UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2003
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____________ to _____________
Commission file number 1-7422
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
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Rule 12b-2 of the Securities Exchange Act of 1934).
Yes No X
The registrant meets the conditions set forth in General Instruction
H(1)(a) and (b) of Form 10-Q and is therefore filing this Form 10-Q
with the reduced disclosure format.
At July 30, 2003, 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 . . . . . . . . . . . . . . 28
Part II 1. Legal Proceedings . . . . . . . . . . . . . . . . . 29
6. Exhibits and Reports on Form 8-K . . . . . . . . . . 29
AVAILABLE INFORMATION
The Company files annual, quarterly, and current reports and other
information with the Securities and Exchange Commission (the SEC). The
SEC maintains a website that contains annual, quarterly, and current
reports and other information that issuers (including the Company) file
electronically with the SEC. The SEC's website is www.sec.gov. Our
annual report on Form 10-K for the year ended December 31, 2002 and our
2003 quarterly reports on Form 10-Q are available free of charge on our
Internet website www.agfinance.com. The information on the Company's
website is not incorporated by reference into this report.
3
Part I - FINANCIAL INFORMATION
Item 1. Financial Statements
AMERICAN GENERAL FINANCE, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Income
(Unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
2003 2002 2003 2002
(dollars in thousands)
Revenues
Finance charges $441,424 $422,926 $ 881,770 $846,780
Insurance 42,672 48,050 88,380 93,550
Other 63,042 23,087 104,193 46,237
Total revenues 547,138 494,063 1,074,343 986,567
Expenses
Interest expense 136,965 138,588 279,841 275,820
Operating expenses 171,430 139,882 334,500 283,497
Provision for finance
receivable losses 76,305 72,852 147,421 143,911
Insurance losses and loss
adjustment expenses 15,160 19,811 35,549 41,793
Total expenses 399,860 371,133 797,311 745,021
Income before provision for
income taxes 147,278 122,930 277,032 241,546
Provision for Income Taxes 53,389 43,766 99,100 85,993
Net Income $ 93,889 $ 79,164 $ 177,932 $155,553
See Notes to Condensed Consolidated Financial Statements.
4
AMERICAN GENERAL FINANCE, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
June 30, December 31,
2003 2002
(Unaudited)
(dollars in thousands)
Assets
Net finance receivables:
Real estate loans $ 9,863,769 $ 9,498,046
Non-real estate loans 2,870,817 2,958,925
Retail sales finance 1,296,310 1,389,241
Net finance receivables 14,030,896 13,846,212
Allowance for finance receivable losses (462,031) (463,031)
Net finance receivables, less allowance
for finance receivable losses 13,568,865 13,383,181
Investment securities 1,293,694 1,227,156
Cash and cash equivalents 273,193 153,660
Other assets 987,572 720,289
Total assets $16,123,324 $15,484,286
Liabilities and Shareholder's Equity
Long-term debt $ 9,576,039 $ 9,566,256
Short-term debt 3,851,545 3,375,674
Insurance claims and policyholder
liabilities 449,851 472,348
Other liabilities 499,479 442,932
Accrued taxes 46,940 40,259
Total liabilities 14,423,854 13,897,469
Shareholder's equity:
Common stock 1,000 1,000
Additional paid-in capital 920,276 920,276
Accumulated other comprehensive loss (34,000) (68,938)
Retained earnings 812,194 734,479
Total shareholder's equity 1,699,470 1,586,817
Total liabilities and shareholder's equity $16,123,324 $15,484,286
See Notes to Condensed Consolidated Financial Statements.
5
AMERICAN GENERAL FINANCE, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(Unaudited)
Six Months Ended
June 30,
2003 2002
(dollars in thousands)
Cash Flows from Operating Activities
Net income $ 177,932 $ 155,553
Reconciling adjustments:
Provision for finance receivable losses 147,421 143,911
Depreciation and amortization 96,337 74,106
Deferral of finance receivable origination
costs (32,350) (29,330)
Deferred income tax charge 562 11,554
Origination of real estate loans held for sale (1,417,697) -
Sales and principal collections of real estate
loans held for sale 1,280,593 -
Change in other assets and other liabilities 25,709 50,407
Change in insurance claims and policyholder
liabilities (22,497) (24,463)
Change in taxes receivable and payable (298) (32,209)
Other, net 8,849 10,235
Net cash provided by operating activities 264,561 359,764
Cash Flows from Investing Activities
Finance receivables originated or purchased (3,846,511) (3,312,292)
Principal collections on finance receivables 3,469,158 3,103,542
Acquisition of Wilmington Finance, Inc. (93,189) -
Investment securities purchased (294,558) (403,234)
Investment securities called and sold 244,236 345,932
Investment securities matured 13,800 11,975
Change in premiums on finance receivables
purchased and deferred charges 6,457 (13,324)
Other, net (7,575) (5,292)
Net cash used for investing activities (508,182) (272,693)
Cash Flows from Financing Activities
Proceeds from issuance of long-term debt 1,175,379 1,195,057
Repayment of long-term debt (1,187,879) (488,314)
Change in short-term debt 475,871 (655,440)
Dividends paid (100,217) (146,996)
Net cash provided by (used for)
financing activities 363,154 (95,693)
Increase (decrease) in cash and cash equivalents 119,533 (8,622)
Cash and cash equivalents at beginning of period 153,660 179,002
Cash and cash equivalents at end of period $ 273,193 $ 170,380
See Notes to Condensed Consolidated Financial Statements.
6
AMERICAN GENERAL FINANCE, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Comprehensive Income
(Unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
2003 2002 2003 2002
(dollars in thousands)
Net income $ 93,889 $ 79,164 $177,932 $155,553
Other comprehensive gain (loss):
Net unrealized gains (losses):
Investment securities 26,617 15,642 30,928 5,400
Interest rate swaps (13,328) (62,560) (21,609) (61,424)
Income tax effect:
Investment securities (9,315) (4,826) (10,814) (1,242)
Interest rate swaps 4,663 21,896 7,562 21,499
Net unrealized gains (losses),
net of tax 8,637 (29,848) 6,067 (35,767)
Reclassification adjustments
for realized losses (gains)
included in net income:
Investment securities (554) 2,952 2,298 1,684
Interest rate swaps 20,288 26,805 42,118 55,196
Income tax effect:
Investment securities 194 (1,033) (804) (589)
Interest rate swaps (7,100) (9,382) (14,741) (19,319)
Realized losses included in
net income, net of tax 12,828 19,342 28,871 36,972
Other comprehensive gain (loss),
net of tax 21,465 (10,506) 34,938 1,205
Comprehensive income $115,354 $ 68,658 $212,870 $156,758
See Notes to Condensed Consolidated Financial Statements.
7
AMERICAN GENERAL FINANCE, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
June 30, 2003
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, 2002.
To conform to the 2003 presentation, we reclassified certain items in
the prior period.
Note 3. Acquisition
Effective January 1, 2003, we acquired 100% of the common stock of
Wilmington Finance, Inc. (WFI), a majority owned subsidiary of WSFS
Financial Corporation, in a purchase business combination. WFI
originates non-conforming residential real estate loans nationally,
primarily through broker relationships and, to a lesser extent,
directly to consumers, and sells its originated loans to third party
investors with servicing released to the purchaser. WFI provides the
Company with another source of revenue through its gains on real estate
loan sales. The purchase price was $120.8 million, consisting of $25.8
million for net assets and $95.0 million for intangibles. The majority
of the tangible assets acquired were real estate loans held for sale.
We included the results of WFI's operations in our financial statements
beginning January 1, 2003, the effective date of the acquisition, and
originally classified the $95.0 million of intangibles as goodwill
pending an independent valuation. We finalized an independent
valuation of the intangibles in second quarter 2003 and reclassified
$40.8 million from goodwill to WFI other intangibles. Goodwill and WFI
other intangibles are both included in other assets. WFI other
intangibles primarily consisted of broker relationships and non-compete
agreements and had an initial weighted-average amortization period of 9
years.
8
Changes in goodwill by business segment were as follows:
Consumer
Finance Insurance Total
(dollars in thousands)
Balance December 31, 2002 $149,781 $ 12,104 $161,885
Acquisition of WFI 95,000 - 95,000
Reclassification to WFI
other intangibles (40,850) - (40,850)
Balance June 30, 2003 $203,931 $ 12,104 $216,035
WFI other intangibles of $37.0 million at June 30, 2003 are net of
accumulated amortization of $3.8 million recognized during second
quarter 2003.
At January 1, 2003, estimated WFI other intangibles amortization
expense for the next five years was as follows:
WFI Other Intangibles
Amortization Expense
(dollars in thousands)
2003 $7,662
2004 7,212
2005 6,087
2006 3,629
2007 3,629
Note 4. Accounting Change
In November 2002, the Financial Accounting Standards Board issued
Interpretation No. 45 (FIN 45), "Guarantor's Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others". FIN 45 elaborates on the disclosures to be
made by a guarantor in its financial statements about its obligations
under certain guarantees that it has issued. It also clarifies that a
guarantor is required to recognize, at the inception of a guarantee, a
liability for the fair value of the obligation undertaken in issuing
the guarantee. Certain guarantee contracts are excluded from both the
disclosure and recognition requirements of FIN 45, including, among
others, residual value guarantees under capital lease arrangements and
loan commitments. The disclosure requirements of FIN 45 were effective
as of December 31, 2002. The recognition requirements of FIN 45 are to
be applied prospectively to guarantees issued or modified after
December 31, 2002. The adoption of FIN 45 did not have a material
impact on our consolidated results of operations, financial position,
or liquidity.
9
Note 5. Finance Receivables
Components of net finance receivables by type were as follows:
June 30, 2003
Real Non-real Retail
Estate Estate Sales
Loans Loans Finance Total
(dollars in thousands)
Gross receivables $9,797,467 $3,177,422 $1,442,561 $14,417,450
Unearned finance charges
and points and fees (143,729) (387,610) (158,069) (689,408)
Accrued finance charges 79,247 38,133 11,974 129,354
Deferred origination costs 15,398 34,673 - 50,071
Premiums, net of discounts 115,386 8,199 (156) 123,429
Total $9,863,769 $2,870,817 $1,296,310 $14,030,896
December 31, 2002
Real Non-real Retail
Estate Estate Sales
Loans Loans Finance Total
(dollars in thousands)
Gross receivables $9,409,294 $3,297,232 $1,550,215 $14,256,741
Unearned finance charges
and points and fees (148,421) (432,747) (176,463) (757,631)
Accrued finance charges 79,664 41,788 13,194 134,646
Deferred origination costs 12,864 36,223 - 49,087
Premiums, net of discounts 144,645 16,429 2,295 163,369
Total $9,498,046 $2,958,925 $1,389,241 $13,846,212
Note 6. 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,
2003 2002 2003 2002
(dollars in thousands)
Balance at beginning of period $460,031 $449,603 $463,031 $448,251
Provision for finance
receivable losses 76,305 72,852 147,421 143,911
Allowance related to net
acquired receivables - - - 1,352
Charge-offs (84,174) (82,725) (168,618) (163,769)
Recoveries 9,869 9,873 20,197 19,858
Balance at end of period $462,031 $449,603 $462,031 $449,603
10
Note 7. Derivative Financial Instruments
Our principal borrowing subsidiary is American General Finance
Corporation (AGFC), a wholly owned subsidiary of AGFI. AGFC uses
derivative financial instruments in managing the cost of its debt and
is neither a dealer nor a trader in derivative financial instruments.
AGFC has generally limited its use of derivative financial instruments
to interest rate swap agreements. These interest rate swap agreements
are designated and qualify as cash flow hedges or fair value hedges.
AGFC uses interest rate swap agreements to limit our exposure to market
interest rate risk in the funding of our operations. Most of our swaps
synthetically convert certain short-term or floating-rate debt to a
long-term fixed-rate. The synthetic long-term fixed rates achieved
through interest rate swap agreements are slightly lower than could
have been achieved by issuing comparable fixed-rate, long-term debt.
Additionally, AGFC has swapped fixed-rate, long-term debt to floating-
rate, long-term debt. As an alternative to funding without these
derivative financial instruments, AGFC's interest rate swap agreements
did not have a material effect on the Company's other revenues,
interest expense, or net income during the six months ended June 30,
2003 or 2002.
Note 8. Accumulated Other Comprehensive Loss
The components of accumulated other comprehensive loss were as follows:
June 30, December 31,
2003 2002
(dollars in thousands)
Net unrealized losses on interest
rate swaps $(85,574) $(98,904)
Net unrealized gains on investment
securities 51,574 29,966
Total $(34,000) $(68,938)
Note 9. Segment Information
We have two business segments: consumer finance and insurance. Our
segments are defined by the type of financial service product offered.
The consumer finance segment makes home equity loans, originates
secured and unsecured consumer loans, extends lines of credit, and
purchases retail sales contracts from, and provides revolving retail
services for, retail merchants. We also purchase private label
receivables originated by a non-subsidiary affiliate of ours, under a
participation agreement. To supplement our lending and retail sales
financing activities, we purchase portfolios of real estate loans, non-
real estate loans, and retail sales finance receivables. We also
originate real estate loans through brokers for sale to third party
investors. We offer credit and non-credit insurance to our consumer
finance customers. The insurance segment writes and assumes credit and
non-credit insurance through products that are offered principally by
the consumer finance segment.
11
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, 2003:
Consumer Total
Finance Insurance Segments
(dollars in thousands)
Revenues:
External:
Finance charges $464,106 $ - $464,106
Insurance 219 42,453 42,672
Other 33,462 20,436 53,898
Intercompany 22,709 (16,832) 5,877
Pretax income 135,851 20,996 156,847
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 107,239 24,045 131,284
For the six months ended June 30, 2003:
Consumer Total
Finance Insurance Segments
(dollars in thousands)
Revenues:
External:
Finance charges $932,697 $ - $932,697
Insurance 445 87,935 88,380
Other 51,239 42,926 94,165
Intercompany 44,336 (34,881) 9,455
Pretax income 271,190 42,376 313,566
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 225,711 43,062 268,773
12
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,
2003 2002 2003 2002
(dollars in thousands)
Pretax income:
Segments $156,847 $131,284 $313,566 $268,773
Corporate (10,309) (5,929) (29,798) (25,236)
Adjustments 740 (2,425) (6,736) (1,991)
Consolidated pretax
income $147,278 $122,930 $277,032 $241,546
Adjustments for pretax income include realized gains (losses) and
certain other investment revenue and pension expense.
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, such as Mississippi, that
permit damage awards disproportionate to the actual economic damages
alleged to have been incurred. Based upon information presently
available, we believe that the total amounts that will ultimately be
paid arising from these lawsuits and proceedings will not have a
material adverse effect on our consolidated results of operations or
financial position. However, the continued occurrences of large damage
awards in general in the United States, including large punitive damage
awards that bear little or no relation to actual economic damages
incurred by plaintiffs in some jurisdictions, 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 condensed consolidated financial statements and all
other financial information presented in this report. We prepared our
condensed consolidated financial statements using accounting principles
generally accepted in the United States (GAAP). We made estimates and
assumptions that affect amounts recorded in the financial statements
and disclosures of contingent assets and liabilities.
The Company's management is responsible for establishing and
maintaining an internal control structure and procedures for financial
reporting. These systems are designed to provide reasonable assurance
that assets are safeguarded from loss or unauthorized use, that
transactions are recorded according to GAAP under management's
direction and that financial records are reliable to prepare financial
statements. We support the internal control structure with careful
selection, training and development of qualified personnel. The
Company's employees are subject to AIG's Code of Conduct designed to
assure that all employees perform their duties with honesty and
integrity. We do not allow loans to executive officers. The systems
include a documented organizational structure and policies and
procedures that we communicate throughout the Company. Our internal
auditors report directly to AIG to strengthen independence. They
continually monitor the operation of our internal controls and report
their findings to the Company's management and AIG's internal audit
department. We take prompt action to correct control deficiencies and
address opportunities for improving the system. The Company's
management assesses the adequacy of our internal control structure
quarterly. Based on these assessments, management has concluded that
the internal control structure and the procedures for financial
reporting have functioned effectively and that the condensed
consolidated financial statements fairly present our consolidated
financial position and the results of our operations for the periods
presented.
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. The important factors, many of which are outside
of our control, which could cause the Company's actual results to
differ, possibly materially, include, but are not limited to, the
following:
* changes in general economic conditions, including the interest
rate environment in which we conduct business and the
financial markets through which we access capital;
* changes in the competitive environment in which we operate,
including the demand for our products, customer responsiveness
to our distribution channels and the formation of business
combinations among our competitors;
* the effectiveness of our credit risk scoring models in
assessing the risk of customer unwillingness or inability to
repay;
* shifts in collateral values, contractual delinquencies, credit
losses and the levels of unemployment and personal
bankruptcies;
* changes in laws or regulations that affect our ability to
conduct business or the manner in which we conduct business,
such as licensing requirements, pricing limitations or
restrictions on the method of offering products;
* the costs and effects of any litigation or governmental
inquiries or investigations that are determined adversely to
the Company;
* changes in accounting standards or tax policies and practices
and the application of such new policies and practices to the
manner in which we conduct business;
* our ability to integrate the operations of our acquisitions
into our business;
* changes in our ability to attract and retain employees or key
executives to support our businesses; and
* natural events and acts of God such as fires or floods
affecting our branches or other operating facilities.
Readers are also directed to other risks and uncertainties discussed in
other documents we file with the Securities and Exchange Commission.
We are under no obligation to (and expressly disclaim any such
obligation to) update or alter any forward-looking statement, whether
written or oral, that may be made from time to time, whether as a
result of new information, future events or otherwise.
15
CRITICAL ACCOUNTING POLICIES
Our Credit Strategy and Policy Committee evaluates our finance
receivable portfolio monthly. The Credit Strategy and Policy Committee
exercises its judgment, based on quantitative analyses and each
committee member's experience in the consumer finance industry, when
determining the amount of the allowance for finance receivable losses.
If its review concludes that an adjustment is necessary, we charge or
credit this adjustment to expense through the provision for finance
receivable losses. We consider this estimate to be a critical
accounting estimate that affects the net income of the Company in total
and the pretax operating income of our consumer finance business
segment. We document the adequacy of the allowance for finance
receivable losses and the analysis of the trends in credit quality
considered by the Credit Strategy and Policy Committee to support its
conclusions.
OFF-BALANCE SHEET ARRANGEMENTS
We do not have any material off-balance sheet arrangements as defined
by Securities and Exchange Commission rules.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity
Our sources of funds include operations, issuances of long-term debt,
short-term borrowings in the commercial paper market, borrowings from
banks under credit facilities, and securitizations. AGFI has also
historically received capital contributions from its parent to support
finance receivable growth and maintain targeted leverage.
In second quarter 2003, AGFC began issuing long-term debt under a
retail note program. These senior, unsecured notes are sold by brokers
to individual investors for a minimum investment of $1,000 and
increments of $1,000.
Also in second quarter 2003, a consolidated special purpose subsidiary
of AGFI purchased $266.8 million of real estate loans from seven
subsidiaries of AGFC. The AGFI subsidiary securitized $259.1 million
of these real estate loans and recorded the transaction as an "on
balance sheet" secured financing.
16
Principal sources and uses of cash were as follows:
Six Months Ended
June 30,
2003 2002
(dollars in millions)
Principal sources of cash:
Operations $264.6 $359.8
Net issuance of debt 463.4 51.3
Total $728.0 $411.1
Principal uses of cash:
Net originations and purchases
of finance receivables $377.4 $208.8
Dividends paid 100.2 147.0
Total $477.6 $355.8
We believe that our overall sources of liquidity will continue to be
sufficient to satisfy our foreseeable operational requirements and
financial obligations. The principal risk factors that could decrease
our sources of liquidity are delinquent payments from our customers and
an inability to access capital markets. The principal factors that
could increase our cash needs are significant increases in net
originations and purchases of finance receivables. We intend to
mitigate liquidity risk factors by continuing to operate the Company
within the following strategies:
* maintain a finance receivable portfolio comprised mostly of
real estate loans, which generally represent a lower risk of
customer non-payment;
* originate and monitor finance receivables with our proprietary
credit risk management system;
* maintain an investment securities portfolio of predominantly
investment grade, liquid securities; and
* maintain a capital structure appropriate to our asset base.
Consistent execution of our business strategies should result in
continued profitability, strong credit ratings, and investor
confidence. These results should allow continued access to capital
markets for issuances of our commercial paper and long-term debt. At
June 30, 2003, we had $3.4 billion of long-term debt securities
registered under the Securities Act of 1933 and available for issuance.
We also maintain committed bank credit facilities and the ability to
securitize a portion of our finance receivables to provide additional
sources of liquidity for needs potentially not met through other
funding sources.
17
Capital Resources
June 30,
2003 2002
Amount Percent Amount Percent
(dollars in millions)
Long-term debt $ 9,576.0 63% $ 7,010.5 56%
Short-term debt 3,851.6 26 4,198.1 33
Total debt 13,427.6 89 11,208.6 89
Equity 1,699.5 11 1,363.7 11
Total capital $15,127.1 100% $12,572.3 100%
Net finance receivables $14,030.9 $12,041.8
Debt to equity ratio 7.90x 8.22x
Debt to tangible equity ratio 8.85x 8.88x
Reconciliations of equity to tangible equity were as follows:
June 30,
2003 2002
(dollars in millions)
Equity $ 1,699.5 $ 1,363.7
Goodwill (216.1) (161.9)
Accumulated other comprehensive loss 34.0 60.5
Tangible equity $ 1,517.4 $ 1,262.3
Our capital varies with the level of net finance receivables. The
increase in total capital at June 30, 2003 when compared to June 30,
2002 was greater than our finance receivable growth for the same period
due to capital required to support the acquisition of WFI and its
operations. The capital mix of debt and equity is based primarily upon
maintaining leverage that supports cost-effective funding.
We issue a combination of fixed-rate debt, principally long-term, and
floating-rate debt, principally short-term. AGFC obtains our fixed-
rate funding through public issuances of long-term debt with maturities
generally ranging from three to ten years. Most floating-rate funding
is through AGFI and AGFC sales and refinancing of commercial paper and
through AGFC issuance of long-term, floating-rate debt. 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,
2003, short-term debt included $407.3 million of extendible commercial
notes.
AGFI has 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 a 9.0 to 1
target. AGFI's ability to pay dividends is substantially dependent on
the receipt of dividends or other funds from its subsidiaries,
primarily AGFC. Certain AGFC financing agreements effectively limit
the amount of dividends AGFC may pay. These agreements have not
prevented AGFI from managing its capital to targeted leverage.
18
Liquidity Facilities
We participate in credit facilities to support the issuance of
commercial paper and to provide an additional source of funds for
operating requirements. At June 30, 2003, AGFC had committed credit
facilities totaling $3.0 billion, including a facility under which AGFI
is an eligible borrower for up to $300.0 million. The annual
commitment fees for the facilities currently average 0.07% and are
based upon AGFC's long-term credit ratings.
At June 30, 2003, AGFI and certain of its subsidiaries also had
uncommitted credit facilities totaling $173.0 million which could be
increased depending upon lender ability to participate its loans under
the facilities.
Available borrowings under all facilities are reduced by any
outstanding borrowings. At June 30, 2003, AGFI's outstanding
borrowings totaled $60.0 million. There were no amounts outstanding at
June 30, 2002. AGFC guarantees its subsidiary borrowings under
uncommitted credit facilities. AGFC does not guarantee any borrowings
of AGFI.
ANALYSIS OF OPERATING RESULTS AND FINANCIAL CONDITION
Net Income
Three Months Ended Six Months Ended
June 30, June 30,
2003 2002 2003 2002
(dollars in millions)
Net income $ 93.9 $ 79.2 $177.9 $155.6
Amount change $ 14.7 $ 9.6 $ 22.3 $ 20.8
Percent change 19% 14% 14% 15%
Return on average
assets (annualized) 2.34% 2.35% 2.25% 2.30%
Return on average
equity (annualized) 21.84% 22.96% 21.26% 22.55%
Ratio of earnings to
fixed charges 1.96x 1.85x
See Note 9. of the Notes to Condensed Consolidated Financial Statements
for information on the results of the Company's business segments.
19
Factors that specifically affected the Company's operating results were
as follows:
Finance Charges
Three Months Ended Six Months Ended
June 30, June 30,
2003 2002 2003 2002
(dollars in millions)
Finance charges $ 441.4 $ 422.9 $ 881.8 $ 846.8
Amount change $ 18.5 $ (7.8) $ 35.0 $ (4.2)
Percent change 4% (2)% 4% -%
Average net receivables $13,937.4 $11,951.2 $13,880.9 $11,947.0
Yield 12.70% 14.19% 12.79% 14.27%
Finance charges increased (decreased) due to the following:
Three Months Ended Six Months Ended
June 30, June 30,
2003 2002 2003 2002
(dollars in millions)
Increase in average
net receivables $ 61.5 $ 1.7 $120.9 $ 5.3
Decrease in yield (43.0) (9.5) (85.9) (9.5)
Total $ 18.5 $ (7.8) $ 35.0 $ (4.2)
Average net receivables by type and growth in average net receivables
when compared to the same periods for the previous year were as
follows:
Three Months Ended June 30,
2003 2002
Amount Growth Amount Growth
(dollars in millions)
Real estate loans $ 9,780.1 $1,987.9 $ 7,792.2 $ 340.8
Non-real estate loans 2,861.9 51.0 2,810.9 (145.6)
Retail sales finance 1,295.4 (52.7) 1,348.1 (32.3)
Total $13,937.4 $1,986.2 $11,951.2 $ 162.9
Percent change 17% 1%
Six Months Ended June 30,
2003 2002
Amount Growth Amount Growth
(dollars in millions)
Real estate loans $ 9,671.0 $1,941.0 $ 7,730.0 $ 344.7
Non-real estate loans 2,882.6 47.3 2,835.3 (132.9)
Retail sales finance 1,327.3 (54.4) 1,381.7 (27.8)
Total $13,880.9 $1,933.9 $11,947.0 $ 184.0
Percent change 16% 2%
20
In 2002, the low interest rate environment caused significant increases
in both originations and liquidations of our real estate loans.
However, we took advantage of the record real estate loan refinancings
that occurred in the market in general and acquired $1.9 billion of
real estate loan portfolios from third party originators during the
last half of 2002.
Yield by type and changes in yield in basis points (bp) when compared
to the same periods for the previous year were as follows:
Three Months Ended June 30,
2003 2002
Yield Change Yield Change
Real estate loans 9.88% (147) bp 11.35% (63) bp
Non-real estate loans 21.34 (43) 21.77 22
Retail sales finance 14.84 6 14.78 54
Total 12.70 (149) 14.19 (45)
Six Months Ended June 30,
2003 2002
Yield Change Yield Change
Real estate loans 9.95% (143) bp 11.38% (48) bp
Non-real estate loans 21.43 (43) 21.86 31
Retail sales finance 14.75 (10) 14.85 88
Total 12.79 (148) 14.27 (29)
Yield decreased for the three and six months ended June 30, 2003 when
compared to the same periods in 2002 primarily reflecting a lower real
estate loan yield resulting from the low interest rate environment.
Insurance Revenues
Insurance revenues were as follows:
Three Months Ended Six Months Ended
June 30, June 30,
2003 2002 2003 2002
(dollars in millions)
Earned premiums $42.1 $47.5 $87.2 $92.5
Commissions 0.6 0.6 1.2 1.1
Total $42.7 $48.1 $88.4 $93.6
Amount change $(5.4) $(2.1) $(5.2) $(4.7)
Percent change (11)% (4)% (6)% (5)%
Earned premiums decreased for the three and six months ended June 30,
2003 when compared to the same periods in 2002 due to the release of
premiums resulting from the termination of a reinsurance agreement and
lower premium volume. Premium volume decreased due to customers
purchasing fewer non-credit insurance products.
21
Other Revenues
Other revenues were as follows:
Three Months Ended Six Months Ended
June 30, June 30,
2003 2002 2003 2002
(dollars in millions)
Net gain on sale of real
estate loans held for
sale $ 33.7 $ - $ 52.9 $ -
Investment revenue 21.3 21.2 41.0 44.2
Net interest income on
real estate loans held
for sale 6.1 - 9.3 -
Writedowns on real estate
owned (1.8) (2.4) (4.1) (4.5)
Net gains on real estate
owned sales 1.0 0.9 1.4 1.4
Other 2.7 3.4 3.7 5.1
Total $ 63.0 $ 23.1 $ 104.2 $ 46.2
Amount change $ 39.9 $ 2.3 $ 58.0 $ 0.5
Percent change 173% 11% 125% 1%
Average invested assets $1,298.0 $1,244.5 $1,294.9 $1,241.0
Adjusted portfolio yield 5.94% 7.50% 6.32% 7.05%
Net realized gains
(losses) on
investments $ 0.6 $ (3.0) $ (2.3) $ (1.7)
Other revenues increased for the three and six months ended June 30,
2003 when compared to the same periods in 2002 primarily due to net
gain on sale of real estate loans held for sale and net interest income
on real estate loans held for sale in 2003 resulting from the
acquisition of WFI in first quarter 2003.
Interest Expense
Three Months Ended Six Months Ended
June 30, June 30,
2003 2002 2003 2002
(dollars in millions)
Interest expense $ 137.0 $ 138.6 $ 279.8 $ 275.8
Amount change $ (1.6) $ (23.0) $ 4.0 $ (58.0)
Percent change (1)% (14)% 1% (17)%
Average borrowings $13,232.8 $11,051.4 $13,137.5 $11,038.0
Borrowing cost 4.12% 5.02% 4.26% 5.00%
22
Interest expense (decreased) increased due to the following:
Three Months Ended Six Months Ended
June 30, June 30,
2003 2002 2003 2002
(dollars in millions)
Increase in average
borrowings $ 27.5 $ 4.3 $ 52.5 $ 8.8
Decrease in borrowing
cost (29.1) (27.3) (48.5) (66.8)
Total $ (1.6) $(23.0) $ 4.0 $(58.0)
Average borrowings by type and changes in average borrowings when
compared to the same periods for the previous year were as follows:
Three Months Ended June 30,
2003 2002
Amount Change Amount Change
(dollars in millions)
Long-term debt $ 9,313.4 $2,386.7 $ 6,926.7 $1,253.0
Short-term debt 3,919.4 (205.3) 4,124.7 (870.6)
Deposits - - - (93.2)
Total $13,232.8 $2,181.4 $11,051.4 $ 289.2
Percent change 20% 3%
Six Months Ended June 30,
2003 2002
Amount Change Amount Change
(dollars in millions)
Long-term debt $ 9,312.5 $2,594.6 $ 6,717.9 $1,075.0
Short-term debt 3,825.0 (495.1) 4,320.1 (683.8)
Deposits - - - (107.1)
Total $13,137.5 $2,099.5 $11,038.0 $ 284.1
Percent change 19% 3%
AGFC issued $3.4 billion of long-term debt during the last half of
2002. The proceeds of these long-term debt issuances were used to
support finance receivable growth and to refinance maturing debt.
23
Borrowing cost by type and changes in borrowing cost in basis points
when compared to the same periods for the previous year were as
follows:
Three Months Ended June 30,
2003 2002
Rate Change Rate Change
Long-term debt 4.76% (143) bp 6.19% (53) bp
Short-term debt 2.63 (42) 3.05 (215)
Total 4.12 (90) 5.02 (99)
Six Months Ended June 30,
2003 2002
Rate Change Rate Change
Long-term debt 4.90% (132) bp 6.22% (51) bp
Short-term debt 2.70 (40) 3.10 (255)
Total 4.26 (74) 5.00 (122)
Federal Reserve actions lowered the federal funds rate 50 basis points
in November 2002 and 25 basis points in June 2003 which resulted in
lower short-term debt rates and lower rates on floating-rate long-term
debt for 2003. Federal Reserve actions from 2001 through June 2003
created the lowest interest rate environment in 45 years and resulted
in lower long-term debt rates as new issuances were at substantially
lower rates than long-term debt being refinanced.
Operating Expenses
Operating expenses were as follows:
Three Months Ended Six Months Ended
June 30, June 30,
2003 2002 2003 2002
(dollars in millions)
Salaries and benefits $101.9 $ 79.1 $200.7 $160.2
Other 69.5 60.8 133.8 123.3
Total $171.4 $139.9 $334.5 $283.5
Amount change $ 31.5 $ (2.6) $ 51.0 $ 5.5
Percent change 23% (2)% 18% 2%
Operating expenses
(annualized) as a
percentage of average
net receivables 4.92% 4.68% 4.82% 4.75%
24
Salaries and benefits increased for the three and six months ended June
30, 2003 when compared to the same periods in 2002 primarily due to the
addition of approximately 500 WFI employees in first quarter 2003,
competitive compensation, and rising benefit costs. The increase in
operating expenses as a percentage of average net receivables for the
three and six months ended June 30, 2003 when compared to the same
periods in 2002 reflected increased operating expenses due to the
acquisition of WFI. WFI originations are classified as real estate
loans held for sale, which are included in other assets and not in net
finance receivables.
Provision for Finance Receivable Losses
At or for the
Three Months Ended Six Months Ended
June 30, June 30,
2003 2002 2003 2002
(dollars in millions)
Provision for finance
receivable losses $76.3 $72.9 $147.4 $143.9
Amount change $ 3.4 $ 5.3 $ 3.5 $ 16.2
Percent change 5% 8% 2% 13%
Net charge-offs $74.3 $72.9 $148.4 $143.9
Charge-off ratio 2.14% 2.44% 2.14% 2.41%
Charge-off coverage 1.55x 1.54x 1.56x 1.56x
60 day+ delinquency $526.3 $454.6
Delinquency ratio 3.65% 3.63%
Allowance for finance
receivable losses $462.0 $449.6
Allowance ratio 3.29% 3.73%
Net charge-offs by type and changes in net charge-offs when compared to
the same periods for the previous year were as follows:
Three Months Ended June 30,
2003 2002
Amount Change Amount Change
(dollars in millions)
Real estate loans $15.0 $ 2.3 $12.7 $ 0.4
Non-real estate loans 47.9 (1.0) 48.9 8.5
Retail sales finance 11.4 0.1 11.3 1.4
Total $74.3 $ 1.4 $72.9 $10.3
Six Months Ended June 30,
2003 2002
Amount Change Amount Change
(dollars in millions)
Real estate loans $ 27.7 $ 2.7 $ 25.0 $ 1.7
Non-real estate loans 97.5 0.8 96.7 16.0
Retail sales finance 23.2 1.0 22.2 3.5
Total $148.4 $ 4.5 $143.9 $ 21.2
25
Charge-off ratios by type and changes in charge-off ratios in basis
points when compared to the same periods for the previous year were as
follows:
Three Months Ended June 30,
2003 2002
Ratio Change Ratio Change
Real estate loans 0.61% (4) bp 0.65% (1) bp
Non-real estate loans 6.70 (27) 6.97 149
Retail sales finance 3.53 21 3.32 46
Total 2.14 (30) 2.44 31
Six Months Ended June 30,
2003 2002
Ratio Change Ratio Change
Real estate loans 0.57% (8) bp 0.65% 2 bp
Non-real estate loans 6.75 (5) 6.80 138
Retail sales finance 3.49 29 3.20 56
Total 2.14 (27) 2.41 32
The decrease in total charge-off ratio for the three and six months
ended June 30, 2003 when compared to the same periods in 2002 reflected
a higher proportion of average net receivables that are real estate
loans. The improvement in real estate loan charge-off ratio reflected
purchases of higher quality real estate loans during the last half of
2002.
Delinquency by type and changes in delinquency when compared to the
same period for the previous year were as follows:
June 30,
2003 2002
Amount Change Amount Change
(dollars in millions)
Real estate loans $321.6 $66.1 $255.5 $28.0
Non-real estate loans 166.7 5.9 160.8 15.4
Retail sales finance 38.0 (0.3) 38.3 7.1
Total $526.3 $71.7 $454.6 $50.5
26
Delinquency ratios by type and changes in delinquency ratios in basis
points when compared to the same period for the previous year were as
follows:
June 30,
2003 2002
Ratio Change Ratio Change
Real estate loans 3.28% 4 bp 3.24% 21 bp
Non-real estate loans 5.25 14 5.11 71
Retail sales finance 2.63 9 2.54 58
Total 3.65 2 3.63 37
Our Credit Strategy and Policy Committee evaluates our finance
receivable portfolio monthly to determine the appropriate level of the
allowance for finance receivable losses. We believe the amount of the
allowance for finance receivable losses is the most significant
estimate we make. In our opinion, the allowance is adequate to absorb
losses inherent in our existing portfolio. The increase in the
allowance for finance receivable losses at June 30, 2003 when compared
to June 30, 2002 was due to the following:
* increase to the allowance for finance receivable losses during
third quarter 2002 of $7.4 million resulting from a purchase
business combination; and
* net increases to the allowance for finance receivable losses
through the provision for finance receivable losses during the
period totaling $5.0 million (these increases were in response
to our increased delinquency and net charge-offs and the
higher levels of both unemployment and personal bankruptcies
in the United States).
The allowance as a percentage of net finance receivables declined in
2003 reflecting purchases of higher quality real estate loans during
the last half of 2002.
Charge-off coverage, which compares the allowance for finance
receivable losses to net charge-offs (annualized), remained near the
same for the three and six months ended June 30, 2003 when compared to
the same periods in 2002 reflecting slightly higher net charge-offs,
offset by increases to allowance for finance receivable losses.
27
Insurance Losses and Loss Adjustment Expenses
Insurance losses and loss adjustment expenses were as follows:
Three Months Ended Six Months Ended
June 30, June 30,
2003 2002 2003 2002
(dollars in millions)
Claims incurred $19.4 $19.4 $42.0 $43.4
Change in benefit
reserves (4.2) 0.4 (6.5) (1.6)
Total $15.2 $19.8 $35.5 $41.8
Amount change $(4.6) $(1.2) $(6.3) $(2.4)
Percent change (23)% (6)% (15)% (6)%
The decline in benefit reserves for the three and six months ended June
30, 2003 when compared to the same periods in 2002 reflected the
release of benefit reserves resulting from the termination of a
reinsurance agreement and lower premium volume of our non-credit life
products.
Provision for Income Taxes
Three Months Ended Six Months Ended
June 30, June 30,
2003 2002 2003 2002
(dollars in millions)
Provision for income
taxes $ 53.4 $ 43.8 $ 99.1 $ 86.0
Amount change $ 9.6 $ 4.4 $ 13.1 $ 9.5
Percent change 22% 11% 15% 12%
Pretax income $147.3 $122.9 $277.0 $241.5
Effective income
tax rate 36.25% 35.60% 35.77% 35.60%
Provision for income taxes increased for the three and six months ended
June 30, 2003 when compared to the same periods in 2002 primarily due
to higher taxable income.
Asset/Liability Management
We manage anticipated cash flows of our assets and liabilities,
principally our finance receivables and debt, in an effort to reduce
the risk associated with unfavorable changes in interest rates not met
by changes in finance charge yields of our finance receivables. We
fund finance receivables with a combination of fixed-rate and floating-
rate debt and equity. Management determines the mix of fixed-rate and
floating-rate debt based, in part, on the nature of the finance
receivables being supported.
28
We limit our exposure to market interest rate increases by fixing
interest rates that we pay for term periods. The primary means by
which we accomplish this is by issuing fixed-rate debt. To supplement
fixed-rate debt issuances, AGFC also alters the nature of certain
floating-rate funding by using interest rate swap agreements to
synthetically create fixed-rate, long-term debt, thereby limiting our
exposure to market interest rate increases. Additionally, AGFC has
swapped fixed-rate, long-term debt to floating-rate, long-term debt.
Including the effect of interest rate swap agreements that effectively
fix floating-rate debt or float fixed-rate debt, our floating-rate debt
represented 44% of our average borrowings for the three months ended
June 30, 2003 and 43% of our average borrowings for the six months
ended June 30, 2003 compared to 34% for the three and six months ended
June 30, 2002.
Item 4. Controls and Procedures.
(a) Evaluation of disclosure controls and procedures
The conclusions of our principal executive officer and principal
financial officer about the effectiveness of the Company's
disclosure controls and procedures based on their evaluation of
these controls and procedures as of June 30, 2003 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 as of the end of each
quarter. Based on these assessments, the Company's principal
executive officer and principal financial officer have concluded
that the disclosure controls and procedures have functioned
effectively and that the condensed consolidated financial
statements fairly present our consolidated financial position and
the results of our operations for the periods presented.
(b) Changes in internal control over financial reporting
There was no change in the Company's internal control over
financial reporting, that occurred during the three months ended
June 30, 2003, that has materially affected, or is reasonably
likely to materially affect, the Company's internal control over
financial reporting.
29
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.
Exhibits are listed in the Exhibit Index beginning on page 31
herein.
(b) Reports on Form 8-K.
No Current Reports on Form 8-K were filed during the second
quarter of 2003.
30
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, 2003 By /s/ Donald R. Breivogel, Jr.
Donald R. Breivogel, Jr.
Senior Vice President and Chief
Financial Officer
(Duly Authorized Officer and
Principal Financial Officer)
31
Exhibit Index
Exhibit
(12) Computation of Ratio of Earnings to Fixed Charges
(31.1) Rule 13a-14(a)/15d-14(a) Certifications
(31.2) Rule 13a-14(a)/15d-14(a) Certifications
(32) Section 1350 Certifications