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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2000
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 1-7422
AMERICAN GENERAL FINANCE, INC.
(Exact name of registrant as specified in its charter)
Indiana 35-1313922
(State of incorporation) (I.R.S. Employer Identification No.)
601 N.W. Second Street, Evansville, IN 47708
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (812) 424-8031
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months, and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K 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 [ ]. Not applicable.
The registrant 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
the reduced disclosure format.
At March 28, 2001, no common stock of the registrant was held by a
non-affiliate.
At March 28, 2001, there were 2,000,000 shares of the registrant's common
stock, $.50 par value, outstanding.
2
TABLE OF CONTENTS
Item Page
Part I 1. Business . . . . . . . . . . . . . . . . . . . . . . 3
2. Properties . . . . . . . . . . . . . . . . . . . . . 16
3. Legal Proceedings . . . . . . . . . . . . . . . . . 16
4. Submission of Matters to a Vote of Security
Holders . . . . . . . . . . . . . . . . . . . . . *
Part II 5. Market for Registrant's Common Equity and Related
Stockholder Matters . . . . . . . . . . . . . . . 18
6. Selected Financial Data . . . . . . . . . . . . . . 18
7. Management's Discussion and Analysis of Financial
Condition and Results of Operations. . . . . . . . 19
7A. Quantitative and Qualitative Disclosures About
Market Risk . . . . . . . . . . . . . . . . . . . 29
8. Financial Statements and Supplementary Data . . . . 29
9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure . . . . . . **
Part III 10. Directors and Executive Officers of the Registrant . *
11. Executive Compensation . . . . . . . . . . . . . . . *
12. Security Ownership of Certain Beneficial Owners
and Management . . . . . . . . . . . . . . . . . . *
13. Certain Relationships and Related Transactions . . . *
Part IV 14. Exhibits, Financial Statement Schedules, and
Reports on Form 8-K . . . . . . . . . . . . . . . 62
* Items 4, 10, 11, 12, and 13 are not included, as per conditions met
by Registrant set forth in General Instructions I(1)(a) and (b) of
Form 10-K.
** Item 9 is not included, as no information was required by Item 304 of
Regulation S-K.
3
PART I
Item 1. Business.
GENERAL
American General Finance, Inc. will be referred to as "AGFI" or
collectively with its subsidiaries, whether directly or indirectly owned,
as the "Company" or "we". AGFI was incorporated in Indiana in 1974 to
become the parent holding company of American General Finance Corporation
(AGFC). AGFC was incorporated in Indiana in 1927 as successor to a
business started in 1920. Since 1982, AGFI has been a direct or indirect
wholly owned subsidiary of American General Corporation (American General),
a leading provider of retirement services, life insurance, consumer loans,
and investments to 12 million customers. American General, a Texas
corporation headquartered in Houston, is the successor to American General
Insurance Company, an insurance company incorporated in Texas in 1926.
On March 11, 2001, American General entered into an agreement to merge with
Prudential plc in which American General will become a wholly owned indirect
subsidiary of Prudential plc. The transaction, which is subject to
shareholder and regulatory approvals, is expected to be completed in third
quarter 2001.
AGFI is a financial services holding company whose principal subsidiary is
AGFC. AGFC is also a financial services holding company with subsidiaries
engaged primarily in the consumer finance and credit insurance business.
We conduct the credit insurance business to supplement our consumer finance
business through Merit Life Insurance Co. (Merit) and Yosemite Insurance
Company (Yosemite), which are both subsidiaries of AGFC.
In May 1999, AGFI acquired Standard Pacific Savings, F.A. from Standard
Pacific Corporation and renamed the institution American General Bank, FSB
(AG Bank). AG Bank currently operates as a traditional thrift, whose
products include deposit and savings accounts, residential mortgage and
home equity loans, and private label services.
At December 31, 2000, the Company had 1,338 offices in 42 states, Puerto
Rico, and the U.S. Virgin Islands and approximately 7,500 employees. Our
executive offices are located in Evansville, Indiana.
Selected Financial Information
The following table shows selected financial information of the Company:
Years Ended December 31,
2000 1999 1998
(dollars in thousands)
Average net receivables $11,408,913 $10,008,809 $ 8,518,922
Average borrowings $10,518,190 $ 9,205,119 $ 7,806,977
Yield - finance charges as a
percentage of average net
receivables 14.19% 14.54% 15.90%
4
Item 1. Continued
At or for the
Years Ended December 31,
2000 1999 1998
Borrowing cost - interest
expense as a percentage
of average borrowings 6.59% 6.23% 6.55%
Interest spread - yield
less borrowing cost 7.60% 8.31% 9.35%
Insurance revenues as a
percentage of average
net receivables 1.72% 1.84% 2.07%
Operating expenses as a
percentage of average
net receivables 4.75% 5.24% 5.93%
Allowance ratio - allowance for
finance receivable losses as
a percentage of net finance
receivables 3.26% 3.59% 3.96%
Charge-off ratio - net charge-offs
as a percentage of the average
of net finance receivables at
the beginning of each month
during the period 1.81% 2.08% 2.60%
Charge-off coverage - allowance
for finance receivable losses
to net charge-offs 1.86x 1.91x 1.74x
Delinquency ratio - finance
receivables 60 days or more
past due as a percentage
of related receivables 3.41% 3.46% 3.75%
Return on average assets 1.59% 1.56% 1.88%
Return on average equity 13.03% 12.03% 13.96%
Ratio of earnings to fixed charges
(refer to Exhibit 12 for
calculations) 1.46x 1.48x 1.56x
Debt to tangible equity ratio -
debt to equity less goodwill
and net unrealized gains or
losses on investment securities 7.50x 7.64x 7.46x
Debt to equity ratio 6.61x 6.68x 5.89x
5
Item 1. Continued
CONSUMER FINANCE OPERATIONS
The consumer finance operation makes loans directly to individuals, offers
retail sales financing to merchants, purchases portfolios of finance
receivables originated by others, and sells credit and non-credit
insurance.
We make home equity loans, originate secured and unsecured consumer loans,
and extend lines of credit. We generally take a security interest in the
real property and/or personal property of the borrower. At December 31,
2000, real estate loans accounted for 62% of the amount and 9% of the
number of net finance receivables outstanding, compared to 64% of the
amount and 8% of the number of net finance receivables outstanding at
December 31, 1999. Real estate loans are secured by first and second
mortgages and generally have maximum original terms of 360 months. Non-
real estate loans are secured by consumer goods, automobiles, or other
chattel security or are unsecured and generally have maximum original terms
of 60 months.
We purchase retail sales contracts and provide revolving retail services
arising from the retail sale of consumer goods and services by
approximately 16,000 retail merchants and offer private label services for
approximately 260 retail merchants. Retail sales contracts are closed-end
accounts that consist of a single purchase. Revolving retail and private
label are open-end revolving accounts that can be used for repeated
purchases. Retail sales contracts are secured by the real property or
personal property giving rise to the contract and generally have maximum
original terms of 60 months. Revolving retail and private label are
secured by purchase money security interests in the goods purchased and
generally require minimum monthly payments based on outstanding balances.
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 that match our customer profile and meet our
credit quality standards and profitability objectives.
We also sell credit life, credit accident and health, credit related
property and casualty, and non-credit insurance to our consumer finance
customers. The benefits of these insurance products for both our customers
and us are described under Insurance Operations. Premiums for insurance
products are most often financed as part of the finance receivable but may
be paid in cash to the insurer.
See Note 20. of the Notes to Consolidated Financial Statements in Item 8.
for further information on the Company's consumer finance business segment.
Finance Receivables
We carry finance receivables at amortized cost which includes accrued
finance charges on interest bearing finance receivables, unamortized
deferred origination costs, and unamortized net premiums and discounts on
purchased finance receivables. They are net of unamortized finance charges
on precomputed receivables and unamortized points and fees.
6
Item 1. Continued
Although a significant portion of insurance claims and policyholder
liabilities originate from the finance receivables, our policy is to show
them as liabilities and not net them against finance receivables. Finance
receivables relate to the financing activities of our consumer finance
business segment and insurance claims and policyholder liabilities relate
to the underwriting activities of our insurance business segment.
The following table shows the amount, number, and average size of finance
receivables originated and renewed by type (retail sales contracts,
revolving retail, and private label comprise retail sales finance) and the
net purchased amount by type:
Years Ended December 31,
2000 1999 1998
Originated and renewed
Amount (in thousands):
Real estate loans $2,086,721 $1,945,181 $1,766,041
Non-real estate loans 2,728,318 2,557,486 2,394,623
Retail sales finance 1,917,128 1,705,635 1,629,258
Total $6,732,167 $6,208,302 $5,789,922
Number:
Real estate loans 58,540 56,933 58,219
Non-real estate loans 829,852 851,798 885,212
Retail sales finance 1,064,865 995,152 1,010,225
Total 1,953,257 1,903,883 1,953,656
Average size (to nearest dollar):
Real estate loans $35,646 $34,166 $30,334
Non-real estate loans 3,288 3,002 2,705
Retail sales finance 1,800 1,714 1,613
Net purchased
Amount (in thousands):
Real estate loans $ 405,848 $1,678,859 $1,705,972
Non-real estate loans 450,655 10,758 116,004
Retail sales finance 66,748 37,764 98,725
Total $ 923,251 $1,727,382 $1,920,701
Net purchased was net of sales of $27.1 million during 2000 and $21.8
million during 1999. We had no sales in 1998.
7
Item 1. Continued
The following table shows the amount, number, and average size of finance
receivables by type:
December 31,
2000 1999 1998
Amount (in thousands):
Real estate loans $ 7,280,234 $ 7,104,227 $ 5,757,185
Non-real estate loans 3,027,989 2,576,081 2,560,565
Retail sales finance 1,453,588 1,349,689 1,339,367
Total $11,761,811 $11,029,997 $ 9,657,117
Number:
Real estate loans 184,591 181,484 169,314
Non-real estate loans 1,017,127 998,150 1,088,584
Retail sales finance 944,923 957,841 993,233
Total 2,146,641 2,137,475 2,251,131
Average size (to nearest dollar):
Real estate loans $39,440 $39,145 $34,003
Non-real estate loans 2,977 2,581 2,352
Retail sales finance 1,538 1,409 1,348
Geographic Distribution
Geographic diversification of finance receivables reduces the concentration
of credit risk associated with a recession in any one region. The largest
concentrations of net finance receivables were as follows:
December 31,
2000 1999 1998
Amount Percent Amount Percent Amount Percent
(dollars in thousands)
California $ 1,582,130 13% $ 1,562,183 14% $ 1,461,438 15%
N. Carolina 831,977 7 811,625 7 728,801 7
Florida 740,186 6 671,970 6 574,693 6
Illinois 698,181 6 659,674 6 593,789 6
Ohio 678,238 6 644,804 6 559,964 6
Indiana 597,898 5 560,887 5 502,653 5
Virginia 486,607 4 430,687 4 367,995 4
Georgia 477,110 4 427,523 4 351,347 4
Other 5,669,484 49 5,260,644 48 4,516,437 47
$11,761,811 100% $11,029,997 100% $ 9,657,117 100%
8
Item 1. Continued
Average Net Receivables and Yield
We recognize finance charges as revenue on the accrual basis using the
interest method. We amortize premiums and discounts on purchased finance
receivables as a revenue adjustment. We stop accruing revenue when the
fourth contractual payment becomes past due for loans and retail sales
contracts and when the sixth contractual payment becomes past due for
revolving retail and private label. Upon suspension, we do not reverse
amounts previously accrued. We resume the accrual of revenue for loans and
retail sales contracts if we receive additional payments and the finance
receivable is less than four contractual payments past due. We recognize
late charges, prepayment penalties and extension fees as revenue when
received.
We defer the costs to originate certain finance receivables and the revenue
from nonrefundable points and fees on loans and amortize them to revenue
on the accrual basis using the interest method over the lesser of the
contractual term or the estimated life based upon prepayment experience.
If a finance receivable liquidates before amortization is completed, we
charge or credit any unamortized costs or points and fees to revenue at the
date of liquidation.
The following table shows average net receivables and yield by type:
Years Ended December 31,
2000 1999 1998
(dollars in thousands)
Real estate loans:
Average net receivables $ 7,211,254 $ 6,227,580 $ 4,681,038
Yield 11.41% 11.59% 12.90%
Non-real estate loans:
Average net receivables $ 2,801,815 $ 2,509,412 $ 2,532,267
Yield 21.54% 21.96% 22.02%
Retail sales finance:
Average net receivables $ 1,395,844 $ 1,271,817 $ 1,305,617
Yield 13.83% 14.35% 14.78%
Total:
Average net receivables $11,408,913 $10,008,809 $ 8,518,922
Yield 14.19% 14.54% 15.90%
See Management's Discussion and Analysis in Item 7. for information on the
trends in yield.
Finance Receivable Credit Quality Information
Our policy is to charge off each month non-real estate loans on which
little or no collections were made in the prior six months, retail sales
contracts that are six installments past due, and revolving retail and
private label accounts that are 180 days past due. We start foreclosure
proceedings on real estate loans when four monthly installments are past
due. When foreclosure is completed and we have obtained title to the
property, we establish the real estate as an asset valued at fair value,
and charge off any loan amount in excess of that value. We occasionally
9
Item 1. Continued
extend the charge-off period for individual accounts when, in our opinion,
such treatment is warranted.
The following table shows net charge-offs and charge-off ratio by type of
finance receivable:
Years Ended December 31,
2000 1999 1998
(dollars in thousands)
Real estate loans:
Net charge-offs $ 45,234 $ 38,364 $ 32,843
Charge-off ratio .63% .62% .71%
Non-real estate loans:
Net charge-offs $130,586 $134,070 $144,382
Charge-off ratio 4.66% 5.34% 5.70%
Retail sales finance:
Net charge-offs $ 30,455 $ 34,198 $ 42,365
Charge-off ratio 2.19% 2.69% 3.25%
Total:
Net charge-offs $206,275 $206,632 $219,590
Charge-off ratio 1.81% 2.08% 2.60%
The following table shows delinquency (finance receivables 60 days or more
past due including unearned finance charges and unearned points and fees
and excluding deferred origination costs, net premiums and discounts on
purchased finance receivables, and accrued finance charges) based on
contract terms in effect and delinquency ratio by type of finance
receivable:
December 31,
2000 1999 1998
(dollars in thousands)
Real estate loans:
Delinquency $239,462 $214,013 $189,474
Delinquency ratio 3.28% 3.02% 3.28%
Non-real estate loans:
Delinquency $148,621 $156,325 $159,027
Delinquency ratio 4.42% 5.37% 5.48%
Retail sales finance:
Delinquency $ 32,493 $ 28,672 $ 35,236
Delinquency ratio 1.95% 1.85% 2.26%
Total:
Delinquency $420,576 $399,010 $383,737
Delinquency ratio 3.41% 3.46% 3.75%
10
Item 1. Continued
We periodically evaluate our finance receivable portfolio as a group to
determine any adjustment necessary to maintain the allowance for finance
receivable losses at a level that we consider adequate to absorb
anticipated losses in our existing portfolio. We consider numerous factors
in estimating the anticipated finance receivable losses, including current
economic conditions, prior finance receivable loss and delinquency
experience, and the composition of our finance receivable portfolio.
The following table shows changes in the allowance for finance receivable
losses:
At or for the
Years Ended December 31,
2000 1999 1998
(dollars in thousands)
Balance at beginning of year $395,626 $382,450 $372,653
Provision for finance receivable
losses 206,275 206,632 212,090
Allowance related to net
(sold) acquired receivables (12,211) 13,176 17,297
Charge-offs, net of recoveries (206,275) (206,632) (219,590)
Balance at end of year $383,415 $395,626 $382,450
Allowance ratio 3.26% 3.59% 3.96%
See Management's Discussion and Analysis in Item 7. for further information
on finance receivable loss and delinquency experience and the related
allowance for finance receivable losses.
Sources of Funds
We fund our consumer finance operations principally through net cash flows
from operating activities, issuances of long-term debt, short-term
borrowings in the commercial paper market, borrowings from banks under
credit facilities, acceptance of bank demand and time deposits, and capital
contributions from American General.
11
Item 1. Continued
Average Borrowings and Borrowing Cost
The following table shows average borrowings and borrowing cost by type of
debt:
Years Ended December 31,
2000 1999 1998
(dollars in thousands)
Long-term debt:
Average borrowings $ 5,708,732 $5,431,257 $4,327,990
Borrowing cost 6.64% 6.61% 6.95%
Short-term debt:
Average borrowings $ 4,765,923 $3,749,160 $3,476,910
Borrowing cost 6.54% 5.70% 6.06%
Deposits:
Average borrowings $ 43,535 $ 24,702 $ 2,077
Borrowing cost 5.94% 5.19% 5.67%
Total:
Average borrowings $10,518,190 $9,205,119 $7,806,977
Borrowing cost 6.59% 6.23% 6.55%
The Company's use of interest rate swap agreements, the effect of which is
included in the rates above, is described in Note 11. of the Notes to
Consolidated Financial Statements in Item 8.
Contractual Maturities
Contractual maturities of net finance receivables and debt at December 31,
2000 were as follows:
Net Finance
Receivables Debt
(dollars in thousands)
Due in:
2001 $ 1,331,563 $ 6,389,208
2002 1,597,547 1,401,748
2003 1,179,355 1,580,723
2004 708,056 376,205
2005 436,589 737,873
2006 and thereafter 6,508,701 347,397
Total $11,761,811 $10,833,154
See Note 4. of the Notes to Consolidated Financial Statements in Item 8.
for contractual maturities of net finance receivables by type and further
information on principal cash collections of finance receivables.
12
Item 1. Continued
INSURANCE OPERATIONS
Merit is a life and health insurance company domiciled in Indiana and
licensed in 44 states, the District of Columbia, and the U.S. Virgin
Islands. Merit writes or assumes (through affiliated and non-affiliated
insurance companies) credit life, credit accident and health, and non-
credit insurance.
Yosemite is a property and casualty insurance company domiciled in Indiana
and licensed in 42 states. Yosemite principally writes or assumes credit-
related property and casualty insurance.
Both Merit and Yosemite market their products through our consumer finance
business segment. Our credit life insurance policies insure the life of
the borrower in an amount typically equal to the unpaid balance of the
finance receivable and provide for payment in full to the lender of the
finance receivable in the event of death. Our credit accident and health
insurance policies provide for the payment to the lender of the
installments on the finance receivable coming due during a period of
disability due to illness or injury. Our credit-related property and
casualty insurance policies are written either to protect the lender's
interest in property pledged as security for the finance receivable or to
provide for the payment to the lender of the installments on the finance
receivable coming due during a period of unemployment. The purchase by the
borrower of credit life, credit accident and health, and credit-related
property and casualty insurance is voluntary with the exception of lender-
placed property damage coverage for automobiles, large equipment,
dwellings, and real estate pledged as collateral. In these instances,
property damage coverage is provided under the terms of the lending
agreement if the borrower does not provide evidence of coverage with
another insurance carrier. The non-credit insurance policies are primarily
ordinary life level term coverage. The purchase of this coverage is
voluntary. Premiums for insurance products are most often financed as part
of the finance receivable but may be paid in cash to the insurer.
Merit and Yosemite have entered into reinsurance agreements with other
insurance companies, including certain other American General subsidiaries,
for assumption of various annuities and non-credit, group, credit life,
credit accident and health, and credit-related property and casualty
insurance on a coinsurance basis. The reserves attributable to this
business fluctuate over time and in certain instances are subject to
recapture by the ceding company. At December 31, 2000, reserves on the
books of Merit and Yosemite attributable to these reinsurance agreements
totaled $151.2 million.
See Note 20. of the Notes to Consolidated Financial Statements in Item 8.
for further information on the Company's insurance business segment.
13
Item 1. Continued
The following table shows information concerning our insurance operations:
At or for the
Years Ended December 31,
2000 1999 1998
(dollars in thousands)
Life Insurance in Force
Credit life $3,075,206 $2,709,962 $2,459,818
Non-credit life 3,343,066 3,355,547 3,618,052
Total $6,418,272 $6,065,509 $6,077,870
Premiums Earned
Credit insurance premiums earned:
Credit life $ 38,958 $ 34,760 $ 32,289
Credit accident and health 48,006 43,237 42,261
Property and casualty 50,016 49,026 49,403
Other insurance premiums earned:
Non-credit life 48,539 46,333 42,981
Non-credit accident and health 6,689 4,541 702
Premiums assumed under
coinsurance agreements 1,156 3,340 4,355
Total $ 193,364 $ 181,237 $ 171,991
Premiums Written
Credit insurance premiums
written:
Credit life $ 45,486 $ 42,114 $ 35,695
Credit accident and health 55,981 52,910 42,452
Property and casualty 58,387 49,846 47,324
Other insurance premiums written:
Non-credit life 48,539 46,333 42,981
Non-credit accident and health 6,689 4,541 702
Premiums assumed under
coinsurance agreements 1,156 3,340 4,355
Total $ 216,238 $ 199,084 $ 173,509
Losses Incurred
Credit insurance losses incurred:
Credit life $ 18,409 $ 16,240 $ 14,775
Credit accident and health 24,412 22,370 21,094
Property and casualty 12,397 13,112 20,187
Other insurance losses incurred:
Non-credit life 20,142 20,746 16,999
Non-credit accident and health 4,031 2,724 409
Losses incurred under
coinsurance agreements 8,963 11,442 11,223
Total $ 88,354 $ 86,634 $ 84,687
14
Item 1. Continued
Investments and Investment Results
The following table shows the investment results of the insurance
operations:
Years Ended December 31,
2000 1999 1998
(dollars in thousands)
Net investment revenue (a) $ 80,807 $ 74,732 $ 74,421
Average invested assets (b) $1,148,950 $1,056,183 $ 983,439
Adjusted portfolio yield (c) 7.35% 7.35% 7.88%
Net realized gains (losses)
on investments (d) $ 2,809 $ (1,564) $ (693)
(a) Net investment revenue is after deducting investment expense but
before net realized gains or losses on investments and provision for
income taxes.
(b) Average invested assets excludes the effect of Statement of
Financial Accounting Standards 115.
(c) Adjusted portfolio yield is calculated based upon the definitions
of net investment revenue and average invested assets listed in (a)
and (b) above.
(d) Includes net realized gains or losses on investment securities and
other invested assets before provision for income taxes.
See Note 6. of the Notes to Consolidated Financial Statements in Item 8.
for information regarding investment securities for all operations of the
Company.
REGULATION
Consumer Finance
The Company is subject to various federal laws and regulations, including
the Federal Consumer Credit Protection Act and the Truth in Lending Act
(governing disclosure of applicable charges and other finance receivable
terms), the Equal Credit Opportunity Act (prohibiting discrimination
against credit-worthy applicants), the Fair Housing Act (prohibiting
discrimination in housing lending), the Fair Credit Reporting Act
(governing the accuracy and use of credit bureau reports), the Real Estate
Settlement Procedures Act (regulating certain loans secured by real
estate), the Federal Fair Debt Collection Practices Act (regulating debt
collection activity in certain instances), the Federal Trade Commission
Act, and the Federal Reserve Board's Regulations B, C, P, Z, and AA. In
many states, the Company relies on federal law to preempt state law
restrictions on interest rates and points and fees for first lien
residential mortgage loans. The Company also relies upon the Federal
Alternative Mortgage Transactions Parity Act in many states to preempt
state rates on loan payments, such as balloon payments and prepayment
15
Item 1. Continued
penalties. The Company makes residential mortgage loans under the
provisions of these and other federal laws. The Company is also subject
to the Federal Privacy Act and the regulations promulgated thereunder,
which generally mandate certain practices and disclosures when dealing with
consumer or customer information.
Various state laws also regulate our consumer lending and retail sales
financing businesses. The degree and nature of such regulation vary from
state to state. The laws under which a substantial amount of our business
is conducted generally: (1) provide for state licensing of lenders; (2)
impose maximum term, amount, interest rate, and other charge limitations;
and (3) enumerate whether and under what circumstances insurance and other
ancillary products may be sold in connection with a lending transaction.
Certain of these laws prohibit the taking of liens on real estate for loans
of small dollar amounts, except liens resulting from judgments. These
state laws may require contract disclosures in addition to those required
under federal law and may limit remedies available in the event of default
by an obligor on the credit.
Additionally, the federal government is considering and a number
of states, counties, and cities have enacted or may be considering, laws
or rules that restrict the credit terms or other aspects of certain loans
that are typically described as "high cost mortgage loans". These
requirements may impose specific statutory liabilities in cases of non-
compliance and may also limit activities or business dealings of affiliates
of the Company under certain conditions.
AG Bank, a wholly owned subsidiary of AGFI, is a federally chartered
savings bank subject to the examination, regulation, and supervision of the
Federal Office of Thrift Supervision (the "OTS"). AG Bank offers consumer
loans and deposit products to the public. AG Bank's deposit accounts are
insured by the Federal Deposit Insurance Corporation. The OTS has the
statutory and regulatory authority to examine AG Bank and its affiliates
and the activities of each entity as it deems necessary.
Insurance
State authorities regulate and supervise our insurance subsidiaries. The
extent of such regulation varies by product but relates primarily to
conduct of business, types of products offered, standards of solvency,
limitations on the payment of dividends and on other transactions with
related parties, licensing, deposits of securities for the benefit of
policyholders, permissible investments, approval of policy forms and
premium rates, periodic examination of the affairs of insurers, form and
content of required financial reports, and reserve requirements for
unearned premiums, losses, and other purposes. Substantially all of the
states in which we operate regulate the rates of premiums charged for
credit insurance and the calculation of premium refunds.
COMPETITION
Consumer Finance
The consumer finance business is highly competitive due to the large
number of companies offering financial products and services, the
sophistication of those products, capital market resources of some
competitors, and general acceptance and widespread usage of available
16
Item 1. Continued
credit. We compete with other consumer finance companies as well as
other types of financial institutions that offer similar products and
services, including, but not limited to, industrial banks, industrial
loan companies, mortgage companies, mortgage brokers, commercial banks,
sales finance companies, national banks, limited purpose credit card
banks, federal savings banks, state banks, credit unions, and vendors
and manufacturers of consumer goods.
Insurance
Our insurance operations supplement our consumer finance operations.
Although the insurance business is competitive in both price and service,
we believe that our insurance companies' abilities to market insurance
products through our distribution systems provide a competitive advantage
over our insurance competitors.
Item 2. Properties.
Our investment in real estate and tangible property is not significant in
relation to our total assets due to the nature of our business. AGFI and
certain of its subsidiaries own real estate upon which AGFI, its
subsidiaries and affiliates, and third parties conduct business. We
generally conduct branch office operations in leased premises. Lease terms
ordinarily range from three to five years.
Item 3. Legal Proceedings.
Satellite Dish Litigation
In the mid-1990s, one of our subsidiaries, A.G. Financial Service Center,
Inc. (Financial Service Center), formerly named American General Financial
Center, provided financing for satellite dishes sold by independent
unaffiliated dealers. On May 18, 1999, the Chancery Court of the First
Judicial District of Jones County, Mississippi in a case captioned Clayton
D. Smith, et al. v. Delta TV Corporation, Don Acy, US Electronics, American
General Financial Center, Civil Action No. 96-0254 (the Clayton Smith
matter), rendered a judgment awarding approximately $500,000 in
compensatory damages and $167 million in punitive damages against Financial
Service Center. The lawsuit was filed on November 15, 1996, by 29
individuals who had each purchased a satellite dish. Financial Service
Center, together with certain other American General companies, were also
named as defendants in other cases involving the financing of satellite
dishes.
17
Item 3. Continued
In August 1999, Financial Service Center filed a voluntary petition to
reorganize under Chapter 11 of the United States Bankruptcy Code with the
United States Bankruptcy Court for the Southern District of Indiana. The
decision to reorganize was necessitated by the judgment rendered against
Financial Service Center by the Mississippi state court. The filing for
reorganization under Chapter 11 was limited to Financial Service Center and
was intended to provide a fair and orderly process for managing the claims
against Financial Service Center. Prior to the bankruptcy filing,
Financial Service Center had assets of approximately $7 million.
As part of the resolution process, settlement agreements were executed in
January 2000 to settle the Clayton Smith matter and certain other claims.
Accordingly, we recorded a charge of $57.0 million ($36.2 million aftertax)
in fourth quarter 1999 to cover the proposed settlements and other
litigation. On September 1, 2000, payment was made in connection with the
final settlement of the Clayton Smith matter.
In 2000, Financial Service Center filed a plan of reorganization to resolve
the remaining claims in the bankruptcy. In January 2001, Financial Service
Center and the creditors' committee in the bankruptcy entered into a
settlement that has been approved by the bankruptcy court. The plan of
reorganization was confirmed by the bankruptcy court in February 2001.
Certain creditors have appealed the confirmation of the plan, but we do not
expect their appeal to prevail. We expect our remaining recorded liability
related to this matter to be sufficient to cover the costs of the plan of
reorganization.
Other
AGFI and certain of its subsidiaries are also parties to various other
lawsuits and proceedings, including certain class action claims, arising
in the ordinary course of business. In addition, many of the proceedings
are pending in jurisdictions 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 and 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.
18
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters.
No trading market exists for AGFI's common stock because American General
owns all of AGFI's common stock. AGFI declared the following cash
dividends on its common stock:
Quarter Ended 2000 1999
(dollars in thousands)
March 31 $ 27,000 $ 41,001
June 30 - 93,003
September 30 15,700 29,996
December 31 64,401 -
$107,101 $164,000
See Management's Discussion and Analysis in Item 7., and Note 15. of the
Notes to Consolidated Financial Statements in Item 8., regarding
limitations on the ability of AGFI and its subsidiaries to pay dividends.
Item 6. Selected Financial Data.
The following selected financial data should be read in conjunction with
the consolidated financial statements and related notes in Item 8.,
Management's Discussion and Analysis in Item 7., and other financial
information in Item 1.
At or for the Years Ended December 31,
2000 1999 1998 1997 1996
(dollars in thousands)
Total revenues $ 1,909,916 $ 1,731,602 $ 1,609,105 $1,524,105 $1,724,948
Net income (a) 207,938 179,734 187,359 129,433 34,146
Total assets 13,408,395 12,635,307 11,172,923 9,289,500 9,563,696
Long-term debt 5,670,670 5,716,991 5,176,965 4,011,457 4,498,530
(a) Per share information is not included because all of AGFI's common stock
is owned by American General.
19
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
Management's Discussion and Analysis of Financial Condition and Results of
Operations should be read in conjunction with the consolidated financial
statements and related notes in Item 8. and other financial information in
Item 1.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity
Our sources of funds include operations, issuances of long-term debt,
short-term borrowings in the commercial paper market, borrowings from banks
under credit facilities, and acceptance of bank demand and time deposits.
American General has also contributed capital to AGFI when needed for
finance receivable growth or other circumstances.
The following table shows principal sources and uses of cash:
Years Ended December 31,
2000 1999 1998
(dollars in millions)
Principal sources of cash:
Operations $ 620.0 $ 493.8 $ 438.6
Net issuance of debt 622.9 1,294.4 1,592.7
Capital contributions - 54.0 79.0
Principal sources of cash $1,242.9 $1,842.2 $2,110.3
Principal uses of cash:
Net originations and purchases
of finance receivables $ 968.1 $1,551.4 $1,814.2
Dividends paid 107.1 164.0 31.6
Principal uses of cash $1,075.2 $1,715.4 $1,845.8
We believe that our overall sources of liquidity will continue to be
sufficient to satisfy our foreseeable financial obligations and operational
requirements.
20
Item 7. Continued
Capital Resources
December 31,
2000 1999
(dollars in millions)
Long-term debt $ 5,670.6 $ 5,717.0
Short-term debt 5,088.5 4,457.5
Deposits 74.0 32.1
Total debt 10,833.1 10,206.6
Equity 1,638.3 1,527.3
Total capital $12,471.4 $11,733.9
Net finance receivables $11,761.8 $11,030.0
Debt to tangible equity ratio 7.50x 7.64x
Our capital varies directly with the level of net finance receivables. 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 most of our
fixed-rate debt through issuances of medium-term notes and underwritten
debt offerings with maturities generally ranging from two to ten years.
AGFI and AGFC obtain most of our floating-rate debt through sales of
commercial paper. Commercial paper, with maturities ranging from 1 to 270
days, is sold directly to banks, insurance companies, corporations, and
other institutional investors. AGFC also sells extendible commercial notes
with initial maturities of up to 90 days, which may be extended by AGFC to
390 days.
We participate in credit facilities to support the issuance of commercial
paper and to provide an additional source of funds for operating
requirements. At December 31, 2000, credit facilities, including
facilities shared with American General, totaled $6.4 billion, with
remaining availability of $6.4 billion. See Note 10. of the Notes to
Consolidated Financial Statements in Item 8. for additional information on
credit facilities.
In addition, our mortgage warehouse lending subsidiary arranges interim
financing for third-party mortgage originators through a purchase facility.
At December 31, 2000, this facility totaled $250.0 million with remaining
availability of $90.0 million.
AGFI has paid dividends to (or received capital contributions from)
American General to manage our leverage of debt to tangible equity (equity
less goodwill and net unrealized gains or losses on investment securities)
to 7.50 to 1. AGFI's ability to pay dividends is substantially dependent
on the receipt of dividends or other funds from its subsidiaries, primarily
AGFC. An AGFC financing agreement limits the amount of dividends AGFC may
pay. This agreement has not prevented us from managing our capital to
targeted leverage. See Note 15. of the Notes to Consolidated Financial
Statements in Item 8. for information on dividend restrictions.
21
Item 7. Continued
Credit Ratings
AGFC's long-term debt and commercial paper ratings facilitate its access
to capital markets. On January 23, 2001, AGFC's ratings were as follows:
Long-term Debt Commercial Paper
Fitch A+ (High) F1+ (Highest)
Moody's A2 (Favorable) P-1 (Highest)
Standard & Poor's A+ (Strong) A-1 (Strong)
ANALYSIS OF OPERATING RESULTS
Net Income
Years Ended December 31,
2000 1999 1998
(dollars in millions)
Net income $207.9 $179.7 $187.4
Return on average assets 1.59% 1.56% 1.88%
Return on average equity 13.03% 12.03% 13.96%
Ratio of earnings to fixed charges 1.46x 1.48x 1.56x
Net income increased $28.2 million, or 16%, for 2000 and decreased $7.7
million, or 4%, for 1999 when compared to the respective previous year.
See Note 20. of the Notes to Consolidated Financial Statements for
information on the results of the Company's business segments.
Net income for 2000 included a charge of $50.0 million ($32.5 million
aftertax) for the estimated loss on an alleged fraud against our mortgage
warehouse lending subsidiary that was discovered in late June 2000.
Without this charge, net income for 2000 would have been $240.4 million.
See Note 16. of the Notes to Consolidated Financial Statements in Item 8.
for further information on the loss.
The decrease in net income for 1999 when compared to 1998 reflected a
charge of $57.0 million ($36.2 million aftertax) in 1999 for the settlement
of satellite dish and other related litigation. Without this charge, net
income for 1999 would have been $215.9 million. See Legal Proceedings in
Item 3. and Note 16. of the Notes to Consolidated Financial Statements in
Item 8. for further information on the satellite dish litigation.
Factors that specifically affected the Company's operating results are as
follows:
22
Item 7. Continued
Finance Charges
Years Ended December 31,
2000 1999 1998
(dollars in millions)
Finance charges $ 1,619.0 $ 1,455.5 $ 1,354.2
Average net receivables $11,408.9 $10,008.8 $ 8,518.9
Yield 14.19% 14.54% 15.90%
Finance charges increased $163.5 million, or 11%, for 2000 and $101.3
million, or 7%, for 1999 when compared to the respective previous year due
to higher average net receivables, partially offset by lower yield.
Average net receivables increased $1.4 billion, or 14%, during 2000 and
$1.5 billion, or 17%, during 1999 when compared to the respective previous
year primarily due to higher average net real estate loans. Yield
decreased 35 basis points during 2000 and 136 basis points during 1999 when
compared to the respective previous year reflecting a larger proportion of
average net receivables that are real estate loans, which generally have
lower yields, and a decline in real estate loan yield. The decrease in
yield for 2000 when compared to 1999 also reflected declines in non-real
estate loan and retail sales finance yield.
Insurance Revenues
Years Ended December 31,
2000 1999 1998
(dollars in millions)
Insurance revenues $196.2 $184.5 $176.0
Premiums earned $193.4 $181.2 $172.0
Insurance revenues as a
percentage of average
net receivables 1.72% 1.84% 2.07%
Insurance revenues increased $11.7 million, or 6%, for 2000 and $8.5
million, or 5%, for 1999 when compared to the respective previous year
primarily due to higher earned premiums. Earned premiums increased due to
higher written premiums in 1999 and 2000 resulting from higher related loan
volume.
Insurance revenues as a percentage of average net receivables declined
during 2000 and 1999 reflecting a higher proportion of average net
receivables that are real estate loans, including purchased real estate
loans, where the opportunity to sell insurance products is limited.
23
Item 7. Continued
Other Revenues
Years Ended December 31,
2000 1999 1998
(dollars in millions)
Other revenues $ 94.7 $ 91.6 $ 79.0
Investment revenue $ 92.4 $ 80.3 $ 75.9
Net realized gains (losses)
on investments $ 2.8 $ (1.6) $ (0.7)
Average invested assets $1,149.0 $1,056.2 $ 983.4
Adjusted portfolio yield 7.35% 7.35% 7.88%
Other revenues increased $3.1 million, or 3%, for 2000 and $12.6 million,
or 16%, for 1999 when compared to the respective previous year.
The increase in other revenues for 2000 when compared to 1999 was primarily
due to higher investment revenue, partially offset by mark-to-market and
portfolio servicing adjustments recorded in 2000. The increase in
investment revenue reflected growth in average invested assets for the
insurance operations of $92.8 million and net realized gains in 2000
compared to net realized losses in 1999.
As a result of the higher interest rate levels in the last half of 1999 and
the first half of 2000, we made mark-to-market and portfolio servicing
adjustments to write-down mortgage loans generated by outside originators
and serviced by our warehouse lending subsidiary that were not sold in the
normal course of business to secondary mortgage investors. These mark-to-
market and portfolio servicing adjustments reduced other revenues by
approximately $8.0 million during 2000.
The increase in other revenues for 1999 when compared to 1998 was primarily
due to higher investment revenue and mortgage set-up/warehousing fees. The
increase in investment revenue reflected growth in average invested assets
for the insurance operations of $72.8 million, partially offset by a
decline in adjusted portfolio yield of 53 basis points and higher realized
losses on investments.
The increases in average invested assets in 2000 and 1999 was primarily due
to investment of insurance operations cash flows. The decrease in adjusted
portfolio yield in 1999 reflected market conditions.
Interest Expense
Years Ended December 31,
2000 1999 1998
(dollars in millions)
Interest expense $ 694.3 $ 573.8 $ 511.6
Average borrowings $10,518.2 $ 9,205.1 $ 7,807.0
Borrowing cost 6.59% 6.23% 6.55%
Interest expense increased $120.5 million, or 21%, for 2000 and $62.2
million, or 12%, for 1999 when compared to the respective previous year.
24
Item 7. Continued
The increase in interest expense for 2000 when compared to 1999 reflected
higher average borrowings and borrowing cost. The increase in interest
expense for 1999 when compared to 1998 was primarily due to higher average
borrowings, partially offset by lower borrowing cost.
Average borrowings increased $1.3 billion, or 14%, during 2000 and $1.4
billion, or 18%, during 1999 when compared to the respective previous year
primarily to support finance receivable growth. Borrowing cost increased
36 basis points during 2000 when compared to 1999 reflecting higher rates
on short-term debt. Borrowing cost decreased 32 basis points during 1999
when compared to 1998 due to lower rates on both long-term and short-term
debt.
Operating Expenses
Years Ended December 31,
2000 1999 1998
(dollars in millions)
Operating expenses $542.4 $524.8 $505.2
Operating expenses as a
percentage of average
net receivables 4.75% 5.24% 5.93%
Operating expenses increased $17.6 million, or 3%, for 2000 and $19.6
million, or 4%, for 1999 when compared to the respective previous year,
substantially less than the increases in average net receivables of 14% and
17%, respectively.
The increase in operating expenses for 2000 when compared to 1999 was
primarily due to higher salaries and data processing expenses, partially
offset by lower litigation expenses.
The increase in operating expenses for 1999 when compared to 1998 was
primarily due to increases in salaries, litigation expenses, amortization
of intangibles, and occupancy expenses, partially offset by higher deferred
loan origination costs.
The increases in salaries for 2000 and 1999 when compared to the respective
previous year reflect higher competitive compensation, partially offset by
a workforce reduction of approximately 200 positions during 2000 and 400
positions during 1999 due to improved productivity.
The improvements in operating expenses as a percentage of average net
receivables in 2000 and 1999 when compared to the respective previous year
reflect continued improvement in operating efficiencies.
25
Item 7. Continued
Provision for Finance Receivable Losses
At or for the
Years Ended December 31,
2000 1999 1998
(dollars in millions)
Provision for finance
receivable losses $206.3 $206.6 $212.1
Net charge-offs $206.3 $206.6 $219.6
Charge-off ratio 1.81% 2.08% 2.60%
Charge-off coverage 1.86x 1.91x 1.74x
60 day+ delinquency $420.6 $399.0 $383.7
Delinquency ratio 3.41% 3.46% 3.75%
Allowance for finance
receivable losses $383.4 $395.6 $382.5
Allowance ratio 3.26% 3.59% 3.96%
Provision for finance receivable losses remained near the same for 2000 and
decreased $5.5 million, or 3%, for 1999 when compared to the respective
previous year. The decrease in the provision for finance receivable losses
for 1999 when compared to 1998 reflected lower net charge-offs.
The decrease in the charge-off ratio for 2000 and 1999 when compared to the
respective previous year reflected the results of past and ongoing credit
quality improvement efforts, including consistent adherence to strict
underwriting guidelines.
The decrease in the delinquency ratio for 2000 and 1999 when compared to
the respective previous year reflected the improvement in credit quality.
The decrease in the delinquency ratio for 2000 also reflected the sale of
fully-reserved delinquent net finance receivables totaling $27.1 million
(gross balances totaling $34.8 million) in 2000. These receivables
consisted of non-real estate loans ($25.0 million) and retail sales finance
($2.1 million). This sale reduced the delinquency ratio by approximately
29 basis points at the time of sale. The decrease in the delinquency ratio
for 2000 was partially offset by the maturation of real estate loan
portfolios purchased in fourth quarter 1999 ($792.7 million), which were
primarily new originations when purchased.
We periodically evaluate our finance receivable portfolio to determine the
appropriate level of the allowance for finance receivable losses. In our
opinion, the allowance is adequate to absorb anticipated losses in our
existing portfolio. The allowance as a percentage of net finance
receivables has declined in both 2000 and 1999 when compared to the
respective previous year reflecting the improvement in credit quality. The
decrease in the allowance ratio for 2000 also reflected the sale of the
fully-reserved net finance receivables in 2000 which reduced the allowance
ratio by approximately 23 basis points at the time of sale. Charge-off
coverage, which compares the allowance for finance receivable losses to net
charge-offs, declined slightly in 2000 and improved in 1999. The slightly
lower charge-off coverage for 2000 reflected the sale of the fully-reserved
net finance receivables during 2000 which reduced charge-off coverage by
approximately 14 basis points at the time of sale.
26
Item 7. Continued
Insurance Losses and Loss Adjustment Expenses
Years Ended December 31,
2000 1999 1998
(dollars in millions)
Claims incurred $83.0 $82.4 $86.5
Change in benefit reserves 5.4 4.2 (1.8)
Insurance losses and loss
adjustment expenses $88.4 $86.6 $84.7
Insurance losses and loss adjustment expenses increased $1.8 million, or
2%, for 2000 and $1.9 million, or 2%, for 1999 when compared to the
respective previous year.
The increase in insurance losses and loss adjustment expenses for 2000 when
compared to 1999 was due to increases in provision for future benefits and
claims. Provision for future benefits increased $1.2 million for 2000 due
to increased sales of non-credit insurance products. Claims increased $.6
million for 2000 primarily due to increased loss experience.
The increase in insurance losses and loss adjustment expenses for 1999 when
compared to 1998 was due to an increase in provision for future benefits,
partially offset by a decrease in claims incurred. Provision for future
benefits increased $6.0 million for 1999 due to increased sales of non-
credit insurance products. Claims decreased $4.1 million for 1999
primarily due to favorable loss experience on credit insurance.
Other Charges
In second quarter 2000, we recorded a charge of $50.0 million ($32.5
million aftertax) for the estimated loss on the alleged fraud against our
mortgage warehouse lending subsidiary that was discovered in late June
2000. See Note 16. of the Notes to Consolidated Financial Statements in
Item 8. for information on the loss.
In fourth quarter 1999, we recorded a charge of $57.0 million ($36.2
million aftertax) for the settlement of satellite dish and other related
litigation. See Legal Proceedings in Item 3. and Note 16. of the Notes to
Consolidated Financial Statements in Item 8. for further information on the
satellite dish litigation.
Provision for Income Taxes
Years Ended December 31,
2000 1999 1998
(dollars in millions)
Provision for income taxes $120.7 $102.9 $108.2
Pretax income $328.6 $282.7 $295.6
Effective income tax rate 36.72% 36.41% 36.62%
27
Item 7. Continued
Provision for income taxes increased $17.8 million, or 17%, for 2000 and
decreased $5.3 million, or 5%, for 1999 when compared to the respective
previous year.
The increase in provision for income taxes for 2000 when compared to 1999
reflected higher taxable income. The decrease in provision for income
taxes for 1999 when compared to 1998 reflected lower taxable income
primarily due to the $57.0 million charge in 1999 for the settlement of
satellite dish and other related litigation.
ANALYSIS OF FINANCIAL CONDITION
At December 31, 2000, the Company's assets were distributed as follows: 85%
in net finance receivables, less allowance for finance receivable losses;
8% in investment securities; 6% in other assets; and 1% in cash and cash
equivalents.
Asset Quality
We believe that our geographic diversification reduces the risk associated
with a recession in any one region. In addition, 97% of our finance
receivables at December 31, 2000 were secured by real property or personal
property. While finance receivables have some exposure to further economic
uncertainty, we believe that the allowance for finance receivable losses
is adequate to absorb anticipated losses in our existing portfolio. See
Analysis of Operating Results for further information on allowance ratio,
delinquency ratio, and charge-off ratio.
Investment securities principally represent the investment portfolio of our
insurance operations. Our investment strategy is to optimize after-tax
returns on invested assets, subject to the constraints of safety,
liquidity, diversification, and regulation.
The largest intangible asset is acquisition-related goodwill, which is
charged to expense in equal amounts over 20 to 40 years.
Asset/Liability Management
We manage anticipated cash flows of our assets and liabilities in an effort
to reduce the risk associated with unfavorable changes in interest rates.
Management determines the mix of fixed-rate and floating-rate debt based,
in part, on the nature of the assets being supported. 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
through the issuance of fixed-rate debt. To supplement fixed-rate debt
issuances, AGFC also uses interest rate swap agreements to synthetically
create fixed-rate debt by altering the nature of certain floating-rate
funding, thereby limiting our exposure to market interest rate increases.
Floating-rate debt represented 37% of our average borrowings for 2000
compared to 32% for 1999. These percentages include the effect of interest
rate swap agreements that converted floating-rate debt to a fixed rate.
28
Item 7. Continued
REGULATION AND OTHER
Regulation
The regulatory environment of the consumer finance and insurance business
is described in Item 1.
Taxation
We monitor federal and state tax legislation and respond with appropriate
tax planning in order to minimize the impact of taxation.
FORWARD-LOOKING STATEMENTS
All statements, trend analyses, and other information contained in this
report relative to trends in our operations or financial results, as well
as other statements including words such as "anticipate," "believe,"
"plan," "estimate," "expect," "intend," and other similar expressions,
constitute forward-looking statements under the Private Securities
Litigation Reform Act of 1995. We have made these forward-looking
statements based upon our current expectations and beliefs concerning
future developments and their potential effects on the Company. There can
be no assurance that future developments affecting the Company will be
those we anticipated. Actual results may differ materially from those
included in the forward-looking statements.
These forward-looking statements involve risks and uncertainties including,
but not limited to, the following: (1) changes in general economic
conditions, including the performance of financial markets, interest rates,
and the level of personal bankruptcies; (2) customer responsiveness to both
products and distribution channels; (3) competitive, regulatory,
accounting, or tax changes that affect the cost of, or demand for, our
products; (4) our ability to secure necessary court and regulatory
approvals; (5) our ability to realize projected expense savings; (6)
adverse litigation results or resolution of litigation, including
proceedings related to satellite dish financing; and (7) the formation of
strategic alliances or business combinations among our competitors or our
business partners. Readers are also directed to other risks and
uncertainties discussed in other documents we filed with the Securities and
Exchange Commission. We undertake no obligation to update or revise any
forward-looking information, whether as a result of new information, future
developments, or otherwise.
29
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
The fair values of certain of our assets and liabilities are sensitive to
changes in market interest rates. The impact of changes in interest rates
would be reduced by the fact that increases (decreases) in fair values of
assets would be partially offset by corresponding changes in fair values
of liabilities. In aggregate, the estimated impact of an immediate and
sustained 100 basis point increase or decrease in interest rates on the
fair values of our interest rate-sensitive financial instruments would not
be material to our financial position.
The estimated increases (decreases) in fair values of interest rate-
sensitive financial instruments were as follows:
December 31, 2000 December 31, 1999
+100 bp -100 bp +100 bp -100 bp
(dollars in thousands)
Assets
Net finance receivables,
less allowance for
finance receivable
losses $(322,005) $ 348,798 $(331,210) $ 361,526
Fixed-maturity securities (51,658) 45,578 (42,700) 44,911
Liabilities
Long-term debt (123,311) 128,317 (122,447) 128,121
Deposits (1,125) 1,159 (214) 214
Derivatives
Interest rate swaps 63,445 (66,407) 34,727 (36,721)
At each year end, we derived the changes in fair values by modeling
estimated cash flows of certain of our assets and liabilities. The
assumptions we used adjusted cash flows to reflect changes in prepayments
and calls but did not consider loan originations, debt issuances, or new
investment purchases.
Readers should exercise care in drawing conclusions based on the above
analysis. While these changes in fair values provide a measure of interest
rate sensitivity, they do not represent our expectations about the impact
of interest rate changes. This analysis is also based on our exposure at
a particular point in time and incorporates numerous assumptions and
estimates. It also assumes an immediate change in interest rates, without
regard to the impact of certain business decisions or initiatives that we
would likely undertake to mitigate or eliminate some or all of the adverse
effects of the modeled scenarios.
Item 8. Financial Statements and Supplementary Data.
The Report of Independent Auditors and the related consolidated financial
statements are presented on the following pages.
30
REPORT OF INDEPENDENT AUDITORS
The Board of Directors
American General Finance, Inc.
We have audited the accompanying consolidated balance sheets of American
General Finance, Inc. (a wholly-owned subsidiary of American General
Corporation) and subsidiaries as of December 31, 2000 and 1999, and the
related consolidated statements of income, shareholder's equity, cash
flows, and comprehensive income for each of the three years in the period
ended December 31, 2000. Our audits also included the financial statement
schedule listed in the Index at Item 14(a). These financial statements and
schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
schedule based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures
in the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management,
as well as evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial
position of American General Finance, Inc. and subsidiaries at December 31,
2000 and 1999, and the consolidated results of their operations and their
cash flows for each of the three years in the period ended December 31,
2000, in conformity with accounting principles generally accepted in the
United States. Also, in our opinion, the related financial statement
schedule, when considered in relation to the basic financial statements
taken as a whole, presents fairly, in all material respects, the
information set forth therein.
Ernst & Young LLP
Indianapolis, Indiana
January 23, 2001
31
American General Finance, Inc. and Subsidiaries
Consolidated Balance Sheets
December 31,
2000 1999
(dollars in thousands)
Assets
Net finance receivables (Notes 2.
and 4.):
Real estate loans $ 7,280,234 $ 7,104,227
Non-real estate loans 3,027,989 2,576,081
Retail sales finance 1,453,588 1,349,689
Net finance receivables 11,761,811 11,029,997
Allowance for finance receivable
losses (Note 5.) (383,415) (395,626)
Net finance receivables, less allowance
for finance receivable losses 11,378,396 10,634,371
Investment securities (Note 6.) 1,107,533 988,563
Cash and cash equivalents 163,895 146,710
Other assets (Note 7.) 758,571 865,663
Total assets $13,408,395 $12,635,307
Liabilities and Shareholder's Equity
Long-term debt (Note 8.) $ 5,670,670 $ 5,716,991
Short-term notes payable:
Commercial paper (Notes 9. and 11.) 5,088,513 4,245,961
Banks and other (Notes 10. and 12.) - 211,559
Deposits 73,971 32,118
Insurance claims and policyholder
liabilities 519,447 462,100
Other liabilities 391,895 416,572
Accrued taxes 25,632 22,771
Total liabilities 11,770,128 11,108,072
Shareholder's equity:
Common stock (Note 14.) 1,000 1,000
Additional paid-in capital 877,576 876,708
Accumulated other comprehensive
income (loss) (Note 6.) 2,631 (6,696)
Retained earnings (Note 15.) 757,060 656,223
Total shareholder's equity 1,638,267 1,527,235
Total liabilities and shareholder's equity $13,408,395 $12,635,307
See Notes to Consolidated Financial Statements.
32
American General Finance, Inc. and Subsidiaries
Consolidated Statements of Income
Years Ended December 31,
2000 1999 1998
(dollars in thousands)
Revenues
Finance charges $1,618,969 $1,455,485 $1,354,158
Insurance 196,241 184,529 175,969
Other 94,706 91,588 78,978
Total revenues 1,909,916 1,731,602 1,609,105
Expenses
Interest expense 694,251 573,834 511,587
Operating expenses 542,412 524,843 505,150
Provision for finance receivable
losses 206,275 206,632 212,090
Insurance losses and loss
adjustment expenses 88,354 86,634 84,687
Other charges (Note 16.) 50,000 57,000 -
Total expenses 1,581,292 1,448,943 1,313,514
Income before provision for income
taxes 328,624 282,659 295,591
Provision for Income Taxes
(Note 17.) 120,686 102,925 108,232
Net Income $ 207,938 $ 179,734 $ 187,359
See Notes to Consolidated Financial Statements.
33
American General Finance, Inc. and Subsidiaries
Consolidated Statements of Shareholder's Equity
Years Ended December 31,
2000 1999 1998
(dollars in thousands)
Common Stock
Balance at beginning of year $ 1,000 $ 1,000 $ 1,000
Balance at end of year 1,000 1,000 1,000
Additional Paid-in Capital
Balance at beginning of year 876,708 822,497 743,083
Capital contributions from
parent and other 868 54,211 79,414
Balance at end of year 877,576 876,708 822,497
Accumulated Other Comprehensive
Income (Loss)
Balance at beginning of year (6,696) 39,419 34,512
Change in net unrealized
gains (losses) on
investment securities 9,327 (46,115) 4,907
Balance at end of year 2,631 (6,696) 39,419
Retained Earnings
Balance at beginning of year 656,223 640,489 484,730
Net income 207,938 179,734 187,359
Common stock dividends (107,101) (164,000) (31,600)
Balance at end of year 757,060 656,223 640,489
Total Shareholder's Equity $1,638,267 $1,527,235 $1,503,405
See Notes to Consolidated Financial Statements.
34
American General Finance, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
Years Ended December 31,
2000 1999 1998
(dollars in thousands)
Cash Flows from Operating Activities
Net Income $ 207,938 $ 179,734 $ 187,359
Reconciling adjustments:
Provision for finance receivable losses 206,275 206,632 212,090
Depreciation and amortization 149,405 132,552 107,946
Deferral of finance receivable
origination costs (54,254) (53,291) (46,773)
Deferred income tax charge (benefit) 21,728 (8,020) 16,446
Change in other assets and other liabilities (74,750) (57,210) (34,947)
Change in insurance claims and
policyholder liabilities 57,347 25,021 220
Change in taxes receivable and payable 64,040 1,422 19,681
Other charges 50,000 57,000 -
Other, net (7,714) 9,932 (23,444)
Net cash provided by operating activities 620,015 493,772 438,578
Cash Flows from Investing Activities
Finance receivables originated or purchased (6,281,876) (6,653,665) (6,589,414)
Principal collections on finance receivables 5,313,806 5,102,250 4,775,254
Acquisition of Standard Pacific Savings, F.A. - 44,516 -
Acquisition of HSA Residential Mortgage
Services of Texas, Inc. - - (25,600)
Investment securities purchased (644,246) (328,442) (211,087)
Investment securities called, matured and sold 536,058 247,886 158,360
Change in premiums on finance receivables
purchased and deferred charges (22,528) (54,609) (122,879)
Other, net (19,884) (37,420) (20,963)
Net cash used for investing activities (1,118,670) (1,679,484) (2,036,329)
Cash Flows from Financing Activities
Proceeds from issuance of long-term debt 1,240,329 1,107,517 2,028,405
Repayment of long-term debt (1,290,234) (571,286) (866,024)
Change in deposits 41,853 (15,683) (700)
Change in short-term notes payable 630,993 773,872 430,977
Capital contribution from parent - 54,000 79,000
Dividends paid (107,101) (164,000) (31,600)
Net cash provided by financing activities 515,840 1,184,420 1,640,058
Increase (decrease) in cash and cash equivalents 17,185 (1,292) 42,307
Cash and cash equivalents at beginning of year 146,710 148,002 105,695
Cash and cash equivalents at end of year $ 163,895 $ 146,710 $ 148,002
Supplemental Disclosure of Cash Flow Information
Income taxes paid $ 34,385 $ 111,127 $ 74,047
Interest paid $ 685,059 $ 552,702 $ 493,356
See Notes to Consolidated Financial Statements.
35
American General Finance, Inc. and Subsidiaries
Consolidated Statements of Comprehensive Income
Years Ended December 31,
2000 1999 1998
(dollars in thousands)
Net Income $207,938 $179,734 $187,359
Other comprehensive income:
Net unrealized gains (losses)
on investment securities 17,254 (72,512) 6,857
Income tax effect (6,101) 25,380 (2,401)
Net unrealized gains (losses)
on investment securities,
net of tax 11,153 (47,132) 4,456
Reclassification adjustment
for realized (gains) losses
included in net income (2,809) 1,564 693
Income tax effect 983 (547) (242)
Realized (gains) losses included
in net income, net of tax (1,826) 1,017 451
Other comprehensive income (loss),
net of tax 9,327 (46,115) 4,907
Comprehensive income $217,265 $133,619 $192,266
See Notes to Consolidated Financial Statements.
36
American General Finance, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2000
Note 1. Nature of Operations
American General Finance, Inc. will be referred to as "AGFI" or
collectively with its subsidiaries, whether directly or indirectly owned,
as the "Company" or "we". AGFI is a wholly owned subsidiary of American
General Corporation (American General). AGFI is a financial services
holding company whose principal subsidiary is American General Finance
Corporation (AGFC). AGFC is also a financial services holding company with
subsidiaries engaged primarily in the consumer finance and credit insurance
business. At December 31, 2000, the Company had 1,338 offices in 42
states, Puerto Rico and the U.S. Virgin Islands and approximately 7,500
employees.
In our consumer finance operations, we make home equity loans, originate
secured and unsecured consumer loans, extend lines of credit, purchase
retail sales contracts and provide revolving retail services arising from
the retail sale of consumer goods and services by approximately 16,000
retail merchants, and offer private label services for approximately 260
retail merchants. 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 sell credit and non-
credit insurance to our consumer finance customers.
In our insurance operations, we write and assume credit life, credit
accident and health, credit-related property and casualty, and non-credit
insurance covering our consumer finance customers and property pledged as
collateral. See Note 20. for further information on the Company's business
segments.
We fund our operations principally through net cash flows from operating
activities, issuances of long-term debt, short-term borrowings in the
commercial paper market, borrowings from banks under credit facilities,
acceptance of bank demand and time deposits, and capital contributions from
American General.
In May 1999, AGFI acquired Standard Pacific Savings, F.A. from Standard
Pacific Corporation and renamed the institution American General Bank, FSB
(AG Bank). AG Bank currently operates as a traditional thrift, whose
products include deposit and savings accounts, residential mortgage and
home equity loans, and private label services.
At December 31, 2000, the Company had $11.8 billion of net finance
receivables due from approximately 2.1 million customer accounts and $6.4
billion of credit and non-credit life insurance in force covering
approximately 1.1 million customer accounts.
Note 2. Summary of Significant Accounting Policies
PRINCIPLES OF CONSOLIDATION
We prepared our consolidated financial statements using generally accepted
accounting principles. They include the accounts of AGFI and its
subsidiaries, all of which are wholly owned. We eliminated all
intercompany items. AGFI is a wholly owned subsidiary of American General.
37
Notes to Consolidated Financial Statements, Continued
FINANCE OPERATIONS
Finance Receivables
We carry finance receivables at amortized cost which includes accrued
finance charges on interest bearing finance receivables, unamortized
deferred origination costs, and unamortized net premiums and discounts on
purchased finance receivables. They are net of unamortized finance charges
on precomputed receivables and unamortized points and fees.
Although a significant portion of insurance claims and policyholder
liabilities originate from the finance receivables, our policy is to show
them as liabilities and not net them against finance receivables. Finance
receivables relate to the financing activities of our consumer finance
business segment and insurance claims and policyholder liabilities relate
to the underwriting activities of our insurance business segment. We
determine delinquency on finance receivables contractually.
Revenue Recognition
We recognize finance charges as revenue on the accrual basis using the
interest method. We amortize premiums and discounts on purchased finance
receivables as a revenue adjustment. We stop accruing revenue when the
fourth contractual payment becomes past due for loans and retail sales
contracts and when the sixth contractual payment becomes past due for
revolving retail and private label. Upon suspension, we do not reverse
amounts previously accrued. We resume the accrual of revenue for loans and
retail sales contracts if we receive additional payments and the finance
receivable is less than four contractual payments past due. We recognize
late charges, prepayment penalties, and extension fees as revenue when
received.
We defer the costs to originate certain finance receivables and the revenue
from nonrefundable points and fees on loans and amortize them to revenue
on the accrual basis using the interest method over the lesser of the
contractual term or the estimated life based upon prepayment experience.
If a finance receivable liquidates before amortization is completed, we
charge or credit any unamortized costs or points and fees to revenue at the
date of liquidation.
Allowance For Finance Receivable Losses
We periodically evaluate the finance receivable portfolio as a group to
determine any adjustment necessary to maintain the allowance for finance
receivable losses at a level that we consider adequate to absorb
anticipated losses in our existing portfolio. We consider numerous factors
in estimating the anticipated finance receivable losses, including current
economic conditions, prior finance receivable loss and delinquency
experience, and the composition of our finance receivable portfolio.
38
Notes to Consolidated Financial Statements, Continued
Our policy is to charge off each month non-real estate loans on which
little or no collections were made in the prior six months, retail sales
contracts that are six installments past due, and revolving retail and
private label accounts that are 180 days past due. We start foreclosure
proceedings on real estate loans when four monthly installments are past
due. When foreclosure is completed and we have obtained title to the
property, we establish the real estate as an asset valued at fair value,
and charge off any loan amount in excess of that value. We occasionally
extend the charge-off period for individual accounts when, in our opinion,
such treatment is warranted.
INSURANCE OPERATIONS
Revenue Recognition
We recognize credit insurance premiums on revolving finance receivables as
revenue when billed. We defer credit insurance premiums collected in
advance in unearned premium reserves which are included in insurance claims
and policyholder liabilities. We recognize premiums on credit life
insurance as revenue using the sum-of-the-digits or actuarial methods,
except in the case of level-term contracts, which we recognize as revenue
using the straight-line method over the terms of the policies. We
recognize premiums on credit accident and health insurance as revenue using
an average of the sum-of-the-digits and the straight-line methods. We
recognize premiums on credit-related property and casualty insurance as
revenue using the straight-line method over the terms of the policies or
appropriate shorter periods. We recognize non-credit life insurance
premiums as revenue when collected but not before their due dates.
Policy Reserves
Policy reserves for credit life, credit accident and health, and credit-
related property and casualty insurance equal related unearned premiums.
We base claim reserves on Company experience. We estimate reserves for
losses and loss adjustment expenses for credit-related property and
casualty insurance based upon claims reported plus estimates of incurred
but not reported claims. We accrue liabilities for future life insurance
policy benefits associated with non-credit life contracts when we recognize
premium revenue and base the amounts on assumptions as to investment
yields, mortality, and surrenders. We base annuity reserves on assumptions
as to investment yields and mortality. We base non-credit life, group
annuity, and accident and health insurance reserves assumed under
coinsurance agreements on various tabular and unearned premium methods.
Acquisition Costs
We defer insurance acquisition costs, principally commissions, reinsurance
fees, and premium taxes, and charge them to expense over the terms of the
related policies or reinsurance agreements.
39
Notes to Consolidated Financial Statements, Continued
INVESTMENT SECURITIES
Valuation
We currently classify all investment securities as available-for-sale and
record them at fair value. We adjust related balance sheet accounts as if
the unrealized gains and losses on investment securities had been realized,
and record the net adjustment in accumulated other comprehensive income
(loss) in shareholder's equity. If the fair value of an investment
security classified as available-for-sale declines below its cost and we
consider the decline to be other than temporary, we reduce the investment
security to its fair value, and recognize a realized loss.
Realized Gains and Losses on Investments
We specifically identify realized gains and losses on investments and
include them in other revenues.
OTHER
Cash Equivalents
We consider all short-term investments with a maturity at date of purchase
of three months or less to be cash equivalents.
Goodwill
We charge goodwill to expense in equal amounts over 20 to 40 years. We
regularly review goodwill for indicators of impairment in value which we
believe are not temporary, including unexpected or adverse changes in the
following: (1) the economic or competitive environments in which we
operate, (2) profitability analyses, and (3) cash flow analyses. If facts
and circumstances suggest that goodwill is impaired, we assess the fair
value of the underlying business and reduce goodwill to an amount that
results in the book value of the Company approximating fair value.
Customer Base Valuations
We charge customer base valuations to expense in equal amounts generally
over 6 years.
Income Taxes
We establish deferred tax assets and liabilities for temporary differences
between the financial reporting basis and the tax basis of assets and
liabilities, using the tax rates expected to be in effect when the
temporary differences reverse.
We provide a valuation allowance for deferred tax assets if it is likely
that some portion of the deferred tax asset will not be realized. We
include an increase or decrease in a valuation allowance resulting from a
change in the realizability of the related deferred tax asset in income.
We include fluctuations in fair value of available-for-sale investment
40
Notes to Consolidated Financial Statements, Continued
securities in accumulated other comprehensive income (loss) in
shareholder's equity.
Derivative Financial Instruments
We account for our derivative financial instruments as hedges. Hedge
accounting requires a high correlation between changes in fair values or
cash flows of the derivative financial instrument and the specific item
being hedged, both at inception and throughout the life of the hedge.
We accrue the differences between amounts payable and receivable on
interest rate swap agreements as adjustments to interest expense over the
lives of the agreements. We include the related amounts payable to and
receivable from counterparties in other liabilities and other assets. We
do not recognize the fair values of interest rate swap agreements in the
consolidated balance sheet, which is consistent with the treatment of the
related debt that is hedged.
We defer any gain or loss resulting from the early termination of an
interest rate swap agreement and amortize it into income over the remaining
term of the related debt. If the underlying debt is extinguished, we
recognize any related gain or loss on the interest rate swap agreement in
income.
Use of Estimates
We make estimates and assumptions in preparing financial statements that
affect amounts reported in our financial statements and disclosures of
contingent assets and liabilities. Ultimate results could differ from our
estimates.
Fair Value of Financial Instruments
We estimate the fair values disclosed in Note 22. using discounted cash
flows when quoted market prices or values obtained from independent pricing
services are not available. The assumptions used, including the discount
rate and estimates of future cash flows, significantly affect the valuation
techniques employed. In certain cases, we cannot verify the estimated fair
values by comparison to independent markets or realize the estimated fair
values in immediate settlement of the instruments.
Note 3. Accounting Changes
On January 1, 2001, we adopted Statement of Financial Accounting Standards
(SFAS) 133, "Accounting for Derivative Instruments and Hedging Activities,"
which requires all derivative instruments to be recognized at fair value
in the balance sheet. Changes in the fair value of a derivative instrument
are required to be reported in net income or accumulated other
comprehensive income, depending upon the intended use of the derivative
instrument. Upon adoption, we recorded aftertax cumulative adjustments to
recognize the fair value of interest rate swaps related to debt in the
balance sheet, which reduced accumulated other comprehensive income in
shareholders' equity $27.4 million. We do not expect SFAS 133 to have a
41
Notes to Consolidated Financial Statements, Continued
material impact on the Company's results of operations and financial
position in future periods.
In fourth quarter 2000, we adopted Staff Accounting Bulletin 101, "Revenue
Recognition in Financial Statements," which provides criteria for revenue
recognition. Adoption of this bulletin did not result in any changes to
the Company's revenue recognition policies.
Note 4. Finance Receivables
The components of net finance receivables by type were as follows:
December 31, 2000
Real Non-real Retail
Estate Estate Sales
Loans Loans Finance Total
(dollars in thousands)
Gross receivables $ 7,297,571 $ 3,366,084 $ 1,667,235 $12,330,890
Unearned finance charges
and points and fees (166,983) (440,567) (237,141) (844,691)
Accrued finance charges 66,936 47,652 22,715 137,303
Deferred origination costs 9,035 37,817 - 46,852
Premiums, net of discounts 73,675 17,003 779 91,457
$ 7,280,234 $ 3,027,989 $ 1,453,588 $11,761,811
December 31, 1999
Real Non-real Retail
Estate Estate Sales
Loans Loans Finance Total
(dollars in thousands)
Gross receivables $ 7,087,150 $ 2,910,348 $ 1,546,013 $11,543,511
Unearned finance charges
and points and fees (154,988) (415,458) (220,271) (790,717)
Accrued finance charges 60,852 42,785 23,814 127,451
Deferred origination costs 8,163 37,882 - 46,045
Premiums, net of discounts 103,050 524 133 103,707
$ 7,104,227 $ 2,576,081 $ 1,349,689 $11,029,997
Real estate loans are secured by first or second mortgages and generally
have maximum original terms of 360 months. Non-real estate loans are
secured by consumer goods, automobiles or other chattel security, or are
unsecured and generally have maximum original terms of 60 months. Retail
sales contracts are secured principally by consumer goods and automobiles
and generally have maximum original terms of 60 months. Revolving retail
and private label are secured by purchase money security interests in the
goods purchased and generally require minimum monthly payments based on
outstanding balances. At December 31, 2000, 97% of our net finance
receivables were secured by the real and/or personal property of the
borrower, compared to 96% at December 31, 1999. At December 31, 2000, real
estate loans accounted for 62% of the amount and 9% of the number of net
finance receivables outstanding, compared to 64% of the amount and 8% of
the number of net finance receivables outstanding at December 31, 1999.
42
Notes to Consolidated Financial Statements, Continued
Contractual maturities of net finance receivables by type at December 31,
2000 were as follows:
Real Non-Real Retail
Estate Estate Sales
Loans Loans Finance Total
(dollars in thousands)
2001 $ 201,217 $ 776,185 $ 354,161 $ 1,331,563
2002 286,196 1,009,791 301,560 1,597,547
2003 297,205 733,431 148,719 1,179,355
2004 303,547 334,978 69,531 708,056
2005 296,553 107,545 32,491 436,589
2006+ 5,895,516 66,059 547,126 6,508,701
$ 7,280,234 $ 3,027,989 $ 1,453,588 $11,761,811
Company experience has shown that customers will renew, convert or pay in
full a substantial portion of finance receivables prior to maturity.
Contractual maturities are not a forecast of future cash collections.
Principal cash collections and such collections as a percentage of average
net receivables were as follows:
Years Ended December 31,
2000 1999 1998
(dollars in thousands)
Real estate loans:
Principal cash collections $1,854,554 $1,886,041 $1,553,759
% of average net receivables 25.72% 30.29% 33.19%
Non-real estate loans:
Principal cash collections $1,610,183 $1,519,531 $1,568,858
% of average net receivables 57.47% 60.55% 61.95%
Retail sales finance:
Principal cash collections $1,849,069 $1,696,678 $1,652,637
% of average net receivables 132.47% 133.41% 126.58%
Unused credit limits extended by the Company to its customers were as
follows:
December 31,
2000 1999
(dollars in thousands)
Unused credit limits $3,718,568 $3,226,282
Company experience has shown that the funded amounts have been less than
the unused credit limits. All unused credit limits, in part or in total,
can be cancelled at the discretion of the Company.
43
Notes to Consolidated Financial Statements, Continued
Geographic diversification of finance receivables reduces the concentration
of credit risk associated with a recession in any one region. The largest
concentrations of net finance receivables were as follows:
December 31, 2000 December 31, 1999
Amount Percent Amount Percent
(dollars in thousands)
California $ 1,582,130 13% $ 1,562,183 14%
N. Carolina 831,977 7 811,625 7
Florida 740,186 6 671,970 6
Illinois 698,181 6 659,674 6
Ohio 678,238 6 644,804 6
Indiana 597,898 5 560,887 5
Virginia 486,607 4 430,687 4
Georgia 477,110 4 427,523 4
Other 5,669,484 49 5,260,644 48
$11,761,811 100% $11,029,997 100%
Finance receivables on which we stopped accruing revenue totaled $333.5
million at December 31, 2000 and $315.4 million at December 31, 1999. Our
accounting policy for revenue recognition on revolving retail and private
label finance receivables follows industry practice and provides for the
accrual of revenue up to the date of charge-off at 180 days past due. We
accrued revenue on revolving retail and private label finance receivables
greater than 90 days contractually delinquent of $.3 million at December
31, 2000 and $.2 million at December 31, 1999.
Note 5. Allowance for Finance Receivable Losses
Changes in the allowance for finance receivable losses are detailed below.
Years Ended December 31,
2000 1999 1998
(dollars in thousands)
Balance at beginning of year $395,626 $382,450 $372,653
Provision for finance receivable
losses 206,275 206,632 212,090
Allowance related to net
(sold) acquired receivables (12,211) 13,176 17,297
Charge-offs, net of recoveries (206,275) (206,632) (219,590)
Balance at end of year $383,415 $395,626 $382,450
See Note 2. for information on the determination of the allowance for
finance receivable losses.
44
Notes to Consolidated Financial Statements, Continued
Note 6. Investment Securities
Investment securities were as follows at December 31:
Fair Value Amortized Cost
2000 1999 2000 1999
(dollars in thousands)
Fixed-maturity investment
securities:
Bonds:
Corporate securities $ 601,588 $581,313 $ 609,502 $601,458
Mortgage-backed securities 182,185 151,028 178,706 151,335
State and political
subdivisions 279,922 179,445 272,144 177,863
Other 4,240 39,148 4,110 31,599
Redeemable preferred stocks 11,426 15,233 10,764 14,272
Total 1,079,361 966,167 1,075,226 976,527
Non-redeemable preferred
stocks 3,635 3,679 3,596 3,631
Other long-term investments 23,680 18,517 23,680 18,517
Common stocks 857 200 887 189
Total investment securities $1,107,533 $988,563 $1,103,389 $998,864
At December 31, the gross unrealized gains and losses on investment
securities were as follows:
Gross Gross
Unrealized Gains Unrealized Losses
2000 1999 2000 1999
(dollars in thousands)
Fixed-maturity investment
securities:
Bonds:
Corporate securities $15,802 $ 4,331 $23,716 $24,476
Mortgage-backed securities 3,747 1,228 268 1,535
State and political
subdivisions 8,279 3,249 501 1,667
Other 130 7,625 - 76
Redeemable preferred stocks 799 966 137 5
Total 28,757 17,399 24,622 27,759
Non-redeemable preferred
stocks 39 48 - -
Common stocks 7 11 37 -
Total investment securities $28,803 $17,458 $24,659 $27,759
The fair values of investment securities sold or redeemed and the resulting
gross realized gains and losses were as follows:
Years Ended December 31,
2000 1999 1998
(dollars in thousands)
Fair value $536,058 $247,886 $158,360
Gross realized gains 14,166 3,003 340
Gross realized losses 11,357 4,567 1,033
45
Notes to Consolidated Financial Statements, Continued
Contractual maturities of fixed-maturity securities at December 31, 2000
were as follows:
Fair Amortized
Value Cost
(dollars in thousands)
Fixed maturities, excluding
mortgage-backed securities:
Due in 1 year or less $ 13,618 $ 13,455
Due after 1 year through 5 years 240,492 239,281
Due after 5 years through 10 years 388,352 392,746
Due after 10 years 254,714 251,038
Mortgage-backed securities 182,185 178,706
Total $1,079,361 $1,075,226
Actual maturities may differ from contractual maturities since borrowers
may have the right to call or prepay obligations. The Company may sell
investments before maturity to achieve corporate requirements and
investment strategies.
Bonds on deposit with regulatory authorities had carrying values of $7.3
million at December 31, 2000 and $6.4 million at December 31, 1999.
Note 7. Other Assets
The components of other assets were as follows:
December 31,
2000 1999
(dollars in thousands)
Goodwill $190,817 $198,720
Fixed assets 109,729 110,725
Other insurance investments 90,495 75,701
Customer base valuations 85,519 94,143
Real estate owned 45,864 52,232
Income tax assets 44,045 132,280
Prepaid expenses and deferred
charges 39,214 39,181
Other 152,888 162,681
Total $758,571 $865,663
Goodwill is net of accumulated amortization of $112.5 million at December
31, 2000 and $104.6 million at December 31, 1999.
46
Notes to Consolidated Financial Statements, Continued
Note 8. Long-term Debt
The carrying value and fair value of long-term debt at December 31 were as
follows:
Carrying Value Fair Value
2000 1999 2000 1999
(dollars in thousands)
Senior debt $5,670,670 $5,716,991 $5,735,653 $5,641,284
Weighted average interest rates on long-term debt were as follows:
Years Ended December 31, December 31,
2000 1999 1998 2000 1999
Senior debt 6.64% 6.61% 6.95% 6.72% 6.58%
Maturities of long-term debt at December 31, 2000 were as follows:
Carrying Value
(dollars in thousands)
2001 $1,264,767
2002 1,388,987
2003 1,571,981
2004 375,589
2005 721,949
2006-2009 347,397
Total $5,670,670
A debt agreement contains restrictions on consolidated retained earnings
for certain purposes (see Note 15.).
Note 9. Short-term Notes Payable
AGFI and AGFC issue commercial paper with terms ranging from 1 to 270 days.
Included in commercial paper are extendible commercial notes that AGFC
sells with initial maturities of up to 90 days which may be extended by
AGFC to 390 days.
47
Notes to Consolidated Financial Statements, Continued
Information concerning short-term notes payable for commercial paper and
to banks under credit facilities was as follows:
At or for the
Years Ended December 31,
2000 1999 1998
(dollars in thousands)
Average borrowings $4,765,422 $3,748,637 $3,475,728
Weighted average interest
rate, at year end:
Money market yield 6.58% 5.95% 5.30%
Semi-annual bond
equivalent yield 6.67% 6.02% 5.36%
Note 10. Liquidity Facilities
We participate in credit facilities to support the issuance of commercial
paper and to provide an additional source of funds for operating
requirements. AGFI and AGFC are eligible borrowers under committed credit
facilities extended to American General and certain of its subsidiaries
(the "shared committed facilities"). At December 31, 2000, the annual
commitment fees for the shared committed facilities ranged from .05% to
.07%. We pay only an allocated portion of the commitment fees for the
shared committed facilities. AGFI and certain subsidiaries also have
uncommitted credit facilities. In addition, AGFI and AGFC were eligible
borrowers under uncommitted credit facilities extended to American General
and certain of its subsidiaries (the "shared uncommitted facilities").
This agreement was modified in December 2000. Available borrowings under
all facilities are reduced by any outstanding borrowings.
Information concerning the credit facilities was as follows:
December 31,
2000 1999
(dollars in thousands)
Committed credit facilities:
Shared committed facilities $6,200,000 $5,600,000
Borrowings - -
Remaining availability $6,200,000 $5,600,000
Uncommitted credit facilities:
Company uncommitted facilities $ 171,000 $ 271,000
Shared uncommitted facilities - 50,000
Borrowings - (211,000)
Remaining availability $ 171,000 $ 110,000
In addition, our mortgage warehouse lending subsidiary arranges interim
financing for third-party mortgage originators through a purchase facility.
At December 31, 2000, this facility totaled $250.0 million with remaining
availability of $90.0 million.
48
Notes to Consolidated Financial Statements, Continued
Note 11. Derivative Financial Instruments
Our principal borrowing subsidiary is AGFC. AGFC uses derivative financial
instruments to manage 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.
AGFC uses interest rate swap agreements to reduce its exposure to market
interest rate increases by synthetically converting certain floating-rate
debt to a fixed-rate basis. We record these floating-rate obligations at
amortized cost. The synthetic long-term fixed rates achieved through
interest rate swap agreements are slightly lower than could have been
achieved by issuing comparable long-term fixed-rate debt. As an
alternative to fixed-rate term debt, AGFC's interest rate swap agreements
did not have a material effect on the Company's weighted-average interest
rate or reported interest expense in any of the three years ended December
31, 2000.
AGFC contracted to pay interest at fixed rates and receive interest at
floating rates on the interest rate swap agreements. Notional amounts and
weighted average receive and pay rates were as follows:
December 31,
2000 1999 1998
(dollars in thousands)
Notional amount $2,450,000 $1,295,000 $935,000
Weighted average receive rate 6.72% 5.40% 4.57%
Weighted average pay rate 6.71% 6.70% 6.94%
These agreements mature at various dates and had the respective fixed rates
at December 31, 2000 as follows:
Notional Weighted Average
Amount Interest Rate
(dollars in
thousands)
2001 $ 270,000 6.32%
2002 610,000 6.85
2003 445,000 7.86
2004 600,000 6.41
2005 225,000 6.24
2006 100,000 7.03
2008 200,000 5.50
$2,450,000 6.71%
49
Notes to Consolidated Financial Statements, Continued
The following table shows changes in the notional amounts for interest rate
swap agreements:
Years Ended December 31,
2000 1999 1998
(dollars in thousands)
Balance at beginning of year $1,295,000 $ 935,000 $940,000
New contracts 1,380,000 410,000 260,000
Expired contracts (225,000) (50,000) (265,000)
Balance at end of year $2,450,000 $1,295,000 $935,000
AGFC is exposed to credit risk in the event of non-performance by
counterparties to derivative financial instruments. AGFC limits this
exposure by entering into agreements with counterparties having high credit
ratings and by basing the amounts and terms of these agreements on their
credit ratings. AGFC regularly monitors counterparty credit ratings
throughout the term of the agreements.
AGFC's credit exposure on derivative financial instruments is limited to
the fair value of the agreements that are favorable to the Company. See
Note 22. for the fair values of the interest rate swap agreements. AGFC
does not expect any counterparty to fail to meet its obligation; however,
non-performance would not have a material impact on the Company's
consolidated results of operations and financial position.
AGFC's exposure to market risk is mitigated by the offsetting effects of
changes in the value of the agreements and of the related debt being
hedged.
Note 12. Short-term Notes Payable - Parent
Borrowings from American General primarily provide overnight operating
liquidity when American General is in a surplus cash position. These
borrowings are due on demand at short-term rates based on overnight bank
investment rates. At December 31, 2000, 1999 and 1998, AGFI had no
borrowings outstanding with American General.
Note 13. Insurance
Our insurance subsidiaries enter into reinsurance agreements among
themselves and other insurers, including other American General insurance
subsidiaries. Insurance claims and policyholder liabilities included the
following amounts with other American General insurance subsidiaries:
December 31,
2000 1999
(dollars in thousands)
Annuity, credit life, and credit
accident and health reserves $80,871 $76,712
50
Notes to Consolidated Financial Statements, Continued
Our insurance subsidiaries assumed policy and claim reserves from other
insurers as follows:
December 31,
2000 1999 1998
(dollars in thousands)
Assumed policy and claim reserves $151,169 $142,917 $130,392
The Company's ceded reinsurance activities were not significant during the
last three years.
Statutory accounting practices differ from generally accepted accounting
principles in the following respects:
Years Ended December 31,
2000 1999 1998
(dollars in thousands)
Statutory net income $58,027 $48,754 $68,537
Change in deferred policy
acquisition costs 12,650 7,405 254
Reserve changes 19,298 5,848 (4,885)
Deferred income tax charge (6,599) (1,870) (1,024)
Amortization of interest
maintenance reserve (710) (711) (561)
Goodwill amortization (458) (458) (458)
Other, net (2,263) 7,744 2,542
GAAP net income $79,945 $66,712 $64,405
December 31,
2000 1999
(dollars in thousands)
Statutory equity $626,572 $575,767
Deferred policy acquisition costs 83,712 70,530
Reserve changes 73,943 57,724
Net unrealized losses (22,508) (27,879)
Goodwill 14,252 14,710
Decrease in carrying value
of affiliates (14,992) (12,836)
Asset valuation reserve 13,650 10,579
Deferred income taxes 3,389 3,606
Interest maintenance reserve 349 (580)
Other, net 15,487 12,970
GAAP equity $793,854 $704,591
51
Notes to Consolidated Financial Statements, Continued
Note 14. Capital Stock
AGFI has two classes of authorized capital stock: special shares and common
shares. AGFI may issue special shares in series. The board of directors
determines the dividend, liquidation, redemption, conversion, voting and
other rights prior to issuance. Par value, shares authorized, and shares
issued and outstanding at December 31, 2000 and 1999 were as follows:
Shares
Issued and Outstanding
Par Shares December 31,
Value Authorized 2000 1999
Special Shares - 25,000,000 - -
Common Shares $0.50 25,000,000 2,000,000 2,000,000
Note 15. Retained Earnings
AGFI's ability to pay dividends is substantially dependent on the receipt
of dividends or other funds from its subsidiaries. State laws restrict the
amounts our insurance subsidiaries may pay as dividends without prior
notice to, or in some cases prior approval from, their respective state
insurance departments. At December 31, 2000, the maximum amount of
dividends which our insurance subsidiaries may pay in 2001 without prior
approval was $72.0 million. At December 31, 2000, our insurance
subsidiaries had statutory capital and surplus of $626.6 million. Merit
Life Insurance Co. (Merit), a wholly owned subsidiary of AGFC, had $52.7
million of accumulated earnings at December 31, 2000 for which no federal
income tax provisions have been required. Merit would be liable for
federal income taxes on such earnings if they were distributed as dividends
or exceeded limits prescribed by tax laws. No distributions are presently
contemplated from these earnings. If such earnings were to become taxable
at December 31, 2000, the federal income tax would approximate $18.4
million.
An AGFC financing agreement limits the amount of dividends AGFC may pay.
Under the restrictive provision contained in this agreement, $620.5 million
of the retained earnings of AGFC was free from such restriction at December
31, 2000.
Note 16. Other Charges
SATELLITE DISH LITIGATION
In the mid-1990s, one of our subsidiaries, A.G. Financial Service Center,
Inc. (Financial Service Center), formerly named American General Financial
Center, provided financing for satellite dishes sold by independent
unaffiliated dealers. On May 18, 1999, a Mississippi state court rendered
a judgment against Financial Service Center for approximately $500,000 in
compensatory damages and $167 million in punitive damages, in a lawsuit
brought by 29 individuals who had each purchased a satellite dish. In
1999, Financial Service Center voluntarily filed for bankruptcy.
52
Notes to Consolidated Financial Statements, Continued
As part of the resolution process, certain settlement agreements were
executed in January 2000. Accordingly, we recorded a charge of $57.0
million ($36.2 million aftertax) in fourth quarter 1999 to cover the
proposed settlements of this and other litigation. On September 1, 2000,
payment was made as final settlement of these agreements.
In 2000, Financial Service Center filed a plan of reorganization to resolve
the remaining claims filed in the bankruptcy. In January 2001, Financial
Service Center and the creditors' committee in the bankruptcy entered into
a settlement that has been approved by the bankruptcy court. The plan of
reorganization was confirmed by the bankruptcy court in February 2001.
Certain creditors may appeal the confirmation of the plan, but we do not
expect the appeals to prevail. We expect our remaining recorded liability
related to this matter to be sufficient to cover the costs of the plan of
reorganization.
See Legal Proceedings in Item 3. for additional information on the
satellite dish litigation.
MORTGAGE WAREHOUSE LENDING
In June 2000, we discovered a potential fraud committed against a
subsidiary that conducts mortgage warehouse lending activities in our
consumer finance operation. Mortgages processed by one originator
allegedly had been funded based on fraudulent information. In July 2000,
the originator's license was suspended and the originator and its parent
company filed for bankruptcy. Based on the available information, we
recorded a charge of $50.0 million ($32.5 million aftertax) in second
quarter 2000 for our loss related to this alleged fraud. We are pursuing
all appropriate remedies and believe our recorded liability is sufficient
to cover this loss.
Note 17. Income Taxes
AGFI and all of its subsidiaries file a consolidated federal income tax
return with American General and the majority of its subsidiaries. We
provide for federal income taxes as if filing a separate tax return, and
pay such amounts to American General under a tax sharing agreement.
53
Notes to Consolidated Financial Statements, Continued
Provision for income taxes is summarized as follows:
Years Ended December 31,
2000 1999 1998
(dollars in thousands)
Federal
Current $ 94,085 $106,189 $ 86,813
Deferred 17,021 (8,917) 13,475
Total federal 111,106 97,272 100,288
State 9,580 5,653 7,944
Total $120,686 $102,925 $108,232
The U.S. statutory federal income tax rate differs from the effective
income tax rate as follows:
Years Ended December 31,
2000 1999 1998
Statutory federal income tax rate 35.00% 35.00% 35.00%
State income taxes 1.89 1.30 1.75
Amortization of goodwill .71 .90 1.07
Nontaxable investment income (1.01) (.99) (.94)
Other, net .13 .20 (.26)
Effective income tax rate 36.72% 36.41% 36.62%
Net deferred tax assets were as follows:
December 31,
2000 1999
(dollars in thousands)
Deferred tax assets $133,980 $205,257
Deferred tax liabilities (99,106) (78,358)
Net deferred tax assets $ 34,874 $126,899
The most significant deferred tax asset relates to the allowance for
finance receivable losses.
During 2000, the Internal Revenue Service completed its examinations of
American General's tax returns through 1992. As a result, the Company
received a cash settlement which reduced deferred tax assets $61.3 million.
State net operating loss (NOL) carryforwards were $603.8 million at
December 31, 2000 and $617.9 million at December 31, 1999 and expire in
2002. These carryforwards resulted from a 1995 state audit of a return and
the state's acceptance of an amended return. The valuation allowance
relating to the state NOL carryforwards totaled $43.5 million at December
31, 2000 and $39.5 million at December 31, 1999.
54
Notes to Consolidated Financial Statements, Continued
Note 18. Lease Commitments, Rent Expense and Contingent Liabilities
Annual rental commitments for leased office space, automobiles and data
processing and related equipment accounted for as operating leases,
excluding leases on a month-to-month basis, are as follows:
Lease Commitments
(dollars in thousands)
2001 $ 44,893
2002 36,679
2003 27,887
2004 17,567
2005 9,569
subsequent to 2005 12,958
Total $149,553
Taxes, insurance and maintenance expenses are obligations of the Company
under certain leases. In the normal course of business, leases that expire
will be renewed or replaced by leases on other properties. Future minimum
annual rental commitments will probably not be less than the amount of
rental expense incurred in 2000. Rental expense totaled $47.9 million in
2000, $45.6 million in 1999, and $35.2 million in 1998.
AGFI 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 the proceedings are pending in
jurisdictions 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 and 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.
Note 19. Benefit Plans
RETIREMENT INCOME PLANS
We participate in the American General Retirement Plans (AGRP), which are
non-contributory defined benefit pension plans covering most employees.
Pension benefits are based on the participant's compensation and length of
credited service. American General's funding policy is to contribute
annually no more than the maximum amount deductible for federal income tax
purposes.
At December 31, 2000, the plans' assets were invested as follows: (1) 65%
in equity mutual funds managed outside American General; (2) 28% in fixed
income mutual funds managed by an American General subsidiary; and (3) 6%
in American General common stock. The pension plans have purchased annuity
contracts from American General subsidiaries to provide approximately $8.2
million of future annual benefits to certain retirees.
55
Notes to Consolidated Financial Statements, Continued
AGFI accounts for its participation in the AGRP as if it had its own plans.
The following table shows AGFI's portion of the plans' funded status:
December 31,
2000 1999 1998
(dollars in thousands)
Projected benefit obligation $ 99,622 $ 85,757 $ 87,882
Plan assets at fair value 112,194 109,371 95,653
Plan assets in excess of projected
benefit obligation 12,572 23,614 7,771
Other unrecognized items, net (10,615) (20,208) (5,086)
Prepaid pension expense $ 1,957 $ 3,406 $ 2,685
Pension expense included the following components:
Years Ended December 31,
2000 1999 1998
(dollars in thousands)
Service cost $ 3,914 $ 3,927 $ 3,623
Interest cost 7,488 6,412 5,688
Expected return on plan assets (10,061) (8,713) (6,950)
Net amortization and deferral 199 119 136
Pension expense $ 1,540 $ 1,745 $ 2,497
Additional assumptions concerning the determination of pension expense were
as follows:
Years Ended December 31,
2000 1999 1998
Weighted average discount rate 8.00% 7.75% 7.00%
Expected long-term rate of
return on plan assets 10.35 10.35 10.25
Rate of increase in
compensation levels 4.50 4.25 4.25
POSTRETIREMENT BENEFITS OTHER THAN PENSIONS
We participate in American General's life, medical, supplemental major
medical, and dental plans for certain retired employees. Most plans are
contributory, with retiree contributions adjusted annually to limit
employer contributions to predetermined amounts. American General and its
subsidiaries reserve the right to change or eliminate these benefits at any
time.
American General's life plans are insured through December 31, 2001. The
majority of the retiree medical and dental plans are unfunded and self-
insured.
56
Notes to Consolidated Financial Statements, Continued
AGFI accounts for its participation in the plans as if it had its own
plans. The accrued liability for postretirement benefits was $6.5 million
at December 31, 2000 and $6.6 million at December 31, 1999. These
liabilities were discounted at the same rates used for the pension plans.
Postretirement benefit expense totaled $.8 million in 2000, $.7 million in
1999, and $.5 million in 1998.
Note 20. Segment Information
We have two business segments: consumer finance and insurance. Our
segments are defined by the type of financial service product offered.
During first quarter 2000, the centralized real estate operation was
decentralized and merged into the then-existing consumer branches
operation. The resulting new segment has been named the consumer finance
operation. The consumer finance operation makes home equity loans,
originates secured and unsecured consumer loans, extends lines of credit,
purchases retail sales contracts from retail merchants, and provides
revolving retail and private label services for retail merchants. 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 sell credit and non-credit insurance to our
consumer finance customers. The insurance operation writes and assumes
credit and non-credit insurance through products that are sold principally
by the consumer finance operation.
We evaluate the performance of the segments based on pretax operating
earnings. The accounting policies of the segments are the same as those
disclosed in Note 2., except that: (1) segment finance charge revenues are
not reduced for the amortization of the deferred origination costs; (2)
segment operating expenses are not reduced for the deferral of origination
costs and exclude the amortization of goodwill; and (3) segment finance
receivables exclude the deferred origination costs. Intersegment sales and
transfers are intended to approximate the amounts segments would earn if
dealing with independent third parties.
The following tables display information about the Company's segments as
well as reconciliations of the segment totals to the consolidated financial
statement amounts. Adjustments for revenues are amortization of deferred
origination costs, realized gains (losses) on investments, and certain
investment expenses. Reconciling items for pretax income include the
amortization of goodwill, realized gains (losses) on investments, and
certain investment expenses. Adjustments for assets include goodwill,
deferred origination costs, other assets, and corporate assets that are not
considered pertinent to determining segment performance. Corporate assets
include cash, prepaid expenses, deferred charges, and fixed assets.
57
Notes to Consolidated Financial Statements, Continued
At or for the Year Ended December 31, 2000:
Consumer Total
Finance Insurance Segments
(dollars in thousands)
Revenues:
External:
Finance charges $ 1,692,881 $ - $ 1,692,881
Insurance 1,129 195,112 196,241
Other (8,512) 89,086 80,574
Intercompany 76,622 (73,641) 2,981
Interest expense 640,504 - 640,504
Provision for finance
receivable losses 206,846 - 206,846
Pretax income 327,761 90,524 418,285
Assets 11,337,094 1,220,235 12,557,329
At or for the Year Ended December 31, 1999:
Consumer Total
Finance Insurance Segments
(dollars in thousands)
Revenues:
External:
Finance charges $ 1,515,761 $ - $ 1,515,761
Insurance 1,573 182,956 184,529
Other 3,058 81,620 84,678
Intercompany 74,616 (72,195) 2,421
Interest expense 529,515 - 529,515
Provision for finance
receivable losses 209,832 - 209,832
Pretax income 335,762 74,759 410,521
Assets 10,456,698 1,095,150 11,551,848
At or for the Year Ended December 31, 1998:
Consumer Total
Finance Insurance Segments
(dollars in thousands)
Revenues:
External:
Finance charges $ 1,392,377 $ - $ 1,392,377
Insurance 1,925 174,044 175,969
Other 3,202 76,088 79,290
Intercompany 71,520 (68,850) 2,670
Interest expense 463,794 112 463,906
Provision for finance
receivable losses 219,431 - 219,431
Pretax income 272,972 70,220 343,192
Assets 9,326,645 1,077,892 10,404,537
58
Notes to Consolidated Financial Statements, Continued
Reconciliation of segment totals to consolidated financial statement
amounts is summarized below:
At or for the
Years Ended December 31,
2000 1999 1998
(dollars in thousands)
Revenues
Segments $ 1,972,677 $ 1,787,389 $ 1,650,306
Corporate (11,176) (751) 4,971
Adjustments (51,585) (55,036) (46,172)
Consolidated revenue $ 1,909,916 $ 1,731,602 $ 1,609,105
Interest Expense
Segments $ 640,504 $ 529,515 $ 463,906
Corporate 53,747 44,319 47,681
Consolidated interest
expense $ 694,251 $ 573,834 $ 511,587
Provision for Finance
Receivable Losses
Segments $ 206,846 $ 209,832 $ 219,431
Corporate (571) (3,200) (7,341)
Consolidated provision for
finance receivable losses $ 206,275 $ 206,632 $ 212,090
Pretax Income
Segments $ 418,285 $ 410,521 $ 343,192
Corporate (83,599) (116,711) (37,091)
Adjustments (6,062) (11,151) (10,510)
Consolidated pretax income $ 328,624 $ 282,659 $ 295,591
Assets
Segments $12,557,329 $11,551,848 $10,404,537
Corporate 624,556 869,614 476,552
Adjustments 226,510 213,845 291,834
Consolidated assets $13,408,395 $12,635,307 $11,172,923
59
Notes to Consolidated Financial Statements, Continued
Note 21. Interim Financial Information (Unaudited)
Unaudited interim information is summarized below:
Total Revenues
Three Months Ended 2000 1999
(dollars in thousands)
March 31 $ 467,257 $ 422,636
June 30 469,257 424,191
September 30 486,216 435,936
December 31 487,186 448,839
Total $1,909,916 $1,731,602
Income Before Provision
for Income Taxes
Three Months Ended 2000 1999
(dollars in thousands)
March 31 $ 93,651 $ 79,739
June 30 43,093 (a) 86,671
September 30 96,213 85,102
December 31 95,667 31,147 (b)
Total $ 328,624 $ 282,659
Net Income
Three Months Ended 2000 1999
(dollars in thousands)
March 31 $ 59,524 $ 50,707
June 30 26,675 (a) 55,114
September 30 61,133 54,113
December 31 60,606 19,800 (b)
Total $ 207,938 $ 179,734
(a) Includes a charge of $50.0 million ($32.5 million aftertax) for the
estimated loss on an alleged fraud against our mortgage warehouse
lending subsidiary.
(b) Includes a charge of $57.0 million ($36.2 million aftertax) for the
settlement of satellite dish and other related litigation.
See Note 16. for further information on these charges.
60
Notes to Consolidated Financial Statements, Continued
Note 22. Fair Value of Financial Instruments
The carrying values and estimated fair values of certain of the Company's
financial instruments are presented below. The reader should exercise care
in drawing conclusions based on fair value, since the fair values presented
below can be misinterpreted and do not include the value associated with
all of the Company's assets and liabilities.
December 31, 2000 December 31, 1999
Carrying Fair Carrying Fair
Value Value Value Value
(dollars in thousands)
Assets
Net finance receivables,
less allowance for
finance receivable
losses $11,378,396 $10,896,639 $10,634,371 $10,569,662
Investment securities 1,107,533 1,107,533 988,563 988,563
Cash and cash equivalents 163,895 163,895 146,710 146,710
Liabilities
Long-term debt 5,670,670 5,735,653 5,716,991 5,641,284
Short-term notes payable 5,088,513 5,088,513 4,457,520 4,457,520
Deposits 73,971 74,160 32,118 32,062
Off-Balance Sheet Financial
Instruments
Unused customer credit
limits - - - -
Interest rate swap
agreements - (42,103) - 23,129
VALUATION METHODOLOGIES AND ASSUMPTIONS
We used the following methods and assumptions to estimate the fair value
of our financial instruments.
Finance Receivables
We estimated fair values of net finance receivables, less allowance for
finance receivable losses using projected cash flows, computed by category
of finance receivable, discounted at the weighted-average interest rates
offered for similar finance receivables at December 31 of each year. We
based cash flows on contractual payment terms adjusted for delinquencies
and finance receivable losses. The fair value estimates do not reflect the
value of the underlying customer relationships or the related distribution
systems.
61
Notes to Consolidated Financial Statements, Continued
Investment Securities
When available, we used quoted market prices as fair values of investment
securities. For investment securities not actively traded, we estimated
fair values using values obtained from independent pricing services or, in
the case of some private placements, by discounting expected future cash
flows using each year's December 31 market rate applicable to yield, credit
quality, and average life of the investments.
Cash and Cash Equivalents
The fair values of cash and cash equivalents approximated the carrying
values.
Long-term Debt
We estimated the fair values of long-term debt using cash flows discounted
at each year's December 31 borrowing rates.
Short-term Notes Payable
The fair values of short-term notes payable approximated the carrying
values.
Unused Customer Credit Limits
The unused credit limits available to our customers have no fair value.
The interest rates charged on these facilities can be changed at our
discretion for private label, or are adjustable and reprice frequently for
loan and retail revolving lines of credit. These amounts, in part or in
total, can be cancelled at the discretion of the Company.
Derivative Financial Instruments
We estimated the fair values of interest rate swap agreements using cash
flows discounted at each year's December 31 market rates.
62
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form
8-K
(a) (1) and (2) The following consolidated financial statements of
American General Finance, Inc. and subsidiaries are included in Item
8:
Consolidated Balance Sheets, December 31, 2000 and 1999
Consolidated Statements of Income, years ended December 31,
2000, 1999, and 1998
Consolidated Statements of Shareholder's Equity, years ended
December 31, 2000, 1999, and 1998
Consolidated Statements of Cash Flows, years ended December 31,
2000, 1999, and 1998
Consolidated Statements of Comprehensive Income, years ended
December 31, 2000, 1999, and 1998
Notes to Consolidated Financial Statements
Schedule I--Condensed Financial Information of Registrant is included
in Item 14(d).
All other financial statement schedules have been omitted because
they are inapplicable.
(3) Exhibits:
Exhibits are listed in the Exhibit Index beginning on page 69
herein.
(b) Reports on Form 8-K
Current Report on Form 8-K dated March 11, 2001, with respect to the
Agreement and Plan of Merger, dated March 11, 2001, entered into by
American General and Prudential plc, a public limited company
incorporated in England and Wales.
(c) Exhibits
The exhibits required to be included in this portion of Item 14. are
submitted as a separate section of this report.
63
Item 14(d).
Schedule I - Condensed Financial Information of Registrant
American General Finance, Inc.
Condensed Balance Sheets
December 31,
2000 1999
(dollars in thousands)
Assets
Cash $ 337 $ 312
Investment in subsidiaries 1,812,345 1,727,479
Notes receivable from subsidiaries 314,534 212,987
Other assets 65,099 76,039
Total assets $2,192,315 $2,016,817
Liabilities and Shareholder's Equity
Long-term debt, 6.60% - 6.75%
due 2001 - 2002 $ 3,103 $ 7,236
Short-term notes payable:
Commercial paper 242,068 -
Notes payable to subsidiaries 261,416 189,973
Notes payable to banks - 211,000
Other liabilities 47,461 81,373
Total liabilities 554,048 489,582
Shareholder's equity:
Common stock 1,000 1,000
Additional paid-in capital 877,576 876,708
Other equity 2,631 (6,696)
Retained earnings 757,060 656,223
Total shareholder's equity 1,638,267 1,527,235
Total liabilities and shareholder's equity $2,192,315 $2,016,817
See Notes to Condensed Financial Statements.
64
Schedule I, Continued
American General Finance, Inc.
Condensed Statements of Income
Years Ended December 31,
2000 1999 1998
(dollars in thousands)
Revenues
Dividends received from subsidiaries $185,115 $166,524 $ 42,875
Interest and other 29,557 21,331 19,536
Total revenues 214,672 187,855 62,411
Expenses
Interest expense 44,861 29,651 27,439
Operating expenses 6,349 1,434 3,929
Other charges - 57,000 -
Total expenses 51,210 88,085 31,368
Income before income taxes and equity
in undistributed net income of
subsidiaries 163,462 99,770 31,043
Income Tax Credit 7,573 24,080 4,135
Income before equity in undistributed
net income of subsidiaries 171,035 123,850 35,178
Equity in Undistributed Net Income of
Subsidiaries 36,903 55,884 152,181
Net Income $207,938 $179,734 $187,359
See Notes to Condensed Financial Statements.
65
Schedule I, Continued
American General Finance, Inc.
Condensed Statements of Cash Flows
Years Ended December 31,
2000 1999 1998
(dollars in thousands)
Cash Flows from Operating Activities
Net Income $ 207,938 $ 179,734 $ 187,359
Reconciling adjustments:
Equity in undistributed net income of
subsidiaries (36,903) (55,884) (152,181)
Change in other assets and other liabilities (84,840) (28,519) (153)
Other charges 50,000 57,000 -
Other, net (24,841) 4,065 (1,816)
Net cash provided by operating activities 111,354 156,396 33,209
Cash Flows from Investing Activities
Capital contributions to subsidiaries - (82,598) (92,000)
Transfer of liabilities from subsidiary - 22,996 -
Net additions to fixed assets (958) (2,389) (522)
Net cash used for investing activities (958) (61,991) (92,522)
Cash Flows from Financing Activities
Repayment of long-term debt (4,234) (7,963) (55,553)
Change in commercial paper 242,068 - -
Change in notes payable to banks (211,000) 13,000 103,000
Change in notes receivable or payable
with parent and subsidiaries (30,104) 6,200 (31,025)
Capital contributions from parent - 54,000 79,000
Dividends paid (107,101) (164,000) (31,600)
Net cash (used for) provided by
financing activities (110,371) (98,763) 63,822
Increase (decrease) in cash 25 (4,358) 4,509
Cash at beginning of year 312 4,670 161
Cash at end of year $ 337 $ 312 $ 4,670
See Notes to Condensed Financial Statements.
66
Schedule I, Continued
American General Finance, Inc.
Notes to Condensed Financial Statements
December 31, 2000
Note 1. Accounting Policies
AGFI's investments in subsidiaries are stated at cost plus the equity in
undistributed net income of subsidiaries since the date of the acquisition.
The condensed financial statements of the registrant should be read in
conjunction with AGFI's consolidated financial statements.
Note 2. Long-Term Debt
Maturities of long-term debt at December 31, 2000 were as follows: 2001,
$1.9 million; and 2002, $1.2 million.
67
Signatures
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized, on
March 28, 2001.
AMERICAN GENERAL FINANCE, INC.
By: /s/ Donald R. Breivogel, Jr.
Donald R. Breivogel, Jr.
(Vice President, Chief Financial
Officer and Treasurer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities indicated on March 28, 2001.
/s/ Frederick W. Geissinger /s/ Robert A. Cole
Frederick W. Geissinger Robert A. Cole
(President and Chief Executive (Director)
Officer and Director -
Principal Executive Officer)
/s/ Jerry L. Gilpin
Jerry L. Gilpin
/s/ Donald R. Breivogel, Jr. (Director)
Donald R. Breivogel, Jr.
(Vice President, Chief
Financial Officer and /s/ Philip M. Hanley
Treasurer - Principal Philip M. Hanley
Financial Officer) (Director)
/s/ George W. Schmidt /s/ Bennie D. Hendrix
George W. Schmidt Bennie D. Hendrix
(Controller and Assistant (Director)
Secretary - Principal
Accounting Officer)
/s/ Stephen L. Blake
Stephen L. Blake
(Director)
68
SUPPLEMENTAL INFORMATION TO BE FURNISHED WITH REPORTS FILED PURSUANT TO
SECTION 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 BY REGISTRANTS WHICH
HAVE NOT REGISTERED SECURITIES PURSUANT TO SECTION 12 OF THE SECURITIES
EXCHANGE ACT OF 1934.
No annual report to security-holders or proxy material has been sent to
security-holders.
69
Exhibit Index
Exhibit
Number
(3) a. Restated Articles of Incorporation of American General Finance,
Inc. (formerly Credithrift Financial, Inc.) dated May 27, 1988
and amendments thereto dated September 7, 1988 and March 20,
1989. Incorporated by reference to Exhibit (3)a. filed as a
part of the Company's Annual Report on Form 10-K for the year
ended December 31, 1988 (File No. 1-7422).
b. By-laws of American General Finance, Inc. Incorporated by
reference to Exhibit (3)b. filed as a part of the Company's
Annual Report on Form 10-K for the year ended December 31, 1992
(File No. 1-7422).
(4) a. The following instruments are filed pursuant to Item
601(b)(4)(ii) of Regulation S-K, which requires with certain
exceptions that all instruments be filed which define the rights
of holders of the Company's long-term debt and our consolidated
subsidiaries. In the aggregate, the outstanding issuances of
debt under each of the Indentures referred to under items (1)
and (2) below exceed 10% of the Company's total assets on a
consolidated basis.
(1) Indenture dated as of May 1, 1999 from American General
Finance Corporation to CitiBank, N.A. Incorporated by
reference to Exhibit 4(a) filed as part of our Quarterly
Report on Form 10-Q for the quarter ended September 30,
2000 (File No. 1-7422).
(2) Indenture dated as of May 1, 1997 from American General
Finance Corporation to Bank One, National Association
(formerly known as The First National Bank of Chicago).
b. In accordance with Item 601(b)(4)(iii) of Regulation S-K,
certain other instruments defining the rights of holders of the
Company's long-term debt and our subsidiaries have not been
filed as exhibits to this Annual Report on Form 10-K because the
total amount of securities authorized and outstanding under each
instrument does not exceed 10% of the total assets of the
Company on a consolidated basis. We hereby agree to furnish a
copy of each instrument to the Securities and Exchange
Commission upon request.
(12) Computation of ratio of earnings to fixed charges.
(23) Consent of Ernst & Young LLP, Independent Auditors