UNITED STATESSECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549-1004FORM 10-Q[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 2006, or [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to .Commission file number: 1-3754GMAC LLC(Exact name of registrant as specified in its charter)
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Explanatory NoteGMAC LLCGMAC LLC’s (GMAC) net loss for the third quarter of 2006, preliminarily indicated as $348 million as furnished in a Form 8-Kdated October 25, 2006, has been reduced by $24 million to $324 million. The reduction in net loss is attributable primarily to process improvements that identified amounts related to loan sales that had not been recorded. These items have been recorded and are reflected in this Form 10-Q.
INDEXGMAC LLC
Condensed Consolidated Statement of Income (unaudited) GMAC LLC" -->
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Condensed Consolidated Balance Sheet (unaudited) GMAC LLC" -->
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Condensed Consolidated Statement of Changes in Equity (unaudited) GMAC LLC" -->
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Condensed Consolidated Statement of Cash Flows (unaudited) GMAC LLC" -->
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Notes to Condensed Consolidated Financial Statements (unaudited) GMAC LLC" -->
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Notes to Condensed Consolidated Financial Statements (unaudited)GMAC LLCliabilities recorded on our balance sheet at January 1, 2006, the date of adoption, we identified three classes of servicing rights: those pertaining to residential mortgage in our ResCap reporting segment, auto finance in our North American Operations reporting segment and commercial mortgages. We have elected to measure our residential mortgage servicing rights at fair value for each reporting date and report changes in fair value in earnings during the period in which the changes occur. At September 30, 2006, these assets were valued at $4.8 billion and recorded separately on our Condensed Consolidated Balance Sheet. Refer to Note 6 to the Condensed Consolidated Financial Statements for further information.For servicing assets and liabilities related to our auto finance and commercial mortgage classes of assets, we have elected to continue to use the amortization method of accounting. As a result of the sale of Capmark on March 23, 2006, the commercial mortgage servicing rights are no longer recorded on our balance sheet at September 30, 2006. Our auto finance servicing assets and liabilities at September 30, 2006, totaled $13 million and $19 million, respectively, and are recorded in other assets and other liabilities, respectively, on our Condensed Consolidated Balance Sheet.Recently Issued Accounting StandardsStatement of Position 05-1 — In September 2005 the American Institute of Certified Public Accountants (AICPA) issued Statement of Position 05-1, Accounting by Insurance Enterprises for Deferred Acquisition Costs in Connection with Modifications or Exchanges of Insurance Contracts (SOP 05-1). SOP 05-1 provides guidance on accounting for deferred acquisition costs on internal replacements of insurance contracts. SOP 05-1 defines an internal replacement and specifies the conditions that determine whether the replacement contract is substantially or unsubstantially changed from the replaced contract. An internal replacement determined to result in a substantially changed contract should be accounted for as an extinguishment of the replaced contract; unamortized deferred acquisition costs and unearned revenue liabilities of the replaced contract should no longer be deferred. An internal replacement determined to result in an unsubstantially changed contract should be accounted for as a continuation of the replaced asset. SOP 05-01 introduces the terms integrated and non-integrated contract features and specifies that non-integrated features do not change the base contract and are to be accounted for in a manner similar to a separately issued contract. Integrated features are evaluated in conjunction with the base contract. SOP 05-1 is effective for internal replacements occurring in fiscal years beginning after December 15, 2006. Management is assessing the potential impact on our financial condition or results of operations.Statement of Financial Accounting Standards No. 155 — In February 2006 the Financial Accounting Standards Board (FASB) issued Statement of Financial Standards No. 155 Accounting for Certain Hybrid Financial Instruments — an amendment of FASB Statements No. 133 and 140 (SFAS 155). This standard permits fair value remeasurement for any hybrid financial instrument that contains an embedded derivative that otherwise would require bifurcation. SFAS 155 allows an entity to make an irrevocable election to measure such a hybrid financial instrument at fair value on an instrument-by-instrument basis. The standard eliminates the prohibition on a QSPE from holding a derivative financial instrument that pertains to a beneficial instrument other than another derivative financial instrument. SFAS 155 also clarifies which interest-only and principal-only strips are not subject to the requirements of SFAS 133, as well as determines that concentrations of credit risk in the form of subordination are not embedded derivatives. SFAS 155 is effective for all financial instruments acquired or issued after the beginning of the fiscal year that begins after September 15, 2006. Adoption of SFAS 155 is not expected to have a material impact on our consolidated financial position or results of operations.FASB Staff Position — FIN 46(R)-6 — In April 2006 the FASB issued FIN 46(R)-6, Determining the Variability to Be Considered in Applying FASB Interpretation No. 46(R),which requires the variability of an entity to be analyzed based on the design of the entity. The nature and risks in the entity, as well as the purpose for the entity’s creation, are examined to determine the variability in applying FIN 46(R). The variability is used in applying FIN 46(R) to determine whether an entity is a variable interest entity, which interests are variable interests in the entity and who is the primary beneficiary of the variable interest entity. This statement is applied prospectively and is effective for all reporting periods after June 15, 2006. The guidance did not have a material impact on our consolidated financial position or results of operations.FASB Interpretation No. 48 — In June 2006 the FASB issued Interpretation No. 48, Accounting for Uncertainty in Income Taxes (FIN 48), which supplements Statement of Financial Accounting Standard No. 109 by defining the confidence level that a tax position must meet in order to be recognized in the financial statements. The Interpretation requires that the tax effects of a position be recognized only if they are “more-likely-than-not” to be sustained based solely on their technical merits as of the reporting date. The more-likely-than-not threshold represents a positive assertion by management that a company is entitled to the economic benefits of a tax position. If a tax position is not considered more-likely-than-not to be sustained based solely on its technical merits, no benefits of the position are to be recognized. Moreover, the more-likely-than-not threshold must continue to be met in each reporting period to support continued recognition of a benefit. At adoption, companies must adjust their financial statements to reflect only those tax positions that are more-likely-than-not to be sustained as of the adoption date. Any necessary adjustment would be recorded directly to retained earnings in the period of adoption and6
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Notes to Condensed Consolidated Financial Statements (unaudited)GMAC LLCreported as a change in accounting principle. This Interpretation is effective as of the beginning of the first fiscal year beginning after December 15, 2006. Management is assessing the potential impact on our financial condition or results of operations.FASB Staff Position (FSP) No. 13-2 — In July 2006 the FASB issued FSP No. 13-2Accounting for a Change or Projected Change in the Timing of Cash Flows Relating to Income Taxes Generated by a Leveraged Lease Transaction, (FSP 13-2), which amends SFAS No. 13, Accounting for Leases, by requiring lessors to recalculate the rate of return and periodic income allocation for leveraged-lease transactions when there is a change or projected change in the timing of income tax cash flows related to the lease. FSP 13-2 requires lessors to use the model in FIN 48 to determine the timing and amount of expected tax cash flows in leveraged-lease calculations and recalculations. FSP 13-2 is effective in the same period as FIN 48. At the date of adoption, the lessor is required to reassess projected income tax cash flows related to leveraged leases using the FIN 48 model for recognition and measurement. Revisions to the net investment in a leverage lease required when FSP 13-2 is adopted would be recorded as an adjustment to the beginning balance of retained earnings in the period of adoption and reported as a change in accounting principle. Management is assessing the potential impact on our financial condition and results of operations.SEC Staff Accounting Bulletin No. 108 — In September 2006 the SEC issued Staff Accounting Bulletin (SAB) No. 108Quantifying Financial Misstatements, which expresses the Staff’s views regarding the process of quantifying financial statement misstatements. Registrants are required to quantify the impact of correcting all misstatements, including both the carryover and reversing effects of prior year misstatements, on the current year financial statements. The techniques most commonly used in practice to accumulate and quantify misstatements are generally referred to as the “rollover” (current year income statement perspective) and “iron curtain” (year-end balance perspective) approaches. The financial statements would require adjustment when either approach results in quantifying a misstatement that is material, after considering all relevant quantitative and qualitative factors. Management does not expect this guidance to have a material effect on our current process for assessing and quantifying financial statement misstatements.SFAS No. 157 — In September 2006 the FASB issued SFAS No. 157 Fair Value Measurements, which provides a definition of fair value, establishes a framework for measuring fair value and requires expanded disclosures about fair value measurements. SFAS 157 is effective for financial statements issued for fiscal years beginning after November 12, 2007, and interim periods within those years. The provisions of SFAS 157 should be applied prospectively. Management is assessing the potential impact on our financial condition and results of operations.SFAS No. 158 — In September 2006 the FASB issued SFAS No. 158 Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans,which amends SFAS No. 87 Employers’ Accounting for Pensions (SFAS No. 87), SFAS No. 88Employer’s Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and for Termination Benefits(SFAS No. 88), SFAS No. 106Employer’s Accounting for Postretirements Benefits Other Than Pensions (SFAS No. 106), and SFAS No. 132(R) Employers’ Disclosures about Pensions and Other Postretirement Benefits (revised 2003)(SFAS 132(R)). This Statement requires companies to recognize an asset or liability for the overfunded or underfunded status of their benefit plans in their financial statements. The asset or liability is the offset to other comprehensive income, consisting of previously unrecognized prior service costs and credits, actuarial gains or losses and transition obligations and assets. SFAS 158 also requires the measurement date for plan assets and liabilities to coincide with the sponsor’s year end. The standard provides two transition alternatives for companies to make the measurement-date provisions. The recognition of asset and liability related to funded status provision is effective for fiscal years ending after December 15, 2006, and the change in measurement is effective for fiscal years ending after December 15, 2008. Management is assessing the potential impact on our financial condition and results of operations.
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Notes to Condensed Consolidated Financial Statements (unaudited)GMAC LLCan amount up to the amount of our net income prior to the acquisition; (v) GM will repay certain indebtedness owing to us, and specified intercompany unsecured obligations owing to us shall be no greater than $1.5 billion and (vi) we will make a one-time distribution to GM of approximately $2.7 billion of cash to reflect the increase in our equity value resulting from the transfer of a portion of our net deferred tax liabilities arising from the conversion by us and certain of our subsidiaries to limited liability company form. The total value of the cash proceeds and distributions to GM after repayment of certain intercompany obligations and before it purchases preferred limited liability company interests will be approximately $14 billion over three years, comprised of the $7.4 billion purchase price, $2.7 billion cash dividend, and other transaction related cash flows including monetization of certain retained assets over three years.As part of the transaction, we will enter into a number of agreements with GM that will require us to continue to allocate capital to automotive financing consistent with historical practices, thereby continuing to provide critical financing support to a significant share of GM’s global sales. While we will retain the right to make individual credit decisions, we will commit to fund a broad spectrum of customers and dealers consistent with historical practice in the relevant jurisdiction. Subject to our fulfillment of certain conditions, GM will grant us exclusivity for 10 years for U.S., Canadian and international GM-sponsored retail and wholesale marketing incentives around the world, with the exception of Saturn branded products.As part of the agreement, GM will retain an option, for 10 years after the closing of the transaction, to repurchase certain assets from us related to the Automotive Finance operations of our North American Operations and our International Operations. GM’s exercise of the option is conditional on GM’s credit rating being investment grade or higher than our credit rating. The call option price will be calculated as the higher of (i) fair market value or (ii) 9.5 times the consolidated net income of our automotive finance operations in either the calendar year the call option is exercised or the calendar year immediately following the year the call option is exercised.The agreement is subject to the satisfaction or waiver of customary and other closing conditions, including, among other things: (i) receipt of ratings for our senior unsecured long-term indebtedness and the ratings of ResCap, our wholly owned subsidiary, after giving effect to the transactions contemplated by the agreement, of at least BB and BBB- (or their respective equivalents), respectively, and an A.M. Best rating for our significant insurance subsidiaries of at least B++; (ii) that no material adverse effect will have occurred with respect to our business, financial condition or results of operations, which includes any actual downgrading by any of the major rating agencies of GM’s unsecured long-term indebtedness rating below CCC or its equivalent; and (iii) the receipt of required regulatory approvals and licenses. The agreement may be terminated upon the occurrence of certain events, including the failure to complete the transaction by March 31, 2007.As previously reported, on July 28, 2006, the Federal Deposit Insurance Corporation (the “FDIC”) announced a six-month moratorium on the acceptance of, or final decisions on, notices filed under the Change in Bank Control Act with regard to industrial loan companies (ILCs). In connection with the transaction, a notice was submitted to the FDIC. Since FDIC regulatory approval is a condition of the Agreement, GM, GMAC and representatives of FIM Holdings have been working with the FDIC to develop a means to enable the parties to stay on target for a closing of the transaction in the fourth quarter of 2006. GM and GMAC expect to close the transaction in the fourth quarter of 2006.8
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Notes to Condensed Consolidated Financial Statements (unaudited)GMAC LLC
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Notes to Condensed Consolidated Financial Statements (unaudited)GMAC LLCThe following table summarizes activity and related amortization of MSRs, which prior to January 1, 2006, were carried at lower of cost or fair value:
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Notes to Condensed Consolidated Financial Statements (unaudited)GMAC LLCThe following summarizes assets that are restricted as collateral for the payment of the related debt obligation primarily arising from securitization transactions accounted for as secured borrowings and repurchase agreements.
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Notes to Condensed Consolidated Financial Statements (unaudited)GMAC LLCThe syndicated multi-currency global credit facility includes a $4.35 billion five-year facility (expires June 2008) and a $3.25 billion364-day facility (expires June 2007). In the event that a public announcement is made by GMAC or GM that the acquisition as defined in the current report on Form 8-K filed by GMAC on April 3, 2006, will not be consummated or that such transaction has otherwise been terminated, $1.51 billion of the 364-day facility may be terminated by the lenders, and the remaining $1.74 billion will be transferred to the NCAT secured committed facility. Provided that such announcement has not been made, the facility also includes a term out option which, if exercised by us prior to expiration, carries a one-year term. Additionally, a leverage covenant in the liquidity facilities and certain other funding facilities restricts the ratio of consolidated borrowed funds (excluding certain obligations of bankruptcy remote special purpose entities) to consolidated net worth 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 that we have 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). Our leverage ratio covenant was 7.4:1 at September 30, 2006, and we are, therefore, in compliance with this covenant.
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Notes to Condensed Consolidated Financial Statements (unaudited)GMAC LLCRetail and lease contracts acquired by us 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, are noted in the table below.
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Notes to Condensed Consolidated Financial Statements (unaudited)GMAC LLCIn connection with the agreement to sell a 51 percent ownership interest in GMAC, GM settled its estimated liabilities with respect to residual support and risk sharing on a portion of our operating lease portfolio (approximately 19% of the North American Automotive Finance operating lease portfolio) and on the entire U.S. balloon retail receivable portfolio in a lump-sum payment. As of April 30, 2006, the maximum amount that would have been paid under the residual support and risk sharing arrangements with GM on this portion of the portfolio totaled approximately $2.0 billion. A negotiated amount totaling approximately $1.1 billion was agreed to by GM under these leases and balloon contracts and was paid to us on May 15, 2006. The payment of $1.1 billion was recorded as a deferred amount in accrued expenses and other liabilities in our Condensed Consolidated Balance Sheet and will be treated as sales proceeds on the underlying assets, as the contracts terminate and the vehicles are sold at auction, in recognizing the gain or loss on sale.For the remainder of the operating lease portfolio, not subject to this payout arrangement, based on September 30, 2006 outstandings, the current amount that we would expect to be paid by GM under residual support programs would be $1.7 billion. The maximum that could be paid under the residual support programs on this portion of the lease portfolio is approximately $2.8 billion and would be paid only in the unlikely event that the proceeds from this portion of the operating lease portfolio are at or below our standard residual rates. As disclosed in Note 2 to the Condensed Consolidated Financial Statements, certain assets with respect to automotive leases will be dividended to GM prior to consummation of the agreement.In addition, as it relates to those lease originations and all U.S. balloon retail contract originations occurring after April 30, 2006, that will remain with GMAC after the majority sale transaction GM agreed to begin payment of the expected residual support owed to us at the time of contract origination as opposed to after contract termination at the time of sale of the related vehicle. After the sale of a 51 percent ownership interest in us is completed, all new operating lease originations will be subject to this revised residual support arrangement with GM. For the affected contracts originated in the second and third quarters of 2006, GM paid or agreed to pay us a total of $234 million. The remaining maximum exposure after consideration of these payments that could be paid under these contracts for residual support is approximately $140 million and would be paid only in the unlikely event that the proceeds from this portion of the operating lease portfolio are at or below our standard residual rates.The maximum amount that could be paid under the risk sharing arrangement on all leases not subject to the payout arrangement is approximately $1.5 billion and would only be paid in the unlikely event that the proceeds from outstanding lease vehicles would be lower than our standard residual rates. The expected amount to be paid under the risk sharing arrangement is approximately $0.2 billion.In addition to the financing arrangements summarized in the foregoing table, GM had a $4 billion revolving line of credit from us that expired September 15, 2006. Subsequently, this revolving line of credit was not renewed. This credit line had previously been used for general operating and seasonal working capital purposes and to reduce external liquidity requirements.
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Management’s Discussion and AnalysisGMAC LLC OverviewWe are a leading global financial services firm with approximately $310 billion of assets and operations in approximately 40 countries. Founded in 1919 as a wholly owned subsidiary of General Motors Corporation, GMAC was originally established to provide GM dealers with the automotive financing necessary to acquire and maintain vehicle inventories and to provide retail customers the means by which to finance vehicle purchases through GM dealers. Our products and services have expanded beyond automotive financing as we currently operate in the following lines of business — Automotive Finance, Mortgage (ResCap), and Insurance. Refer to our 2005 Annual Report on Form 10-K for a more complete description of our business activities, along with the products and services offered and the market competition.Net income for our businesses is summarized as follows:
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Management’s Discussion and AnalysisGMAC LLCExcluding the goodwill and other intangible asset impairment charges, our Other segment, which includes the Commercial Finance business and our equity investment of approximately 22% in Capmark, incurred a net operating loss of $64 million as compared to $142 million earned in the same period last year. Part of the third quarter decline relates to the change in ownership of Capmark, following the first quarter sale of approximately 78% of our commercial mortgage business. As a result, the third quarter income includes the earnings on our equity share of Capmark compared to a year ago when Capmark was wholly owned and fully consolidated in our results. In addition, the Other segment results were negatively affected by higher credit provisions at Commercial Finance business, mostly related to the workout portfolio.The goodwill impairment charge of $685 million (after-tax) at our Commercial Finance business was the result of our third quarter impairment test which was triggered outside the normal fourth quarter cycle as the business experienced attrition of key personnel around the middle of the year. The charge results from lower cash flow projections due to the decision by new management at Commercial Finance business to exit certain low return product lines and asset classes as well as a decline in expected factored sales volume growth.The sale of 51 percent of our equity to FIM Holdings is expected to close in the fourth quarter of this year. In addition to continuing to enable us to support the sale of GM vehicles, the transaction is intended to support our strategic goal of a stable investment grade credit rating and profitable growth. Automotive Finance OperationsOur Automotive Finance operations offer a wide range of financial services and products (directly and indirectly) to retail automotive consumers, automotive dealerships and other commercial businesses. Our Automotive Finance operations are comprised of two separate reporting segments — North American Automotive Finance Operations and International Automotive Finance Operations — and certain corporate activities. The products and services offered by our Automotive Finance operations include the purchase of retail installment sales contracts and leases, extension of term loans, dealer floor plan financing and other lines of credit to dealers, and fleet leasing. Refer to pages 21-31 of our 2005 Annual Report on Form 10-K for further discussion of the business profile of our Automotive Finance operations.Results of OperationsThe following table summarizes the operating results of our Automotive Finance operations for the periods indicated. The amounts presented are before the elimination of balances and transactions with our other reporting segments.
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Management’s Discussion and AnalysisGMAC LLCcertain deferred interest debentures, which resulted in an after-tax unfavorable impact of $135 million. Absent the impact of the tender offer, Automotive Finance operating earnings were $140 million higher than the third quarter of 2005.Total financing revenue increased 7% in the third quarter of 2006, as compared to the prior year, with declines in consumer revenue being more than offset by higher commercial and operating lease revenues in the North American operations. The decrease in consumer revenue is consistent with the reduction in consumer asset levels as a result of continued whole loan sale activity. Consumer finance receivables declined by $13 billion, or approximately 16%, since September 30, 2005. Operating lease revenue (along with the related depreciation expense) increased year over year consistent with the increase in the size of the operating lease portfolio (approximately 20% since September 2005). The increase in the portfolio is reflective of continued strong lease volumes in North American operations and higher average customer balances.The increase in interest expense for the third quarter as compared to the third quarter of 2005 is primarily due to the aforementioned $1 billion debt tender offer, which resulted in a $220 million pre-tax unfavorable impact ($135 million after-tax). Absent the impact of the tender offer, despite lower overall debt levels, interest expense is relatively flat in comparison with 2005 due to an increased cost of funds, as a result of higher market interest rates.The provision for credit losses decreased in comparison to the prior year largely due to the estimated provision, which was necessary in the third quarter of 2005 due to Hurricane Katrina losses. The provision decreases due to Hurricane Katrina were somewhat offset by the overall credit performance of the consumer portfolio. Refer to Credit Risk discussion within this Automotive Finance Operations section of the MD&A for further discussion.Investment income increased for both the third quarter and first nine months of 2006, as compared to the same periods in 2005. The increases are largely a result of higher short-term interest rates and asset balances in 2006 versus 2005. Other income decreased in comparison to the third quarter of 2005 due to lower revenue on intercompany loans. In addition, non-interest expenses increased in comparison with 2005 levels due to an overall decline in operating lease remarketing results as a result of a softening in used vehicle prices and an overall decrease in lease termination volume.Total income tax expense increased by $24 million in the third quarter and declined by $21 million for the first nine months of 2006, respectively, as compared to the same periods in 2005.23
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Management’s Discussion and AnalysisGMAC LLCAutomotive Financing VolumeThe following table summarizes our new vehicle consumer financing volume, our share of GM retail sales and our wholesale financing of new vehicles and related share of GM sales to dealers in markets where we operate.
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Management’s Discussion and AnalysisGMAC LLCresults 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.
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Management’s Discussion and AnalysisGMAC LLCIn addition to the preceding loss and delinquency data, the following table summarizes bankruptcies and repossession information for the United States consumer automotive retail contract portfolio (which represents approximately 58% of our on-balance sheet consumer automotive retail contract portfolio):
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Management’s Discussion and AnalysisGMAC LLCThe allowance for credit losses as a percentage of the total on-balance sheet consumer portfolio has experienced a slight decrease in comparison with the third quarter of 2005. This decrease is primarily related to improved credit performance in our International operations consumer portfolio. The allowance for credit losses as a percentage of the total on-balance sheet consumer portfolio for our North American operations remained stable in comparison to 2005 levels.Commercial CreditOur credit risk on the commercial portfolio is markedly different from that of our consumer portfolio. Whereas the consumer portfolio represents a homogenous pool of retail contracts 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 we operate.At September 30, 2006, the only commercial receivables that had been securitized and accounted for as off-balance sheet transactions represent wholesale lines of credit extended to automotive dealerships, which historically experience low charge-offs. As a result, the amount of charge-offs on our managed portfolio is the same as the on-balance sheet portfolio, and only the on-balance sheet commercial portfolio credit experience is presented in the following table:
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Management’s Discussion and AnalysisGMAC LLCResults of OperationsThe following table summarizes the operating results for ResCap for the periods indicated. The amounts presented are before the elimination of balances and transactions with our other reporting segments.
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Management’s Discussion and AnalysisGMAC LLCThe following summarizes mortgage loan production for the periods indicated.
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Management’s Discussion and AnalysisGMAC LLCAllowance for Loan LossesThe following table summarizes the activity related to the allowance for loan losses:
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Management’s Discussion and AnalysisGMAC LLCOur classification of a loan as nonperforming does not necessarily indicate that the principal amount of the loan is ultimately uncollectible in whole or in part. In certain cases, borrowers make payments to bring their loans contractually current and, in all cases, our mortgage loans are collateralized by residential real estate. As a result, our experience has been that any amount of ultimate loss is substantially less than the unpaid principal balance of a nonperforming loan. Insurance OperationsOur Insurance operations insure automobile service contracts and underwrite personal automobile insurance coverages (ranging from preferred to non-standard risks) and selected commercial insurance and reinsurance coverages. Refer to pages 42-45 of our 2005 Annual Report on Form 10-K for further discussion of the business profile of our Insurance operations.Results of OperationsThe following table summarizes the operating results of GMAC Insurance for the periods indicated. The amounts presented are before the elimination of balances and transactions with our other operating segments.
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Management’s Discussion and AnalysisGMAC LLCwarranty term. Going forward the GM warranty extension will have a financial impact on our operations and management is currently assessing the potential revenue impact.Underwriting results increased in the third quarter 2006 due to lower weather losses in the auto dealer physical damage business combined with the hurricane losses incurred in 2005 (primarily Hurricane Katrina) and continued favorable loss trends experienced by the extended service contract product line.The combination of investment and other income increased 115% and 30% in the third quarter and first nine months of 2006, respectively, as compared to the same 2005 periods. The increase is primarily attributable to higher capital gains realized. The market value of the investment portfolio was $8.0 billion, comprised of $5.5 billion fixed income and $2.5 billion equity investments at September 30, 2006, compared to $7.8 billion, comprised of $5.4 billion fixed income and $2.4 billion equity investments at September 30, 2005. The increase in market value was driven by a strong equity portfolio and the reinvestment of positive cash flow.During the fourth quarter, as part of our investment and capital strategy, our Insurance operations is completing a securities portfolio review and is in the process of rebalancing the mix of equity and fixed income securities. The proceeds from these sales will either be invested in fixed income securities or remitted as dividends. It is expected that significant net capital gains will be realized on these sales during the fourth quarter.Total expenses increased 5% in the third quarter of 2006, as compared to the same period in 2005, and 9% for the first nine months of 2006 over the same period in 2005. The increases were commensurate with higher insurance premiums and service revenue earned and an increase in amortization of deferred acquisition costs, partially offset by favorable loss experience. Other OperationsOther operations is comprised of our Commercial Finance business, equity interest in Capmark, certain corporate activities related to the Mortgage Group, and reclassifications and elimination between the reporting segments.Results of OperationsNet income for our Other operations is summarized as follows:
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Management’s Discussion and AnalysisGMAC LLCEquity Interest in CapmarkOn March 23, 2006, we closed on the sale of approximately 78 percent of our equity in Capmark for approximately $1.5 billion in cash. At the closing, Capmark also repaid us approximately $7.3 billion in intercompany loans, bringing the total cash proceeds from the sale to $8.8 billion.We retained an equity voting interest in Capmark and have representation on its Board of Directors. We no longer have a majority ownership or a majority controlling interest in Capmark but do have the ability to exercise significant influence and have accounted for our remaining interest under the equity method of accounting. In addition to our equity investment, we have an investment of $250 million of subordinated indenture notes issued by Capmark. Both investments are reflected in Other assets in the Condensed Consolidated Balance Sheet.Our net after-tax earnings in Capmark decreased 93% and 76% to $9 and $54 million for the third quarter and first nine months of 2006. The results for the third quarter were partially offset as Capmark recognized a number of losses associated with properties owned by a Capmark subsidiary. For the nine months ended September 30, 2006, earnings declined due to a loss recognized on the sale and a decline in the share of Capmark income recognized as we no longer fully consolidate the results of Capmark but instead reflect our approximate 22% equity interest. Critical Accounting EstimatesWe have 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 our financial condition, results of operations or cash flows under different conditions or using different assumptions.Our most critical accounting estimates are: • Determination of the allowance for credit losses • Valuation of automotive lease residuals • Valuation of mortgage servicing rights • Valuation of interests in securitized assets • Determination of reserves for insurance losses and loss adjustment expensesThe adoption of SFAS 156 as of January 1, 2006, requires us to present our servicing rights at fair value for those classes of servicing rights for which we have elected the fair value method.There have been no other significant changes in the methodologies and processes used in developing these estimates from what is described in our 2005 Annual Report on Form 10-K. Refer to Note 1 for further discussion of the impact of adopting this standard. Funding and LiquidityOur liquidity and our ongoing profitability is, in large part, dependent upon our timely access to capital and the costs associated with raising funds in different segments of the capital markets. Over the past several years, our funding strategy has focused on the development of diversified funding sources across a global investor base, both public and private and, as appropriate, the extension of debt maturities. In addition, we maintain a large cash reserve ($14.1 billion at September 30, 2006), including certain marketable securities that can be utilized to meet our obligations in the event of any market disruption. During the quarter, we reduced our cash reserves from $22.7 billion at June 30, 2006, to $14.1 billion at September 30, 2006, reflecting our increased access to liquidity. From time to time, we repurchase previously issued debt as part of our cash and liquidity management strategy. In October 2006 we successfully completed a debt tender offer to retire $1 billion of deferred interest debentures, which will generate significant interest savings going forward. This multi-faceted strategy, combined with a continuous prefunding of requirements, is designed to enhance our ability to meet our obligations.The diversity of our funding sources enhances funding flexibility, limits dependence on any one source of funds and results in a more cost effective strategy over the longer term. In developing this approach, management considers market conditions, prevailing interest rates, liquidity needs and the desired maturity profile of our liabilities. This strategy has helped us maintain liquidity during periods of weakness in the capital markets, changes in our business or changes in our credit ratings. Despite our diverse funding sources and strategies, our ability to maintain liquidity may be affected by certain risk factors. Refer to Risk Factors for further discussion on risk factors.33
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Management’s Discussion and AnalysisGMAC LLCThe following table summarizes our outstanding debt by funding source, excluding Capmark balances, for the periods indicated:
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Management’s Discussion and AnalysisGMAC LLCformation of ResCap. ResCap, an indirect wholly owned subsidiary, was formed as the holding company of our residential mortgage businesses and in the second quarter of 2005 successfully achieved an investment grade rating (separate from us). To date, ResCap has issued $12.2 billion in public and private unsecured debt and closed a $3.5 billion syndication of its bank facilities. The syndication, which closed in July 2005, consisted of a $1.75 billion syndicated term loan; an $875 million syndicated line of credit committed through July 2008 and an $875 million syndicated line of credit committed through July 2007. In the fourth quarter of 2005, ResCap filed a $12 billion shelf registration statement in order to offer senior and/or subordinated debt securities and has issued $7.2 billion in unsecured debt to date from this shelf. In May 2006 $1.7 billion was issued from this shelf which was comprised of two tranches, GBP 400 million and EUR 750 million. The proceeds from bond transactions were used to repay the intercompany subordinated note to us, thus providing additional liquidity.As previously disclosed, on March 23, 2006, we completed the sale of 78% of our equity in GMAC Commercial Mortgage. Under the terms of the transaction, we received $8.8 billion at closing, which is comprised of sale proceeds and repayment of intercompany debt, thereby increasing our liquidity position and reducing the amount of funding required. Please refer to Note 1 to the Condensed Consolidated Financial Statements for further details.The change in focus in the funding strategy has allowed us to maintain adequate access to capital and a sufficient liquidity position despite reductions in and limited access to traditional unsecured funding sources (i.e., commercial paper, term debt, bank loans and lines of credit) due to the deterioration in our unsecured credit rating. Unsecured sources most impacted by the reduction in our credit rating have been our commercial paper programs, the term debt markets, certain bank loan arrangements primarily at ResCap and our International Automotive operations, as well as Fannie Mae custodial borrowing arrangements at ResCap.A further reduction of our credit rating could increase borrowing costs and further constrain our access to unsecured debt markets, including capital markets for retail debt. In addition, a further reduction of our credit ratings could increase the possibility of additional terms and conditions in any new or replacement financing arrangements and impact elements of certain existing secured borrowing arrangements. However, our funding strategy has increased our focus on expanding and developing diversified secured funding sources and increased use of automotive whole loan sales that are not directly impacted by ratings on our unsecured debt.With limited access to traditional unsecured funding sources, management will continue to diversify and expand our use of asset-backed funding, and we believe that our funding strategy will provide sufficient access to the capital markets to meet our short- and medium-term funding needs. Notwithstanding the foregoing, management believes that the current ratings situation and outlook increases the level of risk to our long-term ability to sustain the current level of asset originations. In an effort to mitigate this risk, on April 3, 2006, GM announced that it agreed to sell a 51 percent controlling interest in us to a consortium led by Cerberus Capital Management, which is expected to close in the fourth quarter of this year. In addition to continuing to enable us to support the sale of GM vehicles, the transaction is intended to support our strategic goal of a stable investment grade rating and profitable growth. In April 2006, in conjunction with the announcement of the sale of 51% of GMAC, we announced that we expected to arrange two asset-backed funding facilities totaling up to $25 billion which would support our ongoing business and enhance our liquidity position. Citigroup has committed $12.5 billion in aggregate to these two facilities. In August 2006, we closed on the first of the two asset backed funding facilities, a three year, $10 billion facility with a subsidiary of Citigroup. At this time, GMAC is continuing to review its options for a second asset-based facility, including the form of the facility, to enhance our overall liquidity position. The funding facilities are in addition to Citigroup’s initial equity investment in us. There can be no assurance that the sale transaction will be successful in achieving a stable investment grade rating and therefore we plan to maintain the current conservative funding strategy until risks to closing the transaction are reduced.Credit RatingsThe cost and availability of unsecured financing is influenced by credit ratings, which are intended to be an indicator of the creditworthiness of a particular company, security, or obligation. Lower ratings generally result in higher borrowing costs as well as reduced access to capital markets. This is particularly true for certain term debt institutional investors whose investment guidelines require investment grade term ratings and for short-term institutional investors (money markets in particular) whose investment guidelines require the two highest rating categories for short-term debt. Substantially all of our 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 health care liabilities and uncertainties at Delphi Corporation, have resulted in a series of credit rating actions, which commenced late in 2001. In the second and third quarters of 2005, Standard & Poor’s, Fitch and Moody’s downgraded our (excluding ResCap) senior debt to a non-investment grade rating with DBRS continuing to maintain an investment grade rating on our senior debt. As a result of GM’s announcement on October 17, 2005, that it was exploring the possible sale of a controlling interest in us to a strategic partner, the four rating agencies changed our review status to either evolving or developing. On March 16, 2006, Moody’s placed our senior unsecured ratings under review for a possible downgrade following GM’s announcement that it would delay filing its annual report on Form 10-K with the SEC. Following35
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Management’s Discussion and AnalysisGMAC LLCthe April 3, 2006 announcement by GM that it agreed to sell a 51 percent controlling interest in us, Fitch revised our rating watch status to Positive from Evolving, indicating that the ratings may be upgraded or maintained at current levels.The following summarizes our current ratings, outlook and the date of last rating action by the respective nationally recognized rating agencies.
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Management’s Discussion and AnalysisGMAC LLC Off-balance Sheet ArrangementsWe use off-balance sheet entities as an integral part of our operating and funding activities. For further discussion of our use of off-balance sheet entities, refer to the Off-balance Sheet Arrangements section in our 2005 Annual Report on Form 10-K.The following table, which excludes Capmark balances, summarizes assets carried off-balance sheet in these entities.
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Management’s Discussion and AnalysisGMAC LLCrepresents a positive assertion by management that a company is entitled to the economic benefits of a tax position. If a tax position is not considered more-likely-than-not to be sustained based solely on its technical merits, no benefits of the position are to be recognized. Moreover, the more-likely-than-not threshold must continue to be met in each reporting period to support continued recognition of a benefit. At adoption, companies must adjust their financial statements to reflect only those tax positions that are more-likely-than-not to be sustained as of the adoption date. Any necessary adjustment would be recorded directly to retained earnings in the period of adoption and reported as a change in accounting principle. This Interpretation is effective as of the beginning of the first fiscal year beginning after December 15, 2006. Management is assessing the potential impact on our financial condition or results of operations.FASB Staff Position (FSP) No. 13-2 — In July 2006 the FASB issued FSP No. 13-2Accounting for a Change or Projected Change in the Timing of Cash Flows Relating to Income Taxes Generated by a Leveraged Lease Transaction,(FSP 13-2), which amends SFAS No. 13, Accounting for Leases, by requiring lessors to recalculate the rate of return and periodic income allocation for leveraged-lease transactions when there is a change or projected change in the timing of income tax cash flows related to the lease. FSP 13-2 requires lessors to use the model in FIN 48 to determine the timing and amount of expected tax cash flows in leveraged-lease calculations and recalculations. FSP 13-2 is effective in the same period as FIN 48. At the date of adoption, the lessor is required to reassess projected income tax cash flows related to leveraged leases using the FIN 48 model for recognition and measurement. Revisions to the net investment in a leverage lease required when FSP 13-2 is adopted would be recorded as an adjustment to the beginning balance of retained earnings in the period of adoption and reported as a change in accounting principle. Management is assessing the potential impact on our financial condition or results of operations.SEC Staff Accounting Bulletin No. 108 — In September 2006 the SEC issued Staff Accounting Bulletin (SAB) No. 108 Quantifying Financial Misstatements, which expresses the Staff’s views regarding the process of quantifying financial statement misstatements. Registrants are required to quantify the impact of correcting all misstatements, including both the carryover and reversing effects of prior year misstatements, on the current year financial statements. The techniques most commonly used in practice to accumulate and quantify misstatements are generally referred to as the “rollover” (current year income statement perspective) and “iron curtain” (year-end balance perspective) approaches. The financial statements would require adjustment when either approach results in quantifying a misstatement that is material, after considering all relevant quantitative and qualitative factors. Management does not expect this guidance to have a material effect on our current process for assessing and quantifying financial statement misstatements.SFAS No. 157 — In September 2006 the FASB issued SFAS No. 157 Fair Value Measurements, which provides a definition of fair value, establishes a framework for measuring fair value and requires expanded disclosures about fair value measurements. SFAS 157 is effective for financial statements issued for fiscal years beginning after November 12, 2007, and interim periods within those years. The provisions of SFAS 157 should be applied prospectively. Management is assessing the potential impact on our financial condition and results of operations.SFAS No. 158 — In September 2006 the FASB issued SFAS No. 158 Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans,which amends SFAS No. 87 Employers’ Accounting for Pensions (SFAS No. 87), SFAS No. 88Employer’s Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and for Termination Benefits(SFAS No. 88), SFAS No. 106Employer’s Accounting for Postretirements Benefits Other Than Pensions (SFAS No. 106), and SFAS No. 132(R) Employers’ Disclosures about Pensions and Other Postretirement Benefits (revised 2003)(SFAS 132(R)). This Statement requires companies to recognize an asset or liability for the overfunded or underfunded status of their benefit plans in their financial statements. The asset or liability is the offset to other comprehensive income, consisting of previously unrecognized prior service costs and credits, actuarial gains or losses and transition obligations and assets. SFAS 158 also requires the measurement date for plan assets and liabilities to coincide with the sponsor’s year end. The standard provides two transition alternatives for companies to make the measurement-date provisions. The recognition of asset and liability related to funded status provision is effective for fiscal years ending after December 15, 2006, and the change in measurement is effective for fiscal years ending after December 15, 2008. Management is assessing the potential impact on our financial condition and results of operations. Consolidated Operating ResultsThe following section provides a discussion of our 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.RevenuesTotal financing revenue increased by $624 million and $1,547 million, respectively, in the third quarter and first nine months of 2006, compared to the same period of 2005, due to increases in auto financing revenue, operating lease income, and mortgage consumer38
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Management’s Discussion and AnalysisGMAC LLCinterest income. Auto financing revenue benefited from strong retail financing penetration and operating lease income benefited due to the growth in the operating lease portfolio. Mortgage consumer interest income benefited from mortgage originations which increased slightly to $51.5 billion in the third quarter from $51.3 billion in the prior period. These increases were partially offset by a decline in mortgage loans held for sale which declined due to the sale of Capmark. Subsequent to the sale of Capmark on March 23, 2006, we only recognize our approximately 22% equity interest versus a year ago when Capmark was wholly-owned and fully consolidated in our results.Interest expense increased by $937 million and $2,267 million in the third quarter and first nine months of 2006, as compared with the same period in 2005. The increase is primarily a result of the negative impact of higher funding costs due to an increase in overall market interest rates. In addition, a portion of the increase is due to an unfavorable impact of $220 million related to our third-quarter debt tender offer to repurchase $1 billion of zero coupon bonds. The provision for credit losses increased for the third quarter of 2006 by $101 million primarily due to increases in provisions at both the Commercial Finance business and ResCap. This increase was partially offset by lower provisions in the auto finance business.Insurance premiums and service revenue earned increased by 7% and 10% in the third quarter and first nine months of 2006, as compared with the same period in 2005. However, insurance premiums and service revenue written declined slightly for the third quarter and first nine months due to a lower volume of policies written in the extended service contract business due to lower penetration and GM retail vehicle sales.Gains on sales of mortgage and automotive loans, net decreased due to lower margins resulting from competitive pricing pressures. Net loan servicing income decreased due to unfavorable mortgage servicing asset valuations resulting from lower long-term rates. The decline in net loan servicing was partially offset by an increase in servicing fees resulting from a higher volume of originations.Investment income increased by $261 million and $161 million in the third quarter and first nine months of 2006, as compared to the same period of the prior year. The increase is primarily attributable to higher capital gains recognized during the period at our Insurance operations. The market value of the investment portfolio at our Insurance operations was $8.0 billion at September 30, 2006, compared to $7.8 billion at September 30, 2005. Gain on sale of equity investments increased by $411 million in the first nine months of 2006, as compared to the same period in the prior year. The increase is primarily due to the sale of our equity interest in a regional homebuilder during the second quarter of 2006.ExpensesNoninterest expense increased by 18% and 11%, in the third quarter and first nine months of 2006, as compared to the same period in the prior year. Depreciation expense on operating lease assets increased during the third quarter and first nine months of 2006, as a result of higher average operating lease asset levels, as compared to the same period of 2005. In addition, noninterest expense was negatively impacted in the third quarter by non-cash goodwill and other intangible asset impairment charges of $840 million related to the Commercial Finance business. Part of the increase was offset by lower compensation and benefits expenses at Capmark which was fully consolidated in 2005 versus accounted for under the equity method starting in March 2006. Forward Looking StatementsThe foregoing Management’s Discussion and Analysis of Financial Condition and Results of Operations and other portions of this Form 10-Qcontains various forward-looking statements within the meaning of applicable federal securities laws, including the Private Securities Litigation Reform Act of 1995, that are based upon our 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.The words “anticipate,” “estimate,” “believe,” “expect,” “intend,” “may,” “plan,” “project,” “future” and “should” and any similar expressions are intended to identify forward-looking statements. Forward-looking statements involve a number of risks, uncertainties and other factors, including (but not limited to) the Risk Factors described in Item 1A of our 2005 Form 10-K, as updated in this Form 10-Q, and which may be revised or supplemented in subsequent reports on SEC Forms 10-Qand 8-K. Such factors include, among others, the following: • the ability of GM to complete the previously announced transaction with a strategic investor of a controlling interest in us while maintaining a significant stake in us, securing separate credit ratings and low cost funding to sustain growth for us and ResCap and maintaining the mutually beneficial relationship between us and GM; • changes in economic conditions, currency exchange rates, significant terrorist attacks or political instability in the major markets where we operate;39
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Management’s Discussion and AnalysisGMAC LLC • changes in the laws, regulations, policies or other activities of governments, agencies and similar organizations where such actions may affect the production, licensing, distribution or sale of our products, the cost thereof or applicable tax rates; and • the threat of terrorism, the outbreak or escalation of hostilities between the United States and any foreign power or territory and changes in international political conditions may continue to affect both the United States and the global economy and may increase other risks.40
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Controls and ProceduresGMAC LLCControls and Procedures" -->
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Other Information GMAC LLC" -->
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Other InformationGMAC LLC • We use estimates and assumptions in determining the fair value of certain of our assets, in determining our allowance for credit losses, in determining lease residual values and in determining our reserves for insurance losses and loss adjustment expenses. If our estimates or assumptions prove to be incorrect, our cash flow, profitability, financial condition and business prospects could be materially adversely affected. • Our business outside the United States exposes us to additional risks that may cause our revenues and profitability to decline. • Our business could be adversely affected by changes in currency exchange rates. • General business and economic conditions of the industries and geographic areas in which we operate affect our revenues, profitability and financial condition. • Our profitability and financial condition may be materially adversely affected by decreases in the residual value of off-lease vehicles. • Fluctuations in valuation of investment securities or significant fluctuations in investment market prices could negatively affect revenues. • Changes in existing U.S. government-sponsored mortgage programs, or disruptions in the secondary markets in the United States or in other countries in which our mortgage subsidiaries operate, could adversely affect the profitability and financial condition of our mortgage business. • We may be required to repurchase contracts and provide indemnification if we breach representations and warranties from our securitization and whole loan transactions, which could harm our profitability and financial condition. • Significant indemnification payments or contract, lease or loan repurchase activity of retail contracts or leases or mortgage loans could harm our profitability and financial condition. • A loss of contractual servicing rights could have a material adverse effect on our financial condition, liquidity and results of operations. • The regulatory environment in which we operate could have a material adverse effect on our business and earnings. • The worldwide financial services industry is highly competitive. If we are unable to compete successfully or if there is increased competition in the automotive financing, mortgage and/or insurance markets or generally in the markets for securitizations or asset sales, our margins could be materially adversely affected.Other Information" -->
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Index of Exhibits GMAC LLC" -->
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Index of ExhibitsGMAC LLC
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