UNITED STATES
FORM 10-K/A
[X] |
ANNUAL REPORT PURSUANT TO SECTION 13 or
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2004, 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: 1-3754
GENERAL MOTORS ACCEPTANCE CORPORATION
Delaware (State or other jurisdiction of incorporation or organization) |
38-0572512 (I.R.S. Employer Identification No.) |
200 Renaissance Center
(313) 556-5000
Securities registered, pursuant to Section 12(b) of the Act, on the New York Stock Exchange:
Title of each class | ||
8.75% Notes due July 15, 2005
|
10.30% Deferred Interest Debentures due June 15, 2015 | |
6 5/8% Notes due October 15, 2005
|
7.30% Public Income NotES (PINES) due March 9, 2031 | |
6 1/8% Notes due January 22, 2008
|
7.35% Notes due August 8, 2032 | |
8 7/8% Notes due June 1, 2010
|
7.25% Notes due February 7, 2033 | |
6.00% Debentures due April 1, 2011
|
7.375% Notes due December 16, 2044 | |
10.00% Deferred Interest Debentures due
December 1, 2012
|
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 [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrants knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X]
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes [ ] No [X]
As of December 31, 2004, there were outstanding 10 shares of the issuers $.10 par value common stock.
Documents incorporated by reference. None.
Reduced Disclosure Format
The registrant meets the conditions set forth in General Instruction I(1)(a) and (b) of Form 10-K and is therefore filing this Form with the reduced disclosure format.
General Motors Acceptance Corporation (GMAC or the Company) is filing this amendment to Form 10-K for the fiscal year ended December 31, 2004, which was filed with the Securities and Exchange Commission on March 16, 2005 (2004 Form 10-K). The Reports of Independent Registered Public Accounting Firm, which appear on pages 53 and 54 of the 2004 Form 10-K, did not include the signature of Deloitte & Touche LLP. At the time of the March 16, 2005 filing of the Form 10-K with the Securities and Exchange Commission, GMAC was in possession of manually-signed copies of the audit opinions, but the signature in typed form was inadvertently omitted from the electronic version. The purpose of this amendment is to file the Reports of Independent Registered Public Accounting Firm which include the signatures in typed form.
Except for the amendment described above, this Form 10-K/A does not modify or update other disclosures in, or exhibits to, GMACs 2004 Form 10-K. For convenience and ease of reference, this amendment sets forth Item 8 Financial Statements and Supplementary Data from the 2004 Form 10-K in its entirety with the applicable changes. Because this amendment only incorporates the signature in typed form of Deloitte & Touche LLP on the Reports of Independent Registered Public Accounting Firm, the dates of all reports and certifications remain as originally filed.
GMACs Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and amendments to these reports are available on the Companys internet website, free of charge, as soon as reasonably practicable after the reports are electronically filed with or furnished to the United States Securities and Exchange Commission (SEC). These reports are available at www.gmacfs.com, under Investment, Financial Statements, and SEC Filings.
Contents | ||||||||
Part I | ||||||||
Signatures |
Page | ||||||
Part I
|
||||||
Item 1.
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Business | * | ||||
Item 2.
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Properties | * | ||||
Item 3.
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Legal Proceedings | * | ||||
Item 4.
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Submission of Matters to a Vote of Security Holders | * | ||||
Part II
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||||||
Item 5.
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Market for Registrants Common Equity and Related Stockholder Matters | * | ||||
Item 6.
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Selected Financial Data | * | ||||
Item 7.
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Managements Discussion and Analysis of Financial Condition and Results of Operations | * | ||||
Item 7A.
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Quantitative and Qualitative Disclosures About Market Risk | * | ||||
Item 8.
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Financial Statements and Supplementary Data | 1 | ||||
Statement of Responsibility for Preparation of Financial Statements | 3 | |||||
Managements Report on Internal Control over Financial Reporting | 4 | |||||
Reports of Independent Registered Public Accounting Firm | 5 | |||||
Consolidated Statement of Income | 7 | |||||
Consolidated Balance Sheet | 8 | |||||
Consolidated Statement of Changes in Stockholders Equity | 9 | |||||
Consolidated Statement of Cash Flows | 10 | |||||
Notes to Consolidated Financial Statements | 11 | |||||
Supplementary Financial Data | 47 | |||||
Item 9.
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Changes in and Disagreements With Accountants on Accounting and Financial Disclosure | * | ||||
Item 9A.
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Controls and Procedures | * | ||||
Item 9B.
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Other Information | * | ||||
Part III
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||||||
Item 10.
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Directors and Executive Officers of the Registrant | * | ||||
Item 11.
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Executive Compensation | * | ||||
Item 12.
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Security Ownership of Certain Beneficial Owners and Management | * | ||||
Item 13.
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Certain Relationships and Related Transactions | * | ||||
Item 14.
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Principal Accountant Fees and Services | * | ||||
Part IV
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||||||
Item 15.
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Exhibits, Financial Statement Schedules | * | ||||
Signatures | 2 | |||||
Index of Exhibits | * |
* Refer to the 2004 Form 10-K filed on March 16, 2005.
Item 8. Financial Statements and Supplementary Data
GMACs Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to these reports are available on the Companys internet website, free of charge, as soon as reasonably practicable after the reports are electronically filed with or furnished to the United States Securities and Exchange Commission (SEC). These reports are available at www.gmacfs.com, under Investment, Financial Statements, and SEC Filings.
1
Pursuant to the requirements of Section 13 or 15(d) 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 13th day of April, 2005.
General Motors Acceptance Corporation | |
(Registrant) |
/s/ SANJIV KHATTRI Sanjiv Khattri Executive Vice President and Principal Financial Officer |
/s/ LINDA K. ZUKAUCKAS Linda K. Zukauckas Controller and Principal Accounting Officer |
2
The Consolidated Financial Statements, Financial Highlights and Managements Discussion and Analysis of Financial Condition and Results of Operations of General Motors Acceptance Corporation and subsidiaries (GMAC) were prepared by management, who is responsible for their integrity and objectivity. Where applicable, this financial information has been prepared in conformity with the Securities Exchange Act of 1934, as amended, and accounting principles generally accepted in the United States of America. The preparation of this financial information requires the use of estimates, judgments, and assumptions that affect the reported amounts of assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the periods presented. The critical accounting estimates that may involve a higher degree of judgment and complexity are included in Managements Discussion and Analysis.
Deloitte & Touche LLP, an independent registered public accounting firm, has audited the consolidated financial statements of GMAC; and their report is included herein. The audit was conducted in accordance with the standards of the Public Company Accounting Oversight Board (United States).
The General Motors Board of Directors, through its Audit Committee (composed entirely of independent directors), is responsible for overseeing managements fulfillment of its responsibilities in the preparation of the consolidated financial statements. The GM Audit Committee annually recommends to the Board of Directors the selection of independent auditors in advance of General Motors Annual Meeting of Stockholders and submits the selection for ratification at the Meeting. In addition, the GM Audit Committee reviews the scope of the audits and the accounting principles being applied in financial reporting. The independent auditors, representatives of management, and the internal auditors meet regularly (separately and jointly) with the GM Audit Committee to review the activities of each, and to ensure that each is properly discharging its responsibilities. To reinforce complete independence, Deloitte & Touche LLP has full and free access to meet with the GM Audit Committee without management representatives present, to discuss the results of the audit, the adequacy of internal control, and the quality of financial reporting. Certain aspects of these responsibilities are delegated to GMACs Audit Committee, comprised of General Motors Chief Financial Officer, Treasurer and President of GM Asset Management.
/s/ ERIC A. FELDSTEIN | /s/ SANJIV KHATTRI | |
|
|
|
Eric A. Feldstein Chairman March 14, 2005 |
Sanjiv Khattri Executive Vice President and Chief Financial Officer March 14, 2005 |
3
General Motors Acceptance Corporations management is responsible for establishing and maintaining effective internal control over financial reporting. The Companys internal control over financial reporting is a process designed under the supervision of the Companys Chief Executive Officer and Chief Financial Officer to provide reasonable assurance regarding the reliability of financial reporting and the preparation of published financial statements in accordance with accounting principles generally accepted in the United States of America.
The Companys internal control over financial reporting includes policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of the consolidated financial statements in conformity with accounting principles generally accepted in the United States of America, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Companys assets that could have a material effect on the consolidated financial statements.
Because of its inherent limitations, internal control over financial reporting can provide only reasonable assurance and may not prevent or detect misstatements. Further, because of changes in conditions, effectiveness of internal control over financial reporting may vary over time.
Management conducted, under the supervision of the Companys Chief Executive Officer and Chief Financial Officer, an evaluation of the effectiveness of the Companys internal control over financial reporting based on the framework in Internal Control Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission, commonly referred to as the COSO criteria. Based on the assessment performed, management concluded that as of December 31, 2004, GMACs internal control over financial reporting was effective based upon the COSO criteria. Additionally, based on their assessment, management determined that there were no material weaknesses in the Companys internal control over financial reporting as of December 31, 2004.
Managements assessment of the effectiveness of internal control over financial reporting as of December 31, 2004 has been audited by Deloitte & Touche LLP, an independent registered public accounting firm, as stated in their report appearing on the following page, which expresses unqualified opinions on managements assessment and on the effectiveness of the Companys internal control over financial reporting as of December 31, 2004.
/s/ ERIC A. FELDSTEIN | /s/ SANJIV KHATTRI | |
|
|
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Eric A. Feldstein Chairman March 14, 2005 |
Sanjiv Khattri Executive Vice President and Chief Financial Officer March 14, 2005 |
4
We have audited managements assessment, included in the accompanying Managements Report on Internal Control Over Financial Reporting, that General Motors Acceptance Corporation and subsidiaries (the Company) maintained effective internal control over financial reporting as of December 31, 2004, based on criteria established in the Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. The Companys management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on managements assessment and an opinion on the effectiveness of the Companys internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, evaluating managements assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinions.
A companys internal control over financial reporting is a process designed by, or under the supervision of, the companys principal executive and principal financial officers, or persons performing similar functions, and effected by the companys board of directors, management, and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A companys internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the companys assets that could have a material effect on the financial statements.
Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, managements assessment that the Company maintained effective internal control over financial reporting as of December 31, 2004, is fairly stated, in all material respects, based on criteria established in the Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2004, based on criteria established in the Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated financial statements of General Motors Acceptance Corporation and subsidiaries as of and for the year ended December 31, 2004. Our report, dated March 14, 2005, expressed an unqualified opinion on those financial statements.
/s/ DELOITTE & TOUCHE LLP
Detroit, Michigan
5
We have audited the accompanying Consolidated Balance Sheet of General Motors Acceptance Corporation and subsidiaries as of December 31, 2004 and 2003, and the related Consolidated Statements of Income, Changes in Stockholders Equity and Cash Flows for each of the three years in the period ended December 31, 2004. These financial statements are the responsibility of the Companys management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of General Motors Acceptance Corporation and subsidiaries at December 31, 2004 and 2003, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2004, in conformity with accounting principles generally accepted in the United States of America.
As discussed in Note 1 to the consolidated financial statements, effective July 1, 2003, General Motors Acceptance Corporation and subsidiaries began consolidating certain variable interest entities to conform to Financial Accounting Standards Board Interpretation No. 46, Consolidation of Variable Interest Entities.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of the Companys internal control over financial reporting as of December 31, 2004, based on the criteria established in the Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 14, 2005 expressed an unqualified opinion on managements assessment of the effectiveness of the companys internal control over financial reporting and an unqualified opinion on the effectiveness of the Companys internal control over financial reporting.
/s/ DELOITTE & TOUCHE LLP
Detroit, Michigan
6
Year ended December 31, (in millions) | 2004 | 2003 | 2002 | ||||||||||
Revenue
|
|||||||||||||
Consumer
|
$10,117 | $8,479 | $6,808 | ||||||||||
Commercial
|
2,177 | 1,950 | 2,059 | ||||||||||
Loans held for sale
|
1,269 | 1,024 | 843 | ||||||||||
Operating leases
|
6,768 | 6,807 | 6,279 | ||||||||||
Total revenue
|
20,331 | 18,260 | 15,989 | ||||||||||
Interest and discount expense
|
9,535 | 7,564 | 6,834 | ||||||||||
Net revenue before provision for credit losses
|
10,796 | 10,696 | 9,155 | ||||||||||
Provision for credit losses
|
1,944 | 1,721 | 2,153 | ||||||||||
Net revenue
|
8,852 | 8,975 | 7,002 | ||||||||||
Insurance premiums and service revenue earned
|
3,528 | 3,178 | 2,678 | ||||||||||
Mortgage banking income
|
2,100 | 2,663 | 1,788 | ||||||||||
Investment income
|
845 | 631 | 524 | ||||||||||
Other income
|
3,508 | 3,129 | 3,531 | ||||||||||
Total net revenue
|
18,833 | 18,576 | 15,523 | ||||||||||
Expense
|
|||||||||||||
Depreciation expense on operating lease assets
|
4,994 | 5,001 | 4,470 | ||||||||||
Compensation and benefits expense
|
2,916 | 2,838 | 2,474 | ||||||||||
Insurance losses and loss adjustment expenses
|
2,371 | 2,288 | 2,027 | ||||||||||
Other operating expenses
|
4,205 | 4,065 | 3,611 | ||||||||||
Total noninterest expense
|
14,486 | 14,192 | 12,582 | ||||||||||
Income before income tax expense
|
4,347 | 4,384 | 2,941 | ||||||||||
Income tax expense
|
1,434 | 1,591 | 1,071 | ||||||||||
Net income
|
$2,913 | $2,793 | $1,870 | ||||||||||
The Notes to the Consolidated Financial Statements are an integral part of these statements.
7
December 31, (in millions) | 2004 | 2003 | |||||||
Assets
|
|||||||||
Cash and cash equivalents
|
$22,718 | $17,976 | |||||||
Investment securities
|
14,960 | 13,200 | |||||||
Loans held for sale
|
19,934 | 19,609 | |||||||
Finance receivables and loans, net of unearned
income
|
|||||||||
Consumer
|
149,934 | 134,358 | |||||||
Commercial
|
53,210 | 43,046 | |||||||
Allowance for credit losses
|
(3,419 | ) | (3,042 | ) | |||||
Total finance receivables and loans, net
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199,725 | 174,362 | |||||||
Investment in operating leases, net
|
26,580 | 24,368 | |||||||
Notes receivable from General Motors
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4,921 | 3,151 | |||||||
Mortgage servicing rights, net
|
3,890 | 3,720 | |||||||
Premiums and other insurance receivables
|
1,763 | 1,960 | |||||||
Other assets
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29,648 | 29,817 | |||||||
Total assets
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$324,139 | $288,163 | |||||||
Liabilities
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|||||||||
Debt
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|||||||||
Unsecured
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$177,003 | $169,839 | |||||||
Secured
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91,957 | 69,023 | |||||||
Total debt
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268,960 | 238,862 | |||||||
Interest payable
|
3,394 | 3,122 | |||||||
Unearned insurance premiums and service revenue
|
4,727 | 4,228 | |||||||
Reserves for insurance losses and loss adjustment
expenses
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2,505 | 2,340 | |||||||
Accrued expenses and other liabilities
|
18,382 | 15,725 | |||||||
Deferred income taxes
|
3,754 | 3,650 | |||||||
Total liabilities
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301,722 | 267,927 | |||||||
Stockholders equity
|
|||||||||
Common stock, $.10 par value (10,000 shares
authorized, 10 shares issued and outstanding) and paid-in
capital
|
5,760 | 5,641 | |||||||
Retained earnings
|
15,491 | 14,078 | |||||||
Accumulated other comprehensive income
|
1,166 | 517 | |||||||
Total stockholders equity
|
22,417 | 20,236 | |||||||
Total liabilities and stockholders equity
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$324,139 | $288,163 | |||||||
The Notes to the Consolidated Financial Statements are an integral part of these statements.
8
Year ended December 31, (in millions) | 2004 | 2003 | 2002 | |||||||||
Common stock and paid-in capital
|
||||||||||||
Balance at beginning of year
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$5,641 | $5,641 | $5,641 | |||||||||
Increase in paid-in capital
|
119 | | | |||||||||
Balance at end of year
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5,760 | 5,641 | 5,641 | |||||||||
Retained earnings
|
||||||||||||
Balance at beginning of year
|
14,078 | 12,285 | 10,815 | |||||||||
Net income
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2,913 | 2,793 | 1,870 | |||||||||
Dividends paid
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(1,500 | ) | (1,000 | ) | (400 | ) | ||||||
Balance at end of year
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15,491 | 14,078 | 12,285 | |||||||||
Accumulated other comprehensive income
(loss)
|
||||||||||||
Balance at beginning of year
|
517 | (95 | ) | (322 | ) | |||||||
Other comprehensive income
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649 | 612 | 227 | |||||||||
Balance at end of year
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1,166 | 517 | (95 | ) | ||||||||
Total stockholders equity
|
||||||||||||
Balance at beginning of year
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20,236 | 17,831 | 16,134 | |||||||||
Increase in paid-in capital
|
119 | | | |||||||||
Net income
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2,913 | 2,793 | 1,870 | |||||||||
Dividends paid
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(1,500 | ) | (1,000 | ) | (400 | ) | ||||||
Other comprehensive income
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649 | 612 | 227 | |||||||||
Total stockholders equity at end of year
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$22,417 | $20,236 | $17,831 | |||||||||
Comprehensive income
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||||||||||||
Net income
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$2,913 | $2,793 | $1,870 | |||||||||
Other comprehensive income
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649 | 612 | 227 | |||||||||
Comprehensive income
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$3,562 | $3,405 | $2,097 | |||||||||
The Notes to the Consolidated Financial Statements are an integral part of these statements.
9
Year ended December 31, (in millions) | 2004 | 2003 | 2002 | |||||||||||
Operating activities
|
||||||||||||||
Net income
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$2,913 | $2,793 | $1,870 | |||||||||||
Reconciliation of net income to net cash provided
by operating activities
|
||||||||||||||
Depreciation and amortization
|
5,316 | 5,302 | 4,842 | |||||||||||
Amortization and valuation adjustments of
mortgage servicing rights
|
1,384 | 1,602 | 3,871 | |||||||||||
Provision for credit losses
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1,944 | 1,721 | 2,152 | |||||||||||
Net gains on sales of finance receivables and
loans
|
(31 | ) | (88 | ) | (239 | ) | ||||||||
Net (gains) losses on investment securities
|
(52 | ) | 71 | (74 | ) | |||||||||
Net change in:
|
||||||||||||||
Trading securities
|
597 | 236 | (656 | ) | ||||||||||
Loans held for sale
|
445 | 456 | (4,715 | ) | ||||||||||
Deferred income taxes
|
(118 | ) | (463 | ) | (454 | ) | ||||||||
Interest payable
|
311 | 358 | 318 | |||||||||||
Other assets
|
2,339 | (741 | ) | (2,383 | ) | |||||||||
Other liabilities
|
(2,801 | ) | (790 | ) | (429 | ) | ||||||||
Other, net
|
1,011 | 1,040 | 3,297 | |||||||||||
Net cash provided by operating activities
|
13,258 | 11,497 | 7,400 | |||||||||||
Investing activities
|
||||||||||||||
Purchases of available for sale securities
|
(12,783 | ) | (15,529 | ) | (36,392 | ) | ||||||||
Proceeds from sales of available for sale
securities
|
3,276 | 7,615 | 12,790 | |||||||||||
Proceeds from maturities of available for sale
securities
|
7,250 | 9,413 | 21,222 | |||||||||||
Net maturities of held to maturity securities
|
111 | 25 | 64 | |||||||||||
Net increase in finance receivables and loans
|
(127,264 | ) | (149,487 | ) | (142,927 | ) | ||||||||
Proceeds from sales of finance receivables and
loans
|
108,147 | 107,505 | 117,276 | |||||||||||
Purchases of operating lease assets
|
(14,324 | ) | (11,033 | ) | (16,071 | ) | ||||||||
Disposals of operating lease assets
|
7,770 | 9,280 | 12,639 | |||||||||||
Change in notes receivable from General Motors
|
(1,635 | ) | 299 | 1,251 | ||||||||||
Purchases and originations of mortgage servicing
rights, net
|
(1,554 | ) | (2,557 | ) | (1,711 | ) | ||||||||
Acquisitions of subsidiaries, net of cash acquired
|
9 | (144 | ) | (182 | ) | |||||||||
Other, net
|
(170 | ) | (1,918 | ) | (1,411 | ) | ||||||||
Net cash used in investing activities
|
(31,167 | ) | (46,531 | ) | (33,452 | ) | ||||||||
Financing activities
|
||||||||||||||
Net change in short-term debt
|
4,123 | 658 | 1,483 | |||||||||||
Proceeds from issuance of long-term debt
|
72,753 | 82,606 | 46,848 | |||||||||||
Repayments of long-term debt
|
(57,743 | ) | (38,944 | ) | (24,220 | ) | ||||||||
Other financing activities
|
4,723 | 1,319 | 333 | |||||||||||
Dividends paid
|
(1,500 | ) | (1,000 | ) | (400 | ) | ||||||||
Net cash provided by financing activities
|
22,356 | 44,639 | 24,044 | |||||||||||
Effect of exchange rate changes on cash and cash
equivalents
|
295 | 268 | 10 | |||||||||||
Net increase (decrease) in cash and cash
equivalents
|
4,742 | 9,873 | (1,998 | ) | ||||||||||
Cash and cash equivalents at beginning of year
|
17,976 | 8,103 | 10,101 | |||||||||||
Cash and cash equivalents at end of year
|
$22,718 | $17,976 | $8,103 | |||||||||||
Supplemental disclosures
|
||||||||||||||
Cash paid for:
|
||||||||||||||
Interest
|
$8,887 | $6,965 | $6,333 | |||||||||||
Income taxes
|
2,003 | 3,479 | 455 | |||||||||||
Non-cash items:
|
||||||||||||||
Finance receivables and loans held for
sale (a)
|
6,849 | 3,487 | | |||||||||||
Increase in paid-in capital (b)
|
119 | | | |||||||||||
(a) | Represents the consolidation of certain assets related to an accounting change under SFAS 140 (refer to Note 1 of the Consolidated Financial Statements) and the adoption of FIN 46 in 2003; there was a corresponding increase in secured debt. |
(b) | Represents the consolidation of Banco GM under FIN 46R beginning January 1, 2004. In the fourth quarter, GMAC purchased Banco GM (refer to Note 19 of the Consolidated Financial Statements). |
The Notes to the Consolidated Financial Statements are an integral part of these statements.
10
1 | Significant Accounting Policies |
General Motors Acceptance Corporation (GMAC or the Company), a wholly owned subsidiary of General Motors Corporation (General Motors or GM), was incorporated in 1997 under the Delaware General Corporation Law. On January 1, 1998, the Company merged with its predecessor, which was originally incorporated in New York in 1919. The Company is a financial services organization providing a diverse range of services to a global customer base.
Consolidation and Basis of Presentation
The Company operates its international subsidiaries in a similar manner as in the United States of America (U.S.), subject to local laws or other circumstances that may cause it to modify its procedures accordingly. The financial statements of subsidiaries outside the United States generally are measured using the local currency as the functional currency. All assets and liabilities of foreign subsidiaries are translated into U.S. dollars at year-end exchange rates. Income and expense items are translated at average exchange rates prevailing during the reporting period. The resulting translation adjustments are recorded as other comprehensive income, a component of shareholders equity.
Effective September 30, 2004, as a result of reconsidering particular transaction provisions, GMAC began to include in the Consolidated Balance Sheet the transfer of certain mortgage assets that historically had been recognized inappropriately as sales in order to reflect the transactions as secured borrowings under Statement of Financial Accounting Standards 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities (SFAS 140). As of September 30, 2004, 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 Companys off-balance sheet disclosures as mortgage warehouse and other mortgage funding facilities. This change did not have a material impact on the Companys annual results of operations or cash flows for all periods presented.
Use of Estimates and Assumptions
Cash Equivalents
Investment Securities
Loans Held for Sale
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Finance Receivables and Loans
Nonaccrual loans
Impaired loans
Allowance for Credit Losses
The Company performs periodic and systematic detailed reviews of its lending portfolios to identify inherent risks and to assess the overall collectibility of those portfolios. The allowance relates to portfolios collectively reviewed for impairment, generally consumer finance receivables and loans, and is based on aggregated portfolio evaluations by product type. Loss models are utilized for these portfolios which consider a variety of factors including, but not limited to, historical loss experience, current economic conditions, anticipated repossessions or foreclosures based on portfolio trends, delinquencies and credit scores, and expected loss factors by receivable and loan type. Loans in the commercial portfolios are generally reviewed on an individual loan basis and, if necessary, an allowance is established for individual loan impairment. Loans subject to individual reviews are analyzed based on factors including, but not limited to, historical loss experience, current economic conditions, collateral performance, and performance trends within specific geographic and portfolio segments, and any other pertinent information, which result in the estimation of specific allowances for credit losses. The allowance related to specifically identified impaired loans is established based on discounted expected cash flows, observable market prices, or for loans that are solely dependent on the collateral for repayment, the fair value of the collateral. The evaluation of these factors for both consumer and commercial finance receivables and loans involves complex, subjective judgments.
Securitizations and Other Off-balance Sheet Transactions
12
GMAC retains servicing responsibilities for all of its retail finance receivable and wholesale loan securitizations and for the majority of its residential and commercial mortgage loan securitizations. The Company may receive servicing fees based on the securitized loan balances and certain ancillary fees, all of which are recorded in other income for retail finance receivables and wholesale loans, and mortgage banking income for residential and commercial mortgage loans. The Company also retains the right to service the residential mortgage loans sold as a result of mortgage-backed security transactions with Ginnie Mae, Fannie Mae, and Freddie Mac and for the sale of automotive finance receivables. GMAC also serves as the collateral manager in the securitizations of commercial investment securities.
Gains or losses on securitizations and sales depend on the previous carrying amount of the assets involved in the transfer and are allocated between the assets sold and the retained interests based on relative fair values at the date of sale. Since quoted market prices are generally not available, GMAC estimates the fair value of retained interests by determining the present value of future expected cash flows using modeling techniques that incorporate managements best estimates of key variables, including credit losses, prepayment speeds, weighted average life and discount rates commensurate with the risks involved and, if applicable, interest or finance rates on variable and adjustable rate contracts. Credit loss assumptions are based upon historical experience, market information for similar investments, and the characteristics of individual receivables and loans underlying the securities. Prepayment speed estimates are determined utilizing data obtained from market participants, where available, or based on historical prepayment rates on similar assets. Discount rate assumptions are determined using data obtained from market participants, where available, or based on current relevant treasury rates plus a risk adjusted spread based on analysis of historical spreads on similar types of securities. Estimates of interest rates on variable and adjustable contracts are based on spreads over the applicable benchmark interest rate using market-based yield curves. Gains on securitizations and sales are reported in other income for retail finance receivables and wholesale loans, and mortgage banking income for residential and commercial mortgage loans. Retained interests are recorded at fair value with any declines in fair value below the carrying amount reflected in other comprehensive income, a component of shareholders equity, or in earnings, if declines are determined to be other than temporary or if the interests are classified as trading. Retained interest-only strips and senior and subordinated interests are generally included in available for sale investment securities, or in trading investment securities, depending on managements intent at the time of securitization. Retained cash reserve accounts are included in other assets.
GMAC uses certain off-balance sheet warehouse structures as funding sources for commercial mortgage loans originated by the Company. The originated loans are first sold to either a bankruptcy-remote special purpose entity or a third-party bank, which then issues both senior and subordinated loan participations. The senior loan participations are purchased by a third-party bank or its commercial paper conduit, and the subordinate participation is purchased (or retained) by GMAC. The Company retains the associated subordinate loan participations within a bankruptcy-remote subsidiary. Subordinate loan participations are classified either as loans held for investment or loans held for sale. Loans held for sale are recorded at the lower of aggregated cost or fair value, in accordance with Statement of Financial Accounting Standards 65, Accounting for Certain Mortgage Banking Activities (SFAS 65). The amount by which the cost of such loans exceeds fair value is recorded as a valuation allowance, thereby reducing the carrying value of the loan. The determination of fair value is based on current market yield requirements, which consider the likelihood of default, and recent trading activity. The returns on these commercial mortgage assets have limited prepayment risk, either because the loans cannot be prepaid without penalty or because the expected returns assume the loans will be prepaid immediately upon the expiration of the penalty period, if limited. Securities that are either retained from securitizations or purchased for investment are classified as available for sale, trading, or held to maturity and are accounted for under Statement of Financial Accounting Standards 115, Accounting for Certain Investments in Debt and Equity Securities (SFAS 115), with consideration given to SFAS 140, which considers the prepayment risk, if any, associated with the investments. Interest-only strips are either purchased or retained, are classified as either available for sale or trading, and are accounted for in accordance with SFAS 115, with further guidance provided by SFAS 140, and Emerging Issues Task Force 99-20, Recognition of Interest Income and Impairment on Purchased and Retained Beneficial Interests in Securitized Financial Assets (EITF 99-20), which considers the prepayment risk, if any, associated with the investments.
Investments in Operating Leases
The Company has significant investments in the residual values of assets in its operating lease portfolio. The residual values represent an estimate of the values of the assets at the end of the lease contracts and are initially recorded based on residual
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Mortgage Servicing Rights
The Company evaluates mortgage servicing rights for impairment by stratifying its portfolio on the basis of the predominant risk characteristics (loan type and interest rate). To the extent that the carrying value of an individual stratum exceeds its fair value, the mortgage servicing rights asset is considered to be impaired. Impairment that is considered to be temporary is recognized through the establishment of (or an increase in) a valuation allowance, with a corresponding unfavorable effect on earnings. If it is later determined that all or a portion of the temporary impairment no longer exists for a particular tranche, the valuation allowance is reduced, with a favorable effect on earnings.
Each quarter, the Company evaluates its MSRs and considers the amount of valuation allowance unlikely to be recovered through future interest rate increases. To estimate this amount, the Company analyzes historical changes in mortgage and other market interest rates to determine the magnitude of interest rate and corresponding MSR value increases with only remote probability of occurring. To the extent recoverability is remote, both the gross MSR asset and the related valuation allowance are reduced by such amount, which is characterized as other than temporary impairment.
Since quoted market prices for MSRs are generally not available, GMAC estimates the fair value of MSRs by determining the present value of future expected cash flows using modeling techniques that incorporate managements best estimates of key variables, including expected cash flows, credit losses, prepayment speeds, and return requirements commensurate with the risks involved. Cash flow assumptions are based on the Companys actual performance, and where possible, the reasonableness of assumptions is periodically validated through comparisons to other market participants. Credit loss assumptions are based upon historical experience and the characteristics of individual loans underlying the MSRs. Prepayment speed estimates are determined utilizing data obtained from market participants. Return requirement assumptions are determined using data obtained from market participants, where available, or based on current relevant interest rates, plus a risk adjusted spread. Since many factors can affect the estimate of the fair value of mortgage servicing rights, the Company regularly evaluates the major assumptions and modeling techniques used in its estimate and reviews such assumptions against market comparables, if available. Also, the Company closely monitors the actual performance of its MSRs by regularly comparing actual cash flow, credit and prepayment experience to modeled estimates. In addition to the use of derivative financial instruments, the Company periodically invests in available for sale securities (i.e., U.S. Treasury Securities) to mitigate the effect of changes in fair value from the interest rate risk inherent in the mortgage servicing rights.
Reinsurance
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Repossessed and Foreclosed Assets
Goodwill and Other Intangibles
Impairment of Long-Lived Assets
Premises and Equipment
Deferred Policy Acquisition Costs
Unearned Insurance Premiums and Service Revenue
Reserves for Insurance Losses and Loss Adjustment Expenses
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Derivative Instruments and Hedging Activities
Loan Commitments
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 the locks 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 Companys financial condition or results of operations.
Income Taxes
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Recently Issued Accounting Standards
Statement of Position 03-3 In December 2003, the American Institute of Certified Public Accountants (AICPA) issued Statement of Position 03-3, Accounting for Certain Loans or Debt Securities Acquired in a Transfer (SOP 03-3), that addresses accounting for differences between contractual cash flows and cash flows expected to be collected from an investors initial investment in loans or debt securities acquired in a transfer if those differences are attributable, at least in part, to credit quality. SOP 03-3 does not apply to loans originated by the entity. SOP 03-3 limits the accretable yield to the excess of the investors estimate of undiscounted expected principal, interest, and other cash flows (expected at acquisition to be collected) over the investors initial investment in the loan and it prohibits carrying over or creating a valuation allowance for the excess of contractual cash flows over cash flows expected to be collected in the initial accounting of a loan acquired in a transfer. SOP 03-3 and the required disclosures are effective for loans acquired in fiscal years beginning after December 15, 2004. Adoption of SOP 03-3 is not expected to have a material impact on the Companys financial condition or results of operations.
EITF 03-1 In March 2004, the Emerging Issues Task Force released 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 (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 September 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 varied depending on the type of investment being considered, however, all disclosure requirements are now effective. 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.
2 | Insurance Premiums and Service Revenue Earned |
The following table is a summary of insurance premiums and service revenue written and earned.
2004 | 2003 | 2002 | |||||||||||||||||||||||
Year ended December 31, (in millions) | Written | Earned | Written | Earned | Written | Earned | |||||||||||||||||||
Insurance premiums
|
|||||||||||||||||||||||||
Direct
|
$2,400 | $2,604 | $2,295 | $2,511 | $2,132 | $2,274 | |||||||||||||||||||
Assumed
|
611 | 630 | 607 | 577 | 483 | 498 | |||||||||||||||||||
Gross insurance premiums
|
3,011 | 3,234 | 2,902 | 3,088 | 2,615 | 2,772 | |||||||||||||||||||
Ceded
|
(348 | ) | (347 | ) | (406 | ) | (379 | ) | (386 | ) | (381 | ) | |||||||||||||
Net insurance premiums
|
2,663 | 2,887 | 2,496 | 2,709 | 2,229 | 2,391 | |||||||||||||||||||
Service revenue
|
1,319 | 641 | 1,336 | 469 | 1,235 | 287 | |||||||||||||||||||
Insurance premiums and service revenue
|
$3,982 | $3,528 | $3,832 | $3,178 | $3,464 | $2,678 | |||||||||||||||||||
Prior to 2002, substantially all of GMAC Insurances vehicle service contract business resulted from contracts between GM and the retail consumer, as GM, in turn, would insure its business risk through a contractual liability policy purchased from GMAC Insurance (while GM remained the direct obligor to the customer). Under this arrangement, GMAC Insurance recognized insurance premium revenue in accordance with Statement of Financial Accounting Standards 60, Accounting and Reporting by Insurance Enterprises (SFAS 60). Beginning in 2002, the business model changed, with substantially all vehicle service contracts being sold directly by GMAC Insurance to the retail customers. The change was designed to concentrate all business related to service contracts with GMAC Insurance (where the activities are managed), rather than splitting the business between GM and
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3 | Mortgage Banking Income |
The following table presents the components of mortgage banking income:
Year ended December 31, | ||||||||||||
(in millions) | 2004 | 2003 | 2002 | |||||||||
Mortgage servicing fees
|
$1,488 | $1,402 | $1,343 | |||||||||
Amortization and impairment of mortgage servicing
rights (a)
|
(1,112 | ) | (2,048 | ) | (2,314 | ) | ||||||
Net gains on derivatives related to MSRs (b)
|
243 | 507 | 685 | |||||||||
Net loan servicing income (loss)
|
619 | (139 | ) | (286 | ) | |||||||
Gains from sales of loans
|
788 | 2,155 | 1,601 | |||||||||
Mortgage processing fees
|
143 | 285 | 206 | |||||||||
Other
|
550 | 362 | 267 | |||||||||
Mortgage banking income (c)
|
$2,100 | $2,663 | $1,788 | |||||||||
(a) | Includes additions to the valuation allowance, representing impairment considered to be temporary. |
(b) | Includes SFAS 133 hedge ineffectiveness, amounts excluded from the hedge effectiveness calculation and the change in value of derivative financial instruments not qualifying for hedge accounting. |
(c) | Excludes net gains realized upon the sale of investment securities used to manage risk associated with mortgage servicing rights, which are reflected as a component of investment income. |
4 | Other Income |
Details of other income were as follows:
Year ended December 31, | ||||||||||||||
(in millions) | 2004 | 2003 | 2002 | |||||||||||
Automotive receivable securitizations and sales
|
||||||||||||||
Gains on sales:
|
||||||||||||||
Wholesale securitizations
|
$497 | $488 | $445 | |||||||||||
Retail automotive portfolio sales transactions
|
53 | 51 | | |||||||||||
Retail automotive securitizations
|
9 | 37 | 239 | |||||||||||
Interest on cash reserves deposits
|
60 | 45 | 51 | |||||||||||
Service fees
|
59 | 40 | 159 | |||||||||||
Other
|
75 | 99 | 134 | |||||||||||
Total automotive receivable securitizations and
sales
|
753 | 760 | 1,028 | |||||||||||
Real estate services
|
464 | 410 | 389 | |||||||||||
Interest and service fees on transactions with GM
|
370 | 384 | 470 | |||||||||||
Other interest revenue
|
297 | 298 | 104 | |||||||||||
Interest on cash equivalents
|
244 | 143 | 97 | |||||||||||
Late charges and other administrative fees
|
164 | 111 | 103 | |||||||||||
Full service leasing fees
|
153 | 137 | 77 | |||||||||||
Insurance service fees
|
136 | 119 | 107 | |||||||||||
Factoring commissions
|
77 | 77 | 68 | |||||||||||
Specialty lending fees
|
60 | 62 | 66 | |||||||||||
Fair value adjustment on certain
derivatives (a)
|
(26 | ) | (103 | ) | (47 | ) | ||||||||
Other
|
816 | 731 | 1,069 | |||||||||||
Total other income
|
$3,508 | $3,129 | $3,531 | |||||||||||
(a) | Refer to Note 16 to the Consolidated Financial Statements for a description of the Companys derivative activities. |
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5 | Other Operating Expenses |
Details of other operating expenses were as follows:
Year ended December 31, (in millions) | 2004 | 2003 | 2002 | |||||||||
Insurance commissions expense (a)
|
$928 | $830 | $653 | |||||||||
Technology and communications expense
|
569 | 508 | 489 | |||||||||
Advertising and marketing
|
537 | 261 | 256 | |||||||||
Professional services
|
474 | 361 | 317 | |||||||||
Premises and equipment depreciation
|
294 | 279 | 297 | |||||||||
Rent and storage
|
253 | 223 | 208 | |||||||||
Full service leasing vehicle maintenance costs
|
215 | 171 | 118 | |||||||||
Lease and loan administration
|
175 | 273 | 304 | |||||||||
Auto remarketing and repossession expenses
|
136 | 239 | 272 | |||||||||
Amortization of intangible assets
|
11 | 11 | 19 | |||||||||
Operating lease disposal gain
|
(192 | ) | (43 | ) | (116 | ) | ||||||
Other
|
805 | 952 | 794 | |||||||||
Total other operating expenses
|
$4,205 | $4,065 | $3,611 | |||||||||
(a) | The increase in insurance commissions expense is primarily the result of GMAC Insurance becoming the direct obligor of GM vehicle service contracts during 2002. As a result, GMAC recognizes the gross contract price billed to the customer as revenue, and expenses the amount of commissions paid to dealers. Refer to Note 2 to the Consolidated Financial Statements for additional details on this arrangement. |
6 | Investment Securities |
The Companys portfolio of securities includes bonds, equity securities, asset- and mortgage-backed securities, notes, interests in securitization trusts and other investments. The cost, fair value and gross unrealized gains and losses on available for sale and held to maturity securities were as follows:
2004 | 2003 | |||||||||||||||||||||||||||||||||
Gross | Gross | |||||||||||||||||||||||||||||||||
unrealized | unrealized | |||||||||||||||||||||||||||||||||
Fair | Fair | |||||||||||||||||||||||||||||||||
December 31, (in millions) | Cost (a) | gains | losses | value | Cost (a) | gains | losses | value | ||||||||||||||||||||||||||
Available for sale securities
|
||||||||||||||||||||||||||||||||||
Debt securities
|
||||||||||||||||||||||||||||||||||
U.S. Treasury and federal agencies
|
$2,198 | $18 | $(8 | ) | $2,208 | $716 | $7 | $(1 | ) | $722 | ||||||||||||||||||||||||
States and political subdivisions
|
556 | 40 | | 596 | 575 | 51 | | 626 | ||||||||||||||||||||||||||
Foreign government securities
|
792 | 14 | (1 | ) | 805 | 681 | 10 | (2 | ) | 689 | ||||||||||||||||||||||||
Mortgage-backed securities:
|
||||||||||||||||||||||||||||||||||
Residential
|
103 | 5 | (5 | ) | 103 | 58 | | | 58 | |||||||||||||||||||||||||
Commercial
|
973 | 9 | (3 | ) | 979 | 636 | 9 | (6 | ) | 639 | ||||||||||||||||||||||||
Asset-backed securities
|
506 | 3 | | 509 | 593 | 6 | | 599 | ||||||||||||||||||||||||||
Interest-only strips
|
252 | 80 | (3 | ) | 329 | 460 | 133 | (1 | ) | 592 | ||||||||||||||||||||||||
Principal-only strips
|
1 | | | 1 | 1 | 1 | | 2 | ||||||||||||||||||||||||||
Collateralized debt obligations
|
153 | | | 153 | 53 | 1 | | 54 | ||||||||||||||||||||||||||
Corporate debt securities
|
2,117 | 65 | (5 | ) | 2,177 | 2,012 | 94 | (5 | ) | 2,101 | ||||||||||||||||||||||||
Other
|
1,160 | 32 | (2 | ) | 1,190 | 1,005 | 34 | (1 | ) | 1,038 | ||||||||||||||||||||||||
Total debt securities (b)
|
8,811 | 266 | (27 | ) | 9,050 | 6,790 | 346 | (16 | ) | 7,120 | ||||||||||||||||||||||||
Equity securities
|
1,505 | 731 | (6 | ) | 2,230 | 1,185 | 522 | (9 | ) | 1,698 | ||||||||||||||||||||||||
Total available for sale securities
|
$10,316 | $997 | $(33 | ) | $11,280 | $7,975 | $868 | $(25 | ) | $8,818 | ||||||||||||||||||||||||
Held to maturity securities Total held to maturity securities (c) |
$135 | $4 | $(1 | ) | $138 | $240 | $5 | $(12 | ) | $233 | ||||||||||||||||||||||||
(a) | Net of $17 and $104 of losses in value determined to be other than temporary for the years ended December 31, 2004 and 2003, respectively. |
(b) | In connection with letters of credit relating to certain assumed reinsurance contracts $142 and $107 of primarily U.S. Treasury securities were pledged as collateral as of December 31, 2004 and 2003, respectively. |
(c) | Primarily mortgage-backed securities. |
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The fair value, unrealized gains (losses), and amount pledged as collateral for the Companys portfolio of trading securities were as follows:
December 31, (in millions) | 2004 | 2003 | ||||||||
Trading securities
|
||||||||||
Fair value
|
||||||||||
Mortgage-backed securities:
|
||||||||||
Residential
|
$1,141 | $1,899 | ||||||||
Commercial
|
366 | 263 | ||||||||
Mortgage residual interests
|
780 | 686 | ||||||||
Interest-only strips
|
448 | 402 | ||||||||
Principal-only strips
|
201 | 167 | ||||||||
Corporate debt securities
|
249 | 228 | ||||||||
Debt and other
|
360 | 497 | ||||||||
Total trading securities
|
$3,545 | $4,142 | ||||||||
Net unrealized gains (losses) (a)
|
$35 | $(341 | ) | |||||||
Pledged as collateral
|
$2,910 | $1,949 | ||||||||
(a) | Unrealized gains and losses are included in investment income on a current period basis. Net unrealized losses totaled $798 at December 31, 2002. |
The maturity distribution of available for sale and held to maturity debt securities outstanding is summarized in the following table. Actual maturities may differ from those scheduled as a result of prepayments by issuers.
Available | Held to | |||||||||||||||
for sale | maturity | |||||||||||||||
Fair | Fair | |||||||||||||||
December 31, 2004 (in millions) | Cost | value | Cost | value | ||||||||||||
Due in one year or less
|
$1,251 | $1,253 | $10 | $10 | ||||||||||||
Due after one year through five years
|
2,431 | 2,476 | | | ||||||||||||
Due after five years through ten years
|
2,506 | 2,580 | | | ||||||||||||
Due after ten years
|
630 | 660 | 5 | 5 | ||||||||||||
Mortgage-backed securities and interests in
securitization trusts
|
1,993 | 2,081 | 120 | 123 | ||||||||||||
Total securities
|
$8,811 | $9,050 | $135 | $138 | ||||||||||||
The following table presents gross gains and losses realized upon the sales of available for sale securities.
Year ended December 31, (in millions) | 2004 | 2003 | 2002 | |||||||||
Gross realized gains
|
$138 | $270 | $402 | |||||||||
Gross realized losses
|
(49 | ) | (202 | ) | (121 | ) | ||||||
Net realized gains
|
$89 | $68 | $281 | |||||||||
Investment securities classified as available for sale and held to maturity that were in an unrealized loss position had a fair value of $2,318 million and $1,677 million, and gross unrealized losses of $34 million and $37 million as of December 31, 2004 and 2003, respectively. The fair value of these securities in a continuous loss position less than twelve months was $2,301 million and $1,067 million with gross unrealized losses of $33 million and $18 million as of December 31, 2004 and 2003, respectively. In the opinion of management, these securities are not considered to be other than temporarily impaired. Refer to Note 1 to the Consolidated Financial Statements for discussion of the evaluation of potential impairment of investments.
In the fourth quarter of 2004, the Company transferred a $102 million subordinate investment security from the held to maturity to available for sale classification due to a change in its intent to no longer hold the security to maturity. The change in the Companys intent was due to significant deterioration in the credit quality of the underlying collateral supporting the investment. The amortized cost of the security approximated its fair value on the date of transfer due to impairment charges taken in previous years. This security was included in collateralized debt obligations under available for sale securities as of December 31, 2004. The amortized cost of this security was $93 million and $126 million at December 31, 2003 and 2002, respectively. In 2003, there was $34 million of realized losses related to this security; in 2002, there was $16 million of unrealized loss related to this security.
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7 | Finance Receivables and Loans |
The composition of finance receivables and loans outstanding was as follows:
2004 | 2003 | |||||||||||||||||||||||||
December 31, (in millions) | Domestic | Foreign | Total | Domestic | Foreign | Total | ||||||||||||||||||||
Consumer
|
||||||||||||||||||||||||||
Retail automotive
|
$73,911 | $18,314 | $92,225 | $71,513 | $16,538 | $88,051 | ||||||||||||||||||||
Residential mortgages
|
54,643 | 3,066 | 57,709 | 44,281 | 2,026 | 46,307 | ||||||||||||||||||||
Total consumer
|
128,554 | 21,380 | 149,934 | 115,794 | 18,564 | 134,358 | ||||||||||||||||||||
Commercial
|
||||||||||||||||||||||||||
Automotive
|
||||||||||||||||||||||||||
Wholesale
|
19,154 | 8,752 | 27,906 | 17,433 | 8,069 | 25,502 | ||||||||||||||||||||
Leasing and lease financing
|
466 | 1,000 | 1,466 | 477 | 983 | 1,460 | ||||||||||||||||||||
Term loans to dealers and others
|
2,890 | 787 | 3,677 | 3,327 | 746 | 4,073 | ||||||||||||||||||||
Commercial and industrial
|
12,019 | 2,184 | 14,203 | 7,689 | 2,089 | 9,778 | ||||||||||||||||||||
Real estate construction
|
2,658 | 152 | 2,810 | 1,966 | 87 | 2,053 | ||||||||||||||||||||
Commercial mortgages (a)
|
2,024 | 1,124 | 3,148 | 130 | 50 | 180 | ||||||||||||||||||||
Total commercial
|
39,211 | 13,999 | 53,210 | 31,022 | 12,024 | 43,046 | ||||||||||||||||||||
Total finance receivables and loans (b) (c)
|
$167,765 | $35,379 | $203,144 | $146,816 | $30,588 | $177,404 | ||||||||||||||||||||
(a) | During 2004, the Company transferred approximately $2.4 billion of loans held for sale to loans held for investment based on an evaluation of managements intent for the disposition of the loans. The cost basis of such loans exceeded the fair value of such loans by approximately $100. In accordance with SFAS 65, the loans were transferred at the lower of cost or fair value on the transfer date. |
(b) | Net of unearned income of $7,562 and $7,347 at December 31, 2004 and 2003, respectively. |
(c) | The aggregate amount of finance receivables and loans maturing in the next five years is as follows: $73,756 in 2005; $29,676 in 2006; $23,087 in 2007; $14,595 in 2008; $8,365 in 2009 and $61,227 in 2010 and thereafter. Prepayments may cause actual maturities to differ from scheduled maturities. |
The following table presents an analysis of the activity in the allowance for credit losses on finance receivables and loans.
2004 | 2003 | 2002 | ||||||||||||||||||||||||||||||||||||
Year ended December 31, | ||||||||||||||||||||||||||||||||||||||
(in millions) | Consumer | Commercial | Total | Consumer | Commercial | Total | Consumer | Commercial | Total | |||||||||||||||||||||||||||||
Allowance at beginning of year
|
$2,533 | $509 | $3,042 | $2,347 | $644 | $2,991 | $1,690 | $355 | $2,045 | |||||||||||||||||||||||||||||
Provision for credit losses
|
1,926 | 18 | 1,944 | 1,643 | 78 | 1,721 | 1,693 | 460 | 2,153 | |||||||||||||||||||||||||||||
Charge-offs
|
||||||||||||||||||||||||||||||||||||||
Domestic
|
(1,469 | ) | (96 | ) | (1,565 | ) | (1,246 | ) | (199 | ) | (1,445 | ) | (940 | ) | (169 | ) | (1,109 | ) | ||||||||||||||||||||
Foreign
|
(269 | ) | (7 | ) | (276 | ) | (278 | ) | (25 | ) | (303 | ) | (120 | ) | (30 | ) | (150 | ) | ||||||||||||||||||||
Total charge-offs
|
(1,738 | ) | (103 | ) | (1,841 | ) | (1,524 | ) | (224 | ) | (1,748 | ) | (1,060 | ) | (199 | ) | (1,259 | ) | ||||||||||||||||||||
Recoveries
Domestic |
112 | 10 | 122 | 108 | 21 | 129 | 107 | 35 | 142 | |||||||||||||||||||||||||||||
Foreign
|
81 | 3 | 84 | 32 | 7 | 39 | 18 | 3 | 21 | |||||||||||||||||||||||||||||
Total recoveries
|
193 | 13 | 206 | 140 | 28 | 168 | 125 | 38 | 163 | |||||||||||||||||||||||||||||
Net charge-offs
|
(1,545 | ) | (90 | ) | (1,635 | ) | (1,384 | ) | (196 | ) | (1,580 | ) | (935 | ) | (161 | ) | (1,096 | ) | ||||||||||||||||||||
Impacts of foreign currency translation
|
17 | 6 | 23 | (7 | ) | (18 | ) | (25 | ) | (20 | ) | 13 | (7 | ) | ||||||||||||||||||||||||
Securitization activity
|
17 | 28 | 45 | (66 | ) | 1 | (65 | ) | (81 | ) | (23 | ) | (104 | ) | ||||||||||||||||||||||||
Allowance at end of year
|
$2,948 | $471 | $3,419 | $2,533 | $509 | $3,042 | $2,347 | $644 | $2,991 | |||||||||||||||||||||||||||||
21
The following table presents information about commercial finance receivables and loans specifically identified for impairment.
December 31, (in millions) | 2004 | 2003 | ||||||
Impaired loans
|
$1,337 | $1,337 | ||||||
Related allowance
|
235 | 333 | ||||||
Average balance of impaired loans during the year
|
1,376 | 1,175 | ||||||
8 | Off-Balance Sheet Securitizations |
The Company securitizes automotive and mortgage financial assets as a funding source. GMAC sells retail finance receivables, wholesale loans, residential mortgage loans, commercial mortgage loans and commercial mortgage securities. The information contained below relates only to the transfers of finance receivables and loans that qualify as off-balance sheet securitizations under the requirements of SFAS 140.
The Company retains servicing responsibilities for and subordinated interests in all of its securitizations of retail finance receivables and wholesale loans. Servicing responsibilities are retained for the majority of its residential and commercial mortgage loan securitizations and the Company may retain subordinated interests in some of these securitizations. GMAC also holds subordinated interests and acts as collateral manager in the companys collateralized debt obligation (CDO) securitization program.
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 loans, no servicing asset or liability is recognized
upon securitization of the loans. As of December 31, 2004,
the weighted average basic servicing fees for GMACs
primary servicing activities were 100 basis points, 100 basis
points, 29 basis points and 8 basis points of the outstanding
principal balance for sold retail finance receivables, wholesale
loans, residential mortgage loans and commercial mortgage loans,
respectively. Additionally, the Company retains the rights to
cash flows remaining after the investors in most securitization
trusts have received their contractual payments. 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 December 31, 2004
and December 31, 2003, servicing liabilities of
$30 million and $22 million, respectively, were
outstanding related to such retail securitization transactions.
For mortgage servicing, the Company capitalizes the value
expected to be realized from performing specified residential
and commercial mortgage servicing activities as mortgage
servicing rights (refer to Note 10 to the Consolidated
Financial Statements).
GMAC maintains cash reserve accounts at predetermined amounts for certain securitization activities in the unlikely event that deficiencies occur in cash flows owed to the investors. The amounts available in such cash reserve accounts totaled $118 million, $1,046 million, $44 million, and $10 million as of December 31, 2004 related to securitizations of retail finance receivables, wholesale loans, residential mortgage loans, and commercial mortgage loans, respectively, and $167 million, $1,219 million, $13 million and $5 million as of December 31, 2003, respectively.
The following table summarizes pre-tax gains on securitizations and certain cash flows received from and paid to securitization trusts for transfers of finance receivables and loans that were completed during 2004:
2004 | |||||||||||||||||||||
Retail | Mortgage loans | Commercial | |||||||||||||||||||
finance | Wholesale | mortgage | |||||||||||||||||||
Year ended December 31, (in millions) | receivables | loans | Residential | Commercial | securities | ||||||||||||||||
Pre-tax gains on securitizations
|
$9 | $497 | $602 | $54 | $11 | ||||||||||||||||
Cash inflows:
|
|||||||||||||||||||||
Proceeds from new securitizations
|
1,824 | 9,188 | 29,412 | 2,108 | 935 | ||||||||||||||||
Servicing fees received
|
105 | 174 | 208 | 20 | | ||||||||||||||||
Other cash flows received on retained interests
|
340 | 808 | 729 | 216 | 68 | ||||||||||||||||
Proceeds from collections reinvested in revolving
securitizations
|
| 91,360 | | | | ||||||||||||||||
Repayments of servicing advances
|
75 | | 947 | 147 | | ||||||||||||||||
Cash outflows:
|
|||||||||||||||||||||
Servicing advances
|
(64 | ) | | (1,035 | ) | (169 | ) | | |||||||||||||
Purchase obligations and options:
|
|||||||||||||||||||||
Representations and warranties obligations
|
(1 | ) | | (66 | ) | | | ||||||||||||||
Administrator or servicer actions
|
(75 | ) | | | | | |||||||||||||||
Asset performance conditional calls
|
| | (137 | ) | | | |||||||||||||||
Cleanup calls
|
(269 | ) | | (3,797 | ) | | | ||||||||||||||
22
The following table summarizes pre-tax gains on securitizations and certain cash flows received from and paid to securitization trusts for transfers of finance receivables and loans that were completed during 2003 and 2002:
2003 | 2002 | ||||||||||||||||||||||||||||||||||||||||
Retail | Mortgage loans | Commercial | Retail | Mortgage loans | Commercial | ||||||||||||||||||||||||||||||||||||
Year ended December 31, | finance | Wholesale | mortgage | finance | Wholesale | mortgage | |||||||||||||||||||||||||||||||||||
(in millions) | receivables | loans | Residential | Commercial | securities | receivables | loans | Residential | Commercial | securities | |||||||||||||||||||||||||||||||
Pre-tax gains on securitizations
|
$37 | $488 | $522 | $75 | $14 | $239 | $445 | $562 | $30 | $18 | |||||||||||||||||||||||||||||||
Cash inflows:
|
|||||||||||||||||||||||||||||||||||||||||
Proceeds from new securitizations
|
1,604 | 3,625 | 29,566 | 3,342 | 1,870 | 9,982 | 2,327 | 38,025 | 1,848 | 439 | |||||||||||||||||||||||||||||||
Servicing fees received
|
228 | 164 | 250 | 20 | | 247 | 146 | 268 | 17 | | |||||||||||||||||||||||||||||||
Other cash flows received on retained interests
|
753 | 174 | 955 | 317 | 69 | 1,361 | 318 | 1,044 | 86 | 37 | |||||||||||||||||||||||||||||||
Proceeds from collections reinvested in revolving
securitizations
|
862 | 97,829 | | 5 | | 482 | 104,485 | | | | |||||||||||||||||||||||||||||||
Repayments of servicing advances
|
114 | | 1,208 | 116 | | 117 | | 1,333 | 116 | | |||||||||||||||||||||||||||||||
Cash outflows:
|
|||||||||||||||||||||||||||||||||||||||||
Servicing advances
|
(118 | ) | | (1,242 | ) | (117 | ) | | (117 | ) | | (1,449 | ) | (122 | ) | | |||||||||||||||||||||||||
Purchase obligations and options:
|
|||||||||||||||||||||||||||||||||||||||||
Representations and warranties obligations
|
(25 | ) | | (154 | ) | | | | | (70 | ) | | | ||||||||||||||||||||||||||||
Administrator or servicer actions
|
(146 | ) | | | | | (198 | ) | | | | | |||||||||||||||||||||||||||||
Asset performance conditional calls
|
| | (122 | ) | | | | | (58 | ) | | | |||||||||||||||||||||||||||||
Cleanup calls
|
(885 | ) | | (1,919 | ) | | | (289 | ) | (55 | ) | (494 | ) | | | ||||||||||||||||||||||||||
Key economic assumptions used in measuring the estimated fair value of retained interests of sales completed during 2004 and 2003, as of the dates of such sales, were as follows:
Retail | Mortgage loans | Commercial | ||||||
finance | mortgage | |||||||
Year ended December 31, | receivables (a) | Residential (b) | Commercial | securities | ||||
2004
|
||||||||
Key
assumptions (c) (rates per annum):
|
||||||||
Annual prepayment rate (d)
|
0.9-1.0% | 0.0-51.3% | 0.0-50.0% | 0.0-19.9% | ||||
Weighted average life (in years)
|
1.6-1.8 | 1.1-5.5 | 0.4-8.8 | 2.5-17.4 | ||||
Expected credit losses
|
(e) | 0.0-10.9% | 0.0% | 0.0-3.1% | ||||
Discount rate
|
9.5% | 6.5-24.8% | 4.3-15.0% | 8.2-11.7% | ||||
2003
|
||||||||
Key
assumptions (c) (rates per annum):
|
||||||||
Annual prepayment rate (d)
|
0.9% | 3.1-59.9% | 0.0-50.0% | 0.0% | ||||
Weighted average life (in years)
|
1.6 | 1.1-5.9 | 1.4-6.2 | 2.5-25.1 | ||||
Expected credit losses
|
(e) | 0.4-7.3% | 0.0-0.8% | 0.0-1.6% | ||||
Discount rate
|
9.5% | 6.5-14.5% | 2.6-10.8% | 8.6-10.0% | ||||
(a) | The fair value of retained interests in wholesale securitizations approximates cost because of the short-term and floating rate nature of wholesale loans. |
(b) | Included within residential mortgage loans are home equity loans and lines, high loan-to-value loans and residential first and second mortgage loans. |
(c) | The assumptions used to measure the expected yield on variable rate retained interests are based on a benchmark interest rate yield curve, plus a contractual spread, as appropriate. The actual yield curve utilized varies depending on the specific retained interests. |
(d) | Based on the weighted average maturity (WAM) for finance receivables and constant prepayment rate (CPR) for mortgage loans and commercial mortgage securities. |
(e) | Amounts totaling $39 million and $83 million at December 31, 2004 and 2003, respectively, have been established for expected credit losses on automotive finance receivables securitized in off-balance sheet transactions. Such amounts are included in the fair value of the retained interests, which are classified as investment securities. |
23
The table below outlines the key economic assumptions and the sensitivity of the fair value of retained interests at December 31, 2004 to immediate 10% and 20% adverse changes in those assumptions.
Mortgage loans | Commercial | ||||||||||||||||
Retail finance | mortgage | ||||||||||||||||
Year ended December 31, ($ in millions) | receivables (a) | Residential | Commercial | securities | |||||||||||||
Carrying value/fair value of retained interests
|
$748 | $1,247 | $443 | $314 | |||||||||||||
Weighted average life (in years)
|
0.1-1.5 | 1.1-5.4 | 0.1-17.3 | 1.5-24.1 | |||||||||||||
Annual prepayment rate
|
0.5-1.6% WAM | 0.0-55.0% CPR | 0.0-55.0% CPR | 0.0-21.1% CPR | |||||||||||||
Impact of 10% adverse change
|
$(1) | $(49) | $ | $(1) | |||||||||||||
Impact of 20% adverse change
|
(2) | (86) | (1) | (2) | |||||||||||||
Loss assumption
|
(b) | 0.3-26.1% | 0.0-4.2% | 0.0-39.5% | |||||||||||||
Impact of 10% adverse change
|
$(4) | $(50) | $(7) | $(13) | |||||||||||||
Impact of 20% adverse change
|
(9) | (93) | (12) | (26) | |||||||||||||
Discount rate
|
9.5-12.0% | 6.5-40.0% | 3.8-26.3% | 5.3-15.0% | |||||||||||||
Impact of 10% adverse change
|
$(3) | $(36) | $ (5) | $(18) | |||||||||||||
Impact of 20% adverse change
|
(7) | (68) | (11) | (35) | |||||||||||||
Market rate (d)
|
2.7-3.6% | (c) | (c) | (c) | |||||||||||||
Impact of 10% adverse change
|
$(4) | $(15) | $ | $ | |||||||||||||
Impact of 20% adverse change
|
(8) | (30) | | | |||||||||||||
(a) | The fair value of retained interests in wholesale securitizations approximates cost because of the short-term and floating rate nature of wholesale receivables. |
(b) | Net of a reserve for expected credit losses totaling $39 at December 31, 2004. Such amounts are included in the fair value of the retained interests, which are classified as investment securities. |
(c) | Forward benchmark interest rate yield curve plus contractual spread. |
(d) | Represents the rate of return paid to the investors. |
These sensitivities are hypothetical and should be used with caution. As the figures indicate, changes in fair value based on a 10% and 20% variation in assumptions generally cannot be extrapolated because the relationship of the change in assumption to the change in fair value may not be linear. Also, in this table, the effect of a variation in a particular assumption on the fair value of the retained interest is calculated without changing any other assumption. In reality, changes in one factor may result in changes in another, which may magnify or counteract the sensitivities. Additionally, the Company hedges interest rate and prepayment risks associated with certain of the retained interests; the effects of such hedge strategies have not been considered herein.
Expected static pool net credit losses include actual incurred losses plus projected net credit losses divided by the original balance of the outstandings comprising the securitization pool. The table below displays the expected static pool net credit losses on the Companys securitization transactions.
December 31, (a) | 2004 | 2003 | 2002 | |||
Retail automotive
|
0.4% | 0.4% | 0.6% | |||
Residential mortgage
|
0.0-26.1% | 0.0-26.1% | 0.0-24.8% | |||
Commercial mortgage
|
0.0-4.2% | 0.0-6.6% | 0.0-4.1% | |||
Commercial mortgage securities
|
0.0-39.5% | 0.9-33.7% | 0.3-36.8% | |||
(a) | Static pool losses not applicable to wholesale finance receivable securitizations because of their short-term nature. |
24
The following table presents components of securitized financial assets and other assets managed, along with quantitative information about delinquencies and net credit losses.
Total finance | Amount 60 days or | ||||||||||||||||||||||||
receivables and loans | more past due | Net credit losses | |||||||||||||||||||||||
December 31, (in millions) | 2004 | 2003 | 2004 | 2003 | 2004 | 2003 | |||||||||||||||||||
Retail automotive
|
$97,631 | $100,628 | $806 | $755 | $1,044 | $1,128 | |||||||||||||||||||
Residential mortgage
|
129,550 | 104,378 | 6,686 | 4,974 | 944 | 682 | |||||||||||||||||||
Total consumer
|
227,181 | 205,006 | 7,492 | 5,729 | 1,988 | 1,810 | |||||||||||||||||||
Wholesale
|
49,197 | 46,644 | 51 | 47 | 2 | 5 | |||||||||||||||||||
Commercial mortgage
|
21,353 | 22,621 | 410 | 652 | 130 | 66 | |||||||||||||||||||
Other automotive and commercial
|
22,155 | 17,364 | 544 | 636 | 71 | 194 | |||||||||||||||||||
Total commercial
|
92,705 | 86,629 | 1,005 | 1,335 | 203 | 265 | |||||||||||||||||||
Total managed portfolio (a)
|
319,886 | 291,635 | $8,497 | $7,064 | $2,191 | $2,075 | |||||||||||||||||||
Securitized finance receivables and loans
|
(96,801 | ) | (94,622 | ) | |||||||||||||||||||||
Loans held for sale (unpaid principal)
|
(19,941 | ) | (19,609 | ) | |||||||||||||||||||||
Total finance receivables and loans
|
$203,144 | $177,404 | |||||||||||||||||||||||
(a) | Managed portfolio represents finance receivables and loans on the balance sheet or that have been securitized, excluding securitized finance receivables and loans 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). |
9 | Investment in Operating Leases |
Investments in operating leases were as follows:
December 31, (in millions) | 2004 | 2003 | ||||||
Vehicles and other equipment, at cost
|
$34,189 | $31,682 | ||||||
Accumulated depreciation
|
(7,609 | ) | (7,314 | ) | ||||
Investment in operating leases, net
|
$26,580 | $24,368 | ||||||
The future lease payments due from customers for equipment on operating leases at December 31, 2004 totaled $12,182 million and are due as follows: $5,492 million in 2005, $3,731 million in 2006, $2,230 million in 2007, $691 million in 2008, and $38 million in 2009.
10 | Mortgage Servicing Rights |
GMAC capitalizes the present value of expected future cash flows associated with performing specified mortgage servicing activities for others. Such capitalized servicing rights are purchased or retained upon sales or securitizations of mortgages. The following table summarizes mortgage servicing rights activity and related amortization.
Year ended December 31, | ||||||||||||
(in millions) | 2004 | 2003 | 2002 | |||||||||
Balance at beginning of year
|
$4,869 | $4,601 | $5,331 | |||||||||
Originations and purchases, net of sales
|
1,554 | 2,639 | 1,718 | |||||||||
Amortization
|
(879 | ) | (1,118 | ) | (891 | ) | ||||||
SFAS 133 hedge valuation adjustments
|
(272 | ) | 446 | (1,557 | ) | |||||||
Other than temporary impairment
|
(453 | ) | (1,699 | ) | | |||||||
Balance at end of year
|
$4,819 | $4,869 | $4,601 | |||||||||
Valuation allowance
|
(929 | ) | (1,149 | ) | (1,918 | ) | ||||||
Carrying value at end of year
|
$3,890 | $3,720 | $2,683 | |||||||||
Estimated fair value at end of year
|
$3,990 | $3,798 | $2,759 | |||||||||
25
The following table summarizes the change in the valuation allowance for mortgage servicing rights:
Year ended December 31, | ||||||||||||
(in millions) | 2004 | 2003 | 2002 | |||||||||
Valuation allowance at beginning of year
|
$1,149 | $1,918 | $491 | |||||||||
Additions (a)
|
233 | 930 | 1,427 | |||||||||
Other than temporary impairment
|
(453 | ) | (1,699 | ) | | |||||||
Valuation allowance at end of year
|
$929 | $1,149 | $1,918 | |||||||||
(a) | Additions to the valuation allowance, which are reflected as a component of mortgage banking income, represent impairment considered to be temporary. |
During 2004 and 2003, the Company recorded other than temporary mortgage servicing rights impairment of $453 million and $1,699 million, respectively, reducing both the mortgage servicing rights gross carrying value and valuation allowance by this amount. This amount was based on a statistical analysis of historical changes in mortgage and other market interest rates to determine the amount that the mortgage servicing rights asset value will increase with only a remote probability of occurring. The adjustment to the valuation allowance reduces the maximum potential future increase to the mortgage servicing rights carrying value (under lower of cost or market accounting), but it has no impact on the net carrying value of the asset or on earnings.
The Company has an active risk management program to hedge the value of mortgage servicing rights. The mortgage servicing rights risk management program contemplates the use of derivative financial instruments and treasury securities that experience changes in value offsetting those of the mortgage servicing rights, in response to changes in market interest rates. Refer to Note 16 to the Consolidated Financial Statements for a discussion of the derivative financial instruments used to hedge mortgage servicing rights. Treasury securities used in connection with this risk management strategy are designated as available for sale or trading. At December 31, 2004, there was approximately $1.3 billion of such treasury securities outstanding related to this risk management activity.
Key economic assumptions and the sensitivity of the current fair value of mortgage servicing rights to immediate 10% and 20% adverse changes in those assumptions are as follows:
GMAC | ||||||||||||||||
December 31, 2004 | GMAC | GMAC- | Commercial | |||||||||||||
($ in millions) | Residential | RFC | Mortgage | Total | ||||||||||||
Estimated fair value
|
$2,683 | $684 | $623 | $3,990 | ||||||||||||
Weighted average prepayment speed (CPR)
|
19.67 | % | 29.84 | % | 2%-8 | % (a) | ||||||||||
Impact on fair value of 10% adverse change
|
$(160 | ) | $(26 | ) | $(3 | ) | $(189 | ) | ||||||||
Impact on fair value of 20% adverse change
|
(304 | ) | (49 | ) | (6 | ) | (359 | ) | ||||||||
Weighted average discount rate
|
10.01 | % | 12.64 | % | 9.40 | % | ||||||||||
Impact on fair value of 10% adverse change
|
$(81 | ) | $(20 | ) | $(6 | ) | $(107 | ) | ||||||||
Impact on fair value of 20% adverse change
|
(157 | ) | (39 | ) | (11 | ) | (207 | ) | ||||||||
(a) | The majority of commercial mortgage loans are subject to prepayment penalties during a rate lockout period. Therefore, prepayment speed assumptions will change as loans mature from 2% during the rate lockout period to 8% once the lockout period has expired. |
These sensitivities are hypothetical and should be used with caution. As the figures indicate, changes in fair value based on a 10% and 20% variation in assumptions generally cannot be extrapolated because the relationship of the change in assumption to the change in fair value may not be linear. Also, in this table, the effect that a change in a particular assumption may have on the fair value is calculated without changing any other assumption. In reality, changes in one factor may result in changes in another, which might magnify or counteract the sensitivities.
11 | Premiums and Other Insurance Receivables |
Premiums and other insurance receivables consisted of the following:
December 31, (in millions) | 2004 | 2003 | ||||||
Prepaid reinsurance premiums
|
$344 | $343 | ||||||
Reinsurance recoverable on unpaid losses
|
775 | 870 | ||||||
Reinsurance recoverable on paid losses (a)
|
56 | 102 | ||||||
Premiums receivable (b)
|
588 | 645 | ||||||
Total premiums and other insurance receivables
|
$1,763 | $1,960 | ||||||
(a) | Net of $5 and $2 allowance for uncollectible reinsurance recoverable on paid losses at December 31, 2004 and 2003, respectively. |
(b) | Net of $5 and $8 allowance for uncollectible premiums receivable at December 31, 2004 and 2003, respectively. |
26
12 | Other Assets |
Other assets consisted of:
December 31, (in millions) | 2004 | 2003 | |||||||
Premises and equipment at cost
|
$3,083 | $2,909 | |||||||
Accumulated depreciation
|
(1,228 | ) | (1,008 | ) | |||||
Net premises and equipment
|
1,855 | 1,901 | |||||||
Fair value of derivative contracts in receivable
position
|
9,489 | 10,025 | |||||||
Goodwill, net of accumulated amortization
|
3,274 | 3,223 | |||||||
Restricted cash collections for securitization
trusts (a)
|
2,217 | 2,291 | |||||||
Cash reserve deposits held for securitization
trusts (b)
|
1,835 | 1,922 | |||||||
Equity investments
|
1,751 | 1,560 | |||||||
Real estate investments
|
1,473 | 1,219 | |||||||
Deferred policy acquisition cost
|
1,444 | 1,038 | |||||||
Accrued interest and rent receivable
|
1,178 | 767 | |||||||
Servicer advances
|
769 | 946 | |||||||
Debt issuance costs
|
754 | 716 | |||||||
Repossessed and foreclosed assets, net
|
615 | 595 | |||||||
Investment in used vehicles held for sale
|
530 | 642 | |||||||
Intangible assets, net of accumulated
amortization (c):
|
|||||||||
Customer lists and contracts
|
33 | 33 | |||||||
Trademarks and other
|
20 | 24 | |||||||
Other assets
|
2,411 | 2,915 | |||||||
Total other assets
|
$29,648 | $29,817 | |||||||
(a) | Represents cash collections from customer payments on securitized receivables. These funds are distributed to investors as the related secured debt matures. |
(b) | Represents credit enhancement in the form of cash reserves for various securitization transactions executed by the Company. |
(c) | Aggregate amortization expense on intangible assets was $11 for each of the years ended December 31, 2004 and 2003, respectively. Amortization expense is expected to approximate $9 in each of the next five fiscal years. |
The changes in the carrying amounts of goodwill for the periods indicated, were as follows:
North | Commercial | GMAC | ||||||||||||||||||||||||||||||
American | Finance | International | GMAC | GMAC- | Commercial | |||||||||||||||||||||||||||
(in millions) | Operations | Group | Operations | Residential | RFC | Mortgage | Insurance | Total | ||||||||||||||||||||||||
Goodwill at beginning of 2003
|
$14 | $1,535 | $490 | $327 | $106 | $130 | $671 | $3,273 | ||||||||||||||||||||||||
Goodwill acquired
|
| | 4 | | 2 | 12 | | 18 | ||||||||||||||||||||||||
Impairment losses and other (a)
|
| (109 | ) | (1 | ) | | (5 | ) | (4 | ) | | (119 | ) | |||||||||||||||||||
Foreign currency translation effect
|
| 32 | 11 | | 8 | | | 51 | ||||||||||||||||||||||||
Goodwill at beginning of 2004
|
$14 | $1,458 | $504 | $327 | $111 | $138 | $671 | $3,223 | ||||||||||||||||||||||||
Goodwill acquired
|
| | 1 | 11 | 1 | 3 | | 16 | ||||||||||||||||||||||||
Impairment losses and other
|
| | | | | | | | ||||||||||||||||||||||||
Foreign currency translation effect
|
| 25 | 10 | | 5 | | (5 | ) | 35 | |||||||||||||||||||||||
Goodwill at end of 2004
|
$14 | $1,483 | $515 | $338 | $117 | $141 | $666 | $3,274 | ||||||||||||||||||||||||
(a) | In September 2003, GMAC received $110 related to a settlement of a claim involving the 1999 acquisition of the asset-based lending and factoring business of The Bank of New York. Of the settlement amount, $109 represented a purchase price adjustment, reducing the related goodwill, while the remainder represented a reimbursement of tax claims paid on behalf of The Bank of New York. |
27
13 | Debt |
The presentation of debt in the following table is classified between domestic and foreign based on the location of the office recording the transaction.
Weighted | |||||||||||||||||||||||||||||||||
average | |||||||||||||||||||||||||||||||||
interest | |||||||||||||||||||||||||||||||||
rates (a) | 2004 | 2003 | |||||||||||||||||||||||||||||||
December 31, ($ in millions) | 2004 | 2003 | Domestic | Foreign | Total | Domestic | Foreign | Total | |||||||||||||||||||||||||
Short-term debt
|
|||||||||||||||||||||||||||||||||
Commercial paper
|
$4,330 | $4,065 | $8,395 | $7,846 | $5,311 | $13,157 | |||||||||||||||||||||||||||
Demand notes
|
8,802 | 354 | 9,156 | 8,632 | 300 | 8,932 | |||||||||||||||||||||||||||
Bank loans and overdrafts
|
4,555 | 7,294 | 11,849 | 3,536 | 4,944 | 8,480 | |||||||||||||||||||||||||||
Repurchase agreements and other (b)
|
23,569 | 2,058 | 25,627 | 9,420 | 3,133 | 12,553 | |||||||||||||||||||||||||||
Total short-term debt
|
2.8% | 2.1% | 41,256 | 13,771 | 55,027 | 29,434 | 13,688 | 43,122 | |||||||||||||||||||||||||
Long-term debt
|
|||||||||||||||||||||||||||||||||
Senior indebtedness
|
|||||||||||||||||||||||||||||||||
Due within one year
|
3.9% | 3.1% | 26,757 | 10,537 | 37,294 | 26,273 | 8,007 | 34,280 | |||||||||||||||||||||||||
Due after one year
|
4.9% | 5.0% | 152,680 | 22,685 | 175,365 | 140,286 | 19,063 | 159,349 | |||||||||||||||||||||||||
Total long-term debt (c)
|
4.7% | 4.7% | 179,437 | 33,222 | 212,659 | 166,559 | 27,070 | 193,629 | |||||||||||||||||||||||||
Fair value adjustment (d)
|
1,205 | 69 | 1,274 | 1,985 | 126 | 2,111 | |||||||||||||||||||||||||||
Total debt (e)
|
$221,898 | $47,062 | $268,960 | $197,978 | $40,884 | $238,862 | |||||||||||||||||||||||||||
(a) | The weighted average interest rates include the effects of derivative financial instruments designated as hedges of debt. |
(b) | Repurchase agreements consist of secured financing arrangements with third-parties at the Companys Mortgage operations. Other primarily includes non-bank secured borrowings. The increase from December 2003 is reflective of the Companys replacement of various off-balance sheet facilities with on-balance sheet funding facilities. In addition, the increase is reflective of the Companys accounting treatment for certain mortgage transfers as secured borrowings effective September 30, 2004, as described in Note 1 to the Consolidated Financial Statements. |
(c) | The Company has issued warrants to subscribe for up to $300 aggregate principal amount of 6.5% notes due October 15, 2009. The warrants entitle the holder to purchase from GMAC the aggregate principal amount at par plus any accrued interest. The warrants are exercisable up to and including October 15, 2007. In each December 2003 and February 2004, $125 of the warrants were exercised, resulting in $50 aggregate principal amount of these warrants remaining outstanding. |
(d) | To adjust designated fixed rate debt to fair value in accordance with SFAS 133. |
(e) | Includes secured debt, as depicted by asset class in the following table. |
The following summarizes assets that are restricted as collateral for the payment of the related debt obligation primarily arising from securitization transactions accounted for as secured borrowings and repurchase agreements:
2004 | 2003 | |||||||||||||||
Related | Related | |||||||||||||||
secured | secured | |||||||||||||||
December 31, (in millions) | Assets | debt (a) | Assets | debt (a) | ||||||||||||
Mortgage assets held for sale or held for
investment
|
$74,022 | $68,041 | $50,593 | $46,600 | ||||||||||||
Retail automotive finance receivables
|
18,163 | 17,474 | 21,046 | 20,251 | ||||||||||||
Investment securities
|
4,522 | 3,597 | 1,896 | 2,148 | ||||||||||||
Investment in operating leases, net
|
1,098 | 1,032 | | | ||||||||||||
Real estate investments and other assets
|
2,514 | 1,813 | 34 | 24 | ||||||||||||
Total
|
$100,319 | $91,957 | $73,569 | $69,023 | ||||||||||||
(a) | Included as part of secured debt are repurchase agreements of $8,827 and $4,322 where GMAC has pledged assets, reflected as investment securities, as collateral for approximately the same amount of debt at December 31, 2004 and 2003, respectively. |
28
The following table presents the scheduled maturity of long-term debt at December 31, 2004, assuming that no early redemptions will occur. The actual payment of secured debt may vary based on the payment activity of the related secured assets.
Year ended December 31, (in millions) | ||||
2005
|
$37,294 | |||
2006
|
38,819 | |||
2007
|
24,321 | |||
2008
|
11,422 | |||
2009
|
9,609 | |||
2010 and thereafter
|
91,820 | |||
Long-term debt (a) (b)
|
213,285 | |||
Unamortized discount
|
(626 | ) | ||
Total long-term debt
|
$212,659 | |||
(a) | Debt issues totaling $17,209 are redeemable at or above par, at the Companys option anytime prior to the scheduled maturity dates, the latest of which is November 2049. | |
(b) | The Companys debt includes $525 in fixed rate notes and $75 in variable rate notes which provide the holders the option to put the debt to GMAC at specific dates prior to the scheduled maturity. In addition, the Companys debt includes $26,187 notes containing a survivors option enabling the holder to put the debt back to GMAC at par prior to maturity in the event of the holders death. The Company repurchased $39 and $63 of these notes prior to maturity during 2004 and 2003, respectively. The latest maturity date of these notes is November 2024. |
To achieve the desired balance between fixed and variable rate debt, GMAC utilizes interest rate swap and interest rate cap agreements. The use of such derivative financial instruments had the effect of synthetically converting $56,722 million of its $165,128 million of fixed rate debt into variable rate obligations and $29,188 million of its $103,208 million of variable rate debt into fixed rate obligations at December 31, 2004. In addition, certain of GMACs debt obligations are denominated in currencies other than the currency of the issuing country. Foreign currency swap agreements are used to hedge exposure to changes in the exchange rates of these obligations.
Liquidity facilities
Unused | |||||||||||||||||||||||||||||||||
Committed | Uncommitted | Total liquidity | liquidity | ||||||||||||||||||||||||||||||
Facilities | facilities | facilities | facilities | ||||||||||||||||||||||||||||||
December 31, (in billions) | 2004 | 2003 | 2004 | 2003 | 2004 | 2003 | 2004 | 2003 | |||||||||||||||||||||||||
Automotive operations:
|
|||||||||||||||||||||||||||||||||
Syndicated multi-currency global credit
facility (a)
|
$8.9 | $8.5 | $ | $ | $8.9 | $8.5 | $8.9 | $8.5 | |||||||||||||||||||||||||
U.S. Mortgage operations (b)
|
| | 7.6 | 3.9 | 7.6 | 3.9 | 3.9 | 1.6 | |||||||||||||||||||||||||
Other:
|
|||||||||||||||||||||||||||||||||
U.S. asset-backed commercial paper liquidity and
receivables facilities (c)
|
22.9 | 22.6 | | | 22.9 | 22.6 | 22.9 | 22.6 | |||||||||||||||||||||||||
Other foreign facilities (d)
|
5.0 | 4.7 | 15.0 | 14.1 | 20.0 | 18.8 | 8.4 | 8.4 | |||||||||||||||||||||||||
Total
|
$36.8 | $35.8 | $22.6 | $18.0 | $59.4 | $53.8 | $44.1 | $41.1 | |||||||||||||||||||||||||
(a) | The entire $8.9 is available for use by GMAC in the U.S., $0.8 is available for use by GMAC (UK) plc and $0.8 is available for use by GMAC International Finance B.V. in Europe. This facility serves primarily as backup for the Companys unsecured commercial paper programs. |
(b) | Includes $1.3 secured master note program with a third-party financial institution, guaranteed by GMAC. The borrowing is currently unsecured; however, upon request by the financial institution or any assignee, the Company is required to pledge mortgage servicing rights valued at 200% of the outstanding balance as collateral. Also includes interbank deposit lines and federal funds lines with various banking institutions. |
(c) | Relates to New Center Asset Trust (NCAT) and Mortgage Interest Networking Trust (MINT), which are qualified special purpose entities administered by GMAC for the purpose of funding assets as part of GMACs securitization and mortgage warehouse funding programs. These entities fund assets through the issuance of asset-backed commercial paper and represent an important source of liquidity to the Company. At December 31, 2004, NCAT commercial paper outstandings are $9.7 and are not consolidated in the Companys Consolidated Balance Sheet. At December 31, 2004, MINT had commercial paper outstanding of $1.5, which is reflected as secured debt in the Companys Consolidated Balance Sheet and is included in repurchase agreements and other short-term debt. Refer to Note 1 to the Consolidated Financial Statements. |
(d) | Consists primarily of credit facilities supporting operations in Canada, Europe, Latin America and Asia-Pacific. |
29
The syndicated multi-currency global facility includes a $4.35 billion five year facility (expires June 2008) and a $4.55 billion 364-day facility (expires June 2005). The 364-day facility includes a term loan option, which, if exercised by GMAC upon expiration, carries a one-year term. Additionally, a leverage covenant restricts the ratio of consolidated unsecured debt to total stockholders 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 & Poors), or Baa1 or less (by Moodys). GMACs leverage covenant ratio was 8.6:1 at December 31, 2004, and the Company was therefore in compliance with this covenant. The leverage covenant calculation excludes from debt those securitization transactions that are accounted for as on-balance sheet secured financings.
14 | Reserves for Insurance Losses and Loss Adjustment Expense |
The following table provides a reconciliation of the activity in the reserves for insurance losses and loss adjustment expenses.
Year ended December 31, | |||||||||||||
(in millions) | 2004 | 2003 | 2002 | ||||||||||
Balance at beginning of year
|
$ | 2,340 | $ | 2,140 | $ | 1,797 | |||||||
Reinsurance recoverables
|
(871 | ) | (812 | ) | (602 | ) | |||||||
Net balance at beginning of year
|
1,469 | 1,328 | 1,195 | ||||||||||
Incurred related to
|
|||||||||||||
Current year
|
2,344 | 2,252 | 1,970 | ||||||||||
Prior years (a)
|
27 | 36 | 57 | ||||||||||
Total incurred (b)
|
2,371 | 2,288 | 2,027 | ||||||||||
Paid related to
|
|||||||||||||
Current year
|
(1,567 | ) | (1,579 | ) | (1,388 | ) | |||||||
Prior years
|
(558 | ) | (582 | ) | (568 | ) | |||||||
Total paid
|
(2,125 | ) | (2,161 | ) | (1,956 | ) | |||||||
Other (c)
|
15 | 14 | 62 | ||||||||||
Net balance at end of year (d)
|
1,730 | 1,469 | 1,328 | ||||||||||
Reinsurance recoverables
|
775 | 871 | 812 | ||||||||||
Balance at end of year
|
$ | 2,505 | $ | 2,340 | $ | 2,140 | |||||||
(a) | Incurred losses and loss adjustment expenses during 2004 related to events of prior years are attributable to changes in reserve estimates for claims, which are based on additional knowledge available to the Company during 2004. In addition, also includes $29 related to reinsurance agreements the Company decided to commute during 2004. During 2003, incurred losses related to events of prior year are attributed to the development of additional information indicating probable additional ultimate losses on U.S. assumed auto reinsurance and U.S. direct auto business. During 2002, the change is primarily attributable to the development of additional information indicating probable ultimate losses on assumed auto reinsurance, partially offset by favorable development in expected vehicle service contract losses. |
(b) | Reflected net of reinsurance recoveries totaling $312, $374, and $500 for the years ended December 31, 2004, 2003, and 2002, respectively. |
(c) | Effects of exchange rate changes for the years ended December 31, 2004, 2003, and 2002. Also included in 2002 is $56, which represents reserves acquired through the purchase of subsidiaries. |
(d) | Includes exposure to asbestos and environmental claims from the reinsurance of general liability, commercial multiple peril, homeowners and workers compensation claims. Reported claim activity to date has not been significant. Net reserves for loss and loss adjustment expenses were $8, $10, and $8 at December 31, 2004, 2003, and 2002, respectively. |
15 | Accrued Expenses and Other Liabilities |
Accrued expenses and other liabilities consisted of:
December 31, (in millions) | 2004 | 2003 | |||||||
Deposits
|
|||||||||
Consumer
|
$2,909 | $750 | |||||||
Commercial
|
3,248 | 3,298 | |||||||
Employee compensation and benefits
|
1,790 | 1,761 | |||||||
Factored client payables
|
1,430 | 1,083 | |||||||
Mortgage escrow deposits
|
1,321 | 1,026 | |||||||
Fair value of derivative contracts in payable
position
|
953 | 1,196 | |||||||
Securitization trustee payable
|
514 | 665 | |||||||
GM payable, net
|
200 | 556 | |||||||
Taxes payable
|
58 | 391 | |||||||
Accounts payable and other liabilities
|
5,959 | 4,999 | |||||||
Total accrued expenses and other liabilities
|
$18,382 | $15,725 | |||||||
16 | Derivative Instruments and Hedging Activities |
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, debts and deposits, as well as off-balance sheet securitizations. In addition, foreign exchange contracts are used to hedge foreign currency denominated debt and foreign exchange transactions.
GMACs 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 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
30
Fair Value Hedges
| Debt obligations Interest rate swaps are used to modify GMACs exposure to interest rate risk by converting fixed rate debt to a floating rate. Generally, individual swaps are designated as hedges of specific debt at the time of issuance with the terms of the swap matching the terms of the underlying debt. As the terms of the swap are designed to match the terms of the debt, the vast majority of the Companys interest rate swaps receive short-cut treatment under SFAS 133, resulting in no hedge ineffectiveness. However, certain of the Companys fair value hedges of debt do not receive short-cut treatment, because of differences in option features between the interest rate swap and the companion debt, in which case, hedge ineffectiveness is measured based on the difference in the fair value movement of the swap and the related debt. |
| Mortgage servicing rights In determining the portion of mortgage servicing rights to hedge, the Company takes into account both natural offsets from mortgage loan production and any available for sale investment securities (e.g., U.S. Treasury notes) used to manage the interest rate risk inherent in mortgage servicing rights. Derivative financial instruments approved for use under the Companys risk management program include: call and put options on treasuries or swaps; mortgage-backed security futures, treasury futures and LIBOR futures; interest rate caps and floors; swaptions; and swaps. GMAC designates a fair value hedging relationship for derivative financial instruments used to hedge the change in the fair value of mortgage servicing rights. For purposes of hedge designation, the loans underlying the mortgage servicing rights asset are aggregated into groups of similar assets. In doing so, management considers characteristics such as loan type, interest rate type (i.e., fixed or variable), coupon interest rate (for fixed), and scheduled maturity. If the changes in the fair value of the hedged mortgage servicing rights are highly correlated to changes in the fair value of the derivative financial instruments, the hedged mortgage servicing rights are adjusted for the change in fair value of the risk being hedged, and the resultant gain or loss is recorded in the Consolidated Statement of Income. The Company closes hedge periods based upon derivative rebalancing or interest rate moves, which resulted in hedge periods closing on average every two business days during 2004. Effectiveness is assessed using historical hedge period data. The Company measures hedge effectiveness employing a statistical-based approach, which must meet thresholds for R-squared, slope and F-statistic. |
| Loans held for sale The Company uses derivative financial instruments to hedge its exposure to risk associated with its mortgage loans held for sale. After loans are funded, they are generally sold into the secondary market to various investors, often as mortgage-backed securities sponsored by Fannie Mae, Freddie Mac, or Ginnie Mae. Mortgage loans that are not eligible for agency sponsored securitization are sold through public or private securitization transactions or in whole loan sales. The primary risk associated with closed loans awaiting sale is a change in the fair value of the loans due to fluctuations in interest rates. The Companys primary strategies to protect against this risk are selling loans or mortgage-backed securities forward to investors using mandatory and optional forward commitments and the use of interest rate swaps. Hedge periods are closed daily, representative of daily hedge portfolio rebalancing due to new loan fundings and sales. Effectiveness is measured using historical daily hedge period data. The Company measures hedge effectiveness employing a statistical-based approach, which must meet thresholds for R-squared, slope, and F-statistic. |
Cash Flow Hedges
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 Companys primary strategy to protect against this risk is selling loans or mortgage-backed securities
31
Economic Hedges not Designated as Accounting Hedges
In addition, the following describes other uses of derivatives that do not qualify for hedge accounting:
| Off-balance sheet securitization activities GMAC enters into interest rate swaps to facilitate securitization transactions where the underlying receivables are sold to a non-consolidated qualified special purpose entity (QSPE). As the underlying assets are carried in a non-consolidated entity, the interest rate swaps do not qualify for hedge accounting treatment. The use of swaps allows for more efficient execution of the securitization transaction as it allows the QSPE to issue asset-backed securities with different characteristics than the underlying assets. |
| Foreign currency debt GMAC has elected not to treat currency swaps that are used to convert foreign denominated debt back into the functional currency at a floating rate as hedges for accounting purposes. While these currency swaps are similar to the foreign currency cash flow hedges described in the foregoing, the Company has not designated them as hedges as the changes in the fair values of the currency swaps are substantially offset by the foreign currency revaluation gains and losses of the underlying debt. |
| Mortgage related securities The Company uses interest rate options, futures, swaps, caps, and floors to mitigate risk related to mortgage related securities classified as trading. |
The following table summarizes the pre-tax earnings effect for each type of accounting hedge classification, segregated by the asset or liability hedged.
Year ended December 31, (in millions) | 2004 | 2003 | 2002 | Income Statement Classification | ||||||||||||
Fair value hedge ineffectiveness gain (loss):
|
||||||||||||||||
Debt obligations
|
$46 | $45 | $68 | Interest and discount expense | ||||||||||||
Mortgage servicing rights
|
70 | 348 | 363 | Mortgage banking income | ||||||||||||
Loans held for sale
|
(12 | ) | (2 | ) | 27 | Mortgage banking income | ||||||||||
Cash flow hedges ineffectiveness gain (loss):
|
||||||||||||||||
Debt Obligations
|
(19 | ) | (1 | ) | 1 | Interest and discount expense | ||||||||||
Economic hedge change in fair value:
|
||||||||||||||||
Off-balance sheet securitization activities
|
||||||||||||||||
Financing operations
|
(26 | ) | (102 | ) | (47 | ) | Other income | |||||||||
Mortgage operations
|
(18 | ) | 254 | 311 | Mortgage banking income | |||||||||||
Foreign currency debt (a)
|
44 | 87 | 66 | Interest and discount expense | ||||||||||||
Loans held for sale or investment
|
(60 | ) | (86 | ) | 147 | Mortgage banking income | ||||||||||
Mortgage servicing rights
|
(7 | ) | (16 | ) | 110 | Mortgage banking income | ||||||||||
Mortgage related securities
|
(95 | ) | (13 | ) | 109 | Investment income | ||||||||||
Other
|
(18 | ) | 19 | (86 | ) | Other income | ||||||||||
Total gain (loss)
|
$(95 | ) | $533 | $1,069 | ||||||||||||
(a) | Amount represents the difference between the changes in the fair values of the currency swap, net of the revaluation of the related foreign denominated debt. |
32
The following table presents additional information related to the Companys derivative financial instruments.
Year ended December 31, (in millions) | 2004 | 2003 | 2002 | |||||||||
Net gain on fair value hedges excluded from
assessment of effectiveness
|
$180 | $175 | $212 | |||||||||
Expected reclassifications from other
comprehensive income to earnings (a)
|
(1 | ) | (1 | ) | (6 | ) | ||||||
(a) | Estimated to occur over the next 12 months. |
Derivative financial instruments contain an element of credit risk in the event that counterparties are unable to meet the terms of the agreements. Credit risk associated with derivative financial instruments is measured as the net replacement cost should the counterparties which owe GMAC under the contract completely fail to perform under the terms of those contracts, assuming no recoveries of underlying collateral, as measured by the market value of the derivative financial instrument. At December 31, 2004, the market value of derivative financial instruments in an asset or receivable position (from GMACs perspective) was $9.5 billion, including accrued interest of $1.1 billion. The Company minimizes the credit risk exposure by limiting the counterparties to those major banks and financial institutions that meet established credit guidelines. As of December 31, 2004, more than of 89% of GMACs exposure is with counterparties with a Fitch rating of A+ or higher. Additionally, the Company reduces credit risk on the majority of its derivative financial instruments by entering into legally enforceable agreements that permit the closeout and netting of transactions with the same counterparty upon occurrence of certain events. In order to further mitigate the risk of counterparty default, the Company maintains collateral agreements with certain counterparties. The agreements require both parties to maintain cash deposits in the event the fair values of the derivative financial instruments meet established thresholds. The Company has placed cash deposits totaling $40 million and $153 million at December 31, 2004 and 2003, respectively, in accounts maintained by counterparties. The Company has received cash deposits from counterparties totaling $266 million and $102 million at December 31, 2004 and 2003, respectively. The cash deposits placed and received are included on the Consolidated Balance Sheet in Other assets and Other liabilities, respectively.
17 | Pension and Other Postretirement Benefits |
Pension
Other employees (primarily at the Mortgage operations, Commercial Finance Group, and certain subsidiaries of GMAC Insurance) participate in separate retirement plans that provide for pension payments to eligible employees upon retirement based on factors such as length of service and salary. The following summarizes information relating to these non-GM sponsored plans:
2004 | 2003 | ||||||||||||||||||||||||
GMAC | Commercial | GMAC | Commercial | ||||||||||||||||||||||
Mortgage | GMAC | Finance | Mortgage | GMAC | Finance | ||||||||||||||||||||
Year ended December 31, (in millions) | Operations | Insurance | Group | Operations | Insurance | Group | |||||||||||||||||||
Benefit obligation
|
$250 | $34 | $23 | $247 | $28 | $18 | |||||||||||||||||||
Fair value of plan assets
|
211 | 21 | 18 | 154 | 16 | 12 | |||||||||||||||||||
Funded status
|
(39 | ) | (13 | ) | (5 | ) | (93 | ) | (12 | ) | (6 | ) | |||||||||||||
Unrecognized net actuarial gain (loss)
|
39 | 5 | | 91 | 5 | (1 | ) | ||||||||||||||||||
Unrecognized prior service cost
|
1 | | | 1 | | | |||||||||||||||||||
Net transition obligation
|
| | | | | | |||||||||||||||||||
Accrued benefit cost
|
$1 | $(8 | ) | $(5 | ) | $(1 | ) | $(7 | ) | $(7 | ) | ||||||||||||||
Net pension expense (a)
|
$34 | $5 | $5 | $26 | $4 | $5 | |||||||||||||||||||
(a) | Net pension expense for year ended December 31, 2002, totaled $21, $3, and $5 for GMAC Mortgage operations, GMAC Insurance, and Commercial Finance Group, respectively. |
Cash contributions to these non-GM sponsored pension plans made by GMAC Mortgage operations, GMAC Insurance, and Commercial Finance Group for the year ended December 31, 2004 were $37 million, $4 million, and $3 million, respectively.
33
The expected rate of return on plan assets is an estimate determined by the Company by summing the expected inflation and the expected real rate of return on stocks and bonds based on allocation percentages within the trust. The weighted average assumptions for the non-GM sponsored pension plans are presented below.
Year ended December 31, | 2004 | 2003 | ||||||
Discount rate
|
6.02% | 6.68% | ||||||
Expected return on plan assets
|
8.67% | 8.68% | ||||||
Rate of compensation increase
|
5.27% | 5.32% | ||||||
Other Postretirement Benefits
18 | Income Taxes |
The significant components of income tax expense were as follows:
Year ended December 31, (in millions) | 2004 | 2003 | 2002 | ||||||||||
Current income tax expense
|
|||||||||||||
U.S. federal
|
$1,518 | $1,411 | $908 | ||||||||||
Foreign
|
128 | 161 | 206 | ||||||||||
State and local
|
(37 | ) | 351 | 290 | |||||||||
Total current expense
|
1,609 | 1,923 | 1,404 | ||||||||||
Deferred income tax expense
|
|||||||||||||
U.S. federal
|
(466 | ) | (196 | ) | (128 | ) | |||||||
Foreign
|
142 | 63 | (9 | ) | |||||||||
State and local
|
149 | (199 | ) | (196 | ) | ||||||||
Total deferred expense
|
(175 | ) | (332 | ) | (333 | ) | |||||||
Total income tax expense
|
$1,434 | $1,591 | $1,071 | ||||||||||
A reconciliation of the statutory U.S. federal income tax rate to the Companys effective tax rate applicable to income is shown in the following table.
Year ended December 31, | 2004 | 2003 | 2002 | ||||||||||
Statutory U.S. federal tax rate
|
35.0 | % | 35.0 | % | 35.0 | % | |||||||
Change in tax rate resulting from:
|
|||||||||||||
State and local income taxes, net of federal
income tax benefit
|
2.7 | 2.3 | 2.8 | ||||||||||
Tax-exempt income
|
(0.8 | ) | (0.7 | ) | (0.5 | ) | |||||||
Foreign income tax rate differential
|
(1.3 | ) | (0.2 | ) | (0.1 | ) | |||||||
Other(a)
|
(2.6 | ) | (0.1 | ) | (0.8 | ) | |||||||
Effective tax rate
|
33.0 | % | 36.3 | % | 36.4 | % | |||||||
(a) | Reflects the benefit of favorable settlements with various tax authorities (both U.S. and International) as well as the impact of changes in reserve requirements. |
Deferred tax assets and liabilities result from differences between assets and liabilities measured for financial reporting purposes and those measured for income tax return purposes. The significant components of deferred tax assets and liabilities are reflected in the following table.
December 31, (in millions) | 2004 | 2003 | |||||||
Deferred tax liabilities
|
|||||||||
Lease transactions
|
$3,416 | $3,967 | |||||||
Mortgage servicing rights
|
785 | 536 | |||||||
Deferred acquisition costs
|
584 | 428 | |||||||
Unrealized gains on securities
|
337 | 295 | |||||||
Debt issuance costs
|
335 | 123 | |||||||
Hedging transactions
|
220 | 145 | |||||||
Accumulated translation adjustment
|
113 | 19 | |||||||
State and local taxes
|
92 | 65 | |||||||
Other
|
16 | 68 | |||||||
Gross deferred tax liabilities
|
5,898 | 5,646 | |||||||
Deferred tax assets
|
|||||||||
Provisions for credit losses
|
1,105 | 1,092 | |||||||
Postretirement benefits
|
288 | 277 | |||||||
Unearned insurance premiums
|
278 | 250 | |||||||
Sales of finance receivables and loans
|
100 | (17 | ) | ||||||
Foreign tax credits (a)
|
73 | 63 | |||||||
Insurance reserves
|
65 | 65 | |||||||
Other
|
235 | 266 | |||||||
Gross deferred tax assets
|
2,144 | 1,996 | |||||||
Net deferred tax liability
|
$3,754 | $3,650 | |||||||
(a) | Net of valuation allowance of $112 as of December 31, 2004 and 2003. |
Foreign pre-tax income totaled $1,004 million in 2004, $784 million in 2003, and $633 million in 2002. Foreign pre-tax income is subject to U.S. taxation when effectively repatriated. The Company provides federal income taxes on the undistributed earnings of foreign subsidiaries, except to the extent that such earnings are
34
The Corporation has open tax years from 1998 to 2003 with various U.S. and foreign taxing jurisdictions. These open years contain matters that could be subject to differing interpretations of applicable tax laws and regulations as they related to the amount, timing or inclusion of revenue and expenses or the sustainability of income tax credits for a given audit cycle. The Corporation has established a liability of approximately $260 million for those matters where the amount of loss is probable and estimable. The amount of the liability is based on managements best estimate given the Corporations history with similar matters and interpretations of current laws and regulations.
19 | Transactions with Affiliates |
As a wholly owned subsidiary, GMAC enters into various operating and financing arrangements with its parent, GM. A master intercompany agreement governs the nature of these transactions to ensure that they are done on an arms length basis, in accordance with commercially reasonable standards and in the best interest of GMAC as a diversified financial services company.
Balance Sheet
December 31, (in millions) | 2004 | 2003 | ||||||
Dealer receivables due from GM (a)
|
$125 | $112 | ||||||
Notes receivable from GM and affiliates
|
4,921 | 3,151 | ||||||
Advances to improve GM leased properties (b)
|
919 | 852 | ||||||
Accounts receivable from (payable to) GM and
affiliates (c)
|
(1,506 | ) | (731 | ) | ||||
Capital contributions (non-cash)
|
119 | | ||||||
Dividends paid
|
$1,500 | $1,000 | ||||||
(a) | GMAC provides wholesale financing and term loans to dealerships owned by GM. These amounts are included in finance receivables and loans. |
(b) | During 2000, GM entered into a sixteen year lease arrangement with GMAC, under which GMAC agreed to fund and capitalize improvements to three Michigan GM leased properties totaling $1.3 billion. |
(c) | Includes wholesale settlements payments to GM, subvention receivables due from GM, and notes payable, which are included in accrued expenses, other liabilities, and debt, respectively. |
In January 2004, GMAC assumed management and financial control of GMs Brazilian financing operation (Banco GM, or BGM), while GM maintained legal ownership. 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 $119 million increase in capital, which represents the net assets of the Brazilian operations on December 31, 2003. In the fourth quarter of 2004, GMAC purchased BGM from GM for $336 million resulting in the transfer of legal ownership to GMAC.
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 installment and lease contracts acquired were as follows:
Year ended December 31, | 2004 | 2003 | |||||||||
GM and affiliates rate subvented contracts acquired: | |||||||||||
North American operations
|
63 | % | 78 | % | |||||||
International operations
|
58 | % | 60 | % | |||||||
In addition to subvention programs, GM provides payment guarantees on certain commercial assets GMAC has outstanding with certain third-party customers. As of December 31, 2004 and 2003, commercial obligations guaranteed by GM were $1,285 million and $1,311 million, respectively.
35
Income Statement
Year ended December 31, (in millions) | 2004 | 2003 | 2002 | ||||||||||
Net financing revenue:
|
|||||||||||||
GM and affiliates lease residual value support
|
$ | 526 | $ | 986 | $ | 1,315 | |||||||
Wholesale subvention and service fees from GM
|
174 | 160 | 149 | ||||||||||
Interest paid on loans from GM
|
(45 | ) | (22 | ) | (40 | ) | |||||||
Consumer lease payments (a)
|
348 | 225 | 60 | ||||||||||
Insurance premiums earned from GM
|
450 | 479 | 498 | ||||||||||
Other income:
|
|||||||||||||
Interest on notes receivable from GM and
affiliates
|
163 | 151 | 204 | ||||||||||
Interest on wholesale settlements (b)
|
101 | 106 | 136 | ||||||||||
Revenues from GM leased properties
|
63 | 58 | 50 | ||||||||||
Service fee income:
|
|||||||||||||
GMAC of Canada operating lease
administration (c)
|
28 | 35 | 50 | ||||||||||
Rental car repurchases held for resale (d)
|
16 | 22 | 17 | ||||||||||
Other
|
| 14 | 13 | ||||||||||
Expense:
|
|||||||||||||
Employee retirement plan costs allocated by GM
|
114 | 116 | 86 | ||||||||||
Off-lease vehicle selling expense
reimbursement (e)
|
(51 | ) | (60 | ) | (70 | ) | |||||||
Payments to GM for services, rent and marketing
expenses
|
281 | 67 | 69 | ||||||||||
(a) | GM sponsors lease pull-ahead programs whereby consumers are encouraged to terminate lease contracts early in conjunction with the acquisition of a new GM vehicle, with the customers remaining payment obligation waived. For certain programs, GM compensates GMAC for the waived payments, adjusted based on the remarketing results associated with the underlying vehicle. | |
(b) | The settlement terms related to the wholesale financing of certain GM products are at shipment date. To the extent that wholesale settlements with GM are made prior to the expiration of transit, interest is received from GM. | |
(c) | GMAC of Canada, Limited administers operating lease receivables on behalf of GM of Canada Limited (GMCL) and receives a servicing fee, which is included in other income. | |
(d) | GMAC receives a servicing fee from GM related to the resale of rental car repurchases. | |
(e) | An agreement with GM provides for the reimbursement of certain selling expenses incurred by GMAC on off-lease vehicles sold by GM at auction. |
20 | Comprehensive Income |
Comprehensive income is composed of net income and other comprehensive income, which includes the after-tax change in unrealized gains and losses on available for sale securities, cash flow hedging activities and foreign currency translation adjustments. The following table presents the components and annual activity in other comprehensive income:
Accumulated | |||||||||||||||||
Unrealized gains | other | ||||||||||||||||
on investment | Translation | Cash flow | comprehensive | ||||||||||||||
Year ended December 31, (in millions) | securities (a) | adjustments (b) | hedges | income (loss) | |||||||||||||
Balance at December 31, 2001
|
$226 | $(377 | ) | $(171 | ) | $(322 | ) | ||||||||||
2002 net change
|
77 | 137 | 13 | 227 | |||||||||||||
Balance at December 31, 2002
|
303 | (240 | ) | (158 | ) | (95 | ) | ||||||||||
2003 net change
|
245 | 300 | 67 | 612 | |||||||||||||
Balance at December 31, 2003
|
548 | 60 | (91 | ) | 517 | ||||||||||||
2004 net change
|
78 | 306 | 265 | 649 | |||||||||||||
Balance at December 31, 2004
|
$626 | $366 | $174 | $1,166 | |||||||||||||
(a) | Primarily represents the after-tax difference between the fair value and amortized cost of the available for sale securities portfolio. |
(b) | Includes after-tax gains and losses on foreign currency translation from operations for which the functional currency is other than the U.S. dollar. Net change amounts are net of taxes totaling $104, $153, and $73 for the years ended December 31, 2004, 2003, and 2002, respectively. |
36
The net changes in the following table represent the sum of net unrealized gains (losses) of available for sale securities and net unrealized gains (losses) on cash flow hedges with the respective reclassification adjustments. Reclassification adjustments are amounts recognized in net income during the current year and that would have been reported in other comprehensive income in previous years.
Year ended December 31, (in millions) | 2004 | 2003 | 2002 | ||||||||||
Available for sale securities:
|
|||||||||||||
Net unrealized gains (losses) arising during
the period, net of taxes (a)
|
$125 | $199 | $(234 | ) | |||||||||
Reclassification adjustment for net
(gains) losses included in net income, net of taxes (b)
|
(47 | ) | 46 | 311 | |||||||||
Net change
|
78 | 245 | 77 | ||||||||||
Cash flow hedges:
|
|||||||||||||
Net unrealized gains (losses) on cash flow
hedges, net of taxes (c)
|
264 | 61 | (17 | ) | |||||||||
Reclassification adjustment for net losses
included in net income, net of taxes (d)
|
1 | 6 | 30 | ||||||||||
Net change
|
$265 | $67 | $13 | ||||||||||
(a) | Net of tax expense of $67 for 2004 and $109 for 2003 and tax benefit of $128 for 2002. |
(b) | Net of tax expense of $25 for 2004 and tax benefit of $25 for 2003 and $168 for 2002. |
(c) | Net of tax expense of $142 for 2004 and $37 for 2003 and tax benefit of $9 for 2002. |
(d) | Net of tax benefit of $1 for 2004, $3 for 2003 and $16 for 2002. |
21 | Fair Value of Financial Instruments |
The Company has developed the following fair value estimates by utilization of available market information or other appropriate valuation methodologies. However, considerable judgment is required in interpreting market data to develop estimates of fair value, so the estimates are not necessarily indicative of the amounts that could be realized or would be paid in a current market exchange. The effect of using different market assumptions or estimation methodologies could be material to the estimated fair values. Fair value information presented herein is based on information available at December 31, 2004 and 2003. Although management is not aware of any factors that would significantly affect the estimated fair value amounts, such amounts have not been updated since those dates and, therefore, the current estimates of fair value at dates subsequent to December 31, 2004 and 2003 could differ significantly from these amounts. The following describes the methodologies and assumptions used to determine fair value for the respective classes of financial instruments.
Investment Securities
Loans Held for Sale
Finance Receivables and Loans, Net
Notes Receivable from GM
Derivative Assets and Liabilities
The fair value of foreign currency swaps is based on discounted expected cash flows using market exchange rates over the remaining term of the agreement.
37
Debt
Deposits
The following table presents the carrying and estimated fair value of assets and liabilities considered financial instruments under Statements of Financial Accounting Standards 107, Disclosures about Fair Value of Financial Instruments (SFAS 107). Accordingly, certain amounts that are not considered financial instruments are excluded from the table.
2004 | 2003 | ||||||||||||||||
Carrying | Carrying | ||||||||||||||||
December 31, (in millions) | value | Fair value | value | Fair value | |||||||||||||
Financial assets
|
|||||||||||||||||
Investment securities
|
$14,960 | $14,963 | $13,200 | $13,193 | |||||||||||||
Loans held for sale
|
19,934 | 20,224 | 19,609 | 19,930 | |||||||||||||
Finance receivables and loans, net
|
199,725 | 199,952 | 174,362 | 176,819 | |||||||||||||
Notes receivable from GM
|
4,921 | 4,915 | 3,151 | 3,143 | |||||||||||||
Derivative assets
|
9,489 | 9,489 | 10,026 | 10,026 | |||||||||||||
Financial liabilities
|
|||||||||||||||||
Debt (a)
|
269,678 | 270,734 | 239,495 | 244,786 | |||||||||||||
Derivative liabilities
|
953 | 953 | 1,196 | 1,196 | |||||||||||||
Deposits
|
4,230 | 4,106 | 1,754 | 1,660 | |||||||||||||
(a) | Debt includes deferred interest for zero coupon bonds of $718 and $633 for 2004 and 2003, respectively. |
22 | Variable Interest Entities |
The following describes the variable interest entities that GMAC has consolidated or in which it has a significant variable interest.
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 $16.1 billion as of December 31, 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. GMACs maximum exposure to loss as a result of its involvement with these non-consolidated variable interest entities is $168 million and would only be incurred in the event of a complete loss on the assets that GMAC transferred.
Mortgage warehouse funding GMACs 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 financings (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.
Management has determined that for certain mortgage warehouse funding facilities, GMAC is the primary beneficiary and, as such, consolidates the entities in accordance with FIN 46R. The assets of these residential mortgage warehouse entities totaled $4.6 billion at December 31, 2004, the majority of which are included in loans held for sale and finance receivables and loans, net of unearned income, in the Companys Consolidated Balance Sheet. The assets of the commercial mortgage warehouse entities totaled $526 million at December 31, 2004, the majority of which are included in loans held for sale and finance receivables and loans, net of unearned income, in the Companys Consolidated Balance Sheet. The beneficial interest holders of these variable interest entities do not have legal recourse to the general credit of GMAC.
38
Residential mortgage loan alliances GMAC-RFC has invested in strategic alliances with several mortgage loan originators. These alliances may include common or preferred equity investments, working capital or other subordinated lending, and warrants. In addition to warehouse lending arrangements, management has determined that GMAC does not have the majority of the expected losses or returns and as such, consolidation is not appropriate under FIN 46R. Total assets in these alliances were $174 million at December 31, 2004. The Companys maximum exposure to loss under these alliances, including commitments to lend additional funds or purchase loans at above-market rates, is $285 million at December 31, 2004.
Construction and real estate 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 $1.2 billion at December 31, 2004, which are included in finance receivables and loans, net of unearned income, in the Companys Consolidated Balance Sheet. The beneficial interest holders of this variable interest entity do not have legal recourse to the general credit of GMAC.
GMAC-RFC has subordinated real estate lending arrangements with certain entities. These entities are created to develop land and construct residential homes. Management has determined that GMAC does not have the majority of the expected losses or returns, and as such, consolidation is not appropriate under FIN 46R. Total assets in these entities were $194 million at December 31, 2004, of which $49 million represents GMACs maximum exposure to loss.
Warehouse lending The Company has a facility in which it transfers mortgage warehouse lending receivables to a 100% owned SPE which then sells a senior participation interest in the receivables to an unconsolidated QSPE. The QSPE funds the purchase of the participation interest from the SPE through financing obtained from third-party asset-backed commercial paper conduits. The SPE funds the purchase of the receivables from the Company with cash obtained from the QSPE, as well as a subordinated loan and/or an equity contribution from the Company. The senior participation interest sold to the QSPE and the commercial paper issued are not included in the assets or liabilities of the Company. Once the receivables have been sold, they may not be purchased by the Company except in very limited circumstances, such as a breach in representations or warranties. Management has determined that GMAC is the primary beneficiary of the SPE, and as such, consolidates the entity in accordance with FIN 46R. The assets of the SPE totaled $686 million at December 31, 2004, which are included in finance receivables and loans, net of unearned income, in the Companys Consolidated Balance Sheet. The beneficial interest holders of this variable interest entity do not have legal recourse to the general credit of GMAC.
Collateralized debt obligations (CDOs) GMACs 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 GMACs 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 December 31, 2004 or 2003.
For the majority of the Companys 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 December 31, 2004, of which GMACs maximum exposure to loss is $50 million, representing GMACs retained interests in these entities. The maximum exposure to loss would only occur in the unlikely event that there was a complete loss on GMACs retained interests in these 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 FIN 46R. The assets in this entity totaled $294 million at December 31, 2004, the majority of which are included in investment securities in the Companys Consolidated Balance Sheet. The beneficial interest holders of this variable interest entity do not have legal recourse to the general credit of GMAC.
Interests in real estate partnerships The Companys Commercial 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
39
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 Companys Consolidated Financial Statements under the financing method, in accordance with Statement of Financial Accounting Standards 66, Accounting for Sales of Real Estate (SFAS 66). Under the financing method, the assets and liabilities of the guaranteed syndicated real estate partnerships are reflected on GMACs Consolidated 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 Companys 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 Companys 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 outstanding in the underlying operating partnerships approximated $5.0 billion at December 31, 2004. GMACs exposure to loss at such time was $708 million, representing the financing liability reflected in GMACs Consolidated Financial Statements, or the amount payable to investors in the event of liquidation of the partnerships. The Companys exposure to loss increases as unaffiliated investors fund additional guaranteed commitments with the Company, and decreases as tax benefits are delivered to unaffiliated investors. Considering such committed amounts, the Companys exposure to loss in future periods is not expected to exceed $1.6 billion.
New market tax credit funds The Company syndicates and manages investments in partnerships that make investments, typically mortgage loans that, in turn, qualify the partnerships to earn New Markets Tax Credits. New Markets Tax Credits permit taxpayers to receive a federal income tax credit for making qualified equity investments in community development entities. For one particular tax credit fund, management has 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 these investments totaled $62 million at December 31, 2004, of which $45 million represents GMACs maximum exposure to loss. In addition to this entity, management has determined that for another tax credit fund, GMAC is a primary beneficiary, and as such, consolidates the entity in accordance with FIN 46R. The assets in the entity totaled $76 million at December 31, 2004, which are included in Other assets in the Companys Consolidated Balance Sheet. The beneficial interest holders of this variable interest entity do not have legal recourse to the general credit of GMAC.
40
23 | Segment and Geographic Information |
Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision makers in deciding how to allocate resources and in assessing performance. Financial information for GMACs reporting segments is summarized below.
Reporting Segments
Financing operations (a) | Mortgage operations | |||||||||||||||||||||||||||||||
North | GMAC | |||||||||||||||||||||||||||||||
Year ended December 31, | American | International | GMAC | GMAC- | Commercial | |||||||||||||||||||||||||||
(in millions) | Operations (b) | Operations (b) | Residential | RFC | Mortgage | Insurance | Other (c) | Consolidated | ||||||||||||||||||||||||
2004
|
||||||||||||||||||||||||||||||||
Net financing revenue before provision for credit
losses
|
$5,971 | $1,670 | $262 | $1,992 | $84 | $ | $817 | $10,796 | ||||||||||||||||||||||||
Provision for credit losses
|
(806 | ) | (144 | ) | 5 | (983 | ) | | | (16 | ) | (1,944 | ) | |||||||||||||||||||
Other revenue
|
2,210 | 706 | 1,457 | 1,145 | 1,014 | 3,983 | (534 | ) | 9,981 | |||||||||||||||||||||||
Total net revenue
|
7,375 | 2,232 | 1,724 | 2,154 | 1,098 | 3,983 | 267 | 18,833 | ||||||||||||||||||||||||
Noninterest expense
|
5,972 | 1,665 | 1,223 | 1,148 | 823 | 3,497 | 158 | 14,486 | ||||||||||||||||||||||||
Income before income tax expense
|
1,403 | 567 | 501 | 1,006 | 275 | 486 | 109 | 4,347 | ||||||||||||||||||||||||
Income tax expense
|
409 | 152 | 226 | 377 | 71 | 157 | 42 | 1,434 | ||||||||||||||||||||||||
Net income
|
$994 | $415 | $275 | $629 | $204 | $329 | $67 | $2,913 | ||||||||||||||||||||||||
Total assets
|
$192,207 | $33,495 | $15,235 | $78,706 | $15,670 | $11,744 | $(22,918 | ) | $324,139 | |||||||||||||||||||||||
2003
|
||||||||||||||||||||||||||||||||
Net financing revenue before provision for credit
losses
|
$6,597 | $1,571 | $95 | $1,369 | $225 | $ | $839 | $10,696 | ||||||||||||||||||||||||
Provision for credit losses
|
(1,045 | ) | (185 | ) | (20 | ) | (420 | ) | 3 | | (54 | ) | (1,721 | ) | ||||||||||||||||||
Other revenue
|
2,250 | 523 | 1,798 | 968 | 1,144 | 3,464 | (546 | ) | 9,601 | |||||||||||||||||||||||
Total net revenue
|
7,802 | 1,909 | 1,873 | 1,917 | 1,372 | 3,464 | 239 | 18,576 | ||||||||||||||||||||||||
Noninterest expense
|
6,189 | 1,471 | 1,282 | 1,065 | 858 | 3,186 | 141 | 14,192 | ||||||||||||||||||||||||
Income before income tax expense
|
1,613 | 438 | 591 | 852 | 514 | 278 | 98 | 4,384 | ||||||||||||||||||||||||
Income tax expense (benefit)
|
594 | 159 | 217 | 314 | 172 | 99 | 36 | 1,591 | ||||||||||||||||||||||||
Net income
|
$1,019 | $279 | $374 | $538 | $342 | $179 | $62 | $2,793 | ||||||||||||||||||||||||
Total assets
|
$191,658 | $27,105 | $10,205 | $60,084 | $15,193 | $10,340 | $(26,422 | ) | $288,163 | |||||||||||||||||||||||
2002
|
||||||||||||||||||||||||||||||||
Net financing revenue before provision for credit
losses
|
$6,169 | $1,315 | $9 | $533 | $208 | $ | $921 | $9,155 | ||||||||||||||||||||||||
Provision for credit losses
|
(1,310 | ) | (165 | ) | (10 | ) | (208 | ) | (21 | ) | | (439 | ) | (2,153 | ) | |||||||||||||||||
Other revenue
|
2,900 | 373 | 1,180 | 998 | 898 | 2,840 | (668 | ) | 8,521 | |||||||||||||||||||||||
Total net revenue
|
7,759 | 1,523 | 1,179 | 1,323 | 1,085 | 2,840 | (186 | ) | 15,523 | |||||||||||||||||||||||
Noninterest expense
|
5,791 | 1,189 | 1,165 | 816 | 719 | 2,754 | 148 | 12,582 | ||||||||||||||||||||||||
Income before income tax expense
|
1,968 | 334 | 14 | 507 | 366 | 86 | (334 | ) | 2,941 | |||||||||||||||||||||||
Income tax expense (benefit)
|
732 | 128 | 8 | 194 | 141 | (1 | ) | (131 | ) | 1,071 | ||||||||||||||||||||||
Net income
|
$1,236 | $206 | $6 | $313 | $225 | $87 | $(203 | ) | $1,870 | |||||||||||||||||||||||
Total assets
|
$170,476 | $21,824 | $14,654 | $26,800 | $11,994 | $8,722 | $(26,742 | ) | $227,728 | |||||||||||||||||||||||
(a) | Financing operations in the MD&A also includes the Commercial Finance Group, which is a separate operating segment and is included in Other above. |
(b) | North American Operations consists of automotive financing in the U.S. and Canada. International Operations consists of automotive financing and full service leasing in all other countries and Puerto Rico. |
(c) | Represents the Companys Commercial Finance Group, certain corporate activities related to the Mortgage Group, reclassifications and eliminations between the reporting segments. At December 31, 2004, total assets were $8.0 billion for the Commercial Finance Group, $10 million for the corporate activities of the Mortgage Group and $(30.9) billion in eliminations. |
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Information concerning principal geographic areas was as follows:
Geographic Information
Income before | Long-lived | |||||||||||||||||||
Year ended December 31, (in millions) | Revenue (a) | Expense (b) | income taxes | Net income | assets (c) | |||||||||||||||
2004
|
||||||||||||||||||||
Canada
|
$1,552 | $1,258 | $294 | $194 | $5,930 | |||||||||||||||
Europe
|
2,293 | 1,880 | 413 | 305 | 3,274 | |||||||||||||||
Latin America
|
768 | 456 | 312 | 226 | 108 | |||||||||||||||
Asia-Pacific
|
309 | 187 | 122 | 95 | 267 | |||||||||||||||
Total foreign
|
4,922 | 3,781 | 1,141 | 820 | 9,579 | |||||||||||||||
Total domestic
|
13,911 | 10,705 | 3,206 | 2,093 | 22,182 | |||||||||||||||
Total
|
$18,833 | $14,486 | $4,347 | $2,913 | $31,761 | |||||||||||||||
2003
|
||||||||||||||||||||
Canada
|
$1,189 | $966 | $223 | $159 | $4,484 | |||||||||||||||
Europe
|
1,957 | 1,622 | 335 | 209 | 2,949 | |||||||||||||||
Latin America
|
603 | 356 | 247 | 170 | 89 | |||||||||||||||
Asia-Pacific
|
365 | 258 | 107 | 103 | 226 | |||||||||||||||
Total foreign
|
4,114 | 3,202 | 912 | 641 | 7,748 | |||||||||||||||
Total domestic
|
14,462 | 10,990 | 3,472 | 2,152 | 21,801 | |||||||||||||||
Total
|
$18,576 | $14,192 | $4,384 | $2,793 | $29,549 | |||||||||||||||
2002
|
||||||||||||||||||||
Canada
|
$996 | $726 | $270 | $200 | $3,298 | |||||||||||||||
Europe
|
1,422 | 1,221 | 201 | 127 | 2,583 | |||||||||||||||
Latin America
|
529 | 372 | 157 | 93 | 75 | |||||||||||||||
Asia-Pacific
|
327 | 231 | 96 | 59 | 173 | |||||||||||||||
Total foreign
|
3,274 | 2,550 | 724 | 479 | 6,129 | |||||||||||||||
Total domestic
|
12,249 | 10,032 | 2,217 | 1,391 | 21,888 | |||||||||||||||
Total
|
$15,523 | $12,582 | $2,941 | $1,870 | $28,017 | |||||||||||||||
(a) | Revenue consists of total net revenue as presented on the Consolidated Statement of Income. |
(b) | Expense is composed of total expense as presented on the Consolidated Statement of Income. |
(c) | Primarily consists of net operating leases assets, goodwill, intangible assets, and net property and equipment. |
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24 | Guarantees, Commitments, Contingencies and Other Risks |
Guarantees
2004 | 2003 | ||||||||||||||||
Carrying value | Carrying value | ||||||||||||||||
December 31, (in millions) | Maximum liability | of liability | Maximum liability | of liability | |||||||||||||
Construction lending
|
$964 | $3 | $640 | $2 | |||||||||||||
Standby letters of credit
|
316 | 2 | 269 | 4 | |||||||||||||
Securitization and sales:
|
|||||||||||||||||
Agency loans sold with recourse
|
4,648 | 6 | 2,415 | 3 | |||||||||||||
Commercial mortgage securitizations
|
1,210 | 1 | 1,301 | | |||||||||||||
HLTV securitizations
|
416 | 11 | 587 | 31 | |||||||||||||
Mortgage-related securities
|
31 | 29 | 92 | 44 | |||||||||||||
Guarantees for repayment of third-party debt
|
212 | 3 | 208 | | |||||||||||||
Construction lending The Company has guaranteed repayment of principal and interest on certain construction loans through its Commercial Mortgage operations. Additionally, the guarantees are issued on long-term fixed rate agency loans. Losses would be incurred in the event of default of the underlying construction loans. These guarantees expire at various times during 2005 to 2009.
Standby letters of credit The Companys Financing operations (primarily through its Commercial Finance Group) issues financial standby letters of credit to customers that represent irrevocable guarantees of payment of specified financial obligations (typically to customers suppliers). In addition, GMACs Mortgage operations issue letters of credit as part of its warehouse and construction lending activities. Expiration dates on the letters of credit range from 2005 to ongoing commitments, and are generally collateralized by assets of the client (trade receivables, cash deposits, etc.).
Agency loans sold with recourse The Companys Mortgage operations guarantee agency loans sold with recourse. Guarantees represent exposure on loans sold with recourse and subject to first loss position. Losses would be incurred in the event of default of the underlying loans. This guarantee represents an ongoing agreement with Fannie Mae.
Commercial mortgage securitizations The Company (through its commercial Mortgage operations) has guaranteed repayment of principal and interest associated with certain commercial mortgage loan securitization transactions. Securities issued as a result of these securitization transactions were credit enhanced by an AAA rated insurer and the Company has issued a guarantee to the insurer for a portion of the guaranteed securities. The Company has also retained an investment in these securitizations that is subordinate to these guarantees. Collateral totaling $110 million and $75 million has been posted with regard to these guarantees for the years ended December 31, 2004 and 2003, respectively. Losses on the guarantee would be incurred in the event that losses on the underlying collateral exceed the Companys subordinated investment. Expiration dates range from 2005 to ongoing agreements.
Also, on occasion, the Company has entered into put option agreements with third-party banks through its commercial Mortgage operations. In these agreements, the bank has the option to tender bonds to GMAC at a purchase price of par plus accrued interest thereon. Upon exercise of such tender option by the bank, GMAC agrees to repurchase the bonds from the bank from its own funds. The term of these put options varies but, in all cases is less than one year. The notional amounts of the unexercised put options aggregated $59 million and $39 million as of December 31, 2004 and 2003, respectively.
High loan-to-value (HLTV) securitizations The Companys residential Mortgage operations have entered into agreements to provide credit loss protection for certain HLTV securitization transactions. Collateral totalling $133 million and $163 million is pledged with regard to these guarantees for the years ended December 31, 2004 and 2003, respectively. GMAC is required to perform on its guaranty obligation when the security credit enhancements are exhausted and losses are passed through to broker-dealers or when the bond insurer makes a payment under the bond insurance policy. The guarantees terminate the first calendar month during which the security aggregate note amount is reduced to zero.
Mortgage-related securities GMAC-RFC has contingent obligations related to prepayment risk on sales of certain mortgage-related securities. For the years ended December 31, 2004 and 2003, the obligations require payment of remaining principal upon maturity of senior classes of issued securities and are capped at
43
Guarantees for repayment of third-party debt Under certain arrangements, the Company guarantees the repayment of third-party debt obligations in the case of default. Some of these guarantees are collateralized by letters of credit.
The Companys Commercial Finance Group provides credit protection to third-parties which guarantee payment of specified financial obligations of the third-party suppliers, without purchasing such obligations.
Other guarantees The Company has other standard indemnification clauses in certain of its funding arrangements that would require GMAC to pay lenders for increased costs resulting from certain changes in laws or regulations. Since any changes would be dictated by legislative and regulatory actions, which are inherently unpredictable, the Company is not able to estimate a maximum exposure under these arrangements. To date, GMAC has not made any payments under these indemnification clauses. The Companys Mortgage operations sponsor certain agents who originate mortgage loans under government loan programs. Under these arrangements, the Company has guaranteed uninsured losses resulting from the actions of the agents. At December 31, 2004 and 2003, the Company did not record any liabilities associated with this guarantee. Since we are unable to predict the agents actions, the Company is not able to estimate a maximum exposure related to this guarantee.
In connection with certain asset sales and securitization transactions, the Company typically delivers standard representations and warranties to the purchaser regarding the characteristics of the underlying transferred assets. These representations and warranties conform to specific guidelines, which are customary in securitization transactions. These clauses are intended to ensure that the terms and conditions of the sales contracts are met upon transfer of the asset. Prior to any sale or securitization transaction, the Company performs due diligence with respect to the assets to be included in the sale to ensure that they meet the purchasers requirements, as expressed in the representations and warranties. Due to these procedures, the Company believes that the potential for loss under these arrangements is remote. Accordingly, no liability is reflected in the Consolidated Balance Sheet related to these potential obligations. The maximum potential amount of future payments the Company could be required to make would be equal to the current balances of all assets subject to such securitization or sale activities. The Company does not monitor the total value of assets historically transferred to securitization vehicles or through other asset sales. Therefore, the Company is unable to develop an estimate of the maximum payout under these representations and warranties.
Commitments
2004 | 2003 | ||||||||||||||||||||||||
Contract | Gain | Loss | Contract | Gain | Loss | ||||||||||||||||||||
December 31, (in millions) | amount | position | position | amount | position | Position | |||||||||||||||||||
Commitments to:
|
|||||||||||||||||||||||||
Originate/purchase mortgages or
securities (a)
|
$13,865 | $9 | $(26 | ) | $10,806 | $72 | $(6 | ) | |||||||||||||||||
Sell mortgages or securities (a)
|
11,823 | 6 | (10 | ) | 8,322 | 1 | (48 | ) | |||||||||||||||||
Remit excess cash flows on certain loan
portfolios (b)
|
4,335 | 19 | | 4,351 | 6 | (105 | ) | ||||||||||||||||||
Fund construction lending (c)
|
2,702 | | | 1,872 | | | |||||||||||||||||||
Sell retail automotive receivables (d)
|
2,000 | | | | | | |||||||||||||||||||
Provide capital to equity method
investees (e)
|
343 | | | 158 | | | |||||||||||||||||||
Unused mortgage lending commitments (f)
|
15,519 | | | 17,625 | | | |||||||||||||||||||
Unused revolving credit line commitments (g)
|
6,721 | | | 6,775 | | | |||||||||||||||||||
(a) | The fair value is estimated using published market information associated with commitments to sell similar instruments. Included as of December 31, 2004 and 2003 are commitments accounted for as derivatives with a contract amount of $18,232 and $14,495; a gain position of $26 and $60; and a loss position of $35 and $159, respectively. |
(b) | Under certain residential mortgage purchase agreements, GMAC is committed to remitting cash flows that exceed a required rate of return less credit loss reimbursements to the mortgage originators. This commitment is accounted for as a derivative. |
(c) | GMAC is committed to fund the completion of the development of certain lots and model homes up to the agreed upon amount per project. |
(d) | GMAC has entered into agreements with third-party banks to sell automotive retail receivables in which GMAC transfers all credit risk to the purchaser (whole loan sales). |
(e) | GMAC is committed to lend equity capital to certain private equity funds. The fair value of these commitments is considered in the overall valuation of the underlying assets with which they are associated. |
(f) | The fair value of these commitments is considered in the overall valuation of the related assets. |
(g) | The unused portions of revolving lines of credit reset at prevailing market rates, and as such, approximate market value. |
44
The mortgage lending and revolving credit line commitments contain an element of credit risk. Management reduces its credit risk for unused mortgage lending and unused revolving credit line commitments by applying the same credit policies in making commitments as it does for extending loans. The Company typically requires collateral as these commitments are drawn.
Lease Commitments
Year ended December 31, (in millions) | ||||
2005
|
$195 | |||
2006
|
158 | |||
2007
|
130 | |||
2008
|
94 | |||
2009
|
62 | |||
2010 and thereafter
|
147 | |||
Total minimum payment required
|
$786 | |||
Certain of the leases contain escalation clauses and renewal or purchase options. Rental expenses under operating leases were $230 million, $230 million and $221 million in 2004, 2003 and 2002, respectively.
Contractual Commitments The Company has entered into multiple agreements for information technology, marketing and advertising, and voice and communication technology and maintenance. Many of the agreements are subject to variable price provisions, fixed or minimum price provisions, and termination or renewal provisions. Future payment obligations under these agreements totaled $319 million and are due as follows: $203 million in 2005, $94 million in 2006 and 2007, $21 million in 2008 and 2009, and $1 million after 2010.
Extended Service and Maintenance Contract Commitments Extended service contract programs provide consumers with expansions and extensions of vehicle warranty coverage for specified periods of time and mileages. Such coverage generally provides for the repair or replacement of components in the event of failure. The terms of these contracts, which are sold through automobile dealerships and direct mail, range from 3 to 84 months.
The following table presents an analysis of activity in unearned service revenue.
Year ended December 31, (in millions) | 2004 | 2003 | ||||||
Balance at beginning of year
|
$2,033 | $1,161 | ||||||
Written service contract revenue
|
1,237 | 1,264 | ||||||
Earned service contract revenue
|
(561 | ) | (392 | ) | ||||
Balance at end of year
|
$2,709 | $2,033 | ||||||
Legal Contingencies
GMAC and its subsidiaries are named as defendants in a number of legal actions, and from time to time, involved in governmental proceedings arising in connection with GMACs respective businesses. Some of the pending actions purport to be class actions. The Company establishes reserves for legal claims when payments associated with the claims become probable and the costs can be reasonably estimated. The actual costs of resolving legal claims may be substantially higher or lower than the amounts reserved for those claims. Based on information currently available, advice of counsel, available insurance coverage, and established reserves, it is the opinion of management that the eventual outcome of the actions against GMAC will not have a material adverse effect on the Companys consolidated financial condition, results of operations, or cash flows. However, in the event of unexpected future developments, it is possible that the ultimate resolution of a legal matter, if unfavorable, may be material to the Companys consolidated financial condition, results of operations, or cash flows.
Other Contingencies
45
Other Risks
December 31, (in millions) | 2004 | 2003 | |||||||
Loans with recourse
|
|||||||||
Sold
|
$3,449 | $3,152 | |||||||
Repurchased
|
43 | 56 | |||||||
Maximum exposure on loans sold with
recourse (a):
|
|||||||||
Full exposure
|
611 | 427 | |||||||
Limited exposure
|
53 | 107 | |||||||
Total exposure
|
$664 | $534 | |||||||
(a) | Maximum recourse exposure is net of amounts reinsured with third-parties totaling $1 and $156 at December 31, 2004 and 2003, respectively. Loss reserves, included in other liabilities, related to loans sold with recourse totaled $7 and $5 at December 31, 2004 and 2003, respectively. |
Concentrations
The majority of GMACs finance receivables and loans and operating lease assets are geographically diversified throughout the United States. Outside the United States, finance receivables and loans and operating lease assets are concentrated in Canada, Europe (primarily Germany and the United Kingdom), Australia and Mexico.
The Companys Insurance operations have a concentration of credit risk related to loss and loss adjustment expenses and prepaid reinsurance ceded to certain state insurance funds. Michigan insurance law and the Companys large market share in North Carolina, result in credit exposure to the Michigan Catastrophic Claims Association and the North Carolina Reinsurance Facility totaling $722 million and $664 million at December 31, 2004 and 2003, respectively.
Capital Requirements
The Company also has certain subsidiaries of the Mortgage operations and North American Automotive Financing operations that operate as depository institutions in the United States which are subject to minimum aggregate capital requirements, and other subsidiaries that are required to maintain regulatory capital requirements under agreements with Freddie Mac, Fannie Mae, Ginnie Mae, the Department of Housing and Urban Development, Utah State Department of Financial Institutions, and the Federal Deposit Insurance Corporation (FDIC). Assets in the depository institutions totaled $7.5 billion and $3.3 billion at December 31, 2004 and 2003, respectively. Deposits in the entities are insured by the FDIC. As of December 31, 2004, the Company has met all regulatory requirements and was in compliance with the minimum capital requirements.
GMAC Insurance is subject to certain minimum aggregated capital requirements, restricted net assets, and restricted dividend distributions under applicable state insurance law, the National Association of Securities Dealers, the Financial Services Authority in England, the Office of the Superintendent of Financial Institution of Canada, and the National Insurance and Bonding Commission of Mexico. To date, compliance with these various regulations has not had a materially adverse effect on the Companys financial position, results of operations, or cash flows.
Under the various state insurance regulations, dividend distributions may be made only from statutory unassigned surplus, and the state regulatory authorities must approve such distributions if they exceed certain statutory limitations. Based on the December 31, 2004 statutory policyholders surplus, the maximum dividend that could be paid by the insurance subsidiaries over the next twelve months without prior statutory approval approximates $226 million.
46
Summary of Consolidated Quarterly Earnings (unaudited) |
Year ended December 31, 2004 | Reported | Restated | Reported | Restated | Reported | Restated | ||||||||||||||||||||||
(in millions) | First (a) | First | Second (a) | Second | Third (a) | Third | Fourth | |||||||||||||||||||||
Total financing revenue
|
$4,894 | $4,943 | $4,974 | $5,052 | $4,974 | $5,032 | $5,304 | |||||||||||||||||||||
Interest and discount expense
|
2,206 | 2,223 | 2,228 | 2,253 | 2,367 | 2,398 | 2,661 | |||||||||||||||||||||
Provision for credit losses
|
457 | 476 | 411 | 412 | 544 | 548 | 508 | |||||||||||||||||||||
Total net revenue
|
4,716 | 4,690 | 4,842 | 4,830 | 4,662 | 4,621 | 4,692 | |||||||||||||||||||||
Net income (b)
|
$786 | $764 | $860 | $846 | $656 | $620 | $683 | |||||||||||||||||||||
(a) | Certain amounts have been reclassified to conform to the annual presentation (refer to Note 1 to the Consolidated Financial Statements), prior to the restatements discussed below. |
(b) | Net income for the quarterly period ended December 31, 2004 was previously furnished in a Form 8-K filing on January 19, 2005 as $611. |
Year ended December 31, 2003 | ||||||||||||||||
(in millions) | First | Second | Third | Fourth | ||||||||||||
Total financing revenue
|
$4,291 | $4,665 | $4,615 | $4,689 | ||||||||||||
Interest and discount expense
|
1,794 | 1,854 | 1,959 | 1,957 | ||||||||||||
Provision for credit losses
|
410 | 386 | 451 | 474 | ||||||||||||
Total net revenue
|
4,543 | 4,929 | 4,493 | 4,611 | ||||||||||||
Net income
|
$699 | $834 | $630 | $630 | ||||||||||||
GMACs quarterly information for each of the three quarters ended March 31, 2004, June 30, 2004 and September 30, 2004 has been restated from previously reported results to adjust for certain amounts that were recognized in the incorrect 2004 quarterly period. These adjustments did not impact GMACs 2004 annual results, financial condition as of December 31, 2004 or cash flows for year ended December 31, 2004, nor were any of these adjustments individually material to GMACs annual or quarterly consolidated financial statements. Most of the adjustments relate to items detected and recorded in the fourth quarter of 2004 at GMACs residential mortgage businesses (GMAC Residential and GMAC-RFC) that relate to earlier 2004 quarters. More specifically, certain of the adjustments were identified and corrected through internal control remediation that occurred in connection with GMACs Corporate Sarbanes-Oxley Section 404 program. The most significant of these adjustments involve the valuation of certain interests in securitized assets, accounting for deferred income taxes related to certain secured financing transactions and the income statement effects of consolidating certain mortgage transfers previously recognized as sales.
47