10-K 1 d283941d10k.htm FORM 10-K FORM 10-K
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

FORM 10-K

(Mark One)

 

  x   ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
         SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2011

OR

 

  ¨   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
         SECURITIES EXCHANGE ACT OF 1934

For the transition period              to             

Commission file number 1-10667

 

 

General Motors Financial Company, Inc.

(Exact name of registrant as specified in its charter)

 

Texas   75-2291093

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

801 Cherry Street, Suite 3500, Fort Worth, Texas 76102

(Address of principal executive offices, including Zip Code)

(817) 302-7000

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

None

(Title of each class)

Securities registered pursuant to Section 12(g) of the Act:

None

(Title of each class)

 

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.   Yes     ¨     No     x

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.  Yes    ¨    No    x

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 (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes    ¨    No    ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes    x    No    ¨

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (Section 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K.  x

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.

 

    Large accelerated filer  ¨       Accelerated filer  ¨   Non-accelerated filer  x   Smaller Reporting Company  ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).  Yes    ¨    No    x

As of February 27, 2012, there were 500 shares of the registrant’s common stock, par value $0.01 per share, outstanding. All of the registrant’s common stock is owned by General Motors Holdings, LLC.

DOCUMENTS INCORPORATED BY REFERENCE

NONE

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 on the reduced disclosure format.

 

 

 


Table of Contents

GENERAL MOTORS FINANCIAL COMPANY, INC.

INDEX TO FORM 10-K

 

Item
No.

        Page  
  

FORWARD-LOOKING STATEMENTS AND INDUSTRY DATA

     1   
   PART I      2   
  1   

BUSINESS

     2   
1A.   

RISK FACTORS

     13   
  2   

PROPERTIES

     22   
  3   

LEGAL PROCEEDINGS

     22   
  4   

MINE SAFETY DISCLOSURE

     22   
   PART II   
  5   

MARKET FOR REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

     23   
  6   

SELECTED FINANCIAL DATA

     24   
  7   

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

     25   
7A.   

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

     52   
  8   

FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

     56   
  9   

CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

     110   
9A.   

CONTROLS AND PROCEDURES

     110   
   PART III   
10   

DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

     112   
11   

EXECUTIVE COMPENSATION

     112   
12   

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

     112   
13   

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

     112   
14   

PRINCIPAL ACCOUNTING FEES AND SERVICES

     112   
   PART IV      113   
15   

EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

     113   
   SIGNATURES      114   

 

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FORWARD-LOOKING STATEMENTS

This Form 10-K contains several “forward-looking statements.” Forward-looking statements are those that use words such as “believe,” “expect,” “anticipate,” “intend,” “plan,” “may,” “will,” “likely,” “should,” “estimate,” “continue,” “future” or other comparable expressions. These words indicate future events and trends. Forward-looking statements are our current views with respect to future events and financial performance. These forward-looking statements are subject to many assumptions, risks and uncertainties that could cause actual results to differ significantly from historical results or from those anticipated by us. The most significant risks are detailed from time to time in our filings and reports with the Securities and Exchange Commission, including this Annual Report on Form 10-K (“Form 10-K”) for the year ended December 31, 2011. It is advisable not to place undue reliance on our forward-looking statements. We undertake no obligation to, and do not, publicly update or revise any forward-looking statements, except as required by federal securities laws, whether as a result of new information, future events or otherwise.

The following factors are among those that may cause actual results to differ materially from historical results or from the forward-looking statements:

 

   

changes in general economic and business conditions;

 

   

General Motors Company’s (“GM”) ability to sell new vehicles in the United States and Canada that we finance;

 

   

interest rate fluctuations;

 

   

our financial condition and liquidity, as well as future cash flows and earnings;

 

   

competition;

 

   

the effect, interpretation or application of new or existing laws, regulations, court decisions and accounting pronouncements;

 

   

the availability of sources of financing;

 

   

the level of net charge-offs, delinquencies and prepayments on the automobile contracts and leases we originate;

 

   

the prices at which used cars are sold in the wholesale auction markets;

 

   

changes in business strategy, including expansion of product lines and credit risk appetite; and

 

   

significant litigation.

If one or more of these risks or uncertainties materialize, or if underlying assumptions prove incorrect, our actual results may vary materially from those expected, estimated or projected.

INDUSTRY DATA

In this Form 10-K, we rely on and refer to information regarding the automobile finance industry from market research reports, analyst reports and other publicly available information. Although we believe that this information is reliable, we have not independently verified any of it.

AVAILABLE INFORMATION

We make available free of charge through our website, www.gmfinancial.com, our AmeriCredit Automobile Receivables Trust and AmeriCredit Prime Automobile Receivables Trust securitization portfolio performance measures and all materials that we file electronically with the SEC, including our reports on Form 10-K, Form 10-Q, Form 8-K, and amendments to those reports filed pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, as soon as reasonably practical after filing or furnishing such material with or to the SEC.

The public may read and copy any materials we file with or furnish to the SEC at the SEC’s Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549. Information on the operation of the Public Reference Room may be obtained by calling the SEC at 1-800-SEC-0330. The SEC maintains an Internet website, www.sec.gov, which contains reports, proxy and information statements and other information regarding issuers that file electronically with the SEC.

 

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PART I

 

ITEM 1. BUSINESS

General Motors Merger

On October 1, 2010, pursuant to the terms of the Agreement and Plan of Merger (the “Merger Agreement”), dated as of July 21, 2010, with General Motors Holdings LLC (“GM Holdings”), a Delaware limited liability company and a wholly owned subsidiary of General Motors Company (“GM”), and Goalie Texas Holdco Inc., a Texas corporation and a direct wholly owned subsidiary of GM Holdings (“Merger Sub”), GM Holdings completed its acquisition of AmeriCredit Corp. via the merger of Merger Sub with and into AmeriCredit Corp. (the “Merger” or “acquisition”), with AmeriCredit Corp. continuing as the surviving company in the Merger and becoming a wholly owned subsidiary of GM Holdings. Following the Merger, our name was changed to General Motors Financial Company, Inc. (“GM Financial” or the “Company”).

Purchase Accounting

The Merger has been accounted for under the purchase method of accounting, whereby the purchase price of the transaction was allocated to our identifiable assets acquired and liabilities assumed based upon their fair values. The estimates of the fair values recorded were determined based on the fair value measurement principles (see Note 13 – “Fair Values of Assets and Liabilities” to the consolidated financial statements included in this Form 10-K for additional information) and reflect significant assumptions and judgments. Material valuation inputs for our finance receivables included adjustments to monthly principal and finance charge cash flows for prepayments and credit loss expectations; servicing expenses; and discount rates developed based on the relative risk of the cash flows which considered loan type, market rates as of our valuation date, credit loss expectations and capital structure. Certain assumptions and judgments that were considered to be appropriate at the acquisition date may prove to be incorrect if market conditions change.

The results of the purchase price allocation included an increase in the total carrying value of net finance receivables, medium term note facility payable, Wachovia funding facility payable, securitization notes payable, deferred tax assets and uncertain tax positions as well as intangible assets. Management believes all material intangible assets have been identified.

The excess of the purchase price over the estimated fair values of the net assets acquired was recorded as goodwill. The goodwill amount was $1.1 billion.

General

GM Financial, the captive finance subsidiary of GM, is a provider of automobile financing solutions with a portfolio of approximately $11 billion in auto receivables and leases as of December 31, 2011. We have been operating in the automobile finance business since September 1992. Our strategic relationship with GM began in September 2009 with a subvention program pursuant to which GM provides its customers access to discounted financing on select new GM models by paying us cash in order to offer lower interest rates on the loans we purchase from GM dealerships. GM acquired us for $3.5 billion on October 1, 2010.

We purchase auto finance contracts for new and used vehicles from GM and non-GM franchised and select independent automobile dealerships. We primarily offer auto financing to consumers who typically are unable to obtain financing from traditional sources such as banks and credit unions. We utilize a proprietary credit scoring system to differentiate credit applications and to statistically rank-order credit risk in terms of expected default rates, which enables us to evaluate credit applications for approval and tailor loan pricing and structure. We service our loan portfolio at regional centers using automated loan servicing and collection systems. Funding for our auto finance activities is primarily obtained through the utilization of our credit facilities and through

 

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securitization transactions. Since 1994, we have securitized approximately $67.5 billion of automobile loans in 78 transactions through December 31, 2011 through our securitization program.

We have historically maintained a significant share of the sub-prime auto finance market and have, in the past, participated in the prime sectors of the auto finance industry to a more limited extent. We source our business primarily through our relationships with automobile dealerships, which we maintain through our regional credit centers, marketing representatives (dealer relationship managers) and alliance relationships. We believe our growth and origination efforts are complemented by disciplined credit underwriting standards, risk-based pricing decisions and expense management.

As GM’s captive finance subsidiary, our business strategy includes increasing the amount of GM new automobile origination volume, while at the same time continuing to remain a valuable financing source for loans for non-GM dealers. In addition to our GM-related loan origination efforts, we offer a full credit spectrum lease financing product for new GM vehicles exclusively to GM-franchised dealerships in the United States. Through the acquisition of FinanciaLinx, an independent auto lease provider in Canada (“FinanciaLinx”), in April 2011, we now also offer lease financing for new GM vehicles in Canada. Through FinanciaLinx, we intend to increase lease origination levels for new GM vehicles sold by GM franchised dealerships in Canada. We expect to expand our business to include dealer wholesale and commercial lending for GM dealerships in the U.S. and Canada. Evidence of our increasing linkage with GM can be seen in our results for the twelve months ended December 31, 2011, during which our percentage of loans and leases for new GM vehicles increased to 40% of our total originations volume, up from 15% for the year ended December 31, 2010.

We were incorporated in Texas on May 18, 1988, and succeeded to the business, assets and liabilities of a predecessor corporation formed under the laws of Texas on August 1, 1986. Our predecessor began operations in March 1987, and the business has been operated continuously since that time. Our principal executive offices are located at 801 Cherry Street, Suite 3500, Fort Worth, Texas, 76102 and our telephone number is (817) 302-7000.

Loan and Lease Originations

Target Market.    Most of our automobile finance programs are designed to serve customers who have limited access to automobile financing through banks and credit unions. The bulk of our typical borrowers have experienced prior credit difficulties or have limited credit histories and generally have credit bureau scores ranging from 500 to 700. Because we generally serve customers who are unable to meet the credit standards imposed by most banks and credit unions we generally charge higher interest rates than those charged by such sources. Since we provide financing in a relatively high-risk market, we also expect to sustain a higher level of credit losses than these other automobile financing sources.

Marketing.    As an indirect auto finance provider, we focus our marketing activities on automobile dealerships. We are selective in choosing the dealers with whom we conduct business and primarily pursue GM and non-GM manufacturer franchised dealerships with new and used car operations and a limited number of independent dealerships. We generally finance later model, low mileage used vehicles, new GM vehicles and moderately priced new vehicles from other manufacturers. Of the contracts purchased by us during the year ended December 31, 2011, approximately 94% were originated by manufacturer franchised dealers, and 6% by select independent dealers; further, approximately 53% were used vehicles, 28% were new GM vehicles (not including new GM vehicles that we leased during the year) and 19% were new non-GM vehicles. We purchased contracts from 12,349 dealers during the year ended December 31, 2011. No dealer location accounted for more than 1% of the total volume of contracts purchased by us for that same period.

We maintain non-exclusive relationships with the dealers. We actively monitor our dealer relationships with the objective of maximizing the volume of applications received from dealers with whom we do business that meet our underwriting standards and profitability objectives. Due to the non-exclusive nature of our relationships with dealerships, the dealerships retain discretion to determine whether to obtain financing from us or from

 

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another source for a contract made by the dealership to a customer seeking to make a vehicle purchase. Our representatives regularly contact and visit dealers to solicit new business and to answer any questions dealers may have regarding our financing programs and capabilities and to explain our underwriting philosophy. To increase the effectiveness of these contacts, marketing personnel have access to our management information systems which detail current information regarding the number of applications submitted by a dealership, our response and the reasons why a particular application was rejected.

We generally purchase finance contracts without recourse to the dealer. Accordingly, the dealer has no liability to us if the consumer defaults on the contract unless a recourse agreement has been executed. Although finance contracts are generally purchased without recourse to the dealer, the dealer typically makes certain representations as to the validity of the contract and compliance with certain laws, and indemnifies us against any claims, defenses and set-offs that may be asserted against us because of assignment of the contract or the condition of the underlying collateral. Recourse based upon those representations and indemnities would be limited in circumstances in which the dealer has insufficient financial resources to perform upon such representations and indemnities. We do not view recourse against the dealer on these representations and indemnities to be of material significance in our decision to purchase finance contracts from a dealer. Depending upon the contract structure and consumer credit attributes, we may charge dealers a non-refundable acquisition fee or pay dealers a participation fee when purchasing finance contracts. These fees are assessed on a contract-by-contract basis.

Origination Network.    Our origination platform provides specialized focus on marketing our financing programs and underwriting loans and leases. Responsibilities are segregated so that the sales group markets our programs and products to our dealer customers, while the underwriting group focuses on underwriting, negotiating and closing loans and leases. The underwriters are based in credit centers while the dealer relationship managers are based in credit centers or work remotely in their service area. We believe that the personal relationships our credit underwriters and dealer relationship managers establish with the dealership staff are an important factor in creating and maintaining productive relationships with our dealer customer base.

We select markets for credit center locations based upon numerous factors, most notably proximity to the geographic markets and dealers we seek to serve and availability of qualified personnel. Credit centers are typically situated in suburban office buildings.

A credit center vice president, regional credit managers, credit managers and credit underwriting specialists staff credit center locations. The credit center vice president reports to a senior vice president in our corporate office. Credit center personnel are compensated with base salaries and incentives based on overall credit center performance, including factors such as loan credit quality, loan pricing adequacy and loan volume objectives.

The credit center vice presidents, regional credit managers and senior vice presidents monitor credit center compliance with our underwriting guidelines. Our management information systems provide these managers with access to credit center information enabling them to consult with credit center teams on credit decisions and assess adherence to our credit and pricing policies. The senior vice presidents also make periodic visits to the credit centers to conduct operational reviews.

Dealer relationship managers typically work from a home office but are aligned with a credit center. Dealer relationship managers solicit dealers for applications and maintain our relationships with the dealers in their geographic vicinity, but do not have credit authority to underwrite contracts. We believe the local presence provided by our dealer relationship managers enables us to be more responsive to dealer concerns and local market conditions. Applications solicited by the dealer relationship managers are underwritten at our regional credit centers. The dealer relationship managers are compensated with base salaries and incentives based on contract volume objectives and dealer penetration rates. The dealer relationship managers report to regional sales managers who report to sales vice presidents.

 

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Manufacturer Relationships.    We have programs with GM and other new vehicle manufacturers, typically known as subvention programs, under which the manufacturers provide us cash payments in order for us to offer lower interest rates on finance contracts we purchase from the manufacturers’ dealership network. The programs serve our goal of increasing new loan originations and the manufacturers’ goal of making credit more available and more affordable to consumers purchasing vehicles sold by the manufacturer.

Leasing.    During December 2010, we began offering a lease product through GM-franchised dealerships that targets consumers with prime credit bureau scores purchasing new GM vehicles. By July 2011, the program expanded to a full spectrum credit program offering financing to customers with both prime and sub-prime credit bureau scores. We had previously provided a limited new vehicle leasing product through certain franchised dealerships that we discontinued in 2008.

Origination Data.    The following table sets forth information with respect to the number of credit centers, number of dealer relationship managers, dollar volume of contracts purchased and number of producing dealerships for the periods set forth below (dollars in thousands):

 

     Year Ended
December 31,

2011
     Period From
July 1, 2010
Through
December 31,

2010
     Years Ended June 30,  
           2010      2009  

Number of credit centers

     16         15         14         13   

Number of dealer relationship managers

     172         110         99         55   

Origination volume(a)

   $ 6,071,560       $ 1,904,471       $ 2,137,620       $ 1,285,091   

Number of producing dealerships(b)

     12,349         11,831         10,756         9,401   

 

(a) Year ended December 31, 2011 and the period from October 1, 2010 through December 31, 2010 amounts include $986.8 million and $10.7 million of contracts purchased through our leasing programs in the U.S. and Canada, respectively.
(b) A producing dealership refers to a dealership from which we purchased a contract in the respective period.

Credit Underwriting

We utilize a proprietary credit scoring system to support the credit approval process. The credit scoring system was developed through statistical analysis of our consumer demographic and portfolio databases consisting of data which we have collected over almost 20 years of operating history. Credit scoring is used to differentiate credit applications and to statistically rank-order credit risk in terms of expected default rates, which enables us to evaluate credit applications for approval and tailor contract pricing and structure. For example, a consumer with a lower score would indicate a higher probability of default and, therefore, we would either decline the application, or, if approved, compensate for this higher default risk through the structuring and pricing of the contract. While we employ a credit scoring system in the credit approval process, credit scoring does not eliminate credit risk. Adverse determinations in evaluating contracts for purchase or changes in certain macroeconomic factors after purchase could negatively affect the credit performance of our portfolio.

The proprietary credit scoring system incorporates data contained in the customer’s credit application, credit bureau report, and other third-party data sources as well as the structure of the proposed financing and produces a statistical assessment of these attributes. This assessment is used to rank-order applicant risk profiles and recommend a price we should charge for different risk profiles. Our credit scorecards are monitored through comparison of actual versus projected performance by score. Periodically, we endeavor to refine our proprietary scorecards based on new information, including identified correlations between portfolio performance and data obtained in the underwriting process.

 

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GM sponsors special-rate financing programs available through us to consumers purchasing new GM vehicles. Under these programs, after we determine the appropriate price to charge for an applicant’s risk profile, GM may provide us with an interest supplement or other support payment in return for reducing the rate of interest actually charged to the consumer on the financing contract, thereby making the credit terms more attractive and affordable to the consumer and supporting the new vehicle sales transaction. Generally, the amount of the interest supplement or support payment from GM offsets the lower interest charges to be received by us over the life of the loan.

In addition to our proprietary credit scoring system, we utilize other underwriting guidelines. These underwriting guidelines are comprised of numerous evaluation criteria, including (a) identification and assessment of the applicant’s willingness and capacity to repay the loan or lease, including consideration of credit history and performance on past and existing obligations; (b) credit bureau data; (c) collateral identification and valuation; (d) payment structure and debt ratios; (e) insurance information; (f) employment, income and residency verifications, as considered appropriate; and (g) in certain cases, the creditworthiness of a co-obligor. These underwriting guidelines, and the minimum credit risk profiles of applicants we will approve as rank-ordered by our credit scorecards, are subject to change from time to time based on economic, competitive and capital market conditions as well as our overall origination strategies.

We purchase individual contracts through our underwriting specialists in regional credit centers using a credit approval process tailored to local market conditions. Underwriting personnel have a specific credit authority based upon their experience and historical portfolio results as well as established credit scoring parameters. More experienced specialists are assigned higher approval levels. If the suggested application attributes and characteristics exceed an underwriting specialist’s credit authority, each specialist has the ability to escalate the application to a more senior underwriter with a higher level of approval authority. Authorized senior underwriting officers may approve any contract application notwithstanding the underwriting guidelines as part of the overall underwriting process. Although the credit approval process is decentralized, our application processing system includes controls designed to ensure that credit decisions comply with the credit scoring strategies and underwriting policies and procedures we have in place at the time.

Finance contract application packages completed by prospective obligors are received electronically through web-based platforms that automate and accelerate the financing process. Upon receipt or entry of application data into our application processing system, a credit bureau report and other third-party data sources are automatically accessed and a proprietary credit score is computed. A substantial percentage of the contract applications received by us fail to meet our minimum credit score requirement and are automatically declined. For applications that are not automatically declined, our underwriting personnel continue to review the application package and judgmentally determine whether to approve the application, approve the application subject to conditions that must be met, or deny the application. We estimate that approximately 35-40% of loan applicants and 70-80% of lease applicants will be approved for credit by us. Dealers are contacted regarding credit decisions electronically or by facsimile. Declined applicants are also provided with appropriate notification of the decision.

Completed contract packages are sent to us by dealers. Contract documentation is scanned to create electronic images and electronically forwarded to one of our centralized processing departments. A processing representative verifies certain applicant employment, income and residency information. Contract terms, insurance coverage and other information may be verified or confirmed with the customer. The original documents are subsequently sent to our centralized account services department and critical documents are stored in a fire resistant vault.

Once cleared for funding, the funds are electronically transferred to the dealer or a check is issued. Upon funding of the contract, we acquire a perfected security interest in the automobile that was financed. Daily reports are generated for review by senior operations management. All of our loan contracts are fully amortizing with substantially equal monthly installments.

 

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Credit performance reports track portfolio performance at various levels of detail, including total company, credit center and dealer. Various daily reports and analytical data are also generated to monitor credit quality as well as to refine the structure and mix of new originations. We review profitability metrics on a consolidated basis, as well as at the credit center, origination channel, dealer and contract levels. Key application data, including credit bureau and credit score information, contract structures and terms and payment histories are maintained. Our credit risk management department also regularly reviews the performance of our credit scoring system and is responsible for the development and enhancement of our credit scorecards.

Servicing

Our servicing activities include collecting and processing customer payments, responding to customer inquiries, initiating contact with customers who are delinquent in payment of an installment, maintaining the security interest in the financed vehicle, monitoring physical damage insurance coverage of the financed vehicle, and arranging for the repossession of financed vehicles, liquidation of collateral and pursuit of deficiencies when appropriate. Our payment processing and customer service activities are operated centrally in Arlington, Texas. Our loan collection activities are operated through four regional standardized collection centers in North America (Arlington, Texas; Peterborough, Ontario; Chandler, Arizona; and Charlotte, North Carolina). We currently use a third party provider to service our U.S. lease portfolio and service our Canadian lease portfolio at our principal Canadian business location in Toronto, Ontario.

We use monthly billing statements to serve as a reminder to customers as well as an early warning mechanism in the event a customer has failed to notify us of an address change. Approximately 15 days before a customer’s first payment due date and each month thereafter, we mail the customer a billing statement directing the customer to mail payments to a lockbox bank for deposit in a lockbox account. Payment receipt data is electronically transferred from our lockbox bank to us for posting to the accounting system. A significant percentage of payments are also received via third party payment processors, such as Western Union, or via electronic transmission of funds. Payment processing and customer account maintenance is performed centrally at our operations center in Arlington, Texas.

A predictive dialing system is utilized to make phone calls to customers whose payments are past due. The predictive dialer is a computer-controlled telephone dialing system that simultaneously dials phone numbers of multiple customers from a file of records extracted from our database. Once a connection is made to the automated dialer’s call, the system automatically transfers the call to a collector and the relevant account information to the collector’s computer screen. Accounts that the system has been unable to reach within a specified number of days are flagged, thereby promptly identifying for management all customers who cannot be reached by telephone. By eliminating the time spent on attempting to reach customers, the system gives a single collector the ability to contact a larger number of customers daily.

Once an account reaches a certain level of delinquency, the account moves to one of our advanced collection units. The objective of these collectors is to resolve the delinquent account. We may repossess a financed vehicle if an account is deemed uncollectible, the financed vehicle is deemed by collection personnel to be in danger of being damaged, destroyed or hidden, the customer deals in bad faith or the customer voluntarily surrenders the financed vehicle.

Statistically-based behavioral assessment models are used in our servicing activities to project the relative probability that an individual account will default. The behavioral assessment models are used to help develop servicing strategies for the portfolio or for targeted account groups within the portfolio. At times, we offer payment deferrals to customers who have encountered financial difficulty, hindering their ability to pay as contracted. A deferral allows the customer to move delinquent payments to the end of the contract, usually by paying a fee that is calculated in a manner specified by applicable law. The collector reviews the customer’s past payment history and behavioral score and assesses the customer’s desire and capacity to make future payments. Before agreeing to a deferral, the collector also considers whether the deferment transaction complies with our

 

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policies and guidelines. Exceptions to our policies and guidelines for deferrals must be approved in accordance with these policies and guidelines. While payment deferrals are initiated and approved in the collections department, a separate department processes authorized deferment transactions. Exceptions are also monitored by our centralized credit risk management function.

Repossessions are subject to prescribed legal procedures, which include peaceful repossession, one or more customer notifications, a prescribed waiting period prior to disposition of the repossessed automobile and return of personal items to the customer. Some jurisdictions provide the customer with reinstatement or redemption rights. Legal requirements, particularly in the event of bankruptcy, may restrict our ability to dispose of the repossessed vehicle. Independent repossession firms engaged by us handle repossessions. All repossessions, other than bankruptcy or previously charged off accounts, must be approved by a collections officer. Upon repossession and after any prescribed waiting period, the repossessed automobile is sold at auction. We do not sell any vehicles on a retail basis. The proceeds from the sale of the automobile at auction, and any other recoveries, are credited against the balance of the contract. Auction proceeds from sale of the repossessed vehicle and other recoveries are usually not sufficient to cover the outstanding balance of the contract, and the resulting deficiency is charged off. We pursue collection of deficiencies when we deem such action to be appropriate.

Our policy is to charge off an account in the month in which the account becomes 120 days contractually delinquent if we have not repossessed the related vehicle. We charge off accounts in repossession when the automobile is repossessed and legally available for disposition. A charge-off represents the difference between the estimated net sales proceeds and the amount of the delinquent contract, including accrued interest. Accounts in repossession that have been charged off are removed from finance receivables and the related repossessed automobiles are included in other assets at net realizable value on the consolidated balance sheet pending disposal. The value of the collateral underlying our portfolio is updated periodically with a loan-by-loan link to national wholesale auction values. This data, along with our own experience relative to mileage and vehicle condition, are used for evaluating collateral disposition activities.

Financing

We primarily finance our loan and lease origination volume through the use of our credit facilities and, in the case of our loan originations, through securitization transactions.

Credit Facilities.    Loans and leases are typically funded initially using credit facilities that are generally administered by agents on behalf of institutionally managed commercial paper conduits. Under these funding agreements, we transfer finance contracts to special purpose finance subsidiaries. These subsidiaries, in turn, issue notes to the agents, collateralized by such finance contracts and cash. The agents provide funding under the notes to the subsidiaries pursuant to an advance formula, and the subsidiaries forward the funds to us in consideration for the transfer of finance contracts. While these subsidiaries are included in our consolidated financial statements, these subsidiaries are separate legal entities and the finance contracts and other assets held by these subsidiaries are legally owned by them and are not available to our creditors or creditors of our other subsidiaries. Advances under our funding agreements bear interest at commercial paper, London Interbank Offered Rates (“LIBOR”), Canadian Dollar Offered Rate (“CDOR”) or prime rates plus a credit spread and specified fees depending upon the source of funds provided by the agents.

Securitizations.    We pursue a financing strategy of securitizing our receivables to diversify our funding sources and free up capacity on our credit facilities for the purchase of additional automobile loans. The asset-backed securities market has traditionally allowed us to finance our auto loan portfolio at fixed interest rates over the life of a securitization transaction, thereby locking in the excess spread on our loan portfolio.

Proceeds from securitizations are primarily used to fund initial cash credit enhancement requirements in the securitization and to pay down borrowings under our credit facilities, thereby increasing availability thereunder

 

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for further contract purchases. Since 1994, we had securitized approximately $67.5 billion of auto loans through December 31, 2011.

In our securitizations, we, through wholly owned subsidiaries, transfer automobile receivables to newly-formed securitization trusts (“Trusts”), which issue one or more classes of asset-backed securities. The asset-backed securities are in turn sold to investors. When we transfer loans to a Trust, we make certain representations and warranties regarding the loans. These representations and warranties pertain to specific aspects of the loans, including the origination of the loans, the obligors of the loans, the accuracy and legality of the records, computer tapes and schedules containing information regarding the loans, the financed vehicles securing the loans, the security interests in the loans, specific characteristics of the loans, and certain matters regarding our servicing of the loans, but do not pertain to the underlying performance of the loans. Upon the breach of one of these representations or warranties (subject to any applicable cure period) that materially and adversely affects the noteholders’ interest in any loan, we will be obligated to repurchase the loan from the Trust. Historically, repurchases of loans due to a breach of a representation or warranty have been immaterial.

Since the second half of 2008, we have primarily utilized senior subordinated securitization structures which involve the public and private sale of subordinated asset-backed securities to provide credit enhancement for the senior, or highest rated, asset-backed securities. In January 2012, we closed a $1.0 billion public senior subordinated securitization transaction, AmeriCredit Automobile Receivables Trust (“AMCAR”) 2012-1, that has initial cash deposit and overcollateralization requirements of 7.75% in order to provide credit enhancement for the asset-backed securities sold, including the double-B rated securities which were the lowest rated securities sold. The level of credit enhancement in future senior subordinated securitizations will depend, in part, on the net interest margin, collateral characteristics and credit performance trends of the receivables transferred, as well as credit trends of our entire portfolio and overall auto finance industry credit trends. Credit enhancement levels may also be impacted by our financial condition, the economic environment and our ability to sell lower rated subordinated bonds at rates we consider acceptable.

The second type of securitization structure, that was last utilized in August 2010, involves the purchase of a financial guaranty insurance policy issued by an insurer. The financial guaranty insurance policies insure the timely payment of interest and the ultimate payment of principal due on the asset-backed securities. We have limited reimbursement obligations to the insurers; however, credit enhancement requirements, including the insurers’ encumbrance of certain restricted cash accounts and subordinated interests in Trusts, provide a source of funds to cover shortfalls in collections and to reimburse the insurers for any claims which may be made under the policies issued with respect to our securitizations. Since our securitization program’s inception, there have been no claims under any insurance policies. We do not anticipate utilizing this second type of structure in the foreseeable future.

The credit enhancement requirements in our securitization transactions include restricted cash accounts that are generally established with an initial deposit and may subsequently be funded through excess cash flows from securitized receivables. An additional form of credit enhancement is provided in the form of overcollateralization whereby more receivables are transferred to the Trusts than the amount of asset-backed securities issued by the Trusts. In securitizations involving a financial guaranty insurance policy, agreements with the insurers provide that if portfolio performance ratios (delinquency, cumulative default or cumulative net loss triggers) in a Trust’s pool of receivables exceed certain targets, the restricted cash account would be increased. Cash would be retained in the restricted cash account and not released to us until the increased target levels have been reached and maintained. We are entitled to receive amounts from the restricted cash accounts to the extent the amounts deposited exceed the required target enhancement levels. The credit enhancement requirements related to our senior subordinated transactions do not contain portfolio performance ratios which could increase the minimum required credit enhancement levels.

 

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The following chart provides a simplified overview of the relationship between us and other key parties to a credit facility or securitization transaction:

LOGO

Trade Names

We have obtained federal trademark protection for the “AmeriCredit” and “GM Financial” names and the logos that incorporates the “AmeriCredit” and “GM Financial” names. Certain other names, logos and phrases used by us in our business operations have also been trademarked.

Regulation

Our operations are subject to regulation, supervision and licensing under various federal, state and local statutes, ordinances and regulations.

In most states in which we operate, a consumer credit regulatory agency regulates and enforces laws relating to consumer lenders and sales finance companies such as us. These rules and regulations generally provide for licensing as a sales finance company or consumer lender or lessor, limitations on the amount, duration and charges, including interest rates, for various categories of loans, requirements as to the form and content of finance contracts and other documentation, and restrictions on collection practices and creditors’ rights. In certain states, we are subject to periodic examination by state regulatory authorities. Some states in which we operate do not require special licensing or provide extensive regulation of our business.

We are also subject to extensive federal regulation, including the Truth in Lending Act, the Equal Credit Opportunity Act and the Fair Credit Reporting Act. These laws require us to provide certain disclosures to

 

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prospective borrowers and lessees and protect against discriminatory lending and leasing practices and unfair credit practices. The principal disclosures required under the Truth in Lending Act include the terms of repayment, the total finance charge and the annual percentage rate charged on each contract or loan and the lease terms to lessees of personal property. The Equal Credit Opportunity Act prohibits creditors from discriminating against credit applicants on the basis of race, color, religion, national origin, sex, age or marital status. According to Regulation B promulgated under the Equal Credit Opportunity Act, creditors are required to make certain disclosures regarding consumer rights and advise consumers whose credit applications are not approved of the reasons for the rejection. In addition, the credit scoring system used by us must comply with the requirements for such a system as set forth in the Equal Credit Opportunity Act and Regulation B. The Fair Credit Reporting Act requires us to provide certain information to consumers whose credit applications are not approved on the basis of a report obtained from a consumer reporting agency and to respond to consumers who inquire regarding any adverse reporting submitted by us to the consumer reporting agencies. Additionally, we are subject to the Gramm-Leach-Bliley Act, which requires us to maintain the privacy of certain consumer data in our possession and to periodically communicate with consumers on privacy matters. We are also subject to the Servicemembers Civil Relief Act, which requires us, in most circumstances, to reduce the interest rate charged to customers who have subsequently joined, enlisted, been inducted or called to active military duty. The dealers who originate auto finance contracts and leases purchased by us also must comply with both state and federal credit and trade practice statutes and regulations. Failure of the dealers to comply with these statutes and regulations could result in consumers having rights of rescission and other remedies that could have an adverse effect on us.

We believe that we maintain all material licenses and permits required for our current operations and are in substantial compliance with all applicable local, state and federal regulations. There can be no assurance, however, that we will be able to maintain all requisite licenses and permits, and the failure to satisfy those and other regulatory requirements could have a material adverse effect on our operations. Further, the adoption of additional, or the revision of existing, rules and regulations could have a material adverse effect on our business.

Compliance with applicable law is costly and can affect operating results. Compliance also requires forms, processes, procedures, controls and the infrastructure to support these requirements, and may create operational constraints. Laws in the financial services industry are designed primarily for the protection of consumers. The failure to comply could result in significant statutory civil and criminal penalties, monetary damages, attorneys’ fees and costs, possible revocation of licenses and damage to reputation, brand and valued customer relationships.

In the near future, the financial services industry is likely to see increased disclosure obligations, restrictions on pricing and fees and enforcement proceedings.

In July 2010 the Wall Street Reform and Consumer Protection Act (“Dodd-Frank Act”) was signed into law. The Dodd-Frank Act is extensive and significant legislation that, among other things:

 

   

creates a liquidation framework under which the Federal Deposit Insurance Corporation, (“FDIC”), may be appointed as receiver following a “systemic risk determination” by the Secretary of Treasury (in consultation with the President) for the resolution of certain nonbank financial companies and other entities, defined as “covered financial companies”, and commonly referred to as “systemically important entities”, in the event such a company is in default or in danger of default and the resolution of such a company under other applicable law would have serious adverse effects on financial stability in the United States, and also for the resolution of certain of their subsidiaries;

 

   

creates a new framework for the regulation of over-the-counter derivatives activities;

 

   

strengthens the regulatory oversight of securities and capital markets activities by the SEC;

 

   

creates the Bureau of Consumer Financial Protection, a new agency responsible for administering and enforcing the laws and regulations for consumer financial products and services; and

 

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increases the regulation of the securitization markets through, among other things, a mandated risk retention requirement for securitizers and a direction to the SEC to regulate credit rating agencies and adopt regulations governing these organizations and their activities.

The various requirements of the Dodd-Frank Act, including the many implementing regulations which have yet to be released, may substantially impact our origination, servicing and securitization activities. With respect to the new liquidation framework for systemically important entities, no assurances can be given that such framework would not apply to us, although the expectation embedded in the Dodd-Frank Act is that the framework will rarely be invoked. Recent guidance from the FDIC indicates that such new framework will largely be exercised in a manner consistent with the existing bankruptcy laws, which is the insolvency regime which would otherwise apply to us.

The SEC has proposed significant changes to the rules applicable to issuers and sponsors of asset-backed securities under the Securities Act and the Securities Exchange Act of 1934, as amended (the “Exchange Act”). With the proposed changes we could potentially see an adverse impact in our access to the asset-backed securities capital markets and reduced effectiveness of our financing programs.

Competition

The automobile finance market is highly fragmented and is served by a variety of financial entities including the captive finance affiliates of other major automotive manufacturers, banks, thrifts, credit unions and independent finance companies. Many of these competitors have substantially greater financial resources and lower costs of funds than ours. In addition, our competitors often provide financing on terms more favorable to automobile purchasers or dealers than we may offer. Many of these competitors also have long standing relationships with automobile dealerships and may offer the dealerships or their customers other forms of financing, including dealer floor plan financing, commercial loans or revolving credit products, which are not currently provided by us. Providers of automobile financing have traditionally competed on the basis of rates charged, the quality of credit accepted, the flexibility of terms offered and the quality of service provided to dealers and customers. In seeking to establish ourselves as one of the principal financing sources at the dealers we serve, we compete predominantly on the basis of our high level of dealer service, strong dealer relationships and by offering flexible contract terms. There can be no assurance that we will be able to compete successfully in this market or against these competitors.

Employees

At December 31, 2011, we employed 3,460 persons in the United States and Canada. None of our employees are a part of a collective bargaining agreement, and our relationships with employees are satisfactory.

Executive Officers

The following sets forth certain data concerning our executive officers.

 

Name

   Age     

Position

Daniel E. Berce

     58       President and Chief Executive Officer

Kyle R. Birch

     51       Executive Vice President, Dealer Services

Steven P. Bowman

     44       Executive Vice President, Chief Credit and Risk Officer

Chris A. Choate

     49       Executive Vice President, Chief Financial Officer and Treasurer

James M. Fehleison

     53       Executive Vice President, Corporate Controller

Jonas B. Hollandsworth

     40       Executive Vice President, U.S. Sales and Credit Operations

J. Michael May

     67       Executive Vice President, Chief Legal Officer and Secretary

Brian S. Mock

     46       Executive Vice President, Consumer Services

Susan B. Sheffield

     45       Executive Vice President, Corporate Finance

James R. Vance

     40       Executive Vice President, Pricing Analytics and Product Development

 

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DANIEL E. BERCE has been President since April 2003 and Chief Executive Officer since August 2005. Mr. Berce was Vice Chairman and Chief Financial Officer from November 1996 until April 2003. Mr. Berce joined us in 1990.

KYLE R. BIRCH has been Executive Vice President, Dealer Services since May 2003. Prior to that, he was Senior Vice President of Dealer Services from July 1999 to April 2003. Mr. Birch joined us in 1997.

STEVEN P. BOWMAN has been Executive Vice President, Chief Credit and Risk Officer since January 2005. Prior to that, he was Executive Vice President, Chief Credit Officer from March 2000 to January 2005. Mr. Bowman joined us in 1996.

CHRIS A. CHOATE has been Executive Vice President, Chief Financial Officer and Treasurer since January 2005. Prior to that, he was Executive Vice President, Chief Legal Officer and Secretary from November 1999 to January 2005. Mr. Choate joined us in 1991.

JAMES M. FEHLEISON has been Executive Vice President, Corporate Controller, since October 2004. Prior to that, he was Senior Vice President, Corporate Controller, from November 2000 to October 2004. Mr. Fehleison joined us in 2000.

JONAS B. HOLLANDSWORTH has been Executive Vice President, U.S. Sales and Credit Operations since April 2011. Prior to that, he was Senior Vice President, Dealer Services from June 2008 to April 2011. Prior to that he was Vice President, Branch Originations from October 2005 until June 2008. Mr. Hollandsworth joined us in 1999.

J. MICHAEL MAY has been Executive Vice President, Chief Legal Officer and Secretary since July 2006. Prior to that, he was Senior Vice President, Associate Counsel, from June 2001 to July 2006. Mr. May joined us in 1999.

BRIAN S. MOCK has been Executive Vice President, Consumer Services since September 2002. Prior to that, he was Senior Vice President of Operational Services from April 2001 to August 2002. Mr. Mock joined us in 2001.

SUSAN B. SHEFFIELD has been Executive Vice President, Corporate Finance since July 2008. Prior to that, she was Senior Vice President, Structured Finance, from February 2004 to July 2008 and Vice President, Structured Finance, from February 2003 to February 2004. Ms. Sheffield joined us in 2001.

JAMES R. VANCE has been Executive Vice President, Pricing Analytics and Product Development since April 2011. Prior to that, he was Senior Vice President, Pricing Analytics and Product Development from August 2010 to April 2011 and Senior Vice President, Operations Controller – Financial Planning and Analysis from September 2006 to August 2010. Mr. Vance joined us in 1998.

ITEM 1A.    RISK FACTORS

The profitability and financial condition of our operations are dependent upon the operations of our parent, General Motors.

A material portion of our business consists of financing the sale of new GM vehicles. If there were significant changes in GM’s liquidity and capital position and access to the capital markets, the production or sales of GM vehicles to retail customers, the quality or resale value of GM vehicles, or other factors impacting GM or its employees, such changes could significantly affect our profitability and financial condition. In addition, GM sponsors special-rate financing programs available through us. Under these programs, GM makes interest supplements or other support payments to us. These programs increase our financing volume and share

 

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of financing the sales of GM vehicles. If GM were to adopt marketing strategies in the future that de-emphasized such programs in favor of other incentives, our financing volume could be reduced.

We currently have a $300 million unsecured revolving credit facility with GM. If this facility was no longer available, and we were unable to obtain similar funding elsewhere, our liquidity would be negatively impacted.

Our ability to continue to purchase contracts and to fund our business is dependent on a number of financing sources.

Dependence on Credit Facilities.    We depend on various credit facilities to finance our purchase of contracts pending securitization.

At December 31, 2011, we had a warehouse credit facility to support new originations. This facility, which we refer to as our syndicated warehouse facility provides borrowing capacity of up to $2.0 billion through May 2012. In May 2012 when the revolving period ends and if the facility is not renewed, the outstanding balance will be repaid over time based on the amortization of the receivables pledged until May 2013 when the remaining balance will be due and payable.

We also have two leasing credit facilities: (a) $600 million lease warehouse facility for lease originations in the U.S. that requires renewal in January 2013 and (b) C$600 million lease warehouse facility for lease originations in Canada that requires renewal in July 2012. Under both of these lease facilities, when the revolving periods end, and if the facilities are not renewed, the outstanding balance will be repaid over a period of approximately six years based on the amortization of the leasing related assets pledged, at which point in time any remaining amounts outstanding will be due and payable.

Additionally, we have a medium term note facility that reached the end of its revolving period in October 2009 and had $293.5 million outstanding at December 31, 2011. The outstanding balance of this facility will be repaid over time based on the amortization of the receivables pledged until October 2016 when any remaining amount outstanding will be due and payable.

We cannot guarantee that any of these financing sources will continue to be available beyond the current maturity dates on reasonable terms or at all. Additionally, as our volume of loan and lease originations increase, including an expansion of leasing volume in Canada, we will require the expansion of our borrowing capacity on our existing credit facilities or the addition of new credit facilities. The availability of these financing sources depend, in part, on factors outside of our control, including regulatory capital treatment for unfunded bank lines of credit, the financial strength and strategic objectives of the banks that participate in our credit facilities and the availability of bank liquidity in general. If we are unable to extend or replace these facilities or arrange new credit facilities or other types of interim financing, we will have to curtail or suspend origination activities, which would have a material adverse effect on our financial position, liquidity, and results of operations.

Our credit facilities, other than the GM revolving credit facility, contain a borrowing base or advance formula which requires us to pledge finance contracts in excess of the amounts which we can borrow under the facilities. We are also required to hold certain funds in restricted cash accounts to provide additional collateral for borrowings under the credit facilities. In addition, the finance contracts pledged as collateral must be less than 31 days delinquent at periodic measurement dates. Accordingly, increases in delinquencies or defaults on pledged collateral resulting from weakened economic conditions, or due to our inability to execute securitization transactions or any other factor, would require us to pledge additional finance contracts to support the same borrowing levels and to replace delinquent or defaulted collateral. The pledge of additional finance contracts to support our credit facilities would adversely impact our financial position, liquidity, and results of operations.

Additionally, the credit facilities, other than the GM revolving credit facility, generally contain various covenants requiring certain minimum financial ratios, asset quality, and portfolio performance ratios (portfolio

 

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net loss and delinquency ratios, and pool level cumulative net loss ratios) as well as limits on deferment levels. Failure to meet any of these covenants could result in an event of default under these agreements. If an event of default occurs under these agreements, the lenders could elect to declare all amounts outstanding under these agreements to be immediately due and payable, enforce their interests against collateral pledged under these agreements or restrict our ability to obtain additional borrowings under these facilities. If the lenders elect to accelerate outstanding indebtedness under these agreements following the violation of any covenant, such actions may result in an event of default under our senior note indenture.

Dependence on Securitization Program.

General.    Since December 1994, we have relied upon our ability to transfer receivables to Trusts and sell securities in the asset-backed securities market to generate cash proceeds for repayment of credit facilities and to purchase additional receivables. Accordingly, adverse changes in our asset-backed securities program or in the asset-backed securities market for automobile receivables in general have in the past, and could in the future, materially adversely affect our ability to purchase and securitize loans on a timely basis and upon terms acceptable to us. Any adverse change or delay would have a material adverse effect on our financial position, liquidity, and results of operations.

We will continue to require the execution of securitization transactions in order to fund our future liquidity needs. Additionally, we will require the expansion of our securitization program, or the development of other long-term funding solutions, to fund our U.S. and Canadian lease originations. There can be no assurance that funding will be available to us through these sources or, if available, that it will be on terms acceptable to us. If these sources of funding are not available to us on a regular basis for any reason, including the occurrence of events of default, deterioration in loss experience on the collateral, breach of financial covenants or portfolio and pool performance measures, disruption of the asset-backed market or otherwise, we will be required to revise the scale of our business, including the possible discontinuation of origination activities, which would have a material adverse effect on our financial position, liquidity, and results of operations.

There can be no assurance that we will continue to be successful in selling securities in the asset-backed securities market. Since we are highly dependent on the availability of the asset-backed securities market to finance our operations, disruptions in this market or adverse changes or delays in our ability to access this market would have a material adverse effect on our financial position, liquidity, and results of operations. Reduced investor demand for asset-backed securities could result in our having to hold assets until investor demand improves, but our capacity to hold assets is not unlimited. A reduced demand for our asset-backed securities could require us to reduce our origination levels. A return to adverse market conditions, such as we experienced in 2008 and early 2009, could also result in increased costs and reduced margins in connection with our securitization transactions.

Securitization Structures.    Since the second half of 2008, we have primarily utilized senior subordinated securitization structures which involve the public and private sale of subordinated asset-backed securities to provide credit enhancement for the senior, or highest rated, asset-backed securities. In a senior subordinated securitization, we expect that the highest rated, or triple-A, securities to be sold by us will comprise approximately 70% of the total securities issued. The balance of securities we expect to issue, the subordinated notes, will comprise the remaining 30%. Sizes of the classes depend upon rating agency loss assumptions and loss coverage requirements in addition to the sizing of subordinate bond classes. The market environment for subordinated securities is traditionally smaller than for senior securities and, therefore, can be more challenging than the market for triple-A securities. There can be no assurance that we will be able to sell the subordinated securities in a senior subordinated securitization, or that the pricing and terms demanded by investors for such securities will be acceptable to us. If we were unable for any reason to sell the subordinated securities in a senior subordinated securitization, we would be required to hold such securities, or find other sources of debt financing which could have a material adverse effect on our financial position, liquidity, and results of operations and could force us to curtail or suspend origination activities.

 

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The amount of the initial credit enhancement on future senior-subordinated securitizations will be dependent upon the amount of subordinated securities sold and the desired ratings on the securities being sold. In the AMCAR 2012-1 securitization, the initial cash deposit and overcollateralization requirement was 7.75% in order to provide credit enhancement for the asset-backed securities sold, including the double-B rated securities which were the lowest rated securities sold. The required initial and targeted credit enhancement levels depend, in part, on the net interest margin expected over the life of a securitization, the collateral characteristics of the pool of receivables securitized, credit performance trends of our entire portfolio and the structure of the securitization transaction. Credit enhancement levels may also be impacted by our financial condition and the economic environment. In periods of economic weakness and associated deterioration of credit performance trends, required credit enhancement levels generally increase, particularly for securitizations of higher risk finance receivables such as our loan portfolio. Higher levels of credit enhancement require significantly greater use of liquidity to execute a securitization transaction. The level of credit enhancement requirements in the future could adversely impact our ability to execute securitization transactions and may affect the timing of such securitizations given the increased amount of liquidity necessary to fund credit enhancement requirements. This, in turn, may adversely impact our ability to opportunistically access the capital markets when conditions are favorable.

The second type of securitization structure, that we last utilized in August 2010, involves the purchase of a financial guaranty insurance policy provided by various monoline insurance providers in order to achieve triple-A ratings on the securities issued in our securitization transactions. Most of the monoline insurers we have used in the past are still facing financial stress and have received rating agency downgrades due to risk exposures on insurance policies that guarantee mortgage debt and related structured products. As a result, there is limited demand for securities guaranteed by insurance policies.

To service our debt, we will require a significant amount of cash. Our ability to generate cash depends on many factors.

Our ability to make payments on or to refinance our indebtedness and to fund our operations depends on our ability to generate cash and our access to the capital markets in the future. These, to a certain extent, are subject to general economic, financial, competitive, legislative, regulatory, capital market conditions and other factors that are beyond our control.

We expect to continue to require substantial amounts of cash. Our primary cash requirements include the funding of:

 

   

loan purchases pending their securitization;

 

   

lease purchases;

 

   

credit enhancement requirements in connection with securitization and credit facilities;

 

   

interest and principal payments under our credit facilities and other indebtedness;

 

   

fees and expenses incurred in connection with the securitization and servicing of loans and leases and credit facilities;

 

   

ongoing operating expenses; and

 

   

capital expenditures.

We require substantial amounts of cash to fund our origination and securitization activities. Although we must fund certain credit enhancement requirements upon the closing of a securitization, we typically receive the cash representing excess cash flows and return of credit enhancement deposits over the actual life of the receivables securitized. We also incur transaction costs in connection with a securitization transaction. Accordingly, our strategy of securitizing our newly purchased receivables will require significant amounts of cash. Additionally, we expect to expand our business in 2012 to include dealer wholesale and commercial

 

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lending for GM dealers, activities that will require substantial amounts of cash to support, particularly until we are able to obtain credit facilities and create a securitization platform to help fund such receivables.

Our primary sources of future liquidity are expected to be:

 

   

payments on loans and leases not yet securitized;

 

   

distributions received from Trusts;

 

   

servicing fees;

 

   

borrowings under our credit facilities or proceeds from securitization transactions;

 

   

further issuances of other debt securities; and

 

   

borrowings on our unsecured line of credit with GM.

Because we expect to continue to require substantial amounts of cash for the foreseeable future, we anticipate that we will require the execution of additional securitization transactions and may choose to enter into other additional debt financings. The type, timing and terms of financing selected by us will be dependent upon our cash needs, the availability of other financing sources and the prevailing conditions in the capital markets. There can be no assurance that funding will be available to us through these sources or, if available, that the funding will be on acceptable terms. If we are unable to execute securitization transactions on a regular basis, we would not have sufficient funds to finance new originations and, in such event, we would be required to revise the scale of our business, which would have a material adverse effect on our ability to achieve our business and financial objectives.

Our substantial indebtedness could adversely affect our financial health and prevent us from fulfilling our existing indebtedness.

We currently have a substantial amount of outstanding indebtedness. Our ability to make payments of principal or interest on, or to refinance, our indebtedness will depend on our future operating performance, including the performance of receivables transferred to Trusts, and our ability to enter into additional securitization transactions as well as other debt financings, which, to a certain extent, are subject to economic, financial, competitive, regulatory, capital markets and other factors beyond our control.

If we are unable to generate sufficient cash flows in the future to service our debt, we may be required to refinance all or a portion of our existing debt or to obtain additional financing. There can be no assurance that any refinancings will be possible or that any additional financing could be obtained on acceptable terms. The inability to service or refinance our existing debt or to obtain additional financing would have a material adverse effect on our financial position, liquidity, and results of operations.

The degree to which we are leveraged creates risks, including:

 

   

we may be unable to satisfy our obligations under our outstanding indebtedness;

 

   

we may find it more difficult to fund future credit enhancement requirements, operating costs, tax payments, capital expenditures, or general corporate expenditures;

 

   

we may have to dedicate a substantial portion of our cash resources to payments on our outstanding indebtedness, thereby reducing the funds available for operations and future business opportunities; and

 

   

we may be vulnerable to adverse general economic, capital markets and industry conditions.

Our credit facilities, other than the GM revolving credit facility, typically require us to comply with certain financial ratios and covenants, including minimum asset quality maintenance requirements. These restrictions may interfere with our ability to obtain financing or to engage in other necessary or desirable business activities.

 

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If we cannot comply with the requirements in our credit facilities, then the lenders may increase our borrowing costs, remove us as servicer or declare the outstanding debt immediately due and payable. If our debt payments were accelerated, the assets pledged on these facilities might not be sufficient to fully repay the debt. These lenders may foreclose upon their collateral, including the restricted cash in these credit facilities. These events may also result in a default under our senior note and convertible senior note indentures. We may not be able to obtain a waiver of these provisions or refinance our debt, if needed. In such case, our financial condition, liquidity, and results of operations would materially suffer.

Defaults and prepayments on contracts purchased or originated by us could adversely affect our operations.

Our financial condition, liquidity, and results of operations depend, to a material extent, on the performance of loans and leases in our portfolio. Obligors under contracts acquired or originated by us may default during the term of their loan or lease. Generally, we bear the full risk of losses resulting from defaults. In the event of a default, the collateral value of the financed vehicle usually does not cover the outstanding contract balance and costs of recovery.

We maintain an allowance for loan losses for finance receivables originated since October 1, 2010 (our “post-acquisition finance receivables” portfolio) which reflects management’s estimates of inherent losses for these loans. If the allowance is inadequate, we would recognize the losses in excess of that allowance as an expense and results of operations would be adversely affected. A material adjustment to our allowance for loan losses and the corresponding decrease in earnings could limit our ability to enter into future securitizations and other financings, thus impairing our ability to finance our business.

We also maintain a carrying value adjustment for finance receivables originated prior to October 1, 2010 (our “pre-acquisition finance receivables” portfolio), which includes future credit losses for these loans. Any incremental deterioration on loans in this group beyond the carrying value adjustment will result in an incremental allowance for loan losses being recorded. Improvements or resolutions will not be a direct offset to provisions or charge-offs, but will result in a transfer of the excess non-accretable discount to accretable yield, which will be recorded as finance charge income over the remaining life from the finance receivables.

We are required to deposit substantial amounts of the cash generated by our interests in securitizations sponsored by us to satisfy targeted credit enhancement requirements. An increase in defaults would reduce the cash flows generated by our interests in securitization transactions lengthening the period required to build targeted credit enhancement levels in the Trusts. Distributions of cash from the securitizations to us would be delayed and the ultimate amount of cash distributable to us would be less, which would have an adverse effect on our liquidity. The targeted credit enhancement levels in future securitizations may also be increased, due to an increase in defaults and losses, further impacting our liquidity.

Consumer prepayments affect the amount of finance charge income we receive over the life of the loans. If prepayment levels increase for any reason and we are not able to replace the prepaid receivables with newly originated loans, we will receive less finance charge income and our results of operations may be adversely affected.

The negative performance of auto contracts in our portfolio could adversely affect our cash flow and servicing rights.

Portfolio Performance – Negative Impact on Cash Flows.    Generally, the form of agreements we have entered into with our financial guaranty insurance providers in connection with securitization transactions insured by them contain specified limits on portfolio performance ratios (delinquency, cumulative default and cumulative net loss) on the receivables included in each Trust. If, at any measurement date, a portfolio performance ratio with respect to any Trust were to exceed the specified limits, provisions of the credit enhancement agreement would automatically increase the level of credit enhancement requirements for that Trust

 

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if a waiver was not obtained. During the period in which the specified portfolio performance ratio was exceeded, excess cash flows, if any, from the Trust would be used to fund additional credit enhancement up to the increased levels instead of being distributed to us, which would have an adverse effect on our cash flows and liquidity.

Our securitization transactions insured by some of our financial guaranty insurance providers are cross-collateralized to a limited extent. In the event of a shortfall in the original targeted credit enhancement requirement for any of these Trusts after a certain period of time, excess cash flows from other transactions insured by the same insurance provider would be used to satisfy the shortfall amount rather than be distributed to us.

Right to Terminate Servicing.    The agreements that we have entered into with our financial guaranty insurance providers in connection with securitization transactions insured by them contain additional specified targeted portfolio performance ratios (delinquency, cumulative default and cumulative net loss) that are higher than the limits referred to above. If, at any measurement date, the targeted portfolio performance ratios with respect to any insured Trust were to exceed these additional levels, provisions of the agreements permit the financial guaranty insurance providers to declare the occurrence of an event of default and take steps to terminate our servicing rights to the receivables sold to that Trust. In addition, the servicing agreements on certain insured Trusts are cross-defaulted so that a default declared under one servicing agreement would allow the financial guaranty insurance provider to terminate our servicing rights under all servicing agreements for Trusts in which they issued a financial guaranty insurance policy. Additionally, if these higher targeted portfolio performance levels were exceeded and the financial guaranty insurance providers elected to declare an event of default, the insurance providers may retain all excess cash generated by other securitization transactions insured by them as additional credit enhancement. This, in turn, could result in defaults under our other securitizations and other material indebtedness, including under our senior note indenture. Although we have never exceeded these additional targeted portfolio performance ratios, there can be no assurance that we will not exceed these additional targeted portfolio performance ratios in the future. If such targeted portfolio performance ratios are exceeded, or if we have breached our obligations under the servicing agreements, or if the financial guaranty insurance providers are required to make payments under a policy, or if certain bankruptcy or insolvency events were to occur then there can be no assurance that an event of default will not be declared and our servicing rights will not be terminated. The termination of any or all of our servicing rights would have a material adverse effect on our financial position, liquidity, and results of operations.

Failure to implement our business strategy could adversely affect our operations.

Our financial position, liquidity, and results of operations depend on management’s ability to execute our business strategy. Key factors involved in the execution of the business strategy include achieving the desired origination volume, continued and successful use of proprietary scoring models for credit risk assessment and risk-based pricing, the use of effective credit risk management techniques and servicing strategies, implementation of effective servicing and collection practices, continued investment in technology to support operating efficiency, implementation of floorplan and commercial lending programs for GM dealers and continued access to funding and liquidity sources. Our failure or inability to execute any element of our business strategy could materially adversely affect our financial position, liquidity, and results of operations.

There is a high degree of risk associated with sub-prime borrowers.

The majority of our origination and servicing activities involve sub-prime automobile receivables. Sub-prime borrowers are associated with higher-than-average delinquency and default rates. While we believe that we effectively manage these risks with our proprietary credit scoring system, risk-based pricing and other underwriting policies, and our servicing and collection methods, no assurance can be given that these criteria or methods will be effective in the future. In the event that we underestimate the default risk or under-price contracts that we purchase, our financial position, liquidity, and results of operations would be adversely affected, possibly to a material degree.

 

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Our profitability is dependent upon consumer demand for automobiles and automobile financing and the ability of consumers to repay loans and leases, and our business may be negatively affected during times of low automobile sales, fluctuating wholesale prices and lease residual values, rising interest rates, weakening of the Canadian dollar and high unemployment.

General.    We are subject to changes in general economic conditions that are beyond our control. During periods of economic slowdown or recession, delinquencies, defaults, repossessions and losses generally increase. These periods also may be accompanied by increased unemployment rates, decreased consumer demand for automobiles and declining values of automobiles securing outstanding loans, which weakens collateral coverage and increases the amount of a loss in the event of default. Additionally, higher gasoline prices, declining stock market values, unstable real estate values, increasing unemployment levels, general availability of consumer credit or other factors that impact consumer confidence or disposable income could increase loss frequency and decrease consumer demand for automobiles as well as weaken collateral values on certain types of automobiles. Because we focus predominantly on sub-prime borrowers, the actual rates of delinquencies, defaults, repossessions and losses are higher than those experienced in the general automobile finance industry and could be more dramatically affected by a general economic downturn. In addition, during an economic slowdown or recession, our servicing costs may increase without a corresponding increase in our finance charge income. While we seek to manage the higher risk inherent in financing sub-prime borrowers through the underwriting criteria and collection methods we employ, no assurance can be given that these criteria or methods will afford adequate protection against these risks. Any sustained period of increased delinquencies, defaults, repossessions or losses or increased servicing costs could adversely affect our financial position, liquidity, results of operations and our ability to enter into future securitizations and future credit facilities.

Wholesale Auction Values.    We sell repossessed automobiles at wholesale auction markets located throughout the United States and Canada. Auction proceeds from the sale of repossessed vehicles and other recoveries are usually not sufficient to cover the outstanding balance of the contract, and the resulting deficiency is charged off. We also sell automobiles returned to us at the end of a lease term. Decreased auction proceeds resulting from the depressed prices at which used automobiles may be sold during periods of economic slowdown or slack consumer demand will result in higher credit losses for us. Furthermore, depressed wholesale prices for used automobiles may result from significant liquidations of rental or fleet inventories, financial difficulties of the new vehicle manufacturers, discontinuance of vehicle brands and models and from increased volume of trade-ins due to promotional programs offered by new vehicle manufacturers. Additionally, higher gasoline prices may decrease the wholesale auction values of certain types of vehicles.

Leased Vehicle Residual Values and Return Rates.    We project expected residual values and return volumes of the vehicles we lease. Actual proceeds realized by us upon the sale of returned leased vehicles at lease termination may be lower than the amount projected, which reduces the profitability of the lease transaction to us. Among the factors that can affect the value of returned lease vehicles are the volume of vehicles returned, economic conditions and the quality or perceived quality, safety or reliability of the vehicles. Actual return volumes may be higher than expected and can be influenced by contractual lease end values relative to auction values, marketing programs for new vehicles, and general economic conditions. All of these, alone or in combination, have the potential to adversely affect the profitability of our lease program and financial results.

Interest Rates.    Our profitability may be directly affected by the level of and fluctuations in interest rates, which affects the gross interest rate spread we earn on our portfolio. As the level of interest rates change, our gross interest rate spread on new originations either increases or decreases since the rates charged on the contracts purchased from dealers are fixed rate and are limited by market and competitive conditions, restricting our opportunity to pass on increased interest costs to the consumer. We believe that our financial position, liquidity, and results of operations could be adversely affected during any period of higher interest rates, possibly to a material degree. We monitor the interest rate environment and may employ hedging strategies designed to mitigate the impact of increases in interest rates. We can provide no assurance however, that hedging strategies will mitigate the impact of increases in interest rates.

 

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Foreign Currency Exchange Rates.    We are exposed to the effects of changes in foreign currency exchange rates. Changes in currency exchange rates cannot always be predicted or hedged. As a result, unfavorable changes in the Canadian dollar could have an effect on our financial condition, liquidity, and results of operations.

Labor Market Conditions.    Competition to hire and retain personnel possessing the skills and experience required by us could contribute to an increase in our employee turnover rate. High turnover or an inability to attract and retain qualified personnel could have an adverse effect on our delinquency, default and net loss rates, our ability to grow and, ultimately, our financial condition, liquidity, and results of operations.

A security breach or a cyber attack could adversely affect our business.

A security breach or cyber attack of our computer systems could interrupt or damage our operations or harm our reputation. If third parties or our employees are able to penetrate our network security or otherwise misappropriate our customers’ personal information or contract information, or if we give third parties or our employees improper access to our customers’ personal information or contract information, we could be subject to liability. This liability could include identity theft or other similar fraud-related claims. This liability could also include claims for other misuses or losses of personal information, including for unauthorized marketing purposes. Other liabilities could include claims alleging misrepresentation of our privacy and data security practices.

We rely on encryption and authentication technology licensed from third parties to provide the security and authentication necessary to effect secure online transmission of confidential consumer information. Advances in computer capabilities, new discoveries in the field of cryptography or other events or developments may result in a compromise or breach of the algorithms that we use to protect sensitive customer transaction data. A party who is able to circumvent our security measures could misappropriate proprietary information or cause interruptions in our operations. We may be required to expend capital and other resources to protect against such security breaches or cyber attacks or to alleviate problems caused by such breaches or attacks. Our security measures are designed to protect against security breaches and cyber attacks, but our failure to prevent such security breaches and cyber attacks could subject us to liability, decrease our profitability, and damage our reputation.

We are involved in and will likely continue to be party to litigation.

As a consumer finance company, we are subject to various consumer claims and litigation seeking damages and statutory penalties, based upon, among other things, usury, disclosure inaccuracies, wrongful repossession, violations of bankruptcy stay provisions, certificate of title disputes, fraud, breach of contract and discriminatory treatment of credit applicants. Some litigation against us could take the form of class action complaints by consumers and/or shareholders. As the assignee of finance contracts originated by dealers, we may also be named as a co-defendant in lawsuits filed by consumers principally against dealers. The damages and penalties claimed by consumers in these types of matters can be substantial. The relief requested by the plaintiffs varies but can include requests for compensatory, statutory and punitive damages. We believe that we have taken prudent steps to address and mitigate the litigation risks associated with our business activities. However, any adverse resolution of litigation pending or threatened against us could have a material affect on our financial condition, liquidity, and results of operations.

We could be jointly and severally liable for certain pension obligations of our affiliate, GM Holdings.

Although we do not sponsor defined benefit pension plans for our employees, an affiliate of ours, GM Holdings sponsors U.S. defined benefit plans covering a portion of its U.S. employees and retirees. The GM Holdings plans are subject to the Employee Retirement Income Security Act of 1974 (“ERISA”), and they are underfunded. ERISA, along with certain provisions of the Internal Revenue Code of 1986, as amended (the “Code”), requires minimum funding contributions to these pension plans, and the Pension Benefit Guaranty

 

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Corporation (“PBGC”) has the authority under certain circumstances to petition a court to terminate an underfunded pension plan. Under ERISA and the Code, we would be jointly and severally liable, together with GM Holdings, for the amount of the unfunded benefit liabilities resulting from a termination of one of these pension plans by the PBGC. In addition, a failure to make required minimum contributions or such a termination of a pension plan by the PBGC could result in liens imposed on our assets.

Regulation.    Reference should be made to Item 1. “Business – Regulation” for a discussion of regulatory risk factors.

Competition.    Reference should be made to Item 1. “Business – Competition” for a discussion of competitive risk factors.

 

ITEM 2. PROPERTIES

Our executive offices are located at 801 Cherry Street, Suite 3500, Fort Worth, Texas, in an 86,000 square foot office space under a lease that expires in May 2019.

We also lease 46,000 square feet of office space in Charlotte, North Carolina under a lease expiring in June 2021, 89,000 square feet of office space in Peterborough, Ontario under a lease expiring in July 2019, 62,000 square feet of office space in Chandler, Arizona, under a lease expiring in August 2018 and 250,000 square feet of office space in Arlington, Texas, under a lease expiring in August 2017. We also own a 250,000 square foot servicing facility in Arlington, Texas. Our Canadian auto leasing operations are housed in a 37,000 square foot facility in Toronto, Ontario under a lease expiring in August 2014. Our regional credit centers are generally leased under agreements with original terms of three to seven years. Such facilities are typically located in a suburban office building and consist of between 3,000 and 15,000 square feet of space.

ITEM 3.    LEGAL PROCEEDINGS

None.

ITEM 4.    MINE SAFETY DISCLOSURE

Not applicable.

 

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PART II

 

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

Market Information

Our common stock previously traded on the New York Stock Exchange under the symbol ACF. Effective October 1, 2010 with the consummation of the Merger all of our issued and outstanding equity securities are owned by a single holder and there is no longer an established public trading market for our common stock. The information provided below represents the information for AmeriCredit Corp. for periods before the effective date of the Merger.

Dividend Policy

We have never paid cash dividends on our common stock. We presently intend to retain future earnings, if any, for use in the operation of the business and do not anticipate paying any cash dividends in the foreseeable future; provided, however, that we may reexamine this policy with our sole shareholder at any time.

The following table sets forth the range of the high, low and closing sale prices for our common stock as reported on the Composite Tape of the New York Stock Exchange Listed Issues.

 

Predecessor

   High      Low      Close  

Three months ended September 30, 2010

   $ 24.53       $ 17.98       $ 24.46   

Fiscal year ended June 30, 2010

        

First Quarter

   $ 18.00       $ 11.51       $ 15.79   

Second Quarter

     20.10         14.71         19.04   

Third Quarter

     24.55         18.69         23.76   

Fourth Quarter

     26.49         18.14         18.22   

 

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ITEM 6. SELECTED FINANCIAL DATA

The table below summarizes selected financial information (dollars in thousands, except per share data). For additional information, refer to the audited consolidated financial statements and notes thereto in Item 8. Financial Statements and Supplementary Data. After the Merger, AmeriCredit Corp. (“Predecessor”) was renamed General Motors Financial Company, Inc. (‘Successor”) and the “Selected Financial Data” for periods preceding and succeeding the Merger have been derived from the consolidated financial statements of the Predecessor and the Successor, respectively. The consolidated financial statements of the Predecessor have been prepared on the same basis as the audited financial statements included in our Annual Report on Form 10-K for the year ended June 30, 2010. The consolidated financial statements of the Successor reflect the application of “purchase accounting”.

 

    Successor    

 

  Predecessor  
    Year Ended
December 31,
2011
    Period From
October 1, 2010
Through
December 31,
2010
   

 

  Period From
July 1, 2010
Through
September 30,
2010
    Years Ended June 30,  
            2010     2009     2008     2007  

Operating Data

                 

Finance charge income

  $ 1,246,687      $ 264,347          $ 342,349      $ 1,431,319      $ 1,902,684      $ 2,382,484      $ 2,142,470   

Other revenue

    163,301        16,824            30,275        91,498        164,640        160,598        197,453   
 

 

 

   

 

 

   

 

 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenue

    1,409,988        281,171            372,624        1,522,817        2,067,324        2,543,082        2,339,923   
 

 

 

   

 

 

   

 

 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Impairment of goodwill

                  212,595     

Net income (loss)

    385,527        74,633            51,300        220,546        (10,889     (82,369     349,963   

Basic earnings (loss) per share

    (a     (a         0.38        1.65        (0.09     (0.72     2.94   

Diluted earnings (loss) per share

    (a     (a         0.37        1.60        (0.09     (0.72     2.65   

Diluted weighted average shares

    (a     (a         140,302,755        138,179,945        125,239,241        114,962,241        133,224,945   

Other Data

                 

Origination volume(b)

  $ 6,071,560      $ 945,467          $ 959,004      $ 2,137,620      $ 1,285,091      $ 6,293,494      $ 8,454,600   

 

     Successor            Predecessor  
     December 31,
2011
     December 31,
2010
           June 30,
2010
     June 30,
2009
     June 30,
2008
     June 30
2007
 

Balance Sheet Data

                      

Cash and cash equivalents

   $ 572,297       $ 194,554            $ 282,273       $ 193,287       $ 433,493       $ 910,304   

Finance receivables, net

     9,162,492         8,197,324              8,160,208         10,037,329         14,030,299         15,102,370   

Leased vehicles, net

     809,491         46,780              94,677         156,387         210,857         33,968   

Total assets

     13,042,920         10,918,738              9,881,033         11,958,327         16,508,201         17,762,999   

Credit facilities

     1,099,391         831,802              598,946         1,630,133         2,928,161         2,541,702   

Securitization notes payable

     6,937,841         6,128,217              6,108,976         7,426,687         10,420,327         11,939,447   

Senior notes

     500,000         70,054              70,620         91,620         200,000         200,000   

Convertible senior notes

     500         1,446              414,068         392,514         642,599         620,537   

Total liabilities

     9,119,882         7,388,630              7,480,609         9,851,019         14,542,939         15,606,407   

Shareholder’s equity

     3,923,038         3,530,108              2,400,424         2,107,308         1,965,262         2,156,592   

 

(a) As a result of the Merger, our common stock is owned by a single holder and is no longer publicly traded and earnings per share is no longer required.
(b) The fiscal year ended December 31, 2011, three month period ended December 31, 2010 and fiscal years ended June 30, 2008 and 2007 include $986.8 million, $10.7 million, $218.1 million and $34.9 million of contracts purchased through our leasing programs in U.S. and Canada, respectively.

 

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ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

GENERAL

We are an auto finance company specializing in purchasing retail automobile installment sales contracts originated by franchised and select independent dealers in connection with the sale of used and new automobiles. Additionally, in December 2010, we began offering a lease product through General Motors Company (“GM”) franchised dealerships. We generate revenue and cash flows primarily through the purchase, retention, subsequent securitization and servicing of finance contracts. As used herein, “loans” include auto finance receivables originated by dealers and purchased by us. To fund the acquisition of contracts prior to securitization, we use available cash and borrowings under our credit facilities. We earn finance charge and other income on the finance contracts and pay interest expense on borrowings under our credit facilities.

Through wholly owned subsidiaries, we periodically transfer receivables to securitization trusts (“Trusts”) that issue asset-backed securities to investors. We retain an interest in these securitization transactions in the form of restricted cash accounts and overcollateralization, whereby more receivables are transferred to the Trusts than the amount of asset-backed securities issued by the Trusts, as well as the estimated future excess cash flows expected to be received by us over the life of the securitization. Excess cash flows result from the difference between the finance charges received from the obligors on the receivables and the interest paid to investors in the asset-backed securities, net of credit losses and expenses.

Excess cash flows from the Trusts are initially utilized to fund credit enhancement requirements in order to attain specific credit ratings for the asset-backed securities issued by the Trusts. Once targeted credit enhancement requirements are reached and maintained, excess cash flows are distributed to us or, in a securitization utilizing a senior subordinated structure, may be used to accelerate the repayment of certain subordinated securities. In addition to excess cash flows, we receive monthly base servicing fees and we collect other fees, such as late charges, as servicer for Trusts. For securitization transactions that involve the purchase of a financial guaranty insurance policy, credit enhancement requirements will increase if specified portfolio performance ratios are exceeded. Excess cash flows otherwise distributable to us from Trusts in which the portfolio performance ratios were exceeded and from other Trusts which may be subject to limited cross-collateralization provisions are accumulated in the Trusts until such higher levels of credit enhancement are reached and maintained. Senior subordinated securitizations typically do not utilize portfolio performance ratios.

Our securitization transactions utilize special purpose entities which are also variable interest entities (“VIE’s”) that meet the requirements to be consolidated in our financial statements. Following a securitization, the finance receivables and the related securitization notes payable remain on the consolidated balance sheets. We recognize finance charge and fee income on the receivables and interest expense on the securities issued in the securitization transaction and record a provision for loan losses to cover probable loan losses on the receivables.

General Motors Merger

On October 1, 2010, pursuant to the terms of the Agreement and Plan of Merger (the “Merger Agreement”), dated as of July 21, 2010, with General Motors Holdings LLC (“GM Holdings”), a Delaware limited liability company and a wholly owned subsidiary of GM, and Goalie Texas Holdco Inc., a Texas corporation and a direct wholly owned subsidiary of GM Holdings (“Merger Sub”), GM Holdings completed its acquisition of AmeriCredit Corp. via the merger of Merger Sub with and into AmeriCredit Corp. (the “Merger” or “acquisition”), with AmeriCredit Corp. continuing as the surviving company in the Merger and becoming a wholly owned subsidiary of GM Holdings. Following the Merger, our name was changed to General Motors Financial Company, Inc. (“GM Financial”).

On December 9, 2010, we changed our fiscal year end to December 31 from June 30. We made this change to align our financial reporting period, as well as our annual planning and budgeting process, with the GM

 

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business cycle. As a result of this change, this Form 10-K reports our financial results for the three month transition period of July 1, 2010 through September 30, 2010, labeled “Predecessor” and the three month transition period of October 1, 2010 through December 31, 2010, labeled “Successor”. Due to the change in basis resulting from the application of purchase accounting, the results of operations of the Predecessor and Successor are not comparable. The years ended December 31, 2011, June 30, 2010 and 2009 reflect the twelve-month results of the respective fiscal year and are referred to herein as fiscal 2011, 2010 and 2009.

All references to “years”, “fiscal” and “fiscal year”, unless otherwise noted refer to the twelve month fiscal year, which prior to July 1, 2010, ended on June 30, and beginning January 1, 2011, ends on December 31 of each year.

CRITICAL ACCOUNTING ESTIMATES

The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions which affect the reported amounts of assets and liabilities and the disclosures of contingent assets and liabilities as of the date of the financial statements and the amount of revenue and costs and expenses during the reporting periods. Actual results could differ from those estimates and those differences may be material. The accounting estimates that we believe are the most critical to understanding and evaluating our reported financial results include the following:

Purchase Accounting

The Merger has been accounted for under the purchase method of accounting, whereby the purchase price of the transaction was allocated to our identifiable assets acquired and liabilities assumed based upon their fair values. The estimates of the fair values recorded were determined based on the fair value measurement principles (see Note 13 – “Fair Values of Assets and Liabilities” to the consolidated financial statements for additional information) and reflect significant assumptions and judgments. Material valuation inputs for our finance receivables included adjustments to monthly principal and finance charge cash flows for prepayments and credit loss expectations; servicing expenses; and discount rates developed based on the relative risk of the cash flows which considered loan type, market rates as of our valuation date, credit loss expectations and capital structure. Certain assumptions and judgments that were considered to be appropriate at the acquisition date may prove to be incorrect if market conditions change.

The results of the purchase price allocation included an increase in the total carrying value of net finance receivables, medium term note facility payable, Wachovia funding facility payable, securitization notes payable, deferred tax assets and uncertain tax positions as well as intangible assets. Management believes all material intangible assets have been identified.

The excess of the purchase price over the estimated fair values of the net assets acquired was recorded as goodwill. The goodwill amount was $1.1 billion.

In accordance with the accounting for goodwill, goodwill is not amortized to net income, but is required to be tested for impairment at least annually. See Note 1 – “Summary of Significant Accounting Policies – Goodwill” to the consolidated financial statements for additional information regarding goodwill. See Note 2 – “Financial Statement Effects of the Merger” to the consolidated financial statements for additional information of the purchase price allocation.

Finance Receivables and the Allowance for Loan Losses

Pre-Acquisition Finance Receivables

Finance receivables originated prior to the acquisition were adjusted to fair value at October 1, 2010. As a result of purchase accounting for the Merger, the allowance for loan losses at October 1, 2010 was eliminated

 

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and a net discount was recorded on the receivables. The fair value of the receivables was less than the principal amount of those receivables, thus resulting in a discount to par. This discount was attributable, in part, to estimate future credit losses that did not exist at the origination of the loans.

A non-accretable difference is the excess between contractually required payments (undiscounted amount of all uncollected contractual principal and interest payments, both past due and scheduled for the future) and the amount of cash flows, considering the impact of prepayments, expected to be collected. An accretable yield is the excess of the cash flows, considering the impact of prepayments, expected to be collected over the initial investment in the loans, which at October 1, 2010, was fair value.

As a result of purchase accounting for the Merger, we evaluated the common risk characteristics of the loan portfolio and split it into several pools. Once a pool of loans is assembled, the integrity of the pool is maintained. A loan is removed from a pool only if it is sold or paid in full, or the loan is written off. Our policy is to remove a written off loan individually from a pool based on comparing any amount received with its contractual amount. Any difference between these amounts is absorbed by the non-accretable difference. This removal method assumes that the amount received approximates pool performance expectations. The remaining accretable yield balance is unaffected and any material change in remaining effective yield caused by this removal method is addressed by our quarterly cash flow evaluation process for each pool. For loans that are resolved by payment in full there is no release of the non-accretable difference for the pool because there is no difference between the amount received and the contractual amount of the loan.

Any deterioration in the performance of the pre-acquisition receivables will result in an incremental provision for loan losses being recorded. Improvements in the performance of the pre-acquisition receivables which results in a significant increase in actual or expected cash flows will result first in the reversal of any incremental related allowance for loan losses and then in a transfer of the excess from the non-accretable difference to accretable yield, which will be recorded as finance charge income over the remaining life of the receivables.

Post-Acquisition Finance Receivables and Allowance for Loan Losses

Finance receivables originated since the acquisition are carried at amortized cost, net of allowance for loan losses. Provisions for loan losses are charged to operations in amounts sufficient to maintain the allowance for loan losses at levels considered adequate to cover probable credit losses inherent in our post-acquisition finance receivables.

The allowance for loan losses is established systematically based on the determination of the amount of probable credit losses inherent in the post-acquisition finance receivables as of the balance sheet date. We review charge-off experience factors, delinquency reports, historical collection rates, estimates of the value of the underlying collateral, economic trends, such as unemployment rates, and other information in order to make the necessary judgments as to the probable credit losses. We also use historical charge-off experience to determine the loss confirmation period, which is defined as the time between when an event, such as delinquency status, giving rise to a probable credit loss occurs with respect to a specific account and when such account is charged off. This loss confirmation period is applied to the forecasted probable credit losses to determine the amount of losses inherent in finance receivables at the balance sheet date. Assumptions regarding credit losses and loss confirmation periods are reviewed periodically and may be impacted by actual performance of finance receivables and changes in any of the factors discussed above. Should the credit loss assumption or loss confirmation period increase, there would be an increase in the amount of allowance for loan losses required, which would decrease the net carrying value of finance receivables and increase the amount of provision for loan losses recorded on the consolidated statements of operations.

A 10% and 20% increase in cumulative charge-offs on the post-acquisition portfolio over the loss confirmation period would increase the allowance for loan losses as of December 31, 2011, as follows (in thousands):

 

     10% increase      20% increase  

Impact on allowance for loan losses

   $ 17,876       $ 35,752   

 

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We believe that the allowance for loan losses is adequate to cover probable losses inherent in our post-acquisition receivables; however, because the allowance for loan losses is based on estimates, there can be no assurance that the ultimate charge-off amount will not exceed such estimates or that our credit loss assumptions will not increase.

Net credit losses, which is the sum of the write-offs of contractual amounts on the pre-acquisition portfolio and the charge-offs on the post-acquisition portfolio, is a non-Generally Accepted Accounting Principle (“GAAP”) measure. See “Credit Quality – Credit Losses – non-GAAP measure” for a reconciliation of charge-offs to total credit losses on the combined portfolio.

Valuation of Automobile Lease Assets and Residuals

We have investments in leased vehicles recorded as operating leases. In accounting for operating leases, we must make a determination at the beginning of the lease contract of the estimated realizable value (i.e., residual value) of the vehicle at the end of the lease. Residual value represents an estimate of the market value of the vehicle at the end of the lease term, which typically ranges from two to four years. We establish residual values by using independently published residual values. The customer is obligated to make payments during the term of the lease for the difference between the purchase price and the contract residual value plus a money factor. However, since the customer is not obligated to purchase the vehicle at the end of the contract, we are exposed to a risk of loss to the extent the value of the vehicle is below the residual value estimated at contract inception. We periodically perform a detailed review of the estimated realizable value of leased vehicles to assess the appropriateness of the carrying value of lease assets.

To account for residual risk, we depreciate automobile operating lease assets to estimated realizable value on a straight-line basis over the lease term. The estimated realizable value is initially based on the residual value established at contract inception. Over the life of the lease, we evaluate the adequacy of the estimate of the realizable value and may make adjustments to the extent the expected value of the vehicle at lease termination changes. Any adjustments would result in a change in the depreciation rate of the lease asset.

In addition to estimating the residual value at lease termination, we must also evaluate the carrying value of the operating lease assets and test for impairment to the extent necessary in accordance with applicable accounting standards. Impairment is determined to exist if the undiscounted expected future cash flows (including the expected residual value) are lower than the carrying value of the asset. There have been no such impairment charges since we reentered the lease market in late 2010.

Our depreciation methodology on operating lease assets considers our expectation of the value of the vehicles upon lease termination, which is based on numerous assumptions and factors influencing used vehicle values. The critical assumptions underlying the estimated carrying value of automobile lease assets include: (a) estimated market value information obtained and used by management in estimating residual values, (b) proper identification and estimation of business conditions, (c) our remarketing abilities, and (d) vehicle and marketing programs of our parent company. Changes in these assumptions could have a significant impact on the value of the lease residuals.

Income Taxes

We are subject to income tax in the United States and Canada. We file unitary, combined or consolidated state and local tax returns with GM in certain jurisdictions. In some state, local, and federal taxing jurisdictions where filing a separate income tax return is mandated, we continue to file separately. In the ordinary course of our business, there may be transactions, calculations, structures and filing positions where the ultimate tax outcome is uncertain. At any point in time, multiple tax years are subject to audit by various taxing jurisdictions and we record liabilities for estimated tax results based on the requirements of the accounting for uncertainty in income taxes. Management believes that the estimates it uses are reasonable. However, due to expiring statutes

 

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of limitations, audits, settlements, changes in tax law or new authoritative rulings, no assurance can be given that the final outcome of these matters will be comparable to what was reflected in the historical income tax provisions and accruals. We may need to adjust our accrued tax assets or liabilities if actual results differ from estimated results or if we adjust these assumptions in the future, which could materially impact the effective tax rate, earnings, accrued tax balances and cash.

As a part of our financial reporting process, we must assess the likelihood that our deferred tax assets can be recovered. Unless recovery is more likely than not, the provision for income taxes must be increased by recording a reserve in the form of a valuation allowance for all or a portion of the deferred tax assets. In this process, certain criteria are evaluated including the existence of deferred tax liabilities that can be used to absorb deferred tax assets, taxable income in prior carryback years that can be used to absorb net operating losses, credit carrybacks, estimated taxable income in future years and the duration of the carryforward periods. We incurred a significant taxable loss for fiscal 2009. On November 6, 2009, the Worker, Homeownership, and Business Assistance Act of 2009 was signed into law which provides an election to carryback a loss to the third, fourth or fifth year that precedes the year of loss. Because of this change in tax law, we elected to extend our U.S. federal fiscal 2009 net operating loss (“NOL”) carryback period. We have fully utilized our federal NOL. In contrast to U.S. federal tax rules, there is generally no carryback potential for the majority of U.S. state tax jurisdictions and the various state carryforward periods range from 5 to 20 years. We have established a valuation allowance against a portion of our state tax net operating loss. Our judgment regarding future taxable income may change due to evolving corporate and operational strategies, market conditions, changes in U.S., state or international tax laws and other factors which may later alter our judgment of the utilization of these assets.

As a result of the Merger, our results of operations for tax purposes became a part of GM’s consolidated federal tax return as of and subsequent to October 1, 2010. However, we continue to account for income taxes on a separate return basis. Accordingly, we account for income taxes using an asset and liability method which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and net operating loss and tax credit carryforwards. Under our tax sharing arrangement with GM, payments for the tax years 2010 through 2013 are deferred for three years from their original due date. The total amount of deferral is not to exceed $650 million. Amounts owed to or from GM for income tax are accrued and recorded as an intercompany payable or receivable. As of December 31, 2011, a difference of $0.5 million between the amounts to be paid under our tax sharing arrangement with GM and our separate return basis used for financial reporting purposes was reported in our consolidated financial statements through additional paid-in capital. As of December 31, 2011, we have an intercompany payable of $300.3 million to GM.

PRESENTATION AND ANALYSIS OF RESULTS

This Management’s Discussion and Analysis should be read in conjunction with the consolidated financial statements and the and accompanying notes included elsewhere in this report. The results of operations are presented for five periods: fiscal 2011 and the three months ended December 31, 2010 (“Successor”), and the three months ended September 30, 2010 and fiscals 2010 and 2009 (“Predecessor”).

 

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RESULTS OF OPERATIONS

Year Ended December 31, 2011 – Successor

Finance Receivables

A summary of our finance receivables is as follows (in thousands):

 

     Successor  

Year Ended December 31,

   2011  

Pre-acquisition finance receivables, carrying value, beginning of period

   $ 7,299,963   

Post-acquisition finance receivables, beginning of period

     923,713   
  

 

 

 
     8,223,676   
  

 

 

 

Loans purchased

     5,084,800   

Charge-offs

     (66,080

Principal collections and other

     (3,418,088

Change in carrying value adjustment on the pre-acquisition finance receivables

     (483,048
  

 

 

 

Balance at end of period

   $ 9,341,260   
  

 

 

 

The average new loan size was $20,697 for fiscal 2011. The average annual percentage rate for finance receivables purchased during fiscal 2011 was 14.6%.

Leased Vehicles

A summary of our leased vehicles is as follows (in thousands):

 

     Successor  

Year Ended December 31,

   2011  

Balance at beginning of period

   $ 51,515   

Leased vehicles purchased

     1,000,200   

Leased vehicles returned – end of term

     (28,723

Leased vehicles returned – default

     (1,139

Manufacturer incentives

     (126,520

Foreign currency translation

     (8,377
  

 

 

 

Balance at end of period

   $ 886,956   
  

 

 

 

Average Earning Assets

Average earning assets are as follows (in thousands):

 

     Successor  

Year Ended December 31,

   2011  

Average finance receivables(a)

   $ 9,112,464   

Average leased vehicles, net

     428,136   
  

 

 

 

Average earning assets

   $ 9,540,600   
  

 

 

 

 

(a) Average finance receivables are defined as the average daily receivable balance excluding the carrying value adjustment.

 

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Net Margin

Net margin is the difference between finance charge and other income earned on our receivables and leased vehicles and the cost to fund the assets as well as the cost of debt incurred for general corporate purposes.

Our net margin as derived from the consolidated statements of operations and comprehensive operations is as follows (in thousands):

 

     Successor  

Year Ended December 31,

   2011  

Finance charge income

   $ 1,246,687   

Other income

     163,301   

Interest expense

     (204,170
  

 

 

 

Net margin

   $ 1,205,818   
  

 

 

 

Net margin as a percentage of average earning assets is as follows:

 

     Successor  

Year Ended December 31,

   2011  

Finance charge income and other income

     14.8

Interest expense

     (2.2
  

 

 

 

Net margin as a percentage of average earning assets

     12.6
  

 

 

 

Revenue

Finance charge income was $1,246.7 million for fiscal 2011. The effective yield on our finance receivables was 13.7% for fiscal 2011. The effective yield represents finance charges and fees recorded in earnings during the period as a percentage of average finance receivables. The effective yield, as a percentage of average finance receivables, is lower than the contractual rates of our auto finance contracts due to finance receivables in nonaccrual status and because the accretable yield is lower than the contractual rate.

Other income consists of the following (in thousands):

 

     Successor  

Year Ended December 31,

   2011  

Leasing income

   $ 97,676   

Investment income

     1,471   

Late fees and other income

     64,154   
  

 

 

 
   $ 163,301   
  

 

 

 

Costs and Expenses

Operating Expenses

Operating expenses were $338.5 million for fiscal 2011. Our operating expenses are predominately related to personnel costs that include base salary and wages, performance incentives and benefits as well as related employment taxes. Personnel costs represented 75.0% of total operating expenses for fiscal 2011.

Operating expenses as a percentage of average earning assets were 3.5% for fiscal 2011.

 

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Leased Vehicle Expenses

Leased vehicle expenses were $67.1 million for fiscal 2011. Our leased vehicle expenses are predominately related to depreciation of leased assets as well as the gain or loss on the disposition of the leased assets.

Provision for Loan Losses

Provisions for loan losses are charged to income to bring our allowance for loan losses to a level which management considers adequate to absorb probable credit losses inherent in the portfolio of post-acquisition finance receivables. The provision for loan losses recorded for fiscal 2011 reflects inherent losses on receivables originated during the period and changes in the amount of inherent losses on post-acquisition receivables originated in prior periods. The provision for loan losses was $178.4 million for fiscal 2011. As a percentage of average post-acquisition finance receivables, the provision for loan losses was 2.0% for fiscal 2011.

Interest Expense

Interest expense was $204.2 million for fiscal 2011. As a result of the Merger, items that were being amortized to interest expense such as the discount associated with the accounting for convertible debt instruments and fees associated with our securitization notes payable and credit facilities were eliminated as part of purchase accounting entries. Interest expense was also affected by $67.0 million in amortization relating to the purchase accounting premium. Average debt outstanding was $7.6 billion for fiscal 2011. Our effective rate of interest expense on our debt was 2.7% for fiscal 2011.

Taxes

Our effective income tax rate was 38.0% for fiscal 2011.

Other Comprehensive Loss

Other comprehensive loss consisted of the following (in thousands):

 

     Successor  

Year Ended December 31,

   2011  

Unrealized gains on cash flow hedges

   $ 2,852   

Foreign currency translation adjustment

     (10,981

Income tax expense

     (1,046
  

 

 

 
   $ (9,175
  

 

 

 

Cash Flow Hedges

Unrealized gains on cash flow hedges consisted of the following (in thousands):

 

     Successor  

Year Ended December 31,

   2011  

Unrealized losses related to changes in fair value

   $ (50

Reclassification of net unrealized losses into earnings

     2,902   
  

 

 

 
   $ 2,852   
  

 

 

 

Unrealized losses related to changes in fair value for fiscal 2011 were due to changes in the fair value of interest rate swap agreements that were designated as cash flow hedges for accounting purposes. The fair value of the interest rate swap agreements fluctuate based upon changes in forward interest rate expectations.

 

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Unrealized gains on cash flow hedges of our floating rate debt are reclassified into earnings when interest rate fluctuations on securitization notes payable or other hedged items affect earnings.

Canadian Currency Translation Adjustment

Canadian currency translation adjustment losses of $11.0 million for fiscal 2011 were included in other comprehensive income. The translation adjustment is due to the change in the value of our Canadian dollar denominated assets related to the change in the U.S. dollar to Canadian dollar exchange rates.

Three Months Ended December 31, 2010 – Successor

Finance Receivables

A summary of our finance receivables is as follows (in thousands):

 

     Successor  

Three Months Ended December 31,

   2010  

Pre-acquisition finance receivables, carrying value, beginning of period

   $ 8,230,743   

Loans purchased

     934,812   

Principal collections and other

     (763,883

Change in carrying value adjustment on the pre-acquisition finance receivables

     (177,996
  

 

 

 

Balance at end of period

   $ 8,223,676   
  

 

 

 

The average new loan size was $19,550 for the three months ended December 31, 2010. The average annual percentage rate for finance receivables purchased during the three months ended December 31, 2010 was 15.2%.

Leased Vehicles

A summary of our leased vehicles is as follows (in thousands):

 

     Successor  

Three Months Ended December 31,

   2010  

Balance at beginning of period

   $ 54,730   

Leased vehicles purchased

     11,371   

Leased vehicles returns – end of term

     (14,041

Leased vehicles returns – default

     (545
  

 

 

 

Balance at end of period

   $ 51,515   
  

 

 

 

Average Earning Assets

Average earning assets are as follows (in thousands):

 

     Successor  

Three Months Ended December 31,

   2010  

Average finance receivables(a)

   $ 8,679,506   

Average leased vehicles, net

     50,144   
  

 

 

 

Average earning assets

   $ 8,729,650   
  

 

 

 

 

(a) Average finance receivables are defined as the average daily receivable balance excluding the carrying value adjustment.

 

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Net Margin

Net margin is the difference between finance charge and other income earned on our receivables and leased vehicles and the cost to fund the assets as well as the cost of debt incurred for general corporate purposes.

Our net margin as derived from the consolidated statements of operations and comprehensive operations is as follows (in thousands):

 

     Successor  

Three Months Ended December 31,

   2010  

Finance charge income

   $ 264,347   

Other income

     16,824   

Interest expense

     (36,684
  

 

 

 

Net margin

   $ 244,487   
  

 

 

 

Net margin as an annualized percentage of average earning assets is as follows:

 

     Successor  

Three Months Ended December 31,

   2010  

Finance charge income and other income

     12.8

Interest expense

     (1.7
  

 

 

 

Net margin as an annualized percentage of average earning assets

     11.1
  

 

 

 

Revenue

Finance charge income was $264.3 million for the three months ended December 31, 2010. The effective yield on our finance receivables was 12.1% for the three months ended December 31, 2010. The effective yield, as a percentage of average finance receivables, is lower than the contractual rates of our auto finance contracts due to finance receivables in nonaccrual status and because the accretable yield is lower than the contractual rate.

Other income consists of the following (in thousands):

 

     Successor  

Three Months Ended December 31,

   2010  

Leasing income

   $ 4,418   

Investment income

     608   

Late fees and other income

     11,798   
  

 

 

 
   $ 16,824   
  

 

 

 

Costs and Expenses

Operating Expenses

Operating expenses were $70.4 million for the three months ended December 31, 2010. Our operating expenses are predominately related to personnel costs that include base salary and wages, performance incentives and benefits as well as related employment taxes. Personnel costs represented 71.7% of total operating expenses for the three months ended December 31, 2010.

Operating expenses as an annualized percentage of average earning assets were 3.2% for the three months ended December 31, 2010.

 

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Provision for Loan Losses

Provisions for loan losses are charged to income to bring our allowance for loan losses to a level which management considers adequate to absorb probable credit losses inherent in the portfolio of post-acquisition finance receivables. The provision for loan losses recorded for the three months ended December 31, 2010 reflects inherent losses on post-acquisition receivables. The provision for loan losses was $26.4 million for the three months ended December 31, 2010. As an annualized percentage of average post-acquisition finance receivables, the provision for loan losses was 1.2% for the three months ended December 31, 2010.

Interest Expense

Interest expense was $36.7 million for the three months ended December 31, 2010. As a result of the Merger, items that were being amortized to interest expense such as the discount associated with the accounting for convertible debt instruments and fees associated with our securitization notes payable and credit facilities were eliminated as part of purchase accounting entries. Interest expense was also affected by $27.1 million in amortization relating to the purchase accounting premium. Average debt outstanding was $7.3 billion for the three months ended December 31, 2010. Our effective rate of interest expense on our debt was 2.0% for the three months ended December 31, 2010.

Acquisition Expenses

Acquisition expenses for the three months ended December 31, 2010 of $16.3 million primarily represent advisory, legal and professional fees and other costs related to the Merger with GM.

Taxes

Our effective income tax rate was 42.3% for the three months ended December 31, 2010.

Other Comprehensive Income

Other comprehensive income consisted of the following (in thousands):

 

     Successor  

Three Months Ended December 31,

   2010  

Unrealized losses on cash flow hedges

   $ (412

Foreign currency translation adjustment

     1,819   

Income tax benefit

     151   
  

 

 

 
   $ 1,558   
  

 

 

 

Cash Flow Hedges

Unrealized losses on cash flow hedges consisted of the following (in thousands):

 

     Successor  

Three Months Ended December 31,

   2010  

Unrealized losses related to changes in fair value

   $ (464

Reclassification of net unrealized losses into earnings

     52   
  

 

 

 
   $ (412
  

 

 

 

Unrealized losses related to changes in fair value for the three months ended December 31, 2010 were due to changes in the fair value of interest rate swap agreements that were designated as cash flow hedges for accounting purposes. The fair value of the interest rate swap agreements fluctuate based upon changes in forward interest rate expectations.

 

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Unrealized losses on cash flow hedges of our floating rate debt are reclassified into earnings when interest rate fluctuations on securitization notes payable or other hedged items affect earnings.

Canadian Currency Translation Adjustment

Canadian currency translation adjustment gains of $1.8 million for the three months ended December 31, 2010 were included in other comprehensive income. The translation adjustment is due to the change in the value of our Canadian dollar denominated assets related to the change in the U.S. dollar to Canadian dollar exchange rates.

Three Months Ended September 30, 2010 as compared to Three Months Ended September 30, 2009 – Predecessor

Changes in Finance Receivables

A summary of changes in our finance receivables is as follows (in thousands):

 

     Predecessor  

Three Months Ended September 30,

   2010     2009  

Balance at beginning of period

   $ 8,733,518      $ 10,927,969   

Loans purchased

     959,004        229,073   

Charge-offs

     (217,520     (379,562

Principal collections and other

     (799,427     (756,447
  

 

 

   

 

 

 

Balance at end of period

   $ 8,675,575      $ 10,021,033   
  

 

 

   

 

 

 

The increase in loans purchased during the three months ended September 30, 2010, as compared to the three months ended September 30, 2009, was primarily due to our establishing higher loan origination goals as a result of improved access to the securitization markets, improving portfolio credit trends and a stabilizing economic environment. The decrease in liquidations and other resulted primarily from reduced average finance receivables.

The average new loan size increased to $19,065 for the three months ended September 30, 2010, from $16,331 for the three months ended September 30, 2009, resulting from an increase in new car loans financed under the GM subvention program initiated in September 2009. The average annual percentage rate for finance receivables purchased during the three months ended September 30, 2010, decreased to 15.8% from 19.1% during the three months ended September 30, 2009 as a result of lower costs of funds passed through in the form of lower rates as well as lower rates on loans originated under the GM subvention program.

Leased Vehicles

A summary of our leased vehicles is as follows (in thousands):

 

     Predecessor  

Three Months Ended September 30,

   2010     2009  

Balance at beginning of period

   $ 190,300      $ 239,646   

Leased vehicles returns – end of term

     (75,986     (2,466

Leased vehicles returns – default

     (850     (1,144
  

 

 

   

 

 

 

Balance at end of period

   $ 113,464      $ 236,036   
  

 

 

   

 

 

 

 

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Average Earning Assets

Average earning assets are as follows (in thousands):

 

     Predecessor  

Three Months Ended September 30,

   2010      2009  

Average finance receivables

   $ 8,718,310       $ 10,482,453   

Average leased vehicles, net

     74,704         150,103   
  

 

 

    

 

 

 

Average earning assets

   $ 8,793,014       $ 10,632,556   
  

 

 

    

 

 

 

Net Margin

Net margin is the difference between finance charge and other income earned on our receivables and the cost to fund the receivables as well as the cost of debt incurred for general corporate purposes.

Our net margin as reflected on the consolidated statements of operations and comprehensive operations is as follows (in thousands):

 

     Predecessor  

Three Months Ended September 30,

   2010     2009  

Finance charge income

   $ 342,349      $ 389,796   

Other income

     30,275        23,488   

Interest expense

     (89,364     (130,148
  

 

 

   

 

 

 

Net margin

   $ 283,260      $ 283,136   
  

 

 

   

 

 

 

Net margin as an annualized percentage of average earning assets is as follows:

 

     Predecessor  

Three Months Ended September 30,

   2010     2009  

Finance charge income and other income

     16.8     15.4

Interest expense

     (4.0     (4.8
  

 

 

   

 

 

 

Net margin as an annualized percentage of average earning assets

     12.8     10.6
  

 

 

   

 

 

 

The increase in net margin as an annualized percentage of average earning assets for the three months ended September 30, 2010, as compared to the three months ended September 30, 2009, was mainly due to higher annual percentage rates for finance receivables purchased in calendar year 2008 and 2009, reduced interest costs as a result of declining leverage and lower interest rates on securitizations completed in fiscal 2010 and the three months ended September 30, 2010.

Revenue

Finance charge income decreased by 12.2% to $342.3 million for the three months ended September 30, 2010, from $389.8 million for the three months ended September 30, 2009, primarily due to the 16.8% decrease in average finance receivables. The effective yield on our finance receivables increased to 15.6% for the three months ended September 30, 2010, from 14.7% for the three months ended September 30, 2009. The effective yield represents finance charges and fees recorded in earnings during the period as a percentage of average finance receivables.

Other income consists of the following (in thousands):

 

     Predecessor  

Three Months Ended September 30,

   2010      2009  

Leasing income

   $ 15,888       $ 11,458   

Investment income

     700         984   

Late fees and other income

     13,687         11,046   
  

 

 

    

 

 

 
   $ 30,275       $ 23,488   
  

 

 

    

 

 

 

 

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For the three months ended September 30, 2010 leasing income increased, despite a decline in outstanding leases, as a result of a gain of $8.3 million on the disposition of leased vehicles upon lease termination.

Costs and Expenses

Operating Expenses

Operating expenses were $68.9 million for the three months ended September 30, 2010 and 2009. Our operating expenses are predominately related to personnel costs that include base salary and wages, performance incentives and benefits as well as related employment taxes. Personnel costs represented 75.5% and 70.1% of total operating expenses for the three months ended September 30, 2010 and 2009, respectively.

Operating expenses as an annualized percentage of average earning assets were 3.1% for the three months ended September 30, 2010 as compared to 2.6% for the three months ended September 30, 2009. The increase in operating expenses as an annualized percentage of average earning assets primarily resulted from the impact of a decreasing portfolio on our fixed cost base and higher origination staffing to support increased origination levels.

Provision for Loan losses

Provisions for loan losses are charged to income to bring our allowance for loan losses to a level which management considers adequate to absorb probable credit losses inherent in the portfolio of finance receivables. The provision for loan losses recorded for the three months ended September 30, 2010 and 2009 reflects inherent losses on receivables originated during those quarters and changes in the amount of inherent losses on receivables originated in prior periods. The provision for loan losses decreased to $74.6 million for the three months ended September 30, 2010, from $158.0 million for the three months ended September 30, 2009, as a result of favorable credit performance of loans originated since early calendar 2008, stabilization of economic conditions and improved recovery rates on repossessed collateral. As an annualized percentage of average finance receivables, the provision for loan losses was 3.4% and 6.0% for the three months ended September 30, 2010 and 2009, respectively.

Interest Expense

Interest expense decreased to $89.4 million for the three months ended September 30, 2010, from $130.1 million for the three months ended September 30, 2009. Average debt outstanding was $7.0 billion and $9.2 billion for the three months ended September 30, 2010 and 2009, respectively. Our effective rate of interest on our debt decreased to 5.1% for the three months ended September 30, 2010, compared to 5.6% for the three months ended September 30, 2009, due to lower interest rates on securitizations completed in fiscal 2010 and the three months ended September 30, 2010.

Acquisition Expenses

Acquisition expenses for the three months ended September 30, 2010 of $42.7 million primarily represent change of control payments to our executive officers, advisory, legal and professional fees and other costs related to the Merger with GM.

Taxes

Our effective income tax rate was 43.4% and 44.3% for the three months ended September 30, 2010 and 2009, respectively. The September 30, 2010 effective tax rate was negatively impacted primarily by the nondeductibility of change of control payments to our executive officers related to the Merger with GM. The September 30, 2009 effective tax rate was negatively impacted primarily by state income tax rates and adjustments to state deferred tax assets and liabilities.

 

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Other Comprehensive Income

Other comprehensive income consisted of the following (in thousands):

 

     Predecessor  

Three Months Ended September 30,

   2010     2009  

Unrealized gains on cash flow hedges

   $ 6,255      $ 7,411   

Canadian currency translation adjustment

     2,055        6,924   

Income tax provision

     (3,027     (5,176
  

 

 

   

 

 

 
   $ 5,283      $ 9,159   
  

 

 

   

 

 

 

Cash Flow Hedges

Unrealized gains on cash flow hedges consisted of the following (in thousands):

 

     Predecessor  

Three Months Ended September 30,

   2010     2009  

Unrealized losses related to changes in fair value

   $ (8,218   $ (15,833

Reclassification of net unrealized losses into earnings

     14,473        23,244   
  

 

 

   

 

 

 
   $ 6,255      $ 7,411   
  

 

 

   

 

 

 

Unrealized losses related to changes in fair value for the three months ended September 30, 2010 and 2009, were due to changes in the fair value of interest rate swap agreements that were designated as cash flow hedges for accounting purposes. The fair value of the interest rate swap agreements fluctuate based upon changes in forward interest rate expectations.

Unrealized gains on cash flow hedges of our floating rate debt are reclassified into earnings when interest rate fluctuations on securitization notes payable or other hedged items affect earnings.

Canadian Currency Translation Adjustment

Canadian currency translation adjustment gains of $2.1 million and $6.9 million for the three months ended September 30, 2010 and 2009, respectively, were included in other comprehensive income. The translation adjustment is due to the change in the value of our Canadian dollar denominated assets related to the change in the U.S. dollar to Canadian dollar exchange rates during the three months ended September 30, 2010 and 2009.

Year Ended June 30, 2010 as compared to Year Ended June 30, 2009 – Predecessor

Changes in Finance Receivables

A summary of changes in our finance receivables is as follows (in thousands):

 

     Predecessor  

Years Ended June 30,

   2010     2009  

Balance at beginning of period

   $ 10,927,969      $ 14,981,412   

Loans purchased

     2,137,620        1,285,091   

Charge-offs

     (1,249,298     (1,659,099

Principal collections and other

     (3,082,773     (3,679,435
  

 

 

   

 

 

 

Balance at end of period

   $ 8,733,518      $ 10,927,969   
  

 

 

   

 

 

 

 

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The increase in loans purchased during fiscal 2010 as compared to fiscal 2009 was primarily due to our establishing higher loan origination goals as a result of improved access to the securitization markets. Loan production targets were constrained during fiscal 2009 in order to preserve capital and liquidity. The decrease in liquidations and other resulted primarily from reduced average finance receivables.

The average new loan size increased to $18,209 for fiscal 2010 from $17,507 for fiscal 2009. The average annual percentage rate for finance receivables purchased during fiscal 2010 was 17.0% for both fiscal 2010 and fiscal 2009.

Leased Vehicles

A summary of our leased vehicles is as follows (in thousands):

 

     Predecessor  

Three Months Ended June 30,

   2010     2009  

Balance at beginning of period

   $ 239,646      $ 248,075   

Leased vehicle returns end of term

     (45,040     (5,407

Leased vehicle returns default

     (4,306     (3,022
  

 

 

   

 

 

 

Balance at end of period

   $ 190,300      $ 239,646   
  

 

 

   

 

 

 

Average Earning Assets

Average earning assets are as follows (in thousands):

 

     Predecessor  

Three Months Ended June 30,

   2010      2009  

Average finance receivables

   $ 9,495,125       $ 13,001,773   

Average leased vehicles, net

     125,532         183,622   
  

 

 

    

 

 

 

Average earning assets

   $ 9,620,657       $ 13,185,395   
  

 

 

    

 

 

 

Net Margin

Net margin is the difference between finance charge and other income earned on our receivables and the cost to fund the receivables as well as the cost of debt incurred for general corporate purposes.

Our net margin as derived from the consolidated statements of operations and comprehensive operations is as follows (in thousands):

 

     Predecessor  

Years Ended June 30,

   2010     2009  

Finance charge income

   $ 1,431,319      $ 1,902,684   

Other income

     91,215        116,488   

Interest expense

     (457,222     (726,560
  

 

 

   

 

 

 

Net margin

   $ 1,065,312      $ 1,292,612   
  

 

 

   

 

 

 

Net margin as a percentage of average earning assets is as follows:

 

     Predecessor  

Years Ended June 30,

   2010     2009  

Finance charge income and other income

     15.8     15.3

Interest expense

     (4.7     (5.5
  

 

 

   

 

 

 

Net margin as a percentage of average earning assets

     11.1     9.8
  

 

 

   

 

 

 

 

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The increase in net margin as a percentage of average earning assets for fiscal 2010, as compared to fiscal 2009, was mainly due to higher annual percentage rates for finance receivables purchased since mid calendar year 2008, reduced interest costs as a result of declining leverage and lower interest rates on securitizations completed in fiscal 2010. Interest expense in fiscal 2009 was also adversely impacted by warrant costs and commitment fees associated with a forward purchase agreement that terminated in fiscal 2009.

Revenue

Finance charge income decreased by 24.8% to $1,431.3 million for fiscal 2010 from $1,902.7 million for fiscal 2009, primarily due to the decrease in average finance receivables. The effective yield on our finance receivables increased to 15.1% for fiscal 2010 from 14.6% for fiscal 2009. The effective yield represents finance charges and fees recorded in earnings during the period as a percentage of average finance receivables and is lower than the contractual rates of our auto finance contracts due to finance receivables in nonaccrual status.

Other income consists of the following (in thousands):

 

     Predecessor  

Years Ended June 30,

   2010      2009  

Leasing income

   $ 44,316       $ 47,073   

Investment income

     2,989         16,295   

Late fees and other income

     43,910         53,120   
  

 

 

    

 

 

 
   $ 91,215       $ 116,488   
  

 

 

    

 

 

 

Investment income decreased as a result of lower invested cash balances combined with lower market interest rates. Late fees and other income decreased as a result of the reduction in average finance receivables.

During fiscal 2010, we repurchased on the open market $21.0 million of senior notes due in 2015 at an average price of 97.3% of the principal amount of the notes repurchased, which resulted in a gain on retirement of debt of $0.3 million. Gain on retirement of debt for fiscal 2009 was $48.2 million. In fiscal 2009, we repurchased on the open market $60.0 million par value of our convertible senior notes due in 2013 at an average price of 44.1% of the principal amount, $200.0 million par value of our convertible senior notes due in 2023 at an average price of 99.5% of the principal amount, and $28.0 million par value of our convertible senior notes due in 2011 at an average price of 44.2% of the principal amount. In connection with these repurchases, we recorded a gain on retirement of debt of $33.5 million. We also issued 15,122,670 shares of our common stock to Fairholme Funds Inc. (“Fairholme”), in a non-cash transaction, in exchange for $108.4 million of our senior notes due 2015, held by Fairholme, at a price of $840 per $1,000 principal amount of the notes. We recognized a gain of $14.7 million, net of transaction costs, on retirement of debt in the exchange. Fairholme and its affiliates held approximately 19.8% of our outstanding common stock prior to the issuance of the shares described above.

Costs and Expenses

Operating Expenses

Operating expenses decreased to $288.8 million for fiscal 2010 from $308.8 million for fiscal 2009. Our operating expenses are predominately related to personnel costs that include base salary and wages, performance incentives and benefits as well as related employment taxes. Personnel costs represented 74.2% and 72.8% of total operating expenses for fiscal 2010 and 2009, respectively.

 

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Operating expenses as a percentage of average earning assets increased to 3.0% for fiscal 2010, as compared to 2.3% for fiscal 2009. The increase in operating expenses as a percentage of average finance receivables primarily resulted from the impact of a decreasing portfolio on our fixed cost base and higher loan origination staffing to support increased origination levels.

Provision for Loan Losses

Provisions for loan losses are charged to income to bring our allowance for loan losses to a level which management considers adequate to absorb probable credit losses inherent in the portfolio of finance receivables. The provision for loan losses recorded for fiscal 2010 and 2009 reflects inherent losses on receivables originated during those periods and changes in the amount of inherent losses on receivables originated in prior periods. The provision for loan losses decreased to $388.1 million for fiscal 2010 from $972.4 million for fiscal 2009 as a result of favorable credit performance of loans originated since early calendar year 2008, stabilization of economic conditions and improved recovery values on repossessed collateral. As a percentage of average finance receivables, the provision for loan losses was 4.1% and 7.5% for fiscal 2010 and 2009, respectively.

Interest Expense

Interest expense decreased to $457.2 million for fiscal 2010 from $726.6 million for fiscal 2009. Average debt outstanding was $8.0 billion and $11.8 billion for fiscal 2010 and 2009, respectively. Our effective rate of interest paid on our debt decreased to 5.7% for fiscal 2010 compared to 6.2% for fiscal 2009, due to lower interest on securitizations completed in fiscal 2010. Interest expense in fiscal 2009 was also adversely impacted by warrant costs and commitment fees associated with a forward purchase agreement that terminated in fiscal 2009.

Taxes

Our effective income tax rate was 37.6% for fiscal 2010. The fiscal 2009 effective tax rate was not meaningful due to the low absolute level of the loss before income taxes.

Other Comprehensive Income (Loss)

Other comprehensive income (loss) consisted of the following (in thousands):

 

     Predecessor  

Years Ended June 30,

   2010     2009  

Unrealized gains (losses) on cash flow hedges

   $ 43,306      $ (26,871

Foreign currency translation adjustment

     8,230        750   

Income tax (provision) benefit

     (18,567     11,426   
  

 

 

   

 

 

 
   $ 32,969      $ (14,695
  

 

 

   

 

 

 

Cash Flow Hedges

Unrealized gains (losses) on cash flow hedges consisted of the following (in thousands):

 

     Predecessor  

Years Ended June 30,

   2010     2009  

Unrealized losses related to changes in fair value

   $ (36,761   $ (109,115

Reclassification of net unrealized losses into earnings

     80,067        82,244   
  

 

 

   

 

 

 
   $ 43,306      $ (26,871
  

 

 

   

 

 

 

Unrealized losses related to changes in fair value for fiscal 2010 and 2009, were due to changes in the fair value of interest rate swap agreements that were designated as cash flow hedges for accounting purposes. The fair value of the interest rate swap agreements changed in fiscal 2010 and 2009 because of significant declines in forward interest rates.

 

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Unrealized gains (losses) on cash flow hedges of our floating rate debt are reclassified into earnings when interest rate fluctuations on securitization notes payable or other hedged items affect earnings.

Canadian Currency Translation Adjustment

Canadian currency translation adjustment gains of $8.2 million and $0.7 million for fiscal 2010 and 2009, respectively, were included in other comprehensive loss. The translation adjustment is due to the change in the value of our Canadian dollar denominated assets related to the change in the U.S. dollar to Canadian dollar exchange rates.

CREDIT QUALITY

We provide financing in relatively high-risk markets, and, therefore, anticipate a corresponding high level of delinquencies and credit losses.

The following table presents certain data related to the receivables portfolio (dollars in thousands):

 

     Successor  
     December 31,
2011
    December 31,
2010
 

Pre-acquisition finance receivables – outstanding balance

   $ 4,366,075      $ 7,724,188   

Pre-acquisition carrying value adjustment

     (338,714     (424,225
  

 

 

   

 

 

 

Pre-acquisition finance receivables – carrying value

     4,027,361        7,299,963   

Post-acquisition finance receivables, net of fees

     5,313,899        923,713   

Allowance for loan losses

     (178,768     (26,352
  

 

 

   

 

 

 

Total finance receivables, net

   $ 9,162,492      $ 8,197,324   
  

 

 

   

 

 

 

Number of outstanding contracts

     727,684        757,148   
  

 

 

   

 

 

 

Average carrying amount of outstanding contract (in dollars)(a)

   $ 13,302      $ 11,422   
  

 

 

   

 

 

 

Allowance for loan losses as a percentage of post-acquisition receivables

     3.4     2.9
  

 

 

   

 

 

 

 

(a) Average carrying amount of outstanding contract consists of pre-acquisition finance receivables – outstanding balance and post-acquisition finance receivables, net of fees divided by number of outstanding contracts.

Delinquency

The following is a summary of finance receivables (based upon contractual amount due, which is not materially different than recorded investment) that are (a) more than 30 days delinquent, but not yet in repossession, and (b) in repossession, but not yet charged off (dollars in thousands):

 

     Successor  
     December 31, 2011     December 31, 2010  
     Amount      Percent of
Contractual
Amount Due
    Amount      Percent of
Contractual
Amount Due
 

Delinquent contracts:

          

31 to 60 days

   $ 517,083         5.3   $ 535,263         6.2

Greater-than-60 days

     181,691         1.9        211,588         2.4   
  

 

 

    

 

 

   

 

 

    

 

 

 
     698,774         7.2     746,851         8.6

In repossession

     26,824         0.3     28,076         0.3
  

 

 

    

 

 

   

 

 

    

 

 

 
   $ 725,598         7.5   $ 774,927         8.9
  

 

 

    

 

 

   

 

 

    

 

 

 

 

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An account is considered delinquent if a substantial portion of a scheduled payment has not been received by the date such payment was contractually due. Delinquencies may vary from period to period based upon the average age or seasoning of the portfolio, seasonality within the calendar year and economic factors. Due to our target customer base, a relatively high percentage of accounts become delinquent at some point in the life of a loan and there is a high rate of account movement between current and delinquent status in the portfolio.

Delinquencies in finance receivables have generally trended downward since fiscal 2009 as a result of the favorable credit performance of loans originated since early calendar year 2008 and stabilization of economic conditions.

Deferrals

In accordance with our policies and guidelines, we, at times, offer payment deferrals to consumers, whereby the consumer is allowed to move up to two delinquent payments to the end of the loan generally by paying a fee (approximately the interest portion of the payment deferred, except where state law provides for a lesser amount). Our policies and guidelines limit the number and frequency of deferments that may be granted. Additionally, we generally limit the granting of deferments on new accounts until a requisite number of payments have been received. Due to the nature of our customer base and policies and guidelines of the deferral program, which policies and guidelines have not changed materially in several years, approximately 50% to 60% of accounts historically comprising the portfolio receive a deferral at some point in the life of the account.

An account for which all delinquent payments are cleared through a deferment transaction, which may include installment payments, is classified as current at the time the deferment is granted and therefore is not included as a delinquent account. Thereafter, such account is aged based on the timely payment of future installments in the same manner as any other account.

Contracts receiving a payment deferral (based on contractual amount due) as an average quarterly percentage of average receivables outstanding were 5.3%, 6.2%, 6.1%, 7.3%, and 7.8% for fiscal 2011, the three months ended December 31, 2010, the three months ended September 30, 2010, and for fiscal 2010 and 2009, respectively. Deferment levels have generally trended down since fiscal 2009 as a result of the stabilization of economic conditions.

The following is a summary of total deferrals as a percentage of total finance receivables, net (both pre-acquisition and post-acquisition) outstanding:

 

     Successor  
     December 31,
2011
    December 31,
2010
 

Never deferred

     78.1     71.9

Deferred:

    

1-2 times

     15.3        18.5   

3-4 times

     6.5        9.5   

Greater than 4 times

     0.1        0.1   
  

 

 

   

 

 

 

Total deferred

     21.9        28.1   
  

 

 

   

 

 

 

Total

     100.0     100.0
  

 

 

   

 

 

 

We evaluate the results of our deferment strategies based upon the amount of cash installments that are collected on accounts after they have been deferred versus the extent to which the collateral underlying the deferred accounts has depreciated over the same period of time. Based on this evaluation, we believe that payment deferrals granted according to our policies and guidelines are an effective portfolio management technique and result in higher ultimate cash collections from the portfolio.

 

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Changes in deferment levels do not have a direct impact on the ultimate amount of finance receivables charged off by us. However, the timing of a charge-off may be affected if the previously deferred account ultimately results in a charge-off. To the extent that deferrals impact the ultimate timing of when an account is charged off, historical charge-off ratios and loss confirmation periods used in the determination of the adequacy of our allowance for loan losses are also impacted. Increased use of deferrals may result in a lengthening of the loss confirmation period, which would increase expectations of credit losses inherent in the loan portfolio and therefore increase the allowance for loan losses and related provision for loan losses. Changes in these ratios and periods are considered in determining the appropriate level of allowance for loan losses and related provision for loan losses.

In April 2011, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) , A Creditor’s Determination of Whether a Restructuring Is a Troubled Debt Restructuring, (“2011-02”), which became effective for us during the period ended September 30, 2011. 2011-02 provides evaluation criteria for whether a restructuring constitutes a troubled debt restructuring. 2011-02 is intended to assist creditors in determining whether a modification of the terms of a loan meets the criteria to be considered a troubled debt restructuring, both for purposes of recording an impairment loss and for disclosure of troubled debt restructurings. In evaluating whether a restructuring constitutes a troubled debt restructuring, a creditor must separately conclude that both of the following exist: (a) the restructuring constitutes a concession; and (b) the debtor is experiencing financial difficulties. We have concluded a loan that is deferred two or more times would be considered significantly delayed and therefore meet the definition of a concession. We have concluded a loan currently in payment default as the result of being delinquent would also represent a debtor experiencing financial difficulties. Therefore, considering these two factors, multiple deferments would be considered troubled debt restructurings and the loan impaired under the guidance of 2011-02. Accounts in Chapter 13 bankruptcy could also be considered troubled debt restructurings. As a result of adopting 2011-02, we assessed deferments granted on or after October 1, 2010, or accounts in the post-acquisition portfolio to identify any that qualified as troubled debt restructurings. The pre-acquisition portfolio is excluded from the provisions of 2011-02 since expected future credit losses were recognized in the purchase accounting for that portfolio. At December 31, 2011, the number of accounts in the post-acquisition portfolio that would be considered troubled debt restructurings is insignificant.

Credit Losses – non-GAAP measure

We analyze portfolio performance of both the pre-acquisition and post-acquisition portfolios on a combined basis. This information allows us and investors the ability to analyze credit loss trends in the combined portfolio. Additionally, credit losses, on a combined basis, facilitates comparisons of current and historical results.

The following is a reconciliation of charge-offs on the post-acquisition portfolio to credit losses on the combined portfolio (in thousands):

 

     Successor     

 

   Predecessor  
     Year Ended
December 31,
2011
     Period From
October 1, 2010
Through
December 31,
2010
    

 

   Period From
July 1, 2010
Through
September 30,
2010
     Years Ended June 30,  
                 2010      2009  

Charge-offs

   $ 66,080               $ 217,520       $ 1,249,298       $ 1,659,099   

Adjustments to reflect write-offs of the contractual amounts on the pre-acquisition portfolio

     568,558       $ 221,046                 
  

 

 

    

 

 

    

 

  

 

 

    

 

 

    

 

 

 

Total credit losses on the combined portfolio(a)

   $ 634,638       $ 221,046            $ 217,520       $ 1,249,298       $ 1,659,099   
  

 

 

    

 

 

    

 

  

 

 

    

 

 

    

 

 

 

 

(a) Total credit losses is comprised of the sum of repossession credit losses and mandatory credit losses.

 

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The following table presents credit loss data (which includes charge-offs on the post-acquisition portfolio and write-offs of contractual amounts on the pre-acquisition portfolio) with respect to our finance receivables portfolio (dollars in thousands):

 

     Successor    

 

   Predecessor  
     Year Ended
December 31,
2011
    Period From
October 1, 2010
Through
December 31,
2010
   

 

   Period From
July 1, 2010
Through
September 30,
2010
    Years Ended June 30,  
        

 

     2010     2009  

Finance receivables:

               

Repossession credit losses

   $ 638,462      $ 219,665           $ 211,426      $ 1,232,318      $ 1,573,006   

Less: Recoveries

     (345,605     (100,904          (98,081     (543,910     (626,245

Mandatory credit losses(a)

     (3,824     1,381             6,094        16,980        86,093   
  

 

 

   

 

 

   

 

  

 

 

   

 

 

   

 

 

 

Net credit losses

   $ 289,033      $ 120,142           $ 119,439      $ 705,388      $ 1,032,854   
  

 

 

   

 

 

   

 

  

 

 

   

 

 

   

 

 

 

Net annualized credit losses as a percentage of average finance receivables(b):

     3.2     5.5          5.4     7.4     7.9
  

 

 

   

 

 

   

 

  

 

 

   

 

 

   

 

 

 

Recoveries as a percentage of gross repossession credit losses:

     54.1     45.9          46.4     44.1     39.8
  

 

 

   

 

 

   

 

  

 

 

   

 

 

   

 

 

 

 

(a) Mandatory credit losses represent accounts 120 days delinquent that are charged off in full with no recovery amounts realized at time of charge-off net of any subsequent recoveries and the net write-down of finance receivables in repossession to the net realizable value of the repossessed vehicle when the repossessed vehicle is legally available for sale.
(b) Average finance receivables are defined as the average daily receivable balance excluding the carrying value adjustment.

While the accounting related to charge-offs has been impacted by the application of purchase accounting, the dollar amount and percentage of net credit losses is comparable between the pre-acquisition and the post-acquisition portfolios. Net credit losses as a percentage of average finance receivables outstanding may vary from period to period based upon the average age or seasoning of the portfolio and economic conditions. Net credit losses have generally trended down since fiscal 2009 as a result of the favorable credit performance of loans originated since early calendar year 2008, stabilization of economic conditions and improved recovery rates on repossessed collateral.

Leased Vehicles

We primarily provide funding for leased vehicles to prime quality customers, and, therefore, anticipate a corresponding low level of delinquencies and charge-offs. At December 31, 2011, 99.6% of our leases were current with respect to payment status.

LIQUIDITY AND CAPITAL RESOURCES

General

Our primary sources of cash have been finance charge and other income, servicing fees, distributions from Trusts, borrowings under credit facilities, transfers of finance receivables to Trusts in securitization transactions, collections and recoveries on finance receivables and issuance of senior notes and other debt securities. Our primary uses of cash have been purchases of finance receivables and leased vehicles, repayment of credit facilities and securitization notes payable, funding credit enhancement requirements for securitization transactions and credit facilities and operating expenses.

 

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We used cash of $5,020.6 million, $947.3 million, $940.8 million, $2,090.6 million and $1,280.3 million for the purchase of finance receivables for fiscal 2011, the three months ended December 31, 2010, the three months ended September 30, 2010, and for fiscal 2010 and 2009, respectively. We used cash of $857.1 million and $10.7 million for the purchase of leased vehicles during fiscal 2011 and the three months ended December 31, 2010. Generally, these purchases were funded initially utilizing cash and borrowings on our credit facilities and our strategy is to subsequently obtain long-term financing for finance receivables and leased vehicles through securitization transactions.

Liquidity

Our available liquidity consists of the following (in thousands):

 

     Successor  
     December 31,
2011
     December 31,
2010
 

Cash and cash equivalents

   $ 572,297       $ 194,554   

Borrowing capacity on unpledged eligible assets

     681,161         272,257   

Borrowing capacity on GM revolving credit facility

     300,000         300,000   
  

 

 

    

 

 

 

Total

   $ 1,553,458       $ 766,811   
  

 

 

    

 

 

 

The increase in liquidity at December 31, 2011 is primarily a result of the proceeds from the issuance of $500 million of senior notes in June 2011. Our current level of liquidity is considered sufficient to meet our obligations.

Credit Facilities

In the normal course of business, in addition to using our available cash, we pledge receivables to and borrow under our credit facilities to fund our operations and repay these borrowings as appropriate under our cash management strategy.

As of December 31, 2011, our credit facilities consist of the following (in thousands):

 

Facility Type

   Facility
Amount
     Advances
Outstanding
 

Syndicated warehouse facility(a)

   $ 2,000,000       $ 621,257   

Lease warehouse facility – U.S.(b)

     600,000      

Lease warehouse facility – Canada(c)

     589,246         181,314   

GM revolving credit facility(d)

     300,000      

Medium term note facility(e)

        293,528   

Wachovia funding facility(f)

        3,292   
     

 

 

 
      $ 1,099,391   
     

 

 

 

 

(a) In May 2012 when the revolving period ends, and if the facility is not renewed, the outstanding balance will be repaid over time based on the amortization of the receivables pledged until May 2013 when the remaining balance will be due and payable.
(b) In January 2012, the facility was renewed for an additional one year term. In January 2013 when the revolving period ends, and if the facility is not renewed, the outstanding balance will be repaid over time based on the amortization of the leasing related assets pledged until July 2018 when any remaining amount outstanding will be due and payable.
(c)

In July 2012 when the revolving period ends, and if the facility is not renewed, the outstanding balance will be repaid over time based on the amortization of the leasing related assets pledged until January 2018 when

 

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  any remaining amount outstanding will be due and payable. This facility amount represents C$600.0 million and the advances outstanding amount represents C$184.6 million at December 31, 2011.
(d) In September 2011, we renewed the unsecured revolving credit facility with GM Holdings, with a maturity date of September 2012.
(e) The revolving period under this facility ended in October 2009, and the outstanding debt balance will be repaid over time based on the amortization of the receivables pledged until October 2016 when any remaining amount outstanding will be due and payable.
(f) Advances under the Wachovia funding facility are currently secured by $3.4 million of asset-backed securities issued in the AmeriCredit Automobile Receivables Trust (“AMCAR”) 2008-1 securitization transaction. Subsequent to December 31, 2011, this facility was paid off.

The following table presents the average amount outstanding, the weighted average interest rate and maximum amount outstanding on the syndicated warehouse and lease warehouse facilities during fiscal 2011 (dollars in thousands):

 

Facility Type

   Weighted
Average
Interest
Rate
    Average
Amount
Outstanding
     Maximum
Amount
Outstanding
 

Syndicated warehouse facility

     1.56   $ 296,576       $ 826,859   

Lease warehouse facility – U.S.

     1.60     24,027         182,749   

Lease warehouse facility – Canada(a)

     2.69     40,849         181,314   

 

(a) Average amount outstanding and maximum amount outstanding represents C$41.6 million and C$184.6 million, respectively.

We are required to hold certain funds in restricted cash accounts to provide additional collateral for borrowings under certain of our facilities. Additionally, our credit facilities, other than the GM revolving credit facility, generally contain various covenants requiring minimum financial ratios, asset quality and portfolio performance ratios (portfolio net loss and delinquency ratios, and pool level cumulative net loss ratios) as well as limits on deferment levels. Failure to meet any of these covenants could result in an event of default under these agreements. If an event of default occurs under these agreements, the lenders could elect to declare all amounts outstanding under these agreements to be immediately due and payable, enforce their interests against collateral pledged under these agreements or, with respect to the syndicated warehouse facility, restrict our ability to obtain additional borrowings. As of December 31, 2011, we were in compliance with all covenants in our credit facilities.

Senior Notes

In June 2011, we issued $500 million of 6.75% senior notes which are due in June 2018 with interest payable semiannually. On July 1, 2011, proceeds of $71 million from this offering were used to redeem all of our outstanding 8.50% senior notes due in 2015. The 6.75% senior notes are guaranteed solely by AmeriCredit Financial Services, Inc., our principal operating subsidiary and none of our other subsidiaries are guarantors of the notes. See Note 25 – “Guarantor Consolidating Financial Statements” to the consolidated financial statements for further discussion.

 

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Contractual Obligations

The following table summarizes the expected scheduled principal and interest payments, where applicable, under our contractual obligations (in thousands):

 

Years Ending December 31,

   2012      2013      2014      2015      2016      Thereafter      Total  

Operating leases

   $ 14,612       $ 14,773       $ 14,318       $ 12,511       $ 11,351       $ 20,831       $ 88,396   

Syndicated warehouse facility

     621,257                        621,257   

Medium term note facility

     293,311                        293,311   

Wachovia funding facility

     3,292                        3,292   

Lease warehouse facility – Canada(a)

     181,314                        181,314   

Securitization notes payable

     3,163,788         1,480,781         1,022,762         720,184         422,093         86,117         6,895,725   

Senior notes

                    500,000         500,000   

Convertible senior notes

        500                     500   

Total expected interest payments(b)

     193,114         134,510         101,214         71,056         45,827         48,958         594,679   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 4,470,688       $ 1,630,564       $ 1,138,294       $ 803,751       $ 479,271       $ 655,906       $ 9,178,474   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(a) Amount represents C$184.6 million.
(b) Interest expense is calculated based on London Interbank Offered Rates (“LIBOR”) or Canadian Dollar Offered Rate (“CDOR”) plus the respective credit spreads and specified fees associated with the medium term note facility, the coupon rate for the senior notes and convertible senior notes and a fixed rate of interest for our securitization notes payable. Interest expense on the floating rate tranches of the securitization notes payable is converted to a fixed rate based on the floating rate plus any expected hedge payments.

We adopted the provisions of accounting for uncertain tax positions on July 1, 2007. As of December 31, 2011, we had liabilities associated with uncertain tax positions of $79.4 million. The table above does not include these liabilities due to the high degree of uncertainty regarding the future cash flows associated with these amounts.

Securitizations

We have completed 78 securitization transactions through December 31, 2011, excluding Trusts entered into by Bay View Acceptance Corporation (“BVAC”) and Long Beach Acceptance Corporation (“LBAC”) prior to their acquisition by us. The proceeds from the transactions were primarily used to repay borrowings outstanding under our credit facilities.

 

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A summary of the active transactions is as follows (in millions):

 

Transaction

   Date      Original
Amount
     Note Balance at
December 31,
2011
 

2006-R-M

     May 2006       $ 1,200.0       $ 63.3   

2007-A-X

     January 2007         1,200.0         93.7   

2007-B-F

     April 2007         1,500.0         143.9   

2007-1 (APART)

     May 2007         1,000.0         87.1   

2007-C-M

     July 2007         1,500.0         188.4   

2007-D-F

     September 2007         1,000.0         142.2   

2007-2-M (APART)

     October 2007         1,000.0         138.4   

2008-A-F

     May 2008         750.0         145.8   

2008-1(a)

     October 2008         500.0         8.3   

2008-2

     November 2008         500.0         17.1   

2009-1

     July 2009         725.0         223.3   

2009-1 (APART)

     October 2009         227.5         74.2   

2010-1

     February 2010         600.0         266.0   

2010-A

     March 2010         200.0         99.6   

2010-2

     May 2010         600.0         302.5   

2010-B

     August 2010         200.0         118.2   

2010-3

     September 2010         850.0         546.0   

2010-4

     November 2010         700.0         424.2   

2011-1

     January 2011         800.0         579.5   

2011-2

     April 2011         950.0         705.9   

2011-3

     June 2011         1,000.0         814.2   

2011-4

     September 2011         900.0         838.2   

2011-5

     November 2011         900.0         875.4   
     

 

 

    

 

 

 

Total active securitizations

      $ 18,802.5       $ 6,895.4   
     

 

 

    

Purchase accounting premium

           42.4   
        

 

 

 
         $ 6,937.8   
        

 

 

 

 

(a) Note balance does not include $3.4 million of asset-backed securities pledged to the Wachovia funding facility. Subsequent to December 31, 2011, this facility was paid off.

Our securitizations utilize special purpose entities which are also VIE’s that meet the requirements to be consolidated in our financial statements. Accordingly, following a securitization, the finance receivables and the related securitization notes payable remain on the consolidated balance sheets. Finance receivables are transferred to a Trust, which is one of our special purpose finance subsidiaries, and the Trusts issue one or more series of asset-backed securities (securitization notes payable). While these Trusts are included in our consolidated financial statements, these Trusts are separate legal entities; thus the finance receivables and other assets held by these Trusts are legally owned by these Trusts, are available to satisfy the related securitization notes payable and are not available to our creditors or our other subsidiaries.

At the time of securitization of finance receivables, we are required to pledge assets equal to a specified percentage of the securitization pool to provide credit enhancement required for specific credit ratings for the asset-backed securities issued by the Trusts. Typically, the assets pledged consist of cash deposited to a restricted account and additional receivables delivered to the Trust, which create overcollateralization. The securitization transactions require the percentage of assets pledged to support the transaction to increase until a specified level is attained. Excess cash flows generated by the Trusts are added to the restricted cash account or used to pay down outstanding debt in the Trusts, creating overcollateralization until the targeted percentage level of assets

 

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has been reached. Once the targeted percentage level of assets is reached and maintained, excess cash flows generated by the Trusts are released to us as distributions from Trusts. Additionally, as the balance of the securitization pool declines, the amount of pledged assets needed to maintain the required percentage level is reduced. Assets in excess of the required percentage are also released to us as distributions from Trusts.

Since the second half of 2008, we have primarily utilized senior subordinated securitization structures which involve the public and private sale of subordinated asset-backed securities to provide credit enhancement for the senior, or highest rated, asset-backed securities. In January 2012, we closed a $1.0 billion public senior subordinated securitization transaction, AMCAR 2012-1, that has initial cash deposit and overcollateralization requirements of 7.75% in order to provide credit enhancement for the asset-backed securities sold, including the double-B rated securities which were the lowest rated securities sold. The level of credit enhancement in future senior subordinated securitizations will depend, in part, on the net interest margin, collateral characteristics, and credit performance trends of the receivables transferred, as well as our financial condition, the economic environment and our ability to sell subordinated bonds at rates we consider acceptable.

The second type of securitization structure that we last utilized in August 2010, involves the purchase of a financial guaranty insurance policy issued by an insurer. The financial guaranty insurance policies insure the timely payment of interest and the ultimate payment of principal due on the asset-backed securities. We have limited reimbursement obligations to the insurers; however, credit enhancement requirements, including the insurers’ encumbrance of certain restricted cash accounts and subordinated interests in Trusts, provide a source of funds to cover shortfalls in collections and to reimburse the insurers for any claims which may be made under the policies issued with respect to our securitizations. Since our securitization program’s inception, there have been no claims under any insurance policies. We do not anticipate utilizing this structure for the foreseeable future.

Cash flows related to securitization transactions were as follows (in millions):

 

     Successor            Predecessor  
     Year Ended
December 31,
2011
     Period From
October 1, 2010
Through
December 31,
2010
           Period From
July 1, 2010
Through
September 30,
2010
     Years Ended June 30,  
                    2010      2009  

Initial credit enhancement deposits:

                   

Restricted cash

   $ 96.6       $ 14.9            $ 23.3       $ 53.9       $ 25.8   

Overcollateralization

     277.6         42.7              114.3         490.8         289.1   

Net distributions from Trusts

     852.4         216.0              110.9         424.2         429.5   

The agreements with the insurers of our securitization transactions covered by a financial guaranty insurance policy provide that if portfolio performance ratios (delinquency, cumulative default or cumulative net loss) in a Trust’s pool of receivables exceed certain targets, the specified credit enhancement levels would be increased.

The agreements that we have entered into with our financial guaranty insurance providers in connection with securitization transactions insured by them contain additional specified targeted portfolio performance ratios (delinquency, cumulative default and cumulative net loss) that are higher than the limits referred to above. If, at any measurement date, the targeted portfolio performance ratios with respect to any insured Trust were to exceed these additional levels, provisions of the agreements permit the financial guaranty insurance providers to declare the occurrence of an event of default and take steps to terminate our servicing rights to the receivables sold to that Trust. In addition, the servicing agreements on certain insured Trusts are cross-defaulted so that a default declared under one servicing agreement would allow the financial guaranty insurance provider to terminate our servicing rights under all servicing agreements for Trusts in which they issued a financial guaranty insurance policy. Additionally, if these higher targeted portfolio performance levels were exceeded and the financial

 

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guaranty insurance providers elect to declare an event of default, the insurance providers may retain all excess cash generated by other securitization transactions insured by them as additional credit enhancement. This, in turn, could result in defaults under our other securitizations and other material indebtedness, including under our senior note and convertible note indentures. As of December 31, 2011, no such servicing right termination events have occurred with respect to any of the Trusts formed by us.

 

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Fluctuations in market interest rates impact our credit facilities and securitization transactions. Our gross interest rate spread, which is the difference between interest and other income earned on our finance contracts and interest paid, is affected by changes in interest rates as a result of our dependence upon the issuance of variable rate securities and the incurrence of variable rate debt to fund our purchases of contracts.

Credit Facilities

Finance contracts purchased by us and pledged to secure borrowings under our credit facilities bear fixed interest rates. Amounts borrowed under our credit facilities bear interest at variable rates that are subject to frequent adjustments to reflect prevailing market interest rates. To protect the interest rate spread within each credit facility, our special purpose finance subsidiaries are contractually required to purchase interest rate cap agreements in connection with borrowings under our credit facilities. The purchaser of the interest rate cap agreement pays a premium in return for the right to receive the difference in the interest cost at any time a specified index of market interest rates rises above the stipulated “cap” or “strike” rate. The purchaser of the interest rate cap agreement bears no obligation or liability if interest rates fall below the “cap” or “strike” rate. As part of our interest rate risk management strategy and when economically feasible, we may simultaneously sell a corresponding interest rate cap agreement in order to offset the premium paid by our special purpose finance subsidiary to purchase the interest rate cap agreement and thus retain the interest rate risk. The fair value of the interest rate cap agreement purchased by the special purpose finance subsidiary is included in other assets and the fair value of the interest rate cap agreement sold by us is included in other liabilities on our consolidated balance sheets.

Securitizations

The interest rate demanded by investors in our securitization transactions depends on prevailing market interest rates for comparable transactions and the general interest rate environment. We utilize several strategies to minimize the impact of interest rate fluctuations on our gross interest rate margin, including the use of derivative financial instruments and the regular sale or pledging of finance contracts to Trusts.

In our securitization transactions, we transfer fixed rate finance receivables to Trusts that, in turn, sell either fixed rate or floating rate securities to investors. The fixed rates on securities issued by the Trusts are indexed to market interest rate swap spreads for transactions of similar duration or various LIBOR and do not fluctuate during the term of the securitization. The floating rates on securities issued by the Trusts are indexed to LIBOR and fluctuate periodically based on movements in LIBOR. Derivative financial instruments, such as interest rate swap and cap agreements, are used to manage the gross interest rate spread on these transactions. We use interest rate swap agreements to convert the variable rate exposures on securities issued by our Trusts to a fixed rate (“pay rate”) and receive a floating or variable rate (“receive rate”), thereby locking in the gross interest rate spread to be earned by us over the life of a securitization. Interest rate swap agreements purchased by us do not impact the amount of cash flows to be received by holders of the asset-backed securities issued by the Trusts. The interest rate swap agreements serve to offset the impact of increased or decreased interest paid by the Trusts on floating rate asset-backed securities on the cash flows to be received by us from the Trusts. We utilize such arrangements to modify our net interest sensitivity to levels deemed appropriate based on our risk tolerance. In circumstances where the interest rate risk is deemed to be tolerable, usually if the risk is less than one year in term at inception, we may choose not to hedge potential fluctuations in cash flows due to changes in interest rates. Our special purpose finance subsidiaries are contractually required to purchase a derivative financial instrument to protect the net spread in connection with the issuance of floating rate securities even if we choose

 

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not to hedge our future cash flows. Although the interest rate cap agreements are purchased by the Trusts, cash outflows from the Trusts ultimately impact our retained interests in the securitization transactions as cash expended by the Trusts will decrease the ultimate amount of cash to be received by us. Therefore, when economically feasible, we may simultaneously sell a corresponding interest rate cap agreement to offset the premium paid by the Trust to purchase the interest rate cap agreement. The fair value of the interest rate cap agreements purchased by the special purpose finance subsidiaries in connection with securitization transactions are included in other assets and the fair value of the interest rate cap agreements sold by us are included in liabilities on our consolidated balance sheets. Changes in the fair value of the interest rate cap agreements are reflected in interest expense on our consolidated statements of operations and comprehensive operations.

We have entered into interest rate swap agreements to hedge the variability in interest payments on seven of our active securitization transactions. Portions of these interest rate swap agreements are designated and qualify as cash flow hedges. The fair value of interest rate swap agreements designated as hedges is included in liabilities on the consolidated balance sheets. Interest rate swap agreements that are not designated as hedges are included in other assets on the consolidated balance sheets.

The following table provides information about our interest rate-sensitive financial instruments by expected maturity date as of December 31, 2011 (dollars in thousands):

 

Years Ending December 31,

  2012     2013     2014     2015     2016     Thereafter     Fair Value  

Assets:

             

Finance receivables

             

Principal amounts

  $ 3,889,053      $ 2,571,226      $ 1,531,495      $ 946,448      $ 547,500      $ 264,992      $ 9,385,851   

Weighted average annual percentage rate

    15.19     15.04     14.87     14.71     14.52     14.60  

Interest rate swaps

             

Notional amounts

  $ 485,553      $ 24,008              $ 2,004   

Average pay rate

    1.44     1.17          

Average receive rate

    0.43     0.84          

Interest rate caps purchased

             

Notional amounts

  $ 251,628      $ 258,619      $ 382,510      $ 319,170      $ 134,657      $ 166,209      $ 4,548   

Average strike rate

    4.00     3.94     3.71     3.71     3.50     3.11  

Liabilities:

             

Credit facilities

             

Principal amounts

  $ 1,099,174                $ 1,099,113   

Weighted average effective interest rate

    1.88            

Securitization notes payable

             

Principal amounts

  $ 3,163,788      $ 1,480,781      $ 1,022,762      $ 720,184      $ 422,093      $ 86,117      $ 6,945,865   

Weighted average effective interest rate

    2.94     3.51     4.05     4.58     5.18     3.64  

Senior notes

             

Principal amounts

            $ 500,000      $ 510,000   

Weighted average effective interest rate

              6.75  

Convertible senior notes

             

Principal amounts

    $ 500              $ 500   

Weighted average effective coupon interest rate

      2.125          

Interest rate swaps

             

Notional amounts

  $ 485,553      $ 24,008              $ 6,440   

Average pay rate

    1.44     1.17          

Average receive rate

    0.43     0.84          

Interest rate caps sold

             

Notional amounts

  $ 209,691      $ 258,619      $ 382,510      $ 319,170      $ 134,657      $ 166,209      $ 4,768   

Average strike rate

    4.05     3.94     3.71     3.71     3.50     3.11  

 

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The following table provides information about our interest rate-sensitive financial instruments by expected maturity date as of December 31, 2010 (dollars in thousands):

 

Years Ending December 31,

  2011     2012     2013     2014     2015     Thereafter     Fair Value  

Assets:

             

Finance receivables

             

Principal amounts

  $ 3,754,987      $ 2,434,183      $ 1,286,764      $ 677,919      $ 372,241      $ 161,272      $ 8,185,854   

Weighted average annual percentage rate

    15.74     15.66     15.57     15.36     15.21     15.37  

Interest rate swaps

             

Notional amounts

  $ 753,848      $ 460,059      $ 13,398            $ 23,058   

Average pay rate

    5.32     3.53     0.97        

Average receive rate

    1.03     1.16     0.43        

Interest rate caps purchased

             

Notional amounts

  $ 176,626      $ 164,299      $ 143,892      $ 169,216      $ 79,002      $ 213,318      $ 7,899   

Average strike rate

    4.81     4.73     4.71     4.53     4.18     3.47  

Liabilities:

             

Credit facilities

             

Principal amounts

  $ 533,214      $ 296,233              $ 832,054   

Weighted average effective interest rate

    3.19     2.28          

Securitization notes payable

             

Principal amounts

  $ 2,961,378      $ 1,702,492      $ 659,356      $ 423,453      $ 274,505        $ 6,106,963   

Weighted average effective interest rate

    3.44     4.03     4.44     4.38     4.88    

Senior notes

             

Principal amounts

          $ 68,394        $ 71,472   

Weighted average effective interest rate

            8.50    

Convertible senior notes

             

Principal amounts

  $ 947        $ 500            $ 1,447   

Weighted average effective coupon interest rate

    0.75       2.125        

Interest rate swaps

             

Notional amounts

  $ 753,848      $ 460,059      $ 13,398            $ 46,797   

Average pay rate

    5.32     3.53     0.97        

Average receive rate

    1.03     1.16     0.43        

Interest rate caps sold

             

Notional amounts

  $ 104,058      $ 122,362      $ 143,892      $ 169,216      $ 79,002      $ 213,318      $ 8,094   

Average strike rate

    4.94     4.85     4.71     4.53     4.18     3.47  

Finance receivables are estimated to be realized by us in future periods using discount rate, prepayment and credit loss assumptions similar to our historical experience. Notional amounts on interest rate swap and cap agreements are based on contractual terms. Credit facilities and securitization notes payable amounts have been classified based on expected payoff. Senior notes and convertible senior notes principal amounts have been classified based on maturity.

The notional amounts of interest rate swap and cap agreements, which are used to calculate the contractual payments to be exchanged under the contracts, represent average amounts that will be outstanding for each of the years included in the table. Notional amounts do not represent amounts exchanged by parties and, thus, are not a measure of our exposure to loss through our use of these agreements.

 

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Management monitors our hedging activities to ensure that the value of derivative financial instruments, their correlation to the contracts being hedged and the amounts being hedged continue to provide effective protection against interest rate risk. However, there can be no assurance that our strategies will be effective in minimizing interest rate risk or that increases in interest rates will not have an adverse effect on our profitability. All transactions are entered into for purposes other than trading.

Recent Accounting Pronouncements

In April 2011, ASU 2011-03 (“2011-03”), Reconsideration of Effective Control for Repurchase Agreements, was issued effective prospectively for new transfers and existing transactions that are modified in the first interim or annual period beginning on or after December 15, 2011. This guidance amends the sale accounting requirement concerning a transferor’s ability to repurchase transferred financial assets even in the event of default by the transferee, which typically is facilitated in a repurchase agreement by the presence of a collateral maintenance provision. We are currently evaluating the impact that 2011-03 will have on our consolidated financial position, results of operations and cash flows.

In May 2011, ASU (“2011-04”), Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs, was issued effective for interim and annual periods beginning on or after December 15, 2011. The adoption of 2011-04 gives fair value the same meaning between GAAP and International Financial Reporting Standards (“IFRSs”), and improves consistency of disclosures relating to fair value. We are currently evaluating the impact that 2011-04 will have on our consolidated financial position, results of operations and cash flows.

In June 2011, ASU (“2011-05”), Comprehensive Income: Presentation of Comprehensive Income, was issued effective for interim and annual periods beginning after December 15, 2011, with early adoption permitted. 2011-05 amends current guidance on reporting comprehensive income and eliminates the option to present the components of other comprehensive income as part of the statement of shareholders’ equity. Instead, comprehensive income must be reported in either a single continuous statement of comprehensive income which contains two sections, net income and other comprehensive income, or in two separate but consecutive statements. In December 2011, ASU (“2011-12”) was issued deferring the effective date for implementation of ASU 2011-05 related only to reclassification out of accumulated other comprehensive income until a later date to be determined after further consideration by the FASB. The adoption of 2011-05 will not have an impact on our consolidated financial position, results of operations and cash flows.

In September 2011, ASU (“2011-08”), Testing Goodwill for Impairment, was issued effective for interim and annual periods beginning after December 15, 2011, with early adoption permitted. Under the revised guidance, entities testing for goodwill impairment have an option of performing a qualitative assessment before calculating the fair value for the reporting unit, i.e., Step 1 of the goodwill impairment test. If an entity determines, on a basis of qualitative factors, that the fair value of the reporting unit is more likely than not less than the carrying amount, the two-step impairment test would be required. If it is not more likely than not that the fair value of the reporting unit is less than the carrying value, then goodwill is not considered to be impaired. 2011-08 does not change how goodwill is calculated or assigned to reporting units, nor does it revise the requirement to test goodwill annually for impairment. We adopted ASU 2011-08 effective October 1, 2011. The adoption of 2011-08 did not have an impact on our consolidated financial position, results of operations and cash flows.

In December 2011, ASU (“2011-11”), Disclosures about Offsetting Assets and Liabilities, was issued effective for interim and annual periods beginning January 1, 2013. 2011-11 amends the disclosure requirements on offsetting in ASC Topic 210 by requiring enhanced disclosures about financial instruments and derivative instruments that are either (a) offset in accordance with existing guidance or (b) subject to an enforceable master netting arrangement or similar agreement, irrespective of whether they are offset on the balance sheet. We do not expect the adoption of 2011-11 to have an impact on our consolidated financial position, results of operations and cash flows.

 

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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

GENERAL MOTORS FINANCIAL COMPANY, INC.

CONSOLIDATED BALANCE SHEETS

(dollars in thousands)

 

     Successor  
     December 31,
2011
    December 31,
2010
 

Assets

    

Cash and cash equivalents

   $ 572,297      $ 194,554   

Finance receivables, net

     9,162,492        8,197,324   

Restricted cash – securitization notes payable

     919,283        926,082   

Restricted cash – credit facilities

     136,556        131,438   

Property and equipment, net

     47,440        47,290   

Leased vehicles, net

     809,491        46,780   

Deferred income taxes

     108,684        157,884   

Goodwill

     1,107,982        1,094,923   

Intercompany subvention receivable

     37,447        8,149   

Other assets

     141,248        114,314   
  

 

 

   

 

 

 

Total assets

   $ 13,042,920      $ 10,918,738   
  

 

 

   

 

 

 

Liabilities and Shareholder’s Equity

    

Liabilities:

    

Credit facilities

   $ 1,099,391      $ 831,802   

Securitization notes payable

     6,937,841        6,128,217   

Senior notes

     500,000        70,054   

Convertible senior notes

     500        1,446   

Accounts payable and accrued expenses

     185,159        97,169   

Taxes payable

     85,477        160,712   

Intercompany taxes payable

     300,306        42,214   

Interest rate swap and cap agreements

     11,208        57,016   
  

 

 

   

 

 

 

Total liabilities

     9,119,882        7,388,630   
  

 

 

   

 

 

 

Commitments and contingencies (Note 14)

    

Shareholder’s equity:

    

Common stock, $.01 par value per share, 500 shares authorized and issued

    

Additional paid-in capital

     3,470,495        3,453,917   

Accumulated other comprehensive (loss) income

     (7,617     1,558   

Retained earnings

     460,160        74,633   
  

 

 

   

 

 

 

Total shareholder’s equity

     3,923,038        3,530,108   
  

 

 

   

 

 

 

Total liabilities and shareholder’s equity

   $ 13,042,920      $ 10,918,738   
  

 

 

   

 

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

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GENERAL MOTORS FINANCIAL COMPANY, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE OPERATIONS

(dollars in thousands, except per share data)

 

    Successor          Predecessor  
    For the
Year Ended
December 31,

2011
    Period From
October 1, 2010
Through
December 31,

2010
   

 

  Period From
July 1, 2010
Through
September 30,

2010
    For the Year Ended June 30,  
               2010     2009  

Revenue

             

Finance charge income

  $ 1,246,687      $ 264,347          $ 342,349      $ 1,431,319      $ 1,902,684   

Other income

    163,301        16,824            30,275        91,215        116,488   

Gain on retirement of debt

              283        48,152   
 

 

 

   

 

 

       

 

 

   

 

 

   

 

 

 
    1,409,988        281,171            372,624        1,522,817        2,067,324   
 

 

 

   

 

 

       

 

 

   

 

 

   

 

 

 

Costs and expenses

             

Operating expenses

    338,540        70,441            68,855        288,791        308,803   

Leased vehicles expenses

    67,088        2,106            6,539        34,639        47,880   

Provision for loan losses

    178,372        26,352            74,618        388,058        972,381   

Interest expense

    204,170        36,684            89,364        457,222        726,560   

Restructuring charges, net

            (39     668        11,847   

Acquisition expenses

      16,322            42,651       
 

 

 

   

 

 

       

 

 

   

 

 

   

 

 

 
    788,170        151,905            281,988        1,169,378        2,067,471   
 

 

 

   

 

 

       

 

 

   

 

 

   

 

 

 

Income (loss) before income taxes

    621,818        129,266            90,636        353,439        (147

Income tax provision

    236,291        54,633            39,336        132,893        10,742   
 

 

 

   

 

 

       

 

 

   

 

 

   

 

 

 

Net income (loss)

    385,527        74,633            51,300        220,546        (10,889
 

 

 

   

 

 

       

 

 

   

 

 

   

 

 

 

Other comprehensive (loss) income

             

Unrealized gains (losses) on cash flow hedges

    2,852        (412         6,255        43,306        (26,871

Foreign currency translation adjustment

    (10,981     1,819            2,055        8,230        750   

Income tax (provision) benefit

    (1,046     151            (3,027     (18,567     11,426   
 

 

 

   

 

 

       

 

 

   

 

 

   

 

 

 

Other comprehensive (loss) income

    (9,175     1,558            5,283        32,969        (14,695
 

 

 

   

 

 

       

 

 

   

 

 

   

 

 

 

Comprehensive income (loss)

  $ 376,352      $ 76,191          $ 56,583      $ 253,515      $ (25,584
 

 

 

   

 

 

       

 

 

   

 

 

   

 

 

 

Earnings (loss) per share

             

Basic

    (a     (a       $ 0.38      $ 1.65      $ (0.09
 

 

 

   

 

 

       

 

 

   

 

 

   

 

 

 

Diluted

    (a     (a       $ 0.37      $ 1.60      $ (0.09
 

 

 

   

 

 

       

 

 

   

 

 

   

 

 

 

Weighted average shares

             

Basic

    (a     (a         135,232,827        133,845,238        125,239,241   
 

 

 

   

 

 

       

 

 

   

 

 

   

 

 

 

Diluted

    (a     (a         140,302,755        138,179,945        125,239,241   
 

 

 

   

 

 

       

 

 

   

 

 

   

 

 

 

  

 

(a) As a result of the Merger, our common stock is no longer publicly traded and earnings per share is no longer required.

The accompanying notes are an integral part of these consolidated financial statements.

 

57


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GENERAL MOTORS FINANCIAL COMPANY, INC.

CONSOLIDATED STATEMENTS OF SHAREHOLDER’S EQUITY

(dollars in thousands)

 

     Successor           Predecessor  
     For the
Year Ended
December 31,

2011
    Period From
October 1, 2010
Through
December 31,

2010
          Period From
July 1, 2010
Through
September 30,
2010
    For the Year Ended June 30,  
                 2010     2009  

Common Stock Shares

               

Balance at the beginning of period

     500        500             136,856,360        134,977,812        118,766,250   

Common stock issued on exercise of options

              17,312        837,411        131,654   

Common stock issued on the retirement of debt

                  15,122,670   

Common stock issued on exercise of warrants

              438,112       

Common stock cancelled – restricted stock

                  (47,000

Common stock issued for employee benefit plans

              439,580        1,041,137        1,004,238   
  

 

 

   

 

 

        

 

 

   

 

 

   

 

 

 

Balance at the end of period

     500        500             137,751,364        136,856,360        134,977,812   
  

 

 

   

 

 

        

 

 

   

 

 

   

 

 

 

Common Stock Amount

               

Balance at the beginning of period

   $        $             $ 1,369      $ 1,350      $ 1,188   

Common stock issued on exercise of options

                8        1   

Common stock issued on exercise of warrants

              4       

Common stock issued on the retirement of debt

                  151   

Common stock issued for employee benefit plans

              5        11        10   
  

 

 

   

 

 

        

 

 

   

 

 

   

 

 

 

Balance at the end of period

   $        $             $ 1,378      $ 1,369      $ 1,350   
  

 

 

   

 

 

        

 

 

   

 

 

   

 

 

 

Additional Paid-in Capital

               

Balance at the beginning of period

   $ 3,453,917      $ 3,453,917           $ 327,095      $ 284,961      $ 134,064   

Common stock issued on exercise of options

              282        11,597        1,053   

Common stock issued on the retirement of debt

                  90,830   

Income tax benefit from exercise of options, warrants and amortization of convertible note hedges

              3,395        9,434        10,678   

Common stock issued on exercise of warrants

              (4    

Common stock issued for employee benefit plans

              1,851        4,020        (11,029

Cash settlement of share based awards

              (16,062    

Stock based compensation expense

     17,106               5,019        15,115        14,264   

Amortization of warrant costs

                1,968        45,101   

True up of payments under tax-sharing agreement and separate return basis

     (528             
  

 

 

   

 

 

        

 

 

   

 

 

   

 

 

 

Balance at the end of period

   $ 3,470,495      $ 3,453,917           $ 321,576      $ 327,095      $ 284,961   
  

 

 

   

 

 

        

 

 

   

 

 

   

 

 

 

Accumulated Other Comprehensive (Loss)

               

Income

               

Balance at the beginning of period

   $ 1,558             $ 11,870      $ (21,099   $ (6,404

Other comprehensive (loss) income net of income tax (provision) benefit of $(1,046), $151, $(3,027), $(18,567), and $11,426, respectively

     (9,175   $ 1,558             5,283        32,969        (14,695
  

 

 

   

 

 

        

 

 

   

 

 

   

 

 

 

Balance at the end of period

   $ (7,617   $ 1,558           $ 17,153      $ 11,870      $ (21,099
  

 

 

   

 

 

        

 

 

   

 

 

   

 

 

 

Retained Earnings

               

Balance at the beginning of period

   $ 74,633             $ 2,099,005      $ 1,878,459      $ 1,889,348   

Consolidation of Wachovia funding facility

              175       

Net income (loss)

     385,527      $ 74,633             51,300        220,546        (10,889
  

 

 

   

 

 

        

 

 

   

 

 

   

 

 

 

Balance at the end of period

   $ 460,160      $ 74,633           $ 2,150,480      $ 2,099,005      $ 1,878,459   
  

 

 

   

 

 

        

 

 

   

 

 

   

 

 

 

Treasury Stock Shares

               

Balance at the beginning of period

              1,916,510        1,806,446        2,454,534   

Common stock issued for employee benefit plans

              39,226        110,064        (648,088
  

 

 

   

 

 

        

 

 

   

 

 

   

 

 

 

Balance at the end of period

              1,955,736        1,916,510        1,806,446   
  

 

 

   

 

 

        

 

 

   

 

 

   

 

 

 

Treasury Stock Amount

               

Balance at the beginning of period

   $        $             $ (38,915   $ (36,363   $ (52,934

Common stock issued for employee benefit plans

              (1,051     (2,552     16,571   
  

 

 

   

 

 

        

 

 

   

 

 

   

 

 

 

Balance at the end of period

   $        $             $ (39,966   $ (38,915   $ (36,363
  

 

 

   

 

 

        

 

 

   

 

 

   

 

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

58


Table of Contents

GENERAL MOTORS FINANCIAL COMPANY, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

 

    Successor          Predecessor  
    For the
Year Ended
December 31,

2011
    Period From
October 1, 2010
Through
December 31,

2010
         Period From
July 1, 2010
Through
September 30,
    For the Year Ended
June 30,
 
          2010     2010     2009  

Cash flows from operating activities

             

Net income (loss)

  $ 385,527      $ 74,633          $ 51,300      $ 220,546      $ (10,889

Adjustments to reconcile net income (loss) to net cash provided by operating activities:

             

Depreciation and amortization

    109,619        7,809            14,649        79,044        109,008   

Provision for loan losses

    178,372        26,352            74,618        388,058        972,381   

Deferred income taxes

    50,236        21,367            452        (24,567     226,783   

Stock based compensation expense

    17,106              5,019        15,115        14,264   

Amortization of carrying value adjustment

    177,566        77,092             

Amortization of purchase accounting premium

    (67,671     (27,458          

Amortization of warrant costs

              1,968        45,101   

Non-cash interest charges on convertible debt

            5,625        21,554        22,506   

Accretion and amortization of loan and leasing fees

    (20,702     1,111            (942     4,791        19,094   

Loss (gain) on retirement of debt

    1,436                (283     (48,907

Other

    (24,654     (11,539         (13,800     (15,954