UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2003
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____________ to _____________
Commission file number 1-6155
AMERICAN GENERAL FINANCE CORPORATION
(Exact name of registrant as specified in its charter)
Indiana 35-0416090
(State of Incorporation) (I.R.S. Employer
Identification No.)
601 N.W. Second Street, Evansville, IN 47708
(Address of principal executive offices) (Zip Code)
(812) 424-8031
(Registrant's telephone number, including area code)
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 X No
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Rule 12b-2 of the Securities Exchange Act of 1934).
Yes No X
The registrant meets the conditions set forth in General Instruction
H(1)(a) and (b) of Form 10-Q and is therefore filing this Form 10-Q
with the reduced disclosure format.
At April 30, 2003, there were 10,160,012 shares of the registrant's
common stock, $.50 par value, outstanding.
2
TABLE OF CONTENTS
Item Page
Part I 1. Financial Statements . . . . . . . . . . . . . . . . 3
2. Management's Discussion and Analysis of Financial
Condition and Results of Operations. . . . . . . . 12
4. Controls and Procedures . . . . . . . . . . . . . . 24
Part II 1. Legal Proceedings . . . . . . . . . . . . . . . . . 25
6. Exhibits and Reports on Form 8-K . . . . . . . . . . 25
AVAILABLE INFORMATION
The Company files annual, quarterly, and current reports and other
information with the Securities and Exchange Commission (the SEC). The
SEC maintains a website that contains annual, quarterly, and current
reports and other information that issuers (including the Company) file
electronically with the SEC. The SEC's website is www.sec.gov. Our
annual report on Form 10-K for the year ended December 31, 2002 and
this quarterly report on Form 10-Q are available free of charge on our
Internet website www.agfinance.com. The information on the Company's
website is not incorporated by reference into this report.
3
Part I - FINANCIAL INFORMATION
Item 1. Financial Statements
AMERICAN GENERAL FINANCE CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Income
(Unaudited)
Three Months Ended
March 31,
2003 2002
(dollars in thousands)
Revenues
Finance charges $430,662 $413,682
Insurance 45,708 45,500
Other 45,186 30,193
Total revenues 521,556 489,375
Expenses
Interest expense 141,829 135,952
Operating expenses 160,454 140,824
Provision for finance receivable losses 69,451 69,597
Insurance losses and loss adjustment
expenses 20,389 21,982
Total expenses 392,123 368,355
Income before provision for income taxes 129,433 121,020
Provision for Income Taxes 45,596 43,067
Net Income $ 83,837 $ 77,953
See Notes to Condensed Consolidated Financial Statements.
4
AMERICAN GENERAL FINANCE CORPORATION AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
March 31, December 31,
2003 2002
(Unaudited)
(dollars in thousands)
Assets
Net finance receivables:
Real estate loans $ 9,501,580 $ 9,313,496
Non-real estate loans 2,805,008 2,905,339
Retail sales finance 1,278,681 1,355,503
Net finance receivables 13,585,269 13,574,338
Allowance for finance receivable losses (450,668) (453,668)
Net finance receivables, less allowance
for finance receivable losses 13,134,601 13,120,670
Investment securities 1,264,286 1,227,156
Cash and cash equivalents 244,189 144,565
Notes receivable from parent 263,750 269,240
Other assets 891,861 639,091
Total assets $15,798,687 $15,400,722
Liabilities and Shareholder's Equity
Long-term debt $ 9,230,784 $ 9,566,256
Short-term debt 3,586,906 3,061,141
Insurance claims and policyholder
liabilities 458,997 472,348
Other liabilities 544,229 453,487
Accrued taxes 71,430 37,562
Total liabilities 13,892,346 13,590,794
Shareholder's equity:
Common stock 5,080 5,080
Additional paid-in capital 951,175 951,175
Accumulated other comprehensive loss (55,465) (68,938)
Retained earnings 1,005,551 922,611
Total shareholder's equity 1,906,341 1,809,928
Total liabilities and shareholder's equity $15,798,687 $15,400,722
See Notes to Condensed Consolidated Financial Statements.
5
AMERICAN GENERAL FINANCE CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(Unaudited)
Three Months Ended
March 31,
2003 2002
(dollars in thousands)
Cash Flows from Operating Activities
Net income $ 83,837 $ 77,953
Reconciling adjustments:
Provision for finance receivable losses 69,451 69,597
Depreciation and amortization 44,709 36,658
Deferral of finance receivable origination
costs (15,211) (14,124)
Deferred income tax charge 720 8,563
Origination of real estate loans held for sale (617,826) -
Sales and principal collections of real estate
loans held for sale 512,627 -
Change in other assets and other liabilities 36,035 121,813
Change in insurance claims and policyholder
liabilities (13,351) (17,317)
Change in taxes receivable and payable 34,327 (6,124)
Other, net 11,585 10,966
Net cash provided by operating activities 146,903 287,985
Cash Flows from Investing Activities
Finance receivables originated or purchased (1,782,462) (1,519,024)
Principal collections on finance receivables 1,664,549 1,565,518
Acquisition of Wilmington Finance, Inc. (93,189) -
Investment securities purchased (595,331) (217,928)
Investment securities called and sold 556,052 205,457
Investment securities matured 7,000 5,845
Change in notes receivable from parent 5,490 (7,639)
Change in premiums on finance receivables
purchased and deferred charges 10,045 (4,538)
Other, net (3,731) (4,172)
Net cash (used for) provided by investing
activities (231,577) 23,519
Cash Flows from Financing Activities
Proceeds from issuance of long-term debt 299,580 698,518
Repayment of long-term debt (640,150) (299,457)
Change in short-term debt 525,765 (529,629)
Dividends paid (897) (89,920)
Net cash provided by (used for) financing
activities 184,298 (220,488)
Increase in cash and cash equivalents 99,624 91,016
Cash and cash equivalents at beginning of period 144,565 175,492
Cash and cash equivalents at end of period $ 244,189 $ 266,508
See Notes to Condensed Consolidated Financial Statements.
6
AMERICAN GENERAL FINANCE CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Comprehensive Income
(Unaudited)
Three Months Ended
March 31,
2003 2002
(dollars in thousands)
Net income $ 83,837 $ 77,953
Other comprehensive gain:
Net unrealized (losses) gains:
Investment securities 4,311 (10,242)
Interest rate swaps (8,281) 1,136
Income tax effect:
Investment securities (1,499) 3,584
Interest rate swaps 2,899 (397)
Net unrealized losses, net of tax (2,570) (5,919)
Reclassification adjustments for
realized losses (gains) included
in net income:
Investment securities 2,852 (1,268)
Interest rate swaps 21,830 28,391
Income tax effect:
Investment securities (998) 444
Interest rate swaps (7,641) (9,937)
Realized losses included in net income,
net of tax 16,043 17,630
Other comprehensive gain, net of tax 13,473 11,711
Comprehensive income $ 97,310 $ 89,664
See Notes to Condensed Consolidated Financial Statements.
7
AMERICAN GENERAL FINANCE CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
March 31, 2003
Note 1. Principles of Consolidation
American General Finance Corporation will be referred to as "AGFC" or
collectively with its subsidiaries, whether directly or indirectly
owned, as the "Company" or "we". We prepared our condensed
consolidated financial statements using accounting principles generally
accepted in the United States for interim periods. The statements
include the accounts of AGFC and its subsidiaries, all of which are
wholly owned. We eliminated all intercompany items. AGFC is a wholly
owned subsidiary of American General Finance, Inc. (AGFI). AGFI is an
indirect wholly owned subsidiary of American International Group, Inc.
(AIG).
Note 2. Adjustments and Reclassifications
We made all adjustments, consisting only of normal recurring
adjustments, that we considered necessary for a fair statement of the
Company's condensed consolidated financial statements. These
statements should be read in conjunction with the consolidated
financial statements and related notes included in our annual report on
Form 10-K for the year ended December 31, 2002.
To conform to the 2003 presentation, we reclassified certain items in
the prior period.
Note 3. Acquisition
Effective January 1, 2003, we acquired 100% of the common stock of
Wilmington Finance, Inc. (WFI), a majority owned subsidiary of WSFS
Financial Corporation, in a purchase business combination. WFI
originates non-conforming residential real estate loans nationally,
primarily through broker relationships and, to a lesser extent,
directly to consumers, and sells its originated loans to third party
investors with servicing released to the purchaser. WFI provides the
Company with another source of revenue through its gains on real estate
loan sales. The purchase price was $120.8 million, consisting of $25.8
million for net assets and $95.0 million for intangibles. The majority
of the tangible assets acquired were real estate loans held for sale.
We expect to finalize an independent valuation of the intangibles in
second quarter 2003, but we anticipate the majority to be goodwill,
which we will assign to our consumer finance business segment. We
included the results of WFI's operations in our financial statements
beginning January 1, 2003, the effective date of the acquisition, and
classified the $95.0 million of intangibles as goodwill.
8
Note 4. Accounting Change
In November 2002, the Financial Accounting Standards Board issued
Interpretation No. 45 (FIN 45), "Guarantor's Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others." FIN 45 elaborates on the disclosures to be
made by a guarantor in its financial statements about its obligations
under certain guarantees that it has issued. It also clarifies that a
guarantor is required to recognize, at the inception of a guarantee, a
liability for the fair value of the obligation undertaken in issuing
the guarantee. Certain guarantee contracts are excluded from both the
disclosure and recognition requirements of FIN 45, including, among
others, residual value guarantees under capital lease arrangements and
loan commitments. The disclosure requirements of FIN 45 were effective
as of December 31, 2002. The recognition requirements of FIN 45 are to
be applied prospectively to guarantees issued or modified after
December 31, 2002. The adoption of FIN 45 did not have a material
impact on our consolidated results of operations, financial position,
or liquidity.
Note 5. Finance Receivables
Components of net finance receivables by type were as follows:
March 31, 2003
Real Non-real Retail
Estate Estate Sales
Loans Loans Finance Total
(dollars in thousands)
Gross receivables $9,429,902 $3,120,087 $1,420,685 $13,970,674
Unearned finance charges
and points and fees (142,841) (395,899) (153,845) (692,585)
Accrued finance charges 74,732 36,409 11,936 123,077
Deferred origination costs 13,348 34,690 - 48,038
Premiums, net of discounts 126,439 9,721 (95) 136,065
Total $9,501,580 $2,805,008 $1,278,681 $13,585,269
December 31, 2002
Real Non-real Retail
Estate Estate Sales
Loans Loans Finance Total
(dollars in thousands)
Gross receivables $9,224,803 $3,244,413 $1,507,184 $13,976,400
Unearned finance charges
and points and fees (145,039) (431,812) (166,922) (743,773)
Accrued finance charges 77,852 41,006 12,953 131,811
Deferred origination costs 12,447 35,441 - 47,888
Premiums, net of discounts 143,433 16,291 2,288 162,012
Total $9,313,496 $2,905,339 $1,355,503 $13,574,338
9
Note 6. Allowance for Finance Receivable Losses
Changes in the allowance for finance receivable losses were as follows:
Three Months Ended
March 31,
2003 2002
(dollars in thousands)
Balance at beginning of period $453,668 $438,860
Provision for finance receivable losses 69,451 69,597
Allowance related to net acquired
receivables - 1,187
Charge-offs (82,608) (79,217)
Recoveries 10,157 9,826
Balance at end of period $450,668 $440,253
Note 7. Derivative Financial Instruments
AGFC uses derivative financial instruments in managing the cost of its
debt and is neither a dealer nor a trader in derivative financial
instruments. AGFC has generally limited its use of derivative
financial instruments to interest rate swap agreements. These interest
rate swap agreements are designated and qualify as cash flow hedges or
fair value hedges.
AGFC uses interest rate swap agreements to limit our exposure to market
interest rate risk in the funding of our operations. Most of our swaps
synthetically convert certain short-term or floating-rate debt to a
long-term fixed-rate. The synthetic long-term fixed rates achieved
through interest rate swap agreements are slightly lower than could
have been achieved by issuing comparable fixed-rate, long-term debt.
Additionally, AGFC has swapped fixed-rate, long-term debt to floating-
rate, long-term debt. As an alternative to funding without these
derivative financial instruments, AGFC's interest rate swap agreements
did not have a material effect on the Company's other revenues,
interest expense, or net income during the three months ended March 31,
2003 or 2002.
Note 8. Accumulated Other Comprehensive Loss
The components of accumulated other comprehensive loss were as follows:
March 31, December 31,
2003 2002
(dollars in thousands)
Net unrealized losses on interest
rate swaps $(90,097) $(98,904)
Net unrealized gains on investment
securities 34,632 29,966
Total $(55,465) $(68,938)
10
Note 9. Segment Information
We have two business segments: consumer finance and insurance. Our
segments are defined by the type of financial service product offered.
The consumer finance segment makes home equity loans, originates
secured and unsecured consumer loans, extends lines of credit, and
purchases retail sales contracts from, and provides revolving retail
services for, retail merchants. We also purchase private label
receivables originated by a non-subsidiary affiliate of ours, under a
participation agreement. To supplement our lending and retail sales
financing activities, we purchase portfolios of real estate loans, non-
real estate loans, and retail sales finance receivables. We also
originate real estate loans through brokers for sale to third party
investors. We offer credit and non-credit insurance to our consumer
finance customers. The insurance segment writes and assumes credit and
non-credit insurance through products that are offered principally by
the consumer finance segment.
The following tables display information about the Company's segments
as well as a reconciliation of total segment pretax income to the
condensed consolidated financial statement amounts.
For the three months ended March 31, 2003:
Consumer Total
Finance Insurance Segments
(dollars in thousands)
Revenues:
External:
Finance charges $458,643 $ - $458,643
Insurance 226 45,482 45,708
Other 17,597 22,490 40,087
Intercompany 21,454 (18,049) 3,405
Pretax income 132,703 21,380 154,083
For the three months ended March 31, 2002:
Consumer Total
Finance Insurance Segments
(dollars in thousands)
Revenues:
External:
Finance charges $437,081 $ - $437,081
Insurance 265 45,235 45,500
Other (4,193) 21,899 17,706
Intercompany 18,540 (17,978) 562
Pretax income 130,161 19,017 149,178
11
Reconciliations of total segment pretax income to the condensed
consolidated financial statement amounts were as follows:
Three Months Ended
March 31,
2003 2002
(dollars in thousands)
Pretax income:
Segments $154,083 $149,178
Corporate (15,239) (27,251)
Adjustments (9,411) (907)
Consolidated pretax income $129,433 $121,020
Adjustments for pretax income include realized gains (losses) and
certain other investment revenue, pension expense, interest expense due
to releveraging of debt, and provision for finance receivable losses
due to redistribution of amounts provided for the allowance for finance
receivable losses.
Note 10. Legal Contingencies
AGFC and certain of its subsidiaries are parties to various lawsuits
and proceedings, including certain class action claims, arising in the
ordinary course of business. In addition, many of these proceedings
are pending in jurisdictions, such as Mississippi, that permit damage
awards disproportionate to the actual economic damages alleged to have
been incurred. Based upon information presently available, we believe
that the total amounts that will ultimately be paid arising from these
lawsuits and proceedings will not have a material adverse effect on our
consolidated results of operations or financial position. However, the
frequency of large damage awards, including large punitive damage
awards that bear little or no relation to actual economic damages
incurred by plaintiffs in some jurisdictions, continues to create the
potential for an unpredictable judgment in any given suit.
12
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.
REPORT OF MANAGEMENT'S RESPONSIBILITY
The Company's management is responsible for the integrity and fair
presentation of our condensed consolidated financial statements and all
other financial information presented in this report. We prepared our
condensed consolidated financial statements using accounting principles
generally accepted in the United States (GAAP). We made estimates and
assumptions that affect amounts recorded in the financial statements
and disclosures of contingent assets and liabilities.
The Company's management is responsible for establishing and
maintaining an internal control structure and procedures for financial
reporting. These systems are designed to provide reasonable assurance
that assets are safeguarded from loss or unauthorized use, that
transactions are recorded according to GAAP under management's
direction and that financial records are reliable to prepare financial
statements. We support the internal control structure with careful
selection, training and development of qualified personnel. The
Company's employees are subject to AIG's Code of Conduct designed to
assure that all employees perform their duties with honesty and
integrity. We do not allow loans to executive officers. The systems
include a documented organizational structure and policies and
procedures that we communicate throughout the Company. Our internal
auditors report directly to AIG to strengthen independence. They
continually monitor the operation of our internal controls and report
their findings to the Company's management and AIG's internal audit
department. We take prompt action to correct control deficiencies and
address opportunities for improving the system. The Company's
management assesses the adequacy of our internal control structure
quarterly. Based on these assessments, management has concluded that
the internal control structure and the procedures for financial
reporting have functioned effectively and that the condensed
consolidated financial statements fairly present our consolidated
financial position and the results of our operations for the periods
presented.
13
FORWARD-LOOKING STATEMENTS
This quarterly report on Form 10-Q and our other publicly available
documents may include, and the Company's officers and representatives
may from time to time make, statements which may constitute "forward-
looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995. These statements are not historical
facts but instead represent only our belief regarding future events,
many of which are inherently uncertain and outside of our control.
These statements may address, among other things, the Company's
strategy for growth, product development, regulatory approvals, market
position, financial results and reserves. The Company's actual results
and financial condition may differ, possibly materially, from the
anticipated results and financial condition indicated in these forward-
looking statements. The important factors, many of which are outside
of our control, which could cause the Company's actual results to
differ, possibly materially, include, but are not limited to, the
following:
* changes in general economic conditions, including the interest
rate environment in which we conduct business and the
financial markets through which we access capital;
* changes in the competitive environment in which we operate,
including the demand for our products, customer responsiveness
to our distribution channels and the formation of business
combinations among our competitors;
* the effectiveness of our credit risk scoring models in
assessing the risk of customer unwillingness or inability to
repay;
* shifts in collateral values, contractual delinquencies, credit
losses and the level of personal bankruptcies;
* changes in laws or regulations that affect our ability to
conduct business or the manner in which we conduct business,
such as licensing requirements, pricing limitations or
restrictions on the method of offering products;
* the costs and effects of any litigation or governmental
inquiries or investigations that are determined adversely to
the Company;
* changes in accounting standards or tax policies and practices
and the application of such new policies and practices to the
manner in which we conduct business;
* our ability to integrate the operations of our acquisitions
into our business;
* changes in our ability to attract and retain employees or key
executives to support our businesses; and
* natural events and acts of God such as fires or floods
affecting our branches or other operating facilities.
Readers are also directed to other risks and uncertainties discussed in
other documents we file with the Securities and Exchange Commission.
We are under no obligation to (and expressly disclaim any such
obligation to) update or alter any forward-looking statement, whether
written or oral, that may be made from time to time, whether as a
result of new information, future events or otherwise.
14
CRITICAL ACCOUNTING POLICIES
Our Credit Strategy and Policy Committee evaluates our finance
receivable portfolio monthly. The Credit Strategy and Policy Committee
exercises its judgment, based on each committee member's experience in
the consumer finance industry, when determining the amount of the
allowance for finance receivable losses. If its review concludes that
an adjustment is necessary, we charge or credit this adjustment to
expense through the provision for finance receivable losses. We
consider this estimate to be a critical accounting estimate that
affects the net income of the Company in total and the pretax operating
income of our consumer finance business segment. We document the
adequacy of the allowance for finance receivable losses and the
analysis of the trends in credit quality considered by the Credit
Strategy and Policy Committee to support its conclusions.
OFF-BALANCE SHEET ARRANGEMENTS
We do not have any material off-balance sheet arrangements as defined
by Securities and Exchange Commission rules.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity
Our sources of funds include operations, issuances of long-term debt,
short-term borrowings in the commercial paper market, and borrowings
from banks under credit facilities. AGFC has also historically
received capital contributions from its parent to support finance
receivable growth and maintain targeted leverage.
Principal sources and uses of cash were as follows:
Three Months Ended
March 31,
2003 2002
(dollars in millions)
Principal sources of cash:
Operations $146.9 $288.0
Net issuances of debt 185.2 -
Net collections on finance
receivables - 46.5
Total $332.1 $334.5
Principal uses of cash:
Net originations and purchases
of finance receivables $117.9 $ -
Dividends paid 0.9 89.9
Net repayment of debt - 130.6
Total $118.8 $220.5
15
We believe that our overall sources of liquidity will continue to be
sufficient to satisfy our foreseeable operational requirements and
financial obligations. The principal risk factors that could decrease
our sources of liquidity are delinquent payments from our customers and
an inability to access capital markets. The principal factors that
could increase our cash needs are significant increases in net
originations and purchases of finance receivables. We intend to
mitigate liquidity risk factors by continuing to operate the Company
within the following strategies:
* maintain a finance receivable portfolio comprised mostly of
real estate loans, which generally represent a lower risk of
customer non-payment;
* originate and monitor finance receivables with our proprietary
credit risk management system;
* maintain an investment securities portfolio of predominantly
investment grade, liquid securities; and
* maintain a capital structure appropriate to our asset base.
Consistent execution of our business strategies should result in
continued profitability, strong credit ratings, and investor
confidence. These results should allow continued access to capital
markets for issuances of our commercial paper and long-term debt. At
March 31, 2003, we had $4.0 billion of long-term debt securities
registered under the Securities Act of 1933 and available for issuance.
We also maintain committed bank credit facilities to provide an
additional source of liquidity for needs potentially not met through
capital markets.
Capital Resources
March 31,
2003 2002
Amount Percent Amount Percent
(dollars in millions)
Long-term debt $ 9,230.8 63% $ 6,700.3 54%
Short-term debt 3,586.9 24 4,049.0 33
Total debt 12,817.7 87 10,749.3 87
Equity 1,906.3 13 1,545.3 13
Total capital $14,724.0 100% $12,294.6 100%
Net finance receivables $13,585.3 $11,587.0
Debt to tangible equity ratio 7.50x 7.48x
Our capital varies with the level of net finance receivables. The
increase in total capital at March 31, 2003 when compared to March 31,
2002 was greater than our finance receivable growth for the same period
due to capital required to support the acquisition of WFI and its
operations. The capital mix of debt and equity is based primarily upon
maintaining leverage that supports cost-effective funding.
We issue a combination of fixed-rate debt, principally long-term, and
floating-rate debt, principally short-term. AGFC obtains our fixed-
rate funding through public issuances of long-term debt with maturities
generally ranging from three to ten years. Most floating-rate funding
is through AGFC sales and refinancing of commercial paper and through
AGFC issuance of long-term, floating-rate debt. Commercial paper, with
16
maturities ranging from 1 to 270 days, is sold to banks, insurance
companies, corporations, and other accredited investors. AGFC also
sells extendible commercial notes with initial maturities of up to 90
days, which may be extended by AGFC to 390 days. At March 31, 2003,
short-term debt included $303.0 million of extendible commercial notes.
AGFC has paid dividends to (or received capital contributions from)
AGFI to manage our leverage of debt to tangible equity (equity less
goodwill and accumulated other comprehensive income) to 7.5 to 1.
Certain AGFC financing agreements effectively limit the amount of
dividends AGFC may pay. These agreements have not prevented AGFC from
managing its capital to targeted leverage.
Liquidity Facilities
We maintain credit facilities to support the issuance of commercial
paper and to provide an additional source of funds for operating
requirements. At March 31, 2003, AGFC had committed credit facilities
totaling $3.0 billion, including a facility under which AGFI is an
eligible borrower for up to $300.0 million. The annual commitment fees
for the facilities currently average 0.07% and are based upon AGFC's
long-term credit ratings.
At March 31, 2003, AGFC and certain of its subsidiaries also had
uncommitted credit facilities (including shared uncommitted facilities
with AGFI) totaling $53.0 million which could be increased depending
upon lender ability to participate its loans under the facilities.
Available borrowings under all facilities are reduced by any
outstanding borrowings. There were no amounts outstanding at March 31,
2003 or March 31, 2002. AGFC guarantees its subsidiary borrowings
under uncommitted credit facilities. AGFC does not guarantee any
borrowings of AGFI.
ANALYSIS OF OPERATING RESULTS AND FINANCIAL CONDITION
Net Income
Three Months Ended
March 31,
2003 2002
(dollars in millions)
Net income $ 83.8 $ 78.0
Amount change $ 5.8 $ 9.8
Percent change 8% 14%
Return on average assets (annualized) 2.16% 2.32%
Return on average equity (annualized) 18.12% 19.84%
Ratio of earnings to fixed charges 1.88x 1.86x
See Note 9. of the Notes to Condensed Consolidated Financial Statements
for information on the results of the Company's business segments.
17
Factors that specifically affected the Company's operating results were
as follows:
Finance Charges
Three Months Ended
March 31,
2003 2002
(dollars in millions)
Finance charges $ 430.7 $ 413.7
Amount change $ 17.0 $ 4.8
Percent change 4% 1%
Average net receivables $13,553.7 $11,666.3
Yield 12.85% 14.33%
Finance charges increased due to the following:
Three Months Ended
March 31,
2003 2002
(dollars in millions)
Increase in average net receivables $ 59.4 $ 5.4
Decrease in yield (42.4) (0.6)
Total $ 17.0 $ 4.8
Average net receivables by type and growth in average net receivables
when compared to the same period for the previous year were as follows:
Three Months Ended March 31,
2003 2002
Amount Growth Amount Growth
(dollars in millions)
Real estate loans $ 9,376.8 $1,898.4 $ 7,478.4 $ 398.9
Non-real estate loans 2,851.2 46.6 2,804.6 (118.4)
Retail sales finance 1,325.7 (57.6) 1,383.3 (18.8)
Total $13,553.7 $1,887.4 $11,666.3 $ 261.7
Percent change 16% 2%
In 2002, the low interest rate environment caused significant increases
in both originations and liquidations of our real estate loans.
However, we took advantage of the record real estate loan refinancings
that occurred in the market in general and acquired $1.9 billion of
real estate loan portfolios from third party originators during the
last half of 2002.
18
Yield by type and changes in yield in basis points (bp) when compared
to the same period for the previous year were as follows:
Three Months Ended March 31,
2003 2002
Yield Change Yield Change
Real estate loans 9.97% (141) bp 11.38% (37) bp
Non-real estate loans 21.49 (43) 21.92 39
Retail sales finance 14.65 (26) 14.91 124
Total 12.85 (148) 14.33 (16)
Yield decreased for the three months ended March 31, 2003 when compared
to the same period in 2002 primarily reflecting a lower real estate
loan yield resulting from the low interest rate environment.
Insurance Revenues
Insurance revenues were as follows:
Three Months Ended
March 31,
2003 2002
(dollars in millions)
Earned premiums $45.1 $45.0
Commissions 0.6 0.5
Total $45.7 $45.5
Amount change $ 0.2 $(2.6)
Percent change - % (5)%
Earned premiums remained substantially the same for the three months
ended March 31, 2003 when compared to the same period in 2002.
19
Other Revenues
Other revenues were as follows:
Three Months Ended
March 31,
2003 2002
(dollars in millions)
Investment revenue $ 19.7 $ 22.9
Net gain on real estate loan sales 19.2 -
Interest revenue - notes receivable
from AGFI 3.3 4.2
Net interest income on real estate
loans held for sale 3.2 -
Writedowns on real estate owned (2.1) (2.0)
Net gains on real estate owned sales 0.3 0.5
Other 1.6 4.6
Total $ 45.2 $ 30.2
Amount change $ 15.0 $ (0.7)
Percent change 50% (2)%
Average invested assets $1,291.8 $1,237.4
Adjusted portfolio yield 6.68% 6.62%
Net realized (losses) gains on
investments $ (2.9) $ 1.3
Other revenues increased for the three months ended March 31, 2003 when
compared to the same period in 2002 primarily due to net gain on real
estate loan sales in 2003, partially offset by lower investment
revenue. The increase in net gain on real estate loan sales was due to
the acquisition of WFI.
Interest Expense
Three Months Ended
March 31,
2003 2002
(dollars in millions)
Interest expense $ 141.8 $ 136.0
Amount change $ 5.8 (31.2)
Percent change 4% (19)%
Average borrowings $12,721.0 $10,752.3
Borrowing cost 4.46% 5.06%
Interest expense increased (decreased) due to the following:
Three Months Ended
March 31,
2003 2002
(dollars in millions)
Increase in average borrowings $ 24.9 $ 5.5
Decrease in borrowing cost (19.1) (36.7)
Total $ 5.8 $(31.2)
20
Average borrowings by type and changes in average borrowings when
compared to the same period for the previous year were as follows:
Three Months Ended March 31,
2003 2002
Amount Change Amount Change
(dollars in millions)
Long-term debt $ 9,292.7 $2,786.8 $ 6,505.9 $ 897.0
Short-term debt 3,428.3 (818.1) 4,246.4 (556.0)
Total $12,721.0 $1,968.7 $10,752.3 $ 341.0
Percent change 18% 3%
AGFC issued $3.4 billion of long-term debt during the last half of
2002. The proceeds of these long-term debt issuances were used to
support finance receivable growth and to refinance maturing debt.
Borrowing cost by type and changes in borrowing cost in basis points
when compared to the same period for the previous year were as follows:
Three Months Ended March 31,
2003 2002
Rate Change Rate Change
Long-term debt 5.04% (123) bp 6.27% (47) bp
Short-term debt 2.89 (34) 3.23 (288)
Total 4.46 (60) 5.06 (139)
Federal Reserve actions lowered the federal funds rate 50 basis points
in November 2002 resulting in lower short-term debt rates and lower
rates on floating-rate long-term debt for the first quarter of 2003.
Federal Reserve actions in 2001 and 2002 created the lowest interest
rate environment in forty years and resulted in lower long-term debt
rates as new issuances were generally at lower rates than long-term
debt being refinanced.
Operating Expenses
Operating expenses were as follows:
Three Months Ended
March 31,
2003 2002
(dollars in millions)
Salaries and benefits $ 97.3 $ 79.2
Other 63.2 61.6
Total $160.5 $140.8
Amount change $ 19.7 $ 8.9
Percent change 14% 7%
Operating expenses (annualized)
as a percentage of average
net receivables 4.74% 4.83%
21
Salaries and benefits increased for the three months ended March 31,
2003 when compared to the same period in 2002 primarily due to the
addition of approximately 500 WFI employees, competitive compensation,
and rising benefit costs. The improvement in operating expenses as a
percentage of average net receivables for the three months ended March
31, 2003 when compared to the same period in 2002 reflected controlled
operating expenses and finance receivable growth.
Provision for Finance Receivable Losses
At or for the
Three Months Ended
March 31,
2003 2002
(dollars in millions)
Provision for finance receivable
losses $ 69.5 $ 69.6
Amount change $ (0.1) $ 10.9
Percent change -% 19%
Net charge-offs $ 72.5 $ 69.4
Charge-off ratio 2.14% 2.37%
Charge-off coverage 1.56x 1.59x
60 day+ delinquency $509.9 $449.7
Delinquency ratio 3.65% 3.72%
Allowance for finance receivable
losses $450.7 $440.3
Allowance ratio 3.32% 3.80%
Net charge-offs by type and changes in net charge-offs when compared to
the same period for the previous year were as follows:
Three Months Ended March 31,
2003 2002
Amount Change Amount Change
(dollars in millions)
Real estate loans $12.3 $0.2 $12.1 $ 1.1
Non-real estate loans 48.6 2.0 46.6 7.3
Retail sales finance 11.6 0.9 10.7 2.3
Total $72.5 $3.1 $69.4 $10.7
Charge-off ratios by type and changes in charge-off ratios in basis
points when compared to the same period for the previous year were as
follows:
Three Months Ended March 31,
2003 2002
Ratio Change Ratio Change
Real estate loans 0.53% (12) bp 0.65% 3 bp
Non-real estate loans 6.77 17 6.60 124
Retail sales finance 3.46 40 3.06 68
Total 2.14 (23) 2.37 31
22
Real estate loan charge-off ratio improved for the three months ended
March 31, 2003 when compared to the same period in 2002 primarily due
to purchases of higher quality real estate loans during the last half
of 2002.
Delinquency by type and changes in delinquency when compared to the
same period for the previous year were as follows:
Three Months Ended March 31,
2003 2002
Amount Change Amount Change
(dollars in millions)
Real estate loans $310.9 $59.0 $251.9 $21.1
Non-real estate loans 160.2 1.2 159.0 24.0
Retail sales finance 38.8 - 38.8 9.3
Total $509.9 $60.2 $449.7 $54.4
Delinquency ratios by type and changes in delinquency ratios in basis
points when compared to the same period for the previous year were as
follows:
Three Months Ended March 31,
2003 2002
Ratio Change Ratio Change
Real estate loans 3.30% (6) bp 3.36% 15 bp
Non-real estate loans 5.14 (2) 5.16 97
Retail sales finance 2.73 14 2.59 70
Total 3.65 (7) 3.72 42
The delinquency ratio at March 31, 2003 decreased when compared to
March 31, 2002 primarily due to a higher proportion of net finance
receivables that are real estate loans, which generally have lower
delinquency.
Our Credit Strategy and Policy Committee evaluates our finance
receivable portfolio monthly to determine the appropriate level of the
allowance for finance receivable losses. We believe the amount of the
allowance for finance receivable losses is the most significant
estimate we make. In our opinion, the allowance is adequate to absorb
losses inherent in our existing portfolio. The increase in the
allowance for finance receivable losses at March 31, 2003 when compared
to March 31, 2002 was due to:
* net increases to the allowance for finance receivable losses
through the provision for finance receivable losses during the
period totaling $3.0 million (these increases were necessary
in response to our increased delinquency and net charge-offs
and the higher levels of both unemployment and personal
bankruptcies in the United States); and
* increase to the allowance for finance receivable losses during
third quarter 2002 of $7.4 million resulting from a purchase
business combination.
The allowance as a percentage of net finance receivables declined in
2003 reflecting purchases of higher quality real estate loans during
the last half of 2002.
23
Charge-off coverage, which compares the allowance for finance
receivable losses to net charge-offs (annualized), decreased slightly
for the three months ended March 31, 2003 when compared to the same
period in 2002 reflecting slightly higher net charge-offs,
substantially offset by increases to allowance for finance receivable
losses.
Insurance Losses and Loss Adjustment Expenses
Insurance losses and loss adjustment expenses were as follows:
Three Months Ended
March 31,
2003 2002
(dollars in millions)
Claims incurred $22.6 $24.0
Change in benefit reserves (2.2) (2.0)
Total $20.4 $22.0
Amount change $(1.6) $(1.3)
Percent change (7)% (5)%
Claims incurred decreased for the three months ended March 31, 2003
when compared to the same period in 2002 primarily due to decreases in
claim reserves.
Provision for Income Taxes
Three Months Ended
March 31,
2003 2002
(dollars in millions)
Provision for income taxes $ 45.6 $ 43.1
Amount change $ 2.5 $ 4.5
Percent change 6% 12%
Pretax income $129.4 $121.0
Effective income tax rate 35.23% 35.59%
Provision for income taxes increased for the three months ended March
31, 2003 when compared to the same period in 2002 primarily due to
higher taxable income.
Asset/Liability Management
We manage anticipated cash flows of our assets and liabilities,
principally our finance receivables and debt, in an effort to reduce
the risk associated with unfavorable changes in interest rates not met
by changes in finance charge yields of our finance receivables. We
fund finance receivables with a combination of fixed-rate and floating-
rate debt and equity. Management determines the mix of fixed-rate and
floating-rate debt based, in part, on the nature of the finance
receivables being supported.
24
We limit our exposure to market interest rate increases by fixing
interest rates that we pay for term periods. The primary means by
which we accomplish this is by issuing fixed-rate debt. To supplement
fixed-rate debt issuances, AGFC also alters the nature of certain
floating-rate funding by using interest rate swap agreements to
synthetically create fixed-rate, long-term debt, thereby limiting our
exposure to market interest rate increases. Additionally, AGFC has
swapped fixed-rate, long-term debt to floating-rate, long-term debt.
Including the effect of interest rate swap agreements that effectively
fix floating-rate debt or float fixed-rate debt, our floating-rate debt
represented 40% of average borrowings for the three months ended March
31, 2003 compared to 33% for the same period in 2002.
Item 4. Controls and Procedures.
(a) Evaluation of disclosure controls and procedures
The conclusions of our principal executive officer and principal
financial officer about the effectiveness of the Company's
disclosure controls and procedures based on their evaluation of
these controls and procedures as of a date within 90 days of the
filing date of this quarterly report on Form 10-Q are as follows:
The Company's disclosure controls and procedures are designed to
ensure that information required to be disclosed by the Company
is recorded, processed, summarized and reported within required
timeframes. The Company's disclosure controls and procedures
include controls and procedures designed to ensure that
information required to be disclosed is accumulated and
communicated to the Company's management, including its principal
executive officer and principal financial officer, as appropriate
to allow timely decisions regarding required disclosure.
The Company's management, including its principal executive
officer and principal financial officer, assesses the adequacy of
our disclosure controls and procedures quarterly. Based on these
assessments, the Company's principal executive officer and
principal financial officer have concluded that the disclosure
controls and procedures have functioned effectively and that the
condensed consolidated financial statements fairly present our
consolidated financial position and the results of our operations
for the periods presented.
(b) Changes in internal control
There were no significant changes in the Company's internal
controls or in other factors that could significantly affect
these controls subsequent to the date of management's most recent
evaluation, including any corrective actions with regard to any
significant deficiencies and material weaknesses.
25
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
See Note 10. of the Notes to Condensed Consolidated Financial
Statements in Part I of this Form 10-Q.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
(12) Computation of Ratio of Earnings to Fixed Charges.
(b) Reports on Form 8-K.
Current Report on Form 8-K dated March 28, 2003 with respect to
the issuance from time to time of up to $1.0 billion aggregate
principal amount of AGFC IncomeNotes.
26
Signature
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
AMERICAN GENERAL FINANCE CORPORATION
(Registrant)
Date: April 30, 2003 By /s/ Donald R. Breivogel, Jr.
Donald R. Breivogel, Jr.
Senior Vice President and Chief
Financial Officer
(Duly Authorized Officer and
Principal Financial Officer)
27
Certifications
I, Frederick W. Geissinger, President and Chief Executive Officer,
certify that:
1. I have reviewed this quarterly report on Form 10-Q of American
General Finance Corporation;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material
fact necessary to make the statements made, in light of the
circumstances under which such statements were made, not
misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other
financial information included in this quarterly report, fairly
present in all material respects the financial condition, results
of operations and cash flows of the registrant as of, and for,
the periods presented in this quarterly report;
4. The registrant's other certifying officer and I are responsible
for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-14 and 15d-14)
for the registrant and we have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures
based on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed,
based on our most recent evaluation, to the registrant's auditors
and the audit committee of registrant's board of directors (or
persons performing the equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and
report financial data and have identified for the
registrant's auditors any material weaknesses in internal
controls; and
b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
28
6. The registrant's other certifying officer and I have indicated in
this quarterly report whether or not there were significant
changes in internal controls or in other factors that could
significantly affect internal controls subsequent to the date of
our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: April 30, 2003
/s/ Frederick W. Geissinger
Frederick W. Geissinger
President and Chief Executive
Officer
29
Certifications
I, Donald R. Breivogel, Jr., Senior Vice President and Chief Financial
Officer, certify that:
1. I have reviewed this quarterly report on Form 10-Q of American
General Finance Corporation;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material
fact necessary to make the statements made, in light of the
circumstances under which such statements were made, not
misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other
financial information included in this quarterly report, fairly
present in all material respects the financial condition, results
of operations and cash flows of the registrant as of, and for,
the periods presented in this quarterly report;
4. The registrant's other certifying officer and I are responsible
for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-14 and 15d-14)
for the registrant and we have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures
based on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed,
based on our most recent evaluation, to the registrant's auditors
and the audit committee of registrant's board of directors (or
persons performing the equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and
report financial data and have identified for the
registrant's auditors any material weaknesses in internal
controls; and
b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
30
6. The registrant's other certifying officer and I have indicated in
this quarterly report whether or not there were significant
changes in internal controls or in other factors that could
significantly affect internal controls subsequent to the date of
our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: April 30, 2003
/s/ Donald R. Breivogel, Jr.
Donald R. Breivogel, Jr.
Senior Vice President and
Chief Financial Officer
31
Exhibit Index
Exhibit
(12) Computation of Ratio of Earnings to Fixed Charges.