adjustments individually material to GMAC’s quarterly consolidated financial statements. Most of the adjustments relate to items detected and recorded in the fourth quarter of 2004 at GMAC’s residential mortgage businesses (GMAC Residential and GMAC-RFC) that related to earlier 2004 quarters. More specifically, certain of the adjustments were identified and corrected through internal control remediation that occurred in connection with GMAC’s Corporate Sarbanes-Oxley Section 404 program. The most significant of these adjustments involved the valuation of certain interests in securitized assets, accounting for deferred income taxes related to certain secured financing transactions and the income statement effects of consolidating certain mortgage transfers previously recognized as sales. The effects of the restatements are as follows:
Recently Issued Accounting StandardsStatement of Position 03-3 — In December 2003, the American Institute of Certified Public Accountants issued Statement of Position 03-3, Accounting for Certain Loans or Debt Securities Acquired in a Transfer (SOP 03-3), that addresses accounting for differences between contractual cash flows and cash flows expected to be collected from an investor’s initial investment in loans or debt securities acquired in a transfer if those differences are attributable, at least in part, to credit quality. SOP 03-3 does not apply to loans originated by the entity. SOP 03-3 limits the accretable yield to the excess of the investor’s estimate of undiscounted expected principal, interest and other cash flows (expected at acquisition to be collected) over the investor’s initial investment in the loan and it prohibits carrying over or creating a valuation allowance for the excess of contractual cash flows over cash flows expected to be
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collected in the initial accounting of a loan acquired in a transfer. SOP 03-3 and the required disclosures were effective for loans acquired in fiscal years beginning after December 15, 2004. Adoption of SOP 03-3 did not have a material impact on the Company’s financial condition or results of operations.
The following table presents the components of mortgage banking income.
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The composition of finance receivables and loans outstanding was as follows:
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The following table presents an analysis of the activity in the allowance for credit losses on finance receivables and loans.
The following table summarizes mortgage servicing rights activity and related amortization.
The following table summarizes the change in the valuation allowance for mortgage servicing rights.
For a description of mortgage servicing rights and the related hedging strategy, refer to Notes 1 and 10 to GMAC’s 2004 Annual Report on Form 10-K.
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The presentation of debt in the following table is classified between domestic and foreign based on the location of the office recording the transaction.
The following summarizes assets that are restricted as collateral for the payment of the related debt obligation primarily arising from securitization transactions accounted for as secured borrowings and repurchase agreements.
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Liquidity FacilitiesLiquidity facilities represent additional funding sources, if required. The financial institutions providing the uncommitted facilities are not legally obligated to fund such amounts. The following table summarizes the liquidity facilities maintained by the Company.
The syndicated multi-currency global credit facility includes a $4.35 billion five-year facility (expires June 2008) and a $4.55 billion 364-day facility (expires June 2005). 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 11.0:1, 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 ratio covenant was 8.2:1 at March 31, 2005, and the Company was, therefore, in compliance with this covenant. The leverage covenant calculation excludes from debt those securitization transactions accounted for as on-balance sheet secured financings. The Company will seek to renew the 364-day facility prior to its expiration in June.
GMAC enters into interest rate and foreign currency futures, forwards, options and swaps in connection with its market risk management activities. In accordance with SFAS 133, as amended, GMAC records derivative financial instruments on the balance sheet as assets or liabilities 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 2004 Annual Report on Form 10-K for a more detailed description of GMAC’s use of and accounting for derivative financial instruments.
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The following table summarizes the pre-tax earnings effect for each type of accounting hedge classification, segregated by the asset or liability being hedged.
In addition, net gains on fair value hedges excluded from assessment of effectiveness totaled $39 million and $82 million for the first quarter of 2005 and 2004, respectively.
As a wholly-owned subsidiary, GMAC enters into various operating and financing arrangements with its parent GM. A master intercompany agreement governs the nature of these transactions to ensure that they are done on an arm’s-length basis, in accordance with commercially reasonable standards. In addition, GM and GMAC agree that GMAC’s total stockholder’s equity as reflected in its consolidated financial statements at the end of any quarter will be maintained at a commercially reasonable level appropriate to support the amount, quality and mix of GMAC’s assets.
Balance SheetA summary of the balance sheet effect of transactions with GM and affiliated companies is as follows:
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Notes to Consolidated Financial Statements (unaudited)
Retail and lease contracts acquired by GMAC that included rate and residual subvention from GM, payable directly or indirectly to GM dealers, as a percent of total new retail and lease contracts acquired were as follows:
Income StatementA summary of the income statement effect of transactions with GM and affiliated companies is as follows:
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10 Segment Information
Financial results for GMAC’s reporting segments are summarized below.
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Management’s Discussion and Analysis
General Motors Acceptance Corporation (GMAC or the Company) is a leading global financial services firm with over $315 billion of assets and operations in 41 countries. Founded in 1919 as a wholly-owned subsidiary of General Motors Corporation, GMAC was established to provide GM dealers with the automotive financing necessary 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 lines of business — Financing, Mortgage and Insurance operations. Refer to GMAC’s 2004 Annual Report on Form 10-K for a more complete description of the Company’s business activities, along with the products and services offered and the market competition.
Net income for GMAC’s businesses is summarized as follows:
GMAC earned $728 million in the first quarter of 2005, representing a moderate decline of $36 million from the record first quarter earnings of $764 million earned in 2004. These results were achieved in a difficult funding environment that included higher market interest rates and the continuation of negative credit rating agency actions. Management continues to believe that GMAC will meet its annual earnings of $2.5 billion in 2005. Along with strong earnings, GMAC continued to provide global support for the marketing of GM vehicles, as well as provided a significant source of cash flow to GM through the payment of a $500 million dividend in the first quarter.
Net income from Financing operations totaled $248 million in the first quarter of 2005 as compared with $442 million earned in the same period of the prior year. The decrease reflects significantly lower net interest margins, somewhat mitigated by improved credit experience and stronger used car prices.
Mortgage operations earned $385 million in the first quarter of 2005, an increase of 67% from the $231 million earned in the first quarter of the prior year, reflecting increases for all three of GMAC’s mortgage entities — GMAC Residential, GMAC-RFC and GMAC Commercial Mortgage. Increases in interest rates favorably impacted mortgage servicing results and fee-based revenue. Although mortgage industry volumes in the first quarter of 2005 were below those of the first quarter of 2004, GMAC’s Mortgage operations continued to increase market share. As a result, mortgage origination volumes were higher for both the residential and commercial mortgage operations as compared to the first quarter of 2004, resulting in an increase in gains on sales of loans.
GMAC’s Insurance operations generated net income of $95 million in the first quarter of 2005, up $4 million from the $91 million earned in the first quarter of 2004. Strong net underwriting revenue and investment income contributed to the results.
The quarterly results presented in this MD&A for the three months ended March 31, 2004 have been restated to adjust for certain amounts that were recognized in the incorrect quarterly period during 2004. Refer to Note 1 to the Condensed Consolidated Financial Statements for further details.
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Management's Discussion and Analysis
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. The Company’s Finance operations is comprised of two separate reporting segments — North American Automotive Finance Operations and International Automotive Finance Operations and one operating segment — Commercial Finance Group. The products and services offered by GMAC’s Financing operations include the purchase of retail installment sales contracts and leases, extension of term loans, dealer floor plan financing and other lines of credit, fleet leasing and factoring of receivables. Refer to pages 10-20 of the Company’s 2004 Annual Report on Form 10-K for further discussion of the business profile of GMAC’s Financing operations.
Results of OperationsThe 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 reporting segments.
As a result of tighter net interest margins due to the impact of increased funding costs, net income from GMAC’s Financing operations decreased 44% for the three months ended March 31, 2005 as compared to the same period in 2004. Favorable credit experience, continued strong remarketing performance on off-lease vehicles and the impact of favorable income tax items helped to mitigate the effect of lower net interest margins.
Consumer financing revenue was comparable with the previous year, consistent with relatively stable asset levels. Commercial revenue increased over 20% from the first three months of 2004 as a result of higher asset levels and the benefit of higher market interest rates in the first quarter of 2005 as compared to the first quarter of 2004. Operating lease revenue remained consistent with the first three months of 2004, despite higher asset levels in the first quarter of 2005, as compared to the same period in the prior year, primarily as a result of a reduction in payments from GM for leases terminated under GM sponsored “pull-ahead” programs from the first quarter of 2004. As part of these programs, GM waives the customer’s remaining payment obligation and compensates GMAC for the foregone revenue from the waived payments. In the first quarter of 2005, GM did not use the pull-ahead programs as a marketing tool to the extent they were used in the first quarter of 2004.
The increase in interest and discount expense of $483 million is commensurate with the higher funding costs experienced by GMAC as a result of an overall increase in market interest rates, and also reflect the wider credit spreads experienced over the past few years due to the Company’s lower credit rating. The increased cost of borrowings is reflected in the Company’s current funding portfolio and thereby continues to negatively impact GMAC’s net interest margins. Refer to the Funding and Liquidity section of this MD&A for further discussion.
The provision for credit losses decreased by 35% for the three months ended March 31, 2005 as compared to the same period in 2004. The decrease in the provision resulted primarily from a decline in consumer asset levels from December 2004 as a result of GMAC’s use of automotive portfolio sales transactions (whole loan sales) as a funding source and improved credit experience in the portfolio during the first quarter of 2005. Refer to the Credit Quality section of this MD&A for a further discussion.
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Operating lease disposal gain for the three months ended March 31, 2005 was favorably impacted as a result of continued improvement in the remarketing results of off-lease vehicles, particularly in the United States. Reduced supply of used vehicles and lower initial residual values in the lease assets contributed to an increase in the average gain per vehicle from $461 for the first quarter of 2004 to an average gain per vehicle of $1,179 for the first quarter of 2005. The number of lease terminations in the first quarter of 2005 was 71,926 as compared to 117,839 in the first quarter of 2004.
In addition, GMAC’s Financing operations benefited from a reduction in remarketing expenses as a result of the reduced volume of off-lease vehicles. Repossession expenses also declined commensurate with a reduction in the number of repossessed vehicles in the U.S. portfolio, as compared to the first quarter of 2004. However, increased advertising expenses related to joint marketing programs with General Motors negatively impacted results for the first quarter of 2005, as compared to the same period in the prior year.
Total income tax expense declined by $155 million in the first quarter of 2005 as compared to the same period in 2004. The decrease is primarily the result of a reduction in taxable income, quarter over quarter, as well as the impact of favorable tax items, related to changes in reserve requirements and lower state and local tax accrual rates, primarily in the Company’s North American Automotive Finance Operations.
Financing Volume
The following table summarizes GMAC’s new vehicle consumer financing volume, the Company’s share of GM retail sales, and GMAC’s wholesale financing of new vehicles and related share of GM sales to dealers in markets where GMAC operates.
GMAC’s consumer financing volume and penetration levels are significantly impacted by the nature, timing and extent of GM’s use of rate, residual and other financing incentives for marketing purposes on consumer retail contracts and leases. Late in 2004, GM reduced its use of special rate financing programs and introduced marketing programs that provided cash incentives to customers that use GMAC to finance their purchase of a new GM vehicle. While the percentage of retail and lease contracts acquired by GMAC that included rate or residual subvention declined for North America in the first quarter of 2005, to 70%, as compared to 81% in the first quarter of 2004, penetration levels increased quarter over quarter, as GMAC’s North American Automotive Finance Operations benefited from these cash incentives. In addition, consistent with the last half of 2004, GM continued to shift a small portion of marketing incentives back to consumer leases from retail contracts. In contrast, in GMAC’s International Automotive Finance Operations, consumer penetration levels declined in the first quarter of 2005 as compared to the first quarter of 2004. This decline was principally a result of a reduction in GM incentives on new vehicles in Brazil during the first quarter of 2005, as well as the inclusion of GM vehicle sales in China, where GMAC has only recently commenced operations. GMAC’s wholesale financing continues to be the primary funding source for GM dealer inventories, as 2005 penetration levels remained relatively consistent with 2004 levels, and continue to reflect traditionally strong levels.
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Consumer Credit
The following tables summarize pertinent loss experience in the consumer managed and on-balance sheet automotive retail contract portfolio. In general, the credit quality of the off-balance sheet portfolio is representative of GMAC’s overall managed consumer automotive retail contract portfolio. However, the process of creating a pool of retail finance receivables for securitization or sale typically excludes accounts that are greater than 30 days delinquent at such time. In addition, the process involves selecting from a pool of receivables that are currently outstanding and, therefore, represent “seasoned” accounts. A seasoned portfolio that excludes delinquent accounts historically results in better credit performance in the managed portfolio than in the on-balance sheet portfolio of retail finance receivables. In addition, the current off-balance sheet transactions are comprised mainly of subvented rate retail finance receivables, which generally attract higher quality customers (or otherwise cash purchasers) than customers typically associated with non-subvented receivables.
The managed portfolio includes retail receivables held on-balance sheet for investment and receivables securitized and sold that the Company continues to service, but excludes securitized and sold finance receivables that GMAC continues to service but has no other continuing involvement (i.e., in which GMAC retains an interest or risk of loss in the underlying receivables). GMAC believes that the disclosure of the credit experience of the managed portfolio presents a more complete presentation of GMAC’s credit exposure because the managed basis reflects not only on-balance sheet receivables, but also securitized assets as to which GMAC retains a risk of loss in the underlying assets (typically in the form of a subordinated retained interest). Consistent with the presentation in the Condensed Consolidated Balance Sheet, retail contracts presented in the table represent the principal balance of the finance receivable discounted for any unearned rate support received from GM.
The following table summarizes pertinent delinquency experience in the consumer automotive retail contract portfolio.
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In addition to the preceding loss and delinquency data, the following summarizes repossession information for the United States traditional consumer automotive retail contract portfolio (which represents approximately 72% of the Company’s on-balance sheet consumer automotive retail contract portfolio):
The following table summarizes activity related to the consumer allowance for credit losses for GMAC’s Financing operations.
Credit fundamentals in GMAC’s consumer automotive portfolio remain strong, with improvements in delinquency trends, repossession activity and consumer credit loss rates in the first quarter of 2005, as compared to the same period in 2004. In addition, loss severity improved with a decline in the average loss incurred per new vehicle repossessed in the United States traditional portfolio from $7,931 in the first quarter of 2004 to $7,637 in the first quarter of 2005. The decline in loss severity is attributable to the strengthening in the used vehicle market resulting from a lower supply of used vehicles. The increase in the number of bankruptcies in the U.S. portfolio from March 31, 2004 reflects increased activity as a result of recently passed legislation, which will make it more difficult for U.S. consumers to file for bankruptcy protection in the future. Delinquency trends in the international portfolio have shown a significant improvement since the first quarter of 2004 as a result of a change in the mix of new and used retail contracts in the portfolio, as well as an improvement in credit performance in certain international markets. Consistent with observed improvements in loss performance, the allowance for credit losses as a percentage of the total on-balance sheet consumer portfolio decreased from March 2004.
Commercial Credit
GMAC’s credit risk on the commercial portfolio is markedly different than that of its consumer portfolio. Whereas the consumer portfolio represents a homogenous pool of retail contracts and leases that exhibit fairly predictable and stable loss patterns, the commercial portfolio exposures are less predictable. In general, the credit risk of the commercial portfolio is tied to overall economic conditions in the countries in which the Company operates.
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At March 31, 2005, the only commercial receivables that had been securitized represent wholesale lines of credit extended to automotive dealerships, which historically experience low losses. Since only wholesale accounts have historically been securitized, the amount of losses on GMAC’s managed portfolio is the same as the on-balance sheet portfolio. As a result, only the on-balance sheet commercial portfolio credit experience is presented in the following table:
The following table summarizes the activity related to the commercial allowance for credit losses for GMAC’s Financing operations:
Net charge-offs in the commercial portfolio remain at traditionally low levels in the first quarter of 2005. Charge-offs in the commercial portfolio declined as compared to the first quarter of 2004 as a result of a continued decline in the amount of charge-offs at the Company’s Commercial Finance Group (included in other commercial financing in the preceding table). Impaired loans in the commercial loan portfolio have increased in comparison to 2004 year-end levels as a result of an increase in the amounts outstanding in the wholesale lines of credit for certain dealer accounts, rather than a deterioration of credit quality in the overall wholesale portfolio. The decrease in the allowance for commercial credit losses is consistent with the lower level of charge-offs, partially offset by an increase in the amount of loans specifically identified as impaired.
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GMAC’s Mortgage operations are comprised of three separate operating and reporting segments: GMAC Residential Holding Corp. (GMAC Residential), GMAC-RFC Holding Corp., (GMAC-RFC) and GMAC Commercial Holding Corp. (GMAC Commercial Mortgage). The principal activities of the three segments involve the origination, purchase, servicing, sale and securitization of consumer (i.e., residential) and commercial mortgage loans and mortgage related products (e.g., real estate services). Typically, mortgage loans are originated and sold to investors in the secondary market, including securitization sales that are legally sold but are accounted for as secured financings. Refer to pages 20-27 of the Company’s 2004 Annual Report on Form 10-K for further discussion of the business profile of GMAC’s Mortgage operations.
Results of Operations
The following table summarizes the operating results of the Company’s Mortgage operations within each of the three Mortgage operations segments for the periods indicated. The amounts presented are before the elimination of balances and transactions with the Company’s other operating segments.
Despite increases in market interest rates and a lower amount of overall mortgage industry volume, loan production at GMAC’s Mortgage operations increased by approximately 17% from the first quarter of 2004, to $41.8 billion. As a result, all three of GMAC’s Mortgage operating segments posted increases in net income from one year ago. On a combined basis, the first quarter 2005 results for GMAC’s residential based mortgage companies (GMAC Residential and GMAC-RFC) were up $124 million, an increase of 63% from the first quarter of 2004, as higher gains on sales, increased market share, increased fee-based revenue and improved mortgage servicing results substantially mitigated the impact of lower net interest margins. GMAC Commercial Mortgage’s earnings were up $30 million, almost double from the first quarter of 2004, reflecting higher gains on sales, commensurate with the increase in loan production, and an increase in fee-based revenue.
Net financing revenue was negatively impacted by increases in interest rates and the resulting increase in interest and discount expense, primarily at GMAC Residential and GMAC-RFC. Partially offsetting the increase in interest and discount expense was a favorable change in the provision for credit losses at GMAC-RFC. The decrease in the provision for credit losses is primarily the result of the larger provision for credit losses in the first quarter of 2004 due to a significant increase in domestic nonperforming loans in that quarter relative to the first quarter of 2005. The increase in the provision for credit losses at GMAC Commercial Mortgage is reflective of unfavorable credit trends related to specific loans within the commercial portfolio. Refer to the Credit Risk discussion within this Mortgage operations section of the MD&A for further discussion.
Mortgage servicing income benefited from the overall increase in market interest rates as lower prepayments resulted in higher servicing fees on residential mortgages and lower amortization and impairment of residential mortgage servicing rights (MSRs). The
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carrying value of the Company’s MSRs increased to $4.2 billion at March 31, 2005 from $3.3 billion at March 31, 2004, with the related amortization and impairment of MSRs for the first quarter of 2005 at $165 million, compared to $339 million in the first quarter of 2004.
On a combined basis, gains on sales of loans increased by approximately 80% in the first quarter of 2005 from the same period in 2004, reflecting increases for each of GMAC Residential, GMAC-RFC and GMAC Commercial Mortgage. The increase in gains on sales of loans is commensurate with higher off-balance sheet securitization volumes, as well as an increase in mortgage origination volumes at each of the three mortgage companies from the first quarter of 2004. In addition, the sale of certain distressed assets by GMAC-RFC, resulted in a $66 million pre-tax gain in the first quarter of 2005 and is reflected in the gains on sale of loans.
Other income increased at GMAC Residential related to interest earned on investments in U.S. Treasury securities during the first quarter of 2005, which are utilized as economic hedges for the Company’s MSR portfolio. At March 31, 2005 and 2004, GMAC Residential had investment securities totaling $4.9 billion and $0.4 billion, respectively. In addition, GMAC Commercial Mortgage experienced an increase in fees related to tax syndication transactions and an increase in gains on certain equity investments. Noninterest expense for GMAC’s Mortgage operations increased in the first quarter of 2005 as compared to the first quarter of 2004 as a result of an increase in supplemental compensation expense, commensurate with the quarter over quarter increase in profitability.
The following table summarizes the nonperforming assets in the Company’s on-balance sheet held for sale and held for investment residential mortgage loan portfolios for each of the periods presented. Nonperforming assets are nonaccrual loans, foreclosed assets and restructured loans. Mortgage loans are generally placed on nonaccrual status when they are 60 days or more past due, or when the timely collection of the principal of the loan, in whole or in part, is doubtful. Management’s classification of a loan as nonaccrual does not necessarily indicate that the principal of the loan is uncollectible in whole or in part.
The following table summarizes the activity related to the consumer allowance for credit losses for GMAC’s Mortgage operations.
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The increase in nonperforming assets and net charge-offs in the first quarter of 2005 as compared to the same period in 2004 is primarily the result of growth in the mortgage loans held for investment portfolio and the credit seasoning of these loans that were originated in prior years. The Company’s use of securitization transactions accounted for as secured financings has resulted in asset growth and, over time, results in an increase in the allowance as these assets mature. Starting in 2001, the Company began to structure many of its securitization transactions as secured financings as opposed to its historical use of off-balance sheet transactions. The portions of the portfolio most impacted by this change are the non-conforming and non-prime loan portfolios. As a result of these factors, the allowance for credit losses as a percentage of the total on-balance sheet held for investment residential mortgage loan portfolio also increased from March 2004.
The primary commercial credit exposures relate to the commercial mortgage operations, as well as the warehouse and construction lending activities of the residential mortgage operations. At GMAC Commercial Mortgage, credit risk primarily arises from direct and indirect relationships with borrowers who may default and potentially cause the Company to incur a loss if it is unable to collect amounts due through loss mitigation strategies. The portion of the allowance for estimated losses on commercial mortgage loans not specifically identified for impairment is based on periodic reviews and analysis of the total portfolio and considers past loan experience, the current credit composition of the total portfolio, historical credit migration, property type diversification, default and loss severity statistics and other relevant factors.
The amount of impaired loans in GMAC Commercial Mortgage’s loan portfolios amounted to $227 million, $208 million and $268 million at March 31, 2005, December 31, 2004 and March 31, 2004, respectively. The reduction in impaired loans from March 31, 2004 to March 31, 2005 is the result of the resolution of certain assets during the year. Actual net charge-offs in GMAC Commercial Mortgage’s on-balance sheet held for investment commercial loan portfolio remained low, at $3 million for the three months ended March 31, 2005.
The Company’s residential mortgage operations have commercial credit exposure through warehouse and construction lending related activities. The following table summarizes the nonperforming assets and net charge-offs in GMAC Residential and GMAC-RFC on-balance sheet held for investment lending receivables portfolios for each of the periods presented. Nonperforming lending receivables are nonaccrual loans, foreclosed assets and restructured loans. Lending receivables are generally placed on nonaccrual status when they are 90 days or more past due or when timely collection of the principal of the loan, in whole or in part, is doubtful. Management’s classification of a receivable as nonaccrual does not necessarily indicate that the principal amount of the loan is uncollectible in whole or in part.
Nonperforming assets related to warehouse and construction lending activities for the first three months of 2005 were impacted by the resolution of a small number of nonperforming construction loans during 2004. The result was a decrease in the balance of nonperforming loans as of March 31, 2005, as compared to March 31, 2004, with balances relatively stable since December 31, 2004.
The allowance for credit losses for the on-balance sheet commercial mortgage loan and mortgage lending receivables portfolios was $163 million, $149 million and $132 million at March 31, 2005, December 31, 2004 and March 31, 2004, respectively. The increase since December 31, 2004 primarily reflects increased reserve levels at GMAC Commercial Mortgage due to unfavorable credit trends related to specific loans within the commercial portfolio, consistent with the increase in impaired loans since December 31, 2004.
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GMAC Insurance insures automobile service contracts and underwrites personal automobile insurance coverages (ranging from preferred to non-standard risks) and selected commercial insurance and reinsurance coverages. Refer to pages 27-30 of the Company’s 2004 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 $95 million for the first quarter of 2005, $4 million higher than 2004 first quarter net income of $91 million. The increase reflects higher earned premiums and an increase in investment income largely mitigated by an increase in acquisition and underwriting expenses commensurate with higher volumes and revenues. Insurance premiums, service and other written revenue amounted to $1,118 million in the first quarter of 2005, as compared to $1,057 million in the first quarter of 2004.
Total revenue at GMAC Insurance for the first quarter of 2005 totaled $1,038 million, as compared to $977 million for the same period in 2004, an increase of 6%. The improvement in revenue was attributable to increased volumes and earning rates in the international operations, extended warranty contracts and personal automobile policies. Investment income increased 13% due to a larger portfolio and higher interest and dividend yields. The market value of GMAC Insurance’s investment portfolio was $7,322 million and $6,531 million at March 31, 2005 and 2004, respectively.
Total expenses amounted to $895 million for the first quarter of 2005, an increase of 7%, as compared to $838 million in total expenses for the same period in 2004. The increase is substantially driven by higher acquisition and underwriting expenses (including commissions), which have increased commensurate with higher volumes and service contract revenues. Insurance losses and loss adjustment expenses, while essentially level from year to year, have decreased as a percentage of earned premium and service revenue earned.
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 2004 Annual Report on Form 10-K.
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Funding Sources and Strategy
GMAC’s liquidity as well as its ongoing profitability, in large part, is dependent upon its timely access to capital and the costs associated with raising funds in different segments of the capital markets. In developing its funding strategy, management considers market conditions, prevailing interest rates, liquidity needs and the desired maturity profile of its liabilities. The Company’s strategy in managing liquidity risk has been to develop diversified funding sources across a global investor base and management of debt maturities over a longer period of time, thereby maintaining sufficient cash balances. As part of its cash management strategy, from time to time the Company repurchases previously issued debt, but does so in a manner that does not compromise overall liquidity.
An important part of its overall funding and liquidity strategy is the Company’s access to substantial bank lines of credit. These bank lines of credit, which totaled $57.1 billion at March 31, 2005, provide “back-up” liquidity and represent additional funding sources, if required. Refer to Note 7 to the Condensed Consolidated Financial Statements for details of these liquidity lines (including asset-backed commercial paper conduits). In addition, the Company has $61.3 billion in funding commitments (with $31.9 billion utilized) through a variety of committed facilities with third parties (including third-party asset-backed commercial paper conduits) that GMAC’s Financing and Mortgage operations may use as additional secured funding sources. Included in these funding commitments are forward flow agreements with third parties, whereby the Company has agreed to sell a certain amount of automotive finance retail contracts over a designated period of time and the third parties have, in turn, committed to purchase a maximum amount of automotive finance retail contracts through a designated period of time.
The following table summarizes GMAC’s outstanding debt by funding source for the periods indicated:
During 2004 and the first quarter of 2005, the Company continued to experience volatile unsecured credit spreads caused by negative credit rating agency actions related to the financial outlook of GM, its overall market position in the automotive industry and its burdensome health care obligations. The Company’s worldwide borrowing costs (including the effects of derivatives) for the three months ended March 31, 2005 averaged 4.30% compared to 3.62% for the same period in 2004. The increase in borrowing costs for the first quarter of 2005 as compared to the same period in 2004 is reflective of an increase in market interest rates since the first quarter of 2004, as well as higher unsecured credit spreads, reflecting the Company’s overall lower credit ratings (refer to the Credit Ratings section of this MD&A
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for further information). This challenging environment has caused the Company to continue to reach beyond traditional unsecured debt sources and focus on expanding and developing a diversified funding base. In addition to the public markets for secured and unsecured debt, GMAC continues to access targeted retail products, including certificates of deposits through its banking activities, as well as expanding the sources of asset-backed funding to include bank conduits, whole loan sales, non-traditional securitizations, and various mortgage funding initiatives. Most recently, in May 2005, GMAC announced the restructuring of the residential mortgage operations through the capitalization of Residential Capital Corporation (ResCap). ResCap is seeking to achieve and maintain a stand-alone credit rating in order to provide additional operational and financial flexibility and to enhance the liquidity of the residential mortgage operations. Refer to the Funding and Liquidity section of the MD&A in the Company’s 2004 Annual Report on Form 10-K for further discussion of GMAC’s funding sources and strategy. Management expects that based on the Company’s current financial position, its funding strategy and diversified funding sources will continue to provide sufficient access to the capital markets to meet the Company’s ongoing funding needs.
Credit Ratings
Substantially all of the Company’s debt has been rated by nationally recognized statistical rating organizations. Concerns over the competitive and financial strength of GM, including how it will fund its burdensome health care liabilities, have resulted in the Company experiencing a series of negative rating actions, which commenced late in 2001. Most recently, on May 5, 2005, Standard & Poor’s downgraded the senior debt of GMAC to non-investment grade (to BB, from BBB-) while also downgrading the commercial paper rating to B-1, from A-3, with the other rating agencies continuing to maintain an investment grade rating on GMAC’s senior debt. A further reduction of GMAC’s credit ratings such that GMAC would be rated non-investment grade by more than one rating agency, would increase borrowing costs and further constrain GMAC’s access to unsecured debt markets, including capital markets for retail debt. In addition, a further reduction of GMAC’s credit ratings could increase the possibility of additional terms and conditions contained in any new or replacement financing arrangements. However, over the past few years, GMAC has increased the Company’s focus on expanding and developing diversified funding sources, including committed bank conduit facilities and asset-backed securities that are not directly affected by ratings on unsecured debt. Accordingly, the possibility of a further reduction of GMAC’s credit ratings such that GMAC would be rated non-investment grade by more than one rating agency is not expected to have a material effect on GMAC’s access to adequate capital to meet the Company’s funding needs in the short and medium term.
Notwithstanding the foregoing, management believes that the current ratings situation and outlook increases the level of risk as to the long term ability of the Company to sustain the current level of asset originations. Management continuously assesses this matter and is seeking to mitigate the increased risk by exploring whether actions could be taken that would provide a basis for rating agencies to evaluate GMAC’s financial performance in order to provide GMAC with ratings independent of those assigned to GM. Currently, only Moody’s and DBRS assign a different credit rating to GMAC than they do to GM. There can be no assurance that any actions by the Company would be taken or that such actions, if taken, would be successful in achieving a “split” rating from other rating agencies.
The following summarizes GMAC’s current ratings, outlook and the date of last rating or outlook change by the respective nationally recognized rating agencies.
Off-balance Sheet Activities
Off-balance Sheet Arrangements
The Company uses off-balance sheet entities as an integral 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 Arrangements section in the Company’s 2004 Annual Report on Form 10-K.
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The following table summarizes assets carried off-balance sheet in these entities.
Accounting and Reporting Developments
Statement of Position 03-3 — In December 2003, the American Institute of Certified Public Accountants issued Statement of Position 03-3, Accounting for Certain Loans or Debt Securities Acquired in a Transfer (SOP 03-3), that addresses accounting for differences between contractual cash flows and cash flows expected to be collected from an investor’s initial investment in loans or debt securities acquired in a transfer if those differences are attributable, at least in part, to credit quality. SOP 03-3 does not apply to loans originated by the entity. SOP 03-3 limits the accretable yield to the excess of the investor’s estimate of undiscounted expected principal, interest and other cash flows (expected at acquisition to be collected) over the investor’s initial investment in the loan and it prohibits “carrying over” or creating a valuation allowance for the excess of contractual cash flows over cash flows expected to be collected in the initial accounting of a loan acquired in a transfer. SOP 03-3 and the required disclosures were effective for loans acquired in fiscal years beginning after December 15, 2004. Adoption of SOP 03-3 did not have a material impact on the Company’s financial condition or results of operations.
Consolidated Operating Results
The following section provides a discussion of GMAC’s consolidated results of operations as displayed in the Condensed Consolidated Statement of Income. The individual business segment sections of this MD&A provide a further discussion of the operating results.
Revenues
Total revenue increased by $254 million in the three months ended March 31, 2005, compared to the three months ended March 31, 2004 primarily from an increase in commercial interest income of $83 million at GMAC’s Financing operations as a result of higher earning rates corresponding to the rise in market interest rates during that time.
Interest and discount expense increased $778 million or 35% for the three months ended March 31, 2005, compared with the same period of 2004. This increase results from the negative impact of the Company’s lower credit rating and was also negatively impacted by higher funding costs due to an increase in overall market interest rates. The provision for credit losses decreased from $484 million for the three months ended March 31, 2004 to $329 million for the first quarter of 2005. This decrease resulted primarily from lower consumer asset levels at GMAC’s Financing operations attributable to the use of automotive portfolio sales transactions (whole loan sales) combined with favorable credit provisions in the residential mortgage loan portfolio during the first quarter of 2005. Insurance premiums and service revenue increased by $48 million for the three months ended March 31, 2005 as compared with the same period in 2004, due to volume growth and higher earning rates in the international operations, extended warranty contracts and personal automobile policies.
Mortgage banking income increased by $233 million for the first quarter of 2005, compared with the same period in the prior year, resulting from higher gains on sales of loans, increased service fee revenue and favorable amortization and impairment of mortgage servicing rights. The increase in gains from sales of loans resulted from higher off-balance sheet securitization volumes during the first quarter of 2005 compared with the prior year, as well as the sale of certain distressed assets during the first quarter of 2005. An
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increase in overall market interest rates had a favorable impact on mortgage servicing fees and amortization and impairment of mortgage servicing rights as the number of loan prepayments declined compared to the prior year.
Investment and other income increased by $132 million as a result of interest income from investments in U.S. Treasury securities at the Company’s residential mortgage operations. Additionally, increases in fees related to tax syndications and gains on certain investments in commercial mortgage operations also contributed to the increased income.
Expenses
Noninterest expense increased by $153 million or 4% in the three months ended March 31, 2005. Depreciation expense on operating lease assets, which increased as a result of higher average operating lease asset levels as compared to the first quarter of 2004, represented $67 million of the increase in noninterest expense. Compensation and benefits expense increased $82 million during the first quarter of 2005 compared with the same period in the prior year. The increase reflects higher supplemental compensation at the Mortgage operations resulting from increased profitability. Insurance losses and loss adjustment expenses was relatively consistent with the expense recognized during the comparable three months of 2004. Other operating expenses was also relatively consistent with the prior year as increases in acquisition and underwriting expenses at the Company’s Insurance operations were offset by higher gains on the disposal of operating lease assets within the Financing operations.
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.
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Controls and Procedures
The Company maintains disclosure controls and procedures (as defined in Rule 13a-15e) 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 Chairman (Principal Executive Officer) and GMAC’s Executive Vice President and Chief Financial Officer (Principal Financial Officer) evaluated, with the participation of GMAC’s management, the effectiveness of the Company’s disclosure controls and procedures.
Based on management’s evaluation, which disclosed no material weaknesses, GMAC’s Principal Executive and Principal Financial Officer each concluded that the Company’s disclosure controls and procedures are effective. There were no changes in the Company’s internal controls over financial reporting (as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934) 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.
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Other Information
Legal Proceedings
GMAC is subject to potential liability under laws and government regulations and various claims and legal actions that are pending or may be asserted against it. The Company did not become party to any material pending legal proceedings during the three month period ended March 31, 2005, or during the period from March 31, 2005 to the filing date of this report.
GMAC's credit ratings were downgraded on May 5, 2005 by Standard & Poor's. The Company's senior debt was downgraded to BB from BBB- and the commercial paper rating to B-1 from A-3, with an outlook of negative.
Exhibits
Exhibits — The exhibits listed on the accompanying Index of Exhibits are filed or incorporated by reference as a part of this report. Such Index is incorporated herein by reference.
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Signatures
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 10th day of May, 2005.
General Motors Acceptance Corporation(Registrant)
/s/ Sanjiv Khattri
/s/ Linda K. Zukauckas
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Index of Exhibits
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