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SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-K
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1996
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ________ to ________.
Commission File Number 1-7422
American General Finance, Inc.
(Exact name of registrant as specified in its charter)
Indiana 35-1313922
(State of incorporation) (I.R.S. Employer Identification No.)
601 N. W. Second Street, Evansville, IN 47708
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (812) 424-8031
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months, and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K [ ]. Not applicable.
The registrant meets the conditions set forth in General Instructions
J(1)(a) and (b) of Form 10-K and is therefore filing this Form 10-K with
the reduced disclosure format.
At March 20, 1997, no voting stock of the registrant was held by a
non-affiliate.
At March 20, 1997, there were 2,000,000 shares of the registrant's common
stock, $.50 par value, outstanding.
2
TABLE OF CONTENTS
Item Page
Part I 1. Business . . . . . . . . . . . . . . . . . . . . . . . 3
2. Properties . . . . . . . . . . . . . . . . . . . . . . 15
3. Legal Proceedings . . . . . . . . . . . . . . . . . . 15
4. Submission of Matters to a Vote of Security Holders. . *
Part II 5. Market for Registrant's Common Equity and Related
Stockholder Matters . . . . . . . . . . . . . . . . 16
6. Selected Financial Data . . . . . . . . . . . . . . . 16
7. Management's Discussion and Analysis of Financial
Condition and Results of Operations. . . . . . . . . 17
8. Financial Statements and Supplementary Data . . . . . 29
9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure . . . . . . . **
Part III 10. Directors and Executive Officers of the Registrant . . *
11. Executive Compensation . . . . . . . . . . . . . . . . *
12. Security Ownership of Certain Beneficial Owners
and Management . . . . . . . . . . . . . . . . . . . *
13. Certain Relationships and Related Transactions . . . . *
Part IV 14. Exhibits, Financial Statement Schedules, and Reports
on Form 8-K . . . . . . . . . . . . . . . . . . . . 59
* Items 4, 10, 11, 12, and 13 are not included, as per conditions
met by Registrant set forth in General Instructions J(1)(a) and
(b) of Form 10-K.
** Item 9 is not included, as no information was required by Item
304 of Regulation S-K.
3
PART I
Item 1. Business.
GENERAL
American General Finance, Inc. will be referred to in this document as
"AGFI" or collectively, with its subsidiaries, whether directly or
indirectly owned, as the "Company". AGFI was incorporated under the laws
of the State of Indiana in 1974 to become the parent holding company of
American General Finance Corporation (AGFC). AGFC was incorporated under
the laws of the State of Indiana in 1927 as successor to a business started
in 1920. Since 1982, AGFI has been a direct or indirect wholly-owned
subsidiary of American General Corporation (American General), the parent
company of one of the nation's largest diversified financial services
organizations. Headquartered in Houston, Texas, American General's
operating subsidiaries are leading providers of retirement services,
consumer loans, and life insurance. American General, a Texas corporation,
is the successor to American General Insurance Company, an insurance
company incorporated in Texas in 1926.
AGFI is a financial services holding company whose principal subsidiaries
are AGFC and American General Financial Center (AGFC-Utah). AGFC is also a
holding company with subsidiaries engaged primarily in the consumer finance
and credit insurance business. The Company conducts the credit insurance
business as part of the consumer finance business through Merit Life
Insurance Co. (Merit) and Yosemite Insurance Company (Yosemite), which are
both subsidiaries of AGFC. AGFC-Utah is an industrial loan company engaged
primarily in the consumer finance business. AGFC-Utah partially funds its
operations by accepting public deposits insured by the Federal Deposit
Insurance Corporation.
At December 31, 1996, the Company had 1,391 offices in 41 states, Puerto
Rico, and the U.S. Virgin Islands and approximately 9,300 employees. The
Company's executive offices are located in Evansville, Indiana.
Selected Financial Information
The Company reclassified credit card and certain private label finance
receivables to assets held for sale on December 31, 1996; therefore,
average net receivables; yield; finance receivable loss experience; and
finance receivables originated, renewed, and purchased for 1996 were not
affected by this reclassification. See Consumer Finance Operations for
further information on this reclassification.
The following table shows certain selected financial information of the
Company for the years indicated:
1996 1995 1994
(dollars in thousands)
Average finance receivables net
of unearned finance charges
(average net receivables) $8,123,947 $8,283,485 $7,096,011
Average borrowings $7,170,371 $7,381,504 $6,308,901
4
Item 1. Continued
1996 1995 1994
Yield - finance charges as a
percentage of average net
receivables 17.85% 18.02% 17.58%
Borrowing cost - interest
expense as a percentage of
average borrowings 6.88% 7.01% 6.60%
Interest spread - yield
less borrowing cost 10.97% 11.01% 10.98%
Insurance revenues as a
percentage of average
net receivables 2.54% 2.68% 2.55%
Operating expenses as a
percentage of average
net receivables 6.31% 5.64% 5.23%
Allowance ratio - allowance for
finance receivable losses as
a percentage of net finance
receivables 5.18% 5.85% 2.86%
Charge-off ratio (defined in
"Consumer Finance Operations -
Finance Receivable Loss and
Delinquency Experience" in
Item 1. herein.) 5.47% 3.77% 2.45%
Delinquency ratio - 60 days or more
(defined in "Consumer Finance
Operations - Finance Receivable
Loss and Delinquency Experience"
in Item 1. herein.) 3.83% 4.13% 2.89%
Return on average assets .37% .90% 3.00%
Return on average equity 2.63% 6.59% 21.27%
Ratio of earnings to fixed charges
(refer to Exhibit 12 herein
for calculations) 1.11 1.22 1.92
Debt to tangible equity ratio -
debt to equity less goodwill
and net unrealized gains or
losses on fixed-maturity
investment securities 8.40 7.44 7.53
Debt to equity ratio 6.36 5.65 5.85
5
Item 1. Continued
CONSUMER FINANCE OPERATIONS
Through its subsidiaries, the Company makes loans directly to individuals,
purchases retail sales contract obligations of individuals, and offers
private label services.
In its lending operations, the Company generally takes a security interest
in real property and/or personal property of the borrower. Of the loans
outstanding at December 31, 1996, 92% were secured by such property. At
December 31, 1996, mortgage loans (generally second mortgages) accounted
for 60% of the aggregate dollar amount of loans outstanding and 14% of the
total number of loans outstanding, compared to 51% and 10%, respectively,
at December 31, 1995. Loans secured by real property generally have
maximum original terms of 180 months. Loans secured by personal property
or that are unsecured generally have maximum original terms of 60 months.
In its retail operations, the Company purchases retail sales contracts
arising from the retail sale of consumer goods and services, and provides
private label services for various business entities. Retail sales
contracts are primarily closed-end accounts which consist of a single
purchase. Private label are open-end revolving accounts that can be used
for repeated purchases. Retail sales contracts are secured by the real
property or personal property giving rise to the contract and generally
have a maximum original term of 60 months. Private label are secured by a
purchase money security interest in the goods purchased and generally
require minimum monthly payments based on current balances.
In its credit card operations, the Company issued MasterCard and VISA
credit cards to individuals through branch and direct mail solicitation
programs. Credit cards are unsecured and require minimum monthly payments
based on current balances.
In fourth quarter 1996, the Company decided to offer for sale $874.8
million of non-strategic, underperforming finance receivable portfolios,
consisting of $520.3 million of credit card and $354.5 million of private
label finance receivables. The Company reclassified these finance
receivables and an associated allowance for finance receivable losses of
$70.0 million to assets held for sale on December 31, 1996. See Note 9. of
the Notes to Consolidated Financial Statements in Item 8. herein for
further information on this reclassification.
Finance Receivables
The table on the following page shows certain information concerning
finance receivables of the Company for the years indicated. All finance
receivable data in this report (except as otherwise indicated) is
calculated on a net basis -- that is, after deduction of unearned finance
charges but before deduction of an allowance for finance receivable losses.
6
Item 1. Continued
Years Ended December 31,
1996 1995 1994
Originated, renewed, and purchased:
Amount (in thousands):
Real estate loans $1,347,133 $1,266,725 $1,173,386
Non-real estate loans 2,224,472 2,953,054 2,983,418
Retail sales contracts 1,042,134 1,494,903 1,448,031
Private label 336,550 624,212 835,530
Credit cards 502,379 567,090 537,738
Total originated and renewed 5,452,668 6,905,984 6,978,103
Net purchased (a) 946,168 23,495 60,533
Total originated, renewed,
and purchased $6,398,836 $6,929,479 $7,038,636
(a) Includes purchases of finance receivables from affiliate of $59.4
million and $29.3 million for 1996 and 1995, respectively.
Number:
Real estate loans 67,583 72,940 70,823
Non-real estate loans 965,384 1,445,451 1,511,166
Retail sales contracts 787,888 1,242,537 1,257,833
Private label 201,888 433,165 604,509
Average size (to nearest dollar):
Real estate loans $19,933 $17,367 $16,568
Non-real estate loans 2,304 2,043 1,974
Retail sales contracts 1,323 1,203 1,151
Private label 1,667 1,441 1,382
Balance at end of period:
Amount (in thousands):
Real estate loans $3,734,195 $2,904,016 $2,704,929
Non-real estate loans 2,516,009 2,765,361 2,660,523
Retail sales contracts 998,441 1,240,708 1,174,648
Private label 376,580 942,706 900,732
Credit cards - 557,603 479,480
Total $7,625,225 $8,410,394 $7,920,312
Number:
Real estate loans 200,420 169,956 162,315
Non-real estate loans 1,243,204 1,460,714 1,432,054
Retail sales contracts 885,556 1,176,165 1,118,656
Private label 276,184 504,184 405,416
Credit cards - 449,591 403,262
Total 2,605,364 3,760,610 3,521,703
Average size (to nearest dollar):
Real estate loans $18,632 $17,087 $16,665
Non-real estate loans 2,024 1,893 1,858
Retail sales contracts 1,127 1,055 1,050
Private label 1,364 1,870 2,222
Credit cards - 1,240 1,189
7
Item 1. Continued
Average Net Receivables and Yields
The following table details average net receivables and yield by type of
finance receivable for the years indicated:
1996 1995 1994
(dollars in thousands)
Real estate loans:
Average net receivables $3,129,379 $2,846,845 $2,661,440
Yield 14.83% 15.02% 14.39%
Non-real estate loans:
Average net receivables $2,549,750 $2,747,661 $2,438,502
Yield 22.29% 21.83% 21.31%
Total loans:
Average net receivables $5,679,129 $5,594,506 $5,099,942
Yield 18.18% 18.37% 17.70%
Retail sales contracts:
Average net receivables $1,080,527 $1,232,395 $1,013,349
Yield 16.95% 17.14% 16.26%
Private label:
Average net receivables $ 835,191 $ 949,979 $ 565,172
Yield 15.15% 15.35% 16.11%
Total retail sales finance:
Average net receivables $1,915,718 $2,182,374 $1,578,521
Yield 16.16% 16.36% 16.20%
Credit cards:
Average net receivables $ 529,100 $ 506,605 $ 417,548
Yield 20.41% 21.28% 21.39%
Total:
Average net receivables $8,123,947 $8,283,485 $7,096,011
Yield 17.85% 18.02% 17.58%
Geographic Distribution
See Note 5. of the Notes to Consolidated Financial Statements in Item 8.
herein for information on geographic distribution of finance receivables.
8
Item 1. Continued
Finance Receivable Loss and Delinquency Experience
The following table details finance receivable loss experience by type of
finance receivable for the years indicated. See Management's Discussion
and Analysis in Item 7. herein and Note 6. of the Notes to Consolidated
Financial Statements in Item 8. herein for further information on finance
receivable loss and delinquency experience and the related allowance.
Years Ended December 31,
1996 1995 1994
(dollars in thousands)
Real estate loans:
Net charge-offs $ 36,997 $ 23,245 $ 15,408
Charge-off ratio 1.19% .82% .58%
Non-real estate loans:
Net charge-offs $229,109 $165,413 $ 93,790
Charge-off ratio 8.95% 6.11% 3.92%
Total loans:
Net charge-offs $266,106 $188,658 $109,198
Charge-off ratio 4.70% 3.38% 2.15%
Retail sales contracts:
Net charge-offs $ 54,565 $ 35,479 $ 24,316
Charge-off ratio 5.00% 2.89% 2.43%
Private label:
Net charge-offs $ 72,512 $ 51,115 $ 14,088
Charge-off ratio 8.59% 5.39% 2.60%
Total retail sales finance:
Net charge-offs $127,077 $ 86,594 $ 38,404
Charge-off ratio 6.57% 3.98% 2.49%
Credit cards:
Net charge-offs $ 51,386 $ 36,206 $ 24,885
Charge-off ratio 9.68% 7.19% 6.01%
Total:
Net charge-offs $444,569 $311,458 $172,487
Charge-off ratio (a) 5.47% 3.77% 2.45%
Allowance for finance
receivable losses (b) $395,153 $492,124 $226,226
Allowance ratio (b) 5.18% 5.85% 2.86%
(a) The charge-off ratio represents charge-offs net of recoveries as a
percentage of the average of the amount of net finance receivables at
the beginning of each month during the period.
(b) Allowance for finance receivable losses represents the balance at the
end of the period. The allowance ratio represents the allowance for
finance receivable losses at the end of the period as a percentage of
net finance receivables.
9
Item 1. Continued
The Company maintains the allowance for finance receivable losses at a
level based on periodic evaluation of the finance receivable portfolio and
reflects an amount that, in management's opinion, is adequate to absorb
anticipated losses in the existing portfolio. In evaluating the portfolio,
management considers numerous factors including current economic
conditions, prior finance receivable loss and delinquency experience, the
composition of the finance receivable portfolio, and an estimate of
anticipated finance receivable losses.
AGFI's policy is to charge off each month loan accounts, except those
secured by real estate, on which little or no collections were made in the
prior six-month period. Retail sales contracts are charged off when six
installments are past due. Credit card and private label accounts are
charged off when 180 days past due. In the case of loans secured by real
estate, foreclosure proceedings are instituted when four monthly
installments are past due. When foreclosure is completed and the Company
has obtained title to the property, the real estate is established as an
asset valued at fair value, and any loan value in excess of that amount is
charged off. The charge-off period is occasionally extended for individual
accounts when, in the opinion of management, such treatment is warranted.
Based upon contract terms in effect at the respective dates, delinquency
(finance receivables any portion of which was 60 days or more past due
including unearned finance charges and excluding deferred origination
costs, a fair value adjustment on finance receivables, and accrued
interest) was as follows:
December 31,
1996 1995 1994
(dollars in thousands)
Real estate loans $ 84,361 $ 60,585 $ 46,746
% of related receivables 2.21% 1.99% 1.64%
Non-real estate loans $184,410 $203,191 $140,615
% of related receivables 6.45% 6.37% 4.54%
Total loans $268,771 $263,776 $187,361
% of related receivables 4.03% 4.23% 3.15%
Retail sales contracts $ 35,394 $ 45,043 $ 25,239
% of related receivables 2.92% 3.00% 1.73%
Private label $ 12,567 $ 48,430 $ 24,020
% of related receivables 3.32% 4.77% 2.76%
Total retail sales finance $ 47,961 $ 93,473 $ 49,259
% of related receivables 3.01% 3.73% 2.13%
Credit cards $ - $ 28,520 $ 15,454
% of related receivables - % 4.85% 3.25%
Total $316,732 $385,769 $252,074
% of related receivables 3.83% 4.13% 2.89%
10
Item 1. Continued
Sources of Funds
The Company funds its consumer finance operations principally through net
cash flows from operating activities, issuances of long-term debt, short-
term borrowings in the commercial paper market, and borrowings from banks.
The spread between the rates charged on finance receivables and the cost of
borrowed funds is one of the major factors determining the Company's
earnings. The Company is limited by statute in most states to a maximum
rate which it may charge in its consumer finance operations.
Average Borrowings and Borrowing Cost
The following table details average borrowings and interest expense as a
percentage of average borrowings by type of debt for the years indicated:
1996 1995 1994
(dollars in thousands)
Long-term debt:
Average borrowings $4,734,633 $4,885,203 $4,162,229
Borrowing cost 7.28% 7.26% 7.33%
Short-term debt:
Average borrowings $2,430,620 $2,490,039 $2,138,324
Borrowing cost 6.10% 6.51% 5.18%
Investment certificates:
Average borrowings $ 5,118 $ 6,262 $ 8,348
Borrowing cost 6.27% 6.48% 5.68%
Total:
Average borrowings $7,170,371 $7,381,504 $6,308,901
Borrowing cost 6.88% 7.01% 6.60%
Contractual Maturities
Contractual maturities of finance receivables and debt at December 31, 1996
were as follows:
Net Finance
Receivables Debt
(dollars in thousands)
Due in:
1997 $2,406,432 $4,350,439
1998 1,440,677 824,577
1999 892,334 594,495
2000 497,572 937,678
2001 311,563 41,715
2002 and thereafter 2,076,647 880,324
Total $7,625,225 $7,629,228
11
Item 1. Continued
See Note 5. of the Notes to Consolidated Financial Statements in Item 8.
herein for further information on principal cash collections of finance
receivables. Debt maturities include amounts to fund assets held for sale
in addition to amounts to fund finance receivables.
INSURANCE OPERATIONS
Merit is a life and health insurance company domiciled in Indiana and
licensed in 43 states, the District of Columbia, and the U.S. Virgin
Islands. Merit writes or assumes (through affiliated and non-affiliated
insurance companies) credit life, credit accident and health, and non-
credit insurance coverages.
Yosemite is a property and casualty insurance company domiciled in
California and licensed in 42 states and principally underwrites credit-
related property and casualty coverages.
Both Merit and Yosemite market their products through the consumer finance
network of the Company. The credit life insurance policies typically cover
the life of the borrower in an amount equal to the unpaid balance of the
obligation and provide for payment in full to the lender of the insured's
obligation in the event of death. The credit accident and health insurance
policies provide for the payment of the installments on the insured's
obligation to the lender coming due during a period of disability due to
illness or injury. The credit-related property and casualty insurance is
written to protect property pledged as security for the obligation and to
provide for the payment of the installments on the insured's obligation to
the lender coming due during a period of unemployment. The purchase by the
borrower of credit life, credit accident and health, and credit property
and casualty insurance is voluntary with the exception of property damage
coverage for automobiles, large equipment, dwellings, and commercial real
estate pledged as collateral. In these instances, property damage coverage
is provided under the terms of the lending agreement if the borrower does
not provide evidence of coverage with another insurance carrier. The non-
credit insurance policies are primarily ordinary life level term coverage.
The purchase of this coverage is voluntary. Premiums for insurance
products are most often financed as part of the insured's obligation to the
lender but may be paid in cash by the borrower.
Merit has from time to time entered into reinsurance agreements with other
insurance companies, including certain other American General subsidiaries,
for assumptions of various shares of annuities and non-credit, group, and
credit life insurance on a coinsurance basis. The reserves attributable to
this business fluctuate over time and in certain instances are subject to
recapture by the ceding company. At December 31, 1996, life reserves on
the books of Merit attributable to these reinsurance agreements totaled
$69.2 million.
12
Item 1. Continued
The following tables show information concerning the insurance operations
for the years indicated:
Life Insurance in Force December 31,
1996 1995 1994
(dollars in thousands)
Credit life $2,629,019 $3,053,300 $2,899,124
Non-credit life 3,936,856 3,564,214 2,773,928
Total $6,565,875 $6,617,514 $5,673,052
Premiums Earned Years Ended December 31,
1996 1995 1994
(dollars in thousands)
Insurance premiums earned in
connection with affiliated
finance and loan activities:
Credit life $ 39,005 $ 44,682 $ 39,398
Credit accident and health 52,379 59,442 51,983
Property 57,895 51,438 37,847
Other insurance premiums earned:
Non-credit life 47,325 50,116 26,685
Premiums assumed under
coinsurance agreements 4,750 11,006 18,599
Total $201,354 $216,684 $174,512
Premiums Written Years Ended December 31,
1996 1995 1994
(dollars in thousands)
Insurance premiums written in
connection with affiliated
finance and loan activities:
Credit life $ 28,864 $ 44,086 $ 47,864
Credit accident and health 39,217 56,175 64,395
Property 52,230 65,059 55,086
Other insurance premiums written:
Non-credit life 47,325 50,116 26,685
Premiums assumed under
coinsurance agreements 4,750 11,006 18,599
Total $172,386 $226,442 $212,629
13
Item 1. Continued
Investments and Investment Results
The following table summarizes the investment results of the Company's
insurance subsidiaries for the years indicated:
Years Ended December 31,
1996 1995 1994
(dollars in thousands)
Net investment revenue (a) $ 64,860 $ 62,880 $ 56,795
Average invested assets (b) $885,741 $817,254 $730,368
Adjusted portfolio yield (c) 8.07% 8.41% 8.53%
Net realized gains (losses)
on investments (d) $ (909) $ 876 $ (141)
(a) Net investment revenue is after deduction of investment expense but
before net realized gains or losses on investments and provision for
income taxes.
(b) Average invested assets excludes the effect of Statement of Financial
Accounting Standards (SFAS) 115.
(c) Adjusted portfolio yield is calculated based upon the definitions of
net investment revenue and average invested assets listed in (a) and
(b) above and also includes an adjustment for tax-exempt investments.
(d) Includes net realized gains or losses on investment securities and
other invested assets before provision for income taxes.
See Note 7. of the Notes to Consolidated Financial Statements in Item 8.
herein for information regarding investment securities for all operations
of the Company.
REGULATION
Consumer Finance
Various state laws regulate the consumer lending and retail sales financing
businesses. The degree and nature of such regulation varies from state to
state. In general, the laws under which a substantial amount of the
Company's business is conducted provide for state licensing of lenders;
impose maximum term, amount, interest rate, and other charge limitations;
and enumerate whether and under what circumstances insurance and other
ancillary products may be sold in connection with a lending transaction.
In addition, certain of these laws prohibit the taking of liens on real
estate except liens resulting from judgments.
14
Item 1. Continued
The Company also is subject to various types of federal regulation,
including the Federal Consumer Credit Protection Act and the Truth In
Lending Act (governing disclosure of applicable charges and other loan
terms), the Equal Credit Opportunity Act (prohibiting discrimination
against credit worthy applicants), the Fair Credit Reporting Act (governing
the accuracy and use of credit bureau reports), and certain Federal Trade
Commission rules. AGFC-Utah, which engages in the consumer finance
business and accepts insured deposits, is subject to regulation by and
reporting requirements of the Federal Deposit Insurance Corporation and is
subject to regulatory codes in the state of Utah.
Insurance
State authorities regulate and supervise the Company's insurance
subsidiaries. The extent of such regulation varies but relates primarily
to conduct of business, types of products offered, standards of solvency,
payment of dividends, licensing, nature of and limitations on investments,
deposits of securities for the benefit of policyholders, the approval of
policy forms and premium rates, periodic examination of the affairs of
insurers, form and content of required financial reports and establishment
of reserves required to be maintained for unearned premiums, losses, and
other purposes. Substantially all of the states in which the Company
operates regulate the rates of premiums charged for credit life and credit
accident and health insurance.
The investment portfolio of the Company's insurance subsidiaries is subject
to state insurance laws and regulations which prescribe the nature, quality
and percentage of various types of investments which may be made by
insurance companies.
COMPETITION
Consumer Finance
The consumer finance industry is highly competitive. The Company competes
with other consumer finance companies, industrial banks, industrial loan
companies, commercial banks, sales finance companies, savings and loan
associations, credit unions, mutual or cooperative agencies, and others.
See Competitive Factors in Item 7. herein for more information.
Insurance
The Company's insurance operations are primarily supplementary to the
consumer finance operations. As such, competition for the insurance
operations is relatively limited.
15
Item 2. Properties.
The Company's investment in real estate and tangible property is not
significant in relation to its total assets due to the nature of its
business. AGFI and certain of its subsidiaries own real estate on which
AGFI and other affiliates conduct business. The Company generally conducts
branch office operations in leased premises. Lease terms ordinarily range
from three to five years.
The Company's exposure to environmental regulation arises from its
ownership of such properties and properties obtained through foreclosure.
The Company monitors properties for compliance with federal and local
environmental guidelines. The Company estimates that potential costs
related to environmental clean-up are immaterial.
Item 3. Legal Proceedings.
California v. Ochoa
In March 1994, a subsidiary of AGFI and a subsidiary of AGFC were named as
defendants in a lawsuit, The People of the State of California
("California") V. Luis Ochoa, Skeeters Automotive, Morris Plan, Creditway
of America, Inc., and American General Finance, filed in the Superior Court
of California, County of San Joaquin, Case No. 271130. California is
seeking injunctive relief, a civil penalty of not less than $5,000 per day
or not less than $250,000 for violation of its Health and Safety Code in
connection with the failure to register and remove underground storage
tanks on property acquired through a foreclosure proceeding by a subsidiary
of AGFI, and a civil penalty of $2,500 for each act of unfair competition
prohibited by its Business and Professions Code, but not less than
$250,000, plus costs. The Company believes that the total amounts that
would ultimately be paid, if any, arising from this environmental claim
would have no material effect on the Company's consolidated results of
operations and financial position.
Other
AGFI and certain of its subsidiaries are parties to various other lawsuits
and proceedings arising in the ordinary course of business. Many of these
lawsuits and proceedings arise in jurisdictions, such as Alabama, that
permit damage awards disproportionate to the actual economic damages
incurred. Based upon information presently available, the Company believes
that the total amounts that will ultimately be paid, if any, arising from
these lawsuits and proceedings will have no material adverse effect on the
Company's consolidated results of operations and financial position.
However, it should be noted that the frequency of large damage awards,
including large punitive damage awards, that bear little or no relation to
actual economic damages incurred by plaintiffs in jurisdictions like
Alabama continues to increase and creates the potential for an
unpredictable judgment in any given suit.
16
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters.
No trading market exists for AGFI common stock because American General
owns all AGFI common stock. AGFI declared the following cash dividends on
its common stock for the years indicated:
Quarter Ended 1996 1995
(dollars in thousands)
March 31 $ 27,000 $ 31,000
June 30 30,088 39,200
September 30 81,502 42,340
December 31 - -
$138,590 $112,540
See Management's Discussion and Analysis in Item 7. herein, as well as Note
16. of Notes to Consolidated Financial Statements in Item 8. herein, with
respect to limitations on the ability of AGFI and its subsidiaries to pay
dividends.
Item 6. Selected Financial Data.
The following selected financial data are derived from the consolidated
financial statements of the Company. The data should be read in
conjunction with the consolidated financial statements and related notes,
Management's Discussion and Analysis in Item 7. herein, and other financial
information included herein.
At or for the Years Ended December 31,
1996 1995 1994 1993(a) 1992
(dollars in thousands)
Total revenues $1,724,948 $1,791,494 $1,491,239 $1,288,777 $1,170,371
Net income (b) 34,146 85,655 244,988 195,741 161,908
Total assets 9,563,696 9,561,350 8,980,728 7,658,775 7,210,763
Long-term debt 4,498,530 4,979,883 4,312,932 4,018,797 3,604,371
(a) The Company adopted three new accounting standards through cumulative
adjustments as of January 1, 1993, resulting in a one-time reduction
of net income of $12.7 million.
(b) Per share information is not included because all of the common stock
of AGFI is owned by American General.
17
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
LIQUIDITY AND CAPITAL RESOURCES
Overview
The Company's sources of funds include operations, issuances of fixed-rate
and floating-rate debt, borrowings under credit facilities, and the sale of
securitized finance receivables. Management believes that the overall
sources of liquidity available to the Company will continue to be
sufficient to satisfy its foreseeable financial obligations and operational
requirements.
Liquidity
Operating cash flow, which includes net income adjusted for non-cash
revenues and expenses, totaled $590.1 million in 1996 compared to $657.9
million in 1995 and $511.5 million in 1994. Operating cash flow combined
with the net proceeds of increased debt, the proceeds of securitized
finance receivables sold in 1995, and a 1995 capital contribution from
American General, generated cash flow of $745.4 million in 1996 compared to
$1.2 billion in 1995 and $1.8 billion in 1994. These cash flows were used
principally to fund the net originations and purchases of finance
receivables and the purchases of assets from affiliates of $514.7 million
in 1996, $888.5 million in 1995, and $1.5 billion in 1994 and to pay
dividends to American General of $138.6 million in 1996, $32.5 million in
1995 (net of an $80.0 million capital contribution from American General),
and $140.0 million in 1994.
Dividends paid are typically managed to maintain the Company's targeted
leverage of 7.5 to 1 of debt to tangible equity (equity less goodwill and
net unrealized gains or losses on fixed-maturity investment securities).
The debt to tangible equity ratio at December 31, 1996 was 8.40 to 1. The
Company exceeded targeted leverage due to the loss associated with the
fourth quarter 1996 decision to offer for sale certain non-strategic,
underperforming finance receivables. Excluding the impact of recording the
valuation charge to income associated with the assets held for sale on
December 31, 1996, the debt to tangible equity ratio at December 31, 1996
was 7.62 to 1. The Company expects to return to its targeted leverage in
first quarter 1997. AGFI's ability to pay dividends is substantially
dependent on the receipt of dividends or other funds from its subsidiaries,
primarily AGFC. Certain AGFI and AGFC financing agreements effectively
limit the amount of dividends the entity may pay; however, management does
not expect those limits to affect the Company's ability to pay the amount
of dividends necessary to maintain targeted leverage. See Note 16. of the
Notes to Consolidated Financial Statements in Item 8. herein for
information on dividend restrictions.
Capital Resources
The Company's capital requirements vary directly with the level of net
finance receivables. The targeted mix of capital between debt and equity
is based primarily upon maintaining leverage that supports cost-effective
funding. At year-end 1996, the Company's capital totaled $8.8 billion,
consisting of $7.6 billion of debt and $1.2 billion of equity, compared to
18
Item 7. Continued
$8.8 billion at year-end 1995, consisting of $7.5 billion of debt and $1.3
billion of equity.
The Company issues a combination of fixed-rate debt, principally long-term,
and floating-rate debt, principally short-term. The Company's principal
borrowing subsidiary, AGFC, and one of its subsidiaries sell commercial
paper notes with maturities ranging from 1 to 270 days directly to banks,
insurance companies, corporations, and other institutional investors. AGFC
may also offer medium-term notes with original maturities of nine months or
longer to certain institutional investors. AGFC obtains the remainder of
its funds primarily through underwritten public debt offerings with
maturities generally ranging from three to ten years.
Credit Ratings
AGFC's strong debt and commercial paper ratings enhance its access to
capital markets. On February 14, 1997, AGFC's ratings (some of which were
under review by the rating agencies, along with certain of American
General's ratings, resulting from American General's planned merger with
USLIFE Corporation (USLIFE) which is expected to close by June 30, 1997)
were as follows:
Long-term Debt Commercial Paper
Moody's A1 (Strong) P-1 (Highest)
Standard & Poor's A+ (Strong) A-1 (Strong)
Duff & Phelps A+ (Strong) D-1+ (Highest)
Fitch - F-1+ (Highest)
On March 11, 1997, Standard & Poor's Ratings Services indicated that it
expects to reduce its long-term debt ratings of AGFC, along with certain of
American General's ratings, by one notch upon completion of the USLIFE
merger into American General. Also, as of this date, Duff & Phelps Credit
Rating Co. has affirmed AGFC's ratings, while Moody's Investors Service,
Inc. continues to review AGFC's ratings for possible downgrade.
Credit Facilities
The Company maintains credit facilities to support the issuance of
commercial paper by AGFC and to provide an additional source of funds for
operating requirements. At year-end 1996, credit facilities, including
facilities shared with American General and certain of its subsidiaries,
totaled $4.3 billion, with remaining availability to the Company of $4.1
billion. See Note 11. of the Notes to Consolidated Financial Statements in
Item 8. herein for additional information on credit facilities.
Securitization
The Company securitized a portion of its portfolio of private label and
credit card finance receivables to establish additional sources of funding
and liquidity. During 1995, the Company sold $100 million of securitized
finance receivables with limited recourse. At December 31, 1996,
19
Item 7. Continued
securitized finance receivables sold remained at $100 million. The Company
plans to reacquire these finance receivables and sell a portion of them
with the assets held for sale. See Note 5. of the Notes to Consolidated
Financial Statements in Item 8. herein for additional information on
securitization.
ANALYSIS OF OPERATING RESULTS
See Selected Financial Information in Item 1. herein for information on
important aspects of the Company's business and as a frame of reference for
the discussion following.
Net Income
Net income decreased $51.5 million, or 60%, for 1996 and $159.3 million, or
65%, for 1995 when compared to the respective previous year.
The decline in credit quality of the Company's finance receivables
beginning in 1995 and management's related actions have caused net income
to fluctuate over the past two years. As a result of the Company's
strategy in prior years of emphasizing higher-yielding finance receivables,
which are characterized by higher credit risk, delinquencies and net
charge-offs increased to higher than anticipated levels beginning in the
third quarter of 1995. Due to these increases in delinquencies and net
charge-offs, a comprehensive review of the Company was initiated in the
fourth quarter of 1995. This review consisted of extensive internal
analysis, together with finance receivable loss development projections
supplied by outside credit consultants. The results of the analysis
indicated a need for an increase in the allowance for finance receivable
losses. Accordingly, a $216.0 million increase in the allowance for
finance receivable losses was recorded in fourth quarter 1995.
In addition, the Company adopted an action program for improving credit
quality that included raising underwriting standards, expanding the use of
credit scoring, slowing branch expansion, stressing collections, improving
branch office training, and rebalancing the finance receivable portfolio
credit risk. Strategies for rebalancing the portfolio credit risk included
slowing growth, de-emphasizing some higher risk portfolios, and increasing
the proportion of real estate secured receivables.
At December 31, 1996, net finance receivables totaled $7.6 billion, a
decrease of $785.2 million from December 31, 1995 primarily due to the
reclassification of certain finance receivables to assets held for sale,
partially offset by an increase in real estate loans.
To increase its focus on core operations, the Company decided in the fourth
quarter of 1996 to offer for sale $874.8 million of non-strategic,
underperforming finance receivable portfolios, consisting of $520.3 million
of credit card and $354.5 million of private label finance receivables.
The Company reclassified these finance receivables and an associated
allowance for finance receivable losses of $70.0 million to assets held for
sale on December 31, 1996. The Company hired an outside advisor to market
the portfolios. Based on negotiations with prospective purchasers
subsequent to year end, the Company determined that an aftertax write-down
20
Item 7. Continued
of $93.5 million was necessary to reduce the carrying amount of the assets
held for sale to net realizable value, after considering related expenses.
See Note 9. of the Notes to Consolidated Financial Statements in Item 8.
herein for further information on this reclassification.
As part of the Company's strategy to rebalance its finance receivable
portfolio, the Company emphasized real estate loan growth during 1996. At
December 31, 1996, real estate secured finance receivables accounted for
49% of total finance receivables compared to 35% at December 31, 1995 due
to the purchases of five real estate loan portfolios totaling $753.7
million, the emphasis on real estate loan growth in the branches, the
reclassification of certain finance receivables to assets held for sale,
and the substantial liquidation of underperforming receivables during 1996.
Operating results for 1996 were below Company expectations primarily due to
the valuation charge to income associated with the assets held for sale,
the above-historical loss rates on finance receivables generated during
1994 and 1995, and the decline in credit fundamentals in the consumer
finance market, including the record level of personal bankruptcies.
During 1996, the Company eliminated certain underperforming non-branch
marketing programs, established higher underwriting standards, revised the
field office incentive compensation system, and increased use of credit
scoring. The Company plans to introduce additional programs during 1997 to
further address credit quality, finance receivable originations, and
expense reduction. In addition to the increased use of industry credit
scoring models, custom scoring models will be implemented during 1997.
Factors which specifically affected the Company's operating results are as
follows:
Finance Charges
Finance charge revenues decreased $42.5 million, or 3%, for 1996 and
increased $244.7 million, or 20%, for 1995 when compared to the respective
previous year.
The decrease in finance charge revenues for 1996 when compared to 1995 was
due to decreases in average net receivables and yields, partially offset by
an additional day in 1996. Average net receivables decreased $159.5
million, or 2%, during 1996 when compared to 1995 primarily due to the
action program to improve credit quality. Due to this action program,
finance receivables originated and renewed decreased when compared to 1995.
This was partially offset by an increase in finance receivables purchased
(primarily real estate secured receivables). The yield decreased 17 basis
points during 1996 when compared to 1995 primarily due to the action
program to improve credit quality (including a larger proportion of the
finance receivable portfolio in real estate secured loans which generally
have lower yields) and the increased proportion of non-accrual delinquent
finance receivables during 1996.
The increase in finance charge revenues for 1995 when compared to 1994 was
due to increases in average net receivables and yields. Average net
receivables increased $1.2 billion, or 17%, during 1995 when compared to
1994 primarily due to growth in the retail sales finance and loan
21
Item 7. Continued
portfolios resulting from business development efforts. The yield
increased 44 basis points during 1995 when compared to 1994 primarily due
to higher yield on loans and retail sales contracts. The loan yield for
1995 increased when compared to 1994 primarily due to higher yield on real
estate loans, resulting from the higher interest rate environment and rate
management. The increase in loan yield for 1995 also reflected the change
in the amortization of premiums on certain purchased finance receivables
which were fully amortized in the second quarter of 1994. The retail sales
contracts' yield for 1995 increased when compared to 1994, reflecting
improved pricing strategies and market conditions.
Insurance Revenues
Insurance revenues decreased $16.1 million, or 7%, for 1996 and increased
$41.4 million, or 23%, for 1995 when compared to the respective previous
year.
The decrease in insurance revenues for 1996 when compared to 1995 was
primarily due to a decrease in earned premiums. Earned premiums decreased
primarily due to a decrease in net written premiums which reflected the
decrease in loan volume resulting from the action program to improve credit
quality.
The increase in insurance revenues for 1995 when compared to 1994 was
primarily due to an increase in earned premiums. Earned premiums increased
primarily due to an increase in net written premiums reflecting higher
credit insurance sales on increased loan volume and the introduction of a
new non-credit insurance product in 1995.
Other Revenues
Other revenues decreased $8.0 million, or 10%, for 1996 and increased $14.2
million, or 23%, for 1995 when compared to the respective previous year.
The decrease in other revenues for 1996 when compared to 1995 was primarily
due to the gain recorded in 1995 for the securitized finance receivables
sold, partially offset by a slight increase in investment revenue on the
invested assets for the insurance operations. The increase in investment
revenue for 1996 when compared to 1995 was primarily due to growth in
average invested assets for the insurance operations of $68.5 million, or
8%, partially offset by realized losses on investments of $.9 million for
1996 compared to $.9 million of realized gains on investments for 1995 and
a decrease in adjusted portfolio yield of 34 basis points.
The increase in other revenues for 1995 when compared to 1994 was primarily
due to an increase in investment revenue on the invested assets for the
insurance operations and the gain recorded in 1995 for the securitized
finance receivables sold. The increase in investment revenue for 1995 when
compared to 1994 was primarily due to growth in average invested assets for
the insurance operations of $86.9 million, or 12%, and realized gains on
investments of $.9 million for 1995 compared to $.1 million of realized
losses on investments for 1994, partially offset by a decrease in adjusted
portfolio yield of 12 basis points.
22
Item 7. Continued
Interest Expense
Interest expense decreased $24.4 million, or 5%, for 1996 and increased
$101.2 million, or 24%, for 1995 when compared to the respective previous
year.
The decrease in interest expense for 1996 when compared to 1995 was due to
decreases in average borrowings and borrowing cost. Average borrowings
decreased $211.1 million, or 3%, for 1996 when compared to 1995 primarily
due to the decrease in average net receivables. The borrowing cost
decreased 13 basis points for 1996 when compared to 1995 due to a decrease
in short-term borrowing cost, with long-term borrowing cost remaining near
the same level.
The increase in interest expense for 1995 when compared to 1994 was due to
increases in average borrowings and borrowing cost. Average borrowings
increased $1.1 billion, or 17%, for 1995 when compared to 1994 to fund
asset growth. The borrowing cost increased 41 basis points for 1995 when
compared to 1994 due to an increase in short-term borrowing cost, partially
offset by a decrease in long-term borrowing cost.
Operating Expenses
Operating expenses increased $45.2 million, or 10%, for 1996 and $96.4
million, or 26%, for 1995 when compared to the respective previous year.
The increase in operating expenses for 1996 when compared to 1995 was
primarily due to the decrease in deferral of finance receivable origination
costs, growth in the business that occurred in the first three quarters of
1995 and in 1994, and increased collection efforts on the higher level of
delinquent finance receivables during 1996. The increase in operating
expenses for 1996 was partially offset by the action program to improve
credit quality and reduce expenses.
Since late 1995, certain underperforming marketing initiatives have either
been restructured or discontinued. Certain non-recurring operating
expenses associated with these programs negatively impacted operating
expenses during 1996 by $8.9 million. The action program implemented in
fourth quarter 1995 (which included emphasizing real estate loan growth)
contributed to a workforce reduction of approximately 700 positions and a
net decrease of 19 branch offices during 1996.
The increase in operating expenses for 1995 when compared to 1994 was
primarily due to growth in the business, including growth that occurred in
1994, which resulted in operational staffing increases and increases in
other growth-related expenses. In 1995, the Company increased its finance
receivable portfolio by over 230,000 accounts, increased net receivables by
$490.1 million, and opened over 100 new consumer finance offices. During
1995, the Company added 1,350 employees, including 1,100 branch employees
and 250 employees to process the private label and credit card finance
receivables. The increase in operating expenses for 1995 when compared to
1994 also reflected increased collection efforts on the higher level of
delinquent finance receivables.
23
Item 7. Continued
Provision for Finance Receivable Losses
Provision for finance receivable losses decreased $156.7 million, or 27%,
for 1996 and increased $360.2 million, or 168%, for 1995 when compared to
the respective previous year.
The decrease in provision for finance receivable losses for 1996 when
compared to 1995 was due to a decrease in the amounts provided for the
allowance for finance receivable losses, partially offset by an increase in
net charge-offs. The increase in provision for finance receivable losses
for 1995 when compared to 1994 was due to increases in amounts provided for
the allowance for finance receivable losses and net charge-offs. The
decline in credit quality beginning in 1995 and management's related
actions have caused net income to fluctuate over the past two years. See
Analysis of Operating Results - Net Income for further information on the
decline in credit quality and management's related actions.
Net charge-offs for 1996 increased to $444.6 million from $311.5 million
for 1995 and $172.5 million for 1994. The charge-off ratio for 1996
increased to 5.47% compared to 3.77% for 1995 and 2.45% for 1994.
At year-end 1996, delinquencies were $316.7 million compared to $385.8
million at 1995 and $252.1 million at 1994. The delinquency ratio at year-
end 1996 decreased to 3.83% compared to 4.13% at 1995 and 2.89% at 1994.
The decrease in delinquency in 1996 was primarily due to the
reclassification of certain finance receivables to assets held for sale.
The allowance for finance receivable losses decreased to $395.2 million at
December 31, 1996 from $492.1 million at December 31, 1995. The allowance
ratio at December 31, 1996 was 5.18% compared to 5.85% at December 31,
1995. The decrease in allowance for finance receivable losses for 1996
reflects management's expected results from the credit quality action
program including the increased proportion of real estate secured loans
which generally have lower net charge-offs and the reclassification of
certain finance receivables to assets held for sale. Based upon an
analysis of the finance receivable portfolio, management believes that the
allowance for finance receivable losses is adequate given the current level
of delinquencies and net charge-offs.
Improvement in credit quality in the core U.S. branch operations and
benefits from the increased proportion of finance receivables that are
secured by real estate were somewhat offset by the general deterioration of
credit fundamentals within the consumer finance market. Growth in U.S.
consumer debt moderated in the second half of 1996 but still remains
strong, challenging individuals' abilities to honor their obligations.
U.S. credit card delinquencies are at record levels, as is consumer and
mortgage debt as a percentage of household income. The liberalization of
bankruptcy laws late in 1995 have been cited as a principal reason for a
30% increase in personal bankruptcies in 1996 to a number in excess of 1.1
million filings.
Management believes that the planned sale of the non-strategic,
underperforming finance receivable portfolios combined with the ongoing
action program will address the overall credit quality issues. However,
24
Item 7. Continued
delinquencies have remained at higher than expected levels, indicating that
charge-offs may continue above historical levels for the near term. In
addition, adverse changes in credit fundamentals within the consumer
finance market, including the current high level of personal bankruptcies,
could negatively impact expected results.
Loss on Assets Held for Sale
In conjunction with the action program to improve credit quality, the
Company decided in fourth quarter 1996 to offer for sale credit card and
certain private label finance receivables. Effective December 31, 1996,
the Company reclassified these finance receivables and an associated
allowance for finance receivable losses to assets held for sale and
recognized a loss. See Analysis of Operating Results - Net Income and Note
9. of the Notes to Consolidated Financial Statements in Item 8. herein for
further information on this reclassification.
Insurance Losses and Loss Adjustment Expenses
Insurance losses and loss adjustment expenses decreased $14.0 million, or
12%, for 1996 and increased $18.9 million, or 19%, for 1995 when compared
to the respective previous year.
The decrease in insurance losses and loss adjustment expenses for 1996 when
compared to 1995 was due to decreases in provision for future benefits and
in claims paid. Provision for future benefits decreased $9.2 million for
1996 due to reduced sales of non-credit insurance products. Claims for
1996 decreased $4.8 million primarily due to a decrease in loss experience
on credit insurance.
The increase in insurance losses and loss adjustment expenses for 1995 when
compared to 1994 was due to an increase in claims and in provision for
future benefits. Claims for 1995 increased $11.8 million reflecting higher
credit insurance sales. Provision for future benefits increased $7.1
million for 1995 primarily due to a new non-credit insurance product sold
beginning in 1995.
Provision for Income Taxes
The provision for income taxes decreased $10.6 million, or 35%, for 1996
and $117.1 million, or 80%, for 1995 when compared to the respective
previous year.
The decrease in the provision for income taxes for 1996 was primarily due
to lower taxable income, partially offset by a non-recurring state income
tax adjustment recorded in 1995. During 1995, the Company recognized state
net operating loss (NOL) carryforwards resulting from the state's audit of
a return and the state's acceptance of an amended return. The Company
recognized a net reduction of $16.6 million in 1995 state income tax
expense primarily related to these carryforwards. At December 31, 1996 and
1995, the state NOL carryforwards remaining were $634.7 million and $650.9
million, respectively, which expire in the years 2005 and 2006.
25
Item 7. Continued
The decrease in the provision for income taxes for 1995 when compared to
1994 was primarily due to lower taxable income and the non-recurring state
income tax adjustment previously discussed.
ANALYSIS OF FINANCIAL CONDITION
At December 31, 1996, the Company's assets were distributed as follows:
75.60% in net finance receivables, less allowance for finance receivable
losses, 9.20% in investment securities, 6.98% in assets held for sale,
4.29% in other assets, 2.83% in acquisition-related goodwill, and 1.10% in
cash and cash equivalents.
Asset Quality
The Company believes that its geographic diversification reduces the risk
associated with a recession in any one region. In addition, 93% of the
loans, retail sales contracts, and private label outstanding at December
31, 1996 are secured by real property or personal property.
During 1995, the Company increased the allowance ratio due to the higher-
than-anticipated increase in delinquencies and net charge-offs. While
delinquencies and net charge-offs have remained at higher than historical
levels during 1996, the allowance for finance receivable losses decreased
reflecting management's expected results from the credit quality action
program including the increased proportion of real estate secured loans
which generally have lower net charge-offs and the reclassification of
certain finance receivables to assets held for sale. See Analysis of
Operating Results for further information on allowance for finance
receivable losses, delinquency ratio, and charge-off ratio. While finance
receivables have some exposure to further economic uncertainty, management
believes that in the present environment, the allowance for finance
receivable losses is adequate to absorb anticipated losses in the existing
portfolio.
Investment securities principally represent the investment portfolio of the
Company's insurance operations. The investment strategy is to optimize
after-tax returns on invested assets, subject to the constraints of safety,
liquidity, diversification, and regulation.
The largest intangible asset is acquisition-related goodwill which is
charged to expense in equal amounts over 20 to 40 years. See Note 2. of
the Notes to Consolidated Financial Statements in Item 8. herein for
information on goodwill.
Operating Requirements
The Company's principal operating requirements for cash include funding
finance receivables, payment of interest, payment of operating expenses and
income taxes, and contractual obligations to policyholders. The principal
sources of cash include collections of finance receivables and finance
charges, proceeds from the issuances of fixed-rate and floating-rate debt,
and borrowings under credit facilities. The overall sources of cash
26
Item 7. Continued
available to the Company are expected to be more than sufficient to satisfy
operating requirements in 1997.
Capital Requirements
The Company expects to finance long-term debt repayments and maturities
plus normal refinancing of short-term debt and any funds required to
support growth in finance receivables through the issuance of long-term and
short-term debt, surplus operating cash, and proceeds from the sale of
assets held for sale.
Asset/Liability Management
The Company manages anticipated cash flows of its assets and liabilities in
an effort to reduce the risk associated with unfavorable changes in
interest rates. The Company's mix of fixed-rate and floating-rate debt is
determined by management based, in part, on the nature of the assets being
supported. The Company limits its exposure to market interest rate
increases by fixing interest rates that it pays for term periods. The
primary means by which the Company accomplishes this is through the
issuance of fixed-rate debt. To supplement fixed-rate debt issuances, AGFC
also has used interest conversion agreements to synthetically create fixed-
rate debt by altering the nature of floating-rate funding, thereby limiting
its exposure to interest rate movements.
BUSINESS ENVIRONMENT FACTORS
The Company operates in a business environment in which effective and
efficient managerial performance, and a prudent lending and investment
strategy are essential. The three most relevant environmental factors
affecting the Company are economic, regulatory, and competitive.
Economic Factors
The three key economic factors that affect the results of the Company are
interest rates, inflation, and recession/recovery.
Interest Rates. The Company's finance receivables, investment securities,
long-term debt, and short-term debt react over varying periods of time to
movements in interest rates. During 1996, interest rates in the United
States generally decreased from 1995, compared to increases during 1995 and
1994 from the historically low levels experienced during 1993.
The Company pursues opportunities created by market conditions regarding
both finance receivable mix and funding alternatives to manage interest
spreads. During 1996, the Company's interest spread decreased slightly
when compared to 1995 due to a decrease in finance receivable yield,
partially offset by a decrease in borrowing cost. Growth in higher
yielding receivables in 1995 and 1994 and a decrease in borrowing cost in
1994 caused the Company's interest spread to increase during 1995 and 1994.
27
Item 7. Continued
The Company's finance receivable yield decreased during 1996, but increased
during 1995 and 1994. The yield decreased during 1996 primarily due to the
effects of the action program to improve credit quality (including a larger
proportion of the finance receivable portfolio in real estate secured loans
which generally have lower yields). Decreases in interest rates also
facilitated the decrease in yield for 1996. During 1994 and the first
three quarters of 1995, the Company took advantage of market opportunities
to originate non-real estate loans and retail sales finance receivables
with higher yields. Increases in interest rates also facilitated the
increase in yield for 1995 and 1994. The 1995 increase in yield was
partially offset by the aforementioned action program to improve credit
quality.
The movement in interest rates also contributed to a decrease in the
Company's borrowing cost during 1996 and 1994 and an increase during 1995.
Rates on short-term debt, principally commercial paper, decreased during
1996, but increased during 1995 and 1994. During 1996, rates on long-term
debt remained relatively flat, but decreased during 1995 and 1994.
The Company's insurance subsidiaries' average invested assets and net
investment revenue increased in each of the last three years. The return
on invested assets for the insurance operations declined in each of the
last three years primarily due to the generally lower interest rate
environment and the Company's conservative investment policy, both of which
have resulted in lower yielding securities.
The Company believes that it is difficult to assess or predict the overall
effects of any given change in interest rates due to the following
uncertainties: 1) whether such a movement results in a convergence,
divergence, or tandem movement in the long-term/short-term yield curves, 2)
market opportunities that may or may not exist at the time such a movement
occurs for both investment and funding alternatives, and 3) the level of
interest rates relative to the finance receivable portfolio yield, the
return on invested assets, and the borrowing cost when such a movement in
interest rates occurs.
Inflation. Inflation and inflationary expectations are factors that to
some extent affect the Company's revenue and expenses and are factors
implicit in interest rates. During each of the last three years, the
Company operated in a low inflation environment. However, market
expectations of inflation apparently contributed to significant increases
in interest rates (particularly short-term rates) during 1994 and the first
half of 1995.
Revenue generated from interest rates charged on most of the Company's
finance receivables (other than real estate secured loans) is relatively
insensitive to movements in interest rate levels caused by inflation. Real
estate secured finance receivables are particularly subject to refinancing
when market interest rates trend lower. Net investment revenue and
realized gains or losses on the Company's investment securities, and
borrowing cost on the Company's long-term and short-term debt, are
relatively sensitive over varying periods of time to movements in general
interest rate levels caused by inflation. The Company's operating expenses
are no more or less sensitive to the effects of inflation than would be
experienced by businesses in general.
28
Item 7. Continued
Economic Cycle. The Company believes that its implementation of more
conservative lending policies, its conservative insurance underwriting and
investment policies, and its geographic diversification mitigate the
potential impact of defaults on finance receivables and investments in any
downturn of the U.S. economic cycle.
Recent economic statistics suggest that the U. S. economy remains in a
somewhat expansionary mode and that employment is improving in both
absolute and relative terms. However, other data suggest consumers are
becoming overextended in their ability to repay obligations as evidenced by
increased consumer debt outstanding and increased frequency of personal
bankruptcies. The Company believes that there will be limited economic
growth for the country in general during 1997. This economic outlook,
combined with the Company's more conservative lending policies and
portfolio restructuring, indicate that net growth of finance receivables
from internally generated sources will, at best, be minimal for 1997.
Regulatory Factors
The regulatory environment of the consumer finance and insurance industries
is described in Item 1. herein. Taxation is another regulatory factor
affecting the Company. A risk to any business is that changes in state and
federal tax laws or regulations may affect the way that the business
operates. Since tax laws affect not only the way that the Company is taxed
but also the design of many of its products, these laws and regulations and
the way they are interpreted are of concern to the Company. The Company
monitors federal and state tax legislation and responds with appropriate
tax planning in order to minimize the impact of taxation.
Competitive Factors
Consumer finance companies compete with other types of financial
institutions which offer similar products and services. Competition in
financial services markets also continues to intensify due to an increase
in the number and sophistication of financial products, technological
improvement, and more rapid communication.
The Company has positioned itself to meet the continuing challenge of
competition in three primary ways:
Customer Focus. The Company focuses on selling financial service products
to low- to middle-income consumers.
Customer Service. The Company concentrates on delivering quality service
to its customers. This is done through one of the industry's largest
domestic branch networks.
Productivity. The Company continuously monitors performance of its
branches and products and makes organizational and procedural changes as
necessary to manage marketing and cost effectiveness.
29
Item 7. Continued
FORWARD-LOOKING STATEMENTS
The statements contained in this filing on Form 10-K that are not
historical facts are forward-looking statements within the meaning of the
Private Securities Litigation Reform Act. Actual results may differ
materially from those included in the forward-looking statements. These
forward-looking statements involve risks and uncertainties including, but
not limited to, the following: changes in general economic conditions,
including the performance of financial markets, interest rates, and the
level of personal bankruptcies; competitive, regulatory, or tax changes
that affect the cost of or demand for the Company's products; adverse
litigation results; and failure to achieve the Company's anticipated levels
of expense savings from cost-saving initiatives. The Company's future
results also could be adversely affected if finance receivable volume is
lower than anticipated or if, despite the Company's initiatives to improve
credit quality, finance receivable delinquencies and net charge-offs
increase or remain at current levels for a longer period than anticipated
by management. Failure to dispose of assets held for sale for carrying
value could also adversely affect the Company's future results. Readers
are also directed to other risks and uncertainties discussed in documents
filed by the Company with the Securities and Exchange Commission.
Item 8. Financial Statements and Supplementary Data.
The Report of Independent Auditors and the related consolidated financial
statements are presented on the following pages.
30
REPORT OF INDEPENDENT AUDITORS
The Board of Directors
American General Finance, Inc.
We have audited the accompanying consolidated balance sheets of American
General Finance, Inc. (a wholly-owned subsidiary of American General
Corporation) and subsidiaries as of December 31, 1996 and 1995, and the
related consolidated statements of income, shareholder's equity and cash
flows for each of the three years in the period ended December 31, 1996.
Our audit also included the financial statement schedule listed in the
Index at Item 14(a). These financial statements and schedule are the
responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements and schedule based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial
position of American General Finance, Inc. and subsidiaries at December 31,
1996 and 1995, and the consolidated results of their operations and their
cash flows for each of the three years in the period ended December 31,
1996, in conformity with generally accepted accounting principles. Also,
in our opinion, the related financial statement schedule, when considered
in relation to the basic financial statements taken as a whole, presents
fairly, in all material respects, the information set forth therein.
ERNST & YOUNG, LLP
Indianapolis, Indiana
February 14, 1997
31
American General Finance, Inc. and Subsidiaries
Consolidated Balance Sheets
December 31,
1996 1995
(dollars in thousands)
Assets
Finance receivables, net of unearned
finance charges (Note 5.):
Real estate loans $3,734,195 $2,904,016
Non-real estate loans 2,516,009 2,765,361
Retail sales contracts 998,441 1,240,708
Private label 376,580 942,706
Credit cards - 557,603
Net finance receivables 7,625,225 8,410,394
Allowance for finance receivable
losses (Note 6.) (395,153) (492,124)
Net finance receivables, less allowance
for finance receivable losses 7,230,072 7,918,270
Investment securities (Note 7.) 880,033 884,775
Cash and cash equivalents 105,493 103,238
Goodwill (Note 8.) 270,989 279,995
Other assets (Note 8.) 410,102 375,072
Assets held for sale (Note 9.) 667,007 -
Total assets $9,563,696 $9,561,350
Liabilities and Shareholder's Equity
Long-term debt (Note 10.) $4,498,530 $4,979,883
Short-term notes payable:
Commercial paper (Notes 11. and 12.) 3,015,920 2,194,771
Banks and other (Notes 11. and 13.) 111,000 289,100
Investment certificates 3,778 6,197
Insurance claims and policyholder
liabilities 456,430 483,971
Other liabilities 260,284 273,485
Accrued taxes 17,273 12,162
Total liabilities 8,363,215 8,239,569
Shareholder's equity:
Common stock (Note 15.) 1,000 1,000
Additional paid-in capital 696,230 696,128
Net unrealized gains on investment
securities (Note 7.) 21,454 38,412
Retained earnings (Note 16.) 481,797 586,241
Total shareholder's equity 1,200,481 1,321,781
Total liabilities and shareholder's equity $9,563,696 $9,561,350
See Notes to Consolidated Financial Statements.
32
American General Finance, Inc. and Subsidiaries
Consolidated Statements of Income
Years Ended December 31,
1996 1995 1994
(dollars in thousands)
Revenues
Finance charges $1,449,968 $1,492,467 $1,247,727
Insurance 206,170 222,264 180,913
Other 68,810 76,763 62,599
Total revenues 1,724,948 1,791,494 1,491,239
Expenses
Interest expense 493,051 517,475 416,233
Operating expenses 512,698 467,475 371,125
Provision for finance receivable
losses 417,446 574,166 213,987
Loss on assets held for sale 145,459 - -
Insurance losses and loss
adjustment expenses 102,811 116,829 97,893
Total expenses 1,671,465 1,675,945 1,099,238
Income before provision for income
taxes 53,483 115,549 392,001
Provision for Income Taxes
(Note 14.) 19,337 29,894 147,013
Net Income $ 34,146 $ 85,655 $ 244,988
See Notes to Consolidated Financial Statements.
33
American General Finance, Inc. and Subsidiaries
Consolidated Statements of Shareholder's Equity
Years Ended December 31,
1996 1995 1994
(dollars in thousands)
Common Stock
Balance at beginning of year $ 1,000 $ 1,000 $ 1,000
Balance at end of year 1,000 1,000 1,000
Additional Paid-in Capital
Balance at beginning of year 696,128 616,021 616,021
Capital contribution from parent
and other 102 80,107 -
Balance at end of year 696,230 696,128 616,021
Net Unrealized Gains (Losses)
on Investment Securities
Balance at beginning of year 38,412 (18,407) 33,740
Change during year (16,958) 56,819 (52,147)
Balance at end of year 21,454 38,412 (18,407)
Retained Earnings
Balance at beginning of year 586,241 613,126 459,939
Net income 34,146 85,655 244,988
Common stock dividends (138,590) (112,540) (91,801)
Balance at end of year 481,797 586,241 613,126
Total Shareholder's Equity $1,200,481 $1,321,781 $1,211,740
See Notes to Consolidated Financial Statements.
34
American General Finance, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
Years Ended December 31,
1996 1995 1994
(dollars in thousands)
Cash Flows from Operating Activities
Net Income $ 34,146 $ 85,655 $ 244,988
Reconciling adjustments to net cash
provided by operating activities:
Provision for finance receivable losses 417,446 574,166 213,987
Depreciation and amortization 98,032 114,789 124,287
Deferral of finance receivable
origination costs (50,303) (73,829) (91,420)
Deferred federal income tax benefit (43,659) (69,572) (17,020)
Deferred state income tax benefit (2,216) (16,550) -
Change in other assets and other
liabilities (29,983) 49,800 13,817
Change in insurance claims and
policyholder liabilities (27,541) 17,088 51,395
Loss on assets held for sale 145,459 - -
Gain on finance receivables sold
through securitization - (4,552) -
Other, net 48,718 (19,136) (28,576)
Net cash provided by operating activities 590,099 657,859 511,458
Cash Flows from Investing Activities
Finance receivables originated or purchased (5,338,928) (5,785,976) (5,826,776)
Principal collections on finance receivables 4,886,420 4,926,756 4,322,592
Securitized finance receivables sold - 100,000 -
Investment securities purchased (188,732) (200,112) (161,239)
Investment securities called, matured and sold 169,405 108,701 81,221
Purchase of assets from affiliates (62,176) (29,291) -
Other, net (70,542) (69,513) (26,338)
Net cash used for investing activities (604,553) (949,435) (1,610,540)
Cash Flows from Financing Activities
Proceeds from issuance of long-term debt 124,228 1,576,530 1,136,208
Repayment of long-term debt (609,559) (913,909) (846,468)
Change in investment certificates (2,419) (404) (2,805)
Change in short-term notes payable 643,049 (287,592) 956,502
Capital contribution from parent - 80,000 -
Dividends paid (138,590) (112,540) (140,000)
Net cash provided by financing activities 16,709 342,085 1,103,437
Increase in cash and cash equivalents 2,255 50,509 4,355
Cash and cash equivalents at beginning of year 103,238 52,729 48,374
Cash and cash equivalents at end of year $ 105,493 $ 103,238 $ 52,729
Supplemental Disclosure of Cash Flow Information
Income taxes paid $ 34,167 $ 153,137 $ 169,543
Interest paid $ 497,084 $ 501,830 $ 407,647
See Notes to Consolidated Financial Statements.
35
American General Finance, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 1996
Note 1. Nature of Operations
American General Finance, Inc. will be referred to in these Notes to
Consolidated Financial Statements as "AGFI" or collectively, with its
subsidiaries, whether directly or indirectly owned, as the "Company". The
subsidiaries include American General Finance Corporation (AGFC) and
American General Financial Center (AGFC-Utah). AGFI is a financial
services holding company with subsidiaries that are engaged primarily in
the consumer finance and credit insurance business. In this business, the
Company makes loans directly to individuals, purchases retail sales
contract obligations of individuals, offers private label services and
markets insurance products through the consumer finance network. At
December 31, 1996, the Company had 1,391 offices in 41 states, Puerto Rico
and the U.S. Virgin Islands and approximately 9,300 employees.
In its lending operations, the Company makes loans directly to individuals
and generally takes a security interest in real property and/or personal
property of the borrower. In its retail operations, the Company purchases
retail sales contracts arising from the retail sale of consumer goods and
services by approximately 15,000 retail merchants and provides private
label services for approximately 250 retail merchants. Retail sales
contracts are secured by the real property or personal property giving rise
to the contract. Private label are secured by a purchase money security
interest in the goods purchased. In its credit card operations, the
Company issued MasterCard and VISA credit cards to individuals through
branch and direct mail solicitation programs. Credit cards are unsecured.
In its insurance operations, the Company writes and assumes credit life,
credit accident and health, non-credit insurance coverages and credit-
related property and casualty insurance on its consumer finance customers.
In fourth quarter 1996, the Company decided to offer for sale $874.8
million of non-strategic, underperforming finance receivable portfolios,
consisting of $520.3 million of credit card and $354.5 million of private
label finance receivables. The Company reclassified these finance
receivables and an associated allowance for finance receivable losses of
$70.0 million to assets held for sale on December 31, 1996. See Note 9.
for further information on this reclassification.
The Company funds its operations principally through net cash flows from
operating activities, issuances of long-term debt, short-term borrowings in
the commercial paper market, and borrowings from banks.
At December 31, 1996, the Company had $7.6 billion of net finance
receivables due from approximately 2.6 million customer accounts and $6.6
billion of credit and non-credit life insurance in force covering
approximately 1.5 million customer accounts.
36
Notes to Consolidated Financial Statements, Continued
Note 2. Summary of Significant Accounting Policies
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements have been prepared in accordance with
generally accepted accounting principles and include the accounts of AGFI
and its subsidiaries. The subsidiaries are all wholly-owned and all
intercompany items have been eliminated. AGFI is a wholly-owned subsidiary
of American General Corporation (American General).
FINANCE OPERATIONS
Revenue Recognition
Revenue on finance receivables is accounted for as follows:
(1) Finance charges on discounted finance receivables and interest on
interest-bearing finance receivables are recognized as revenue on the
accrual basis using the interest method. The accrual of revenue is
suspended when the fourth contractual payment becomes past due for
loans and retail sales contracts and when the sixth contractual
payment becomes past due for credit cards and private label.
(2) Extension fees and late charges are recognized as revenue when
received.
(3) Nonrefundable points and fees on loans are recognized as revenue on
the accrual basis using the interest method over the lesser of the
contractual term or the estimated life based upon prepayment
experience. If a loan liquidates before amortization is completed,
any unamortized fees are recognized as revenue at the date of
liquidation.
Origination Costs
The Company defers costs associated with the origination of certain finance
receivables. Deferred origination costs are included in finance
receivables and are amortized to revenue on the accrual basis using the
interest method over the lesser of the contractual term or the estimated
life based upon prepayment experience. If a finance receivable liquidates
before amortization is completed, any unamortized costs are charged to
revenue at the date of liquidation.
Allowance For Finance Receivable Losses
The Company maintains the allowance for finance receivable losses at a
level based on periodic evaluation of the finance receivable portfolio and
reflects an amount that, in management's opinion, is adequate to absorb
anticipated losses in the existing portfolio. In evaluating the portfolio,
management considers numerous factors, including current economic
conditions, prior finance receivable loss and delinquency experience, the
37
Notes to Consolidated Financial Statements, Continued
composition of the finance receivable portfolio, and an estimate of
anticipated finance receivable losses.
AGFI's policy is to charge off each month loan accounts, except those
secured by real estate, on which little or no collections were made in the
prior six-month period. Retail sales contracts are charged off when six
installments are past due. Credit card and private label accounts are
charged off when 180 days past due. In the case of loans secured by real
estate, foreclosure proceedings are instituted when four monthly
installments are past due. When foreclosure is completed and the Company
has obtained title to the property, the real estate is established as an
asset valued at fair value, and any loan value in excess of that amount is
charged off. The charge-off period is occasionally extended for individual
accounts when, in the opinion of management, such treatment is warranted.
INSURANCE OPERATIONS
Revenue Recognition
The Company's insurance subsidiaries write and assume credit life and
credit accident and health insurance, non-credit insurance, and property
and casualty insurance. Premiums on credit life insurance are recognized
as revenue using the sum-of-the-digits or actuarial methods, except in the
case of level-term contracts, which are recognized as revenue using the
straight-line method over the lives of the policies. Premiums on credit
accident and health insurance are recognized as revenue using an average of
the sum-of-the-digits and the straight-line methods. Non-credit life
insurance premiums are recognized when collected but not before their due
dates. Premiums on property and casualty insurance are recognized as
revenue using the straight-line method over the terms of the policies or
appropriate shorter periods.
Policy Reserves
Policy reserves for credit life and credit accident and health insurance
equal related unearned premiums. Claim reserves are based on Company
experience. Liabilities for future life insurance policy benefits
associated with non-credit life contracts are accrued when premium revenue
is recognized and are computed on the basis of assumptions as to investment
yields, mortality, and surrenders. Annuity reserves are computed on the
basis of assumptions as to investment yields and mortality. Reserves for
losses and loss adjustment expenses for property and casualty insurance are
estimated based upon claims reported plus estimates of incurred but not
reported claims. Non-credit life, group annuity, and accident and health
insurance reserves assumed under coinsurance agreements are established on
the bases of various tabular and unearned premium methods.
Acquisition Costs
Insurance acquisition costs, principally commissions, reinsurance fees, and
premium taxes, are deferred and charged to expense over the terms of the
related policies or reinsurance agreements.
38
Notes to Consolidated Financial Statements, Continued
Reinsurance
The Company's insurance subsidiaries enter into reinsurance agreements
among themselves and other insurers, including other insurance subsidiaries
of American General. The annuity reserves attributable to this business
with the subsidiaries of American General were $60.8 million and $61.0
million at December 31, 1996 and 1995, respectively. The Company's
insurance subsidiaries assumed from other insurers $47.5 million, $59.9
million, and $51.4 million of reinsurance premiums during 1996, 1995, and
1994, respectively. The Company's ceded reinsurance activities were not
significant during the last three years.
GAAP vs. Statutory Accounting
Statutory accounting practices differ from generally accepted accounting
principles, primarily in the following respects: credit life insurance
reserves are maintained on the basis of mortality tables; non-credit life
and group annuity insurance reserves are based on statutory requirements;
insurance acquisition costs are expensed when incurred rather than expensed
over the related contract period; deferred income taxes are not recorded on
temporary differences in the recognition of revenue and expense; certain
intangible assets resulting from a purchase and the related amortization
are not reflected in statutory financial statements; investments in fixed-
maturity securities are carried at amortized cost; and an asset valuation
reserve and interest maintenance reserve are required for Merit Life
Insurance Co. (Merit), a wholly-owned subsidiary of AGFC. The following
compares net income and shareholder's equity determined under statutory
accounting practices with those determined under generally accepted
accounting principles:
Net Income Shareholder's Equity
Years Ended December 31, December 31,
1996 1995 1994 1996 1995
(dollars in thousands)
Statutory accounting
practices $79,157 $42,006 $35,466 $394,708 $319,413
Generally accepted
accounting principles 59,625 58,245 46,903 539,307 496,640
INVESTMENT SECURITIES
Valuation
All investment securities are currently classified as available-for-sale
and recorded at fair value. After adjusting related balance sheet accounts
as if the unrealized gains and losses on investment securities had been
realized, the net adjustment is recorded in net unrealized gains or losses
on investment securities within shareholder's equity. If the fair value of
an investment security classified as available-for-sale declines below its
cost and this decline is considered to be other than temporary, the
investment security is reduced to its fair value, and the reduction is
recorded as a realized loss.
39
Notes to Consolidated Financial Statements, Continued
Realized Gains and Losses on Investments
Realized gains and losses on investments are recognized using the specific
identification method and include declines in fair value of investments
below cost that are considered other than temporary. Realized gains and
losses on investments are included in other revenues.
OTHER
Cash Equivalents
The Company considers all short-term investments with a maturity at date of
purchase of three months or less to be cash equivalents.
Goodwill
Acquisition-related goodwill is charged to expense in equal amounts over 20
to 40 years. The carrying value of goodwill is regularly reviewed for
indicators of impairment in value, which in the view of management are
other than temporary, including unexpected or adverse changes in the
following: 1) the economic or competitive environments in which the
Company operates, 2) profitability analyses, and 3) cash flow analyses. If
facts and circumstances suggest that goodwill is impaired, the Company
assesses the fair value of the underlying business and reduces goodwill to
an amount that results in the book value of the Company approximating fair
value. The Company determines the fair value based on an independent
appraisal.
Income Taxes
Deferred tax assets and liabilities are established for temporary
differences between the financial reporting basis and the tax basis of
assets and liabilities, at the enacted tax rates expected to be in effect
when the temporary differences reverse. The effect of a tax rate change is
recognized in income in the period of enactment.
A valuation allowance for deferred tax assets is provided if all or some
portion of the deferred tax asset may not be realized. An increase or
decrease in a valuation allowance that results from a change in
circumstances that causes a change in judgement about the realizability of
the related deferred tax asset is included in income. A change related to
fluctuations in fair value of available-for-sale investment securities is
included in net unrealized gains or losses on investment securities in
shareholder's equity.
Interest Conversion Agreements
The interest differential to be paid or received on interest conversion
agreements is recorded on the accrual basis and is recognized over the life
of the agreements as an adjustment to interest expense. The related amount
40
Notes to Consolidated Financial Statements, Continued
payable to or receivable from counterparties is included in other
liabilities or other assets.
The fair values of interest conversion agreements are not recognized in the
consolidated balance sheet, which is consistent with the treatment of the
related funding that is hedged.
Any gain or loss from early termination of an interest conversion agreement
is deferred and amortized into income over the remaining term of the
related funding. If the underlying funding is extinguished, any related
gain or loss on interest conversion agreements is recognized in income.
Use of Estimates
Management makes estimates and assumptions in preparing financial
statements in conformity with generally accepted accounting principles that
affect (1) the reported amounts of assets and liabilities, (2) disclosures
of contingent assets and liabilities and (3) the reported amounts of
revenues and expenses during the reporting periods. Ultimate results could
differ from those estimates.
Fair Value of Financial Instruments
The fair values disclosed in Note 20. are based on estimates using
discounted cash flows when quoted market prices are not available. The
valuation techniques employed are significantly affected by the assumptions
used, including the discount rate and estimates of future cash flows. In
that regard, the derived fair value estimates cannot be substantiated by
comparison to independent markets and, in many cases, could not be realized
in immediate settlement of the instrument. The fair value amounts
presented can be misinterpreted, and care should be exercised in drawing
conclusions from such data.
Note 3. Accounting Changes
In June 1996, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) 125, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities." This statement provides accounting standards for determining
whether transfers of financial assets are treated as sales or secured
borrowings and when a liability should be considered extinguished. The
statement must be applied prospectively to applicable transactions
occurring after December 31, 1996; however, certain provisions addressing
secured borrowings with a pledge of collateral and transfers of financial
assets that are part of repurchase agreements, dollar rolls, securities
lendings, and similar transactions are effective for transactions after
December 31, 1997. Earlier or retroactive application is not permitted.
The Company does not anticipate a material effect on consolidated results
of operations and financial position related to adoption of this statement.
41
Notes to Consolidated Financial Statements, Continued
During 1995, the Company adopted SFAS 121, "Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." This
statement establishes accounting standards for (1) the impairment of long-
lived assets, certain identifiable intangibles, and goodwill related to
those assets to be held and used in the business, and (2) long-lived assets
and certain identifiable intangibles to be disposed of. Adoption of this
standard did not have a material impact on the consolidated financial
statements.
During 1994, the Company adopted SFAS 118, "Accounting by Creditors for
Impairment of a Loan - Income Recognition and Disclosures," and SFAS 119,
"Disclosure about Derivative Financial Instruments and Fair Value of
Financial Instruments." SFAS 118 requires disclosures about the recorded
investment in certain impaired loans and the recognition of related
interest income. SFAS 119 requires additional disclosures about derivative
financial instruments and amends existing fair value disclosure
requirements. Adoption of these standards did not impact the consolidated
financial statements.
Note 4. Purchase of Assets from Affiliates
Subsidiaries of AGFI purchased assets, primarily finance receivables, from
subsidiaries of American General for $62.2 million during 1996 and $29.3
million during 1995.
Note 5. Finance Receivables
Loans collateralized by security interests in real estate generally have
maximum original terms of 180 months. Loans collateralized by consumer
goods, automobiles or other chattel security, and loans that are unsecured,
generally have maximum original terms of 60 months. Retail sales contracts
are collateralized principally by consumer goods and automobiles, and
generally have maximum original terms of 60 months. Private label are
secured by a purchase money security interest in the goods purchased and
generally require minimum monthly payments based upon current balances.
Credit card receivables are unsecured and require minimum monthly payments
based upon current balances. Of the loans, retail sales contracts, and
private label outstanding at December 31, 1996, 93% were secured by the
real or personal property of the borrower. At December 31, 1996, mortgage
loans (generally second mortgages) accounted for 60% of the aggregate
dollar amount of loans outstanding and 14% of the total number of loans
outstanding.
42
Notes to Consolidated Financial Statements, Continued
Contractual maturities of finance receivables were as follows:
December 31, 1996
Net Receivables Percent of
Amount Net Receivables
(dollars in thousands)
1997 $2,406,432 31.56%
1998 1,440,677 18.89
1999 892,334 11.70
2000 497,572 6.53
2001 311,563 4.09
2002 and thereafter 2,076,647 27.23
Total $7,625,225 100.00%
Experience of the Company has shown that a substantial portion of finance
receivables will be renewed, converted, or paid in full prior to maturity.
Accordingly, the preceding information as to contractual maturities should
not be considered as a forecast of future cash collections.
Principal cash collections and such collections as a percentage of average
net receivables for the years indicated were as follows (retail sales
contracts and private label comprise retail sales finance):
1996 1995
(dollars in thousands)
Loans:
Principal cash collections $2,653,457 $2,587,659
Percent of average net receivables 46.72% 46.25%
Retail sales finance:
Principal cash collections $1,776,688 $1,884,972
Percent of average net receivables 92.74% 86.37%
Credit cards:
Principal cash collections $ 456,275 $ 454,125
Percent of average net receivables 86.24% 89.64%
Unused credit limits on private label extended by the Company to its
customers were $3.1 billion and $3.5 billion at December 31, 1996 and 1995,
respectively. Unused credit limits on credit cards extended by the Company
to its customers were $2.0 billion at December 31, 1995. Unused credit
limits on loan and retail sales contracts revolving lines of credit
extended by the Company to its customers were $227.6 million and $266.4
million at December 31, 1996 and 1995, respectively. All unused credit
limits, in part or in total, can be cancelled at the discretion of the
Company, and are not indicative of the amounts expected to be funded.
During 1995, the Company securitized a portion of its portfolio of private
label and credit card finance receivables to establish additional sources
of funding and liquidity. On May 17, 1995, the Company sold $100.0 million
of securitized finance receivables with limited recourse. At December 31,
1996 and 1995, securitized finance receivables sold remained at $100.0
million. The Company plans to reacquire these finance receivables and sell
43
Notes to Consolidated Financial Statements, Continued
a portion of them with the assets held for sale. Although the Company
continues to service these finance receivables and maintains the customer
relationships, the securitized finance receivables sold were treated as a
sale with an immaterial gain for financial reporting purposes.
Accordingly, the securitized finance receivables sold are not reflected on
the Company's balance sheet. In addition, the sale of securitized finance
receivables results in effectively recording finance charge revenues and
provision for finance receivable losses on such finance receivables sold in
other revenues.
Geographic diversification of finance receivables reduces the concentration
of credit risk associated with a recession in any one region. The largest
concentrations of finance receivables, net of unearned finance charges,
were as follows:
December 31, 1996 December 31, 1995
Location Amount Percent Amount Percent
(dollars in thousands) (dollars in thousands)
California $ 697,734 9.15% $ 886,974 10.55%
N. Carolina 672,021 8.81 737,630 8.77
Florida 534,936 7.02 626,519 7.45
Ohio 454,290 5.96 439,522 5.23
Illinois 452,508 5.93 489,840 5.82
Indiana 397,698 5.22 454,892 5.41
Virginia 350,349 4.59 392,146 4.66
Georgia 312,377 4.10 372,963 4.43
Other 3,753,312 49.22 4,009,908 47.68
$7,625,225 100.00% $8,410,394 100.00%
Note 6. Allowance for Finance Receivable Losses
The changes in the allowance for finance receivable losses for the years
indicated are detailed below. See Management's Discussion and Analysis in
Item 7. herein for discussion of activity.
1996 1995 1994
(dollars in thousands)
Balance at beginning of year $492,124 $226,226 $183,756
Provision for finance receivable
losses 417,446 574,166 213,987
Allowance reclassified to assets
held for sale (70,000) - -
Allowance related to net acquired
receivables and other 152 3,190 970
Charge-offs:
Finance receivables charged off (495,699) (351,876) (209,340)
Recoveries 51,130 40,418 36,853
Net charge-offs (444,569) (311,458) (172,487)
Balance at end of year $395,153 $492,124 $226,226
44
Notes to Consolidated Financial Statements, Continued
Management believes the adequacy of the allowance for finance receivable
losses is a material estimate and that it is reasonably possible a material
change to such estimate could occur in the near term due to changes in the
economy and other conditions that influence the Company's net charge-offs.
See Note 2. for information on the determination of the allowance for
finance receivable losses.
Note 7. Investment Securities
At December 31, 1996 and 1995, all investment securities were classified as
available-for-sale and reported at fair value. Investment securities were
as follows at December 31:
Fair Value Amortized Cost
1996 1995 1996 1995
(dollars in thousands)
Fixed-maturity investment
securities:
Bonds:
Corporate securities $450,754 $438,527 $435,877 $409,898
Mortgage-backed securities 202,974 234,148 199,482 223,951
States and political
subdivisions 168,274 157,068 162,547 149,240
Other 45,525 47,186 36,721 35,242
Redeemable preferred stocks 7,235 6,956 7,135 6,764
Total 874,762 883,885 841,762 825,095
Non-redeemable preferred
stocks 2,271 890 2,264 584
Other long-term investments 3,000 - 3,000 -
Total investment securities $880,033 $884,775 $847,026 $825,679
At December 31, the gross unrealized gains and losses on investment
securities were as follows:
Gross Gross
Unrealized Gains Unrealized Losses
1996 1995 1996 1995
(dollars in thousands)
Fixed-maturity investment
securities:
Bonds:
Corporate securities $17,175 $30,050 $ 2,298 $ 1,421
Mortgage-backed securities 4,687 10,356 1,195 159
State and political
subdivisions 6,106 7,895 379 67
Other 8,851 11,944 47 -
Redeemable preferred stocks 138 270 38 78
Total 36,957 60,515 3,957 1,725
Non-redeemable preferred
stocks 7 306 - -
Other long-term investments - - - -
Total investment securities $36,964 $60,821 $ 3,957 $ 1,725
45
Notes to Consolidated Financial Statements, Continued
During the years ended December 31, 1996, 1995, and 1994, investment
securities with a fair value of $169.4 million, $108.7 million, and $81.2
million, respectively, were sold or redeemed. The gross realized gains on
such investment securities sales or redemptions totaled $1.8 million, $1.3
million, and $.3 million, respectively. The gross realized losses on
investments totaled $3.1 million, $.6 million and $.6 million,
respectively.
The contractual maturities of fixed-maturity securities at December 31,
1996 were as follows:
Fair Amortized
Value Cost
(dollars in thousands)
Fixed maturities, excluding
mortgage-backed securities:
Due in 1 year or less $ 7,800 $ 7,707
Due after 1 year through 5 years 87,819 84,686
Due after 5 years through 10 years 427,705 412,647
Due after 10 years 148,464 137,240
Mortgage-backed securities 202,974 199,482
Total $874,762 $841,762
Actual maturities may differ from contractual maturities since borrowers
may have the right to call or prepay obligations. Company requirements and
investment strategies may result in the sale of investments before
maturity.
Certain of the bonds were on deposit with regulatory authorities. The
carrying values of such bonds were $8.3 million and $8.2 million at
December 31, 1996 and 1995, respectively.
Note 8. Costs In Excess of Net Assets Acquired
Goodwill, resulting from the excess of the purchase price paid over the
fair value of separately identified tangible and intangible net assets
acquired, totaled $271.0 million and $280.0 million at December 31, 1996
and 1995, respectively. Accumulated amortization totaled $77.8 million and
$68.8 million at December 31, 1996 and 1995, respectively.
Included in other assets is a customer base valuation of $18.5 million and
$28.6 million at December 31, 1996 and 1995, respectively, which is being
amortized to operating expenses on a straight-line basis over 25 years.
46
Notes to Consolidated Financial Statements, Continued
Note 9. Assets Held for Sale
In fourth quarter 1996, the Company decided to offer for sale $874.8
million of non-strategic, underperforming finance receivable portfolios,
consisting of $520.3 million of credit card and $354.5 million of private
label finance receivables. The Company reclassified these finance
receivables and an associated allowance for finance receivable losses of
$70.0 million to assets held for sale on December 31, 1996.
The Company hired an outside advisor to market the portfolios. Based on
negotiations with prospective purchasers subsequent to year end, the
Company determined that a write-down of $145.5 million ($93.5 million
aftertax) was necessary to reduce the carrying amount of the assets held
for sale to net realizable value, after considering related expenses.
Management believes the adequacy of the valuation on assets held for sale
is a material estimate and that it is reasonably possible a material change
to such estimate could occur in the near term due to changes in the economy
and other conditions that could influence the amount realized on the
anticipated sale.
Unused credit limits on credit card assets held for sale extended by AGFC-
Utah to its customers were $2.2 billion at December 31, 1996. These
amounts, in part or in total, can be cancelled at the discretion of AGFC-
Utah, and are not indicative of the amount expected to be funded. The
credit limits on private label assets held for sale at December 31, 1996
have been terminated.
Note 10. Long-term Debt
At December 31, 1996 and 1995, long-term debt consisted of senior debt.
The carrying value and fair value of the Company's long-term debt at
December 31 were as follows:
Carrying Value Fair Value
1996 1995 1996 1995
(dollars in thousands)
Senior $4,498,530 $4,979,883 $4,607,540 $5,225,034
The weighted average interest rates on long-term debt by type were as
follows:
Years Ended December 31, December 31,
1996 1995 1996 1995
Senior 7.28% 7.26% 7.16% 7.26%
Senior subordinated - 6.44 - -
Total 7.28 7.26 7.16 7.26
47
Notes to Consolidated Financial Statements, Continued
Maturities of long-term debt at December 31, 1996 were as follows:
Maturity Carrying Value
(dollars in thousands)
1997 $1,219,741
1998 824,577
1999 594,495
2000 937,678
2001 41,715
2002-2006 582,336
2007-2009 297,988
Total $4,498,530
A certain debt issue of the Company is repayable prior to maturity at par,
at the option of the holder. If this issue was so repaid, the amounts
above would increase $149.1 million in 1999 and would decrease $149.1
million in 2009.
Certain debt agreements contain restrictions on consolidated retained
earnings for certain purposes (see Note 16.).
Note 11. Short-term Notes Payable and Credit Facilities
AGFC and one of its subsidiaries issue commercial paper with terms ranging
from 1 to 270 days. Information concerning short-term notes payable for
commercial paper and to banks was as follows:
1996 1995 1994
(dollars in thousands)
Maximum borrowings at any month end $3,126,920 $2,764,804 $2,770,886
Average borrowings $2,426,920 $2,489,880 $2,138,124
Weighted average interest rate,
giving effect to interest
conversion agreements and
commitment fees 6.10% 6.52% 5.18%
Weighted average interest rate,
at December 31, 5.57% 5.74% 5.85%
The Company maintains credit facilities to support the issuance of
commercial paper and to provide an additional source of funds for operating
requirements. At December 31, 1996 and 1995, the Company had committed
credit facilities of $700.0 million and $800.0 million, respectively, and
was an eligible borrower under $2.8 billion and $2.4 billion, respectively,
of committed credit facilities extended to American General and certain of
its subsidiaries (the "shared committed facilities"). The annual
commitment fees for all committed facilities ranged from .05% to .09%. The
Company pays only an allocated portion of the commitment fees for the
shared committed facilities. At December 31, 1996 and 1995, the Company
also had $576.0 million and $621.0 million, respectively, of uncommitted
48
Notes to Consolidated Financial Statements, Continued
credit facilities and was an eligible borrower under $165.0 million and
$185.0 million, respectively, of uncommitted credit facilities extended to
American General and certain of its subsidiaries. Available borrowings
under all facilities are reduced by any amounts outstanding thereunder. At
December 31, 1996 and 1995, Company short-term borrowings outstanding under
all credit facilities totaled $111.0 million and $289.1 million,
respectively, and Company long-term borrowings outstanding under all credit
facilities totaled $9.0 million and $68.4 million, respectively, with
remaining availability to the Company of $3.5 billion and $3.2 billion,
respectively, in committed facilities and $621.0 million and $448.5
million, respectively, in uncommitted facilities.
Note 12. Derivative Financial Instruments
The Company uses interest conversion agreements as one of its methods to
manage the Company's exposure to market interest rate risk associated with
funding activities. The Company is neither a dealer nor a trader in
derivative financial instruments.
The Company's objective for using interest conversion agreements is to
synthetically modify a portion of the Company's floating-rate funding to
fixed rates. The Company carries such floating-rate obligations in the
consolidated financial statements at amortized cost.
Fixed interest rates contracted to be paid on interest conversion
agreements approximated the rates on fixed-rate term debt with maturities
similar to the derivative financial instruments at the date of contract.
Accordingly, the Company's use of interest conversion agreements did not
have a material effect on the weighted-average interest rate or reported
interest expense in any of the three years ended December 31, 1996.
Interest conversion agreements in which the Company contracted to pay
interest at fixed rates and receive interest at floating rates were $540.0
million, $590.0 million, and $390.0 million in notional amounts at December
31, 1996, 1995, and 1994, respectively. The weighted average interest rate
paid was 8.08%, 8.28%, and 8.77% for the years ended December 31, 1996,
1995, and 1994, respectively. The weighted average interest rate received
was 5.72%, 6.10%, and 4.64% for the years ended December 31, 1996, 1995,
and 1994, respectively. See Note 20. for the fair value of the interest
conversion agreements. These agreements mature at various dates and had
the respective fixed rates at December 31, 1996 as shown in the table
below:
Notional Weighted Average
Maturity Amount Interest Rate
(dollars in
thousands)
1997 $ 25,000 7.17%
1998 265,000 7.08
1999 50,000 9.39
2000 200,000 9.10
$540,000 8.05%
49
Notes to Consolidated Financial Statements, Continued
The rollforward of notional amounts for interest conversion agreements for
the years indicated was as follows:
Notional Amounts
1996 1995 1994
(dollars in thousands)
Balance at beginning of year $ 590,000 $ 390,000 $ 290,000
New contracts - 200,000 200,000
Expired contracts (50,000) - (100,000)
Balance at end of year $ 540,000 $ 590,000 $ 390,000
The Company is exposed to credit risk in the event of non-performance by
counterparties to interest conversion agreements. The Company limits its
exposure to credit risk by entering into interest conversion agreements
with counterparties having high credit ratings and by basing the amount and
term of an agreement on these credit ratings. Furthermore, the Company
regularly monitors counterparty credit ratings throughout the term of the
agreements.
The Company's credit exposure on interest conversion agreements is limited
to the fair value of interest conversion agreements that are favorable to
the Company. The Company does not expect any counterparty to fail to meet
its obligation; however, non-performance would not have a material impact
on the consolidated results of operations and financial position.
The Company's exposure to market risk is mitigated by the offsetting
effects of changes in the value of interest conversion agreements and of
the underlying funding to which they relate.
Note 13. Short-term Notes Payable - Parent
Borrowings from American General primarily provide overnight operating
liquidity when American General is in a surplus cash position. All such
borrowings are made on a due on demand basis at short-term rates based on
overnight bank investment rates. At December 31, 1996, 1995 and 1994, AGFI
had no borrowings outstanding with American General.
Information concerning such borrowings for the years indicated was as
follows:
1996 1995 1994
(dollars in thousands)
Maximum borrowings at any month end $ - $ - $ -
Average borrowings $3,700 $ 159 $ 200
Weighted average interest rate (total
interest expense divided by average
borrowings) 5.16% 6.05% 4.35%
50
Notes to Consolidated Financial Statements, Continued
Note 14. Income Taxes
AGFI and all of its subsidiaries file a consolidated federal income tax
return with American General and the majority of its subsidiaries. AGFI
and its subsidiaries provide for federal income taxes as if filing a
separate tax return, and pay such amounts to American General in accordance
with a tax sharing agreement.
Provision for income taxes is summarized as follows:
Years Ended December 31,
1996 1995 1994
(dollars in thousands)
Federal
Current $ 61,702 $118,171 $152,968
Deferred (43,659) (69,572) (17,020)
Total federal 18,043 48,599 135,948
State 1,294 (18,705) 11,065
Total $ 19,337 $ 29,894 $147,013
The U.S. statutory federal income tax rate differs from the effective
income tax rate as follows:
Years Ended December 31,
1996 1995 1994
Statutory federal income tax rate 35.00% 35.00% 35.00%
Benefit of state net operating
loss (NOL) carryforwards - (9.90) -
Amortization of goodwill 5.89 2.85 1.13
Nontaxable investment income (4.84) (2.10) (.55)
State income taxes 1.57 (.62) 1.83
Other, net (1.46) .64 .09
Effective income tax rate 36.16% 25.87% 37.50%
During 1995, the Company recognized state NOL carryforwards resulting from
the state's audit of a return and the state's acceptance of an amended
return. The Company recognized a net reduction of $16.6 million in 1995
state income tax expense primarily related to these carryforwards. At
December 31, 1996 and 1995, the state NOL carryforwards remaining were
$634.7 million and $650.9 million, respectively, which expire in the years
2005 and 2006.
The net deferred tax asset at December 31, 1996 of $121.3 million was net
of deferred tax liabilities totaling $137.1 million. The net deferred tax
asset at December 31, 1995 of $69.8 million was net of deferred tax
liabilities totaling $141.9 million. The most significant deferred tax
assets relate to the provision for finance receivable losses, the benefit
of the loss on assets held for sale and the state NOL carryforwards, and
insurance premiums recorded for financial reporting purposes. A valuation
allowance of $39.5 million ($25.7 million aftertax) was recognized at
December 31, 1995 related to the state NOL carryforwards. At December 31,
1996, the valuation allowance remained at $39.5 million.
51
Notes to Consolidated Financial Statements, Continued
Note 15. Capital Stock
AGFI has two classes of capital stock: special shares (without par value,
25 million shares authorized) which may be issued in series with such
dividend, liquidation, redemption, conversion, voting and other rights as
the board of directors may determine prior to issuance; and common shares
($.50 par value, 25 million shares authorized). Issued shares were as
follows:
Special Shares - At December 31, 1996 and 1995, there were no shares issued
and outstanding.
Common Shares - At December 31, 1996 and 1995, there were 2 million shares
issued and outstanding.
Note 16. Consolidated Retained Earnings
AGFI's ability to pay dividends is substantially dependent on the receipt
of dividends or other funds from its subsidiaries. State laws restrict the
Company's insurance subsidiaries as to the amounts they may pay as
dividends without prior notice to, or in some cases prior approval from,
their respective state insurance departments. At December 31, 1996, the
maximum amount of dividends which the Company's insurance subsidiaries can
pay in 1997 without prior approval was $78.7 million. At December 31,
1996, the Company's insurance subsidiaries had statutory capital and
surplus of $394.7 million. Merit had $52.7 million of accumulated earnings
at December 31, 1996 for which no federal income tax provisions have been
required. Merit would be liable for federal income taxes on such earnings
if they are distributed as dividends or exceed limits prescribed by tax
laws. No distributions are presently contemplated from these earnings. If
such earnings were to become taxable at December 31, 1996, the federal
income tax would approximate $18.4 million.
Certain AGFI and AGFC financing agreements effectively limit the amount of
dividends the entity may pay. Under the most restrictive provision of such
agreements, $258.0 million of the consolidated retained earnings of AGFI
and $325.3 million of the consolidated retained earnings of AGFC were free
from such restrictions at December 31, 1996. At that same date, $8.7
million of the retained earnings of AGFI's industrial loan company
subsidiaries was unrestricted as to the payment of dividends.
Note 17. Benefit Plans
RETIREMENT INCOME PLANS
The Company participates in the American General Retirement Plans (AGRP),
which are noncontributory defined benefit pension plans covering most
employees. Pension benefits are based on the participant's average monthly
52
Notes to Consolidated Financial Statements, Continued
compensation and length of credited service. American General's funding
policy is to contribute annually no more than the maximum amount that can
be deducted for federal income tax purposes.
Equity and fixed-maturity securities were 60% and 35%, respectively, of the
plans' assets at the plans' most recent balance sheet dates. The pension
plans have purchased annuity contracts from American General subsidiaries
to provide benefits to certain retirees. These annuity contracts provided
$2.1 million, $2.2 million, and $2.3 million for benefits to the Company's
retirees for the years ended December 31, 1996, 1995, and 1994.
AGFI accounts for its participation in the AGRP as if it had its own plan.
The following table shows AGFI's portion of the plans' funded status:
December 31,
1996 1995 1994
(dollars in thousands)
Accumulated benefit obligation (a) $51,936 $46,406 $31,591
Projected benefit obligation $62,887 $56,395 $38,778
Plan assets at fair value 71,450 60,968 50,247
Plan assets in excess of projected
benefit obligation 8,563 4,573 11,469
Other unrecognized items, net (2,709) 2,894 (4,664)
Prepaid pension expense $ 5,854 $ 7,467 $ 6,805
(a) Accumulated benefit obligation is over 85% vested.
Net pension expense included the following components for the years ended
December 31:
1996 1995 1994
(dollars in thousands)
Service cost (benefits earned) $ 3,194 $ 2,241 $ 2,960
Interest cost 4,480 3,624 3,084
Actual return on plan assets (11,288) (11,283) (237)
Net amortization and deferral 5,417 5,233 (5,523)
Total pension expense (income) $ 1,803 $ (185) $ 284
Additional assumptions concerning the determination of net pension costs
were as follows:
1996 1995 1994
Weighted average discount rate 7.50% 7.25% 8.50%
Expected long-term rate of
return on plan assets 10.00 10.00 10.00
Rate of increase in
compensation levels 4.00 4.00 4.00
53
Notes to Consolidated Financial Statements, Continued
POSTRETIREMENT BENEFITS OTHER THAN PENSIONS
The Company participates in American General's life, medical, supplemental
major medical, and dental plans for certain retired employees. Most plans
are contributory, with retiree contributions adjusted annually to limit
employer contributions to predetermined amounts. American General and its
subsidiaries have reserved the right to change or eliminate these benefits
at any time.
American General's life plans are fully insured. A portion of the retiree
medical and dental plans are funded through a voluntary employees'
beneficiary association (VEBA); the remainder is unfunded and self-insured.
All of the retiree medical and dental plans' assets held in the VEBA were
invested in readily marketable securities at the plans' most recent balance
sheet date.
AGFI accounts for its participation in the plans as if it had its own
plans. The following table shows AGFI's portion of the plans' combined
funded status:
December 31,
1996 1995
(dollars in thousands)
Actuarial present value of benefit
obligation:
Retirees $1,152 $1,545
Active plan participants 4,461 4,939
Accumulated postretirement benefit
obligation 5,613 6,484
Plan assets at fair value 90 89
Accumulated postretirement benefit
obligation in excess of plan
assets at fair value 5,523 6,395
Unrecognized net gain 1,512 247
Accrued postretirement benefit cost $7,035 $6,642
The weighted-average discount rate used in determining the accumulated
postretirement benefit obligation for the years ended December 31, 1996 and
1995 was 7.50% and 7.25%, respectively. Postretirement benefit expense in
1996 and 1995 was $.7 million and $.6 million, respectively.
Note 18. Lease Commitments, Rent Expense and Contingent Liabilities
The approximate annual rental commitments for leased office space,
automobiles and data processing and related equipment accounted for as
operating leases, excluding leases on a month-to-month basis, are as
follows: 1997, $29.4 million; 1998, $24.1 million; 1999, $18.2 million;
2000, $11.5 million; 2001, $6.3 million; and subsequent to 2001, $14.8
million.
54
Notes to Consolidated Financial Statements, Continued
Taxes, insurance and maintenance expenses are obligations of the Company
under certain leases. In the normal course of business, leases that expire
will be renewed or replaced by leases on other properties; therefore,
future minimum annual rental commitments will probably not be less than the
amount of rental expense incurred in 1996. Rental expense incurred for the
years ended December 31, 1996, 1995, and 1994, was $36.0 million, $38.5
million, and $32.2 million, respectively.
AGFI and certain of its subsidiaries are parties to various lawsuits and
proceedings arising in the ordinary course of business. Many of these
lawsuits and proceedings arise in jurisdictions, such as Alabama, that
permit damage awards disproportionate to the actual economic damages
incurred. Based upon information presently available, the Company believes
that the total amounts that will ultimately be paid, if any, arising from
these lawsuits and proceedings will have no material adverse effect on the
Company's consolidated results of operations and financial position.
However, it should be noted that the frequency of large damage awards,
including large punitive damage awards, that bear little or no relation to
actual economic damages incurred by plaintiffs in jurisdictions like
Alabama continues to increase and creates the potential for an
unpredictable judgment in any given suit.
55
Notes to Consolidated Financial Statements, Continued
Note 19. Interim Financial Information (Unaudited)
Unaudited interim information for 1996 and 1995 is summarized below:
Total Revenues
Three Months Ended 1996 1995
(dollars in thousands)
March 31 $ 438,958 $ 430,748
June 30 429,904 449,149
September 30 429,313 459,380
December 31 426,773 452,217
Total $1,724,948 $1,791,494
Income Before Provision
for Income Taxes
Three Months Ended 1996 1995
(dollars in thousands)
March 31 $ 44,235 $ 95,530
June 30 47,410 99,559
September 30 68,124 60,380
December 31 (106,286) (a) (139,920) (b)
Total $ 53,483 $ 115,549
Net Income
Three Months Ended 1996 1995
(dollars in thousands)
March 31 $ 28,188 $ 60,101
June 30 29,588 62,405
September 30 43,611 54,956
December 31 (67,241) (a) (91,807) (b)
Total $ 34,146 $ 85,655
(a) Includes loss on assets held for sale of $145.5 million ($93.5 million
aftertax).
(b) Includes increase in allowance for finance receivable losses of $216.0
million ($140.2 million aftertax).
56
Notes to Consolidated Financial Statements, Continued
Note 20. Fair Value of Financial Instruments
The carrying values and estimated fair values of certain of the Company's
financial instruments are presented below. The reader should exercise care
in drawing conclusions based on fair value, since the fair values presented
below do not include the value associated with all of the Company's assets
and liabilities.
December 31, 1996 December 31, 1995
Carrying Fair Carrying Fair
Value Value Value Value
Assets (dollars in thousands)
Net finance receivables,
less allowance for finance
receivable losses $7,230,072 $7,230,072 $7,918,270 $7,918,270
Investment securities 880,033 880,033 884,775 884,775
Cash and cash equivalents 105,493 105,493 103,238 103,238
Assets held for sale 667,007 667,007 - -
Liabilities
Long-term debt (4,498,530) (4,607,540) (4,979,883) (5,225,034)
Short-term notes payable (3,126,920) (3,126,920) (2,483,871) (2,483,871)
Investment certificates (3,778) (3,796) (6,197) (6,264)
Off-Balance Sheet Financial
Instruments
Unused credit limits - - - -
Interest conversion agreements - (30,314) - (50,232)
VALUATION METHODOLOGIES AND ASSUMPTIONS
The following methods and assumptions were used in estimating the fair
value of the Company's financial instruments.
Finance Receivables
Fair value of net finance receivables (which approximates carrying amount
less allowance for finance receivable losses) was estimated using projected
cash flows, computed by category of finance receivable, discounted at the
weighted-average interest rates currently being offered for similar finance
receivables. Cash flows were based on contractual payment terms adjusted
for delinquencies and finance receivable losses. The fair value estimate
does not reflect the value of the underlying customer relationships or the
related distribution system.
57
Notes to Consolidated Financial Statements, Continued
Investment Securities
Fair values of investment securities are based on quoted market prices,
where available. For investment securities not actively traded, fair
values were estimated using values obtained from independent pricing
services or, in the case of some private placements, by discounting
expected future cash flows using a current market rate applicable to yield,
credit quality, and average life of the investments.
Cash and Cash Equivalents
The carrying amounts reported in the Consolidated Balance Sheets for cash
and cash equivalents approximate those assets' fair values.
Assets Held for Sale
The carrying amounts reported in the Consolidated Balance Sheets for assets
held for sale approximate the assets' fair value.
Long-term Debt
The fair values of the Company's long-term borrowings are estimated using
cash flows discounted at current borrowing rates.
Short-term Notes Payable
The carrying value of short-term notes payable approximates the fair value.
Investment Certificates
Fair values for fixed-rate time deposits are estimated using a discounted
cash flow calculation that applies interest rates currently being offered
on time deposits to a schedule of aggregated expected monthly maturities on
time deposits. The carrying amounts for variable-rate time deposits
approximate their fair values at the reporting date. The fair values for
demand deposits are, by definition, equal to the amount payable on demand
at the reporting date.
Unused Customer Credit Lines
The unused credit lines available to the Company's customers are considered
to have no fair value. The interest rates charged on these facilities can
either be changed at the Company's discretion, such as for credit cards and
private label, or are adjustable and reprice frequently, such as for loan
and retail sales contracts revolving lines of credit. Furthermore, these
amounts, in part or in total, can be cancelled at the discretion of the
Company.
58
Notes to Consolidated Financial Statements, Continued
Interest Conversion Agreements
Fair values for the Company's interest conversion agreements are based on
estimates, obtained from the individual counterparties, of the cost or
benefit of terminating the agreements at the balance sheet date.
59
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) (1) and (2) The following consolidated financial statements of American
General Finance, Inc. and subsidiaries are included in Item 8:
Consolidated Balance Sheets, December 31, 1996 and 1995
Consolidated Statements of Income, years ended December 31, 1996,
1995, and 1994
Consolidated Statements of Shareholder's Equity, years ended
December 31, 1996, 1995, and 1994
Consolidated Statements of Cash Flows, years ended December 31,
1996, 1995, and 1994
Notes to Consolidated Financial Statements
Schedule I--Condensed Financial Information of Registrant is included
in Item 14(d).
All other schedules for which provision is made in the applicable
accounting regulations of the Securities and Exchange Commission have
been omitted, because they are inapplicable, or the required
information is included in the consolidated financial statements or
notes.
(3) Exhibits:
Exhibits are listed in the Exhibit Index beginning on page 66
herein.
(b) Reports on Form 8-K
No Current Reports on Form 8-K were filed during the fourth quarter
of 1996.
(c) Exhibits
The exhibits required to be included in this portion of Item 14. are
submitted as a separate section of this report.
60
Item 14(d).
Schedule I - Condensed Financial Information of Registrant
American General Finance, Inc.
Condensed Balance Sheets
December 31,
1996 1995
(dollars in thousands)
Assets
Cash $ 601 $ 441
Investments in subsidiaries 1,355,896 1,470,410
Notes receivable from subsidiaries 173,235 187,038
Other assets 40,156 49,332
Total assets $1,569,888 $1,707,221
Liabilities and Shareholder's Equity
Senior long-term debt, 5.0% - 9.75%,
due 1997-2001 $ 81,893 $ 43,989
Notes payable to banks 111,000 153,400
Notes payable to subsidiaries 173,331 187,038
Other liabilities 3,183 1,013
Total liabilities 369,407 385,440
Shareholder's equity:
Common stock 1,000 1,000
Additional paid-in capital 696,230 696,128
Other equity 21,454 38,412
Retained earnings 481,797 586,241
Total shareholder's equity 1,200,481 1,321,781
Total liabilities and shareholder's equity $1,569,888 $1,707,221
See Notes to Condensed Financial Statements.
61
Schedule I, Continued
American General Finance, Inc.
Condensed Statements of Income
Years Ended December 31,
1996 1995 1994
(dollars in thousands)
Revenues
Dividends received from subsidiaries $150,574 $108,633 $119,145
Finance charges - - 151,246
Interest and other 25,850 6,703 13,816
Total revenues 176,424 115,336 284,207
Expenses
Interest expense 29,802 12,639 83,070
Operating expenses 23,844 8,386 41,638
Provision for finance
receivable losses - - 51,492
Total expenses 53,646 21,025 176,200
Income before income taxes and equity
in (overdistributed) undistributed
net income of subsidiaries 122,778 94,311 108,007
Income Tax Credit 9,751 5,026 3,925
Income before equity in (overdistributed)
undistributed net income of subsidiaries 132,529 99,337 111,932
Equity in (Overdistributed) Undistributed
Net Income of Subsidiaries (98,383) (13,682) 133,056
Net Income $ 34,146 $ 85,655 $244,988
See Notes to Condensed Financial Statements.
62
Schedule I, Continued
American General Finance, Inc.
Condensed Statements of Cash Flows
Years ended December 31,
1996 1995 1994
(dollars in thousands)
Cash Flows from Operating Activities
Net Income $ 34,146 $ 85,655 $244,988
Reconciling adjustments to net cash
provided by operating activities:
Equity in overdistributed
(undistributed) net income
of subsidiaries 98,383 13,682 (133,056)
Provision for finance receivable
losses - - 51,492
Change in dividends receivable - - 32,512
Change in other assets and other
liabilities 812 16,685 6,653
Other, net 8,263 7,801 (5,546)
Net cash provided by operating activities 141,604 123,823 197,043
Cash Flows from Investing Activities
Capital contribution to subsidiaries - (80,228) (6,667)
Return of capital from subsidiary - - 7,435
Participation in finance receivables - - (1,246,417)
Cash collections on participated
finance receivables - - 548,384
Sale of participated finance receivables - - 1,205,945
Transfer of subsidiary - 1,871 -
Net additions to fixed assets (6,085) (14,615) (7,955)
Other, net 8,423 (9,168) 4,175
Net cash provided by (used for)
investing activities 2,338 (102,140) 504,900
Cash Flows from Financing Activities
Proceeds from issuance of
long-term debt 46,411 8,597 5,664
Repayment of long-term debt (9,299) (13,149) (12,118)
Change in notes receivable or payable
with parent and subsidiaries 96 3,299 (576,555)
Change in notes payable to banks (42,400) 12,400 21,000
Capital contribution from parent - 80,000 -
Common stock dividends paid (138,590) (112,540) (140,000)
Net cash used for financing activities (143,782) (21,393) (702,009)
Increase (decrease) in cash 160 290 (66)
Cash at beginning of year 441 151 217
Cash at end of year $ 601 $ 441 $ 151
See Notes to Condensed Financial Statements.
63
Schedule I, Continued
American General Finance, Inc.
Notes to Condensed Financial Statements
December 31, 1996
Note 1. Accounting Policies
AGFI's investments in subsidiaries are stated at cost plus the equity in
undistributed net income of subsidiaries since the date of the acquisition.
The condensed financial statements of the registrant should be read in
conjunction with AGFI's consolidated financial statements.
Note 2. Long-Term Debt
Senior long-term debt maturities for the five years after December 31,
1996, were as follows: 1997, $15.5 million; 1998, $15.0 million; 1999,
$45.8 million; 2000, $3.8 million; and 2001, $1.8 million.
Note 3. Participation Agreement
On May 1, 1992, AGFI entered into a participation agreement whereby AGFI
purchased finance receivables from a subsidiary. The servicing fee expense
recorded by AGFI for the participation transaction for the year ended
December 31, 1994 was $30.1 million. On December 31, 1994, the
participation agreement was transferred to a subsidiary of AGFI.
64
Signatures
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized on March
20, 1997.
AMERICAN GENERAL FINANCE, INC.
By: /s/ John S. Poelker
John S. Poelker
(Senior Vice President and
Chief Financial Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities indicated on March 20, 1997.
/s/ Frederick W. Geissinger /s/ Philip M. Hanley
Frederick W. Geissinger Philip M. Hanley
(Chairman, President, and Chief (Director)
Executive Officer and Director -
Principal Executive Officer)
/s/ Bennie D. Hendrix
Bennie D. Hendrix
/s/ John S. Poelker (Director)
John S. Poelker
(Senior Vice President and Chief
Financial Officer and Director - /s/ Harold S. Hook
Principal Financial Officer) Harold S. Hook
(Director)
/s/ George W. Schmidt
George W. Schmidt /s/ Larry R. Klaholz
(Controller and Assistant Secretary - Larry R. Klaholz
Principal Accounting Officer) (Director)
/s/ Jon P. Newton
Robert M. Devlin Jon P. Newton
(Director) (Director)
/s/ Jerry L. Gilpin /s/ David C. Seeley
Jerry L. Gilpin David C. Seeley
(Director) (Director)
65
SUPPLEMENTAL INFORMATION TO BE FURNISHED WITH REPORTS FILED PURSUANT TO
SECTION 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 BY REGISTRANTS WHICH
HAVE NOT REGISTERED SECURITIES PURSUANT TO SECTION 12 OF THE SECURITIES
EXCHANGE ACT OF 1934.
No annual report to security-holders or proxy material has been sent to
security-holders.
66
Exhibit Index
Exhibits Page
(3) a. Restated Articles of Incorporation of American General Finance,
Inc. (formerly Credithrift Financial, Inc.) dated May 27, 1988 and
amendments thereto dated September 7, 1988 and March 20, 1989.
Incorporated by reference to Exhibit (3)a filed as a part of the
Company's Annual Report on Form 10-K for the year ended December
31, 1988 (File No. 1-7422).
b. By-laws of American General Finance, Inc. Incorporated by
reference to Exhibit (3)b filed as a part of the Company's Annual
Report on Form 10-K for the year ended December 31, 1992 (File No.
1-7422).
(4) a. The following instruments are filed pursuant to Item 601(b)(4)(ii)
of Regulation S-K, which requires with certain exceptions that all
instruments be filed which define the rights of holders of long-
term debt of the Company and its consolidated subsidiaries. In
the aggregate, the outstanding issuances of debt under each
Indenture referred to under items (1) and (2) below exceed 10% of
the total assets of the Company on a consolidated basis.
(1) Senior Indenture dated as of February 1, 1993 from American
General Finance Corporation to Citibank, N.A. Incorporated
by reference to Exhibit 4(a) filed as a part of American
General Finance Corporation's Registration Statement on Form
S-3 (Registration No. 33-57910).
(a) Resolutions and form of note for senior notes, 6 3/8%
due March 1, 2003. Incorporated by reference to
Exhibits 4(a) and 4(b) filed as a part of American
General Finance Corporation's Current Report on Form
8-K dated March 4, 1993 (File No. 1-6155).
(b) Resolutions and form of note for senior notes, 5 7/8%
due July 1, 2000. Incorporated by reference to
Exhibits 4(a) and 4(b) filed as a part of American
General Finance Corporation's Current Report on Form
8-K dated June 29, 1993 (File No. 1-6155).
(c) Resolutions and form of note for senior notes, 5.80%
due April 1, 1997. Incorporated by reference to
Exhibits 4(a) and 4(b) filed as a part of American
General Finance Corporation's Current Report on Form
8-K dated March 22, 1994 (File No. 1-6155).
(d) Resolutions and form of note for senior notes, 6 5/8%
due June 1, 1997. Incorporated by reference to
Exhibits 4(a) and 4(b) filed as a part of American
General Finance Corporation's Current Report on Form
8-K dated May 17, 1994 (File No. 1-6155).
67
Exhibit Index, Continued
Exhibits Page
(e) Resolutions and form of note for senior notes, 6 7/8%
due July 1, 1999. Incorporated by reference to
Exhibits 4(a) and 4(b) filed as a part of American
General Finance Corporation's Current Report on Form
8-K dated June 8, 1994 (File No. 1-6155).
(f) Resolutions and form of note for senior notes, 7% due
October 1, 1997. Incorporated by reference to
Exhibits 4(a) and 4(b) filed as a part of American
General Finance Corporation's Current Report on Form
8-K dated September 26, 1994 (File No. 1-6155).
(g) Resolutions and form of note for senior notes, 7.70%
due November 15, 1997. Incorporated by reference to
Exhibits 4(a) and 4(b) filed as a part of American
General Finance Corporation's Current Report on Form
8-K dated November 10, 1994 (File No. 1-6155).
(h) Resolutions and form of note for senior notes, 8 1/4%
due January 15, 1998. Incorporated by reference to
Exhibits 4(a) and 4(b) filed as a part of American
General Finance Corporation's Current Report on Form
8-K dated January 6, 1995 (File No. 1-6155).
(2) Indenture dated as of October 1, 1994 from American General
Finance Corporation to The Chase Manhattan Bank.
Incorporated by reference to Exhibit 4(a) filed as a part of
American General Finance Corporation's Registration Statement
on Form S-3 (Registration No. 33-55803).
(a) Resolutions and form of note for senior notes, 8% due
February 15, 2000. Incorporated by reference to
Exhibits 4(a) and 4(b) filed as a part of American
General Finance Corporation's Current Report on Form
8-K dated February 3, 1995 (File No. 1-6155).
(b) Resolutions and forms of notes for (senior) Medium-
Term Notes, Series D. Incorporated by reference to
Exhibits 4(a), 4(b) and 4(c) filed as a part of
American General Finance Corporation's Current Report
on Form 8-K dated February 13, 1995 (File No. 1-6155).
(c) Resolutions and form of note for senior notes, 7 1/4%
due March 1, 1998. Incorporated by reference to
Exhibits 4(a) and 4(b) filed as a part of American
General Finance Corporation's Current Report on Form
8-K dated February 27, 1995 (File No. 1-6155).
68
Exhibit Index, Continued
Exhibits Page
(d) Resolutions and form of note for senior notes, 7 1/4%
due April 15, 2000. Incorporated by reference to
Exhibits 4(a) and 4(b) filed as a part of American
General Finance Corporation's Current Report on Form
8-K dated April 11, 1995 (File No. 1-6155).
(e) Resolutions and form of note for senior notes, 7 1/4%
due May 15, 2005. Incorporated by reference to
Exhibits 4(a) and 4(b) filed as a part of American
General Finance Corporation's Current Report on Form
8-K dated May 5, 1995 (File No. 1-6155).
(f) Resolutions for (senior) Medium-Term Notes, Series D.
Incorporated by reference to Exhibit 4 filed as a part
of American General Finance Corporation's Current
Report on Form 8-K dated November 16, 1995 (File No.
1-6155).
b. In accordance with Item 601(b) (4) (iii) of Regulation S-K,
certain other instruments defining the rights of holders of
long-term debt of the Company and its subsidiaries have not
been filed as exhibits to this Annual Report on Form 10-K
because the total amount of securities authorized and
outstanding under each such instrument does not exceed 10% of
the total assets of the Company on a consolidated basis. The
Company hereby agrees to furnish a copy of each such instrument
to the Securities and Exchange Commission upon request
therefor.
(12) Computation of ratio of earnings to fixed charges. 69
(23) Consent of Ernst & Young LLP, Independent Auditors 70
(27) Financial Data Schedule 71