<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____________ to _____________
Commission file number 1-7422
AMERICAN GENERAL FINANCE, INC.
(Exact name of registrant as specified in its charter)
Indiana 35-1313922
(State of Incorporation) (I.R.S. Employer
Identification No.)
601 N.W. Second Street, Evansville, IN 47708
(Address of principal executive offices) (Zip Code)
(812) 424-8031
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X No
The registrant meets the conditions set forth in General Instruction
H(1)(a) and (b) of Form 10-Q and is therefore filing this Form 10-Q with
the reduced disclosure format.
At November 13, 1997, there were 2,000,000 shares of the registrant's
common stock, $.50 par value, outstanding.
<PAGE>
<PAGE> 2
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.
<TABLE>
AMERICAN GENERAL FINANCE, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Income
(Unaudited)
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1997 1996 1997 1996
(dollars in thousands)
<S> <C> <C> <C> <C>
Revenues
Finance charges $314,997 $359,223 $ 950,044 $1,092,884
Insurance 46,436 51,677 140,705 154,950
Other 18,185 18,413 53,087 50,341
Total revenues 379,618 429,313 1,143,836 1,298,175
Expenses
Interest expense 117,169 121,267 342,816 368,518
Operating expenses 118,970 123,499 355,221 387,827
Provision for finance
receivable losses 55,634 90,636 186,639 301,220
Loss on sale of non-
strategic assets - - 42,225 -
Insurance losses and loss
adjustment expenses 23,500 25,787 69,252 80,841
Total expenses 315,273 361,189 996,153 1,138,406
Income before provision for
income taxes 64,345 68,124 147,683 159,769
Provision for Income Taxes 23,656 24,513 54,578 58,382
Net Income $ 40,689 $ 43,611 $ 93,105 $ 101,387
<FN>
<F1>
See Notes to Condensed Consolidated Financial Statements.
</FN>
</TABLE>
<PAGE>
<PAGE> 3
<TABLE>
AMERICAN GENERAL FINANCE, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(Unaudited)
<CAPTION>
September 30, December 31,
1997 1996
(dollars in thousands)
<S> <C> <C>
Assets
Finance receivables, net of unearned
finance charges:
Real estate loans $3,845,695 $3,734,195
Non-real estate loans 2,462,597 2,516,009
Retail sales contracts 965,313 998,441
Private label 253,028 376,580
Net finance receivables 7,526,633 7,625,225
Allowance for finance receivable
losses (380,154) (395,153)
Net finance receivables, less allowance
for finance receivable losses 7,146,479 7,230,072
Investment securities 912,281 880,033
Cash and cash equivalents 104,262 105,493
Goodwill 264,244 270,989
Assets held for sale - 667,007
Other assets 398,898 410,102
Total assets $8,826,164 $9,563,696
Liabilities and Shareholder's Equity
Long-term debt $4,178,756 $4,498,530
Short-term notes payable:
Commercial paper 2,583,662 3,015,920
Banks and other 90,000 111,000
Investment certificates 3,249 3,778
Insurance claims and policyholder
liabilities 430,963 456,430
Other liabilities 304,365 260,284
Accrued taxes 20,342 17,273
Total liabilities 7,611,337 8,363,215
Shareholder's equity:
Common stock 1,000 1,000
Additional paid-in capital 736,230 696,230
Net unrealized gains on investment
securities 29,194 21,454
Retained earnings 448,403 481,797
Total shareholder's equity 1,214,827 1,200,481
Total liabilities and shareholder's equity $8,826,164 $9,563,696
<FN>
<F1>
See Notes to Condensed Consolidated Financial Statements.
</FN>
</TABLE>
<PAGE>
<PAGE> 4
<TABLE>
AMERICAN GENERAL FINANCE, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(Unaudited)
<CAPTION>
Nine Months Ended
September 30,
1997 1996
(dollars in thousands)
<S> <C> <C>
Cash Flows from Operating Activities
Net income $ 93,105 $101,387
Reconciling adjustments to net cash
provided by operating activities:
Provision for finance receivable losses 186,639 301,220
Depreciation and amortization 63,228 73,028
Deferral of finance receivable
origination costs (28,797) (38,232)
Deferred federal income tax charge 59,057 8,481
Change in other assets and other liabilities (67,908) (7,626)
Change in insurance claims and
policyholder liabilities (25,467) (20,585)
Loss on sale of non-strategic assets 42,225 -
Operations related to assets held for sale 39,905 -
Other, net 11,961 59,446
Net cash provided by operating activities 373,948 477,119
Cash Flows from Investing Activities
Finance receivables originated or purchased (3,380,751) (3,859,686)
Principal collections on finance receivables 3,199,699 3,729,716
Net collections on assets held for sale 61,266 -
Securitized finance receivables purchased (100,000) -
Sale of non-strategic assets 732,504 -
Investment securities purchased (99,879) (149,261)
Investment securities called, matured and sold 82,209 138,969
Other, net (7,503) (43,669)
Net cash provided by (used for)
investing activities 487,545 (183,931)
Cash Flows from Financing Activities
Proceeds from issuance of long-term debt 485,367 73,031
Repayment of long-term debt (807,804) (425,584)
Change in investment certificates (529) (2,175)
Change in short-term notes payable (453,258) 212,917
Capital contribution from parent 40,000 -
Dividends paid (126,500) (138,590)
Net cash used for financing activities (862,724) (280,401)
(Decrease) increase in cash and cash equivalents (1,231) 12,787
Cash and cash equivalents at beginning of period 105,493 103,238
Cash and cash equivalents at end of period $104,262 $116,025
Supplemental Disclosure of Cash Flow Information
Income taxes paid $ 20,755 $ 13,900
Interest paid $378,066 $368,720
<FN>
<F1>
See Notes to Condensed Consolidated Financial Statements.
</FN>
</TABLE>
<PAGE>
<PAGE> 5
AMERICAN GENERAL FINANCE, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
September 30, 1997
Note 1. Principles of Consolidation
The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with generally accepted accounting principles
for interim periods and include the accounts of American General Finance,
Inc. and its subsidiaries. American General Finance, Inc. will be referred
to as "AGFI" or collectively, with its subsidiaries, whether directly or
indirectly owned, as the "Company". The subsidiaries are wholly-owned, and
all intercompany items have been eliminated. Per share information is not
included because AGFI is a wholly-owned subsidiary of American General
Corporation (American General).
Note 2. Adjustments and Reclassifications
These condensed consolidated financial statements include all adjustments,
consisting only of normal recurring adjustments, considered necessary by
management for a fair presentation of the Company's consolidated financial
position at September 30, 1997 and December 31, 1996, its consolidated
results of operations for the three months and nine months ended September
30, 1997 and 1996, and its consolidated cash flows for the nine months
ended September 30, 1997 and 1996. These condensed consolidated financial
statements should be read in conjunction with the consolidated financial
statements and related notes included in the Company's Annual Report on
Form 10-K for the year ended December 31, 1996.
During third quarter 1997, certain real estate secured loans having
advances of less than $10 thousand and high loan-to-value ratios were
reclassified from real estate to non-real estate loans (effective January
1, 1997). From a servicing and collection standpoint, these loans are
administered more like non-real estate secured loans than real estate
secured loans. This reclassification affected $169.1 million loans at
September 30, 1997.
Note 3. Accounting Changes
In June 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) 130, "Reporting
Comprehensive Income" which establishes standards for reporting and
displaying comprehensive income and its components in the financial
statements. This statement is effective for interim and annual periods
beginning after December 15, 1997. Reclassification of financial
statements for all periods presented will be required upon adoption.
Application of this statement will not change recognition or measurement
of net income and, therefore, will not impact the Company's consolidated
results of operations or financial position.
<PAGE>
<PAGE> 6
In June 1997, the FASB also issued SFAS 131, "Disclosures about Segments
of an Enterprise and Related Information" which changes the way companies
report segment information. This statement is effective for years
beginning after December 15, 1997, but need not be applied to interim
financial statements in the initial year of application. Restatement of
comparative information for all periods presented will be required upon
adoption. Adoption of this statement will result in more detailed segment
disclosures but will not have an impact on the Company's consolidated
results of operations or financial position.
Note 4. Derivative Financial Instruments
The Company's principal borrowing subsidiary is American General Finance
Corporation (AGFC), a wholly-owned subsidiary of AGFI. AGFC makes limited
use of derivative financial instruments to manage the cost of its debt.
AGFC uses interest conversion agreements to reduce its exposure to future
fluctuations in interest expense rates by effectively converting short-term
and certain long-term floating-rate debt to a fixed-rate basis. At
September 30, 1997, outstanding interest conversion agreements in which
AGFC contracted to pay interest at fixed rates and receive floating rates
totaled $740.0 million of notional amount, with an average fixed pay rate
of 7.72% and an average floating receive rate of 5.66%. AGFC's use of
interest conversion agreements did not have a material effect on the
Company's weighted-average interest rate or reported interest expense in
the first nine months of 1997 or 1996.
Note 5. Sale of Non-strategic Assets
During fourth quarter 1996, the Company decided to offer for sale $874.8
million of non-strategic, underperforming credit card and private label
finance receivable portfolios. These assets held for sale were carried at
net realizable value, after considering related expenses.
In April 1997, the Company repurchased $100.0 million of private label and
credit card receivables that previously had been sold through
securitization. No gain or loss resulted from this transaction. These
repurchased credit card receivables were offered for sale along with the
Company's other credit card receivables, which increased the carrying
amount of assets held for sale by approximately $70.0 million in April
1997.
In June 1997, the Company sold all of the assets held for sale (with a
remaining balance of $658.1 million) and $81.4 million of other private
label finance receivables. In connection with these sales, the Company
recorded an aftertax loss of $27.0 million in second quarter 1997. This
loss primarily resulted from establishing a liability for estimated future
payments to the purchaser of the credit card portfolio under a five-year
loss sharing arrangement.
<PAGE>
<PAGE> 7
Item 2. 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, and borrowings under credit facilities. 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 $373.9 million for the nine months ended
September 30, 1997 compared to $477.1 million for the same period in 1996.
Operating cash flow combined with the proceeds from the sale of non-
strategic assets, the net collections on assets held for sale, and a
capital contribution from American General generated cash flow of $1.2
billion for the nine months ended September 30, 1997 compared to $477.1
million for the same period in 1996. These cash flows were used
principally to fund the net repayments of debt for the nine months ended
September 30, 1997 and 1996 of $776.2 million and $141.8 million,
respectively, to pay dividends to American General of $126.5 million and
$138.6 million, respectively, to finance the net originations and purchases
of finance receivables of $181.1 million and $130.0 million, respectively,
and to repurchase $100.0 million of securitized finance receivables during
second quarter 1997.
Dividends are typically paid to manage the Company's leverage to a target
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 September 30, 1997 was 7.44 to 1. 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 maintain targeted leverage.
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 September 30, 1997, the Company's capital totaled $8.1
billion, consisting of $6.9 billion of debt and $1.2 billion of equity,
compared to $8.6 billion at September 30, 1996, consisting of $7.3 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
<PAGE>
<PAGE> 8
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.
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 uses 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.
Credit Facilities
The Company maintains credit facilities to support the issuance of
commercial paper and to provide an additional source of funds for operating
requirements. At September 30, 1997, the Company was an eligible borrower
under $3.6 billion of committed credit facilities extended to American
General and certain of its subsidiaries (the "shared committed
facilities"). The annual commitment fees for the shared committed
facilities ranged from .05% to .07%. The Company pays only an allocated
portion of the commitment fees for such committed facilities. At September
30, 1997, the Company also had $421.0 million of uncommitted credit
facilities and was an eligible borrower under $165.0 million of uncommitted
credit facilities extended to American General and certain of its
subsidiaries. Available borrowings under all facilities are reduced by any
outstanding borrowings. At September 30, 1997, Company borrowings
outstanding under uncommitted credit facilities totaled $90.0 million, and
there were no borrowings under any committed credit facilities.
Securitization
On April 1, 1997, the Company repurchased all $100.0 million of the private
label and credit card receivables that had previously been sold through
securitization. No gain or loss resulted from the repurchase transaction.
Of the $100.0 million repurchased, approximately $70.0 million was
classified as assets held for sale in April 1997. The repurchase
facilitated the sale of the credit card portfolio included in assets held
for sale and sold in June 1997.
Year 2000 Contingency
Management has been engaged in a company-wide program to render its
computer systems (hardware and mainframe and personal applications
software) year 2000 compliant. The Company will continue to incur internal
staff costs as well as third-party vendor and other expenses to prepare the
systems for year 2000. The cost of testing and conversion of systems
applications has not had, and is not expected to have, a material adverse
effect on the Company's consolidated results of operations or financial
condition. However, risks and uncertainties exist in most significant
systems development projects. If conversion of the Company's systems is
not completed on a timely basis, due to nonperformance by third-party
vendors or other unforeseen circumstances, the year 2000 problem could have
a material adverse impact on the operations of the Company.
<PAGE>
<PAGE> 9
SELECTED FINANCIAL INFORMATION
The following table shows certain selected financial information of the
Company for the periods indicated:
At or for the At or for the
Three Months Ended Nine Months Ended
September 30, September 30,
1997 1996 1997 1996
(dollars in thousands)
Average finance receivables,
net of unearned finance
charges (average net
receivables) $7,446,628 $8,042,491 $7,482,977 $8,094,076
Average borrowings $6,775,958 $7,051,834 $7,178,811 $7,123,268
Yield - finance charges
(annualized) as a
percentage of average
net receivables 16.83% 17.80% 16.96% 18.02%
Borrowing cost - interest
expense (annualized) as
a percentage of average
borrowings 6.90% 6.87% 6.80% 6.90%
Interest spread - yield
less borrowing cost 9.93% 10.93% 10.16% 11.12%
Insurance revenues
(annualized) as a
percentage of average
net receivables 2.49% 2.57% 2.51% 2.55%
Operating expenses
(annualized) as a
percentage of average
net receivables 6.39% 6.14% 6.33% 6.39%
Return on average assets
(annualized) 1.86% 1.91% 1.35% 1.47%
Return on average equity
(annualized) 13.47% 13.44% 10.07% 10.33%
Charge-off ratio -
net charge-offs
(annualized) as a
percentage of average
net receivables 3.27% 5.37% 3.59% 5.40%
Allowance ratio -
allowance for finance
receivable losses as a
percentage of net
finance receivables - - 5.05% 5.67%
<PAGE>
<PAGE> 10
Selected Financial Information (Continued)
At or for the
Nine Months Ended
September 30,
1997 1996
Ratio of earnings to fixed charges (refer to
Exhibit 12 for calculations) 1.39 1.42
Delinquency ratio - finance receivables any
portion of which was 60 days or more past
due as a percentage of related receivables
(including unearned finance charges and
excluding deferred origination costs, a
fair value adjustment on finance receivables,
and accrued interest) 3.83% 4.28%
Debt to tangible equity ratio - debt to
equity less goodwill and net unrealized
gains or losses on fixed-maturity
investment securities 7.44 7.54
Debt to equity ratio 5.64 5.82
ANALYSIS OF OPERATING RESULTS
Net Income
Net income decreased $2.9 million, or 7%, for the three months ended
September 30, 1997 and $8.3 million, or 8%, for the nine months ended
September 30, 1997 when compared to the same periods in 1996 primarily due
to decreases in finance charges, partially offset by decreases in the
provision for finance receivable losses, operating expenses, and interest
expense. The decrease in net income for the nine months ended September
30, 1997 also reflected the loss on the sale of non-strategic assets during
second quarter 1997.
Net income has fluctuated over the past two years due to the decline in
credit quality of the Company's finance receivables beginning in 1995 and
management's related actions to address credit quality. The Company's
strategy in prior years of emphasizing higher-yielding finance receivables,
which are characterized by higher credit risk, resulted in delinquencies
and net charge-offs increasing to higher than anticipated levels beginning
in the third quarter of 1995. Due to these increases in delinquencies and
net charge-offs, management initiated a comprehensive review of the Company
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, the Company recorded a $216.0 million increase in the
allowance for finance receivable losses in fourth quarter 1995.
<PAGE>
<PAGE> 11
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.
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 charge to
operations of $93.5 million was necessary to reduce the carrying amount of
the assets held for sale to net realizable value. This charge was recorded
in fourth quarter 1996.
In June 1997, the Company sold all of the assets held for sale (with a
remaining balance of $658.1 million) and $81.4 million of other private
label finance receivables. In connection with these sales, the Company
took an aftertax charge of $27.0 million in second quarter 1997. This
additional loss primarily resulted from establishing a liability for
estimated future payments to the purchaser of the credit card portfolio
under a five-year loss sharing arrangement.
Net finance receivables totaled $7.5 billion at September 30, 1997, a
decrease of $681.7 million from September 30, 1996 primarily due to the
aforementioned reclassification and sale of credit card and certain private
label receivables and the substantial liquidation of underperforming
receivables, partially offset by purchases of real estate loan portfolios
during fourth quarter 1996 and real estate loan growth during 1997. At
September 30, 1997, real estate secured finance receivables accounted for
51% of total net finance receivables compared to 42% at September 30, 1996.
Results of the action program to improve credit quality became evident in
the first nine months of 1997. Although yield decreased 106 basis points
for the nine months ended September 30, 1997 when compared to the same
period in 1996, this was offset by a 181 basis point improvement in the
charge-off ratio. The delinquency ratio also improved to 3.83% at
September 30, 1997 from 4.28% a year earlier.
Factors which specifically affected the Company's operating results are as
follows:
Finance Charges
Finance charge revenues decreased $44.2 million, or 12%, for the three
months ended September 30, 1997 and $142.8 million, or 13%, for the nine
months ended September 30, 1997 when compared to the same periods in 1996
primarily due to decreases in average net receivables and yield. Average
net receivables decreased $595.9 million, or 7%, for the three months ended
September 30, 1997 and $611.1 million, or 8%, for the nine months ended
September 30, 1997 when compared to the same periods in 1996 primarily due
<PAGE>
<PAGE> 12
to the action program for improving credit quality, which included the
aforementioned reclassification and sales of certain finance receivables
and the substantial liquidation of underperforming receivables. The
exclusion of finance charges related to the assets held for sale for the
nine months ended September 30, 1997 totaled $75.0 million. Yield
decreased 97 basis points for the three months ended September 30, 1997 and
106 basis points for the nine months ended September 30, 1997 when compared
to the same periods in 1996 primarily due to the action program for
improving credit quality, including increasing the proportion of finance
receivables that are real estate loans (which generally have lower yields),
partially offset by the decreased proportion of non-accrual delinquent
finance receivables during 1997.
Insurance Revenues
Insurance revenues decreased $5.2 million, or 10%, for the three months
ended September 30, 1997 and $14.2 million, or 9%, for the nine months
ended September 30, 1997 when compared to the same periods in 1996
primarily due to decreases in earned premiums. Earned premiums decreased
primarily due to the decline in related loan volume resulting from the
action program for improving credit quality.
Other Revenues
Other revenues decreased $.2 million, or 1%, for the three months ended
September 30, 1997 and increased $2.7 million, or 5%, for the nine months
ended September 30, 1997 when compared to the same periods in 1996. The
increase in other revenues for the nine months ended September 30, 1997 was
primarily due to an increase in investment revenue. The increase in
investment revenue for the nine months ended September 30, 1997 was
primarily due to growth in average invested assets for the insurance
operations of $40.2 million, partially offset by a decrease in adjusted
portfolio yield of 7 basis points.
Interest Expense
Interest expense decreased $4.1 million, or 3%, for the three months ended
September 30, 1997 and $25.7 million, or 7%, for the nine months ended
September 30, 1997 when compared to the same periods in 1996. The decrease
in interest expense for the three months ended September 30, 1997 was
primarily due to a decrease in average borrowings. The decrease in
interest expense for the nine months ended September 30, 1997 was due to
the exclusion of interest expense related to the assets held for sale
totaling $23.2 million and to the decline in borrowing cost, partially
offset by an increase in average borrowings. Borrowing cost decreased 10
basis points for the nine months ended September 30, 1997 when compared to
the same period in 1996 due to lower short-term borrowing cost, partially
offset by higher long-term borrowing cost. Average borrowings decreased
$275.9 million, or 4%, for the three months ended September 30, 1997 and
increased $55.5 million, or 1%, for the nine months ended September 30,
1997 when compared to the same periods in 1996. The decrease in average
borrowings for the three months ended September 30, 1997 was primarily due
to the aforementioned sales of certain finance receivables during second
quarter 1997, partially offset by purchases of real estate loan portfolios
that occurred in fourth quarter 1996 and growth in real estate loans during
1997. The increase in average borrowings for the nine months ended
September 30, 1997 was primarily to fund the purchases of real estate loan
<PAGE>
<PAGE> 13
portfolios that occurred in fourth quarter 1996 and growth in real estate
loans during 1997, partially offset by the aforementioned sales of certain
finance receivables during second quarter 1997.
Operating Expenses
Operating expenses decreased $4.5 million, or 4%, for the three months
ended September 30, 1997 and $32.6 million, or 8%, for the nine months
ended September 30, 1997 when compared to the same periods in 1996 due to
(1) the exclusion of expenses to service the non-strategic assets sold
during second quarter 1997 totaling $3.8 million and $18.2 million,
respectively (the Company continued to service the receivables through
September 1997); (2) certain non-recurring operating expenses associated
with discontinued initiatives that negatively impacted the financial
results for 1996 by $1.2 million and $8.5 million, respectively; and (3)
the action program to improve credit quality and reduce expenses. The
action program implemented in fourth quarter 1995 (which included
emphasizing real estate loan growth) contributed to a workforce reduction
of approximately 900 positions and a net decrease of 62 branch offices
since September 30, 1996.
Provision for Finance Receivable Losses
Provision for finance receivable losses decreased $35.0 million, or 39%,
for the three months ended September 30, 1997 and $114.6 million, or 38%,
for the nine months ended September 30, 1997 when compared to the same
periods in 1996 primarily due to the decreases in net charge-offs totaling
$47.0 million and $126.7 million, respectively. These decreases were
primarily due to reductions in charge-off levels for the core branch
network. The decrease in net charge-offs for the nine months ended
September 30, 1997 also reflected the exclusion of net charge-offs related
to the assets held for sale totaling $58.6 million.
Net charge-offs from finance receivables for the three months ended
September 30, 1997 decreased to $60.6 million from $107.6 million for the
same period in 1996. Net charge-offs for the three months ended June 30,
1997 were $68.5 million. The charge-off ratio for third quarter 1997 was
3.27% compared to 3.68% for second quarter 1997 and 5.37% for third quarter
1996. Excluding the portfolios held for sale, the charge-off ratio was
4.56% for third quarter 1996.
At September 30, 1997, delinquencies were $312.2 million compared to $380.2
million at September 30, 1996 and $299.6 million at June 30, 1997. The
delinquency ratio at September 30, 1997 was 3.83% compared to 3.73% at June
30, 1997 and 4.28% at September 30, 1996. The increase in the delinquency
ratio from June 30, 1997 reflected an increase in such ratio in the loan
portfolio. Excluding the portfolios held for sale, the delinquency ratio
at September 30, 1996 was 3.93%.
During third quarter 1997, management reduced the allowance for finance
receivable losses by $5.0 million from the balance at June 30, 1997 based
on the favorable credit quality trends of the finance receivable portfolio.
The allowance for finance receivable losses decreased $85.0 million from
$465.2 million at September 30, 1996 due to the reclassification of $70.0
million of allowance for finance receivable losses to assets held for sale
and reductions in the allowance for finance receivable losses based on the
results of the action program for improving credit quality, including the
<PAGE>
<PAGE> 14
increased proportion of real estate loans. The allowance ratio at
September 30, 1997 was 5.05% compared to 5.20% at June 30, 1997 and 5.67%
at September 30, 1996. 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.
Loss on Sale of Non-strategic Assets
Loss on sale of non-strategic assets totaled $42.2 million ($27.0 million
aftertax) for the nine months ended September 30, 1997 due to the sale of
non-strategic, underperforming receivables during second quarter 1997. See
Analysis of Operating Results - Net Income for further information on loss
on sale of non-strategic assets.
Insurance Losses and Loss Adjustment Expenses
Insurance losses and loss adjustment expenses decreased $2.3 million, or
9%, for the three months ended September 30, 1997 and $11.6 million, or
14%, for the nine months ended September 30, 1997 when compared to the same
periods in 1996 due to decreases in provision for future benefits and in
claims paid. Provision for future benefits decreased $1.3 million and $5.3
million, respectively, due to reduced sales of non-credit insurance
products. Claims decreased $1.0 million and $6.3 million, respectively,
primarily due to decreased business. The decrease in claims for the nine
months ended September 30, 1997 also reflected favorable loss experience
on credit insurance.
Provision for Income Taxes
The provision for income taxes decreased $.9 million, or 3%, for the three
months ended September 30, 1997 and $3.8 million, or 7%, for the nine
months ended September 30, 1997 when compared to the same periods in 1996
primarily due to lower taxable income.
Forward-looking Statements
The statements contained in this filing on Form 10-Q 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; the Company's ability to render its computer systems
year 2000 compliant; and failure to achieve the Company's anticipated
levels of expense savings from cost-saving initiatives. Readers are also
directed to other risks and uncertainties discussed in documents filed by
the Company with the Securities and Exchange Commission.
<PAGE>
<PAGE> 15
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
In addition to those lawsuits or proceedings disclosed in the Company's
1996 Form 10-K, 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 not have a 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.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
(12) Computation of Ratio of Earnings to Fixed Charges.
(27) Financial Data Schedule.
(b) Reports on Form 8-K.
No Current Reports on Form 8-K were filed during the third quarter of
1997.
<PAGE>
<PAGE> 16
Signature
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
AMERICAN GENERAL FINANCE, INC.
(Registrant)
Date: November 13, 1997 By /s/ John S. Poelker
John S. Poelker
Senior Vice President and Chief
Financial Officer
(Duly Authorized Officer and Principal
Financial Officer)
<PAGE>
<PAGE> 17
Exhibit Index
Exhibits Page
(12) Computation of Ratio of Earnings to Fixed Charges. 18
(27) Financial Data Schedule. 19
<PAGE>
<PAGE>
<PAGE> 18
Exhibit 12
<TABLE>
AMERICAN GENERAL FINANCE, INC. AND SUBSIDIARIES
Computation of Ratio of Earnings to Fixed Charges
(Unaudited)
<CAPTION>
Nine Months Ended
September 30,
1997 1996
(dollars in thousands)
<S> <C> <C>
Earnings:
Income before provision for income
taxes $147,683 $159,769
Interest expense (including $23,221
for 1997 to fund assets held for
sale) 366,037 368,518
Implicit interest in rents 8,012 9,141
Total earnings $521,732 $537,428
Fixed charges:
Interest expense (including $23,221
for 1997 to fund assets held for
sale) $366,037 $368,518
Implicit interest in rents 8,012 9,141
Total fixed charges $374,049 $377,659
Ratio of earnings to fixed charges 1.39 1.42
</TABLE>
<PAGE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 104,262
<SECURITIES> 912,281
<RECEIVABLES> 7,526,633<F1>
<ALLOWANCES> 380,154<F2>
<INVENTORY> 0<F3>
<CURRENT-ASSETS> 0<F4>
<PP&E> 0<F4>
<DEPRECIATION> 0<F4>
<TOTAL-ASSETS> 8,826,164
<CURRENT-LIABILITIES> 0<F4>
<BONDS> 4,178,756<F5>
0<F3>
0<F3>
<COMMON> 1,000
<OTHER-SE> 1,213,827<F6>
<TOTAL-LIABILITY-AND-EQUITY> 8,826,164
<SALES> 0<F3>
<TOTAL-REVENUES> 1,143,836<F7>
<CGS> 0<F3>
<TOTAL-COSTS> 0<F4>
<OTHER-EXPENSES> 466,698<F8>
<LOSS-PROVISION> 186,639<F9>
<INTEREST-EXPENSE> 342,816<F10>
<INCOME-PRETAX> 147,683
<INCOME-TAX> 54,578
<INCOME-CONTINUING> 93,105
<DISCONTINUED> 0<F3>
<EXTRAORDINARY> 0<F3>
<CHANGES> 0<F3>
<NET-INCOME> 93,105
<EPS-PRIMARY> 0<F3>
<EPS-DILUTED> 0<F3>
<PAGE>
<FN>
<F1>RECEIVABLES IN THIS EXHIBIT REPRESENTS NET FINANCE RECEIVABLES REPORTED
IN THE COMPANY'S CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
<F2>ALLOWANCES IN THIS EXHIBIT REPRESENTS ALLOWANCE FOR FINANCE RECEIVABLE
LOSSES REPORTED IN THE COMPANY'S CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS.
<F3>NOT APPLICABLE.
<F4>NOT REPORTED SEPARATELY (OR NOT REPORTED SEPARATELY AS DEFINED BY
ARTICLE 5 OF REGULATION S-X) IN DOCUMENT FILED.
<F5>BONDS IN THIS EXHIBIT REPRESENTS LONG-TERM DEBT REPORTED IN THE COMPANY'S
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS WHICH INCLUDES OTHER LONG-TERM
DEBT.
<F6>OTHER STOCKHOLDER'S EQUITY IN THIS EXHIBIT REPRESENTS ADDITIONAL PAID-IN-
CAPITAL, NET UNREALIZED GAINS (LOSSES) ON INVESTMENT SECURITIES, AND
RETAINED EARNINGS REPORTED IN THE COMPANY'S CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS.
<F7>TOTAL REVENUES IN THIS EXHIBIT REPRESENTS TOTAL REVENUES REPORTED IN THE
COMPANY'S CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
<F8>OTHER EXPENSES IN THIS EXHIBIT REPRESENTS OPERATING EXPENSES, LOSS ON SALE
OF NON-STRATEGIC ASSETS, AND INSURANCE LOSSES AND LOSS ADJUSTMENT EXPENSES
REPORTED IN THE COMPANY'S CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
<F9>LOSS PROVISION IN THIS EXHIBIT REPRESENTS PROVISION FOR FINANCE
RECEIVABLE LOSSES REPORTED IN THE COMPANY'S CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS.
<F10>INTEREST EXPENSE IN THIS EXHIBIT REPRESENTS INTEREST EXPENSE REPORTED
IN THE COMPANY'S CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
<PAGE>
</FN>
</TABLE>
