UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2005
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
At May 5, 2005, there were 2,000,000 shares of the registrant's common
stock, $.50 par value, outstanding.
2
TABLE OF CONTENTS
Item Page
Part I - Financial Information
1. Financial Statements (Unaudited) . . . . . . . . . . . . . . . 3
2. Management's Discussion and Analysis of Financial Condition
and Results of Operations. . . . . . . . . . . . . . . . . . 11
3. Quantitative and Qualitative Disclosures About Market Risk . . 25
4. Controls and Procedures . . . . . . . . . . . . . . . . . . . 26
Part II - Other Information
1. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . 26
2. Unregistered Sales of Equity Securities and Use of Proceeds. . 26
3. Defaults Upon Senior Securities . . . . . . . . . . . . . . . 27
4. Submission of Matters to a Vote of Security Holders . . . . . 27
5. Other Information . . . . . . . . . . . . . . . . . . . . . . 27
6. Exhibits . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
AVAILABLE INFORMATION
American General Finance, Inc. (AGFI) 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 AGFI) file electronically with the SEC. The SEC's
website is www.sec.gov.
The following reports are available free of charge on our Internet
website www.agfinance.com as soon as reasonably practicable after we
file them with or furnish them to the SEC:
* our 2005 Current Reports on Form 8-K;
* this Quarterly Report on Form 10-Q; and
* our Annual Report on Form 10-K as amended by our Annual Report
on Form 10-K/A (Amendment No. 1) for the year ended December
31, 2004.
The information on our website is not incorporated by reference into
this report. The website addresses listed above are provided for the
information of the reader and are not intended to be active links.
3
Part I - FINANCIAL INFORMATION
Item 1. Financial Statements
AMERICAN GENERAL FINANCE, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Income
(Unaudited)
Three Months Ended
March 31,
2005 2004
(dollars in thousands)
Revenues
Finance charges $545,140 $463,658
Insurance 42,509 45,701
Other:
Service fee income from a non-subsidiary
affiliate 63,057 35,617
Miscellaneous 24,035 28,082
Total revenues 674,741 573,058
Expenses
Interest expense 196,460 137,661
Operating expenses:
Salaries and benefits 132,136 119,880
Other operating expenses 74,677 70,829
Provision for finance receivable losses 64,665 59,253
Insurance losses and loss adjustment
expenses 17,148 21,127
Total expenses 485,086 408,750
Income before provision for income taxes 189,655 164,308
Provision for Income Taxes 69,793 59,670
Net Income $119,862 $104,638
See Notes to Condensed Consolidated Financial Statements.
4
AMERICAN GENERAL FINANCE, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(Unaudited)
March 31, December 31,
2005 2004
(dollars in thousands)
Assets
Net finance receivables:
Real estate loans $17,129,131 $15,742,238
Non-real estate loans 3,024,839 3,043,602
Retail sales finance 1,341,131 1,382,018
Net finance receivables 21,495,101 20,167,858
Allowance for finance receivable losses (456,031) (456,031)
Net finance receivables, less allowance
for finance receivable losses 21,039,070 19,711,827
Investment securities 1,381,421 1,378,362
Cash and cash equivalents 215,527 160,610
Other assets 979,133 984,973
Total assets $23,615,151 $22,235,772
Liabilities and Shareholder's Equity
Long-term debt $15,773,702 $14,679,501
Short-term debt 4,273,791 4,299,085
Insurance claims and policyholder
liabilities 411,208 422,957
Other liabilities 531,518 414,441
Accrued taxes 105,965 43,546
Total liabilities 21,096,184 19,859,530
Shareholder's equity:
Common stock 1,000 1,000
Additional paid-in capital 996,305 996,305
Accumulated other comprehensive income 60,279 37,413
Retained earnings 1,461,383 1,341,524
Total shareholder's equity 2,518,967 2,376,242
Total liabilities and shareholder's equity $23,615,151 $22,235,772
See Notes to Condensed Consolidated Financial Statements.
5
AMERICAN GENERAL FINANCE, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(Unaudited)
Three Months Ended
March 31,
2005 2004
(dollars in thousands)
Cash Flows from Operating Activities
Net income $ 119,862 $ 104,638
Reconciling adjustments:
Provision for finance receivable losses 64,665 59,253
Depreciation and amortization 40,944 43,312
Deferral of finance receivable origination
costs (19,674) (18,321)
Deferred income tax (benefit) charge (11,334) 5,802
Origination of real estate loans held for sale (19,587) (20,135)
Sales and principal collections of real estate
loans held for sale 17,328 35,865
Change in other assets and other liabilities 97,807 149,001
Change in insurance claims and policyholder
liabilities (11,749) (7,652)
Change in taxes receivable and payable 62,457 42,701
Other, net 2,929 4,478
Net cash provided by operating activities 343,648 398,942
Cash Flows from Investing Activities
Finance receivables originated or purchased (3,344,050) (2,714,357)
Principal collections on finance receivables 1,954,415 1,783,540
Investment securities purchased (125,204) (248,144)
Investment securities called and sold 79,967 220,980
Investment securities matured 16,000 2,600
Change in premiums on finance receivables
purchased and deferred charges (9,200) (1,965)
Other, net (6,631) (2,875)
Net cash used for investing activities (1,434,703) (960,221)
Cash Flows from Financing Activities
Proceeds from issuance of long-term debt 1,765,588 764,347
Repayment of long-term debt (594,322) (433,188)
Change in short-term debt (25,294) 330,644
Dividends paid - (24,002)
Net cash provided by financing activities 1,145,972 637,801
Increase in cash and cash equivalents 54,917 76,522
Cash and cash equivalents at beginning of period 160,610 145,462
Cash and cash equivalents at end of period $ 215,527 $ 221,984
See Notes to Condensed Consolidated Financial Statements.
6
AMERICAN GENERAL FINANCE, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Comprehensive Income
(Unaudited)
Three Months Ended
March 31,
2005 2004
(dollars in thousands)
Net income $119,862 $104,638
Other comprehensive gain:
Changes in net unrealized (losses) gains:
Investment securities (26,268) 15,687
Swap agreements 53,746 (7,793)
Minimum pension liability (2,247) -
Income tax effect:
Investment securities 9,193 (5,491)
Swap agreements (18,810) 2,728
Minimum pension liability 876 -
Changes in net unrealized gains, net of tax 16,490 5,131
Reclassification adjustments for
realized losses (gains) included
in net income:
Investment securities 2,307 (769)
Swap agreements 7,502 15,589
Income tax effect:
Investment securities (807) 269
Swap agreements (2,626) (5,456)
Realized losses included in net income,
net of tax 6,376 9,633
Other comprehensive gain, net of tax 22,866 14,764
Comprehensive income $142,728 $119,402
See Notes to Condensed Consolidated Financial Statements.
7
AMERICAN GENERAL FINANCE, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
March 31, 2005
Note 1. Basis of Presentation
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).
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. You should
read these statements 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, 2004. To conform to the 2005
presentation, we reclassified certain items in the prior period.
Note 2. Finance Receivables
Components of net finance receivables by type were as follows:
March 31, 2005
Real Non-real Retail
Estate Estate Sales
Loans Loans Finance Total
(dollars in thousands)
Gross receivables $17,040,935 $3,330,421 $1,465,298 $21,836,654
Unearned finance charges
and points and fees (126,218) (372,210) (138,913) (637,341)
Accrued finance charges 104,399 36,439 14,771 155,609
Deferred origination costs 31,281 28,811 - 60,092
Premiums, net of discounts 78,734 1,378 (25) 80,087
Total $17,129,131 $3,024,839 $1,341,131 $21,495,101
December 31, 2004
Real Non-real Retail
Estate Estate Sales
Loans Loans Finance Total
(dollars in thousands)
Gross receivables $15,664,295 $3,359,288 $1,511,684 $20,535,267
Unearned finance charges
and points and fees (128,899) (387,504) (144,521) (660,924)
Accrued finance charges 101,475 39,812 14,942 156,229
Deferred origination costs 30,168 30,047 - 60,215
Premiums, net of discounts 75,199 1,959 (87) 77,071
Total $15,742,238 $3,043,602 $1,382,018 $20,167,858
8
Note 3. Allowance for Finance Receivable Losses
Changes in the allowance for finance receivable losses were as
follows:
Three Months Ended
March 31,
2005 2004
(dollars in thousands)
Balance at beginning of period $456,031 $466,031
Provision for finance receivable losses 64,665 59,253
Charge-offs (77,839) (81,256)
Recoveries 13,174 12,003
Balance at end of period $456,031 $456,031
Note 4. 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 but
is neither a dealer nor a trader in derivative financial instruments.
AGFC's derivative financial instruments consist of interest rate,
foreign currency, and equity-indexed swap agreements.
We design our interest rate and foreign currency swap agreements to
qualify as cash flow hedges or fair value hedges. While our equity-
indexed swap agreements mitigate economic exposure of related equity-
indexed debt, these swap agreements do not qualify as cash flow or
fair value hedges under GAAP. At March 31, 2005, equity-indexed debt
was immaterial.
Note 5. Accumulated Other Comprehensive Income
Components of accumulated other comprehensive income were as follows:
March 31, December 31,
2005 2004
(dollars in thousands)
Net unrealized gains (losses) on swap
agreements $33,710 $(6,102)
Net unrealized gains on investment
securities 27,940 43,515
Net unrealized losses on minimum
pension liability (1,371) -
Accumulated other comprehensive income $60,279 $37,413
9
Note 6. Segment Information
We have three business segments: branch, centralized real estate, and
insurance. We define our segments by types of financial service
products we offer, nature of our production processes, and methods we
use to distribute our products and to provide our services, as well as
our management reporting structure.
In our Annual Report on Form 10-K for the year ended December 31,
2004, we expanded our segment reporting to reflect our centralized
real estate business as a separate segment. We also restated prior
interim periods so that these prior periods are shown on a comparable
basis to our new presentation.
In our branch business segment, we:
* originate real estate loans secured by first or second
mortgages on residential real estate, which may be closed-end
accounts or open-end home equity lines of credit;
* originate secured and unsecured non-real estate loans;
* purchase retail sales contracts and provide revolving retail
services arising from the retail sale of consumer goods and
services by retail merchants; and
* purchase private label receivables originated by AIG Federal
Savings Bank (AIG Bank) 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 originated by other lenders. We also
offer credit and non-credit insurance and ancillary products to all
eligible branch customers.
In our centralized real estate business segment, we:
* provide, for fees, marketing, certain origination processing
services, and loan servicing and related services for AIG
Bank;
* originate real estate loans for transfer to the centralized
real estate servicing center;
* originate real estate loans for sale to investors with
servicing released to the purchaser; and
* service a portfolio of real estate loans generated through:
* portfolio acquisitions from third party lenders;
* correspondent relationships;
* our mortgage origination subsidiaries;
* refinancing existing mortgages; or
* advances on home equity lines of credit.
In our insurance business segment, we write and reinsure credit life,
credit accident and health, credit-related property and casualty,
credit involuntary unemployment, and non-credit insurance covering our
customers and the property pledged as collateral through products that
the branch business segment offers its customers. We also monitor our
finance receivables to determine that the collateral is adequately
protected.
10
Information about the Company's segments as well as reconciliations of
total segment pretax income to the condensed consolidated financial
statement amounts were as follows:
For the three months ended March 31, 2005:
Centralized Total
Branch Real Estate Insurance Segments
(dollars in thousands)
Revenues:
External:
Finance charges $432,858 $136,572 $ - $569,430
Insurance 177 - 42,332 42,509
Other (977) 62,921 23,824 85,768
Intercompany 19,793 375 (16,916) 3,252
Pretax income 147,297 31,846 24,418 203,561
For the three months ended March 31, 2004:
Centralized Total
Branch Real Estate Insurance Segments
(dollars in thousands)
Revenues:
External:
Finance charges $425,875 $ 60,666 $ - $486,541
Insurance 203 - 45,498 45,701
Other (3,328) 37,530 24,259 58,461
Intercompany 20,470 238 (18,096) 2,612
Pretax income 135,503 15,234 22,148 172,885
Reconciliations of total segment pretax income to the condensed
consolidated financial statement amounts were as follows:
Three Months Ended
March 31,
2005 2004
(dollars in thousands)
Pretax income:
Segments $203,561 $172,885
Corporate (12,060) (9,674)
Adjustments (1,846) 1,097
Consolidated pretax income $189,655 $164,308
Adjustments for pretax income include realized gains (losses) and
certain other investment revenue.
Note 7. Legal Contingencies
AGFI and certain of its subsidiaries are parties to various lawsuits
and proceedings, including certain purported 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, if any, 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
11
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.
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
statement 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) for interim
periods. 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. We designed these systems 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. In 2004, AIG adopted the AIG Director, Executive Officer,
and Senior Financial Officer Code of Business Conduct and Ethics,
which covers such directors and officers of AIG and its subsidiaries,
including the Company's Chief Executive Officer, Chief Financial
Officer, and Chief Accounting Officer. We do not allow loans to
executive officers. The aforementioned 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, AIG's management, and AIG's internal audit
department. We take prompt action to correct control deficiencies and
improve the systems. The Company's management assesses any changes to
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.
12
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 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 and invest
cash flows from the insurance business segment;
* 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, and
credit losses;
* levels of unemployment and personal bankruptcies;
* our ability to access capital markets and maintain our credit
rating position;
* 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 businesses;
* changes in our ability to attract and retain employees or key
executives to support our businesses; and
* natural or accidental events such as fires or floods affecting
our branches or other operating facilities.
We also direct readers to other risks and uncertainties discussed in
other documents we file with the SEC. We are under no obligation to
(and expressly disclaim any obligation to) update or alter any
forward-looking statement, whether written or oral, that we may make
from time to time, whether as a result of new information, future
events or otherwise.
13
CRITICAL ACCOUNTING ESTIMATES
We consider our most critical accounting estimate to be the
establishment of an adequate allowance for finance receivable losses.
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,
qualitative factors, 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 branch and centralized real estate business
segments. We document the adequacy of the allowance for finance
receivable losses, the analysis of the trends in credit quality, and
the current economic conditions the Credit Strategy and Policy
Committee considered to support its conclusions. See Provision for
Finance Receivable Losses for further information on the allowance for
finance receivable losses.
OFF-BALANCE SHEET ARRANGEMENTS
We do not have any off-balance sheet arrangements as defined by SEC
rules.
CAPITAL RESOURCES AND LIQUIDITY
Capital Resources
Our capital varies primarily with the amount of net finance
receivables. We base the mix of debt and equity primarily upon
maintaining leverage that supports cost-effective funding.
March 31,
2005 2004
Amount Percent Amount Percent
(dollars in millions)
Long-term debt $15,773.7 70% $11,209.1 66%
Short-term debt 4,273.8 19 3,797.8 23
Total debt 20,047.5 89 15,006.9 89
Equity 2,519.0 11 1,919.2 11
Total capital $22,566.5 100% $16,926.1 100%
Net finance receivables $21,495.1 $16,155.5
Debt to equity ratio 7.96x 7.82x
Debt to tangible equity ratio 8.97x 8.86x
14
Reconciliations of equity to tangible equity were as follows:
March 31,
2005 2004
(dollars in millions)
Equity $ 2,519.0 $ 1,919.2
Goodwill (224.7) (224.7)
Accumulated other comprehensive
(income) loss (60.3) 0.2
Tangible equity $ 2,234.0 $ 1,694.7
We issue a combination of fixed-rate debt, principally long-term, and
floating-rate debt, both long-term and short-term. AGFC obtains most
of our fixed-rate funding through public issuances of long-term debt
with maturities generally ranging from three to ten years. AGFC and
AGFI obtain floating-rate funding by issuing and refinancing
commercial paper and through issuances of long-term, floating-rate
debt. We issue commercial paper, with maturities ranging from 1 to
270 days, to banks, insurance companies, corporations, and other
accredited investors. At March 31, 2005, short-term debt included
$3.7 billion of commercial paper. AGFC also issues extendible
commercial notes with initial maturities of up to 90 days, which AGFC
may extend to 390 days. At March 31, 2005, short-term debt included
$518.6 million of extendible commercial notes.
AGFC uses interest rate, foreign currency, and equity-indexed swap
agreements in conjunction with specific debt issuances. AGFC's
objective is to achieve net U.S. dollar, fixed or floating interest
exposure at costs not materially different from costs AGFC would have
incurred by issuing debt for the same net exposure without using
derivatives. Accordingly, this cost differential did not have a
material effect on the Company's net income during the three months
ended March 31, 2005 or 2004.
AGFI has historically paid dividends to (or received capital
contributions from) its parent to manage our leverage of debt to
tangible equity to a targeted amount, which is currently 9.0 to 1.
Certain AGFI and AGFC financing agreements effectively limit the
amount of dividends they may pay. AGFI's ability to pay dividends
depends on dividends or other funds it receives from its subsidiaries,
primarily AGFC.
Liquidity Facilities
We maintain credit facilities to support the issuance of commercial
paper and to provide an additional source of funds for operating
requirements. At March 31, 2005, AGFC had committed credit facilities
totaling $3.5 billion consisting of a $1.5 billion multi-year facility
and $2.0 billion of credit facilities with commitments of less than
one year (but with one-year term out provisions upon drawdown) under
which AGFI is an eligible borrower for up to $660 million. The annual
commitment fees for the facilities are based upon AGFC's long-term
credit ratings and averaged 0.07% at March 31, 2005.
At March 31, 2005, AGFI and certain of its subsidiaries also had
uncommitted credit facilities totaling $170.0 million which could be
increased depending upon lender ability to participate its loans under
the facilities.
15
Outstanding borrowings under all facilities totaled $60.0 million at
March 31, 2005 and March 31, 2004. AGFC does not guarantee any
borrowings of AGFI.
Liquidity
Our sources of funds include operations, issuances of long-term debt
in domestic and foreign markets, short-term borrowings in the
commercial paper market, borrowings from banks under credit
facilities, and securitizations. AGFI has also received capital
contributions from its parent to support finance receivable growth and
maintain targeted leverage.
We believe that our overall sources of liquidity will continue to be
sufficient to satisfy our foreseeable operational requirements and
financial obligations. The principal factors that could decrease our
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 by continuing to operate the Company utilizing the following
existing 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 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.
Principal sources and uses of cash were as follows:
Three Months Ended
March 31,
2005 2004
(dollars in millions)
Principal sources of cash:
Net issuances of debt $1,146.0 $ 661.8
Operations 343.6 398.9
Total $1,489.6 $1,060.7
Principal uses of cash:
Net originations and purchases
of finance receivables $1,389.6 $ 930.8
Dividends paid - 24.0
Total $1,389.6 $ 954.8
Net originations and purchases of finance receivables and net
issuances of debt increased for the three months ended March 31, 2005
when compared to the same period in 2004 primarily due to an increase
in our centralized real estate loan production.
16
We believe 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 to issue our commercial paper and long-term debt. We have
implemented programs and operating guidelines to ensure adequate
liquidity, to mitigate the impact of any inability to access capital
markets, and to provide contingent funding sources. These programs
and guidelines include the following:
* We manage commercial paper as a percentage of total debt. At
March 31, 2005 that percentage was 18% compared to 21% at
March 31, 2004.
* We spread commercial paper maturities throughout upcoming
weeks and months.
* We limit the amount of commercial paper that any one investor
may hold.
* We maintain credit facilities to support the issuance of
commercial paper and to provide an additional source of funds
for operating requirements. At March 31, 2005, we had $3.5
billion of committed bank credit facilities.
* As of March 31, 2005, we had effective shelf registration
statements that provided AGFC with the ability to issue up to
$4.2 billion of long-term debt securities registered under the
Securities Act of 1933. AGFC could issue these securities as
traditional public term debt, retail notes, or equity index-
linked notes, among other forms.
* We have established AGFC as an issuer in the international
capital markets.
* We have the ability to sell, on a whole loan basis, or
securitize a portion of our finance receivables to provide
additional sources of liquidity for needs potentially not met
through other funding sources.
* We collected principal payments on our finance receivables
totaling $7.6 billion in the past twelve months. We chose to
reinvest most of these collections, plus additional amounts
from borrowings, in new finance receivables during this
period, but these funds could be made available for other
uses, if necessary.
* We have the ability to sell a portion of our insurance
subsidiaries' investment securities and dividend, subject to
certain limits, cash from the securities sales.
ANALYSIS OF OPERATING RESULTS AND FINANCIAL CONDITION
Net Income
Three Months Ended
March 31,
2005 2004
(dollars in millions)
Net income $119.9 $104.6
Amount change $ 15.3 $ 20.6
Percent change 15% 25%
Return on average assets 2.09% 2.40%
Return on average equity 19.61% 22.26%
Ratio of earnings to fixed charges 1.94x 2.16x
17
See Note 6. of the Notes to Condensed Consolidated Financial
Statements for information on the results of the Company's business
segments.
Factors that affected the Company's operating results were as follows:
Finance Charges
Finance charges by type were as follows:
Three Months Ended
March 31,
2005 2004
(dollars in millions)
Real estate loans $ 342.1 $ 260.1
Non-real estate loans 158.7 156.7
Retail sales finance 44.3 46.9
Total $ 545.1 $ 463.7
Amount change $ 81.4 $ 23.4
Percent change 18% 5%
Average net receivables $20,895.8 $15,686.4
Yield 10.56% 11.88%
Finance charges increased due to the following:
Three Months Ended
March 31,
2005 2004
(dollars in millions)
Increase in average net receivables $139.3 $ 49.5
Decrease in yield (52.7) (30.3)
(Decrease) increase in number of days (5.2) 4.2
Total $ 81.4 $ 23.4
Average net receivables by type and changes in average net receivables
when compared to the same period for the previous year were as
follows:
Three Months Ended March 31,
2005 2004
Amount Change Amount Change
(dollars in millions)
Real estate loans $16,503.8 $5,045.5 $11,458.3 $1,896.3
Non-real estate loans 3,027.5 106.0 2,921.5 18.2
Retail sales finance 1,364.5 57.9 1,306.6 (52.6)
Total $20,895.8 $5,209.4 $15,686.4 $1,861.9
Percent change 33% 13%
18
The low interest rate environment contributed to the increase in
originations of our real estate loans. Real estate loan production
arising from our centralized real estate origination services also
increased real estate loan originations by $4.8 billion during the
last twelve months. In addition, real estate loan production
continued to benefit from correspondent relationships we have
established.
Yield by type and changes in yield in basis points (bp) when compared
to the same period for the previous year were as follows:
Three Months Ended March 31,
2005 2004
Yield Change Yield Change
Real estate loans 8.40% (73) bp 9.13% (88) bp
Non-real estate loans 21.14 (39) 21.53 2
Retail sales finance 13.13 (127) 14.40 (27)
Total 10.56 (132) 11.88 (100)
Yield decreased for the three months ended March 31, 2005 when
compared to the same period in 2004 primarily due to the low interest
rate environment and the larger proportion of finance receivables that
are real estate loans.
Insurance Revenues
Insurance revenues were as follows:
Three Months Ended
March 31,
2005 2004
(dollars in millions)
Earned premiums $42.3 $44.7
Commissions 0.2 1.0
Total $42.5 $45.7
Amount change $(3.2) $ -
Percent change (7)% - %
Earned premiums decreased for the three months ended March 31, 2005
when compared to the same period in 2004 primarily due to declining
credit and non-credit premium volume. We continued to experience
decreases in the number of non-real estate loan customers, who
historically have purchased the majority of our insurance products,
due to the low mortgage interest rate environment.
19
Other Revenues
Other revenues were as follows:
Three Months Ended
March 31,
2005 2004
(dollars in millions)
Service fee income from a non-subsidiary
affiliate $63.1 $35.6
Miscellaneous:
Investment revenue 21.0 25.4
Writedowns on real estate owned (2.0) (2.3)
Net recovery on sales of real estate owned 0.9 0.3
Net gain on sales of real estate loans
held for sale 0.7 3.5
Other 3.4 1.2
Total $87.1 $63.7
Amount change $23.4 $22.5
Percent change 37% 55%
Other revenues increased for the three months ended March 31, 2005
when compared to the same period in 2004 primarily due to higher
service fee income from a non-subsidiary affiliate, partially offset
by lower investment revenue. Service fee income from a non-subsidiary
affiliate increased due to higher AIG Bank real estate loan production
using our centralized real estate segment's services.
Investment revenue was affected by the following:
Three Months Ended
March 31,
2005 2004
(dollars in millions)
Average invested assets $1,408.2 $1,339.1
Investment portfolio yield 6.50% 7.14%
Net realized (losses) gains on
investments $ (2.3) $ 0.8
20
Interest Expense
The impact of using swap agreements to fix floating-rate debt or float
fixed-rate debt is included in interest expense and the related
borrowing statistics below. Interest expense by type was as follows:
Three Months Ended
March 31,
2005 2004
(dollars in millions)
Long-term debt $ 163.0 $ 113.4
Short-term debt 33.5 24.3
Total $ 196.5 $ 137.7
Amount change $ 58.8 (5.2)
Percent change 43% (4)%
Average borrowings $19,289.7 $14,493.3
Borrowing cost 4.07% 3.80%
Interest expense increased (decreased) due to the following:
Three Months Ended
March 31,
2005 2004
(dollars in millions)
Increase in average borrowings $ 45.6 $ 16.1
Increase (decrease) in borrowing cost 13.2 (21.3)
Total $ 58.8 $ (5.2)
Average borrowings by type and changes in average borrowings when
compared to the same period for the previous year were as follows:
Three Months Ended March 31,
2005 2004
Amount Change Amount Change
(dollars in millions)
Long-term debt $14,816.2 $4,163.4 $10,652.8 $1,360.1
Short-term debt 4,473.5 633.0 3,840.5 109.9
Total $19,289.7 $4,796.4 $14,493.3 $1,470.0
Percent change 33% 11%
AGFC issued $6.7 billion of long-term debt during the last twelve
months. The proceeds of these long-term debt issuances were used to
support finance receivable growth and to refinance maturing debt.
21
Borrowing cost by type and changes in borrowing cost in basis points
when compared to the same period for the previous year were as
follows:
Three Months Ended March 31,
2005 2004
Rate Change Rate Change
Long-term debt 4.40% 14 bp 4.26% (78) bp
Short-term debt 3.03 49 2.54 (23)
Total 4.07 27 3.80 (59)
Short-term, market interest rates have risen significantly since mid-
2004, when interest rates were at the lowest levels since the 1950s.
We expect our borrowing costs to continue rising over the remainder of
2005, particularly for short-term debt. Our actual future borrowing
costs will be dependent upon general interest rate levels and market
credit spreads, which are influenced by our credit ratings and the
market perception of credit risk for the Company and possibly our
affiliates, including our ultimate parent, AIG.
Operating Expenses
Operating expenses were as follows:
Three Months Ended
March 31,
2005 2004
(dollars in millions)
Salaries and benefits $132.1 $119.9
Other 74.7 70.8
Total $206.8 $190.7
Amount change $ 16.1 $ 27.6
Percent change 8% 17%
Operating expenses as a percentage
of average net receivables 3.96% 4.86%
Operating expenses increased for the three months ended March 31, 2005
when compared to the same period in 2004 primarily due to growth in
our centralized real estate business segment, including higher
salaries and benefits expenses. Approximately $58.6 million of the
Company's operating expenses for the three months ended March 31, 2005
were directly related to the centralized real estate business segment,
compared to $43.7 million for the same period in 2004. The increase
in salaries and benefits reflected approximately 620 centralized real
estate employees hired during the last twelve months. The decrease in
operating expenses as a percentage of average net receivables for the
three months ended March 31, 2005 when compared to the same period in
2004 reflected higher average net receivables and continued emphasis
on controlling operating expenses, partially offset by growth in our
centralized real estate business segment.
22
Provision for Finance Receivable Losses
At or for the
Three Months Ended
March 31,
2005 2004
(dollars in millions)
Provision for finance receivable
losses $ 64.7 $ 59.3
Amount change $ 5.4 $(11.8)
Percent change 9% (17)%
Net charge-offs $ 64.7 $ 69.3
Charge-off ratio 1.25% 1.78%
Charge-off coverage 1.76x 1.65x
60 day+ delinquency $431.9 $471.9
Delinquency ratio 1.98% 2.85%
Allowance for finance receivable
losses $456.0 $456.0
Allowance ratio 2.12% 2.82%
Net charge-offs by type and changes in net charge-offs when compared
to the same period for the previous year were as follows:
Three Months Ended March 31,
2005 2004
Amount Change Amount Change
(dollars in millions)
Real estate loans $14.6 $(0.3) $14.9 $ 2.2
Non-real estate loans 41.2 (2.8) 44.0 (5.6)
Retail sales finance 8.9 (1.5) 10.4 (1.4)
Total $64.7 $(4.6) $69.3 $(4.8)
The improvement in net charge-offs for the three months ended March
31, 2005 when compared to the same period in 2004 was primarily due to
the improving economy.
Charge-off ratios by type and changes in charge-off ratios in basis
points when compared to the same period for the previous year were as
follows:
Three Months Ended March 31,
2005 2004
Ratio Change Ratio Change
Real estate loans 0.36% (17) bp 0.53% - bp
Non-real estate loans 5.44 (58) 6.02 (77)
Retail sales finance 2.59 (55) 3.14 (31)
Total 1.25 (53) 1.78 (36)
The improvement in the charge-off ratio for the three months ended
March 31, 2005 when compared to the same period in 2004 was primarily
due to the improving economy and a higher proportion of average net
receivables that were real estate loans.
23
Delinquency based on contract terms in effect by type and changes in
delinquency when compared to the same period for the previous year
were as follows:
March 31,
2005 2004
Amount Change Amount Change
(dollars in millions)
Real estate loans $267.4 $(24.8) $292.2 $(23.5)
Non-real estate loans 134.5 (11.3) 145.8 (17.6)
Retail sales finance 30.0 (3.9) 33.9 (5.8)
Total $431.9 $(40.0) $471.9 $(46.9)
Delinquency at March 31, 2005 was favorably impacted by the improving
economy.
Delinquency ratios based on contract terms in effect by type and
changes in delinquency ratios in basis points when compared to the
same period for the previous year were as follows:
March 31,
2005 2004
Ratio Change Ratio Change
Real estate loans 1.57% (88) bp 2.45% (83) bp
Non-real estate loans 4.04 (48) 4.52 (63)
Retail sales finance 2.05 (37) 2.42 (30)
Total 1.98 (87) 2.85 (79)
The delinquency ratio at March 31, 2005 improved when compared to
March 31, 2004 primarily due to the improving economy and a higher
proportion of net finance receivables that were real estate loans.
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 allowance as a percentage of net finance receivables at March 31,
2005 decreased when compared to March 31, 2004 primarily due to the
improving economy and a higher proportion of net finance receivables
that were real estate loans.
Charge-off coverage, which compares the allowance for finance
receivable losses to net charge-offs (annualized), improved for the
three months ended March 31, 2005 when compared to the same period in
2004 primarily due to lower net charge-offs.
24
Insurance Losses and Loss Adjustment Expenses
Insurance losses and loss adjustment expenses were as follows:
Three Months Ended
March 31,
2005 2004
(dollars in millions)
Claims incurred $18.4 $22.4
Change in benefit reserves (1.3) (1.3)
Total $17.1 $21.1
Amount change $(4.0) $ 0.7
Percent change (19)% 4%
Insurance losses and loss adjustment expenses decreased for the three
months ended March 31, 2005 when compared to the same period in 2004
due to lower credit insurance claims incurred, partially offset by
higher non-credit insurance claims incurred.
Provision for Income Taxes
Three Months Ended
March 31,
2005 2004
(dollars in millions)
Provision for income taxes $ 69.8 $ 59.7
Amount change $ 10.1 $ 14.0
Percent change 17% 31%
Pretax income $189.7 $164.3
Effective income tax rate 36.80% 36.32%
Provision for income taxes increased for the three months ended March
31, 2005 when compared to the same period in 2004 primarily due to
higher pretax income.
Asset/Liability Management
To reduce the risk associated with unfavorable changes in interest
rates not offset by favorable changes in yield of our finance
receivables, we monitor the anticipated cash flows of our assets and
liabilities, principally our finance receivables and debt. We fund
finance receivables with a combination of fixed-rate and floating-rate
debt and equity. We base the mix of fixed-rate and floating-rate
debt, in part, on the nature of the finance receivables being
supported.
We issue fixed-rate, long-term debt as the primary source of fixed-
rate debt. AGFC also alters the nature of certain floating-rate
funding by using swap agreements to create synthetic fixed-rate, long-
term debt, to limit our exposure to market interest rate increases.
Additionally, AGFC has swapped fixed-rate, long-term debt to floating-
rate, long-term debt. Including the impact of interest rate swap
agreements that effectively fix floating-rate debt or float fixed-rate
debt, our floating-rate debt represented 43% of our borrowings at
March 31, 2005 compared to 41% at March 31, 2004. Adjustable-rate net
25
finance receivables represented 18% of our net finance receivables at
March 31, 2005 compared to 22% at March 31, 2004.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
The fair values of certain of our assets and liabilities are sensitive
to changes in market interest rates. The impact of changes in
interest rates would be reduced by the fact that increases (decreases)
in fair values of assets would be partially offset by corresponding
changes in fair values of liabilities. In aggregate, the estimated
impact of an immediate and sustained 100 basis point increase or
decrease in interest rates on the fair values of our interest rate-
sensitive financial instruments would not be material to our financial
position.
The estimated increases (decreases) in fair values of interest rate-
sensitive financial instruments were as follows:
March 31, 2005 December 31, 2004
+100 bp -100 bp +100 bp -100 bp
(dollars in thousands)
Assets
Net finance receivables,
less allowance for
finance receivable
losses $(1,009,536) $1,154,282 $(899,688) $1,025,476
Fixed-maturity investment
securities (75,515) 76,792 (85,646) 76,189
Swap agreements 99,160 (104,933) 87,699 (92,989)
Liabilities
Long-term debt (339,792) 373,256 (371,877) 390,104
Swap agreements 7,859 (8,824) 8,616 (9,180)
We derived the changes in fair values by modeling estimated cash flows
of certain of our assets and liabilities. The assumptions we used
adjusted cash flows to reflect changes in prepayments and calls, but
did not consider loan originations, debt issuances, or new investment
purchases.
Readers should exercise care in drawing conclusions based on the above
analysis. While these changes in fair values provide a measure of
interest rate sensitivity, they do not represent our expectations
about the impact of interest rate changes on our financial results.
This analysis is also based on our exposure at a particular point in
time and incorporates numerous assumptions and estimates. It also
assumes an immediate change in interest rates, without regard to the
impact of certain business decisions or initiatives that we would
likely undertake to mitigate or eliminate some or all of the adverse
effects of the modeled scenarios.
26
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 March 31, 2005 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, evaluates the
effectiveness of our disclosure controls and procedures as of the
end of each quarter. Based on an evaluation of the disclosure
controls and procedures as of March 31, 2005, 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 during the three months ended March 31, 2005,
that has materially affected, or is reasonably likely to
materially affect, the Company's internal control over financial
reporting.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
See Note 7. of the Notes to Condensed Consolidated Financial
Statements in Part I of this Quarterly Report on Form 10-Q.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
The Company had no unregistered sales of equity securities.
27
Item 3. Defaults Upon Senior Securities.
The Company had no defaults upon senior securities.
Item 4. Submission of Matters to a Vote of Security Holders.
The Company did not submit any matters to a vote of security holders.
Item 5. Other Information.
The Company had no other information to report.
Item 6. Exhibits.
Exhibits are listed in the Exhibit Index beginning on page 29 herein.
28
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: May 5, 2005 By /s/ Donald R. Breivogel, Jr.
Donald R. Breivogel, Jr.
Senior Vice President and Chief
Financial Officer
(Duly Authorized Officer and
Principal Financial Officer)
29
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