Company Quick10K Filing
Quick10K
General Motors Financial Company
10-K 2018-12-31 Annual: 2018-12-31
10-Q 2018-09-30 Quarter: 2018-09-30
10-Q 2018-06-30 Quarter: 2018-06-30
10-Q 2018-03-31 Quarter: 2018-03-31
10-K 2018-02-06 Annual: 2018-02-06
10-Q 2017-09-30 Quarter: 2017-09-30
10-Q 2017-06-30 Quarter: 2017-06-30
10-Q 2017-03-31 Quarter: 2017-03-31
10-K 2016-12-31 Annual: 2016-12-31
10-Q 2016-09-30 Quarter: 2016-09-30
10-Q 2016-06-30 Quarter: 2016-06-30
10-Q 2016-03-31 Quarter: 2016-03-31
10-K 2015-12-31 Annual: 2015-12-31
8-K 2019-02-06 Regulation FD, Exhibits
8-K 2019-02-06 Earnings, Exhibits
8-K 2019-01-14 Other Events, Exhibits
8-K 2018-11-01 Other Events, Exhibits
8-K 2018-10-31 Earnings, Exhibits
8-K 2018-10-31 Regulation FD, Exhibits
8-K 2018-09-17 Shareholder Rights, Other Events, Exhibits
8-K 2018-08-20 Exhibits
8-K 2018-07-25 Regulation FD, Exhibits
8-K 2018-07-25 Earnings, Exhibits
8-K 2018-06-14 Enter Agreement, Exhibits
8-K 2018-04-18 Enter Agreement, Off-BS Arrangement, Exhibits
8-K 2018-04-05 Enter Agreement, Exhibits
8-K 2018-02-12 Other Events
8-K 2018-02-07 Regulation FD, Exhibits
8-K 2018-01-02 Enter Agreement, Exhibits
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ACF 2018-12-31
Part I
Item 1. Business
Item 1A. Risk Factors
Item 1B. Unresolved Staff Comments
Item 2. Properties
Item 3. Legal Proceedings
Item 4. Mine Safety Disclosure
Part II
Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Item 6. Selected Financial Data
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 7A. Quantitative and Qualitative Disclosure About Market Risk
Item 8. Financial Statements and Supplementary Data
Note 1. Summary of Significant Accounting Policies
Note 2. Related Party Transactions
Note 3. Finance Receivables
Note 4. Leased Vehicles
Note 5. Goodwill
Note 6. Equity in Net Assets of Non-Consolidated Affiliates
Note 7. Debt
Note 8. Variable Interest Entities
Note 9. Derivative Financial Instruments and Hedging Activities
Note 10. Commitments and Contingencies
Note 11. Shareholders' Equity
Note 12. Parent Company Stock-Based Compensation
Note 13. Employee Benefit Plans
Note 14. Income Taxes
Note 16. Supplemental Cash Flow Information
Note 17. Segment Reporting and Geographic Information
Note 18. Regulatory Capital and Other Regulatory Matters
Note 19. Quarterly Financial Data (Unaudited)
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Item 9A. Controls and Procedures
Part III
Item 14. Principal Accounting Fees and Services
Part IV
Item 15. Exhibits and Financial Statement Schedules
Item 16. Form 10-K Summary
EX-23.1 gmfexhibit231consentofinde.htm
EX-23.2 gmfexhibit232consentofinde.htm
EX-31.1 gmfexhibit311certification.htm
EX-31.2 gmfexhibit312certification.htm
EX-32 gmfexhibit32certifications.htm

General Motors Financial Company Earnings 2018-12-31

ACF 10K Annual Report

Balance SheetIncome StatementCash Flow

10-K 1 gmf1231201810-k.htm 10-K Document

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
______________________________________________ 
FORM 10-K
(Mark One)
ý
 
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2018
OR
o
 
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:
Title of each class
 
Name of each Exchange on which registered
5.250% Senior Notes due 2026
 
New York Stock Exchange
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    ý    No    ¨
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    ý
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    ý   No    ¨
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).  Yes    ý    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 or any amendment to this Form 10-K.  ý
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer
o
Accelerated filer
o
Non-accelerated filer
ý
Smaller reporting company
o
Emerging growth company
o
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).  Yes    ¨    No    ý
As of February 5, 2019, there were 5,050,000 shares of the registrant’s common stock, par value $0.0001 per share, outstanding. All of the registrant’s common stock is owned by General Motors Holdings LLC, a wholly-owned subsidiary of General Motors Company.
DOCUMENTS INCORPORATED BY REFERENCE
NONE
The registrant is a wholly-owned subsidiary of General Motors Company and meets the conditions set forth in General Instructions (I)(1)(a) and (b) of Form 10-K and is therefore filing this Form 10-K with a reduced disclosure format as permitted by Instruction I(2).



INDEX
 
 
Page
 
Forward-Looking Statements
 
PART I
 
Item 1.
Business
Item 1A.
Risk Factors
Item 1B.
Unresolved Staff Comments
Item 2.
Properties
Item 3.
Legal Proceedings
Item 4.
Mine Safety Disclosures
 
PART II
 
Item 5.
Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Item 6.
Selected Financial Data
Item 7.
Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 7A.
Quantitative and Qualitative Disclosures About Market Risk
Item 8.
Financial Statements and Supplementary Data
 
Consolidated Balance Sheets
 
Consolidated Statements of Income and Comprehensive Income
 
Consolidated Statements of Shareholders' Equity
 
Consolidated Statements of Cash Flows
 
Notes to Consolidated Financial Statements
 
Note 1. Summary of Significant Accounting Policies
 
Note 2. Related Party Transactions
 
Note 3. Finance Receivables
 
Note 4. Leased Vehicles
 
Note 5. Goodwill
 
Note 6. Equity in Net Assets of Non-consolidated Affiliates
 
Note 7. Debt
 
Note 8. Variable Interest Entities
 
Note 9. Derivative Financial Instruments and Hedging Activities
 
Note 10. Commitments and Contingencies
 
Note 11. Shareholders' Equity
 
Note 12. Parent Company Stock-Based Compensation
 
Note 13. Employee Benefit Plans
 
Note 14. Income Taxes
 
Note 15. Discontinued Operations
 
Note 16. Supplemental Cash Flow Information
 
Note 17. Segment Reporting and Geographic Information
 
Note 18. Regulatory Capital and Other Regulatory Matters
 
Note 19. Quarterly Financial Data (unaudited)
 
 
 
Item 9.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Item 9A.
Controls and Procedures
 
PART III
 
Directors, Executives Officers and Corporate Governance
Executive Compensation
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Certain Relationships and Related Transactions, and Director Independence
Principal Accounting Fees and Services
 
PART IV
 
Item 15.
Exhibits, Financial Statement Schedules
Item 16.
Form 10-K Summary
 
Index to Exhibits
 
Signatures


GENERAL MOTORS FINANCIAL COMPANY, INC.

Forward-Looking Statements
This report contains several "forward-looking statements." Forward-looking statements are those that use words such as "believe," "expect," "intend," "plan," "may," "likely," "should," "estimate," "continue," "future" or "anticipate" and 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 SEC, including this Annual Report on Form 10-K for the year ended December 31, 2018. 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:
GM's ability to sell new vehicles that we finance in the markets we serve;
the viability of GM-franchised dealers that are commercial loan customers;
changes in the automotive industry that result in a change in demand for vehicles and related vehicle financing;
the sufficiency, availability and cost of sources of financing, including credit facilities, securitization programs and secured and unsecured debt issuances;
our joint ventures in China, which we cannot operate solely for our benefit and over which we have limited control;
the adequacy of our underwriting criteria for loans and leases and the level of net charge-offs, delinquencies and prepayments on the loans and leases we purchase or originate;
the adequacy of our allowance for loan losses on our finance receivables;
the effect, interpretation or application of new or existing laws, regulations, court decisions and accounting pronouncements;
changes in tax laws and regulations, adverse determinations with respect to the application of existing laws, or the results of any audits from tax authorities;
the prices at which used vehicles are sold in the wholesale auction markets;
vehicle return rates, our ability to estimate residual value at the inception of a lease and the residual value performance on vehicles we lease;
interest rate fluctuations and certain related derivatives exposure;
foreign currency exchange rate fluctuations and other risks applicable to our operations outside of the U.S.;
changes to the LIBOR calculation process and potential phasing out of LIBOR;
our ability to effectively manage capital or liquidity consistent with evolving business or operational needs, risk management standards, and regulatory or supervisory requirements;
changes in local, regional, national or international economic, social or political conditions;
our ability to maintain and expand our market share due to competition in the automotive finance industry from a large number of banks, credit unions, independent finance companies and other captive automotive finance subsidiaries;
our ability to secure private customer data or our proprietary information and manage risks related to security breaches and other disruptions to our networks and systems; and
changes in business strategy, including expansion of product lines and credit risk appetite, acquisitions and divestitures.
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.

PART I
Item 1. Business
General General Motors Financial Company, Inc. (sometimes referred to as we, us, our, the Company, or GM Financial), the wholly-owned captive finance subsidiary of General Motors Company (GM), is a global provider of automobile finance solutions. On October 31, 2017, we completed the sale of certain of our European subsidiaries and branches (collectively, the European Operations) to Banque PSA Finance S.A. and BNP Paribas Personal Finance S.A. The results of operations of the European Operations are presented as discontinued operations in our consolidated financial statements for the years ended December 31,

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GENERAL MOTORS FINANCIAL COMPANY, INC.

2017 and 2016. Refer to Note 15 to our consolidated financial statements for additional details regarding our disposal of these operations. Unless otherwise indicated, information contained herein relates to our continuing operations.
We offer substantially similar products and services throughout many different regions, subject to local regulations and market conditions. We evaluate our business in two operating segments: North America (the North America Segment) and International (the International Segment). Our global footprint covers approximately 90% of GM’s worldwide market. Except as otherwise specified, amounts presented within the tables are stated in millions.
North America Segment Our North America Segment includes operations in the U.S. and Canada. We have been operating in the automobile finance business in the U.S. since September 1992. Our retail automobile finance programs include full credit spectrum lending and leasing offered through GM-franchised dealers under the GM Financial brand. We also offer a sub-prime lending product through non-GM-franchised and select independent dealers under the AmeriCredit brand. Our sub-prime lending program is designed to serve customers who have limited access to automobile financing through banks and credit unions. Therefore, we generally charge higher rates than those charged by banks and credit unions and expect to sustain a higher level of credit losses than on prime lending. Our commercial lending programs are offered to our GM-franchised dealer customers and their affiliates.
International Segment Our International Segment includes operations in Brazil, Chile, Colombia, Mexico and Peru, as well as our equity investments in joint ventures in China. Certain of our international operations were originally a part of General Motors Acceptance Corporation, the former captive finance subsidiary of GM. Due to this longstanding relationship, the international operations have substantial business related to GM and its dealer network. The retail lending and leasing programs in our International Segment focus on financing new GM vehicles and select used vehicles. We also offer finance- and/or vehicle-related insurance and other products.
Retail Finance In our retail finance business the term "loan" refers to retail installment contracts we purchase from automobile dealers or other vehicle financing products. We also purchase lease agreements for new GM vehicles.
Marketing As an indirect auto finance provider, we focus our marketing activities on automobile dealers. We primarily pursue franchised dealerships; however, we also conduct business with a limited number of independent dealerships. We generally finance new GM vehicles, moderately-priced new vehicles from other manufacturers, and later-model, low-mileage used vehicles.
We maintain non-exclusive relationships with the dealers and actively monitor our dealer relationships with the objective of maximizing the volume of retail financing applications received from dealerships with whom we do business that meet our underwriting standards and profitability objectives. Due to the non-exclusive nature of our relationships with dealers, the dealers retain discretion to determine whether to obtain financing from us or from another source for a customer seeking to make a vehicle purchase.
Subvention Programs GM offers subvention programs, under which GM provides us cash payments in order for us to be able to provide for lower customer payments on loan and lease agreements originated through GM's dealership network, making credit more affordable to customers financing or leasing vehicles manufactured by GM. GM also supports our loan origination volume by offering other incentives to borrowers who finance their vehicles with us.
Origination Data Our business strategy is to help GM sell vehicles while earning an appropriate risk-adjusted return. This includes increasing new GM automobile sales by offering a full spectrum of competitive financing programs. Total retail loan and lease origination levels were as follows:
 
Years ended December 31,
 
2018
 
2017
 
2016
New GM vehicles
$
44,124

 
$
40,326

 
$
35,044

Other vehicles
4,650

 
5,015

 
4,645

Total
$
48,774

 
$
45,341

 
$
39,689

Underwriting We utilize proprietary credit scoring systems to support our credit approval process. The credit scoring systems were developed through statistical analysis of customer demographics, credit bureau attributes and portfolio databases and are tailored to each country where we conduct business. 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, contract pricing and structure.
In addition to our proprietary credit scoring systems, we utilize other underwriting guidelines. These underwriting guidelines are comprised of numerous evaluation criteria, including, but not limited to: (i) 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

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GENERAL MOTORS FINANCIAL COMPANY, INC.

obligations; (ii) credit bureau data; (iii) collateral identification and valuation; (iv) payment structure and debt ratios; (v) insurance information; (vi) employment, income and residency verifications, as considered appropriate; and (vii) 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.
Servicing Our business strategy includes increasing the loyalty and retention of GM customers through our customer service activities. Our servicing activities include collecting and processing customer payments, responding to customer inquiries, initiating contact with customers who are delinquent, maintaining our security interest in financed vehicles, arranging for the repossession of financed vehicles, liquidation of collateral and pursuit of deficiency balances when appropriate.
Operating Leases Our operating leases are closed-end leases; therefore, we assume the residual risk on the leased vehicle. The lessee may purchase the leased vehicle at the maturity of the lease by paying the purchase price stated in the lease agreement, which equals the contract residual value determined at origination of the lease, plus any fees and all other amounts owed under the lease. If the lessee decides not to purchase the leased vehicle, the lessee must return it to a dealer by the lease's scheduled lease maturity date. Extensions may be granted to the lessee for up to six months. If the lessee extends the maturity date on their lease agreement, the lessee is responsible for additional monthly payments until the leased vehicle is returned or purchased.
We seek to maximize net sales proceeds on returned leased vehicles. Net sales proceeds equal gross proceeds less fees and costs for reconditioning and transporting the leased vehicles. We sell returned leased vehicles through either our exclusive online channel or our wholesale auction partners.
Commercial Finance Commercial lending products include floorplan financing, also known as wholesale or inventory financing, which is lending to finance vehicle inventory, as well as dealer loans, which are loans to finance improvements to dealership facilities, to provide working capital, and to finance dealership real estate. Other commercial products include financing for parts and accessories, dealer fleets and storage centers.
Floorplan Financing We support the financing of new and used vehicle inventory primarily for our GM-franchised dealerships and their affiliates before sale or lease to the retail customer. Financing is provided through lines of credit extended to individual dealerships. In general, each floorplan line is secured by all financed vehicles and by other dealership assets and, when available, the continuing personal guarantee of the dealership's owners. Under certain circumstances, such as repossession of dealership inventory, GM and other manufacturers may be obligated by applicable law, or under agreements with us, to reassign or to repurchase new vehicle inventory within certain mileage and model year parameters, further minimizing our risk. The amount we advance to a dealership for new vehicles purchased through the manufacturer is equal to 100% of the wholesale invoice price of new vehicles, which includes destination and other miscellaneous charges, and a price rebate from the manufacturer to the dealer in varying amounts stated as a percentage of the invoice price. We advance the loan proceeds directly to the manufacturer. To support a dealership's used vehicle inventory needs, we advance funds to the dealership or auction to purchase used vehicles for inventory based on the appropriate wholesale book value for the region in which the dealer is located.
Floorplan lending is typically structured to yield interest at a floating rate indexed to an appropriate benchmark rate. The rate for a particular dealership is based on, among other things, the dealership's creditworthiness, the amount of the credit line, the dealer's risk rating and whether or not the dealership is in default. Interest on floorplan loans is generally payable monthly. GM offers floorplan interest subvention, under which GM makes payments to us to cover certain periods of interest on certain floorplan loans. Upon the sale or lease of a financed vehicle, the dealer must repay the advance on the vehicle according to the repayment terms. These repayment terms may vary based on the dealer's risk rating. As a result, funds advanced may be repaid in a short time period, depending on the length of time the dealer holds the vehicle until its sale.
We periodically inspect and verify the location of the financed vehicles that are available for sale. The timing of the verifications varies and no advance notice is given to the dealer. Among other things, verifications are intended to determine dealer compliance with its credit agreement as to repayment terms and to determine the status of our collateral.
As part of our floorplan lending agreement, we offer a cash management program. Under the program, subject to certain conditions, a dealer may choose to reduce the amount of interest on their floorplan line by making principal payments to us in advance. This program allows for the dealer to manage their liquidity position and reduce their cost of funds, while maintaining the repayment terms on the advances made associated with new vehicles.
Dealer Loans We also make loans to finance parts and accessories as well as improvements to dealership facilities, to provide working capital and to purchase and finance dealership real estate. These loans are typically secured by mortgages or deeds of trust on dealership land and buildings, security interests in other dealership assets and often the continuing personal guarantees from the owners of the dealerships and/or the real estate, as applicable. Dealer loans are structured to yield interest at fixed or floating rates, which are indexed to an appropriate benchmark rate. Interest on dealer loans is generally payable monthly.

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GENERAL MOTORS FINANCIAL COMPANY, INC.

Underwriting Each dealership is assigned a risk rating based on various factors, including, but not limited to, capital sufficiency, operating performance, financial outlook and credit and payment history, if available. The risk rating affects loan pricing and guides the management of the account. We monitor the level of borrowing under each dealership's account daily. When a dealer's outstanding balance exceeds the availability on any given credit line with that dealership, we may reallocate balances across existing lines, temporarily suspend the granting of additional credit, increase the dealer's credit line or take other actions following an evaluation and analysis of the dealer's financial condition and the cause of the excess or overline. Under the terms of the credit agreement with the dealership, we may call the floorplan loans due and payable and receive payment typically within 60 days of the call.
Servicing Commercial lending servicing activities include dealership customer service, account maintenance, credit line monitoring and adjustment, exception processing and insurance monitoring. Our commercial lending servicing operations are centralized in each country.
Sources of Financing We primarily finance our loan, lease and commercial origination volume through the use of our secured and unsecured credit facilities, through public and private securitization transactions and through the issuance of unsecured debt in the capital markets. Generally, we seek to fund our operations through local sources of funding to minimize currency and country risk, although we may issue debt globally in order to diversify funding sources, especially to support U.S. financing needs. As such, the mix of funding sources varies from country to country based on the characteristics of our earning assets and the relative development of the capital markets in each country. We actively monitor the capital markets and seek to optimize our mix of funding sources to minimize our cost of funds.
Secured Credit Facilities Some loans and leases are funded using secured credit facilities with participating banks providing financing either directly or through institutionally-managed conduits. Under these funding agreements, we transfer financial assets to special purpose finance subsidiaries. These subsidiaries, in turn, issue notes to the bank participants or agents, collateralized by such financial assets. The bank participants or 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 financial assets. While these subsidiaries are included in our consolidated financial statements, these subsidiaries are separate legal entities and the 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 these secured credit facilities bear interest at commercial paper, London Interbank Offered Rates (LIBOR), Canadian Dollar Offered Rate, The Interbank Equilibrium Interest Rate or prime rates plus a credit spread and specified fees, depending upon the source of funds provided by the bank participants or agents. In certain markets in the International Segment, we also finance loans through the sale of receivables to banks under a full recourse arrangement.
Unsecured Credit Facilities We utilize both committed and uncommitted unsecured credit facilities as an additional source of funding. The financial institutions providing the uncommitted facilities are not obligated to advance funds under them. GM also provides us with financial resources through a $1.0 billion unsecured intercompany revolving credit facility (the Junior Subordinated Revolving Credit Facility) and exclusive access to no less than a $2.0 billion facility (GM Revolving 364-Day Credit Facility).
Securitizations We also fund loans and leases through public and private securitization transactions. Proceeds from securitizations are used primarily to fund initial cash credit enhancement requirements in the securitization, pay down borrowings under our credit facilities, and support further originations.
In our securitizations, we transfer loans or lease-related assets to 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 securitized assets to a Trust, we make certain representations and warranties regarding the securitized assets. These representations and warranties pertain to specific aspects of the securitized assets, including the origination of the securitized assets, the obligors of the securitized assets, the accuracy and legality of the records, schedules containing information regarding the securitized assets, the financed vehicles securing the securitized assets, the security interests in the securitized assets, specific characteristics of the securitized assets, and certain matters regarding our servicing of the securitized assets, but do not pertain to the underlying performance of the securitized assets. 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 securitized assets, we are obligated to repurchase the securitized assets from the Trust. Historically, repurchases due to a breach of a representation or warranty have been insignificant.
We utilize 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. 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 assets transferred, as well as our credit trends 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.

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GENERAL MOTORS FINANCIAL COMPANY, INC.

The credit enhancement requirements in our securitization transactions may include restricted cash accounts that are generally established with an initial deposit and may subsequently be funded through excess cash flows from the securitized assets. An additional form of credit enhancement is provided in the form of overcollateralization, whereby the value of the securitized assets transferred to the Trusts is greater than the amount due on asset-backed securities issued by the Trusts. In the International Segment, our securitization transactions may contain portfolio performance ratios or loss-based advance rate calculations which could increase the credit enhancement levels. In the North America Segment, our securitization transactions typically do not contain these performance ratios.
Unsecured Debt We also access the capital markets through the issuance of unsecured notes and commercial paper.
Trade Names We and GM have obtained federal trademark protection for the AmeriCredit, GM Financial and GMAC names and the logos that incorporate those names. Certain other names, logos and phrases we use in our business operations have also been trademarked. The trademarks that GM and we hold are very important to our identity and recognition in the marketplace.
Regulation Our operations are subject to regulation, supervision and licensing by governmental authorities under various national, state and local laws and regulations.
North America Segment In the U.S., we are subject to extensive federal regulation, including the Truth in Lending Act, the Equal Credit Opportunity Act and the Fair Credit Reporting Act. 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, and the Servicemembers Civil Relief Act, which has limitations on the interest rate charged to customers who have subsequently entered military service, and provides other protections such as early lease termination and restrictions on repossession.
The primary federal agency responsible for ensuring compliance with these consumer protection laws is the Consumer Financial Protection Bureau (CFPB). The CFPB has broad rule-making, examination and enforcement authority over non-bank automobile finance companies like us. We are subject to supervision and examination by the CFPB as a “larger participant” in the automobile finance market.
In most states and other jurisdictions in which we operate, consumer credit regulatory agencies regulate and enforce laws relating to sales finance companies and consumer lenders or lessors like us. These laws 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, requirements as to the form and content of finance contracts and other documentation, and restrictions on collection practices and creditors' rights. In certain jurisdictions, we are subject to periodic examination by regulatory authorities.
In Canada, we are subject to both federal and provincial laws and regulations, including the Interest Act, the Consumer Protection Acts and Cost of Credit Disclosure regulations. Additionally, we are subject to certain provincial Consumer Reporting Acts and the Personal Information Protection and Electronic Documents Act, as well as provincial counterparts, which regulates how we can collect, use, and/or disclose consumers' personal information. 
International Segment In certain countries in the International Segment, we operate in local markets as either banks or regulated finance companies and are subject to legal and regulatory restrictions which vary country to country and may change from time to time. The regulatory restrictions, among other things, may require that the regulated entities meet certain minimum capital requirements, may restrict dividend distributions and ownership of certain assets, and may require certain disclosures to prospective purchasers and lessees and restrict certain practices related to the servicing of consumer accounts. 
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, leasing companies and independent finance companies. Many of these competitors have substantial financial resources, highly competitive funding costs and significant scale and efficiency. Capital inflows from investors to support the growth of new entrants in the automobile finance market, as well as growth initiatives from more established market participants, has resulted in generally increasing competitive conditions. While we have a competitive advantage when GM-sponsored subvention or other support programs are offered exclusively through us to targeted GM dealers and their customers, when no subvention or other support programs are offered our competitors can often provide financing on terms more favorable to customers 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 products and services, which we may not currently provide.

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GENERAL MOTORS FINANCIAL COMPANY, INC.

Employees At December 31, 2018, we employed approximately 10,000 people, excluding our joint venture employees. We participate in mandatory national collective bargaining agreements where they are required, and maintain satisfactory working relationships with trade union representatives where they exist. 
As of February 6, 2019, the names and ages of our executive officers and their positions with GM Financial are as follows: 
Name (Age)
 
Present GMF Position (Effective Date)
 
Position Held During the Past Five Years
if Other Than Present GMF Position (Effective Date)
Daniel E. Berce (65)
 
President and Chief Executive Officer (2005)
 
 
Kyle R. Birch (58)
 
Executive Vice President and Chief Operating Officer - North America (2013)
 
 
Mark F. Bole (55)
 
President, International Operations and Chief Administrative Officer (2018)
 
President, International Operations (2013)
Connie Coffey (47)
 
Executive Vice President, Corporate Controller and Chief Accounting Officer (2014)
 
Executive Vice President and Corporate Controller (2012)
Richard A. Gokenbach, Jr. (42)
 
Executive Vice President and Treasurer (2018)
 
Senior Vice President, Capital Management (2015), Senior Vice President, Pricing and Product Development (2013)
Douglas T. Johnson (52)
 
Executive Vice President and Chief Legal Officer (2013)
 
 
Michael S. Kanarios (48)
 
Executive Vice President and Chief Strategy Officer (2017)
 
Executive Vice President and Chief Operating Officer, International Operations (2015), Executive Vice President and Chief Financial Officer, International Operations (2013)
Susan B. Sheffield (52)
 
Executive Vice President and Chief Financial Officer (2018)
 
Executive Vice President and Treasurer (2014)

James R. Vance (47)
 
Executive Vice President and Chief Pricing and Risk Officer (2018)
 
Executive Vice President, Pricing Analytics and Product Development (2011)
Available Information We make available free of charge through our website, www.gmfinancial.com, our public securitization information 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. We encourage the public to visit our website, as we frequently update and post new information about our company on our website and it is possible that this information could be deemed to be material information. Our website and information included or linked to our website are not part of this Form 10-K.
Item 1A. Risk Factors
The profitability and financial condition of our operations are dependent upon the operations of our parent, GM.
A material portion of our retail finance business, and substantially all our commercial lending activities, consist of financing associated with the sale and lease of new GM vehicles and our relationship with GM-franchised dealerships. 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, GM's operations that may require restructuring or rationalization actions, or other factors impacting GM or its products, such changes could significantly affect our profitability, financial condition, and access to the capital markets. In addition, GM sponsors special-rate financing and other incentive programs available through us. Under these programs, GM makes interest supplements or other support payments to us. These programs increase our financing volume and our share of financed GM vehicle sales. 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.
There is no assurance that the global automotive market or GM's share of that market will not suffer downturns in the future, and any negative impact could in turn have a material adverse effect on our financial position, liquidity and results of operations.

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GENERAL MOTORS FINANCIAL COMPANY, INC.

Our operations are heavily reliant on automotive dealers, and our profitability could be adversely affected by a change in dealers’ relationships with us or in their financial condition.
Substantially all of our revenue is generated from financial products offered to or through automotive dealers. Whether we are able to originate automotive loans and leases, as well as maintain and grow our commercial lending portfolio, is dependent upon the willingness and ability of dealers to effectively market our financial products to their retail and lease customers and select our commercial lending products over those of our competitors. As a result, our ability to cultivate and maintain strong relationships with dealers, particularly GM-franchised dealers, is essential to our operations.
Given the reliance of our operations on GM-franchised dealers, we have significant exposure to their financial condition. Dealers operate in a highly competitive market, and GM-franchised dealers are vulnerable to both decreased demand for new GM vehicles and periods of economic slowdown or recession. Negative changes in the financial condition of GM-franchised dealers could result in decreased loan and lease originations, reduced demand for financing of dealer inventory, construction projects and working capital, and increased defaults and net loss rates in our commercial lending portfolio, which in turn could adversely impact our profitability and financial results.
Our ability to continue to fund our business and service our debt is dependent on a number of financing sources and requires a significant amount of cash.
We depend on various financing sources, including credit facilities, securitization programs and unsecured debt issuances, to finance our loan and lease originations and commercial lending business. Additionally, our ability to refinance or make payments on our indebtedness depends on our access to financing sources in the future and our ability to generate cash. Our access to financing sources depends upon our financial position, general market conditions, availability of bank liquidity, the bank regulatory environment, our compliance with covenants imposed under our financing agreements, the credit quality of the collateral we can pledge to support secured financings, and other factors. Changes in GM's and our credit ratings may also impact our access to and cost of financing. There can be no assurance that funding will be available to us through these financing sources or, if available, that the funding will be on acceptable terms. If these financing sources are not available to us on a regular basis for any reason, or we are not otherwise able to generate significant amounts of cash, then we would not have sufficient funds and would be required to revise the scale of the business, including the possible reduction or discontinuation of origination activities, which would have a material adverse effect on our financial position, liquidity and results of operations.
Our substantial indebtedness could adversely affect our financial health and prevent us from fulfilling our obligations under existing indebtedness.
We currently have a substantial amount of outstanding indebtedness. In addition, we have guaranteed a substantial amount of indebtedness incurred by our International Segment and our principal Canadian operating subsidiary. We have also entered into intercompany loan agreements with several of our International Segment subsidiaries, providing these companies with access to our liquidity to support originations and other activities. Our ability to make payments of principal or interest on, or to refinance, our indebtedness will depend on our future operating performance, and our ability to enter into additional credit facilities and 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 refinancing 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, industry and capital markets conditions.
Our credit facilities may 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 of our securitized assets or declare the outstanding debt immediately due and payable. If our debt payments were accelerated, any assets pledged to secure 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 unsecured debt 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 loans and leases 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, including dealer obligors in our commercial lending portfolio, 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 value of the financed vehicle or, in the case of a commercial obligor, the value of the inventory and other commercial assets we finance usually does not cover the outstanding amount due to us, including the costs of recovery and asset disposition.
The amounts owed to us by any given dealership or dealership group in our commercial lending portfolio can be significant. The amount of potential loss resulting from the default of a dealer in our commercial lending portfolio can, therefore, be material even after liquidating the dealer's inventory and other assets to offset the defaulted obligations. Additionally, because the receivables in our commercial lending portfolio may include complex arrangements including guarantees, inter-creditor agreements, mortgages and other liens, our ability to recover and dispose of the underlying inventory and other collateral may be time-consuming and expensive, thereby increasing our potential loss.
We maintain an allowance for loan losses on our finance receivables which reflects management's estimates of inherent losses for these receivables. 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 financings, thus impairing our ability to finance our business.
An increase in defaults would reduce the cash flows generated by us, and distributions of cash to us from our secured debt facilities would be delayed and the ultimate amount of cash distributable to us would be less, which would have an adverse effect on our liquidity.
Customer prepayments and dealer repayments on commercial obligations, which are generally revolving in nature, 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.
A portion of our origination and servicing activities in the North America Segment have historically involved sub-prime automobile receivables. Sub-prime borrowers are associated with higher-than-average delinquency and default rates. The actual rates of delinquencies, defaults, repossessions and losses with respect to those borrowers could also be more dramatically affected by a general economic downturn. 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 our methods will be effective in the future. In the event that we underestimate the default risk or underprice contracts that we purchase, our financial position, liquidity and results of operations would be adversely affected.
We operate in a highly competitive industry, and competitive pressures could have a significant negative effect on our pricing, market share and operating results.
The automotive finance industry is highly competitive, and we compete with a large number of banks, credit unions, independent finance companies and other captive automotive finance subsidiaries. Our ability to maintain and expand our market share is contingent upon us offering competitive pricing, developing and maintaining strong relationships with dealers and customers, making substantial investments in our technological infrastructure, and effectively responding to changes in the automotive industry. In addition, any expansion into new markets may require us to compete with more experienced and established market participants. Failure to effectively manage these challenges could adversely affect our market share, and pressure to provide competitive pricing could have a negative effect on our operating results.
Compliance with laws and regulations can significantly increase our costs and affect how we do business.
We are subject to a wide variety of laws and regulations in the jurisdictions where we operate, including supervision and licensing by numerous governmental entities. These laws and regulations can create significant constraints on our operations and result in significant costs related to compliance. Failure to comply with these laws and regulations could impair our ability to continue operating and result in substantial civil and criminal penalties, monetary damages, attorneys’ fees and costs, possible

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revocation of licenses, and damage to reputation, brand and valued customer relationships.
In the United States, the Dodd-Frank Act imposes significant regulatory oversight on the financial industry and grants the CFPB extensive rulemaking and enforcement authority, all of which may substantially impact our operations. As a “larger participant” in the automobile finance market, we are subject to possible comprehensive and rigorous on-site examinations by the CFPB. Any violations of law or unfair lending practices found during these examinations could result in enforcement actions, fines, and mandated process, procedure or product-related changes or consumer refunds.
We could be materially adversely affected by significant legal and regulatory proceedings.
We are subject to various legal and regulatory proceedings and governmental investigations in the ordinary course of our business. An adverse outcome in one or more of these proceedings or investigations could result in substantial damages, settlements, fines, penalties, diminished income or reputational harm. For a further discussion of these matters, refer to Note 10 to our consolidated financial statements.
Our profitability is dependent upon retail demand for automobiles and related automobile financing and the ability of customers 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, 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 demand for automobiles and declining values of automobiles securing outstanding loans and leases, which weakens collateral values 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 and other factors that impact consumer confidence or disposable income could increase loss frequency and decrease demand for automobiles as well as weaken collateral values on certain types of automobiles. In addition, during an economic slowdown or recession, our servicing costs may increase without a corresponding increase in our revenue. While we seek to manage these risks 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 financings.
Demand for automobiles may also be impacted by the entrants of non-traditional participants in the automotive industry, who are disrupting the industry's historic business model through the introduction of new products, services, and methods of travel and vehicle ownership.
Wholesale Auction Values We sell automobiles returned to us at the end of lease terms either through our exclusive online channel or our wholesale auction partners. We also sell repossessed automobiles at wholesale auction markets located throughout the countries where we have operations. Depressed wholesale prices for used automobiles may result in or increase a loss upon our disposition of off-lease or repossessed vehicles and, in the case of a repossessed vehicle we may be unable to collect the resulting deficiency balance. Depressed wholesale prices for used automobiles may result from significant liquidations of rental or fleet inventories, financial difficulties of new vehicle manufacturers, discontinuance of vehicle brands and models and 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. Decreased auction proceeds resulting from the depressed prices at which used automobiles may be sold during periods of economic slowdown or low retail demand will result in higher losses for us.
Leased Vehicle Residual Values and Return Rates We project expected residual values and return volumes of the vehicles we lease. At the inception of a lease, we determine the amount of lease payments we charge our lease customer based, in part, on our estimated residual value. Actual proceeds realized by us upon the sale of a returned leased vehicle 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 industry 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 then-existing market 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. Further, a material decrease in the value of a leased asset group could result in an impairment charge, which could adversely affect our financial results.
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,

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liquidity and results of operations.
Our hedging strategies may not be successful in minimizing risks from unfavorable changes in interest rates and foreign currency exchange rates.
Unfavorable changes in interest rates and foreign currency exchange rates may adversely affect our financial condition, liquidity and results of operations. We utilize various hedging strategies to mitigate our exposure to rate fluctuations, including entering into derivative instruments with various major financial institutions that we believe are creditworthy. However, changes in interest rates and currency exchange rates cannot always be predicted or hedged, and there can be no assurance that our hedging strategies will be effective in minimizing interest rate and foreign currency risks. Our results of operations may be adversely impacted by volatility in the valuation of derivative instruments. Additionally, we may be unable to find creditworthy counterparties willing to enter derivative instruments on acceptable terms, and counterparties may be unable to meet their financial obligations under our derivative instruments.
We do not control the operations of our investments in joint ventures, and we are subject to the risks of operating in China.
We do not control the operations of our joint ventures, and we do not have a majority interest in the joint ventures. In the joint ventures, we share ownership and management with other parties who may not have the same goals, strategies, priorities, or resources as we do and may compete with us outside the joint ventures. Joint ventures are intended to be operated for the benefit of all co-owners, rather than for our exclusive benefit. Operating a business as a joint venture often requires additional organizational formalities, as well as time-consuming procedures for sharing information and making decisions that must further take into consideration our co-owners' interest. In joint ventures, we are required to foster our relationship with our co-owners as well as promote the overall success of the joint ventures, and if a co-owner changes or relationships deteriorate, our success in the joint ventures may be materially adversely affected. The benefits from a successful joint venture are shared among the co-owners, and as such, we do not receive the full benefits from a successful joint venture. As a result of having limited control over the actions of the joint ventures, we may be unable to prevent misconduct or other violations of applicable laws. Moreover, the joint ventures may not follow the same requirements regarding internal controls and internal control over financial reporting that we follow. To the extent another party makes decisions that negatively impact the joint ventures or internal control issues arise within the joint ventures, we may have to take responsive or other actions or we may be subject to penalties, fines or other related actions for these activities that could have a material adverse impact on our business, financial condition and results of operations. In addition, we are subject to the risks of operating in China. The automotive finance market in China is highly competitive and subject to significant governmental regulation. As the Chinese market continues to develop, we anticipate that additional competitors, both international and domestic, will seek to enter the Chinese market and that existing market participants will act aggressively to increase their market share. Increased competition, increased U.S.-China trade restrictions and weakening economic conditions in China, among other things, may result in price reductions, reduced sales, profitability and margins, and challenges to gain or hold market share. In addition, business in China is sensitive to economic and market conditions that drive sales volume in China. If our joint ventures are unable to maintain their position in the Chinese market or if vehicle sales in China decrease or do not continue to increase, our business and financial results could be materially adversely affected.
We may incur additional tax expense or become subject to additional tax exposure.

We are subject to the tax laws and regulations of the U.S. and numerous other jurisdictions in which we do business. Many judgments are required in determining our worldwide provision for income taxes and other tax liabilities, and we are regularly under audit by the U.S. Internal Revenue Service and other tax authorities, which may not agree with our tax positions. In addition, our tax liabilities are subject to other significant risks and uncertainties, including those arising from potential changes in laws and/or regulations in the countries in which we do business, the possibility of adverse determinations with respect to the application of existing laws, and changes in the valuation of our deferred tax assets and liabilities. Any unfavorable resolution of these and other uncertainties may have a significant adverse impact on our tax rate. For example, the impact of the U.S. Tax Cuts and Jobs Act of 2017 (the Tax Act), which was enacted on December 22, 2017, may differ from our previously recorded amounts, possibly materially, due to potential changes in the Tax Act (including with respect to the regulations promulgated thereunder) or changes to its interpretation. If our tax expense were to increase, or if the ultimate determination of our taxes owed is for an amount in excess of amounts previously accrued, our operating results, cash flows and financial condition could be adversely affected.

A substantial portion of our long–term indebtedness bears interest at variable interest rates, primarily based on USD–LIBOR, which may be subject to regulatory guidance and/or reform that could cause interest rates under our current or future debt agreements to perform differently than in the past or cause other unanticipated consequences.

The U.K. Financial Conduct Authority, which regulates LIBOR, has announced that it intends to stop encouraging or requiring banks to submit LIBOR rates after 2021, and it is unclear if LIBOR will cease to exist or if new methods of calculating LIBOR

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GENERAL MOTORS FINANCIAL COMPANY, INC.

will evolve. If LIBOR ceases to exist or if the methods of calculating LIBOR change from their current form, interest rates on our current or future indebtedness may be adversely affected.
Security breaches and other disruptions to systems and networks owned or maintained by us, or third-party vendors or suppliers on our behalf, could interfere with our operations and could compromise the confidentiality of private customer data or our proprietary information.
We rely upon information technology systems and networks, some of which are managed by third parties, to process, transmit and store electronic information, and to manage or support a variety of our business processes, activities and products. Additionally, we collect and store sensitive data, including intellectual property, proprietary business information, and personally identifiable information of our customers and employees in data centers and on information technology networks. The secure operation of these systems and networks, and the processing and maintenance of the information processed by these systems and networks, is critical to our business operations and strategy. Despite security measures and business continuity plans, these systems and networks may be vulnerable to damage, disruptions or shutdowns due to attacks by hackers, computer viruses or breaches due to errors or malfeasance by employees, contractors and others who have access to these systems and networks. The occurrence of any of these events could compromise the operational integrity of these systems and networks. Similarly, such an occurrence could result in the compromise or loss of the information processed by these systems and networks. Such events could result in, among other things, the loss of proprietary data, interruptions or delays in our business operations and damage to our reputation. In addition, such events could result in legal claims or proceedings, liability or regulatory penalties under laws protecting the privacy of personal information, disruption of operations, or reduction in the competitive advantage we hope to derive from our investment in advanced technologies. We have experienced such events in the past and, although past events were immaterial, future events may occur and may be material.
Portions of our information technology systems and networks also may experience interruptions, delays or cessations of service or produce errors due to regular maintenance efforts, such as systems integration or migration work that takes place from time to time. We may not be successful in implementing new systems and transitioning data, which could cause business disruptions and be more expensive, time-consuming, disruptive and resource intensive. Such disruptions could adversely impact our ability to originate receivables and service customer accounts, and may interrupt other business processes.
Our enterprise data practices, including the collection, use, sharing, and security of the Personal Identifiable Information of our customers or employees are subject to increasingly complex, restrictive, and punitive regulations in all key market regions.
Under these regulations, the failure to maintain compliant data practices could result in consumer complaints and regulatory inquiry, resulting in civil or criminal penalties, as well as brand impact or other harm to our business. In addition, increased consumer sensitivity to real or perceived failures in maintaining acceptable data practices could damage our reputation and deter current and potential users or customers from using our products and services. Because many of these laws are new, there is little clarity as to their interpretation, as well as a lack of precedent for the scope of enforcement. In addition, increased attention to data practices may result in the adoption of new regulations in the markets we serve. For example, in late 2018, Brazil and California enacted new data protection regimes, both of which will take effect in 2020. The cost of compliance with these laws and regulations will be high and is likely to increase in the future.
Our operations outside the U.S. expose us to additional risks.
Our operations outside the U.S. are subject to many of the same risks as our U.S. operations. In addition to those risks, our non-U.S. operations, including the operations of our joint ventures, are subject to certain additional risks, such as the following:
economic downturns in foreign countries or geographic regions where we have significant operations, such as Brazil, Mexico and China;
multiple foreign regulatory requirements that are subject to change;
difficulty in establishing, staffing and managing foreign operations;
differing labor regulations;
consequences from changes in tax laws;
restrictions on the ability to repatriate profits or transfer cash into or out of foreign countries and the tax consequences of such repatriations and transfers;
fluctuations in foreign currencies;
political and economic instability, natural calamities, war, and terrorism; and
compliance with laws and regulations applicable to international operations, including anti-corruption laws such as the Foreign Corrupt Practices Act and international trade and economic sanctions laws.

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The effects of these risks may, individually or in the aggregate, adversely affect our business.
Item 1B. Unresolved Staff Comments
None.
Item 2. Properties
Our executive offices are located in Fort Worth, Texas. We operate credit centers, collections and customer service centers and administrative offices in facilities in North America and Latin America. Our joint ventures operate in offices located in China.

Item 3. Legal Proceedings
Refer to Note 10 to our consolidated financial statements for information relating to legal proceedings.

Item 4. Mine Safety Disclosure
Not applicable.

PART II
Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
All of our common stock is owned by General Motors Holdings LLC, a wholly-owned subsidiary of GM; therefore, there is no public trading market for our common stock. Future dividends are payable at the sole discretion of our Board of Directors and will depend on a number of factors including, but not limited to, business and economic conditions, our financial condition, earnings, liquidity requirements and leverage ratio.
Item 6. Selected Financial Data
Omitted in accordance with General Instruction I to Form 10-K.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
General We are a global provider of automobile finance solutions, and we operate in the auto finance market as the wholly-owned captive finance subsidiary of GM. We evaluate our business in two operating segments: the North America Segment, which includes our operations in the U.S. and Canada, and the International Segment, which includes operations in Brazil, Chile, Colombia, Mexico and Peru and in China through our joint ventures.
Critical Accounting Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the U.S. 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 expenses during the reporting periods. Actual results could differ from those estimates, due to inherent uncertainties in making estimates, and those differences may be material. Refer to Note 1 to our consolidated financial statements for our significant accounting policies related to our critical accounting estimates. The accounting estimates that we believe are the most critical to understanding and evaluating our reported financial results include the following:
Residual Value of Leased Vehicles We have investments in leased vehicles recorded as operating leases. Each leased asset in our portfolio represents a vehicle that we own and have leased to a customer. At the time we purchase a lease, we establish an expected residual value for the vehicle at the end of the lease term, which typically ranges from two to five years. We estimate the expected residual value based on third-party data which considers inputs including recent auction values, the expected future volume of returning leased vehicles, used vehicle prices, manufacturer incentive programs and fuel prices.
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 customer returns the vehicle prior to or at the end of the lease term and the value of the vehicle is lower than the residual value estimated at inception of the lease.

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At December 31, 2018, the estimated residual value of our leased vehicles at the end of the lease term was $31.4 billion. Depreciation reduces the carrying value of each leased asset in our operating lease portfolio over time from its original acquisition value to its expected residual value at the end of the lease term. We periodically perform a review of the adequacy of the depreciation rates. If we believe that the expected residual values for our leased assets have changed, we revise the depreciation rate to ensure that our net investment in operating leases will be adjusted to reflect our revised estimate of the expected residual value at the end of the lease term. Such adjustments to the depreciation rate would result in a change in the depreciation expense on the leased assets, which is recorded prospectively on a straight-line basis. The effect of a 1% change in our assumption regarding residual values would increase or decrease depreciation expense on the operating lease portfolio over the remaining term of the leases as follows:
 
Impact to
Depreciation Expense
Cars
$
49

Trucks
73

Crossovers
150

SUVs
42

Total
$
314

Used vehicle prices in 2018 held at similar levels compared to 2017. We expect a decrease of 4% to 5% in 2019 compared to 2018, due primarily to continued increases in the industry supply of used vehicles. Used vehicle prices are an input to estimated residual values, and to the extent that used vehicle prices decrease more than anticipated by the estimated residual values, we will record increased depreciation expense or evaluate for impairment.
We also evaluate the carrying value of the operating leases aggregated by vehicle make, year and model into leased asset groups, check for indicators of impairment and test for impairment to the extent necessary in accordance with applicable accounting standards. A leased asset group is considered impaired if impairment indicators exist and the undiscounted expected future cash flows (including the expected residual value) are lower than the carrying value of the asset group. We believe no impairment indicators existed during 2018, 2017 or 2016.
Retail Finance Receivables and the Allowance for Loan Losses Our retail finance receivables portfolio consists of smaller-balance, homogeneous loans which are carried at amortized cost, net of allowance for loan losses. These loans are divided among pools based on common risk characteristics, such as internal credit score, origination period, delinquent status and geography. An internal credit score, of which FICO is an input in North America, is created by using algorithms or statistical models contained in origination scorecards. The scorecards are used to evaluate a consumer’s ability to pay based on statistical modeling of their prior credit usage, structure of the loan and other information. The output of the scorecards rank-order consumers from those that are least likely to default to those that are most likely to default. By further dividing the portfolio into pools based on internal credit scores we are better able to distinguish expected credit performance for different credit risks. These pools are collectively evaluated for impairment based on a statistical calculation, which is supplemented by management judgment. The allowance is aggregated for each of the pools.
We use a combination of forecasting methodologies to determine the allowance for loan losses, including roll rate modeling and static pool modeling techniques. A roll rate model is generally used to project near-term losses and static pool models are generally used to project losses over the remaining life. Probable losses are estimated for groups of accounts aggregated by past-due status and origination month. Generally, historical loss experience is evaluated, and recent performance is more heavily weighted when determining the allowance to result in an estimate that is more reflective of the current internal and external environments. Factors that are considered when estimating the allowance include historical delinquency migration to loss, probability of default (PD) and loss given default (LGD). PD and LGD are specifically estimated for each monthly vintage (i.e., group of originations) in cases where vintage models are used. PD is estimated based on expectations that are aligned with internal credit scores. LGD is projected based on historical trends experienced over the last 10 years, weighted toward more recent performance in order to consider recent market supply and demand factors that impact wholesale used vehicle pricing. While forecasted probable losses are quantitatively derived, we assess the recent internal operating and external environments and may qualitatively adjust certain assumptions to result in an allowance that is more reflective of losses that are expected to occur in the current environment.
We also use historical charge-off experience to determine a loss confirmation period (LCP). The LCP is a key assumption within our models and represents the average amount of time between when a loss event first occurs to when the receivable is charged-off. This LCP is the basis of our allowance and is applied to the forecasted probable credit losses to determine the amount of losses we believe exist at the balance sheet date.

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We believe these factors are relevant in estimating incurred losses and also consider an evaluation of overall portfolio credit quality based on indicators such as changes in our credit evaluation, underwriting and collection management policies, changes in the legal and regulatory environment, general economic conditions and business trends and uncertainties in forecasting and modeling techniques used in estimating our allowance. We update our retail loss forecast models and portfolio indicators on a quarterly basis to incorporate information reflective of the current economic environment.
Assumptions regarding credit losses and LCPs 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 LCPs 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.
Finance receivables that are considered impaired, including troubled debt restructurings (TDRs), are individually evaluated for impairment. In assessing the risk of individually impaired loans such as TDRs, among the factors we consider are the financial condition of the borrower, geography, collateral performance, historical loss experience, and industry-specific information that management believes is relevant in determining the occurrence of a loss event and measuring impairment. These factors are based on an evaluation of historical and current information, and involve subjective assessment and interpretation.
We believe that the allowance for loan losses on retail finance receivables is adequate to cover probable losses inherent in our retail finance 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. A 10% and 20% increase in cumulative charge-offs after recoveries on the portfolio over the LCP would increase the allowance for loan losses at December 31, 2018 by $84 million and $169 million. 
Income Taxes We account for income taxes on a separate return basis 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 financial statements' carrying amounts of existing assets and liabilities and their respective tax basis, net operating loss and tax credit carryforwards.
We are subject to income tax in the U.S. and various other state and foreign jurisdictions. Since October 1, 2010, we have been included in GM's consolidated U.S. federal income tax returns. Refer to Note 14 to our consolidated financial statements for more information relating to our tax sharing agreement with GM for our U.S. operations.
In the ordinary course of 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 records are reasonable. However, due to expiring statutes 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 the assumptions used in the computation of the estimated tax results in the future. These adjustments could materially impact the effective tax rate, earnings, accrued tax balances and cash.
The ability to realize deferred tax assets depends on the ability to generate sufficient taxable income within the carryback or carryforward periods provided for in the tax law for each applicable tax jurisdiction. The assessment regarding whether a valuation allowance is required or should be adjusted is based on an evaluation of possible sources of taxable income and also considers all available positive and negative evidence factors. Our accounting for deferred tax consequences represents our best estimate of future events. Changes in our current estimates, due to unanticipated market conditions or events, could have a material effect on our ability to utilize deferred tax assets.
The Tax Act changed many aspects of U.S. corporate income taxation, including the reduction of the corporate income tax rate from 35% to 21%, implementation of a territorial tax system and imposition of a tax on deemed repatriated earnings of foreign subsidiaries. During 2018, we filed our 2017 U.S. federal income tax return and updated our 2017 estimated tax benefit from $240 million to $286 million, primarily related to the remeasurement of transition tax as a result of proposed regulations issued in August 2018 and associated impacts to our deferred tax asset carryforwards.

14

GENERAL MOTORS FINANCIAL COMPANY, INC.

Results of Operations
Earnings before taxes for the year ended December 31, 2018 increased to $1.9 billion from $1.2 billion for the year ended December 31, 2017 due primarily to the following:
Retail finance charge income increased $230 million, due primarily to an increase in the average balance of the consumer finance receivables portfolio.
Commercial finance charge income increased $143 million, due to an increase in the average balance of the commercial finance receivables portfolio as well as increased interest rates on the portfolio.
Net leased vehicle income increased $855 million, due primarily to an increase in the average balance of the leased vehicle portfolio, as well as increased gains on the sales of terminated leased vehicles of $475 million.
Interest expense increased $659 million, due to an increase in the average balance of debt outstanding as well as an increase in the effective rate of interest on debt.
Return on average equity is widely used to measure earnings in relation to invested capital. Our return on average equity increased to 14.2% in 2018 from 11.5% in 2017 due to increased earnings.
We use return on average tangible common equity (a non-GAAP measure) to measure our contribution to GM's enterprise profitability and cash flow. Our return on average tangible common equity increased to 17.2% in 2018 from 13.4% in 2017 due to increased earnings.
The following table presents our reconciliation of return on average tangible common equity to return on average equity, the most directly comparable GAAP measure:
 
Years ended December 31,
 
2018
 
2017
Net income attributable to common shareholder
$
1,504

 
$
645

Plus: loss from discontinued operations, net of tax

 
424

Net income from continuing operations attributable to common shareholder
1,504

 
1,069

 
 
 
 
Average equity
11,049

 
9,451

Less: average preferred equity
1,136

 
303

Average common equity
9,913

 
9,148

Less: average goodwill
1,192

 
1,199

Average tangible common equity
$
8,721

 
$
7,949

 
 
 
 
Return on average tangible common equity
17.2
%
 
13.4
%
Return on average equity
14.2
%
 
11.5
%
Our calculation of this non-GAAP measure may not be comparable to similarly titled measures of other companies due to potential differences between companies in the method of calculation. As a result, the use of this non-GAAP measure has limitations and should not be considered superior to, in isolation from, or as a substitute for, related U.S. GAAP measures. This non-GAAP measure allows investors the opportunity to measure and monitor our performance against our externally communicated targets and evaluate the investment decisions being made by management to improve our return on average tangible common equity. Management uses this measure in its financial, investment and operational decision-making processes, for internal reporting and as part of its forecasting and budgeting processes. For these reasons we believe this non-GAAP measure is useful for our investors.

15

GENERAL MOTORS FINANCIAL COMPANY, INC.

Year Ended December 31, 2018 Compared to Year Ended December 31, 2017
Average Earning Assets
Years Ended December 31,
 
2018 vs. 2017 Change
 
2018
 
2017
 
Amount
 
Percentage
Average retail finance receivables
$
36,167

 
$
30,619

 
$
5,548

 
18.1
 %
Average commercial finance receivables
10,689

 
9,060

 
1,629

 
18.0
 %
Average finance receivables
46,856

 
39,679

 
7,177

 
18.1
 %
Average leased vehicles, net
43,710

 
39,255

 
4,455

 
11.3
 %
Average earning assets
$
90,566

 
$
78,934

 
$
11,632

 
14.7
 %
 
 
 
 
 
 
 
 
Retail finance receivables purchased
$
26,181

 
$
19,920

 
$
6,261

 
31.4
 %
Leased vehicles purchased
$
22,593

 
$
25,421

 
$
(2,828
)
 
(11.1
)%
Average retail finance receivables increased with a higher volume of new loan originations in excess of principal collections and payoffs due to an increase in retail penetration. Our retail penetration of GM's retail sales in North America increased to 47% in 2018 from 37% in 2017, due primarily to further alignment with GM and greater dealer engagement. Average commercial finance receivables increased due primarily to an increase in our GM-franchised dealer commercial lending relationships. Leased vehicles purchased during 2018 decreased primarily as a result of a change in GM's retail sales mix. However, average leased vehicles, net continued to increase as the volume of leases originated exceeded the depreciation and termination of leases.
Revenue
Years Ended December 31,
 
2018 vs. 2017 Change
 
2018
 
2017
 
Amount
 
Percentage
Finance charge income
 
 
 
 
 
 
 
Retail finance receivables
$
3,070

 
$
2,840

 
$
230

 
8.1
%
Commercial finance receivables
$
559

 
$
416

 
$
143

 
34.4
%
Leased vehicle income
$
9,963

 
$
8,606

 
$
1,357

 
15.8
%
Other income
$
424

 
$
289

 
$
135

 
46.7
%
Equity income
$
183

 
$
173

 
$
10

 
5.8
%
Effective yield - retail finance receivables
8.5
%
 
9.3
%
 
 
 
 
Effective yield - commercial finance receivables
5.2
%
 
4.6
%
 
 
 
 
Finance charge income on retail finance receivables increased due to growth in the portfolio, partially offset by a decrease in effective yield. The effective yield on our retail finance receivables decreased due primarily to increased lending to borrowers with prime credit. The effective yield represents finance charges and fees recorded in earnings during the period as a percentage of average retail finance receivables. The effective yield, as a percentage of average retail finance receivables, is higher than the contractual rates of our auto finance contracts primarily because the effective yield includes, in addition to the contractual rates and fees, the impact of rate subvention provided by GM.
Finance charge income on commercial finance receivables increased due to growth in the portfolio, including an increase in the number of dealers in our floorplan program, and an increase in the effective yield resulting from rising benchmark interest rates.
The increase in leased vehicle income reflects the growth of the leased asset portfolio.
The increase in other income is primarily due to (i) a $70 million increase in investment income due to rising benchmark interest rates and (ii) a $47 million increase in insurance revenue primarily due to a change in the timing of the recognition of commissions due to the adoption of Accounting Standards Codification (ASC) 606.

16

GENERAL MOTORS FINANCIAL COMPANY, INC.

Costs and Expenses
Years Ended December 31,
 
2018 vs. 2017 Change
 
2018
 
2017
 
Amount
 
Percentage
Operating expenses
$
1,522

 
$
1,390

 
$
132

 
9.5
 %
Leased vehicle expenses
$
6,917

 
$
6,415

 
$
502

 
7.8
 %
Provision for loan losses
$
642

 
$
757

 
$
(115
)
 
(15.2
)%
Interest expense
$
3,225

 
$
2,566

 
$
659

 
25.7
 %
Average debt outstanding
$
85,050

 
$
74,912

 
$
10,138

 
13.5
 %
Effective rate of interest on debt
3.8
%
 
3.4
%
 
 
 
 
Operating Expenses The increase in operating expenses relates to the growth in earning assets and investments to support origination and servicing capabilities in the U.S. Operating expenses as a percentage of average earning assets decreased to 1.7% for 2018 from 1.8% for 2017, due primarily to efficiency gains achieved through higher earning asset levels.
Leased Vehicle Expenses The increase in leased vehicle expenses is due primarily to increased depreciation expense of $940 million due to growth in the lease portfolio, offset by increased gains on sales of terminated leased vehicles of $475 million due to stronger than expected used vehicle prices.
Provision for Loan Losses As a percentage of average retail finance receivables, the provision for retail loan losses decreased to 1.7% for 2018 from 2.4% for 2017, due primarily to a shift in the credit mix of the portfolio to a larger percentage of prime loans, better than forecast recovery rates on repossessed vehicles and a decrease in the loss confirmation period. The provision for commercial loan losses was insignificant for 2018 and 2017.
Interest Expense Interest expense increased due to an increase in the average debt outstanding resulting from growth in the loan and lease portfolios as well as rising benchmark interest rates.
Taxes Our consolidated effective income tax rate was 18.9% and 10.9% of income before income taxes and equity income for 2018 and 2017. The increase in the effective income tax rate is due primarily to a favorable impact recorded in 2017 from the U.S. tax reform legislation.
Other Comprehensive (Loss) Income
Foreign Currency Translation Adjustment Foreign currency translation adjustments included in other comprehensive (loss) income were $(291) million and $450 million for 2018 and 2017. Translation adjustments resulted from changes in the values of our international currency-denominated assets and liabilities as the value of the U.S. Dollar changed in relation to international currencies, particularly the Brazilian Real, the Chinese Yuan Renminbi and the Canadian Dollar.

17

GENERAL MOTORS FINANCIAL COMPANY, INC.

Earning Asset Quality
Retail Finance Receivables Our retail finance receivables portfolio includes loans made to consumers and businesses to finance the purchase of vehicles for personal and commercial use. A summary of the credit risk profile by FICO score or its equivalent, determined at origination, of the retail finance receivables is as follows:
 
December 31, 2018
 
December 31, 2017
 
Amount
 
Percent
 
Amount
 
Percent
Prime - FICO Score 680 and greater
$
24,434

 
60.0
%
 
$
16,892

 
51.5
%
Near-prime - FICO Score 620 to 679
6,144

 
15.1

 
5,226

 
15.9

Sub-prime - FICO Score less than 620
10,124

 
24.9

 
10,684

 
32.6

Retail finance receivables, net of fees
40,702

 
100.0
%
 
32,802

 
100.0
%
Less: allowance for loan losses
(844
)
 
 
 
(889
)
 
 
Retail finance receivables, net
$
39,858

 
 
 
$
31,913

 
 
Number of outstanding contracts
2,607,703

 
 
 
2,308,826

 
 
Average amount of outstanding contracts (in dollars)(a)
$
15,608

 
 
 
$
14,207

 
 
Allowance for loan losses as a percentage of retail finance receivables, net of fees
2.1
%
 
 
 
2.7
%
 
 
_________________ 
(a)
Average amount of outstanding contracts consists of retail finance receivables, net of fees, divided by number of outstanding contracts.
At December 31, 2018, the allowance for loan losses as a percentage of retail finance receivables, net of fees, decreased from the level at December 31, 2017 due primarily to a shift in the credit mix of the portfolio to a larger percentage of prime loans, an increase in our forecast recovery rates on repossessed vehicles and a decrease in the loss confirmation period. The loss confirmation period change resulted from a shift in the credit mix of the portfolio to a larger percentage of prime loans. The recovery rate forecast change reflects stronger than expected wholesale auction values for 2018.
Delinquency The following is a consolidated summary of the contractual amounts of delinquent retail finance receivables:
 
December 31, 2018
 
December 31, 2017
 
Amount
 
Percent of Contractual Amount Due
 
Amount
 
Percent of Contractual Amount Due
31 - 60 days
$
1,349

 
3.3
%
 
$
1,334

 
4.1
%
Greater than 60 days
547

 
1.4

 
559

 
1.7

Total finance receivables more than 30 days delinquent
1,896

 
4.7

 
1,893

 
5.8

In repossession
44

 
0.1

 
27

 

Total finance receivables more than 30 days delinquent or in repossession
$
1,940

 
4.8
%
 
$
1,920

 
5.8
%
Overall, delinquency continues to improve due primarily to the continued shift in credit mix to prime credit.
TDRs Refer to Note 3 to our consolidated financial statements for further discussion of TDRs.
Net Charge-offs The following table presents charge-off data with respect to our retail finance receivables portfolio:  
 
Years Ended December 31,
 
2018
 
2017
 
2016
Charge-offs
$
1,196

 
$
1,171

 
$
1,136

Less: recoveries
(536
)
 
(552
)
 
(542
)
Net charge-offs
$
660

 
$
619

 
$
594

Net charge-offs as a percentage of average retail finance receivables
1.8
%
 
2.0
%
 
2.4
%
 
Net charge-offs as a percentage of average retail finance receivables decreased during 2018 from the prior years, due primarily to the shift in the North America receivables portfolio toward prime credit quality. The recovery rate as a percentage of gross repossession charge-offs in North America was 52.3%, 51.9% and 52.7% for 2018, 2017 and 2016.

18

GENERAL MOTORS FINANCIAL COMPANY, INC.

Commercial Finance Receivables
December 31, 2018
 
December 31, 2017
Commercial finance receivables, net of fees
$
12,721

 
$
10,312

Less: allowance for loan losses
(67
)
 
(53
)
Commercial finance receivables, net
$
12,654

 
$
10,259

Number of dealers
1,750

 
1,538

Average carrying amount per dealer
$
7

 
$
7

Allowance for loan losses as a percentage of commercial finance receivables, net of fees
0.5
%
 
0.5
%
There were insignificant charge-offs of commercial finance receivables during 2018, 2017 and 2016. At December 31, 2018 and 2017, substantially all of our commercial finance receivables were current with respect to payment status and none were classified as TDRs.
Leased Vehicles At December 31, 2018 and 2017, 98.8% and 98.7% of our operating leases were current with respect to payment status.
The following table summarizes the residual value and the number of units included in leased vehicles, net by vehicle type (units in thousands):
 
December 31, 2018
 
December 31, 2017
 
Residual Value
 
Units
 
Percentage
of Units
 
Residual Value
 
Units
 
Percentage
of Units
Cars
$
4,884

 
379

 
22.3
%
 
$
5,701

 
450

 
27.2
%
Trucks
7,299

 
296

 
17.4

 
7,173

 
285

 
17.3

Crossovers
15,057

 
917

 
53.8

 
13,723

 
818

 
49.5

SUVs
4,160

 
111

 
6.5

 
3,809

 
99

 
6.0

Total
$
31,400

 
1,703

 
100.0
%
 
$
30,406

 
1,652

 
100.0
%
Used vehicle prices in 2018 held at similar levels as compared to 2017. We expect a decrease of 4% to 5% in 2019 compared to 2018, due primarily to continued increases in the industry supply of used vehicles.
The following table summarizes additional information for operating leases (in thousands):
 
Years ended December 31,
 
2018
 
2017
 
2016
Operating leases originated
587

 
678

 
672

Operating leases terminated
536

 
349

 
138

Operating lease vehicles returned(a)
369

 
238

 
69

Percentage of lease vehicles returned(b)
69
%
 
68
%
 
50
%
________________ 
(a)
Represents the number of vehicles returned to us for remarketing.
(b)
Calculated as the number of operating leases returned divided by the number of operating leases terminated.
Operating leases originated decreased primarily as a result of a change in GM's retail sales mix. Operating leases terminated and operating lease vehicles returned increased due to the growth and maturity of the leased asset portfolio. The return rate can fluctuate based upon the level of used vehicle pricing compared to residual values at lease inception and growth and age of the lease portfolio.
Liquidity and Capital Resources
General Our primary sources of cash are finance charge income, leasing income and proceeds from the sale of terminated leased vehicles, net distributions from credit facilities, securitizations, secured and unsecured borrowings, and collections and recoveries on finance receivables. Our primary uses of cash are purchases of retail finance receivables and leased vehicles, the funding of commercial finance receivables, repayment of secured and unsecured debt, funding credit enhancement requirements in connection with securitizations and secured credit facilities, operating expenses and interest costs.

19

GENERAL MOTORS FINANCIAL COMPANY, INC.

Typically, our purchase and funding of retail and commercial finance receivables and leased vehicles are financed initially utilizing cash and borrowings on our secured credit facilities. Subsequently, we typically obtain long-term financing for finance receivables and leased vehicles through securitization transactions and the issuance of unsecured debt.
Cash Flow During 2018, net cash provided by operating activities increased due primarily to an increase in finance charge income and leased vehicle income, partially offset by increased interest expense.
During 2018, net cash used in investing activities decreased due to increased collections and recoveries on retail finance receivables of $4.5 billion, an increase in proceeds received on terminated leases of $4.2 billion, and a decrease in purchases of leased vehicles of $2.4 billion, partially offset by an increase in purchases of retail finance receivables of $6.8 billion.
During 2018, net cash provided by financing activities decreased due primarily to a decrease in borrowings, net of repayments, of $4.6 billion and a decrease in the issuance of preferred stock of $0.5 billion, partially offset by a decrease in dividends paid of $0.1 billion.
Liquidity
December 31, 2018
 
December 31, 2017
Cash and cash equivalents(a)
$
4,883

 
$
4,265

Borrowing capacity on unpledged eligible assets
18,048

 
12,533

Borrowing capacity on committed unsecured lines of credit
290

 
129

Borrowing capacity on the Junior Subordinated Revolving Credit Facility
1,000

 
1,000

Borrowing capacity on the GM Revolving 364-Day Credit Facility
2,000

 

Available liquidity
$
26,221

 
$
17,927

_________________
(a)
Includes $503 million and $656 million in unrestricted cash outside of the U.S. at December 31, 2018 and 2017. This cash is considered to be indefinitely invested based on specific plans for reinvestment of these earnings.
During 2018, available liquidity increased due primarily to an increase in cash and additional capacity on new and renewed secured revolving credit facilities, resulting from the issuance of securitizations and unsecured debt. In addition, we added $2.0 billion in borrowing capacity on the GM Revolving 364-Day Credit Facility as described below.
Our support agreement with GM (the Support Agreement) provides that GM will use commercially reasonable efforts to ensure that we will continue to be designated as a subsidiary borrower under GM's unsecured revolving credit facilities. In April 2018, GM amended and restated its revolving credit facilities, consisting of a three-year, $4.0 billion facility and a five-year, $10.5 billion facility, and added a 364-day, $2.0 billion facility. We have access to the entire $16.5 billion, subject to available capacity, with irrevocable and exclusive access to no less than $2.0 billion of the GM Revolving 364-Day Credit Facility to support our liquidity. At December 31, 2018, we had no borrowings outstanding under any of these facilities.
Credit Ratings We receive ratings from four independent credit rating agencies: DBRS Limited, Fitch Rating (Fitch), Moody’s Investor Service (Moody’s) and Standard & Poor’s (S&P). The credit ratings assigned to us from all the credit rating agencies are closely associated with their opinions on GM. The following table summarizes our credit ratings at February 5, 2019:
 
 
Company Rating
 
Bond Rating
 
Short Term Rating
 
Outlook
DBRS Limited
 
BBB
 
BBB
 
R-2
 
Positive
Fitch
 
BBB
 
BBB
 
F-2
 
Stable
Moody’s
 
Baa3
 
Baa3
 
P-3
 
Stable
S&P
 
BBB
 
BBB
 
A-2
 
Stable
In June 2018, DBRS Limited revised their outlook to Positive from Stable.
Credit Facilities In the normal course of business, in addition to using our available cash, we fund our operations by borrowing under our credit facilities, which may be secured and/or structured as securitizations, or may be unsecured. We repay these borrowings as appropriate under our liquidity management strategy.

20

GENERAL MOTORS FINANCIAL COMPANY, INC.

At December 31, 2018, credit facilities consist of the following:
Facility Type
 
Facility Amount
 
Advances Outstanding
Revolving retail asset-secured facilities(a)
 
$
22,412

 
$
3,149

Revolving commercial asset-secured facilities(b)
 
3,966

 
261

Total secured
 
26,378

 
3,410

Unsecured committed facilities
 
436

 
146

Unsecured uncommitted facilities(c)
 
2,011

 
2,011

Total unsecured
 
2,447

 
2,157

Junior Subordinated Revolving Credit Facility
 
1,000

 

GM Revolving 364-Day Credit Facility(d)
 
2,000

 

Total
 
$
31,825

 
$
5,567

_________________
(a)
Includes committed and uncommitted revolving credit facilities backed by retail finance receivables and leases. The financial institutions providing the uncommitted facilities are not contractually obligated to advance funds under them.  We had $117 million in advances outstanding and $696 million in unused borrowing capacity on these facilities at December 31, 2018.
(b)
Includes revolving credit facilities backed by loans to dealers for floorplan financing.
(c)
The financial institutions providing the uncommitted facilities are not contractually obligated to advance funds under them. We had $1.1 billion in unused borrowing capacity on these facilities at December 31, 2018.
(d)
Does not include $14.5 billion in additional borrowing capacity available to us under GM's unsecured revolving credit facilities.
Refer to Note 7 to our consolidated financial statements for further discussion of the terms of our revolving credit facilities.
Securitization Notes Payable We periodically finance our retail and commercial finance receivables and leases through public and private term securitization transactions, where the securitization markets are sufficiently developed. A summary of securitization notes payable is as follows:
Year of Transaction
 
Maturity Date (a)
 
Original Note Issuance (b)
 
Note Balance
At December 31, 2018
2014
 
November 2021
-
March 2022
 
$
3,350

 
$
377

2015
 
January 2021
-
December 2023
 
$
5,297

 
950

2016
 
May 2019
-
September 2024
 
$
13,177

 
4,570

2017
 
August 2019
-
May 2025
 
$
22,394

 
13,770

2018
 
June 2020
-
September 2026
 
$
23,005

 
19,832

Total active securitizations
 
 
 
 
 
 
 
39,499

Debt issuance costs
 
 
 
 
 
 
 
(74
)
     Total
 
 
 
 
 
 
 
$
39,425

_________________ 
(a)
Maturity dates represent legal final maturity of issued notes. The notes are expected to be paid based on amortization of the finance receivables and leases pledged.
(b)
At historical foreign currency exchange rates at the time of issuance.
Our securitizations utilize special purpose entities (SPEs) which are also variable interest entities (VIEs) that meet the requirements to be consolidated in our financial statements. Refer to Note 8 to our consolidated financial statements for further discussion.
Unsecured Debt We periodically access the unsecured debt capital markets through the issuance of senior unsecured notes. At December 31, 2018, the aggregate principal amount of our outstanding unsecured senior notes was $43.2 billion.
We issue other unsecured debt through commercial paper offerings and other bank and non-bank funding sources. At December 31, 2018, we had $3.4 billion of this type of unsecured debt outstanding.

21

GENERAL MOTORS FINANCIAL COMPANY, INC.

Support Agreement At December 31, 2018 and 2017, our earning assets leverage ratio calculated in accordance with the terms of the Support Agreement was 9.05x and 9.49x, and the applicable leverage ratio threshold was 11.50x. The earning assets leverage ratio decreased during 2018 due to growth in earnings and the issuance of preferred stock.
Dividends on Common Stock In consideration of our level of pre-tax earnings, our increasing penetration of GM retail sales during 2018 and our decreased leverage ratio during 2018, our Board of Directors declared and paid a $375 million dividend on our common stock to General Motors Holdings LLC in October 2018. Following payment of the dividend, our leverage ratio remained below the applicable threshold. Future dividends are payable at the sole discretion of our Board of Directors and will depend on a number of factors including, but not limited to, business and economic conditions, our financial condition, earnings, liquidity requirements and leverage ratio.
Off-Balance Sheet Arrangements We do not currently utilize off-balance sheet securitization arrangements. All finance receivables and related obligations subject to securitization programs were recorded on our consolidated balance sheets at December 31, 2018 and 2017.
Contractual Obligations The following table presents the expected scheduled principal and interest payments under our contractual debt and lease obligations:
 
Years Ending December 31,
 
2019
 
2020
 
2021
 
2022
 
2023
 
Thereafter
 
Total
Operating leases
$
27

 
$
26

 
$
25

 
$
23

 
$
19

 
$
47

 
$
167

Secured debt
21,331

 
14,262

 
5,394

 
1,656

 
10

 
257

 
42,910

Unsecured debt
9,714

 
8,891

 
9,644

 
5,774

 
5,073

 
9,680

 
48,776

Interest payments(a)
2,811

 
1,816

 
1,178

 
707

 
491

 
714

 
7,717

 
$
33,883

 
$
24,995

 
$
16,241

 
$
8,160

 
$
5,593

 
$
10,698

 
$
99,570

_________________ 
(a)
Interest payments were determined using the interest rate in effect at December 31, 2018 for floating rate debt and the contractual rates for fixed-rate debt.
At December 31, 2018, we had liabilities associated with uncertain tax positions of $124 million, including penalties and interest. The table above does not include these liabilities since it is impracticable to estimate the future cash flows associated with these amounts.
Under our tax sharing arrangement with GM, we are responsible for our tax liabilities as if we filed separate returns. As of December 31, 2018, we have no accrued liability to GM. Refer to Note 14 to our consolidated financial statements for more information.
Item 7A. Quantitative and Qualitative Disclosure About Market Risk
Overview We are exposed to a variety of risks in the normal course of our business. Our financial condition depends on the extent to which we effectively identify, assess, monitor and manage these risks. The principal types of risk to our business include:
Market risk - the possibility that changes in interest and currency exchange rates will adversely affect our cash flow and economic value;
Counterparty risk - the possibility that a counterparty may default on a derivative instrument or cash deposit or will fail to meet its lending commitments to us;
Credit risk - the possibility of loss from a customer's failure to make payments according to contract terms;
Residual risk - the possibility that the actual proceeds we receive at lease termination will be lower than our projections or return volumes will be higher than our projections;
Liquidity risk - the possibility that we may be unable to meet all of our current and future obligations in a timely manner; and
Operating risk - the possibility of errors relating to transaction processing and systems, actions that could result in compliance deficiencies with regulatory standards or contractual obligations and the possibility of fraud by our employees or outside persons.
We manage each of these types of risk in the context of its contribution to our overall global risks. We make business decisions on a risk-adjusted basis and price our services consistent with these risks. A discussion of market risk (including interest rate and foreign currency exchange rate risk), counterparty risk, and operating risk follows.

22

GENERAL MOTORS FINANCIAL COMPANY, INC.

Market Risk We seek to minimize volatility in our earnings from changes in interest rates and foreign currency exchange rates. Our strategies to manage market risk are approved by our International and North America Asset Liability Committees (collectively, the ALCO). Our Corporate Treasury group is responsible for the development of our interest rate and liquidity management policies as presented to the ALCO.
Interest Rate Risk We depend on accessing the capital markets to fund asset originations. We are exposed to interest rate risks as our financial assets and liabilities have different characteristics that may impact our financial performance. These differences may include tenor, yield, re-pricing timing, and prepayment expectations.
Our assets are primarily comprised of fixed-rate retail installment loans and operating lease agreements under which customers typically make equal monthly payments over the life of the contracts. Our commercial finance receivables primarily earn a floating rate of interest, and are revolving in nature.
Our debt includes long-term unsecured debt and securitization notes payable. Our senior unsecured debt issuances have tenors of up to ten years. Approximately 83% of these debt instruments are fixed-rate and pay equal interest payments over the life of the debt and a single principal payment at maturity. Our securitization notes payable are primarily fixed-rate and amortize as the underlying assets pay down.
Risk Management Our interest rate risk management objective is to reduce volatility in our cash flows and volatility in our economic value from changes in interest rates based on an established risk tolerance that may vary by market. We use economic value of equity sensitivity analysis and duration gap analysis to evaluate potential long-term effects of changes in interest rates. We then enter into interest rate derivatives to convert portions of our floating-rate assets and liabilities to fixed or our fixed-rate assets and liabilities to floating to ensure that our exposure falls within the tolerances established by the ALCO. We also use net interest income sensitivity analysis to monitor the level of near-term cash flow exposure. The net interest income sensitivity analysis measures the changes in expected cash flows associated with our interest-rate-sensitive assets, liabilities, and derivative financial instruments from hypothetical changes in interest rates over a twelve-month period. The ALCO reviews these metrics and approves the derivative strategy required to maintain exposure within approved thresholds prior to execution. Management monitors our hedging activities to ensure that the value of derivative financial instruments, their correlation to the instruments 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. We do not engage in any speculative trading in derivatives.
Quantitative Disclosure We measure the sensitivity of our net interest income to changes in interest rates by using interest rate scenarios that assume a hypothetical, instantaneous parallel shift of one hundred basis points in all interest rates across all maturities, as well as a base case that assumes that rates perform at the current market forward curve. However, interest rate changes are rarely instantaneous or parallel and rates could move more or less than the one hundred basis points assumed in our analysis. Therefore, the actual impact to our net interest income could be higher or lower than the results detailed in the table below. These interest rate scenarios are purely hypothetical and do not represent our view of future interest rate movements.
Net Interest Income Sensitivity
December 31, 2018
 
December 31, 2017
One hundred basis points instantaneous increase in interest rates
$
10.7

 
$
19.4

One hundred basis points instantaneous decrease in interest rates(a)
$
(10.7
)
 
$
(19.4
)
________________
(a)
Net interest income sensitivity given a one hundred basis points decrease in interest rates requires an assumption of negative interest rates in markets where existing interest rates are below one percent.
Under these interest rate scenarios, we are asset-sensitive, meaning that we expect more assets than liabilities to re-price within the next twelve months. During a period of rising interest rates, the interest earned on our assets will increase more than the interest paid on our debt, which would initially increase our net interest income. During a period of falling interest rates, we would expect our net interest income to initially decrease. Our net interest income sensitivity decreased from 2017 to 2018 due primarily to the implementation of our ALCO strategy of hedging our fixed-rate asset originations with pay-fixed interest rate swaps.
Additional Model Assumptions The sensitivity analysis presented is our best estimate of the effect of the hypothetical interest rate scenarios; however, our actual results could differ. Our estimates are also based on assumptions including the amortization and prepayment of the finance receivable portfolio, originations of finance receivables and leases, refinancing of maturing debt, replacement of maturing derivatives and exercise of options embedded in debt and derivatives. Our prepayment projections are based on historical experience. If interest rates or other factors change, our actual prepayment experience could be different than projected.

23

GENERAL MOTORS FINANCIAL COMPANY, INC.

Derivative Notional Values The following table presents the outstanding notional value of our derivative instruments (in billions):
 
December 31, 2018
 
December 31, 2017
Interest rate contracts
 
 
 
Pay-fixed, receive-floating interest rate swaps
$
42

 
$
36

Pay-floating, receive-fixed interest rate swaps
29

 
24

Long interest rate caps and floors
19

 
17

Short interest rate caps and floors
20

 
18

     Total interest rate contracts
110

 
95

Foreign currency swaps
4

 
3

     Total notional value
$
114

 
$
98

Derivative Fair Values The net fair value of our derivative financial instruments at December 31, 2018 was a liability of $367 million, compared to an asset of $56 million at December 31, 2017. The fair value of our cross-currency swaps decreased due to the strengthening of the U.S. Dollar against other currencies, and the fair value of our interest rate swaps decreased overall due to changes in the forward interest rate curve. Refer to Note 9 to our consolidated financial statements for more information.
Foreign Currency Exchange Rate Risk We primarily finance receivables and lease assets with debt in the same currency, minimizing exposure to exchange rate movements. When a different currency is used, we may use foreign currency derivatives to minimize any impact to earnings. Exchange rate movements can impact our net investment in foreign subsidiaries, which impacts our tangible equity through other comprehensive income/loss. The following table summarizes the amounts of foreign currency translation and transaction and remeasurement (gains) losses:
 
Years Ended December 31,
 
2018
 
2017
 
2016
Foreign currency translation losses (gains) recorded in accumulated other comprehensive loss
$
291

 
$
(450
)
 
$
144

 
 
 
 
 
 
(Gains) losses resulting from foreign currency transactions and remeasurement recorded in earnings
$
(226
)
 
$
251

 
$
(41
)
Losses (gains) resulting from foreign currency exchange swaps recorded in earnings
238

 
(242
)
 
45

Net losses resulting from foreign currency exchange recorded in earnings
$
12

 
$
9

 
$
4

Most of the international operations use functional currencies other than the U.S. Dollar. Translation adjustments result from changes in the values of our international currency-denominated assets and liabilities as the value of the U.S. Dollar changes in relation to international currencies. The foreign currency translation loss in 2018 was due primarily to decreases in the values of the Brazilian Real, the Chinese Yuan Renminbi, the Chilean Peso and the Canadian Dollar in relation to the U.S. Dollar. The foreign currency translation gain in 2017 was due primarily to increases in the values of the Brazilian Real, the Chinese Yuan Renminbi and the Canadian Dollar in relation to the U.S. Dollar and also includes the reversal of $197 million in accumulated translation losses that were recognized as part of the disposal loss on the sale of the European Operations.
Counterparty Risk Counterparty risk relates to the financial loss we could incur if an obligor or counterparty to a transaction is unable to meet its financial obligations. Typical sources of exposure include balances maintained in bank accounts, investments, and derivative instruments. Investments are typically securities representing high quality monetary instruments which are easily accessible and derivative instruments are used for managing interest rate and foreign currency exchange rate risk. We, together with GM, establish exposure limits for each counterparty to minimize risk and provide counterparty diversification.
We enter into arrangements with individual counterparties that we believe are creditworthy and generally settle on a net basis. In addition, the ALCO performs a quarterly assessment of our counterparty credit risk, including a review of credit ratings, credit default swap rates and potential nonperformance of the counterparty.

24

GENERAL MOTORS FINANCIAL COMPANY, INC.

Operating Risk We operate in many locations and rely on the abilities of our employees and computer systems to process a large number of transactions. Improper employee actions, improper operation of systems, or unforeseen business interruptions could result in financial loss, regulatory action and damage to our reputation, and breach of contractual obligations. To address this risk, we maintain internal control processes that identify transaction authorization requirements, safeguard assets from misuse or theft, protect the reliability of financial and other data, and minimize the impact of a business interruption on our customers. We also maintain system controls to maintain the accuracy of information about our operations. These controls are designed to manage operating risk throughout our operation.

25

GENERAL MOTORS FINANCIAL COMPANY, INC.

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders and the Board of Directors of
General Motors Financial Company, Inc.

Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheet of General Motors Financial Company, Inc. (the Company) as of December 31, 2018, the related consolidated statements of income, comprehensive income, shareholders' equity and cash flows for the year ended December 31, 2018, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2018, and the results of its operations and its cash flows for the year ended December 31, 2018, in conformity with U.S. generally accepted accounting principles.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/Ernst & Young LLP

We have served as the Company’s auditor since 2017.
Fort Worth, Texas
February 6, 2019



26

GENERAL MOTORS FINANCIAL COMPANY, INC.

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of
General Motors Financial Company, Inc.:

Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheet of General Motors Financial Company, Inc. and subsidiaries (the "Company") as of December 31, 2017, the related consolidated statements of income and comprehensive income, shareholders’ equity, and cash flows for each of the two years in the period ended December 31, 2017, and the related notes (collectively referred to as the "financial statements"). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2017, and the results of its operations and its cash flows for each of the two years in the period ended December 31, 2017, in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

/s/Deloitte & Touche LLP
Fort Worth, Texas
February 6, 2018


We began serving as the Company's auditor in 2006. In 2018 we became the predecessor auditor.

27

GENERAL MOTORS FINANCIAL COMPANY, INC.

Item 8. Financial Statements and Supplementary Data

CONSOLIDATED BALANCE SHEETS
(in millions, except per share amounts) 
 
December 31, 2018
 
December 31, 2017
ASSETS
 
 
 
Cash and cash equivalents
$
4,883

 
$
4,265

Finance receivables, net (Note 3; Note 8 VIEs)
52,512

 
42,172

Leased vehicles, net (Note 4; Note 8 VIEs)
43,559

 
42,882

Goodwill (Note 5)
1,186

 
1,197

Equity in net assets of non-consolidated affiliates (Note 6)
1,355

 
1,187

Property and equipment, net of accumulated depreciation of $221 and $159
251

 
259

Deferred income taxes (Note 14)
214

 
249

Related party receivables (Note 2)
729

 
309

Other assets (Note 8 VIEs)
5,231

 
4,495

Total assets
$
109,920

 
$
97,015

LIABILITIES AND SHAREHOLDERS' EQUITY
 
 
 
Liabilities
 
 
 
Secured debt (Note 7; Note 8 VIEs)
$
42,835

 
$
39,887

Unsecured debt (Note 7)
48,153

 
40,830

Accounts payable and accrued expenses
1,891

 
1,622

Deferred income
3,605

 
3,221

Deferred income taxes (Note 14)
522

 
288

Related party payables (Note 2)
63

 
92

Other liabilities
1,192

 
781

Total liabilities
98,261

 
86,721

Commitments and contingencies (Note 10)

 

Shareholders' equity (Note 11)
 
 
 
Common stock, $0.0001 par value per share

 

Preferred stock, $0.01 par value per share

 

Additional paid-in capital
8,058

 
7,525

Accumulated other comprehensive loss
(1,066
)
 
(768
)
Retained earnings
4,667

 
3,537

Total shareholders' equity
11,659

 
10,294

Total liabilities and shareholders' equity
$
109,920

 
$
97,015

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

28

GENERAL MOTORS FINANCIAL COMPANY, INC.


CONSOLIDATED STATEMENTS OF INCOME
(in millions) 
 
Years Ended December 31,
 
2018
 
2017
 
2016
Revenue
 
 
 
 
 
Finance charge income
$
3,629

 
$
3,256

 
$
2,846

Leased vehicle income
9,963

 
8,606

 
5,896

Other income
424

 
289

 
241

Total revenue
14,016

 
12,151

 
8,983

Costs and expenses
 
 
 
 
 
Operating expenses
1,522

 
1,390

 
1,250

Leased vehicle expenses
6,917

 
6,415

 
4,506

Provision for loan losses (Note 3)
642

 
757

 
644

Interest expense
3,225

 
2,566

 
1,972

Total costs and expenses
12,306

 
11,128

 
8,372

Equity income (Note 6)
183

 
173

 
151

Income from continuing operations before income taxes
1,893

 
1,196

 
762

Income tax provision (Note 14)
323

 
111

 
105

Income from continuing operations
1,570

 
1,085

 
657

(Loss) income from discontinued operations, net of tax (Note 15)

 
(424
)
 
97

Net income
$
1,570

 
$
661

 
$
754


 
 
 
 
 
Net income attributable to common shareholder
$
1,504

 
$
645

 
$
754


CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in millions)
 
Years Ended December 31,
 
2018
 
2017
 
2016
Net income
$
1,570

 
$
661

 
$
754

Other comprehensive (loss) income, net of tax
 
 
 
 
 
Unrealized (loss) gain on hedges, net of income tax (benefit) expense of $(5), $(2) and $11
(7
)
 
(1
)
 
17

Defined benefit plans after reclassification adjustment, net of income tax expense (benefit) of $0, $9 and $(3)

 
21

 
(7
)
Foreign currency translation adjustment before reclassification adjustment, net of income tax (benefit) expense of $(1), $33 and $17
(291
)
 
253

 
(144
)
Reclassification adjustment(a)

 
197

 

Other comprehensive (loss) income, net of tax
(298
)
 
470

 
(134
)
Comprehensive income
$
1,272

 
$
1,131

 
$
620

_________________
(a)
The reclassification adjustment in 2017 is related to the sale of the European Operations.
The accompanying notes are an integral part of these consolidated financial statements.

29

GENERAL MOTORS FINANCIAL COMPANY, INC.


CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(Dollars in millions) 
 
Common Stock
 
Preferred Stock
 
Additional Paid-in Capital
 
Accumulated Other Comprehensive Loss
 
Retained Earnings
 
Total Equity
Balance at January 1, 2016
$

 
$

 
$
6,484

 
$
(1,104
)
 
$
2,672

 
$
8,052

Net income

 

 

 

 
754

 
754

Other comprehensive loss

 

 

 
(134
)
 

 
(134
)
Stock based compensation

 

 
21

 

 

 
21

Balance at December 31, 2016

 

 
6,505

 
(1,238
)
 
3,426

 
8,693

Net income

 

 

 

 
661

 
661

Other comprehensive income

 

 

 
470

 

 
470

Stock based compensation

 

 
35

 

 

 
35

Issuance of preferred stock

 

 
985

 

 

 
985

Dividends paid

 

 

 

 
(550
)
 
(550
)
Balance at December 31, 2017

 

 
7,525

 
(768
)
 
3,537

 
10,294

Adoption of accounting standards (Note 1)

 

 

 

 
40

 
40

Net income

 

 

 

 
1,570

 
1,570

Other comprehensive loss

 

 

 
(298
)
 

 
(298
)
Stock based compensation

 

 
41

 

 

 
41

Issuance of preferred stock (Note 11)

 

 
492

 

 

 
492

Dividends paid (Note 11)

 

 

 

 
(434
)
 
(434
)
Dividends declared on preferred stock (Note 11)

 

 

 

 
(46
)
 
(46
)
Balance at December 31, 2018
$

 
$

 
$
8,058

 
$
(1,066
)
 
$
4,667

 
$
11,659

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




30

GENERAL MOTORS FINANCIAL COMPANY, INC.


CONSOLIDATED STATEMENTS OF CASH FLOWS
(in millions)
 
Years Ended December 31,
 
2018
 
2017
 
2016
Cash flows from operating activities
 
 
 
 
 
Income from continuing operations
$
1,570

 
$
1,085

 
$
657

Adjustments to reconcile income from continuing operations to net cash provided by operating activities
 
 
 
 
 
Depreciation and amortization
7,697

 
6,706

 
4,789

Accretion and amortization of loan and leasing fees
(2,018
)
 
(1,711
)
 
(1,136
)
Amortization of carrying value adjustment

 

 
(28
)
Undistributed earnings of non-consolidated affiliates, net
(183
)
 
(173
)
 
(22
)
Provision for loan losses
642

 
757

 
644

Deferred income taxes
239

 
42

 
8

Stock-based compensation expense
29

 
48

 
25

Gain on termination of leased vehicles
(641
)
 
(166
)
 
(147
)
Other operating activities
166

 
(140
)
 
(2
)
Changes in assets and liabilities:
 
 
 
 
 
Other assets
(401
)
 
(54
)
 
(432
)
Accounts payable and accrued expenses
262

 
153

 
209

Other liabilities
10

 
(28
)
 
(4
)
Net cash provided by operating activities - continuing operations
7,372

 
6,519

 
4,561

Net cash provided by operating activities - discontinued operations

 
233

 
320

Net cash provided by operating activities
7,372

 
6,752

 
4,881

Cash flows from investing activities
 
 
 
 
 
Purchases of retail finance receivables, net
(26,315
)
 
(19,524
)
 
(14,180
)
Principal collections and recoveries on retail finance receivables
17,357

 
12,854

 
9,899

Net funding of commercial finance receivables
(2,573
)
 
(2,584
)
 
(2,467
)
Purchases of leased vehicles, net
(16,736
)
 
(19,180
)
 
(19,483
)
Proceeds from termination of leased vehicles
10,864

 
6,667

 
2,554

Purchases of property and equipment
(60
)
 
(94
)
 
(93
)
Acquisition of equity interest
(54
)
 

 

Other investing activities
1

 
2

 
1

Net cash used in investing activities - continuing operations
(17,516
)
 
(21,859
)
 
(23,769
)
Net cash provided by (used in) investing activities - discontinued operations

 
3

 
(1,005
)
Net cash used in investing activities
(17,516
)
 
(21,856
)
 
(24,774
)
Cash flows from financing activities
 
 
 
 
 
Net change in debt (original maturities less than three months)
1,124

 
(105
)
 
(309
)
Borrowings and issuances of secured debt
26,693

 
32,480

 
27,379

Payments on secured debt
(23,626
)
 
(27,451
)
 
(17,294
)
Borrowings and issuances of unsecured debt
12,200

 
15,883

 
12,234

Payments on unsecured debt
(5,215
)
 
(5,018
)
 
(2,754
)
Borrowings on related party line of credit

 

 
418

Payments on related party line of credit

 

 
(418
)
Debt issuance costs
(146
)
 
(155
)
 
(131
)
Proceeds from issuance of preferred stock
492

 
985

 

Dividends paid
(434
)
 
(550
)
 

Net cash provided by financing activities - continuing operations
11,088

 
16,069

 
19,125

Net cash provided by financing activities - discontinued operations

 
219

 
1,109

Net cash provided by financing activities
11,088

 
16,288

 
20,234

Net increase in cash, cash equivalents and restricted cash
944

 
1,184

 
341

Effect of foreign exchange rate changes on cash, cash equivalents and restricted cash
(68
)
 
81

 
(41
)
Cash, cash equivalents and restricted cash at beginning of period
6,567

 
5,302

 
5,002

Cash, cash equivalents and restricted cash at end of period
$
7,443

 
$
6,567

 
$
5,302

Cash, cash equivalents and restricted cash from continuing operations at end of period
$
7,443

 
$
6,567

 
$
4,630

Cash, cash equivalents and restricted cash from discontinued operations at end of period
$

 
$

 
$
672





31

GENERAL MOTORS FINANCIAL COMPANY, INC.


The following table provides a reconciliation of cash, cash equivalents and restricted cash reported within the consolidated balance sheet:
 
December 31, 2018
 
December 31, 2017
Cash and cash equivalents
$
4,883

 
$
4,265

Restricted cash included in other assets
2,560

 
2,302

Total
$
7,443

 
$
6,567

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

32

GENERAL MOTORS FINANCIAL COMPANY, INC.


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Summary of Significant Accounting Policies
History and Operations We have been operating in the automobile finance business in the U.S. since September 1992 and have been a wholly-owned subsidiary of GM since October 2010. On October 31, 2017, we completed the sale of certain of our European subsidiaries and branches (collectively, our European Operations) to Banque PSA Finance S.A. and BNP Paribas Personal Finance S.A. The European Operations are presented as discontinued operations in our consolidated financial statements for all periods presented. Refer to Note 15 for additional details regarding our disposal of these operations. Unless otherwise indicated, information in these notes to the consolidated financial statements relates to our continuing operations.
Basis of Presentation The consolidated financial statements include our accounts and the accounts of our consolidated subsidiaries, including certain SPEs utilized in secured financing transactions, which are considered VIEs. All intercompany transactions and accounts have been eliminated in consolidation. Except as otherwise specified, dollar amounts presented within tables are stated in millions.
The preparation of financial statements in conformity with accounting principles generally accepted in the U.S. 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 expenses during the reporting periods. Actual results could differ from those estimates and those differences may be material.
Generally, the financial statements of entities that operate outside of the U.S. are measured using the local currency as the functional currency. All assets and liabilities of the foreign subsidiaries are translated into U.S. dollars at period-end exchange rates and the results of operations and cash flows are determined using approximate weighted-average exchange rates for the period. Translation adjustments are related to the foreign subsidiaries using local currency as their functional currency and are reported as a separate component of accumulated other comprehensive income/loss. Foreign currency transaction gains or losses are recorded directly to the consolidated statements of income and comprehensive income, regardless of whether such amounts are realized or unrealized. We may enter into foreign currency derivatives to mitigate our exposure to changes in foreign currency exchange rates.
Cash Equivalents Cash equivalents are defined as short-term, highly liquid investments with original maturities of 90 days or less.
Net Presentation of Cash Flows on Commercial Finance Receivables and Related Debt Our commercial finance receivables are primarily comprised of floorplan financing, which are loans to dealers to finance vehicle inventory, also known as wholesale or inventory financing. In our experience, these loans are typically repaid within 90 days of when the credit is extended. Furthermore, we typically have the unilateral ability to call the loans and receive payment within 60 days of the call. Therefore, the presentation of the cash flows related to commercial finance receivables are reflected on the consolidated statements of cash flows as "Net funding of commercial finance receivables."
We have revolving debt agreements to finance our commercial lending activities. The revolving period of these agreements ranges from 12 to 18 months; however, the terms of these financing agreements require that a borrowing base of eligible floorplan receivables, within certain concentration limits, must be maintained in sufficient amounts to support advances. When a dealer repays a floorplan receivable to us, either the amount advanced against such receivables must be repaid by us or the equivalent amount in new receivables must be added to the borrowing base. Despite the revolving term exceeding 90 days, the actual term for repayment of advances under these agreements is when we receive repayment from the dealers, which is typically within 90 days of when the credit is extended. Therefore, the cash flows related to these revolving debt agreements are reflected on the consolidated statements of cash flows as “Net change in debt (original maturities less than three months).”
Retail Finance Receivables and the Allowance for Loan Losses Our retail finance receivables portfolio consists of smaller-balance, homogeneous loans which are carried at amortized cost, net of allowance for loan losses. These loans are divided among pools based on common risk characteristics, such as internal credit score, origination period, delinquent status and geography. An internal credit score, of which FICO is an input in North America, is created by using algorithms or statistical models contained in origination scorecards. The scorecards are used to evaluate a consumer’s ability to pay based on statistical modeling of their prior credit usage, structure of the loan and other information. The output of the scorecards rank-order consumers from those that are least likely to default to those that are most likely to default. By further dividing the portfolio into pools based on internal credit scores we are better able to distinguish expected credit performance for different credit risks. These pools are collectively evaluated for impairment based on a statistical calculation, which is supplemented by management judgment. The allowance is aggregated for each of the pools. 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 losses inherent in our finance receivables.

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We use a combination of forecasting methodologies to determine the allowance for loan losses, including roll rate modeling and static pool modeling techniques. A roll rate model is generally used to project near-term losses and static pool models are generally used to project losses over the remaining life. Probable losses are estimated for groups of accounts aggregated by past-due status and origination month. Generally, historical loss experience is evaluated, and recent performance is more heavily weighted when determining the allowance to result in an estimate that is more reflective of the current internal and external environments. Factors that are considered when estimating the allowance include historical delinquency migration to loss, probability of default (PD) and loss given default (LGD). PD and LGD are specifically estimated for each monthly vintage (i.e., group of originations) in cases where vintage models are used. PD is estimated based on expectations that are aligned with internal credit scores. LGD is projected based on historical trends experienced over the last 10 years, weighted toward more recent performance in order to consider recent market supply and demand factors that impact wholesale used vehicle pricing. While forecasted probable losses are quantitatively derived, we assess the recent internal operating and external environments and may qualitatively adjust certain assumptions to result in an allowance that is more reflective of losses that are expected to occur in the current environment.
We also use historical charge-off experience to determine a loss confirmation period (LCP). The LCP is a key assumption within our models and represents the average amount of time between when a loss event first occurs to when the receivable is charged off. This LCP is the basis of our allowance and is applied to the forecasted probable credit losses to determine the amount of losses we believe exist at the balance sheet date.
We believe these factors are relevant in estimating incurred losses and also consider an evaluation of overall portfolio credit quality based on indicators such as changes in our credit evaluation, underwriting and collection management policies, changes in the legal and regulatory environment, general economic conditions and business trends and uncertainties in forecasting and modeling techniques used in estimating our allowance. We update our retail loss forecast models and portfolio indicators on a quarterly basis to incorporate information reflective of the current economic environment.
Assumptions regarding credit losses and LCPs 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 assumptions or LCP 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.
Finance receivables that are considered impaired, including TDRs, are individually evaluated for impairment. In assessing the risk of individually impaired loans such as TDRs, among the factors we consider are the financial condition of the borrower, geography, collateral performance, historical loss experience, and industry-specific information that management believes is relevant in determining the occurrence of a loss event and measuring impairment. These factors are based on an evaluation of historical and current information, and involve subjective assessment and interpretation.
Commercial Finance Receivables and the Allowance for Loan Losses Our commercial lending offerings consist of floorplan financing as well as dealer loans, which are loans to finance improvements to dealership facilities, to provide working capital, and to purchase and/or finance dealership real estate.
Commercial finance receivables are carried at amortized cost, net of allowance for loan losses and any amounts received under a cash management program. 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 the commercial finance receivables. For the International Segment, we established the allowance for loan losses based on historical loss experience. We have less of a history of commercial lending in the North America Segment; therefore, we have performed an analysis of the experience of comparable commercial lenders in order to estimate probable credit losses inherent in our portfolio. The commercial finance receivables are aggregated into loan-risk pools, which are determined based on our internally-developed risk rating system. Based upon our risk ratings, we also determine if any specific dealer loan is considered impaired. If impaired loans are identified, specific reserves are established, as appropriate, and the loan is segregated for separate monitoring.
Charge-off Policy Generally, our policy is to charge off a retail account in the month in which the account becomes 120 days contractually delinquent if we have not yet recorded a repossession charge-off.
Commercial finance receivables are individually evaluated and, where collectability of the recorded balance is in doubt, are written down to the fair value of the collateral less costs to sell. Commercial receivables are charged off at the earlier of when they are deemed uncollectible or reach 360 days past due.

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Troubled Debt Restructurings (TDRs) In evaluating whether a loan modification constitutes a TDR, our policy for retail loans is that (i) the modification must constitute a concession and (ii) the debtor must be experiencing financial difficulties. In accordance with our policies and guidelines, we, at times, offer payment deferrals to customers. Each deferral allows the consumer to move up to two delinquent monthly 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). A loan that is deferred two or more times would be considered significantly delayed and therefore meets the definition of a concession. 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, we have determined that the second deferment granted by us on a retail loan will be considered a TDR and the loan impaired. Accounts in Chapter 13 bankruptcy that have an interest rate or principal adjustment as part of a confirmed bankruptcy plan will also be considered TDRs. Retail finance receivables that become classified as TDRs are separately assessed for impairment. A specific allowance is estimated based on the present value of expected cash flows of the receivables discounted at the original weighted average effective interest rate.
Commercial receivables subject to forbearance, moratoriums, extension agreements, or other actions intended to minimize economic loss and to avoid foreclosure or repossession of collateral are classified as TDRs. We do not grant concessions on the principal balance of dealer loans.
Leased Vehicles Leased vehicles consist of automobiles leased to customers and are carried at amortized cost less manufacturer subvention payments, which are received up front. Depreciation expense is recorded on a straight-line basis over the term of the lease agreement. Manufacturer subvention is recognized on a straight-line basis as a reduction to depreciation expense.
We estimate the expected residual value based on third party data which considers inputs including recent auction values, the expected future volume of returning leased vehicles, used vehicle prices, manufacturer incentive programs and fuel prices. Leased vehicles are depreciated to the estimated residual value at the end of the lease term. Changes in the expected residual value result in increased or decreased depreciation of the leased asset over the remaining term of the lease. Upon disposition, a gain or loss is recorded for any difference between the net book value of the lease and the proceeds from the disposition of the asset, including any insurance proceeds. Under the accounting for impairment or disposal of long-lived assets, vehicles on operating leases are evaluated by asset group for impairment. We aggregate leased vehicles into asset groups based on make, year and model. When asset group indicators of impairment exist and aggregate future cash flows from the operating lease, including the expected realizable fair value of the leased assets at the end of the lease, are less than the book value of the lease asset group, an immediate impairment write-down is recognized if the difference is deemed not recoverable.
Variable Interest Entities (VIEs) – Securitizations and Credit Facilities We finance a significant portion of our loan and lease origination volume through the use of our credit facilities and execution of securitization transactions, which both utilize Special Purpose Entities (SPEs). In our credit facilities, we transfer finance receivables and lease-related assets to SPEs. These subsidiaries, in turn, issue notes to the agents, collateralized by such assets 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 the assets.
In our securitizations, we transfer finance receivables and lease-related assets to SPEs structured as securitization trusts (Trusts), which issue one or more classes of asset-backed securities. The asset-backed securities are in turn sold to investors.
Our continuing involvement with the credit facilities and Trusts consist of servicing assets held by the SPEs and holding residual interests in the SPEs. These transactions are structured without recourse. The SPEs are considered VIEs under U.S. GAAP and are consolidated because we have: (i) power over the significant activities of the entities and (ii) an obligation to absorb losses and the right to receive benefits from the VIEs which could be significant to the VIEs. Accordingly, we are the primary beneficiary of the VIEs and the finance receivables, lease-related assets, borrowings under our credit facilities and, following a securitization, the related securitization notes payable remain on the consolidated balance sheets. Refer to Note 3, Note 7 and Note 8 for further information.
We are not required, and do not currently intend, to provide any additional financial support to SPEs. While these subsidiaries are included in our consolidated financial statements, these subsidiaries are separate legal entities and the finance receivables, lease-related assets and cash held by these subsidiaries are legally owned by them and are not available to our creditors or creditors of our other subsidiaries.
We recognize finance charge, lease vehicle and fee income on the securitized assets and interest expense on the secured debt issued in securitization transactions, and record a provision for loan losses to recognize probable loan losses inherent in the securitized assets. Cash pledged to support securitization transactions is deposited to a restricted account and recorded on our

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consolidated balance sheets as restricted cash, which is invested in highly liquid securities with original maturities of 90 days or less.
Property and Equipment Property and equipment additions are carried at amortized cost. Depreciation is generally provided on a straight-line basis over the estimated useful lives of the assets, which ranges from 1 to 30 years. The basis of assets sold or retired and the related accumulated depreciation are removed from the accounts at the time of disposition and any resulting gain or loss is included in operating expenses. Maintenance, repairs and minor replacements are charged to operations as incurred; major replacements and improvements are capitalized.
Goodwill Goodwill is not amortized but rather tested for impairment annually on October 1 or when events occur or circumstances change that trigger a review. The impairment test entails an assessment of qualitative factors to determine whether it is more likely than not that an impairment exists. If it is more likely than not that an impairment exists, then a quantitative impairment test is performed. Impairment exists when the carrying amount of a reporting unit exceeds it fair value.
Derivative Financial Instruments We recognize all of our derivative financial instruments as either assets or liabilities on our consolidated balance sheets at fair value. We do not use derivative financial instruments for trading or speculative purposes.
Interest rate risk management instruments are generally expressed in notional principal or contract amounts that are much larger than the amounts potentially at risk for nonpayment by counterparties. Therefore, in the event of nonperformance by the counterparties, our credit exposure is limited to the uncollected interest and the market value related to the instruments that have become favorable to us, to the extent that market values are not collateralized. We maintain a policy of requiring that all derivative instruments be governed by an International Swaps and Derivatives Association Master Agreement. We enter into derivative instruments and establish risks limits with counterparties that we believe are creditworthy and generally settle on a net basis. In addition, management performs a quarterly assessment of our counterparty credit risk, including a review of credit ratings, credit default swap rates and potential nonperformance of the counterparty.
Interest Rate Swap Agreements We utilize interest rate swap agreements to convert certain floating rate exposures to fixed rate or certain fixed-rate exposures to floating rate in order to manage our interest rate exposure. Cash flows from derivatives used to manage interest rate risk are classified as operating activities.
We designate certain pay-fixed, receive-floating interest rate swaps as cash flow hedges of variable rate debt. The risk being hedged is the risk of variability in interest payments attributable to changes in interest rates. If the hedge relationship is deemed to be highly effective, we record the effective portion of changes in the fair value of the hedge in accumulated other comprehensive income/loss. When the hedged cash flows affect earnings, we reclassify these amounts to interest expense. Any ineffective portion of a cash flow hedge is recorded to interest expense immediately.
We designate certain receive-fixed, pay-floating interest rate swaps as fair value hedges of fixed-rate debt. The risk being hedged is the risk of changes in the fair value of the hedged debt attributable to changes in the benchmark interest rate. If the hedge relationship is deemed to be highly effective, we record the changes in the fair value of the hedged debt related to the risk being hedged in interest expense. The change in fair value of the related hedge (excluding accrued interest) is also recorded in interest expense.
Interest Rate Cap and Floor Agreements We may purchase interest rate cap and floor agreements to limit floating rate exposures in our credit facilities. As part of our interest rate risk management strategy and when economically feasible, we may simultaneously sell a corresponding interest rate cap or floor agreement in order to offset the premium paid to purchase the interest rate cap or floor agreement and thus retain the interest rate risk. Because the interest rate cap and floor agreements entered into by us or our SPEs do not qualify for hedge accounting, changes in the fair value of interest rate cap and floor agreements purchased by the SPEs and interest rate cap and floor agreements sold by us are recorded in interest expense.
Foreign Currency Swap Agreements Our policy is to minimize exposure to changes in currency exchange rates. To meet funding objectives, we borrow in a variety of currencies. We face exposure to currency exchange rates when the currency of our earning assets differs from the currency of the debt funding those assets. When possible, we fund earning assets with debt in the same currency, minimizing exposure to exchange rate movements. When a different currency is used, we may use foreign currency swaps to convert our debt obligations to the local currency of the earning assets being financed.
We designate certain pay-fixed, receive-fixed cross-currency swaps as cash flow hedges of foreign currency-denominated debt. The risk being hedged is the variability in the cash flows for the payments of both principal and interest attributable to changes in foreign currency exchange rates. If the hedge relationship is deemed to be highly effective, we record the effective portion of changes in the fair value of the swap in accumulated other comprehensive income/loss. When the hedged cash flows affect earnings

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via principal remeasurement or accrual of interest expense, we reclassify these amounts to operating expenses or interest expense. Any ineffective portion of a cash flow hedge is recorded to interest expense immediately.
Fair Value Financial instruments are considered Level 1 when quoted prices are available in active markets for identical assets or liabilities as of the reporting date. Active markets are those in which transactions for the asset or liability occur in sufficient frequency and volume to provide pricing information on an ongoing basis.
Financial instruments are considered Level 2 when inputs other than quoted prices are observable for the asset or liability, either directly or indirectly. These include quoted prices for similar assets or liabilities in active markets and quoted prices for identical or similar assets or liabilities in markets that are not active.
Financial instruments are considered Level 3 when their values are determined using price models, discounted cash flow methodologies or similar techniques and at least one significant model assumption or input is unobservable. Level 3 financial instruments also include those for which the determination of fair value requires significant management judgment or estimation.
Income Taxes We account for income taxes on a separate return basis 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 basis, net operating loss and tax credit carryforwards. A valuation allowance is recognized if it is more likely than not that some portion or the entire deferred tax asset will not be realized.
We record uncertain tax positions on the basis of a two-step process whereby: (i) we determine whether it is more likely than not that the tax positions will be sustained