Ally Financial - 10-Q quarterly report FY

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549-1004

FORM 10-Q

Commission file number: 1-3754

GENERAL MOTORS ACCEPTANCE CORPORATION
(Exact name of registrant as specified in its charter)

200 Renaissance Center
P.O. Box 200 Detroit, Michigan
48265-2000
(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, 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.

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INDEX
General Motors Acceptance Corporation

*     Item is omitted pursuant to the Reduced Disclosure Format, as set forth on the cover page of this filing.

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Consolidated Statement of Income (unaudited)
General Motors Acceptance Corporation

The Notes to the Consolidated Financial Statements are an integral part of these statements.

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Consolidated Balance Sheet (unaudited)
General Motors Acceptance Corporation

The Notes to the Consolidated Financial Statements are an integral part of these statements.

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Consolidated Statement of Changes in Stockholder’s Equity (unaudited)
General Motors Acceptance Corporation

The Notes to the Consolidated Financial Statements are an integral part of these statements.

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Consolidated Statement of Cash Flows (unaudited)
General Motors Acceptance Corporation

The Notes to the Consolidated Financial Statements are an integral part of these statements.

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Notes to Consolidated Financial Statements (unaudited)
General Motors Acceptance Corporation

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 March 31, 2003 and for the three-month periods ended March 31, 2003 and 2002 are unaudited, but in management’s opinion include all adjustments, consisting of only 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 the GMAC 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

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 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, to decide whether to consolidate that entity. FIN 46 requires variable interest entities to be consolidated by their primary beneficiaries if the entities do not effectively disperse risks among 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 is effective for all enterprises with interests in variable interest entities created after January 31, 2003. For variable interest entities created before February 1, 2003, the consolidation provisions of the Interpretation shall be applied no later than the beginning of the first interim or annual reporting period beginning after June 15, 2003. The Company has certain interests in variable interest entities and is in the process of analyzing the provisions of FIN 46 to determine the resulting impact to the Company’s financial position, results of operations and cash flows.

In analyzing these entities, it was determined that GMAC may be deemed to be the primary beneficiary of Central Originating Lease Trust (COLT) and therefore required to consolidate COLT effective July 1, 2003, pursuant to FIN 46. COLT is a limited purpose business trust that purchased vehicles and related consumer leases from GM franchised dealers through October 2002. COLT funded these acquisitions through secured notes, which were sold to GMAC, and through the issuance of equity. In addition to acting as the originating agent and servicer for COLT leases, GMAC reimbursed COLT’s third-party insurance provider for any losses on the underlying leases (subject to a limit). In March 2003, GMAC purchased the third-party equity of COLT. GMAC now owns all of the outstanding equity and COLT is a fully consolidated entity of GMAC. The impact of this consolidation is that 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 the amount of the third-party equity purchased ($168 million).

The Company continues to analyze its interests in certain other entities to determine if GMAC is the primary beneficiary and if consolidation is appropriate under FIN 46. In the course of performing this analysis, management is considering revising GMAC’s involvement in the entities, which could have an impact on the consolidation analysis under FIN 46. Management has identified the following entities where it is reasonably possible (as currently structured) that GMAC will consolidate or disclose information in the Consolidated Financial Statements when FIN 46 becomes effective.

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. Certain of these structured finance arrangements include sales to off-balance sheet warehouse funding special purpose entities (SPEs), including GMAC- and bank-sponsored commercial paper conduits. Transfers of assets into each facility are accounted for as sales based on the provisions of SFAS No. 140. Certain of these warehouse funding SPEs may be considered variable interest entities under FIN 46. As the Company retains some of the risks and rewards associated with the underlying assets, it is possible that the Company could be deemed to be the primary beneficiary and thereby required to consolidate the SPEs. Total assets in these facilities approximated

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Notes to Consolidated Financial Statements (unaudited)
General Motors Acceptance Corporation

$12.6 billion at March 31, 2003. The exposure to loss related to these facilities was $3.8 billion as of March 31, 2003, representing the Company’s retained interests in these facilities.

Collateralized debt obligations (CDOs) — GMAC’s Mortgage operations sponsors, purchases subordinate and equity interests in, and serves as collateral manager for CDOs. Equity investments in CDOs have been purchased from SPEs that are not QSPEs and may be considered variable interest entities under FIN 46. Total assets held in CDOs, which are not QSPEs, approximated $844 million at March 31, 2003. The Company’s exposure to loss represents the retained interests in these CDOs ($77 million at March 31, 2003).

Guaranteed tax credit funds — The Company’s Mortgage operations have sold investments in tax credit funds to unaffiliated investors and have guaranteed the timely payment of a specified return to those investors. The investors’ return is 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. As of March 31, 2003, the aggregate amount of such investments approximated $528 million.

The following table presents the components of mortgage banking income.

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Notes to Consolidated Financial Statements (unaudited)
General Motors Acceptance Corporation

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.

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Notes to Consolidated Financial Statements (unaudited)
General Motors Acceptance Corporation

For a further description of mortgage servicing rights and the related hedge strategy, see Notes 1 and 10 to the 2002 Annual Report on Form 10-K. 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.

Debt is presented below and is segregated between domestic and foreign based on the location of the office recording the transaction.

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Notes to Consolidated Financial Statements (unaudited)
General Motors Acceptance Corporation

Liquidity facilities

Liquidity 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.

The syndicated multi-currency global facility includes a $7.4 billion five year facility (expires June 2006) and a $1.5 billion 364-day facility (expires June 2003) with a one-year term-out option. Additionally, a leverage covenant restricts the ratio of consolidated debt to total stockholder’s equity to no greater than 11:1, under certain conditions. This 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 Ratings Services (S&P) or Baa1 or less by Moody’s. These conditions are currently in effect, and the Company is in compliance with the covenant.

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 more detailed description of GMAC’s use of and accounting for derivative financial instruments.

The following table presents information on the income impacts of derivatives designated as fair value hedges.

GMAC recognized an immaterial amount of hedge ineffectiveness on cash flow hedges for the three months ended March 31, 2003 and 2002.

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Notes to Consolidated Financial Statements (unaudited)
General Motors Acceptance Corporation

Financial results for GMAC’s operating segments are summarized below.

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Management’s Discussion and Analysis
General Motors Acceptance Corporation

GMAC is a leading global financial services firm with over $200 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 operations. 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 segments is summarized as follows.

GMAC recorded its highest quarterly earnings ever in the first quarter of 2003, in large part due to record results at the Mortgage operations. Consolidated net income of $699 million was up 59% from the $439 million earned in the same quarter of 2002.

For the quarter, net income from Financing operations totaled $302 million, up $47 million from the $255 million earned in the prior year. The increase reflects a combination of higher asset levels and lower credit loss provisions, which more than offset the unfavorable impact of wider borrowing spreads and the continued weakness in lease residuals.

GMAC’s Mortgage operations earned a quarterly record $371 million in the first quarter of 2003, up 151% from the $148 million earned in the same period of 2002. The higher earnings reflect exceptional production volumes across all three of the Company’s Mortgage divisions.

Insurance operations generated net income of $26 million in the first quarter of 2003, down $10 million from the same period in 2002. The overall reduction in earnings reflects a write down of certain investment securities due to the continued weaknesses in equity markets, partially offset by improved underwriting results.

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, extension of term loans, dealer floorplan financing (wholesale) and other lines of credit, and 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.

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Management’s Discussion and Analysis
General Motors Acceptance Corporation

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.

A combination of increased asset levels and lower credit loss provisions (particularly as it relates to the commercial loan portfolio) contributed to the 18% increase in first quarter net income for GMAC’s Financing operations. These favorable income impacts were mitigated by the negative effect of wider borrowing spreads caused by weakness in the corporate capital markets and credit concerns specific to GM.

Total financing revenue for the first quarter decreased 1% as compared to 2002. Consumer revenue increased due to asset growth resulting from the continued use of special rate financing programs by GM. Because the commercial portfolio is predominately floating rate based, lower market interest rates reduced commercial financing revenue, despite higher wholesale finance receivables. Average wholesale finance receivable outstandings increased as a result of higher GMAC penetration and increased GM dealer stocks. The Company’s first quarter net operating lease revenue declined as GMAC’s average operating lease portfolio declined, consistent with GM’s marketing focus on special rate financing for retail installment sale contracts (retail contracts). A continued deterioration in off-lease vehicle remarketing results also lowered net operating lease revenue. Weakness in the used vehicle market resulted in an average net loss per operating lease terminated in the United States of $63 in the first quarter, as compared to the average net gain of $426 realized in the first quarter of 2002.

Notwithstanding an increase in debt to fund higher asset levels, interest and discount expense decreased compared to the prior year due to the general market decline in interest rates. However, the decrease in market rates was mitigated by a sharp increase in GMAC’s borrowing spreads caused by weakness in the corporate capital markets and credit concerns specific to GM (refer to the Funding and Liquidity section of this MD&A for further discussion).

Despite a challenging economic environment, the provision for credit losses decreased by 37%. This decline was due to higher provisions in the first quarter of 2002 on the Company’s non-automotive dealer portion of the commercial loan portfolio. In addition, the 2003 first quarter loss provision for the consumer portfolio declined relative to 2002 due to a slower rate of asset growth in 2003 as compared to 2002. Refer to the Credit Quality section of this MD&A for a further discussion of the credit performance of the Company’s financing portfolio.

The most notable items impacting other income were a reduction of securitization related income and an increase in full service leasing revenues. Beginning in the fourth quarter of 2002, the Company began executing securitization transactions that are accounted for as secured financings. As secured financings, the underlying receivables (and related revenue) continue to be carried on the Company’s consolidated financial statements (along with the associated debt), reducing the amount of revenue recognized in other income as compared to an off-balance sheet securitization, which typically results in up-front gains. GMAC’s continued expansion of the international full service leasing business has also led to an increase in non-financing revenues.

Total noninterest expense for the first quarter increased by 13% from the prior year. Compensation expense increased due to increased pension and postretirement allocations from GM. Noninterest expense was also impacted by higher vehicle maintenance costs in the growing international full service leasing business. In addition, a higher volume of consumer lease terminations in the United States resulted in an increase in costs related to vehicle disposal.

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Management’s Discussion and Analysis
General Motors Acceptance Corporation

Financing Volume

The following table summarizes GMAC’s new vehicle consumer financing volume, the Company’s share of GM retail sales, GMAC’s wholesale financing of new vehicles and the Company’s share of GM sales to dealers.

GMAC’s first quarter consumer financing volume on new vehicles decreased as compared to the prior year consistent with the decrease in GM retail sales. However, the Company’s penetration share of GM vehicle sales remained relatively steady as compared to the historically high levels experienced in 2002. The strong penetration levels are the result of GM’s continued aggressive use of financing incentive programs to market its vehicles. The shift in financing mix between retail contracts to leases is primarily the result of unusually high retail contract volume in the first quarter of 2002 as a result of GM’s concentrated use of retail financing incentives, combined with the timing of GM-sponsored lease pull-ahead programs that allow consumers to terminate their existing lease prior to scheduled maturity while in turn buying or leasing a new vehicle.

Wholesale financing volume increased in 2003 primarily because of an increase in GMAC’s North American penetration rate and an increase in GM wholesale deliveries for the period. GM’s wholesale sales to dealers increased even though retail sales declined resulting in a higher level of dealer inventories in the first quarter of 2003 as compared to 2002.

Credit Quality

The following tables summarize pertinent credit quality information in the Company’s consumer automotive retail and commercial receivables portfolios.

Consumer

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Management’s Discussion and Analysis
General Motors Acceptance Corporation

Consumer credit losses as a percentage of receivables increased in 2003 despite stable delinquency trends. The percentage increase in consumer losses is primarily caused by an increase in loss severity. A weaker used vehicle market has resulted in an increase in the loss per occurrence as GMAC is realizing less upon repossession and disposal of an underlying vehicle.

Commercial