UNITED STATESSECURITIES AND EXCHANGE COMMISSIONWashington, 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 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 September 30, 2004, 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)General Motors Acceptance Corporation
The Notes to the Condensed Consolidated Financial Statements are an integral part of these statements.
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Condensed Consolidated Balance Sheet (unaudited)General Motors Acceptance Corporation
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Condensed Consolidated Statement of Changes in Stockholder’s Equity (unaudited)General Motors Acceptance Corporation
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Condensed Consolidated Statement of Cash Flows (unaudited)General Motors Acceptance Corporation
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Notes to Condensed 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 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 September 30, 2004 and for the third quarter and nine month periods ended September 30, 2004 and 2003 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 accounting principles generally accepted 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, 2003, filed with the United States Securities and Exchange Commission (SEC) on March 9, 2004.
Effective September 30, 2004, as a result of reconsidering particular transaction provisions, the accounting treatment for the transfer of certain mortgage assets that historically had been recognized as sales was deemed inappropriate and therefore, was changed prospectively to reflect the transactions as secured borrowings under SFAS 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities (SFAS 140). The impact resulted in a $6.8 billion increase in assets ($3.3 billion in loans held for sale and $3.5 billion in commercial finance receivables) with a corresponding increase in secured debt. Historically, these assets (and related obligations) were included in the Company’s off-balance sheet disclosures as mortgage warehouse and other mortgage funding facilities. This change did not have a material impact on the Company’s Condensed Consolidated Statements of Income or Cash Flows for all periods presented.
Recently Issued Accounting Standards
FASB Interpretation No. 46R — In December 2003, the Financial Accounting Standards Board (FASB) released a revision to Interpretation No. 46,Consolidation of Variable Interest Entities (FIN 46R) to clarify some of the provisions of the original interpretation (FIN 46) and to exempt certain entities from its requirements. FIN 46R provides special effective date provisions to enterprises that fully or partially applied FIN 46 prior to the issuance of the revised interpretation. In particular, entities that had already adopted FIN 46 were not required to adopt FIN 46R until the quarterly reporting period ended March 31, 2004. Since GMAC adopted FIN 46 effective July 1, 2003, the Company adopted FIN 46R for the period ended March 31, 2004. Among other matters, FIN 46R changed the primary beneficiary analysis of variable interest entities as it relates to fees paid to decision makers. However, these changes did not impact the conclusions of the Company’s primary beneficiary analysis previously reached under FIN 46 and, as such, the adoption of FIN 46R did not impact the Company’s financial condition or results of operations.
SAB 105 — In March 2004, the SEC issued Staff Accounting Bulletin No. 105,Application of Accounting Principles to Loan Commitments (SAB 105), that summarizes the views of the staff regarding the application of GAAP to loan commitments accounted for as derivative instruments. SAB 105 is effective for commitments to originate or purchase loans to be held for sale and for commitments to purchase loans to be held for investment (also referred to as interest rate lock commitments, or IRLCs) that are entered into after March 31, 2004. SAB 105 provides specific guidance on the measurement of loan commitments accounted for at fair value, specifying that fair value measurement exclude any expected future cash flows related to the customer relationship or loan servicing.
Prior to April 1, 2004, upon entering into the commitment, GMAC recognized loan commitments at fair value based on expected future gain on sale, including an estimate of the future mortgage servicing rights (MSRs). For certain products, the future gain on sale (exclusive of MSR value) was known based on transparent pricing in an active secondary market and was included in current period earnings. Any additional value associated with the loan commitments (including the future value of the MSR) was deferred and recognized in earnings at the time of the sale (or securitization) of the loan. As a result of SAB 105, effective April 1, 2004, GMAC no longer recognizes the value of the commitment at the time of the rate lock. However, subsequent changes in value from the time of the lock are recognized as assets or liabilities, with a corresponding adjustment to current period earnings, but exclude any future MSR value. Upon sale of the loan, the initial estimated value associated with the rate lock, along with the MSR, are recognized as part of the gain on sale (or securitization). The impact of adopting the provisions of SAB 105 resulted in a deferral in the timing of recognizing the value of certain loan commitments, but did not have a material impact on the Company’s financial condition or results of operations.
EITF 03-1 — In March 2004, the Emerging Issues Task Force released EITF Issue No. 03-1, The Meaning of Other Than Temporary Impairment and Its Application to Certain Investments (EITF 03-1). EITF 03-1 provides guidance for determining when an investment is other than temporarily impaired and applies to investments classified as either available for sale or held to maturity under SFAS 115, Accounting for Certain Investments in Debt and Equity Securities(including individual securities and investments in mutual funds), and investments accounted for under the cost method. In addition, EITF 03-1 contains disclosure requirements for impairments that have not been recognized as other than temporary. In October 2004, the FASB voted to delay the effective date of the recognition and measurement provisions related to determining other than temporary impairment on available for sale securities. The effective dates for
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the disclosure requirements vary depending on the type of investment being considered, with the first effective date for fiscal years ending after December 15, 2003. Management is monitoring the ongoing discussions by the FASB related to this issue in order to assess the potential impact of this guidance on the financial statements of the Company.
The following table presents the components of mortgage banking income
Details of other income were as follows:
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The composition of finance receivables and loans 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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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 the 2003 Annual Report on Form 10-K.
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Debt is presented below and is segregated 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 certain debt obligations primarily arising from securitization transactions accounted for as secured borrowings, repurchase agreements and other collateralized arrangements.
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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 an additional 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 covenant ratio was 8.0:1 at September 30, 2004, and the Company was, therefore, in compliance with this covenant. The leverage covenant calculation excludes from debt those securitization transactions accounted for as secured borrowings.
GMAC enters into interest rate and foreign currency futures, forwards, options and swaps in connection with its market risk management activities. Derivative financial instruments are used to manage interest rate risk relating to specific groups of assets and liabilities, including investment securities, loans held for sale, mortgage servicing rights, debt and deposits as well as off-balance sheet securitizations. In addition, foreign exchange contracts are used to hedge non-U.S. dollar denominated debt and foreign exchange transactions.
GMAC’s primary objective for utilizing derivative financial instruments is to manage market risk volatility associated with interest rate and foreign currency risks related to the assets and liabilities of the automotive financing and mortgage operations. Managing this volatility enables the Company to price its finance and mortgage offerings at competitive rates and to minimize the impact of market risk on earnings of the Company. These strategies are applied on a decentralized basis by the respective automotive financing and mortgage operations, consistent with the level at which market risk is managed, but are subject to various limits and controls at both the local unit and consolidated level. One of the key goals of the Company’s strategy is to modify the asset and liability and interest rate mix, including the assets and liabilities associated with securitization transactions that may be recorded in off-balance sheet special purpose entities. In addition, the Company uses derivative financial instruments to mitigate the risk of changes in the fair values of loans held for sale and mortgage servicing rights. Derivative financial instruments are also utilized to manage the foreign currency exposure related to foreign currency denominated debt. The following summarizes GMAC’s derivative activity based on the accounting hedge designation:
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Fair Value Hedges
GMAC’s fair value hedges primarily include hedges of fixed rate debt, mortgage servicing rights and loans held for sale:
Cash Flow Hedges
GMAC enters into derivative financial instrument contracts to hedge exposure to variability in cash flows related to floating rate and foreign currency financial instruments. Interest rate swaps are used to modify exposure to variability in expected future cash flows attributable to variable rate debt. Currency swaps and forwards are used to hedge foreign exchange exposure on foreign currency denominated debt by converting the funding currency to the same currency of the assets being financed. Similar to the Company’s fair value hedges, the swaps are generally concurrent with the debt issuance, with the terms of the swap matching the terms of the underlying debt. GMAC recognized an immaterial amount of hedge ineffectiveness on cash flow hedges related to floating rate debt for the nine months ended September 30, 2004 and 2003.
The Company uses derivative financial instruments to hedge its exposure to variability in expected cash flows associated with the future issuance of bonds payable related to securitizations of mortgage loans held for investment. The primary risk associated with these transactions is the variability on the issuance price of the debt securities. The Company’s primary strategy to protect against this risk is selling loans or mortgage-backed securities forward, using mandatory and optional forward commitments. Upon issuance of the debt securities, the hedging relationship terminates and the changes in fair value of the hedging instrument are reclassified out of other comprehensive income and into earnings over the term of the debt securities, as an adjustment to yield.
Economic Hedges not Designated as Accounting Hedges
GMAC utilizes certain derivative financial instruments to manage interest rate, price and foreign exchange risks, which do not qualify or are not designated as hedges under SFAS 133. As these derivatives are not designated as accounting hedges, changes in the fair value of the derivative instruments are recognized in earnings each period. Similar to the fair value hedging activities described above, the Company utilizes certain derivatives that do not qualify as accounting hedges under SFAS 133, to economically hedge the value of mortgage servicing rights and mortgage loans.
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In addition, the following describes other uses of derivatives that do not qualify for hedge accounting:
The following table summarizes the pre-tax earnings effect for each type of accounting hedge classification, segregated by the asset or liability hedged.
In addition, net gains (losses) on fair value hedges excluded from assessment of effectiveness totaled $23 million and $(6) million for the third quarter of 2004 and 2003, respectively, and $155 million and $84 million for the nine months ended September 30, 2004 and 2003, respectively.
Balance Sheet
A summary of the balance sheet effect of transactions with GM and affiliated companies is as follows:
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In January 2004, GMAC assumed management and financial control of GM’s Brazilian financing operation (Banco GM, or BGM), while GM maintained legal ownership. In addition to the ongoing management of the operation, GMAC receives the financial benefits and risks of ownership of BGM. As a result of entering into this arrangement, effective January 1, 2004, GMAC began consolidating BGM, which previously had been consolidated by GM. The impact of the consolidation was a $129 million increase in capital, which represents the net assets of the Brazilian operations on December 31, 2003.
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 Statement
A summary of the effect of transactions with GM and affiliated companies on GMAC’s statement of income is as follows:
The following describes the variable interest entities that GMAC has consolidated or in which it has a significant variable interest.
Mortgage warehouse funding — GMAC’s Mortgage operations transfer 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 transfers to warehouse funding entities, including GMAC- and bank-sponsored commercial paper conduits. Transfers of assets from GMAC into each facility are accounted for as either sales (off-balance sheet) or secured borrowings (on-balance sheet) based on the provisions of SFAS 140 however, in either case, creditors of these facilities have no legal recourse to the general credit of GMAC. Some of these warehouse funding entities represent variable interest entities under FIN 46R. For one particular mortgage warehouse entity, management determined that GMAC does not have the majority of the expected losses or returns and, as such, consolidation is not appropriate under FIN 46R. The assets in this entity totaled $863 million at September 30, 2004, of which $343 million represents GMAC’s maximum exposure to loss. The maximum exposure would only occur in the unlikely event that there was a complete loss on the underlying assets of the entities. In addition to this entity, management has determined that for certain mortgage warehouse funding facilities, GMAC is the primary beneficiary and,
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as such, consolidates the entities in accordance with FIN 46R. The assets in these entities totaled $3.2 billion at September 30, 2004, the majority of which are included in loans held for sale and finance receivables and loans, net of unearned income, in the Company’s Consolidated Balance Sheet. The beneficial interest holders of these variable interest entities do not have recourse to the general credit of GMAC.
Interests in real estate partnerships — The Company’s Mortgage operations syndicate investments in real estate partnerships to unaffiliated investors in the form of limited partner ownership interests (typically 99.99% of the total interests). These syndicated real estate partnerships, in turn, acquire limited partner ownership interests in various operating partnerships that develop, own, and operate affordable housing properties throughout the United States. Returns to investors in the partnerships syndicated by the Company are derived from flow-through low-income housing tax credits and tax losses generated by the underlying operating partnership entities. The Company does have loss exposure based on its limited partnership interest and to the investors in the guaranteed syndicated real estate partnerships to which the Company has guaranteed a rate of return. The loss exposure represents the potential under-delivery of income tax benefits by the syndicated real estate partnerships to the investors. In certain syndicated real estate partnerships, the Company has guaranteed a specified rate of return to the investors. In the event of a shortfall in the delivery of tax benefits to the investors, the Company is required to provide funding to the syndicated real estate partnerships. Syndicated real estate partnerships that contain a guarantee (i.e., guaranteed syndicated real estate partnerships) are reflected in the Company’s financial statements under the financing method, in accordance with SFAS 66, Accounting for Sales of Real Estate. Under the financing method, the assets and liabilities of the guaranteed syndicated real estate partnerships are reflected on GMAC’s balance sheet. More specifically, cash and cash equivalents and equity method investments (in the underlying operating partnership entities) of the guaranteed syndicated real estate partnerships are included in assets in the Company’s Consolidated Balance Sheet. Liabilities of the guaranteed syndicated real estate partnerships consist almost entirely of a financing liability (initially equal to the amount of equity contributed by each investor), payable to each tax credit fund investor. The financing liability to the investors is extinguished over the life of the guaranteed syndicated real estate partnerships, as annual tax benefits guaranteed to each investor are delivered.
In addition to reflecting the assets and liabilities of the guaranteed syndicated real estate partnerships, the Company has variable interests in the underlying operating partnerships (primarily in the form of limited partnership interests). The results of the Company’s variable interest analysis indicated that GMAC is not the primary beneficiary of these partnerships and, as a result, is not required to consolidate these entities under FIN 46R. Assets held by the Company in the underlying partnerships approximated $4.7 billion at September 30, 2004. GMAC’s exposure to loss at such time was $983 million, representing the financing liability reflected in GMAC’s financial statements, or the amount payable to investors in the event of liquidation of the partnerships. The Company’s exposure to loss increases as unaffiliated investors place additional guaranteed commitments with the Company, and decreases as tax benefits are delivered to unaffiliated investors. Considering such committed amounts, the Company’s exposure to loss in future periods is not expected to exceed $1.5 billion.
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, and are therefore exempt from FIN 46R. GMAC receives an asset management fee for purposes of surveillance of existing collateral performance. In the event that an asset is credit impaired, a call option is triggered whereby GMAC, as collateral manager, may buy the asset out of the pool and sell it to a third-party. The call is triggered only by events that are outside of GMAC’s control, such as the downgrade by a rating agency of an asset in the pool or in the event more than a specified percentage of mortgage loans underlying a security are greater than 60 days delinquent (or have been liquidated). In the event the conditions under which the Company can exercise the call option are met, the Company recognizes these assets. In accordance with these provisions, GMAC did not recognize any assets as of September 30, 2004 or December 31, 2003.
For the majority of the Company’s remaining CDOs, the results of the primary beneficiary analysis support the conclusion that consolidation is not appropriate under FIN 46R because GMAC does not have the majority of the expected losses or returns. The assets in these CDOs totaled $2.5 billion at September 30, 2004, of which GMAC’s maximum exposure to loss is $52 million, representing GMAC’s retained interests in these entities. The maximum exposure to loss would occur only in the unlikely event that there was a complete loss on the underlying assets of the entities. In addition, management has determined that for a particular CDO entity, GMAC is the primary beneficiary and, as such, consolidates the entity in accordance with FIN46R. The assets in this entity totaled $300 million at September 30, 2004, the majority of which are included in investment securities in the Company’s Consolidated Balance Sheet. The beneficial interest holders of this variable interest entity do not have recourse to the general credit of GMAC.
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Construction Lending —The Company uses a special purpose entity to finance construction lending receivables. The special purpose entity purchases and holds the receivables and funds the majority of the purchases through financing obtained from third-party asset-backed commercial paper conduits. GMAC is the primary beneficiary and, as such, consolidates the entity in accordance with FIN 46R. The assets in this entity totaled $1.1 billion at September 30, 2004, which are primarily included in finance receivables and loans, net of unearned income, in the Company’s Consolidated Balance Sheet. The beneficial interest holders of this variable interest entity do not have recourse to the general credit of GMAC.
Automotive finance receivables — In certain securitization transactions, GMAC transfers consumer finance receivables and wholesale lines of credit into bank-sponsored multi-seller commercial paper conduits. These conduits provide a funding source to GMAC (as well as other transferors into the conduit) as they fund the purchase of the receivables through the issuance of commercial paper. Total assets outstanding in these bank-sponsored conduits approximated $13.9 billion as of September 30, 2004. While GMAC has a variable interest in these conduits, the Company is not considered to be the primary beneficiary, as GMAC does not retain the majority of the expected losses or returns. GMAC’s maximum exposure to loss as a result of its involvement with these non-consolidated variable interest entities is $171 million and would be incurred only in the event of a complete loss on the assets that GMAC transferred.
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Financial results for GMAC’s reporting segments are summarized below.
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Management’s Discussion and AnalysisGeneral Motors Acceptance Corporation
GMAC is a leading global financial services firm with over $304 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 Annual Report on Form 10-K for the year ended December 31, 2003 for a more complete description of the Company’s business, along with the products and services offered and the market competition.
Net income for GMAC’s businesses is summarized as follows:
Reflecting strong performance from GMAC’s diversified businesses, GMAC earned $656 million in the third quarter of 2004, representing an increase of $26 million from the $630 million earned in the same quarter of 2003.
Net income from financing operations totaled $259 million in the third quarter of 2004, compared to $320 million earned in the same period in 2003. Improved credit experience and favorable vehicle remarketing results were more than offset by lower net margins on stable asset levels.
Mortgage operations earned $302 million in the third quarter of 2004, an increase of $49 million from the same period in 2003. Increases in interest rates, while negatively impacting loan production and securitization volumes, have favorably impacted net servicing income.
GMAC Insurance net income of $95 million for the third quarter was a $38 million increase from the prior year. Operational strength across the business unit contributed to improved net underwriting results, while investment income remained stable, as compared to the prior year.
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 floor plan financing and other lines of credit, fleet leasing, and factoring of receivables. Refer to pages 10-17 of the Company’s 2003 Annual Report on Form 10-K for further discussion of the business profile of GMAC’s Financing operations.
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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 lines of business.
GMAC’s Financing operations’ net income for the nine months ended September 30, 2004 exceeded prior year results by 13% as lower credit loss provisions and improved remarketing performance on off-lease vehicles more than offset lower net interest margins. In addition to those factors, third quarter results were negatively impacted by increased marketing expenses as GMAC’s Financing operations’ net income declined by $61 million for the third quarter of 2004 as compared to the same period in 2003.
Consumer financing revenue and operating lease revenue were comparable with the previous year, consistent with stable asset levels. Commercial assets remained above prior year levels, as dealers experienced higher inventory levels in comparison to 2003. These increased inventory levels along with higher earning rates, resulting from an increase in market interest rates during the third quarter of 2004, contributed to the increase in commercial revenue.
Interest and discount expense increased as a result of higher average borrowing costs primarily due to general increases in market interest rates in 2004. Additionally, the wider credit spreads experienced over the past few years are reflected in the Company’s current portfolio borrowing costs and thereby continue 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 million and $264 million for the third quarter and nine months ended September 30, 2004, respectively, as compared to the same periods in 2003. The decrease in the provision resulted primarily from slower growth in consumer assets in the Company’s North American and International operations during the nine months ended September 30, 2004 as compared with 2003. The overall credit quality and performance of the consumer portfolio remained relatively stable compared to losses reported during 2003. Refer to the Credit Quality section of this MD&A for a further discussion of the credit experience of the Company’s financing portfolio.
Noninterest expense for the nine months ended September 30, 2004 was favorably impacted as a result of continued improvement in the remarketing results of off-lease vehicles. 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 $249 for the third quarter of 2003 to an average gain of $459 per vehicle for the third quarter of 2004. However, increased advertising expenses related to joint marketing programs with General Motors negatively impacted results for the third quarter of 2004, as compared to the same period in the prior year.
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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. The 2004 International amounts reflect GM’s Brazilian financing operation (Banco GM, or BGM), of which GMAC assumed management and financial control in January 2004 (refer to Note 8 to the Condensed Consolidated Financial Statements for further details).
GMAC’s consumer financing volume and penetration levels are significantly affected by the nature, timing, and magnitude of GM’s marketing incentive programs. GM’s reductions in the use of special rate financing programs as a marketing strategy in 2004 had a negative impact on GMAC’s consumer financing penetration levels for the nine months ended September 30, 2004 as compared to the same period in the prior year. However, the penetration levels remained consistent during the third quarter of 2004 compared to the first six months of 2004 as GMAC benefited from the introduction of GM marketing programs that provide additional up-front cash incentives to customers that use GMAC to finance their purchase of a new GM vehicle.
GMAC’s wholesale financing continues to be the primary funding source for GM dealer inventories, as 2004 penetration levels remained relatively consistent with 2003 levels and at historically high levels.
Consumer Credit
Based on information provided by the dealer, the Company performs a credit review prior to purchasing a retail contract or lease from the dealer. As part of this process, GMAC evaluates, among other things, the following factors:
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GMAC uses a proprietary credit scoring system to support this credit approval process and to manage the credit quality of the portfolio. Credit scoring is used to differentiate credit applicants in terms of expected default rates, enabling the Company to better evaluate credit applications for approval and to tailor the pricing and financing structure based on this assessment of credit risk. The Company’s credit scoring models are periodically reviewed and updated based on historical information and current trends. However, these actions by management do not eliminate credit risk. Improper evaluations of contracts for purchase and changes in the borrower financial condition subsequent to approval could negatively affect the quality of the Company’s receivables portfolio, resulting in credit losses. As a part of the contract purchase process, the Company verifies that physical damage insurance is placed on the vehicle, and a security interest is established in the vehicle (for retail contracts), which further mitigates credit losses.
ServicingThe Company’s servicing activities consist of collecting and processing customer payments, responding to customer inquiries, initiating contact with customers who are delinquent, maintaining a perfected security interest in the financed vehicle and monitoring physical damage insurance coverage of the vehicle. In the event that a customer fails to comply with the terms of the retail contract or lease, GMAC, after satisfying local legal requirements, is generally able to repossess the vehicle.
GMAC customers have the option to remit payments based on monthly billing statements, coupon books or electronic funds transfers. Customer payments are processed by regional third-party processing centers that electronically transfer payment data to customers’ accounts. GMAC also utilizes regional customer service centers to process customer requests for changes of address, payoff quotes, copies of contracts and other requests.
Collection activity on a retail contract is initiated when a customer becomes 10 days past due. Accounts 10 days past due receive a late notice. When an account is more than 15 days but less than 40 days past due, a third-party collection service attempts to contact the customer and make payment arrangements. Once an account becomes 40 days past due, specialized collection centers within GMAC begin collection follow-up, with the objective of tracking the account more closely and making appropriate decisions regarding repossession of the vehicle.
During the collection process, GMAC may offer a payment extension to a customer experiencing temporary financial difficulty, enabling the customer to delay monthly payments for 30, 60, or 90 days, thereby deferring the maturity date of the contract by such period of delay. Extensions granted to a customer typically do not exceed 90 days in the aggregate over any twelve-month period or 180 days in aggregate over the life of the contract. If the customer’s financial difficulty is not temporary, and management believes the customer could continue to make payments at a lower payment amount, GMAC may offer to rewrite the remaining obligation, extending the term and lowering the monthly payment obligation. Extensions and rewrites are a collection technique that help mitigate financial loss in those cases where management believes that the customer will recover from temporary financial difficulty and resume regularly scheduled payments, or can fulfill the obligation with lower payments over a longer period of time. Before offering an extension or rewrite, collection personnel evaluate and take into account the capacity of the customer to meet the revised payment terms. While the granting of an extension could delay the eventual charge-off of an account, typically GMAC will repossess and sell the related collateral, thereby mitigating the loss. As an indication of the effectiveness of GMAC’s consumer credit practices, of the population of accounts in the U.S. retail finance portfolio as of September 30, 2001, which have subsequently been extended or rewritten, only 8% of the outstanding balance was subsequently charged off, through September 30, 2004. A three-year period was utilized for this analysis as this approximates the weighted average remaining term of the portfolio. As of September 30, 2004, less than approximately 5% of active accounts had been granted an extension or rewritten.
Subject to legal considerations, GMAC will normally begin repossession activity once an account becomes 90 days past due. Repossession may occur earlier than 90 days past due if management determines that the vehicle is in danger of being damaged, hidden or the customer voluntarily surrenders the vehicle. Repossessions are handled by third-party repossession firms. Upon repossession, GMAC records the difference between the outstanding principal balance including accrued interest and the expected proceeds from sale of the vehicle at auction as a charge-off against the allowance for credit losses. The customer is given a period of time to redeem the vehicle by bringing the account current. If the vehicle is not redeemed, it is sold at auction with the difference between the actual loss and the estimated loss at repossession charged to other operating expenses. Regional asset recovery centers pursue collections on accounts where the vehicle has been repossessed and on “skip” accounts where the vehicle cannot be located.
Consumer Credit RiskCredit losses in the Company’s consumer automotive retail contract and lease portfolio are influenced by general business and economic conditions, such as unemployment, bankruptcy filings and used vehicle prices. The Company analyzes credit losses according to frequency (i.e., the number of contracts that default) and severity (i.e., the magnitude of loss per occurrence of default). GMAC manages credit risk through its contract purchase policy, credit review process (including the proprietary credit scoring system) and servicing capabilities.
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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 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 assets, 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).
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The following table summarizes pertinent delinquency experience in the managed consumer automotive retail contract portfolio. In general, the delinquency performance of GMAC’s overall managed consumer automotive retail portfolio is consistent with the on-balance sheet portfolio. However, as previously described, 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. Therefore, the delinquency performance for the overall managed consumer automotive retail portfolio (which includes those receivables securitized or sold) is better than the on-balance sheet consumer automotive retail portfolio. At September 30, 2004, the percent of retail contracts 30 days or more past due for the on-balance sheet consumer automotive retail portfolio was 2.44% as compared to 2.26% for the overall managed portfolio.
In addition to the above loss and delinquency data, the following summarizes repossession information for the United States retail contract portfolio:
The following table summarizes the applicable allowance for credit losses as a percentage of the total on-balance sheet consumer automotive retail contracts:
Credit loss experience on the consumer portfolio remained stable with delinquency results, repossession activity and loss severity consistent with the prior year. The average loss incurred per new vehicle repossessed declined from $8,002 in the third quarter of 2003 to $7,986 in the third quarter of 2004. The allowance for credit losses as a percentage of the total on-balance sheet consumer portfolio decreased from December 2003 due to a change in the mix of retail automotive finance contracts in the United States portfolio. During 2004, the amount of balloon finance contracts and used retail contracts outstanding decreased in relation to the entire finance receivables portfolio. Under balloon finance contracts, the consumer is obligated to make a lump sum payment representing the remaining contractual principal, at the end of the contract term. In general, the balloon payment feature increases the risk of loss and, as such, reserve levels are generally higher on balloon contracts, as compared to traditional retail contracts. Similarly, used retail contracts have an increased risk of loss, and in general, reserve levels are higher.
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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To date the only commercial receivables that have been securitized have been wholesale lines of credit extended to automotive dealerships, which historically experience low losses (with no charge-offs recognized in 2004 or 2003). 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 applicable allowance for credit losses as a percentage of on-balance sheet commercial loans:
Impaired loans in the commercial loan portfolio have declined in comparison to 2003 year-end levels. The increase in impaired loans from September 2003 is the result of an individual commercial exposure for which the estimated impairment is less than 3% of the outstanding loan balance. Excluding this exposure would result in a lower balance and percentage of impaired loans at September 30, 2004 as compared to September 2003. Charge-offs in the commercial portfolio remained low, with the decrease as compared to 2003 resulting from a lower amount of charge-offs at the Company’s Commercial Finance Group. The decrease in allowance coverage for commercial credit losses was due partially to loans charged-off in 2004 that had been previously provided for, combined with a lower amount of loans specifically identified as impaired.
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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, including securitization sales that are legally sold but are accounted for as secured borrowings. Refer to pages 18-22 of the Company’s 2003 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 lines of business.
Loan production at the Mortgage Group totaled $41.1 billion for the third quarter of 2004, a decline of 34% from the same period in 2003 primarily due to reduced refinancing activity in the residential market, consistent with increases in mortgage rates. The volume decline, combined with decreased pricing margins and growth in residential mortgage loans held as collateral for secured borrowings, resulted in significant year-over-year decreases in gains on sales of loans for both the third quarter and nine months ended September 30, 2004.
Financing revenue and interest expense each increased significantly as compared to the prior year, reflecting continued growth in the balance of residential mortgage loans held as collateral for secured financings. In addition, the provision for credit losses was negatively impacted by the increase in assets combined with a seasoning of the portfolio and unfavorable credit trends in the subprime and home equity residential mortgage portfolios. For example, monthly charge-offs as a percentage of average assets for the mortgage loan portfolio held as collateralizing debt increased from 0.30% in December 2003 to 0.37% in September 2004.
Increases in interest rates, while adversely affecting loan production volumes, has favorably impacted amortization and impairment of MSRs. Amortization and impairment of MSRs, net of the impact of related risk management activities, decreased by $438 million and $666 million, respectively, for the third quarter and nine months ended September 30, 2004.
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GMAC Insurance insures and reinsures automobile service contracts, personal automobile insurance coverages (ranging from preferred to non-standard risks) and selected commercial insurance coverages. Proceeds from premiums and other revenue sources are invested in a portfolio of equity and fixed income securities from which future claim payments are made as claims are settled. Investment securities are classified by GMAC Insurance management as available for sale and carried at estimated fair value. These estimates of fair value are subjective in nature and involve uncertainties and matters of judgment. A limited amount of securities (i.e., less than 5% of the total portfolio) held in GMAC Insurance’s portfolio are not exchange-traded and are, therefore, valued by management based upon data provided by pricing services or broker-dealer quotes. For these and other securities, such as those which may be thinly traded or which might be sold in large blocks relative to amounts outstanding, the amount that may ultimately be realized at sale may be different than the estimated fair value as of the balance sheet date. Refer to pages 22-24 of the Company’s 2003 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 lines of business.
Net income from Insurance operations totaled $95 million and $261 million for the third quarter and nine months ended September 30, 2004, respectively, compared to $57 million and $106 million for the same periods in 2003. The increases were attributed mainly to favorable underwriting results and net capital gains realized in 2004, in contrast to net capital losses recognized during 2003, the latter of which included the write down of certain investment securities.
Total revenue at GMAC Insurance and its subsidiaries was $1,015 million and $2,982 million for the third quarter and nine months of 2004, respectively, compared to $869 million and $2,483 million for the same periods in 2003. The increases over 2003 were primarily due to growth in service contracts as a result of increased penetration levels and reinsurance.
The increase in investment income of $120 million for the nine months ended September 30, 2004 over the same period in 2003 was attributable primarily to net capital gains of $62 million, as compared to net capital losses of $44 million recognized for the same period in 2003. The Company recognized less than $0.2 million in other than temporary impairment in the investment portfolio for the nine months ended September 30, 2004, as compared to $41 million recognized for the same period in 2003.
Total expenses amounted to $879 million and $2,592 million for the third quarter and nine months ended September 30, 2004, respectively, compared to $784 million and $2,326 million for the same periods in 2003. The increases in 2004 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.
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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 2003 Annual Report on Form 10-K.
Funding Sources and Strategy
GMAC’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 bank lines of credit. These bank lines of credit, which totaled $57.7 billion at September 30, 2004, provide “back-up” liquidity and represent additional funding sources, if required. Refer to Note 6 to the Condensed Consolidated Financial Statements for details of these liquidity lines (including asset-backed commercial paper conduits). In addition, the Company has $54.8 billion in funding commitments (with $25.6 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 $2.0 billion of retail automotive receivables by December 31, 2004 and an additional $2.0 billion of retail automotive receivables by March 31, 2005. The third parties have, in turn, committed to purchase up to a total of $9.0 billion of retail automotive receivables through December 31, 2005. During 2004, the Company executed the sale of $2.0 billion of retail automotive receivables under these agreements. Refer to the Funding and Liquidity section in the Company’s 2003 Annual Report on Form 10-K for a further discussion of GMAC’s funding sources and strategy.
The following table summarizes GMAC’s funding sources for the periods indicated.
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The Company’s worldwide borrowings costs (including the effects of derivatives) for the third quarter and nine months ended September 30, 2004 averaged 3.83% and 3.66%, respectively, as compared to 3.55% and 3.68% for the same periods in 2003. The increase in borrowing costs for the third quarter of 2004 as compared to the same period in 2003 is reflective of a steady increase in market interest rates during the year. Additionally, the Company has continued to experience high unsecured credit spreads reflecting the Company’s overall lower credit ratings (refer to the Credit Ratings section of this MD&A) due to an overall 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. As a result of these challenges, one of the Company’s primary objectives is to diversify its sources of funding. In addition to the public markets for secured and unsecured debt, GMAC has increased its activity in retail targeted products as well as expanding the sources of secured funding to include bank conduits and whole loan sales. 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. In the event of deterioration in the funding environment, management will adjust the funding and business strategy as necessary to meet the Company’s liquidity requirements.
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 pension and retiree health care obligations, have resulted in the Company experiencing a series of negative rating actions since 2003. Most recently, in October and November 2004, all four nationally recognized rating agencies downgraded GMAC’s credit ratings.
The following summarizes GMAC’s current ratings, outlook and the date of last rating or outlook change by the respective 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. The entities include QSPEs and VIEs used for securitization transactions, mortgage warehouse facilities and other mortgage-related funding programs. The amounts outstanding in these off-balance sheet facilities have decreased since December 31, 2003 as the Company continues to utilize securitization transactions that, while similar in legal structure to off-balance sheet securitizations, are accounted for as secured borrowings and as the Company’s Mortgage operations have replaced various off-balance sheet facilities with consolidated funding facilities. In addition, the decrease is reflective of the Company’s accounting treatment for certain mortgage transfers effective September 30, 2004. Refer to Note 1 to the Condensed Consolidated Financial Statements.
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The following table summarizes assets carried off-balance sheet in these entities.
Securitization
As part of its ongoing operations and overall funding and liquidity strategy, the Company securitizes consumer automotive finance retail contracts, automotive leases, wholesale loans, mortgage loans, commercial mortgage securities, asset-backed securities, real estate investment trust debt and tax-exempt related securities. Securitization of assets allows the Company to diversify funding sources and to support the core activities of the Mortgage operations relative to originating and purchasing mortgage loans to generate origination and servicing income. Termination of GMAC’s securitization activities would reduce funding sources and disrupt the core auto finance and mortgage banking activities, adversely impacting the Company’s operating profit.
As part of the program, assets are generally sold to bankruptcy-remote subsidiaries of the Company. These bankruptcy remote subsidiaries are separate legal entities that assume the risk and reward of ownership of the receivables. Neither the Company nor these subsidiaries are responsible for the other entities’ debts, and the assets of the subsidiaries are not available to satisfy the claims of the Company or its creditors. In turn, the bankruptcy-remote subsidiaries establish separate trusts to which they transfer the assets in exchange for the proceeds from the sale of asset- or mortgage-backed securities issued by the trust. The trusts’ activities are generally limited to acquiring the assets, issuing asset- or mortgage-backed securities, making payments on the securities, and periodically reporting to the investors. Due to the nature of the assets held by the trusts and the limited nature of each trust’s activities, most trusts are QSPEs in accordance with SFAS 140. In accordance with SFAS 140, assets and liabilities of the QSPEs are generally not consolidated in the Company’s Consolidated Balance Sheet.
As part of the Company’s securitization program, GMAC generally agrees to service the transferred assets for a fee and may earn other related ongoing income. The Company retains servicing responsibilities for and subordinated interests in all securitizations of retail automotive finance receivables and wholesale lines of credit. As servicer, GMAC generally receives a monthly fee stated as a percentage of the outstanding sold receivables. For retail automotive finance receivables where GMAC is paid a fee, the Company has concluded that the fee represents adequate compensation as a servicer and, as such, no servicing asset or liability is recognized. Considering the short-term revolving nature of wholesale lines of credit, no gain (or servicing asset or liability) is recognized upon securitization of the loans. In certain retail securitization transactions, retail receivables are sold on a servicing retained basis, but with no servicing compensation and, as such, a servicing liability is established and recorded in other liabilities. As of September 30, 2004 and December 31, 2003, servicing liabilities of $21 million and $22 million, respectively, were outstanding related to such retail securitization transactions. For mortgage servicing, the Company capitalizes that the value expected to be realized from performing specified residential and commercial mortgage servicing activities as mortgage servicing rights (refer to Note 5 to the Condensed Consolidated Financial Statements).
The Company also may retain a portion of senior and subordinated interests issued by the trusts. For transactions accounted for as sales, these interests are reported as investment securities in the Company’s Consolidated Balance Sheet. Subordinate interests typically provide credit support to the more highly rated senior interests in a securitization transaction and may be subject to all or a portion of the first loss related to the sold assets. Amounts totaling $47 million and $83 million at September 30, 2004 and December 31, 2003, respectively, have been established for expected credit losses on automotive finance receivables securitized in off-balance sheet transactions. Such amounts are included in the fair value of the retained interests, which are classified as investment securities. The Company also purchases derivative financial instruments in order to facilitate securitization activities.
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Limited recourse provisions exist that allow holders of the asset- or mortgage-backed securities to put those securities back to the Company. The Company’s exposure related to the securitization trusts is generally limited to cash reserves held for the benefit of investors in the trusts and retained interests. The trusts have a limited life and generally terminate upon final distribution of amounts owed to investors or upon exercise by GMAC, as servicer, of its cleanup call option when the servicing of the sold contracts becomes burdensome. In addition, the trusts do not invest in the equity of GMAC or any of its affiliates.
The Company’s collateralized debt obligation (CDO) securitization program includes the securitization of commercial mortgage securities, asset-backed securities, real estate investment trust debt, commercial mortgage loans and subordinated loan participations. Some of the CDOs sponsored by the Company are QSPEs and are, therefore, not consolidated by the Company. In addition, certain CDOs represent VIEs in which GMAC is not considered to be the primary beneficiary and are therefore also not consolidated. For one particular CDO, the Company is the primary beneficiary and has been consolidated in accordance in with FIN 46R. Under the CDO arrangements, GMAC and other unaffiliated parties each contribute a portion of the total collateral underlying the CDO investments. GMAC may hold subordinated interests, including partial first loss positions in CDO investments, and may act as collateral manager for the entity. The subordinated interests are carried as trading or available for sale securities in the Company’s Consolidated Balance Sheet.
The Company’s tax-exempt related securitizations include the tender option bond (TOB) and tax-exempt conduit (TEC) programs. Under the TOB program, the Company acquires long-term, tax-exempt, fixed rate municipal bonds (generally AAA- and AA-rated), deposits them into a QSPE (TOB Trust), securitizes them with a tender option (also known as a put option), and resells the newly created short-term, tax-exempt notes to third-party investors. The tender option allows the holder of the short-term notes to put back its interest to the liquidity bank or remarketing agent for cash at any time. The Company’s retained interests reflect the difference between the interest on the fixed rate bond and the rate required to market the short-term notes. The Company is not obligated to repurchase or redeem the short term notes before maturity. However, should the remarketing agent be unable to remarket the short term notes, the Trustee would liquidate the TOB Trust assets which could result in losses to the Company.
Under its TEC program, the Company acquires long-term, tax-exempt or taxable, fixed and floating rate bonds, deposits them into a QSPE (TEC Trust), securitizes them with a put option, bundles them with a credit enhancement and a liquidity guarantee, and then finances the newly created short-term taxable fixed rate or tax-exempt variable rate certificates with third-party investors. The put option allows the holders of the tax-exempt variable rate certificates to put back their interest to the liquidity provider for cash upon failed remarketing. The Company retains the difference between the interest on the underlying bonds deposited into each TEC Trust and the rate paid on the certificates issued by the TEC Trust. The Company is not obligated to repurchase or redeem the tax-exempt variable rate certificates before maturity. However, should the remarketing agent be unable to remarket the tax-exempt variable rate certificates, the Trustee would liquidate the TEC Trust assets which could result in losses to the Company.
The Company generally does not guarantee any securities issued by the trusts. However, the Company has guaranteed repayment of principal and interest associated with certain securitization transactions. Securities issued as a result of such securitization transactions were credit enhanced by a AAA-rated insurer and the Company has issued a guarantee to the insurer for a portion of the guaranteed bonds. The Company generally has also retained an investment related to such securitizations that is subordinate to the guarantees. Guarantee losses would be incurred in the event that losses on the underlying collateral exceed the Company’s subordinated investment. Expiration dates range from 2004 through the expected life of the asset pool.
The Company has also entered into agreements to provide credit loss protection for certain high loan-to-value (HLTV) mortgage loan securitization transactions. GMAC is required to perform on its guaranty obligation when the security credit enhancements are exhausted and losses are passed through to investors. The guarantees terminate the first calendar month during which the security aggregate note amount is reduced to zero.
Certain of the Company’s securitization borrowings, while similar in legal structure to the transactions described above (i.e., the assets are legally sold to a bankruptcy remote subsidiary), do not meet the isolation and control criteria of SFAS 140 and are therefore accounted for as secured financings. As secured financings, the underlying automotive finance retail contracts, automotive leases or mortgage loans remain on the balance sheet with the corresponding obligation (consisting of the debt securities issued) reflected as debt. The Company recognizes income on the finance receivables, automotive leases and loans and interest expense on the securities issued in the securitization and provides for credit losses as incurred over the life of the securitization. Approximately $80.1 billion and $61.6 billion of finance receivables, automotive leases and loans were related to secured borrowings at September 30, 2004 and December 31, 2003, respectively.
Other Off-Balance Sheet Entities
The Company also uses other off-balance sheet entities for operational and liquidity purposes which are in addition to the securitization activities that are part of the transfer and servicing of financial assets under SFAS 140 (as described above). The purposes and activities of these entities vary, with some entities classified as QSPEs under SFAS 140 and others, whose activities are not sufficiently limited to meet the QSPE criteria of SFAS 140, are considered to be VIEs and are accounted for in accordance with FIN 46R.
The Company may also act as a counterparty in derivative financial instruments with these entities to facilitate transactions. Although representing effective risk management techniques, these derivative financial instrument positions do not qualify for hedge accounting treatment as the risk being reduced relates to assets or liabilities that are carried off-balance sheet. As such, these derivative financial
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instruments are reported in the Company’s Consolidated Balance Sheet at market value, with valuation adjustments reflected in the Consolidated Statement of Income on a current period basis. Included in the Company’s derivative financial instrument positions are put options held by third-party banks covering $430 million and $1.7 billion in mortgage loans at September 30, 2004 and December 31, 2003, respectively. In the event of a concurrent exercise of these puts by the holders, GMAC would need to obtain additional financing to satisfy its obligations.
GMAC does not guarantee debt issued in connection with any of its commercial paper facilities, nor guarantee the liquidity support (to the extent applicable) that is provided by third-party banks. Further, there are limited recourse provisions that would permit holders to put the related debt obligations back to GMAC. In the event that liquidity banks fail to renew their commitment (which commitments may be subject to periodic renewal) and GMAC is unable to find replacement liquidity support or alternative financing, the outstanding commercial paper would be paid with loans from participating banks, and proceeds from the underlying assets would be used to repay the banks. Finally, none of these entities related to its off-balance sheet facilities owns stock of GMAC or any of its affiliates.
The Company’s more significant off-balance sheet entities are described as follows:
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Purchase Obligations and Options
Certain of the structures related to securitization transactions and other off-balance activities contain provisions, which are standard in the securitization industry, where the Company may (or, in limited circumstances, is obligated to) purchase specific assets from the entities. The Company’s purchase obligations relating to off-balance sheet transactions are as follows:
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The Company’s purchase options relating to off-balance sheet transactions are as follows:
When purchases of assets from off-balance sheet facilities occur, either as a result of an obligation to do so, or upon GMAC obtaining the ability to acquire sold assets through an option, any resulting purchase is executed in accordance with the legal terms in the facility or specific transaction documents. In most cases, the provisions for the purchase of specific assets in automotive receivables and mortgage asset transactions state that the purchase price is equal to the unpaid principal balance (i.e., par value) of the receivable, plus any accrued interest thereon. Once the conditions are satisfied for an obligatory or optional purchase (or in the case of cleanup calls, when notice of intent to exercise is provided), the asset is reported in the Company’s Consolidated Balance Sheet as held for sale or held for investment, with a corresponding liability (until paid in full, written off, or sold in a later transaction).
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An exception relates to cleanup calls, which may result in a net gain or loss. In these cases, the Company records assets when the option to purchase is exercisable, as determined by the legal documentation. Any difference between the purchase price and amounts paid to discharge third-party beneficial interests is remitted to the Company through the recovery on the related retained interest. Any resulting gain or loss is recognized upon the exercise of a cleanup call option.
Upon the obligatory or optional purchase of assets from an off-balance sheet facility, no net gain or loss is generally recognized by GMAC because the asset is purchased at par value, plus any accrued interest thereon, (as required by the transaction documents). To the extent that the fair value differs from the par value, any resulting gain or loss would be materially offset by a gain or loss recognized through the revaluation of any retained interest. Subordinated retained interests are valued based on modeled expectations of future cash flows (including prepayment speeds and future credit losses). As a result, the event of purchasing the asset does not, in and of itself, result in any material net gain or loss to GMAC.
Accounting and Reporting Developments
FASB Interpretation No. 46R — In December 2003, the FASB released a revision to Interpretation No. 46, Consolidation of Variable Interest Entities (FIN 46R) to clarify some of the provisions of the original interpretation (FIN 46) and to exempt certain entities from its requirements. FIN 46R provides special effective date provisions to enterprises that fully or partially applied FIN 46 prior to the issuance of the revised interpretation. In particular, entities that had already adopted FIN 46 were not required to adopt FIN 46R until the quarterly reporting period ended March 31, 2004. Since GMAC adopted FIN 46 effective July 1, 2003, the Company adopted FIN 46R for the period ended March 31, 2004. Among other matters, FIN 46R changed the primary beneficiary analysis of variable interest entities as it relates to fees paid to decision makers. However, these changes did not impact the conclusions of the Company’s primary beneficiary analysis previously reached under FIN 46 and, as such, the adoption of FIN 46R did not impact the Company’s financial condition or results of operations.
Prior to April 1, 2004, upon entering into the commitment, GMAC recognized loan commitments at fair value based on expected future gain on sale, including an estimate of the future MSRs. For certain products, the future gain on sale (exclusive of MSR value) was known based on transparent pricing in an active secondary market and was included in current period earnings. Any additional value associated with the loan commitments (including the future value of the MSR) was deferred and recognized in earnings at the time of the sale (or securitization) of the loan. As a result of SAB 105, effective April 1, 2004, GMAC no longer recognizes the value of the commitment at the time of the rate lock. However, subsequent changes in value from the time of the lock are recognized as assets or liabilities, with a corresponding adjustment to current period earnings, but exclude any future MSR value. Upon sale of the loan, the initial estimated value associated with the rate lock, along with the MSR, are recognized as part of the gain on sale (or securitization). The impact of adopting the provisions of SAB 105 resulted in a deferral in the timing of recognizing the value of certain loan commitments, but did not have a material impact on the Company’s financial condition or results of operations.
EITF 03-1 — In March 2004, the Emerging Issues Task Force released EITF Issue No. 03-1, The Meaning of Other Than Temporary Impairment and Its Application to Certain Investments (EITF 03-1). EITF 03-1 provides guidance for determining when an investment is other than temporarily impaired and applies to investments classified as either available for sale or held to maturity under SFAS 115, Accounting for Certain Investments in Debt and Equity Securities(including individual securities and investments in mutual funds), and investments accounted for under the cost method. In addition, EITF 03-1 contains disclosure requirements for impairments that have not been recognized as other than temporary. In October 2004, the FASB voted to delay the effective date of the recognition and measurement provisions related to determining other than temporary impairment on available for sale securities. The effective dates for the disclosure requirements vary depending on the type of investment being considered, with the first effective date for fiscal years ending after December 15, 2003. Management is monitoring the ongoing discussions by the FASB related to this issue in order to assess the potential impact of this guidance on the financial statements of the Company.
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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 financing revenue increased by $359 million and $1,272 million, in the third quarter and nine months ended September 30, 2004, respectively. Financing revenue at the Company’s Mortgage operations increased $319 million and $1,217 million, in the third quarter and nine months ended September 30, 2004, respectively, as compared to the same periods in the prior year despite a decline in refinancing activity in the residential mortgage market. The increase was due to continued use of secured borrowing structures for residential mortgage loans which has resulted in increased asset levels. Additionally, interest income from commercial loans in the Company’s financing operations increased due to higher dealer inventory levels.
An increase in borrowing costs combined with higher debt levels to fund the growth in consolidated assets contributed to an increase in interest and discount expense in 2004 of $408 million and $1,193 million for the third quarter and nine months ended September 30, 2004, respectively, as compared to the same period in 2003. The provision for credit losses increased by $92 million and $132 million for the third quarter and nine months ended September 30, 2004, respectively, as compared to the same periods in 2003, resulting from increased mortgage assets held as collateral for secured borrowings. This increase was partially offset by lower loss provisions in the Company’s Financing operations. Insurance premiums and service revenue increased by $145 million and $386 million for the third quarter and nine months ended September 30, 2004, respectively, as compared with the same periods in 2003 due to volume growth in service contracts as a result of increased penetration levels and reinsurance.
Mortgage banking income increased by $95 million for the third quarter of 2004 compared with the same period in the prior year resulting from favorable amortization and impairment of mortgage servicing rights due to an increase in market interest rates. The decrease in mortgage banking income of $307 million for the nine months ended September 30, 2004 compared with the same period in 2003 results from lower gains on sales of loans caused by a combination of decreased residential loan production and lower pricing margins, which was partially offset by a decrease in amortization and impairment of mortgage servicing rights.
The increase in other income was due primarily to higher fee related income in commercial mortgage operations as well as the favorable impact of interest rate changes on derivative assets in the Company’s automotive financing operations.
Expenses
Noninterest expense increased by $205 million and $166 million in the third quarter and nine months ended September 30, 2004, respectively. Depreciation on operating lease assets was comparable to prior periods consistent with asset levels. Increases in insurance losses and loss adjustment expenses and higher acquisition and underwriting expenses were commensurate with increases in insurance premium revenue. Other operating expenses increased due to higher advertising expenses within the Company’s Finance operations related to shared marketing programs with General Motors, which was partially offset by favorable remarketing results on operating lease assets. The Company’s effective tax rate declined in the third quarter and nine months ended September 30, 2004 primarily due to favorable tax settlements and other changes in tax circumstances in certain of the Company’s international subsidiaries.
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 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 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 the evaluation, which disclosed no significant deficiencies or 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 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 InformationGeneral Motors Acceptance Corporation
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 nine-month period ended September 30, 2004, or during the period from September 30, 2004 to the filing date of this report.
Exhibits and Reports on Form 8-K
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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 10th day of November, 2004.
General Motors Acceptance Corporation(Registrant)
/s/ SANJIV KHATTRI
/s/ LINDA K. ZUKAUCKAS
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Index of ExhibitsGeneral Motors Acceptance Corporation
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The following exhibit shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934 or otherwise subject to the liability of that Section. In addition Exhibit No. 32 shall not be deemed incorporated into any filing under the Securities Act of 1933 or the Securities Exchange Act of 1934.
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