SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2002
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)
(812) 424-8031
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days.
Yes X . No .
The registrant meets the conditions set forth in General Instruction
H(1)(a) and (b) of Form 10-Q and is therefore filing this Form 10-Q
with the reduced disclosure format.
At July 30, 2002, there were 2,000,000 shares of the registrant's
common stock, $.50 par value, outstanding.
2
Part I - FINANCIAL INFORMATION
Item 1. Financial Statements
AMERICAN GENERAL FINANCE, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Income
(Unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
2002 2001 2002 2001
(dollars in thousands)
Revenues
Finance charges $422,926 $430,678 $846,780 $851,003
Insurance 48,050 50,203 93,550 98,281
Other 23,087 20,831 46,237 45,665
Total revenues 494,063 501,712 986,567 994,949
Expenses
Interest expense 138,588 161,577 275,820 333,765
Operating expenses 139,882 142,460 283,497 277,972
Provision for finance
receivable losses 72,852 67,646 143,911 127,678
Insurance losses and loss
adjustment expenses 19,811 20,978 41,793 44,236
Total expenses 371,133 392,661 745,021 783,651
Income before provision for
income taxes 122,930 109,051 241,546 211,298
Provision for Income Taxes 43,766 39,419 85,993 76,531
Net Income $ 79,164 $ 69,632 $155,553 $134,767
See Notes to Condensed Consolidated Financial Statements.
3
AMERICAN GENERAL FINANCE, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
June 30, December 31,
2002 2001
(Unaudited)
(dollars in thousands)
Assets
Net finance receivables:
Real estate loans $ 7,889,854 $ 7,624,824
Non-real estate loans 2,817,335 2,922,557
Retail sales finance 1,334,633 1,440,908
Net finance receivables 12,041,822 11,988,289
Allowance for finance receivable losses (449,603) (448,251)
Net finance receivables, less allowance
for finance receivable losses 11,592,219 11,540,038
Investment securities 1,193,950 1,142,186
Cash and cash equivalents 170,380 179,002
Other assets 643,850 670,428
Total assets $13,600,399 $13,531,654
Liabilities and Shareholder's Equity
Long-term debt $ 7,010,522 $ 6,301,433
Commercial paper 4,198,080 4,853,520
Insurance claims and policyholder
liabilities 471,125 495,588
Other liabilities 515,457 452,354
Accrued taxes 41,553 74,200
Total liabilities 12,236,737 12,177,095
Shareholder's equity:
Common stock 1,000 1,000
Additional paid-in capital 879,935 880,594
Accumulated other comprehensive loss (60,482) (61,687)
Retained earnings 543,209 534,652
Total shareholder's equity 1,363,662 1,354,559
Total liabilities and shareholder's equity $13,600,399 $13,531,654
See Notes to Condensed Consolidated Financial Statements.
4
AMERICAN GENERAL FINANCE, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(Unaudited)
Six Months Ended
June 30,
2002 2001
(dollars in thousands)
Cash Flows from Operating Activities
Net income $ 155,553 $ 134,767
Reconciling adjustments:
Provision for finance receivable losses 143,911 127,678
Depreciation and amortization 74,106 72,687
Deferral of finance receivable origination
costs (29,330) (27,675)
Deferred income tax charge 11,554 284
Change in other assets and other liabilities 50,407 62,881
Change in insurance claims and policyholder
liabilities (24,463) (12,073)
Change in taxes receivable and payable (32,209) 15,219
Other, net 10,235 9,730
Net cash provided by operating activities 359,764 383,498
Cash Flows from Investing Activities
Finance receivables originated or purchased (3,312,292) (3,160,086)
Principal collections on finance receivables 3,103,542 2,946,047
Investment securities purchased (403,234) (587,377)
Investment securities called and sold 345,932 521,315
Investment securities matured 11,975 4,815
Change in premiums on finance receivables
purchased and deferred charges (13,324) (9,546)
Other, net (5,292) (6,082)
Net cash used for investing activities (272,693) (290,914)
Cash Flows from Financing Activities
Proceeds from issuance of long-term debt 1,195,057 596,869
Repayment of long-term debt (488,314) (349,362)
Change in deposits - 29,003
Change in commercial paper (655,440) (195,969)
Dividends paid (146,996) (127,797)
Net cash used for financing activities (95,693) (47,256)
(Decrease) increase in cash and cash equivalents (8,622) 45,328
Cash and cash equivalents at beginning of period 179,002 163,895
Cash and cash equivalents at end of period $ 170,380 $ 209,223
Supplemental Disclosure of Cash Flow
Information
Income taxes paid $ 106,964 $ 61,414
Interest paid $ 272,325 $ 342,513
See Notes to Condensed Consolidated Financial Statements.
5
AMERICAN GENERAL FINANCE, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Comprehensive Income
(Unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
2002 2001 2002 2001
(dollars in thousands)
Net income $ 79,164 $ 69,632 $155,553 $134,767
Other comprehensive (loss) gain:
Net unrealized (losses) gains:
Investment securities 15,642 (15,261) 5,400 (4,850)
Interest rate swaps:
Transition adjustment - - - (42,103)
Current period (62,560) 21,417 (61,424) (29,417)
Minimum pension liability - - - (535)
Income tax effect:
Investment securities (4,826) 5,342 (1,242) 1,698
Interest rate swaps:
Transition adjustment - - - 14,736
Current period 21,896 (7,496) 21,499 10,297
Minimum pension liability - - - 187
Net unrealized (losses) gains,
net of tax (29,848) 4,002 (35,767) (49,987)
Reclassification adjustments
for realized losses included
in net income:
Investment securities 2,952 4,987 1,684 3,470
Interest rate swaps 26,805 12,498 55,196 16,894
Income tax effect:
Investment securities (1,033) (1,746) (589) (1,215)
Interest rate swaps (9,382) (4,374) (19,319) (5,913)
Realized losses included in
net income, net of tax 19,342 11,365 36,972 13,236
Other comprehensive (loss) gain,
net of tax (10,506) 15,367 1,205 (36,751)
Comprehensive income $ 68,658 $ 84,999 $156,758 $ 98,016
See Notes to Condensed Consolidated Financial Statements.
6
AMERICAN GENERAL FINANCE, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
June 30, 2002
Note 1. Principles of Consolidation
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". We prepared our condensed
consolidated financial statements using accounting principles generally
accepted in the United States for interim periods. The statements
include the accounts of AGFI and its subsidiaries, all of which are
wholly owned. We eliminated all intercompany items. AGFI is a wholly
owned subsidiary of American General Corporation (American General).
American General is a wholly owned subsidiary of American International
Group, Inc. (AIG).
Note 2. Adjustments and Reclassifications
We made all adjustments, consisting only of normal recurring
adjustments, that we considered necessary for a fair statement of the
Company's condensed consolidated financial statements. These
statements should be read in conjunction with the consolidated
financial statements and related notes included in our Annual Report on
Form 10-K for the year ended December 31, 2001.
To conform to the 2002 presentation, we reclassified certain items in
the prior period.
Note 3. Accounting Change
On January 1, 2002, we adopted Statement of Financial Accounting
Standards (SFAS) 142, "Goodwill and Other Intangible Assets." SFAS
142 provides that goodwill and other intangible assets with indefinite
lives are no longer to be amortized. These assets are to be reviewed
for impairment annually, or more frequently if impairment indicators
are present. Separable intangible assets that have finite lives will
continue to be amortized over their useful lives. The amortization
provisions of SFAS 142 apply to goodwill and intangible assets acquired
after June 30, 2001. Amortization of goodwill and intangible assets
acquired prior to July 1, 2001 continued through December 31, 2001.
During first quarter 2002, we determined that the required impairment
testing related to the Company's goodwill and other intangible assets
did not require a write-down of any such assets.
7
The impact of goodwill amortization on net income was as follows:
Three Months Ended Six Months Ended
June 30, June 30,
2002 2001 2002 2001
(dollars in thousands)
Reported net income $ 79,164 $ 69,632 $155,553 $134,767
Goodwill amortization,
net of tax - 1,523 - 2,787
Adjusted net income $ 79,164 $ 71,155 $155,553 $137,554
Note 4. Finance Receivables
Components of net finance receivables by type were as follows:
June 30, 2002
Real Non-real Retail
Estate Estate Sales
Loans Loans Finance Total
(dollars in thousands)
Gross receivables $7,879,385 $3,147,499 $1,504,319 $12,531,203
Unearned finance charges
and points and fees (151,191) (417,652) (181,694) (750,537)
Accrued finance charges 67,006 39,022 13,401 119,429
Deferred origination costs 11,891 37,552 - 49,443
Premiums, net of discounts 82,763 10,914 (1,393) 92,284
Total $7,889,854 $2,817,335 $1,334,633 $12,041,822
December 31, 2001
Real Non-real Retail
Estate Estate Sales
Loans Loans Finance Total
(dollars in thousands)
Gross receivables $7,613,988 $3,274,716 $1,634,686 $12,523,390
Unearned finance charges
and points and fees (152,301) (444,604) (210,658) (807,563)
Accrued finance charges 69,296 42,760 15,910 127,966
Deferred origination costs 10,787 37,645 - 48,432
Premiums, net of discounts 83,054 12,040 970 96,064
Total $7,624,824 $2,922,557 $1,440,908 $11,988,289
8
Note 5. Allowance for Finance Receivable Losses
Changes in the allowance for finance receivable losses were as follows:
Three Months Ended Six Months Ended
June 30, June 30,
2002 2001 2002 2001
(dollars in thousands)
Balance at beginning of period $449,603 $386,221 $448,251 $383,415
Provision for finance
receivable losses 72,852 67,646 143,911 127,678
Allowance related to net
acquired (sold) receivables - 6,706 1,352 9,512
Charge-offs, net of recoveries (72,852) (62,646) (143,911) (122,678)
Balance at end of period $449,603 $397,927 $449,603 $397,927
Note 6. Derivative Financial Instruments
Our principal borrowing subsidiary is American General Finance
Corporation (AGFC), a wholly owned subsidiary of AGFI. To protect
against interest rate fluctuations, AGFC uses derivative financial
instruments in managing the cost of its debt. AGFC has generally
limited its use of derivative financial instruments to interest rate
swap agreements to reduce its exposure to market interest rate
increases by synthetically converting certain short-term or floating-
rate debt to a long-term fixed-rate.
We recognize the fair values of interest rate swap agreements in the
consolidated balance sheets. Our interest rate swap agreements are
designated and qualify as cash flow hedges. We report the effective
portion of the gain or loss on the instruments as a component of other
comprehensive income. We do not have any ineffectiveness to report in
the consolidated statements of income.
As an alternative to fixed-rate term debt, our interest rate swap
agreements did not have a material effect on other revenues, interest
expense, or net income during the six months ended June 30, 2002 or
2001.
Note 7. Segment Information
We have two business segments: consumer finance and insurance. Our
segments are defined by the type of financial service product offered.
The consumer finance segment makes home equity loans, originates
secured and unsecured consumer loans, extends lines of credit, and
purchases retail sales contracts from, and provides revolving retail
services for, retail merchants. We also purchase private label
receivables originated by an affiliate of ours under a participation
agreement. To supplement our lending and retail sales financing
activities, we purchase portfolios of real estate loans, non-real
estate loans, and retail sales finance receivables. We also offer
credit and non-credit insurance to our consumer finance customers. The
insurance segment writes and assumes credit and non-credit insurance
through products that are offered principally by the consumer finance
segment.
9
The following tables display information about the Company's segments
as well as a reconciliation of total segment pretax income to the
condensed consolidated financial statement amounts.
For the three months ended June 30, 2002:
Consumer Total
Finance Insurance Segments
(dollars in thousands)
Revenues:
External:
Finance charges $442,931 $ - $442,931
Insurance 254 47,796 48,050
Other (4,081) 23,058 18,977
Intercompany 20,077 (19,308) 769
Pretax income 111,078 23,317 134,395
For the three months ended June 30, 2001:
Consumer Total
Finance Insurance Segments
(dollars in thousands)
Revenues:
External:
Finance charges $447,964 $ - $447,964
Insurance 279 49,924 50,203
Other (2,215) 24,646 22,431
Intercompany 20,648 (19,848) 800
Pretax income 107,034 25,711 132,745
For the six months ended June 30, 2002:
Consumer Total
Finance Insurance Segments
(dollars in thousands)
Revenues:
External:
Finance charges $890,414 $ - $890,414
Insurance 519 93,031 93,550
Other (8,342) 44,957 36,615
Intercompany 38,806 (37,286) 1,520
Pretax income 229,842 42,033 271,875
For the six months ended June 30, 2001:
Consumer Total
Finance Insurance Segments
(dollars in thousands)
Revenues:
External:
Finance charges $887,623 $ - $887,623
Insurance 560 97,721 98,281
Other (4,670) 47,553 42,883
Intercompany 40,450 (38,880) 1,570
Pretax income 213,410 46,012 259,422
10
Reconciliations of total segment pretax income to the condensed
consolidated financial statement amounts were as follows:
Three Months Ended Six Months Ended
June 30, June 30,
2002 2001 2002 2001
(dollars in thousands)
Pretax income:
Segments $134,395 $132,745 $271,875 $259,422
Corporate (7,050) (18,455) (23,754) (43,805)
Adjustments (4,415) (5,239) (6,575) (4,319)
Consolidated pretax
income $122,930 $109,051 $241,546 $211,298
Adjustments for pretax income include certain administrative expenses
allocated from AIG, realized gains (losses) and certain other
investment revenue, and pension expense. Adjustments for pretax income
in 2001 also included the amortization of goodwill.
Note 8. Legal Contingencies
Satellite Dish Operations Bankruptcy
In August 1999, a subsidiary of the Company, A.G. Financial Service
Center, Inc. (Financial Service Center), formerly named American
General Financial 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 a Mississippi state court in May
1999 in the amount of $167 million. 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.
The plan of reorganization was confirmed by the bankruptcy court in
February 2001 and distribution under the plan is substantially
complete. 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 these
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 or financial position. However, the
frequency of large damage awards, including large punitive damage
awards that bear little or no relation to actual economic damages
11
incurred by plaintiffs in some jurisdictions, continues to create the
potential for an unpredictable judgment in any given suit.
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.
FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q and our other publicly available
documents may include, and the Company's officers and representatives
may from time to time make, statements which may constitute "forward-
looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995. These statements are not historical
facts but instead represent only our belief regarding future events,
many of which are inherently uncertain and outside of our control.
These statements may address, among other things, the Company's
strategy for growth, product development, regulatory approvals, market
position, financial results and reserves. The Company's actual results
and financial condition may differ, possibly materially, from the
anticipated results and financial condition indicated in these forward-
looking statements. Forward-looking statements involve risks and
uncertainties including, but not limited to, the following:
* changes in general economic conditions, including the
performance of financial markets, interest rates, and the
level of personal bankruptcies;
* customer responsiveness to both products and distribution
channels or changes in contractual delinquencies, collateral
values, or credit losses;
* competitive, regulatory, accounting, or tax changes that
affect the cost of, or demand for, our products or the manner
in which we conduct business;
* adverse litigation results or resolution of litigation or any
governmental inquiries or investigations;
* the formation of strategic alliances or business combinations
among our competitors or our business partners;
* changes in our ability to attract and retain employees or key
executives; and
* natural events affecting Company facilities.
Readers are also directed to other risks and uncertainties discussed in
other documents we file with the Securities and Exchange Commission.
We are under no obligation to (and expressly disclaim any such
obligation to) update or alter any forward-looking statement, whether
written or oral, that may be made from time to time, whether as a
result of new information, future events or otherwise.
CRITICAL ACCOUNTING POLICIES
We believe the amount of the allowance for finance receivable losses is
the most significant estimate we make. We establish the allowance for
finance receivable losses primarily through the provision for finance
receivable losses charged to expense. We periodically evaluate our
finance receivable portfolio to determine the appropriate level of the
allowance for finance receivable losses. This policy is discussed in
greater detail in Note 2. of the Notes to Consolidated Financial
12
Statements in our Annual Report on Form 10-K for the year ended
December 31, 2001. In our opinion, the allowance is adequate to absorb
losses inherent in our existing portfolio.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity
Our sources of funds include operations, issuances of long-term debt,
short-term borrowings in the commercial paper market, and borrowings
from banks under credit facilities. AGFI has also historically
received capital contributions from its parent to support finance
receivable growth and maintain targeted leverage.
Principal sources and uses of cash were as follows:
Six Months Ended
June 30,
2002 2001
(dollars in millions)
Principal sources of cash:
Operations $359.8 $383.5
Net issuance of debt 51.3 80.5
Total $411.1 $464.0
Principal uses of cash:
Net originations and purchases
of finance receivables $208.8 $214.0
Dividends paid 147.0 127.8
Total $355.8 $341.8
We believe that our overall sources of liquidity will continue to be
sufficient to satisfy our foreseeable financial obligations and
operational requirements. The principal risk factors that could
decrease our sources of liquidity are delinquent payments from our
customers and our inability to access capital markets. The principal
factors that could increase our cash needs are significant increases in
net originations and purchases of finance receivables. We intend to
mitigate liquidity risk factors by continuing to operate the Company
within the following strategies:
* maintain a finance receivable portfolio comprised mostly of
real estate loans, which generally represent a lower risk of
customer non-payment;
* originate and monitor finance receivables with our proprietary
credit risk management system;
* maintain an investment securities portfolio of predominantly
investment grade, liquid securities; and
* maintain a capital structure appropriate to our asset base.
13
Consistent execution of our business strategies should result in
continued profitability, strong credit ratings, and investor
confidence. These results should allow continued access to capital
markets for issuances of our commercial paper and term debt. We
maintain committed bank credit facilities to provide an additional
source of liquidity for needs potentially not met through capital
markets.
Capital Resources
June 30,
2002 2001
(dollars in millions)
Long-term debt $ 7,010.5 $ 5,919.9
Commercial paper 4,198.1 4,892.5
Deposits - 103.0
Total debt 11,208.6 10,915.4
Equity 1,363.7 1,608.5
Total capital $12,572.3 $12,523.9
Net finance receivables $12,041.8 $11,845.7
Debt to tangible equity ratio 8.88x 7.50x
Our capital varies 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 our fixed-
rate funding through public issuances of long-term debt with maturities
generally ranging from two to ten years. AGFI and AGFC obtain most of
our floating-rate funding effectively through sales and refinancing of
commercial paper. Commercial paper, with maturities ranging from 1 to
270 days, is sold to banks, insurance companies, corporations, and
other accredited investors. AGFC also sells extendible commercial
notes with initial maturities of up to 90 days, which may be extended
by AGFC to 390 days. At June 30, 2002, commercial paper included $49.8
million of extendible commercial notes.
Until fourth quarter 2001, AGFI paid dividends to (or received capital
contributions from) American General to manage our leverage of debt to
tangible equity (equity less goodwill and accumulated other
comprehensive income) to 7.5 to 1. At the end of fourth quarter 2001,
following discussions with credit rating agencies, we increased our
leverage target to 9.0 to 1. This increase was based on our success
with managing credit risk and maintaining a lower risk finance
receivable portfolio. We intend to continue these practices. 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.
14
Credit Facilities
We participate in credit facilities to support the issuance of
commercial paper and to provide an additional source of funds for
operating requirements. At June 30, 2002, AGFI and AGFC were eligible
borrowers under committed credit facilities extended to American
General and certain of its subsidiaries (the "shared committed
facilities"). At June 30, 2002, the shared committed facilities
totaled $5.2 billion and annual commitment fees ranged between 0.04%
and 0.06%. We paid only an allocated portion of the commitment fees
for the shared committed facilities. In July 2002, AGFC, AGFI, and
American General terminated these shared committed credit facilities
and AGFC established its own committed credit facilities totaling $3.0
billion, including a facility under which AGFI is an eligible borrower
for up to $300 million. The annual commitment fees for the new
facilities currently average 0.07% based upon AGFC's long-term credit
ratings.
At June 30, 2002, AGFI and certain of its subsidiaries also have
uncommitted credit facilities totaling $171 million which could be
increased depending upon lender ability to participate its loans under
the facilities.
Available borrowings under all facilities are reduced by any
outstanding borrowings. There were no amounts outstanding at June 30,
2002 or June 30, 2001. AGFC guarantees its subsidiary borrowings under
uncommitted credit facilities. AGFC does not guarantee any borrowings
of AGFI.
ANALYSIS OF OPERATING RESULTS AND FINANCIAL CONDITION
Net Income
Three Months Ended Six Months Ended
June 30, June 30,
2002 2001 2002 2001
(dollars in millions)
Net income $ 79.2 $ 69.6 $155.6 $134.8
Return on average
assets (annualized) 2.35% 2.06% 2.30% 2.00%
Return on average
equity (annualized) 22.96% 17.32% 22.55% 16.69%
Ratio of earnings to
fixed charges 1.85x 1.62x
Net income increased $9.6 million, or 14%, for the three months ended
June 30, 2002 and $20.8 million, or 15%, for the six months ended June
30, 2002 when compared to the same periods in 2001. See Note 7. of the
Notes to Condensed Consolidated Financial Statements for information on
the results of the Company's business segments.
Net income for 2002 did not include goodwill amortization due to the
adoption of SFAS 142 on January 1, 2002. Net income included goodwill
amortization of $2.3 million for the three months and $4.3 million for
the six months ended June 30, 2001.
15
Factors that specifically affected the Company's operating results were
as follows:
Finance Charges
Three Months Ended Six Months Ended
June 30, June 30,
2002 2001 2002 2001
(dollars in millions)
Finance charges $ 422.9 $ 430.7 $ 846.8 $ 851.0
Average net receivables $11,951.2 $11,788.3 $11,947.0 $11,763.0
Yield 14.19% 14.64% 14.27% 14.56%
Finance charges decreased $7.8 million, or 2%, for the three months
ended June 30, 2002 and remained near the same for the six months ended
June 30, 2002 when compared to the same periods in 2001. The decrease
for the three months ended June 30, 2002 when compared to the same
period in 2001 was due to lower yield, partially offset by higher
average net receivables.
Average net receivables by type were as follows:
Three Months Ended Six Months Ended
June 30, June 30,
2002 2001 2002 2001
(dollars in millions)
Real estate loans $ 7,792.2 $ 7,451.4 $ 7,730.0 $ 7,385.3
Non-real estate loans 2,810.9 2,956.5 2,835.3 2,968.2
Retail sales finance 1,348.1 1,380.4 1,381.7 1,409.5
Total $11,951.2 $11,788.3 $11,947.0 $11,763.0
Average net receivables increased $162.9 million, or 1%, for the three
months ended June 30, 2002 and $184.0 million, or 2%, for the six
months ended June 30, 2002 when compared to the same periods in 2001
reflecting real estate loan growth. We tightened underwriting
standards last year and discontinued relationships with unprofitable
retail merchants. The low interest rate environment has caused higher
than normal real estate loan liquidations, although this trend has
slowed recently. These factors, coupled with a sluggish economy since
mid-2001, have limited finance receivable growth.
Yield by type of finance receivable was as follows:
Three Months Ended Six Months Ended
June 30, June 30,
2002 2001 2002 2001
Real estate loans 11.35% 11.98% 11.38% 11.86%
Non-real estate loans 21.77 21.55 21.86 21.55
Retail sales finance 14.78 14.24 14.85 13.97
Total 14.19 14.64 14.27 14.56
Yield decreased 45 basis points for the three months ended June 30,
2002 and 29 basis points for the six months ended June 30, 2002 when
compared to the same periods in 2001 reflecting a lower real estate
loan yield resulting from the low interest rate environment.
16
Insurance Revenues
Three Months Ended Six Months Ended
June 30, June 30,
2002 2001 2002 2001
(dollars in millions)
Insurance revenues $48.1 $50.2 $93.6 $98.3
Premiums earned $47.5 $49.5 $92.5 $97.2
Insurance revenues
(annualized) as a
percentage of average
net receivables 1.61% 1.70% 1.57% 1.67%
Insurance revenues decreased $2.1 million, or 4%, for the three months
ended June 30, 2002 and $4.7 million, or 5%, for the six months ended
June 30, 2002 when compared to the same periods in 2001 primarily due
to lower earned premiums. Earned premiums decreased due to lower
premium volume.
Insurance revenues as a percentage of average net receivables decreased
for the three months and six months ended June 30, 2002 when compared
to the same periods in 2001 reflecting a higher proportion of average
net receivables that are real estate loans. Our experience is that
customers purchase fewer insurance products on real estate loans than
on non-real estate loans.
Other Revenues
Three Months Ended Six Months Ended
June 30, June 30,
2002 2001 2002 2001
(dollars in millions)
Other revenues $23.1 $20.8 $46.2 $45.7
Investment revenue $21.2 $19.6 $44.2 $44.1
Other revenues increased $2.3 million, or 11%, for the three months
ended June 30, 2002 and $.5 million, or 1%, for the six months ended
June 30, 2002 when compared to the same periods in 2001. The increase
in other revenues for the three months ended June 30, 2002 was
primarily due to higher investment revenue and service fee income with
a non-subsidiary affiliate. The increase in other revenues for the six
months ended June 30, 2002 was primarily due to service fee income with
a non-subsidiary affiliate. The increase in investment revenue for the
three months ended June 30, 2002 when compared to the same period in
2001 was primarily due to lower realized losses. Investment revenue
for the six months ended June 30, 2002 remained near the same primarily
due to lower realized losses, offset by the disposition of American
General Bank, FSB in third quarter 2001.
17
Interest Expense
Three Months Ended Six Months Ended
June 30, June 30,
2002 2001 2002 2001
(dollars in millions)
Interest expense $ 138.6 $ 161.6 $ 275.8 $ 333.8
Average borrowings $11,051.4 $10,762.2 $11,038.0 $10,753.9
Borrowing cost 5.02% 6.01% 5.00% 6.22%
Interest expense decreased $23.0 million, or 14%, for the three months
ended June 30, 2002 and $58.0 million, or 17%, for the six months ended
June 30, 2002 when compared to the same periods in 2001 primarily due
to lower borrowing cost, partially offset by higher average borrowings.
Borrowing cost decreased 99 basis points for the three months ended
June 30, 2002 and 122 basis points for the six months ended June 30,
2002 when compared to the same periods in 2001. Federal Reserve
actions lowered the federal funds rate a total of 475 basis points
between December 2000 and December 2001 resulting in a low market rate
environment. These actions resulted in lower rates on short-term and
long-term debt. Average borrowings increased $289.2 million, or 3%,
for the three months ended June 30, 2002 and $284.1 million, or 3%, for
the six months ended June 30, 2002 when compared to the same periods in
2001 primarily to support real estate loan growth and our increase in
leverage.
Operating Expenses
Three Months Ended Six Months Ended
June 30, June 30,
2002 2001 2002 2001
(dollars in millions)
Operating expenses $139.9 $142.5 $283.5 $278.0
Operating expenses
(annualized) as a
percentage of average
net receivables 4.68% 4.83% 4.75% 4.73%
Operating expenses decreased $2.6 million, or 2%, for the three months
ended June 30, 2002 and increased $5.5 million, or 2%, for the six
months ended June 30, 2002 when compared to the same periods in 2001.
The decrease in operating expenses for the three months ended June 30,
2002 when compared to the same period in 2001 was primarily due to
lower litigation expenses and the absence of goodwill amortization in
2002, partially offset by higher salaries. The increase in operating
expenses for the six months ended June 30, 2002 when compared to the
same period in 2001 was primarily due to higher salaries and litigation
expenses, partially offset by the absence of goodwill amortization in
2002. The increase in salaries reflected higher competitive
compensation. The decrease in operating expenses as a percentage of
average net receivables for the three months ended June 30, 2002 when
compared to the same period in 2001 reflected lower operating expenses
compared to moderate finance receivable growth.
18
Provision for Finance Receivable Losses
At or for the
Three Months Ended Six Months Ended
June 30, June 30,
2002 2001 2002 2001
(dollars in millions)
Provision for finance
receivable losses $72.9 $67.6 $143.9 $127.7
Net charge-offs $72.9 $62.6 $143.9 $122.7
60 day+ delinquency $454.6 $404.1
Allowance for finance
receivable losses $449.6 $397.9
Provision for finance receivable losses increased $5.3 million, or 8%,
for the three months ended June 30, 2002 and $16.2 million, or 13%, for
the six months ended June 30, 2002 when compared to the same periods in
2001 primarily due to higher net charge-offs.
Charge-off ratios by type of finance receivable were as follows:
Three Months Ended Six Months Ended
June 30, June 30,
2002 2001 2002 2001
Real estate loans 0.65% 0.66% 0.65% 0.63%
Non-real estate loans 6.97 5.48 6.80 5.42
Retail sales finance 3.32 2.86 3.20 2.64
Total 2.44 2.13 2.41 2.09
The increase in the charge-off ratio for the three months and six
months ended June 30, 2002 when compared to the same periods in 2001
was primarily due to higher net charge-offs on non-real estate loans
and retail sales finance receivables reflecting slowing economic
conditions.
Delinquency ratios by type of finance receivable were as follows:
June 30,
2002 2001
Real estate loans 3.24% 3.03%
Non-real estate loans 5.11 4.40
Retail sales finance 2.54 1.96
Total 3.63 3.26
The increase in the delinquency ratio at June 30, 2002 when compared to
June 30, 2001 also reflected slowing economic conditions.
Statistics relating to the allowance for finance receivable losses were
as follows:
At or for the
Three Months Ended Six Months Ended
June 30, June 30,
2002 2001 2002 2001
Allowance ratio 3.73% 3.36%
Charge-off coverage 1.54x 1.59x 1.56x 1.62x
19
We periodically evaluate our finance receivable portfolio to determine
the appropriate level of the allowance for finance receivable losses.
We believe the amount of the allowance for finance receivable losses is
the most significant estimate we make. In our opinion, the allowance
is adequate to absorb losses inherent in our existing portfolio. The
increase in the allowance as a percentage of net finance receivables at
June 30, 2002 when compared to June 30, 2001 was primarily due to:
* increases to the allowance for finance receivable losses
through the provision for finance receivable losses during the
last twelve months totaling $20.0 million (this increase was
necessary in response to our increased delinquency and net
charge-offs and the higher levels of both unemployment and
personal bankruptcies in the United States);
* an increase to the allowance for finance receivable losses
through other charges in third quarter 2001 totaling $25.0
million; and
* increases to the allowance for finance receivable losses
during the last twelve months totaling $6.7 million resulting
from applying purchase accounting to net portfolio
acquisitions.
Charge-off coverage, which compares the allowance for finance
receivable losses to net charge-offs (annualized), decreased slightly
for the three months and six months ended June 30, 2002 when compared
to the same periods in 2001 reflecting higher net charge-offs,
substantially offset by increases to allowance for finance receivable
losses.
Insurance Losses and Loss Adjustment Expenses
Three Months Ended Six Months Ended
June 30, June 30,
2002 2001 2002 2001
(dollars in millions)
Claims incurred $19.4 $20.3 $43.4 $44.2
Change in benefit
reserves 0.4 0.7 (1.6) -
Insurance losses and
loss adjustment
expenses $19.8 $21.0 $41.8 $44.2
Insurance losses and loss adjustment expenses decreased $1.2 million,
or 6%, for the three months ended June 30, 2002 and $2.4 million, or
6%, for the six months ended June 30, 2002 when compared to the same
periods in 2001 due to decreases in provision for future benefits and
claims. The provision for future benefits decreased $.3 million for
the three months ended June 30, 2002 and $1.6 million for the six
months ended June 30, 2002 due to fewer policies in force. Claims
decreased $.9 million for the three months ended June 30, 2002 and $.8
million for the six months ended June 30, 2002 primarily due to
decreased loss experience.
20
Provision for Income Taxes
Three Months Ended Six Months Ended
June 30, June 30,
2002 2001 2002 2001
(dollars in millions)
Provision for income
taxes $ 43.8 $ 39.4 $ 86.0 $ 76.5
Pretax income $122.9 $109.1 $241.5 $211.3
Effective income
tax rate 35.60% 36.15% 35.60% 36.22%
The provision for income taxes increased $4.4 million, or 11%, for the
three months ended June 30, 2002 and $9.5 million, or 12%, for the six
months ended June 30, 2002 when compared to the same periods in 2001
primarily due to higher taxable income, partially offset by a lower
effective tax rate.
Asset/Liability Management
We manage anticipated cash flows of our assets and liabilities,
principally our finance receivables and debt, in an effort to reduce
the risk associated with unfavorable changes in interest rates.
Management determines the mix of fixed-rate and floating-rate debt
based, in part, on the nature of the finance receivables being
supported. We limit our exposure to market interest rate increases by
fixing interest rates that we pay for term periods. The primary way we
accomplish this is by issuing fixed-rate debt. To supplement fixed-
rate debt issuances, AGFC also uses interest rate swap agreements to
synthetically create fixed-rate, long-term debt by altering the nature
of certain floating-rate funding, thereby limiting our exposure to
market interest rate increases. Floating-rate debt (principally
commercial paper) represented 34% of our average borrowings for the
three months and six months ended June 30, 2002 compared to 35% for the
three months and six months ended June 30, 2001. These percentages
include the effect of interest rate swap agreements that effectively
converted short-term or floating-rate debt to a long-term fixed rate.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
See Note 8. of the Notes to Condensed Consolidated Financial Statements
in Part I of this Form 10-Q.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
(12) Computation of Ratio of Earnings to Fixed Charges.
(b) Reports on Form 8-K.
Current report on Form 8-K dated April 22, 2002, with respect to
the Company changing independent auditors.
21
Signature
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
AMERICAN GENERAL FINANCE, INC.
(Registrant)
Date: July 30, 2002 By /s/ Donald R. Breivogel, Jr.
Donald R. Breivogel, Jr.
Senior Vice President and Chief
Financial Officer
(Duly Authorized Officer and
Principal Financial Officer)
22
Exhibit Index
Exhibit
(12) Computation of Ratio of Earnings to Fixed Charges.