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Business Context and Reporting Period

This Form 10-Q covers the quarterly period ended June 30, 2002, for General Motors Acceptance Corporation (GMAC), a wholly-owned subsidiary of General Motors Corporation. GMAC is a financial services corporation providing consumer vehicle financing, commercial financing, insurance, and mortgage banking services globally. The filing utilizes the reduced disclosure format.

Key Financial Metrics

Material Changes vs. Prior Period

• Net Income: Q2 2002 net income of $431 million decreased 4% from $449 million in Q2 2001. For the six-month period, net income was $870 million, down $10 million from $880 million in the prior year (excluding a $34 million cumulative accounting change in 2001).
• Revenue: Total financing revenue declined $85 million in Q2 and $335 million in the six-month period compared to 2001. This was driven by a $232 million (Q2) and $604 million (6-month) decrease in wholesale and commercial loan revenue due to lower earning rates, partially offset by increases in retail and lease financing revenue.
• Expenses: The provision for credit losses increased significantly to $466 million (Q2) and $952 million (6-month) from $275 million and $536 million in 2001, attributed to deteriorating economic conditions and higher receivable levels. Amortization and valuation adjustments for mortgage servicing rights (MSRs) rose to $657 million (Q2) and $976 million (6-month) due to impairment charges from declining interest rates.
• Asset Quality: Average retail accounts past due over 30 days improved to 2.07% (Q2) from 2.27% in 2001. However, net retail losses as a percent of average serviced receivables increased to 0.77% (Q2) from 0.68%.
• Liquidity: Cash and cash equivalents dropped from $10.1 billion at year-end 2001 to $3.9 billion at June 30, 2002, primarily due to decreased term funding activity.

Outlook, Risks, and Management Commentary

• Segment Performance: Automotive financing earnings declined due to higher credit losses and narrower spreads. Insurance earnings fell due to the absence of capital gains in a weak equity market, though underwriting results improved. Mortgage operations earnings increased 21% in Q2 due to higher production, offset by MSR valuation reductions.
• Interest Rate Environment: The decline in interest rates increased mortgage refinancing activity, leading to higher prepayment speeds and significant impairment charges on mortgage servicing rights ($517 million in Q2, $673 million in 6 months).
• Debt Ratings: As of August 14, 2002, GMAC maintained investment-grade ratings (Fitch: A-, Moody's: A2, S&P: BBB+). S&P affirmed its ratings in July 2002 with a stable outlook. The company is subject to a leverage covenant (max 11.0:1 debt-to-equity) triggered by its S&P rating of BBB+ or lower.
• Risks: Key risks include the potential for further deterioration in MSR values if interest rates remain low, increased credit losses from economic conditions, and reliance on securitization programs for funding. The company notes that termination of securitization activities could increase the cost of funds.

Investor Verification Checklist

• Credit Loss Trends: Verify the trajectory of the provision for credit losses and net retail loss rates against economic forecasts.
• MSR Valuation: Assess the impact of the new third-party prepayment model on future mortgage servicing rights impairment charges.
• Liquidity Position: Monitor the reduction in cash equivalents and the reliance on commercial paper and securitization facilities for funding.
• Debt Covenants: Confirm continued compliance with the 11.0:1 debt-to-equity leverage covenant given the current rating levels.
• Wholesale Revenue: Investigate the sustained decline in wholesale and commercial loan revenue and its impact on overall margins.