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 September 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 November 8, 2002, 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. Financial Statements . . . . . . . . . . . . . . . . 3
2. Management's Discussion and Analysis of Financial
Condition and Results of Operations. . . . . . . . 13
4. Controls and Procedures . . . . . . . . . . . . . . 24
Part II 1. Legal Proceedings . . . . . . . . . . . . . . . . . 24
6. Exhibits and Reports on Form 8-K . . . . . . . . . . 24
3
Part I - FINANCIAL INFORMATION
Item 1. Financial Statements
AMERICAN GENERAL FINANCE, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Income
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
2002 2001 2002 2001
(dollars in thousands)
Revenues
Finance charges $427,457 $432,030 $1,274,237 $1,283,033
Insurance 47,839 48,314 141,389 146,595
Other 19,896 22,433 66,133 68,098
Total revenues 495,192 502,777 1,481,759 1,497,726
Expenses
Interest expense 135,914 157,238 411,734 491,003
Operating expenses 139,424 141,986 422,921 419,958
Provision for finance
receivable losses 71,404 66,272 215,315 193,950
Insurance losses and loss
adjustment expenses 19,201 21,462 60,994 65,698
Other charges - 78,297 - 78,297
Total expenses 365,943 465,255 1,110,964 1,248,906
Income before provision for
income taxes 129,249 37,522 370,795 248,820
Provision for Income Taxes 46,013 13,354 132,006 89,885
Net Income $ 83,236 $ 24,168 $ 238,789 $ 158,935
See Notes to Condensed Consolidated Financial Statements.
4
AMERICAN GENERAL FINANCE, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
September 30, December 31,
2002 2001
(Unaudited)
(dollars in thousands)
Assets
Net finance receivables:
Real estate loans $ 8,904,417 $ 7,624,824
Non-real estate loans 2,887,791 2,922,557
Retail sales finance 1,368,052 1,440,908
Net finance receivables 13,160,260 11,988,289
Allowance for finance receivable losses (466,402) (448,251)
Net finance receivables, less allowance
for finance receivable losses 12,693,858 11,540,038
Investment securities 1,201,994 1,142,186
Cash and cash equivalents 207,799 179,002
Other assets 687,306 670,428
Total assets $14,790,957 $13,531,654
Liabilities and Shareholder's Equity
Long-term debt $ 8,185,635 $ 6,301,433
Short-term notes payable:
Commercial paper 3,984,400 4,853,520
Notes payable to banks 60,000 -
Insurance claims and policyholder
liabilities 465,501 495,588
Other liabilities 577,303 452,354
Accrued taxes 55,277 74,200
Total liabilities 13,328,116 12,177,095
Shareholder's equity:
Common stock 1,000 1,000
Additional paid-in capital 912,935 880,594
Accumulated other comprehensive loss (77,539) (61,687)
Retained earnings 626,445 534,652
Total shareholder's equity 1,462,841 1,354,559
Total liabilities and shareholder's equity $14,790,957 $13,531,654
See Notes to Condensed Consolidated Financial Statements.
5
AMERICAN GENERAL FINANCE, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(Unaudited)
Nine Months Ended
September 30,
2002 2001
(dollars in thousands)
Cash Flows from Operating Activities
Net income $ 238,789 $ 158,935
Reconciling adjustments:
Provision for finance receivable losses 215,315 193,950
Depreciation and amortization 109,415 110,393
Deferral of finance receivable origination
costs (44,080) (42,401)
Deferred income tax charge (benefit) 8,865 (26,082)
Change in other assets and other liabilities 48,876 26,724
Change in insurance claims and policyholder
liabilities (30,087) (18,012)
Change in taxes receivable and payable (48,449) 30,306
Other charges - 78,297
Other, net 7,478 7,636
Net cash provided by operating activities 506,122 519,746
Cash Flows from Investing Activities
Finance receivables originated or purchased (5,944,368) (4,571,783)
Principal collections on finance receivables 4,603,854 4,430,703
Disposition of American General Bank, FSB - (39,998)
Investment securities purchased (506,049) (753,529)
Investment securities called and sold 457,858 729,957
Investment securities matured 22,975 9,880
Change in premiums on finance receivables
purchased and deferred charges (59,806) (16,498)
Other, net (9,145) (10,552)
Net cash used for investing activities (1,434,681) (221,820)
Cash Flows from Financing Activities
Proceeds from issuance of long-term debt 2,922,962 1,591,966
Repayment of long-term debt (1,042,490) (835,195)
Change in deposits - 28,924
Change in short-term notes payable (809,120) (901,536)
Capital contribution from parent 33,000 -
Dividends paid (146,996) (178,297)
Net cash provided by (used for) financing
activities 957,356 (294,138)
Increase in cash and cash equivalents 28,797 3,788
Cash and cash equivalents at beginning of period 179,002 163,895
Cash and cash equivalents at end of period $ 207,799 $ 167,683
Supplemental Disclosure of Cash Flow
Information
Income taxes paid $ 171,981 $ 84,438
Interest paid $ 397,125 $ 498,557
See Notes to Condensed Consolidated Financial Statements.
6
AMERICAN GENERAL FINANCE, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Comprehensive Income
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
2002 2001 2002 2001
(dollars in thousands)
Net income $ 83,236 $ 24,168 $238,789 $158,935
Other comprehensive loss:
Net unrealized (losses) gains:
Investment securities 29,024 20,091 34,424 15,241
Interest rate swaps:
Transition adjustment - - - (42,103)
Current period (80,029) (97,694) (141,453) (127,111)
Minimum pension liability - - - (535)
Income tax effect:
Investment securities (10,807) (7,002) (12,049) (5,304)
Interest rate swaps:
Transition adjustment - - - 14,736
Current period 28,009 34,193 49,508 44,490
Minimum pension liability - - - 187
Net unrealized losses, net
of tax (33,803) (50,412) (69,570) (100,399)
Reclassification adjustments
for realized losses included
in net income:
Investment securities 911 1,516 2,595 4,986
Interest rate swaps 24,851 18,241 80,047 35,135
Income tax effect:
Investment securities (319) (530) (908) (1,745)
Interest rate swaps (8,697) (6,384) (28,016) (12,297)
Realized losses included
in net income, net of tax 16,746 12,843 53,718 26,079
Other comprehensive loss, net
of tax (17,057) (37,569) (15,852) (74,320)
Comprehensive income (loss) $ 66,179 $(13,401) $222,937 $ 84,615
See Notes to Condensed Consolidated Financial Statements.
7
AMERICAN GENERAL FINANCE, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
September 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 an
indirect, wholly owned subsidiary of American International Group, Inc.
(AIG).
Note 2. Adjustments and Reclassifications
We made all adjustments, consisting only of normal recurring
adjustments, that we considered necessary for a fair statement of the
Company's condensed consolidated financial statements. These
statements should be read in conjunction with the consolidated
financial statements and related notes included in our Annual Report on
Form 10-K for the year ended December 31, 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. There has been no
indication of impairment since our review of the Company's goodwill
during the first quarter of 2002.
8
The impact of goodwill amortization on net income was as follows:
Three Months Ended Nine Months Ended
September 30, September 30,
2002 2001 2002 2001
(dollars in thousands)
Reported net income $ 83,236 $ 24,168 $238,789 $158,935
Goodwill amortization,
net of tax - 1,220 - 4,007
Adjusted net income $ 83,236 $ 25,388 $238,789 $162,942
Note 4. Finance Receivables
Components of net finance receivables by type were as follows:
September 30, 2002
Real Non-real Retail
Estate Estate Sales
Loans Loans Finance Total
(dollars in thousands)
Gross receivables $8,838,471 $3,217,306 $1,532,547 $13,588,324
Unearned finance charges
and points and fees (150,817) (418,139) (178,342) (747,298)
Accrued finance charges 72,283 38,761 13,611 124,655
Deferred origination costs 12,557 37,016 - 49,573
Premiums, net of discounts 131,923 12,847 236 145,006
Total $8,904,417 $2,887,791 $1,368,052 $13,160,260
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
9
Note 5. Allowance for Finance Receivable Losses
Changes in the allowance for finance receivable losses were as follows:
Three Months Ended Nine Months Ended
September 30, September 30,
2002 2001 2002 2001
(dollars in thousands)
Balance at beginning of period $449,603 $397,927 $448,251 $383,415
Provision for finance
receivable losses 71,404 66,272 215,315 193,950
Allowance related to net
acquired (sold) receivables 16,799 (200) 18,151 9,312
Charge-offs, net of recoveries (71,404) (66,272) (215,315) (188,950)
Other charges - additional
provision - 25,000 - 25,000
Balance at end of period $466,402 $422,727 $466,402 $422,727
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.
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 nine months ended September 30, 2002
or 2001.
Note 7. Accumulated Other Comprehensive Loss
The components of accumulated other comprehensive loss were as follows:
September 30, December 31,
2002 2001
(dollars in thousands)
Net unrealized losses on interest
rate swaps $(107,427) $ (67,513)
Net unrealized gains on investment
securities 30,236 6,174
Net unrealized losses on minimum
pension liability (348) (348)
Accumulated other comprehensive loss $ (77,539) $ (61,687)
10
Note 8. Other Charges
In September 2001, we recorded one-time charges totaling $78.3 million
($50.9 million aftertax), resulting from AIG's and the Company's joint
assessment of the business environment and post-business combination
plans. These charges recognized that certain assets had no future
economic benefit or ability to generate future revenues. These costs
included asset impairment charges related to goodwill and customer base
intangibles that resulted from previous business acquisitions. Also
included were certain adjustments associated with conforming the
Company's balances to AIG's accounting policies and methodologies, as
well as an increase in the allowance for finance receivable losses to
reflect AIG's and the Company's assumptions about the business
environment.
Note 9. Segment Information
We have two business segments: consumer finance and insurance. Our
segments are defined by the type of financial service product offered.
The consumer finance segment makes home equity loans, originates
secured and unsecured consumer loans, extends lines of credit, and
purchases retail sales contracts from, and provides revolving retail
services for, retail merchants. We also purchase private label
receivables originated by 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.
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 September 30, 2002:
Consumer Total
Finance Insurance Segments
(dollars in thousands)
Revenues:
External:
Finance charges $ 445,692 $ - $ 445,692
Insurance 241 47,598 47,839
Other (4,049) 21,019 16,970
Intercompany 19,656 (18,868) 788
Pretax income 120,197 22,831 143,028
11
For the three months ended September 30, 2001:
Consumer Total
Finance Insurance Segments
(dollars in thousands)
Revenues:
External:
Finance charges $ 451,589 $ - $ 451,589
Insurance 279 48,035 48,314
Other (2,493) 21,983 19,490
Intercompany 19,698 (18,921) 777
Pretax income 25,741 21,360 47,101
For the nine months ended September 30, 2002:
Consumer Total
Finance Insurance Segments
(dollars in thousands)
Revenues:
External:
Finance charges $1,336,106 $ - $1,336,106
Insurance 760 140,629 141,389
Other (12,391) 65,976 53,585
Intercompany 58,462 (56,154) 2,308
Pretax income 345,908 65,893 411,801
For the nine months ended September 30, 2001:
Consumer Total
Finance Insurance Segments
(dollars in thousands)
Revenues:
External:
Finance charges $1,339,212 $ - $1,339,212
Insurance 839 145,756 146,595
Other (7,163) 69,536 62,373
Intercompany 60,148 (57,801) 2,347
Pretax income 239,151 67,372 306,523
Reconciliations of total segment pretax income to the condensed
consolidated financial statement amounts were as follows:
Three Months Ended Nine Months Ended
September 30, September 30,
2002 2001 2002 2001
(dollars in thousands)
Pretax income:
Segments $143,028 $ 47,101 $411,801 $306,523
Corporate (12,452) (8,469) (37,684) (52,274)
Adjustments (1,327) (1,110) (3,322) (5,429)
Total consolidated
pretax income $129,249 $ 37,522 $370,795 $248,820
Adjustments for pretax income include realized gains (losses) and
certain other investment revenue and pension expense. Adjustments for
pretax income in 2001 also included the amortization of goodwill.
12
Note 10. 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
incurred by plaintiffs in some jurisdictions, continues to create the
potential for an unpredictable judgment in any given suit.
13
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.
REPORT OF MANAGEMENT'S RESPONSIBILITY
The Company's management is responsible for the integrity and fair
presentation of our consolidated financial statements and all other
financial information presented in this report. We prepared our
consolidated financial statements using accounting principles generally
accepted in the United States (GAAP). We made estimates and
assumptions that affect amounts recorded in the financial statements
and disclosures of contingent assets and liabilities. We have no
special purpose entities, limited partnerships or structured finance
transactions whose primary function is removing assets or liabilities
from the balance sheets. Our only material off-balance sheet items are
our unused customer credit limits extended to certain of our finance
receivable customers; our operating leases representing annual rental
commitments for leased office space, automobiles, and data processing
and related equipment; and our commitments for further investments
under the limited partnerships which are part of the investment
securities portfolio of our insurance operations.
The Company's management is responsible for establishing and
maintaining an internal control structure and procedures for financial
reporting. These systems are designed to provide reasonable assurance
that assets are safeguarded from loss or unauthorized use, that
transactions are recorded according to GAAP under management's
direction and that financial records are reliable to prepare financial
statements. We support the internal control structure with careful
selection, training and development of qualified personnel. The
Company's employees are subject to AIG's Code of Conduct designed to
assure that all employees perform their duties with honesty and
integrity. We do not allow loans to executive officers. The systems
include a documented organizational structure and policies and
procedures that we communicate throughout the Company. Our internal
auditors report directly to AIG to strengthen independence. They
continually monitor the operation of our internal controls and report
their findings to the Company's management and AIG's internal audit
department. We take prompt action to correct control deficiencies and
address opportunities for improving the system. The Company's
management assesses the adequacy of our internal control structure
quarterly. Based on these assessments, management has concluded that
the internal control structure and the procedures for financial
reporting have functioned effectively and that the consolidated
financial statements fairly present our consolidated financial position
and the results of our operations for the periods presented.
14
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. During each quarter, we 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
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.
15
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:
Nine Months Ended
September 30,
2002 2001
(dollars in millions)
Principal sources of cash:
Net issuance of debt $1,071.4 $ -
Operations 506.1 519.7
Capital contribution 33.0 -
Total $1,610.5 $ 519.7
Principal uses of cash:
Net originations and purchases
of finance receivables $1,340.5 $ 141.1
Net repayment of debt - 115.8
Dividends paid 147.0 178.3
Total $1,487.5 $ 435.2
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.
Management believes that 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.
16
Capital Resources
September 30,
2002 2001
(dollars in millions)
Long-term debt $ 8,185.6 $ 6,430.2
Short-term debt 4,044.4 4,187.0
Total debt 12,230.0 10,617.2
Equity 1,462.9 1,532.2
Total capital $13,692.9 $12,149.4
Net finance receivables $13,160.3 $11,618.6
Debt to tangible equity ratio 8.87x 7.37x
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 September 30, 2002, commercial paper included
$437.5 million of extendible commercial notes.
Until fourth quarter 2001, AGFI paid dividends to (or received capital
contributions from) its parent 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.
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 September 30, 2002, AGFC had 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 facilities currently average 0.07% and are
based upon AGFC's long-term credit ratings.
At September 30, 2002, AGFI and certain of its subsidiaries also had
uncommitted credit facilities totaling $171 million which could be
increased depending upon lender ability to participate its loans under
the facilities.
17
Available borrowings under all facilities are reduced by any
outstanding borrowings. At September 30, 2002, AGFI's outstanding
borrowings totaled $60 million. There were no amounts outstanding at
September 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 Nine Months Ended
September 30, September 30,
2002 2001 2002 2001
(dollars in millions)
Net income $ 83.2 $ 24.2 $238.8 $158.9
Return on average
assets (annualized) 2.40% .72% 2.34% 1.57%
Return on average
equity (annualized) 23.85% 6.00% 22.99% 13.13%
Ratio of earnings to
fixed charges 1.87x 1.49x
Net income for the three months and nine months ended September 30,
2001 included charges of $78.3 million ($50.9 million aftertax)
resulting from our review of our businesses and the assets supporting
those businesses, as well as the adoption of AIG's accounting policies
and methodologies, in connection with AIG's indirect acquisition of the
Company. See Note 8. of the Notes to Condensed Consolidated Financial
Statements for further information on these charges.
Including these non-recurring charges, net income increased $59.0
million, or 244%, for the three months ended September 30, 2002 and
$79.9 million, or 50%, for the nine months ended September 30, 2002
when compared to the same periods in 2001. Excluding these non-
recurring charges, net income increased $8.1 million, or 11%, for the
three months ended September 30, 2002 and $29.0 million, or 14%, for
the nine months ended September 30, 2002 when compared to the same
periods in 2001. See Note 9. 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 $1.9 million for the three months and $6.2 million for
the nine months ended September 30, 2001.
18
Factors that specifically affected the Company's operating results were
as follows:
Finance Charges
Three Months Ended Nine Months Ended
September 30, September 30,
2002 2001 2002 2001
(dollars in millions)
Finance charges $ 427.5 $ 432.0 $ 1,274.2 $ 1,283.0
Average net receivables $12,324.5 $11,740.4 $12,072.8 $11,755.4
Yield 13.79% 14.63% 14.10% 14.58%
Finance charges decreased $4.5 million, or 1%, for the three months
ended September 30, 2002 and $8.8 million, or 1%, for the nine months
ended September 30, 2002 when compared to the same periods in 2001
reflecting lower yield, partially offset by higher average net
receivables.
Average net receivables by type were as follows:
Three Months Ended Nine Months Ended
September 30, September 30,
2002 2001 2002 2001
(dollars in millions)
Real estate loans $ 8,144.7 $ 7,368.2 $ 7,868.3 $ 7,379.6
Non-real estate loans 2,841.9 2,954.9 2,837.4 2,963.7
Retail sales finance 1,337.9 1,417.3 1,367.1 1,412.1
Total $12,324.5 $11,740.4 $12,072.8 $11,755.4
Average net receivables increased $584.1 million, or 5%, for the three
months ended September 30, 2002 and $317.4 million, or 3%, for the nine
months ended September 30, 2002 when compared to the same periods in
2001 reflecting real estate loan growth. In response to a weakening
economy, we tightened lending underwriting standards last year and
discontinued relationships with certain less profitable retail
merchants. These factors, coupled with a sluggish economy since mid-
2001 and declining market interest rates, have led to higher
liquidations and limited opportunities to outpace such liquidations
with finance receivable originations. We supplemented originations
with portfolio acquisitions, including the third quarter 2002 purchases
of $1.1 billion of real estate loans.
Yield by type of finance receivable was as follows:
Three Months Ended Nine Months Ended
September 30, September 30,
2002 2001 2002 2001
Real estate loans 11.01% 11.85% 11.25% 11.86%
Non-real estate loans 21.39 21.67 21.70 21.59
Retail sales finance 14.55 14.41 14.75 14.12
Total 13.79 14.63 14.10 14.58
19
Yield decreased 84 basis points for the three months ended September
30, 2002 and 48 basis points for the nine months ended September 30,
2002 when compared to the same periods in 2001 primarily reflecting a
lower real estate loan yield resulting from the low interest rate
environment.
Insurance Revenues
Three Months Ended Nine Months Ended
September 30, September 30,
2002 2001 2002 2001
(dollars in millions)
Insurance revenues $ 47.8 $ 48.3 $141.4 $146.6
Premiums earned $ 47.2 $ 47.7 $139.8 $144.9
Insurance revenues
(annualized) as a
percentage of average
net receivables 1.55% 1.65% 1.56% 1.66%
Insurance revenues decreased $.5 million, or 1%, for the three months
ended September 30, 2002 and $5.2 million, or 4%, for the nine months
ended September 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 nine months ended September 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 Nine Months Ended
September 30, September 30,
2002 2001 2002 2001
(dollars in millions)
Other revenues $ 19.9 $ 22.4 $ 66.1 $ 68.1
Investment revenue $ 20.3 $ 20.4 $ 64.4 $ 64.6
Other revenues decreased $2.5 million, or 11%, for the three months
ended September 30, 2002 and $2.0 million, or 3%, for the nine months
ended September 30, 2002 when compared to the same periods in 2001
primarily due to lower revenue on mortgage warehouse lending activity,
partially offset by higher service fee income with a non-subsidiary
affiliate. During first quarter 2002, we discontinued the operations
of our mortgage warehouse lending subsidiary.
20
Interest Expense
Three Months Ended Nine Months Ended
September 30, September 30,
2002 2001 2002 2001
(dollars in millions)
Interest expense $ 135.9 $ 157.2 $ 411.7 $ 491.0
Average borrowings $11,358.3 $10,735.2 $11,146.0 $10,747.6
Borrowing cost 4.78% 5.84% 4.93% 6.09%
Interest expense decreased $21.3 million, or 14%, for the three months
ended September 30, 2002 and $79.3 million, or 16%, for the nine months
ended September 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 106 basis points for the
three months ended September 30, 2002 and 116 basis points for the nine
months ended September 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
$623.1 million, or 6%, for the three months ended September 30, 2002
and $398.4 million, or 4%, for the nine months ended September 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 Nine Months Ended
September 30, September 30,
2002 2001 2002 2001
(dollars in millions)
Operating expenses $139.4 $142.0 $422.9 $420.0
Operating expenses
(annualized) as a
percentage of average
net receivables 4.53% 4.84% 4.67% 4.76%
Operating expenses decreased $2.6 million, or 2%, for the three months
ended September 30, 2002 and increased $2.9 million, or 1%, for the
nine months ended September 30, 2002 when compared to the same periods
in 2001. The decrease in operating expenses for the three months ended
September 30, 2002 reflected lower litigation expenses and the absence
of goodwill amortization in 2002. The increase in operating expenses
for the nine months ended September 30, 2002 reflected higher salaries
and administrative expenses allocated from AIG, 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 and nine months ended September 30, 2002 when compared to the
same periods in 2001 reflected controlled operating expenses and
moderate finance receivable growth.
21
Provision for Finance Receivable Losses
At or for the
Three Months Ended Nine Months Ended
September 30, September 30,
2002 2001 2002 2001
(dollars in millions)
Provision for finance
receivable losses $ 71.4 $ 66.3 $215.3 $194.0
Net charge-offs $ 71.4 $ 66.3 $215.3 $189.0
60 day+ delinquency $504.3 $432.4
Allowance for finance
receivable losses $466.4 $422.7
Provision for finance receivable losses increased $5.1 million, or 8%,
for the three months ended September 30, 2002 and $21.3 million, or
11%, for the nine months ended September 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 Nine Months Ended
September 30, September 30,
2002 2001 2002 2001
Real estate loans 0.64% 0.67% 0.65% 0.65%
Non-real estate loans 6.70 5.94 6.76 5.59
Retail sales finance 3.40 2.80 3.26 2.69
Total 2.35 2.25 2.39 2.14
The increase in the charge-off ratio for the three months and nine
months ended September 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:
September 30,
2002 2001
Real estate loans 3.26% 3.24%
Non-real estate loans 5.44 4.83
Retail sales finance 2.69 2.33
Total 3.71 3.55
The increase in the delinquency ratio at September 30, 2002 when
compared to September 30, 2001 also reflected slowing economic
conditions.
22
Statistics relating to the allowance for finance receivable losses were
as follows:
At or for the
Three Months Ended Nine Months Ended
September 30, September 30,
2002 2001 2002 2001
Allowance ratio 3.54% 3.64%
Charge-off coverage 1.63x 1.59x 1.62x 1.68x
During each quarter, we 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 for finance receivable losses
at September 30, 2002 when compared to September 30, 2001 was 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);
* increases to the allowance for finance receivable losses
during the last twelve months totaling $23.7 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), improved slightly
for the three months ended September 30, 2002 and decreased slightly
for the nine months ended September 30, 2002 when compared to the same
periods in 2001. The slightly lower charge-off coverage for the nine
months ended September 30, 2002 reflected higher net charge-offs,
substantially offset by increases to allowance for finance receivable
losses.
Insurance Losses and Loss Adjustment Expenses
Three Months Ended Nine Months Ended
September 30, September 30,
2002 2001 2002 2001
(dollars in millions)
Claims incurred $ 19.4 $ 22.3 $ 62.7 $ 66.5
Change in benefit
reserves (0.2) (0.8) (1.7) (0.8)
Insurance losses and
loss adjustment
expenses $ 19.2 $ 21.5 $ 61.0 $ 65.7
23
Insurance losses and loss adjustment expenses decreased $2.3 million,
or 11%, for the three months ended September 30, 2002 and $4.7 million,
or 7%, for the nine months ended September 30, 2002 when compared to
the same periods in 2001 primarily due to decreases in claims incurred.
Claims incurred decreased $2.9 million for the three months ended
September 30, 2002 and $3.8 million for the nine months ended September
30, 2002 primarily due to decreases in claim reserves, partially offset
by increases in claims paid.
Other Charges
In third quarter 2001, we recorded charges of $78.3 million ($50.9
million aftertax) resulting from our review of our businesses and the
assets supporting those businesses, as well as the adoption of AIG's
accounting policies and methodologies, in connection with AIG's
indirect acquisition of the Company. See Note 8. of the Notes to
Condensed Consolidated Financial Statements for further information on
these charges.
Provision for Income Taxes
Three Months Ended Nine Months Ended
September 30, September 30,
2002 2001 2002 2001
(dollars in millions)
Provision for income
taxes $ 46.0 $ 13.4 $132.0 $ 89.9
Pretax income $129.2 $ 37.5 $370.8 $248.8
Effective income
tax rate 35.60% 35.59% 35.60% 36.12%
The provision for income taxes increased $32.6 million, or 245%, for
the three months ended September 30, 2002 and $42.1 million, or 47%,
for the nine months ended September 30, 2002 when compared to the same
periods in 2001 primarily due to higher taxable income resulting from
the other charges of $78.3 million in third quarter 2001.
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. Including the effect of interest rate
swap agreements that effectively converted short-term or floating-rate
debt to a long-term fixed rate, floating-rate debt represented 37% of
our average borrowings for the three months and 35% for the nine months
ended September 30, 2002 compared to 28% for the three months ended
September 30, 2001 and 33% for the nine months ended September 30,
2001.
24
Item 4. Controls and Procedures.
(a) Evaluation of disclosure controls and procedures. The
conclusions of our principal executive officer and principal
financial officer about the effectiveness of the Company's
disclosure controls and procedures based on their evaluation of
these controls and procedures within 90 days prior to the filing
of this Form 10-Q are as follows:
The Company's disclosure controls and procedures are designed to
ensure that information required to be disclosed by the Company
is recorded, processed, summarized and reported within required
timeframes. The Company's disclosure controls and procedures
include controls and procedures designed to ensure that
information required to be disclosed is accumulated and
communicated to the Company's management, including its principal
executive officer and principal financial officer, as appropriate
to allow timely decisions regarding required disclosure.
The Company's management, including its principal executive
officer and principal financial officer, assesses the adequacy of
our disclosure controls and procedures quarterly. Based on these
assessments, the Company's principal executive officer and
principal financial officer have concluded that the disclosure
controls and procedures have functioned effectively and that the
consolidated financial statements fairly present our consolidated
financial position and the results of our operations for the
periods presented.
(b) Changes in internal control. There were no significant changes
in the Company's internal controls or in other factors that could
significantly affect these controls subsequent to the date of
management's most recent evaluation, including any corrective
actions with regard to any significant deficiencies and material
weaknesses.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
See Note 10. of the Notes to Condensed Consolidated Financial
Statements in Part I of this Form 10-Q.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
(12) Computation of Ratio of Earnings to Fixed Charges.
(b) Reports on Form 8-K.
No Current Reports on Form 8-K were filed during the third
quarter of 2002.
25
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: November 8, 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)
26
Certifications
I, Frederick W. Geissinger, Chairman, Chief Executive Officer, and
President certify that:
1. I have reviewed this quarterly report on Form 10-Q of American
General Finance, Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material
fact necessary to make the statements made, in light of the
circumstances under which such statements were made, not
misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other
financial information included in this quarterly report, fairly
present in all material respects the financial condition, results
of operations and cash flows of the registrant as of, and for,
the periods presented in this quarterly report;
4. The registrant's other certifying officer and I are responsible
for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-14 and 15d-14)
for the registrant and we have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures
based on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed,
based on our most recent evaluation, to the registrant's auditors
and the audit committee of registrant's board of directors (or
persons performing the equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and
report financial data and have identified for the
registrant's auditors any material weaknesses in internal
controls; and
b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
27
6. The registrant's other certifying officer and I have indicated in
this quarterly report whether or not there were significant
changes in internal controls or in other factors that could
significantly affect internal controls subsequent to the date of
our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: November 8, 2002
/s/ Frederick W. Geissinger
Frederick W. Geissinger
Chairman, Chief Executive
Officer, and President
28
Certifications
I, Donald R. Breivogel, Jr., Senior Vice President and Chief Financial
Officer, certify that:
1. I have reviewed this quarterly report on Form 10-Q of American
General Finance, Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material
fact necessary to make the statements made, in light of the
circumstances under which such statements were made, not
misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other
financial information included in this quarterly report, fairly
present in all material respects the financial condition, results
of operations and cash flows of the registrant as of, and for,
the periods presented in this quarterly report;
4. The registrant's other certifying officer and I are responsible
for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-14 and 15d-14)
for the registrant and we have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures
based on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed,
based on our most recent evaluation, to the registrant's auditors
and the audit committee of registrant's board of directors (or
persons performing the equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and
report financial data and have identified for the
registrant's auditors any material weaknesses in internal
controls; and
b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
29
6. The registrant's other certifying officer and I have indicated in
this quarterly report whether or not there were significant
changes in internal controls or in other factors that could
significantly affect internal controls subsequent to the date of
our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: November 8, 2002
/s/ Donald R. Breivogel, Jr.
Donald R. Breivogel, Jr.
Senior Vice President and
Chief Financial Officer
30
Exhibit Index
Exhibit
(12) Computation of Ratio of Earnings to Fixed Charges.