<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, 1998
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 12, 1998, there were 2,000,000 shares of the registrant's
common stock, $.50 par value, outstanding.
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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,
1998 1997 1998 1997
(dollars in thousands)
<S> <C> <C> <C> <C>
Revenues
Finance charges $343,612 $314,997 $1,002,076 $ 950,044
Insurance 44,290 46,436 131,630 140,705
Other 19,683 18,185 58,638 53,087
Total revenues 407,585 379,618 1,192,344 1,143,836
Expenses
Interest expense 130,398 117,169 376,116 342,816
Operating expenses 129,767 118,970 381,317 355,221
Provision for finance
receivable losses 52,706 55,634 152,613 186,639
Loss on sale of non-
strategic assets - - - 42,225
Insurance losses and loss
adjustment expenses 20,736 23,500 64,504 69,252
Total expenses 333,607 315,273 974,550 996,153
Income before provision for
income taxes 73,978 64,345 217,794 147,683
Provision for Income Taxes 26,451 23,656 80,864 54,578
Net Income $ 47,527 $ 40,689 $ 136,930 $ 93,105
<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,
1998 1997
(dollars in thousands)
<S> <C> <C>
Assets
Finance receivables, net of unearned
finance charges:
Real estate loans $ 4,956,212 $4,155,167
Non-real estate loans 2,540,568 2,554,888
Retail sales finance 1,310,737 1,301,133
Net finance receivables 8,807,517 8,011,188
Allowance for finance receivable
losses (365,153) (372,653)
Net finance receivables, less allowance
for finance receivable losses 8,442,364 7,638,535
Investment securities 993,452 929,311
Cash and cash equivalents 126,814 105,695
Other assets 716,676 615,959
Total assets $10,279,306 $9,289,500
Liabilities and Shareholder's Equity
Long-term debt $ 4,327,366 $4,011,457
Short-term notes payable:
Commercial paper 3,614,517 3,157,671
Banks and other 141,500 95,000
Investment certificates 1,883 2,574
Insurance claims and policyholder
liabilities 433,904 436,859
Other liabilities 342,181 300,342
Accrued taxes 22,318 22,272
Total liabilities 8,883,669 8,026,175
Shareholder's equity:
Common stock 1,000 1,000
Additional paid-in capital 757,083 743,083
Accumulated other comprehensive
income 47,494 34,512
Retained earnings 590,060 484,730
Total shareholder's equity 1,395,637 1,263,325
Total liabilities and shareholder's equity $10,279,306 $9,289,500
<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,
1998 1997
(dollars in thousands)
<S> <C> <C>
Cash Flows from Operating Activities
Net income $ 136,930 $ 93,105
Reconciling adjustments:
Provision for finance receivable losses 152,613 186,639
Depreciation and amortization 75,529 63,228
Deferral of finance receivable origination costs (33,536) (28,797)
Deferred income tax charge 8,836 59,057
Change in other assets and other liabilities 4,222 6,244
Change in insurance claims and
policyholder liabilities (2,955) (25,467)
Change in taxes receivable and payable 23,127 (21,103)
Loss on sale of non-strategic assets - 42,225
Operations related to assets held for sale - 39,905
Other, net (14,494) 6,965
Net cash provided by operating activities 350,272 422,001
Cash Flows from Investing Activities
Finance receivables originated or purchased (4,488,116) (3,380,751)
Principal collections on finance receivables 3,549,880 3,199,699
Net collections on assets held for sale - 61,266
Securitized finance receivables purchased - (100,000)
Acquisition of HSA Residential Mortgage Services
of Texas, Inc. (25,600) -
Advances for purchases of finance receivables (16,020) (48,053)
Sale of non-strategic assets - 732,504
Investment securities purchased (168,784) (99,879)
Investment securities called, matured and sold 130,776 82,209
Change in premiums on finance receivables
purchased and deferred charges (95,474) (4,548)
Other, net (14,502) (2,955)
Net cash (used for) provided by investing activities (1,127,840) 439,492
Cash Flows from Financing Activities
Proceeds from issuance of long-term debt 1,128,506 485,367
Repayment of long-term debt (814,874) (807,804)
Change in investment certificates (691) (529)
Change in short-term notes payable 503,346 (453,258)
Capital contribution from parent 14,000 40,000
Dividends paid (31,600) (126,500)
Net cash provided by (used for) financing activities 798,687 (862,724)
Increase (decrease) in cash and cash equivalents 21,119 (1,231)
Cash and cash equivalents at beginning of period 105,695 105,493
Cash and cash equivalents at end of period $126,814 $104,262
Supplemental Disclosure of Cash Flow Information
Income taxes paid $ 50,303 $ 20,755
Interest paid $391,397 $378,066
<FN>
<F1>
See Notes to Condensed Consolidated Financial Statements.
</FN>
</TABLE>
<PAGE>
<PAGE> 5
<TABLE>
AMERICAN GENERAL FINANCE, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Comprehensive Income
(Unaudited)
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1998 1997 1998 1997
(dollars in thousands)
<S> <C> <C> <C> <C>
Net income $47,527 $40,689 $136,930 $ 93,105
Other comprehensive income:
Net unrealized gains on
investment securities 18,856 14,642 19,676 12,116
Income tax effect (6,600) (5,125) (6,887) (4,241)
Net unrealized gains on
investment securities,
net of tax 12,256 9,517 12,789 7,875
Reclassification adjustment
for realized gains
(losses) included in
net income 391 (99) 297 (208)
Income tax effect (137) 35 (104) 73
Realized gains (losses)
included in net income,
net of tax 254 (64) 193 (135)
Other comprehensive income,
net of tax 12,510 9,453 12,982 7,740
Comprehensive income $60,037 $50,142 $149,912 $100,845
<FN>
<F1>
See Notes to Condensed Consolidated Financial Statements.
</FN>
</TABLE>
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<PAGE> 6
AMERICAN GENERAL FINANCE, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
September 30, 1998
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, 1998 and December 31, 1997, its consolidated
results of operations for the three months and nine months ended September
30, 1998 and 1997, its consolidated cash flows for the nine months ended
September 30, 1998 and 1997, and its consolidated comprehensive income for
the three months and nine months ended September 30, 1998 and 1997. 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,
1997.
To conform with the 1998 presentation, certain items in the prior period
have been reclassified.
Note 3. Accounting Changes
In June 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (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
disclosures but will not have an impact on the Company's consolidated
results of operations or financial position.
In June 1998, the FASB issued SFAS 133, "Accounting for Derivative
Instruments and Hedging Activities," which requires all derivative
instruments to be recognized at fair value as either assets or liabilities
in the balance sheet. Changes in the fair value of a derivative instrument
are reported as earnings or other comprehensive income, depending upon the
intended use of the derivative instrument. This statement is effective for
years beginning after June 15, 1999. Adoption of SFAS 133 is not expected
<PAGE>
<PAGE> 7
to have a material impact on the Company's consolidated results of
operations or financial position.
During first quarter 1998, the Company adopted SFAS 130, "Reporting
Comprehensive Income," which establishes standards for reporting and
displaying comprehensive income and its components in the financial
statements. The Company elected to report comprehensive income and its
components in the consolidated statements of comprehensive income.
Adoption of SFAS 130 did not change recognition or measurement of net
income and, therefore, did not impact 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 and
is neither a dealer nor a trader in derivative financial instruments.
AGFC's use of derivative financial instruments is generally limited to
interest rate swap and treasury rate lock agreements.
AGFC uses interest rate swap agreements to reduce its exposure to adverse
future fluctuations in interest expense rates by effectively converting
short-term and certain long-term floating-rate debt to a fixed-rate basis.
Interest rate swap agreements in which AGFC contracted to pay interest at
fixed rates and receive interest at floating rates totaled $965.0 million
in notional amount at September 30, 1998, with a weighted average interest
rate payable of 7.24% and a weighted average interest rate receivable of
5.25%.
Treasury rate lock agreements have been used to hedge against the risk of
rising interest rates on anticipated long-term debt issuances. These
agreements provide for future cash settlements that are a function of
specified U.S. Treasury rates. At September 30, 1998, there were no
treasury rate lock agreements in effect.
AGFC's use of interest rate swap and treasury rate lock 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 1998 or 1997.
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 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 $70.0 million of allowance for finance receivable losses 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 1996, the
Company determined that a write-down of $145.5 million ($93.5 million
aftertax) at December 31, 1996 was necessary to reduce the carrying amount
of the assets held for sale to net realizable value, after considering
related expenses.
<PAGE>
<PAGE> 8
In April 1997, the Company repurchased $100.0 million of private label and
credit card finance receivables that previously had been sold through
securitization. No gain or loss resulted from this transaction. These
repurchased credit card finance receivables were offered for sale along
with the Company's other credit card finance 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 a loss of $42.2 million ($27.0 million aftertax) 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.
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, borrowings under credit facilities, the sale of
securitized finance receivables, and capital contributions from American
General. 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 $350.3 million for the nine months ended
September 30, 1998 compared to $422.0 million for the same period in 1997.
The decrease in operating cash flow for the nine months ended September 30,
1998 when compared to the same period in 1997 was primarily due to the sale
of non-strategic assets in June 1997. Operating cash flow combined with
the net proceeds from issuance of debt and a capital contribution of $14.0
million from American General generated cash flow of $1.2 billion for the
nine months ended September 30, 1998. This cash flow was used principally
to finance the net originations and purchases of finance receivables of
$954.3 million, to fund the increase in premiums on finance receivables
purchased and deferred charges of $95.5 million, to pay dividends to
American General of $31.6 million, and to acquire HSA Residential Mortgage
Services of Texas, Inc. for $25.6 million. 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 of $40.0
million from American General generated cash flow of $1.3 billion for the
nine months ended September 30, 1997. This cash flow was used principally
to fund the net repayments of debt of $776.2 million, to finance the net
originations and purchases of finance receivables of $229.1 million, to pay
dividends to American General of $126.5 million, and to repurchase $100.0
million of securitized finance receivables.
<PAGE>
<PAGE> 9
Dividends are paid (or capital contributions are received) to manage the
Company's leverage to a target of 7.50 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,
1998 was 7.56 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, 1998, the Company's capital totaled $9.5
billion, consisting of $8.1 billion of debt and $1.4 billion of equity,
compared to $8.1 billion at September 30, 1997, consisting of $6.9 billion
of debt and $1.2 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 capital 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. Management determines the Company's mix of fixed-rate and
floating-rate debt 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 rate swap agreements to synthetically create fixed-rate
debt by altering the nature of floating-rate funding, thereby limiting its
exposure to adverse interest rate movements. In addition, AGFC has used
treasury rate lock agreements to hedge against the risk of rising interest
rates on anticipated long-term debt issuances.
Credit Facilities
The Company participates in credit facilities to support the issuance of
commercial paper and to provide an additional source of funds for operating
requirements. At September 30, 1998, the Company was an eligible borrower
under $5.0 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, 1998, the Company also had $318.5 million of uncommitted credit
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<PAGE> 10
facilities and was an eligible borrower under $200.0 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, 1998, Company borrowings
outstanding under uncommitted credit facilities totaled $140.0 million, and
there were no borrowings under any committed credit facilities.
Year 2000
Internal Systems. The Company is in the process of modifying its internal
systems to achieve Year 2000 readiness. The Company has developed and is
implementing a plan to minimize the risk of a significant negative impact
on its operations.
The Company's plan includes the following activities: (1) perform an
inventory of the Company's information technology and non-information
technology systems; (2) assess which items in the inventory may expose the
Company to business interruptions due to Year 2000 issues; (3) reprogram or
replace systems that are not Year 2000 ready; (4) test systems to prove
that they will function into the next century as they do currently; and (5)
return the systems to operations. As of September 30, 1998, the inventory
and assessment activities are substantially complete, and the Company is
progressing with activities (3) and (4). The Company expects to
substantially complete the remaining activities for critical systems by
December 31, 1998. However, activities (3) through (5) for certain systems
will continue in 1999.
Third Party Relationships. The Company has relationships with various
third parties who must also be Year 2000 ready. These third parties
provide (or receive) resources and services to (or from) the Company and
include organizations with which the Company exchanges information. Third
parties include vendors of hardware, software, and information services;
providers of infrastructure services such as voice and data communications
and utilities for office facilities; and customers. Third parties differ
from internal systems in that the Company exercises less, or no, control
over Year 2000 readiness. The Company has developed a plan to assess and
attempt to mitigate the risks associated with the potential failure of
third parties to achieve Year 2000 readiness. The plan includes the
following activities: (1) identify and classify third party dependencies;
(2) research, analyze, and document Year 2000 readiness for critical third
parties; and (3) test critical hardware and software products and
electronic interfaces. As of September 30, 1998, the identification and
classification activities are substantially complete. The Company expects
to substantially complete the research and analysis of critical third
parties' Year 2000 readiness by December 31, 1998. Due to the various
stages of third parties' Year 2000 readiness, testing activities will
extend through 1999.
Contingency Plan. The Company has commenced contingency planning to reduce
the risk of Year 2000-related business failures. The contingency plan,
which addresses both internal systems and third party relationships,
includes the following activities: (1) evaluate the consequences of failure
of business processes with significant exposure to Year 2000 risk; (2)
determine the probability of a Year 2000-related failure for those
processes that have a high consequence of failure; (3) develop an action
plan to complete contingency plan for those processes that rank high in
both consequence and probability of failure; and (4) complete the
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<PAGE> 11
applicable action plan. The Company has substantially completed evaluation
activities as of September 30, 1998 and is proceeding with the subsequent
activities. The Company expects to substantially complete all contingency
planning activities by April 30, 1999.
Risks and Uncertainties. Based on its plan to make internal systems ready
for Year 2000, to deal with third party relationships, and to develop
contingency actions, the Company believes that it will experience at most
isolated and minor disruptions of business processes following the turn of
the century. Such disruptions are not expected to have a material effect
on the Company's future results of operations, liquidity, or financial
condition. However, due to the magnitude and complexity of this project,
risks and uncertainties exist and the Company is not able to predict a most
reasonably likely worst case scenario. If conversion of the Company's
internal systems is not completed on a timely basis (due to non-performance
by significant third-party vendors, lack of qualified personnel to perform
the Year 2000 work, or other unforeseen circumstances in completing the
Company's plan), or if critical third parties fail to achieve Year 2000
readiness on a timely basis, the Year 2000 issues could have a material
adverse impact on the Company's operations following the turn of the
century.
Costs. Through September 30, 1998, the Company has incurred and expensed
$3.6 million (pretax) related to Year 2000 readiness, including $2.9
million incurred during the first nine months of 1998. The Company
currently anticipates that it will incur future costs of approximately $3.7
million (pretax) for additional internal staff, third-party vendors, and
other expenses to achieve Year 2000 readiness. In addition, the Company
has elected to accelerate the planned replacement of certain systems as
part of the Year 2000 plan. Costs of the replacement systems are being
capitalized and amortized over their useful lives, recorded as operating
leases, or expensed as incurred in accordance with the Company's normal
accounting policies. The Company currently anticipates total replacement
costs of $2.1 million.
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<PAGE> 12
SELECTED FINANCIAL INFORMATION
The following table shows selected financial information of the Company:
At or for the At or for the
Three Months Ended Nine Months Ended
September 30, September 30,
1998 1997 1998 1997
(dollars in thousands)
Average finance receivables
net of unearned finance
charges (average net
receivables) $8,678,694 $7,446,628 $8,307,683 $7,482,977
Average borrowings $7,946,247 $6,775,958 $7,584,573 $7,178,811
Yield - finance charges
(annualized) as a
percentage of average
net receivables 15.75% 16.83% 16.11% 16.96%
Borrowing cost - interest
expense (annualized) as
a percentage of average
borrowings 6.55% 6.90% 6.62% 6.80%
Interest spread - yield
less borrowing cost 9.20% 9.93% 9.49% 10.16%
Insurance revenues
(annualized) as a
percentage of average
net receivables 2.04% 2.49% 2.11% 2.51%
Operating expenses
(annualized) as a
percentage of average
net receivables 5.98% 6.39% 6.12% 6.33%
Return on average assets
(annualized) 1.87% 1.86% 1.88% 1.35%
Return on average equity
(annualized) 13.96% 13.47% 13.89% 10.07%
Charge-off ratio - net
charge-offs (annualized)
as a percentage of the
average of net finance
receivables at the
beginning of each month
during the period 2.44% 3.27% 2.58% 3.59%
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<PAGE> 13
Selected Financial Information (Continued)
At or for the
Nine Months Ended
September 30,
1998 1997
Allowance ratio - allowance for finance
receivable losses as a percentage of
net finance receivables 4.15% 5.05%
Ratio of earnings to fixed charges (refer
to Exhibit 12 for calculations) 1.57 1.39
Delinquency ratio - finance receivables 60
days or more past due as a percentage of
related receivables 3.75% 3.83%
Debt to tangible equity ratio - debt to
equity less goodwill and net unrealized
gains or losses on fixed-maturity
investment securities 7.56 7.44
Debt to equity ratio 5.79 5.64
ANALYSIS OF OPERATING RESULTS
Net Income
Net income increased $6.8 million, or 17%, for the three months ended
September 30, 1998 and $43.8 million, or 47%, for the nine months ended
September 30, 1998 when compared to the same periods in 1997 reflecting
lower net charge-offs and finance receivable growth. The increase in net
income for the nine months ended September 30, 1998 also reflected the loss
on the sale of non-strategic assets during second quarter 1997.
During the past several years, the Company has focused on an action program
to improve credit quality. The components of this action program included
selling under-performing receivable portfolios, raising underwriting
standards, and rebalancing the portfolio to increase the proportion of real
estate loans. See Note 5. of the Notes to Condensed Consolidated Financial
Statements in Item 1. for further information on the sale of the Company's
non-strategic assets.
Results of the action program became evident in 1997 and continued to
improve the Company's operating results in the first nine months of 1998.
The charge-off ratio improved 101 basis points for the nine months ended
September 30, 1998 when compared to the same period in 1997, which more
than offset the decline in yield of 85 basis points.
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<PAGE> 14
Factors which specifically affected the Company's operating results are as
follows:
Finance Charges
Finance charge revenues increased $28.6 million, or 9%, for the three
months ended September 30, 1998 and $52.0 million, or 5%, for the nine
months ended September 30, 1998 when compared to the same periods in 1997
due to increases in average net receivables, partially offset by declines
in yield. Average net receivables increased $1.2 billion, or 17%, for the
three months ended September 30, 1998 and $824.7 million, or 11%, for the
nine months ended September 30, 1998 when compared to the same periods in
1997 primarily due to growth in real estate loans. The increase in average
net receivables for the nine months ended September 30, 1998 was partially
offset by the sale of certain private label receivables in second quarter
1997. Yield decreased 108 basis points for the three months ended
September 30, 1998 and 85 basis points for the nine months ended September
30, 1998 when compared to the same periods in 1997 primarily due to the
larger proportion of finance receivables that are real estate loans, which
generally have lower yields.
Insurance Revenues
Insurance revenues decreased $2.1 million, or 5%, for the three months
ended September 30, 1998 and $9.1 million, or 6%, for the nine months ended
September 30, 1998 when compared to the same periods in 1997 primarily due
to decreases in earned premiums. Earned premiums decreased primarily due
to a decrease in related loan volume in 1996 and the first three quarters
of 1997.
Other Revenues
Other revenues increased $1.5 million, or 8%, for the three months ended
September 30, 1998 and $5.6 million, or 10%, for the nine months ended
September 30, 1998 when compared to the same periods in 1997. The increase
in other revenues for the nine months ended September 30, 1998 was
primarily due to an increase in investment revenue reflecting growth in
average invested assets, partially offset by a decline in adjusted
portfolio yield.
Interest Expense
Interest expense increased $13.2 million, or 11%, for the three months
ended September 30, 1998 and $33.3 million, or 10%, for the nine months
ended September 30, 1998 when compared to the same periods in 1997 due to
increases in average borrowings to support asset growth, partially offset
by declines in borrowing cost. Borrowing cost decreased 35 basis points
for the three months ended September 30, 1998 and 18 basis points for the
nine months ended September 30, 1998 when compared to the same periods in
1997.
<PAGE>
<PAGE> 15
Operating Expenses
Operating expenses increased $10.8 million, or 9%, for the three months
ended September 30, 1998 and $26.1 million, or 7%, for the nine months
ended September 30, 1998 when compared to the same periods in 1997
primarily due to increases in salaries and benefits, litigation expenses,
amortization of intangibles, and advertising expenses, partially offset by
an increase in deferred loan acquisition costs. The increase in salaries
and benefits expense reflects an increase in incentive program expenses,
partially offset by a workforce reduction of approximately 350 positions
since September 30, 1997 which includes the effects of cost containment
programs and the sale of the non-strategic assets during second quarter
1997.
Provision for Finance Receivable Losses
Provision for finance receivable losses decreased $2.9 million, or 5%, for
the three months ended September 30, 1998 and $34.0 million, or 18%, for
the nine months ended September 30, 1998 when compared to the same periods
in 1997 due to decreases in net charge-offs totaling $7.9 million and $41.5
million, respectively.
Net charge-offs for the three months ended September 30, 1998 decreased to
$52.7 million from $60.6 million for the same period in 1997. The charge-
off ratio for third quarter 1998 was 2.44% compared to 3.27% for third
quarter 1997.
At September 30, 1998, delinquencies were $352.7 million compared to $312.2
million at September 30, 1997. The delinquency ratio at September 30, 1998
was 3.75% compared to 3.83% at September 30, 1997. The decrease in the
delinquency ratio from September 30, 1997 reflected the results of the
Company's efforts to improve credit quality. The delinquency ratio
increased from 3.43% at June 30, 1998 reflecting the effects of general
economic conditions, as well as the maturing of purchased real-estate
portfolios which were primarily new originations when purchased.
At September 30, 1998, the allowance for finance receivable losses was
$365.2 million compared to $380.2 million at September 30, 1997. The
allowance ratio at September 30, 1998 was 4.15% compared to 5.05% at
September 30, 1997. The Company maintains the allowance for finance
receivable losses at a level based on periodic evaluation of the finance
receivable portfolio which reflects an amount that, in management's
opinion, is adequate to absorb anticipated losses in the existing
portfolio.
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
Note 5. of the Notes to Condensed Consolidated Financial Statements in Item
1. for further information on the sale of the Company's non-strategic
assets.
<PAGE>
<PAGE> 16
Insurance Losses and Loss Adjustment Expenses
Insurance losses and loss adjustment expenses decreased $2.8 million, or
12%, for the three months ended September 30, 1998 and $4.7 million, or 7%,
for the nine months ended September 30, 1998 when compared to the same
periods in 1997 due to decreases in claims paid and provision for future
benefits. Claims decreased $2.2 million and $3.3 million, respectively,
primarily due to lower earned premiums and favorable loss experience on
credit insurance. Provision for future benefits decreased $.6 million and
$1.4 million, respectively, due to reduced sales of non-credit insurance
products.
Provision for Income Taxes
The provision for income taxes increased $2.8 million, or 12%, for the
three months ended September 30, 1998 and $26.3 million, or 48%, for the
nine months ended September 30, 1998 when compared to the same periods in
1997 primarily due to higher taxable income.
Forward-looking Statements
All statements, trend analyses, and other information contained in this
report and elsewhere (such as other filings by the Company with the
Securities and Exchange Commission, press releases, presentations by
management of the Company, or oral statements) relative to trends in the
Company's operations or financial results, as well as other statements
including words such as "anticipate," "believe," "plan," "estimate,"
"expect," "intend," and other similar expressions, constitute forward-
looking statements under the Private Securities Litigation Reform Act of
1995. Forward-looking statements are made based upon management's current
expectations and beliefs concerning future developments and their potential
effects upon the Company. There can be no assurance that future
developments affecting the Company will be those anticipated by management.
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: (1) changes in general economic
conditions, including the performance of financial markets, interest rates,
and the level of personal bankruptcies; (2) competitive, regulatory, or tax
changes that affect the cost of or demand for the Company's products; (3)
the Company's ability to achieve Year 2000 readiness for critical systems
and operations on a timely basis; (4) adverse litigation results or
resolution of litigation; and (5) the Company's failure to achieve
anticipated levels of expense savings from cost-saving initiatives.
Readers are also directed to other risks and uncertainties discussed in
other documents filed by the Company with the Securities and Exchange
Commission. The Company undertakes no obligation to update or revise any
forward-looking information, whether as a result of new information, future
developments, or otherwise.
<PAGE>
<PAGE> 17
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
In addition to those lawsuits or proceedings disclosed in the Company's
1997 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 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 certain jurisdictions
continues to create 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
1998.
<PAGE>
<PAGE> 18
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 12, 1998 By /s/ Robert A. Cole
Robert A. Cole
Senior Vice President and Chief
Financial Officer
(Duly Authorized Officer and Principal
Financial Officer)
<PAGE>
<PAGE> 19
Exhibit Index
Exhibits Page
(12) Computation of Ratio of Earnings to Fixed Charges. 20
(27) Financial Data Schedule. 21
<PAGE>
<PAGE>
<PAGE> 20
Exhibit 12
<TABLE>
AMERICAN GENERAL FINANCE, INC. AND SUBSIDIARIES
Computation of Ratio of Earnings to Fixed Charges
(Unaudited)
<CAPTION>
Nine Months Ended
September 30,
1998 1997
(dollars in thousands)
<S> <C> <C>
Earnings:
Income before provision for income
taxes $217,794 $147,683
Interest expense (including $23,221
for 1997 to fund assets held for
sale) 376,116 366,037
Implicit interest in rents 8,314 8,012
Total earnings $602,224 $521,732
Fixed charges:
Interest expense (including $23,221
for 1997 to fund assets held for
sale) $376,116 $366,037
Implicit interest in rents 8,314 8,012
Total fixed charges $384,430 $374,049
Ratio of earnings to fixed charges 1.57 1.39
</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-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 126,814
<SECURITIES> 993,452
<RECEIVABLES> 8,807,517<F1>
<ALLOWANCES> 365,153<F2>
<INVENTORY> 0<F3>
<CURRENT-ASSETS> 0<F4>
<PP&E> 0<F4>
<DEPRECIATION> 0<F4>
<TOTAL-ASSETS> 10,279,306
<CURRENT-LIABILITIES> 0<F4>
<BONDS> 4,327,366<F5>
0<F3>
0<F3>
<COMMON> 1,000
<OTHER-SE> 1,394,637<F6>
<TOTAL-LIABILITY-AND-EQUITY> 10,279,306
<SALES> 0<F3>
<TOTAL-REVENUES> 1,192,344<F7>
<CGS> 0<F3>
<TOTAL-COSTS> 0<F4>
<OTHER-EXPENSES> 445,821<F8>
<LOSS-PROVISION> 152,613<F9>
<INTEREST-EXPENSE> 376,116<F10>
<INCOME-PRETAX> 217,794
<INCOME-TAX> 80,864
<INCOME-CONTINUING> 136,930
<DISCONTINUED> 0<F3>
<EXTRAORDINARY> 0<F3>
<CHANGES> 0<F3>
<NET-INCOME> 136,930
<EPS-PRIMARY> 0<F3>
<EPS-DILUTED> 0<F3>
<PAGE>
<FN>
<F1>RECEIVABLES IN THIS EXHIBIT REPRESENTS NET FINANCE RECEIVABLES REPORTED
IN THE COMPANY'S UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
<F2>ALLOWANCES IN THIS EXHIBIT REPRESENTS ALLOWANCE FOR FINANCE RECEIVABLE
LOSSES REPORTED IN THE COMPANY'S UNAUDITED 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
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS WHICH INCLUDES
OTHER LONG-TERM DEBT.
<F6>OTHER STOCKHOLDER'S EQUITY IN THIS EXHIBIT REPRESENTS ADDITIONAL PAID-IN-
CAPITAL, ACCUMULATED OTHER COMPREHENSIVE INCOME, AND RETAINED EARNINGS
REPORTED IN THE COMPANY'S UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS.
<F7>TOTAL REVENUES IN THIS EXHIBIT REPRESENTS TOTAL REVENUES REPORTED IN THE
COMPANY'S UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
<F8>OTHER EXPENSES IN THIS EXHIBIT REPRESENTS OPERATING EXPENSES AND
INSURANCE LOSSES AND LOSS ADJUSTMENT EXPENSES REPORTED IN THE COMPANY'S
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
<F9>LOSS PROVISION IN THIS EXHIBIT REPRESENTS PROVISION FOR FINANCE
RECEIVABLE LOSSES REPORTED IN THE COMPANY'S UNAUDITED CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS.
<F10>INTEREST EXPENSE IN THIS EXHIBIT REPRESENTS INTEREST EXPENSE REPORTED
IN THE COMPANY'S UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
<PAGE>
</FN>
</TABLE>
