<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 June 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 August 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 Six Months Ended
June 30, June 30,
1998 1997 1998 1997
(dollars in thousands)
<S> <C> <C> <C> <C>
Revenues
Finance charges $331,712 $315,248 $658,464 $635,047
Insurance 44,379 46,740 87,340 94,269
Other 20,003 17,482 38,955 34,902
Total revenues 396,094 379,470 784,759 764,218
Expenses
Interest expense 124,016 112,816 245,718 225,647
Operating expenses 126,758 117,582 251,550 236,251
Provision for finance
receivable losses 50,902 63,458 99,907 131,005
Loss on sale of non-
strategic assets - 42,225 - 42,225
Insurance losses and loss
adjustment expenses 21,731 21,748 43,768 45,752
Total expenses 323,407 357,829 640,943 680,880
Income before provision for
income taxes 72,687 21,641 143,816 83,338
Provision for Income Taxes 27,506 8,019 54,413 30,922
Net Income $ 45,181 $ 13,622 $ 89,403 $ 52,416
<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>
June 30, December 31,
1998 1997
(dollars in thousands)
<S> <C> <C>
Assets
Finance receivables, net of unearned
finance charges:
Real estate loans $4,740,538 $4,155,167
Non-real estate loans 2,567,735 2,554,888
Retail sales finance 1,313,577 1,301,133
Net finance receivables 8,621,850 8,011,188
Allowance for finance receivable
losses (365,153) (372,653)
Net finance receivables, less allowance
for finance receivable losses 8,256,697 7,638,535
Investment securities 955,906 929,311
Cash and cash equivalents 108,049 105,695
Other assets 668,452 615,959
Total assets $9,989,104 $9,289,500
Liabilities and Shareholder's Equity
Long-term debt $4,253,814 $4,011,457
Short-term notes payable:
Commercial paper 3,508,254 3,157,671
Banks and other 100,000 95,000
Investment certificates 2,109 2,574
Insurance claims and policyholder
liabilities 432,795 436,859
Other liabilities 334,415 300,342
Accrued taxes 22,118 22,272
Total liabilities 8,653,505 8,026,175
Shareholder's equity:
Common stock 1,000 1,000
Additional paid-in capital 757,083 743,083
Accumulated other comprehensive
income 34,984 34,512
Retained earnings 542,532 484,730
Total shareholder's equity 1,335,599 1,263,325
Total liabilities and shareholder's equity $9,989,104 $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>
Six Months Ended
June 30,
1998 1997
(dollars in thousands)
<S> <C> <C>
Cash Flows from Operating Activities
Net income $ 89,403 $ 52,416
Reconciling adjustments:
Provision for finance receivable losses 99,907 131,005
Depreciation and amortization 48,340 42,562
Deferral of finance receivable origination costs (21,833) (19,522)
Deferred federal income tax charge 4,090 60,466
Change in other assets and other liabilities 26,399 (55,183)
Change in insurance claims and
policyholder liabilities (4,064) (23,287)
Change in taxes receivable and payable 23,919 2,217
Loss on sale of non-strategic assets - 42,225
Operations related to assets held for sale - 39,905
Other, net (7,381) 10,409
Net cash provided by operating activities 258,780 283,213
Cash Flows from Investing Activities
Finance receivables originated or purchased (3,069,098) (2,155,436)
Principal collections on finance receivables 2,352,989 2,145,602
Net collections on assets held for sale - 61,266
Securitized finance receivables purchased - (100,000)
Advances for purchases of finance receivables (27,764) (309)
Sale of non-strategic assets - 732,504
Investment securities purchased (103,503) (70,981)
Investment securities called, matured and sold 82,058 70,269
Change in premiums on finance receivables
purchased and deferred charges (65,746) (2,104)
Other, net (3,716) (1,320)
Net cash (used for) provided by investing activities (834,780) 679,491
Cash Flows from Financing Activities
Proceeds from issuance of long-term debt 872,760 161,776
Repayment of long-term debt (631,923) (711,282)
Change in investment certificates (465) (538)
Change in short-term notes payable 355,583 (346,778)
Capital contribution from parent 14,000 40,000
Dividends paid (31,601) (106,000)
Net cash provided by (used for) financing activities 578,354 (962,822)
Increase (decrease) in cash and cash equivalents 2,354 (118)
Cash and cash equivalents at beginning of period 105,695 105,493
Cash and cash equivalents at end of period $108,049 $105,375
Supplemental Disclosure of Cash Flow Information
Income taxes paid $ 26,052 $ 38,791
Interest paid $240,265 $254,071
<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 Six Months Ended
June 30, June 30,
1998 1997 1998 1997
(dollars in thousands)
<S> <C> <C> <C> <C>
Net income $45,181 $13,622 $89,403 $52,416
Other comprehensive income:
Net unrealized gains
(losses) on investment
securities 2,147 17,136 820 (2,526)
Income tax effect (751) (5,997) (287) 884
Net unrealized gains
(losses) on investment
securities, net of tax 1,396 11,139 533 (1,642)
Reclassification adjustment
for realized gains
included in net income (92) (27) (94) (109)
Income tax effect 32 9 33 38
Realized gains included in
net income, net of tax (60) (18) (61) (71)
Other comprehensive income
(loss), net of tax 1,336 11,121 472 (1,713)
Comprehensive income $46,517 $24,743 $89,875 $50,703
<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
June 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 June 30, 1998 and December 31, 1997, its consolidated results
of operations for the three months and six months ended June 30, 1998 and
1997, its consolidated cash flows for the six months ended June 30, 1998
and 1997, and its consolidated comprehensive income for the three months
and six months ended June 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.
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<PAGE> 7
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
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 $765.0 million
in notional amount at June 30, 1998, with a weighted average interest rate
payable of 7.69% and a weighted average interest rate receivable of 5.58%.
Treasury rate lock agreements are 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. During fourth quarter 1997, AGFC entered into treasury
rate lock agreements with settlement dates in 1998. At June 30, 1998, the
notional amount of these agreements was $190.0 million.
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 six 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.
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<PAGE> 8
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.
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 $258.8 million for the six months ended June
30, 1998 compared to $283.2 million for the same period in 1997. The
decrease in operating cash flow for the six months ended June 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 $868.7 million for the six
months ended June 30, 1998. This cash flow was used principally to finance
the net originations and purchases of finance receivables of $743.9
million, to fund the increase in premiums on finance receivables purchased
and deferred charges of $65.7 million, and to pay dividends to American
General of $31.6 million. Operating cash flow combined with the net
collections of finance receivables and assets held for sale, the proceeds
<PAGE>
<PAGE> 9
from the sale of non-strategic assets, and a capital contribution of $40.0
million from American General generated cash flow of $1.1 billion for the
six months ended June 30, 1997. This cash flow was used principally to
fund the net repayments of debt of $896.8 million, to pay dividends to
American General of $106.0 million, and to repurchase $100.0 million of
securitized finance receivables.
Dividends are paid (or capital contributions are received) 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 June 30, 1998
was 7.54 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 June 30, 1998, the Company's capital totaled $9.2 billion,
consisting of $7.9 billion of debt and $1.3 billion of equity, compared to
$7.9 billion at June 30, 1997, consisting of $6.7 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 uses
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
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<PAGE> 10
requirements. At June 30, 1998, the Company was an eligible borrower under
$4.8 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 June 30, 1998, the Company also had
$318.5 million of uncommitted credit 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 June
30, 1998, Company borrowings outstanding under uncommitted credit
facilities totaled $100.0 million, and there were no borrowings under any
committed credit facilities.
Year 2000 Contingency
The Company is in the process of modifying its systems to achieve Year 2000
readiness. The Company has developed and is implementing a plan to
minimize the risk of 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) test systems for Year
2000 readiness; (4) reprogram or replace systems that are not Year 2000
ready; and (5) return the systems to operations. The Company expects to
substantially complete the foregoing for significant systems by December
31, 1998. However, activities (3) through (5) for certain systems will
continue in 1999.
In addition, the Company has relationships with various third parties that
must also be Year 2000 ready. Therefore, the Company's plan also assesses
and attempts to mitigate the risks associated with the potential failure
of third parties to achieve Year 2000 readiness. Due to the various stages
of third parties' Year 2000 readiness, these activities will extend through
1999.
Through June 30, 1998, the Company has incurred and expensed $1.5 million
(pretax) related to Year 2000 readiness, including $.8 million incurred
during the first six months of 1998. The Company currently anticipates
that it will incur future costs of approximately $5.8 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 its Year
2000 plans. Costs of the replacement systems will be capitalized and
amortized over their useful lives, in accordance with the Company's normal
accounting policies.
Due to the magnitude and complexity of this project, risks and
uncertainties exist. If conversion of the Company's systems is not
completed on a timely basis (due to nonperformance by significant third-
party vendors, lack of qualified personnel to perform the Year 2000 work,
or other unforeseen circumstances in completing the Company's plans), or
if significant third parties fail to achieve Year 2000 readiness on a
timely basis, the Year 2000 issue could have a material adverse impact on
the operations of the Company.
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<PAGE> 11
SELECTED FINANCIAL INFORMATION
The following table shows selected financial information of the Company:
At or for the At or for the
Three Months Ended Six Months Ended
June 30, June 30,
1998 1997 1998 1997
(dollars in thousands)
Average finance receivables
net of unearned finance
charges (average net
receivables) $8,242,128 $7,452,793 $8,122,178 $7,501,152
Average borrowings $7,522,371 $7,259,950 $7,400,739 $7,383,576
Yield - finance charges
(annualized) as a
percentage of average
net receivables 16.13% 16.95% 16.30% 17.02%
Borrowing cost - interest
expense (annualized) as
a percentage of average
borrowings 6.60% 6.82% 6.66% 6.76%
Interest spread - yield
less borrowing cost 9.53% 10.13% 9.64% 10.26%
Insurance revenues
(annualized) as a
percentage of average
net receivables 2.15% 2.51% 2.15% 2.51%
Operating expenses
(annualized) as a
percentage of average
net receivables 6.15% 6.31% 6.19% 6.30%
Return on average assets
(annualized) 1.87% .59% 1.88% 1.12%
Return on average equity
(annualized) 13.91% 4.29% 13.86% 8.42%
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 2.62% 3.68% 2.66% 3.76%
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<PAGE> 12
Selected Financial Information (Continued)
At or for the
Six Months Ended
June 30,
1998 1997
Allowance ratio - allowance for finance
receivable losses as a percentage of
net finance receivables 4.24% 5.20%
Ratio of earnings to fixed charges (refer
to Exhibit 12 for calculations) 1.57 1.33
Delinquency ratio - finance receivables 60
days or more past due as a percentage of
related receivables 3.43% 3.73%
Debt to tangible equity ratio - debt to
equity less goodwill and net unrealized
gains or losses on fixed-maturity
investment securities 7.54 7.49
Debt to equity ratio 5.89 5.68
ANALYSIS OF OPERATING RESULTS
Net Income
Net income increased $31.6 million, or 232%, for the three months ended
June 30, 1998 and $37.0 million, or 71%, for the six months ended June 30,
1998 when compared to the same periods in 1997 primarily due to the loss on
the sale of non-strategic assets during second quarter 1997, and improved
credit quality and finance receivable growth in the 1998 periods.
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 half of 1998.
Although yield decreased 72 basis points for the six months ended June 30,
1998 when compared to the same period in 1997, this was more than offset by
a 110 basis point improvement in the charge-off ratio. The delinquency
ratio also improved to 3.43% at June 30, 1998 from 3.73% at June 30, 1997.
<PAGE>
<PAGE> 13
Factors which specifically affected the Company's operating results are as
follows:
Finance Charges
Finance charge revenues increased $16.5 million, or 5%, for the three
months ended June 30, 1998 and $23.4 million, or 4%, for the six months
ended June 30, 1998 when compared to the same periods in 1997 due to
increases in average net receivables, partially offset by decreases in
yield. Average net receivables increased $789.3 million, or 11%, for the
three months ended June 30, 1998 and $621.0 million, or 8%, for the six
months ended June 30, 1998 when compared to the same periods in 1997
primarily due to growth in real estate loans, partially offset by the sale
of certain private label receivables in second quarter 1997. Yield
decreased 82 basis points for the three months ended June 30, 1998 and 72
basis points for the six months ended June 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 $2.4 million, or 5%, for the three months
ended June 30, 1998 and $6.9 million, or 7%, for the six months ended June
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 $2.5 million, or 14%, for the three months ended
June 30, 1998 and $4.1 million, or 12%, for the six months ended June 30,
1998 when compared to the same periods in 1997 primarily due to increases
in investment revenue and revenue on foreclosed real estate. The increase
in investment revenue for the three months and six months ended June 30,
1998 when compared to the same periods in 1997 was primarily due to an
increase in adjusted portfolio yield for the insurance operations of 43
basis points and 64 basis points, respectively, and growth in average
invested assets of $57.6 million and $52.3 million, respectively. Realized
gains and losses remained at near the same level for the three months and
six months ended June 30, 1998 when compared to the same periods in 1997.
Investment revenue includes $1.2 million and $2.7 million, respectively, of
net gains on calls and tenders of investment securities that are included
in adjusted portfolio yield for the three months and six months ended June
30, 1998, compared to $170 thousand and $197 thousand, respectively, that
are included in realized gains and losses for the three months and six
months ended June 30, 1997.
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<PAGE> 14
Interest Expense
Interest expense increased $11.2 million, or 10%, for the three months
ended June 30, 1998 and $20.1 million, or 9%, for the six months ended June
30, 1998 when compared to the same periods in 1997 due to increases in
average borrowings to support asset growth, partially offset by a decline
in borrowing cost. Borrowing cost decreased 22 basis points for the three
months ended June 30, 1998 and 10 basis points for the six months ended
June 30, 1998 when compared to the same periods in 1997.
Operating Expenses
Operating expenses increased $9.2 million, or 8%, for the three months
ended June 30, 1998 and $15.3 million, or 6%, for the six months ended June
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 600 positions since June
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 $12.6 million, or 20%,
for the three months ended June 30, 1998 and $31.1 million, or 24%, for the
six months ended June 30, 1998 when compared to the same periods in 1997
due to decreases in net charge-offs totaling $15.1 million and $33.6
million, respectively.
Net charge-offs for the three months ended June 30, 1998 decreased to $53.4
million from $68.5 million for the same period in 1997. Net charge-offs
for the three months ended March 31, 1998 were $54.0 million. The charge-
off ratio for second quarter 1998 was 2.62% compared to 2.70% for first
quarter 1998 and 3.68% for second quarter 1997.
At June 30, 1998, delinquencies were $316.8 million compared to $303.3
million at March 31, 1998 and $299.6 million at June 30, 1997. The
delinquency ratio at June 30, 1998 was 3.43% compared to 3.49% at March 31,
1998 and 3.73% at June 30, 1997.
The allowance for finance receivable losses decreased to $365.2 million
from $385.2 million at June 30, 1997. The allowance ratio at June 30, 1998
was 4.24% compared to 4.56% at March 31, 1998 and 5.20% at June 30, 1997.
The decrease in the allowance ratio for each period reflects the results of
the action program to improve credit quality, including the increased
proportion of real estate loans. 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.
<PAGE>
<PAGE> 15
Loss on Sale of Non-strategic Assets
Loss on sale of non-strategic assets totaled $42.2 million ($27.0 million
aftertax) for the three months and six months ended June 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.
Insurance Losses and Loss Adjustment Expenses
Insurance losses and loss adjustment expenses remained at near the same
level for the three months ended June 30, 1998 and decreased $2.0 million,
or 4%, for the six months ended June 30, 1998 when compared to the same
periods in 1997. The decrease in insurance losses and loss adjustment
expenses for the six months ended June 30, 1998 was due to decreases in
provision for future benefits and in claims paid. Provision for future
benefits decreased $.9 million due to reduced sales of non-credit insurance
products. Claims decreased $1.1 million primarily due to lower earned
premiums, partially offset by unfavorable loss experience on credit
insurance.
Provision for Income Taxes
The provision for income taxes increased $19.5 million, or 243%, for the
three months ended June 30, 1998 and $23.5 million, or 76%, for the six
months ended June 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 significant
systems and operations on a timely basis; (4) adverse litigation results
or resolution of litigation; and (5) the Company's failure to achieve
<PAGE>
<PAGE> 16
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.
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, 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 create the potential for an
unpredictable judgment in any given suit.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
(4) a. The following instrument is filed pursuant to Item
601(b)(4)(ii) of Regulation S-K as a result of certain debt
issuances in the second quarter of 1998. In the aggregate,
the outstanding issuances of debt under the Indenture
referred to under item (1) below exceed 10% of the total
assets of the Company on a consolidated basis.
(1) Indenture dated as of May 1, 1997 from American General
Finance Corporation to The First National Bank of
Chicago. 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. 333-28925).
(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 second quarter of
1998.
<PAGE>
<PAGE> 17
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: August 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> 18
Exhibit Index
Exhibits Page
(12) Computation of Ratio of Earnings to Fixed Charges. 19
(27) Financial Data Schedule. 20
<PAGE>
<PAGE>
<PAGE> 19
Exhibit 12
<TABLE>
AMERICAN GENERAL FINANCE, INC. AND SUBSIDIARIES
Computation of Ratio of Earnings to Fixed Charges
(Unaudited)
<CAPTION>
Six Months Ended
June 30,
1998 1997
(dollars in thousands)
<S> <C> <C>
Earnings:
Income before provision for income
taxes $143,816 $ 83,338
Interest expense (including $23,221
for 1997 to fund assets held for
sale) 245,718 248,868
Implicit interest in rents 5,561 5,408
Total earnings $395,095 $337,614
Fixed charges:
Interest expense (including $23,221
for 1997 to fund assets held for
sale) $245,718 $248,868
Implicit interest in rents 5,561 5,408
Total fixed charges $251,279 $254,276
Ratio of earnings to fixed charges 1.57 1.33
</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> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 108,049
<SECURITIES> 955,906
<RECEIVABLES> 8,621,850<F1>
<ALLOWANCES> 365,153<F2>
<INVENTORY> 0<F3>
<CURRENT-ASSETS> 0<F4>
<PP&E> 0<F4>
<DEPRECIATION> 0<F4>
<TOTAL-ASSETS> 9,989,104
<CURRENT-LIABILITIES> 0<F4>
<BONDS> 4,253,814<F5>
0<F3>
0<F3>
<COMMON> 1,000
<OTHER-SE> 1,334,599<F6>
<TOTAL-LIABILITY-AND-EQUITY> 9,989,104
<SALES> 0<F3>
<TOTAL-REVENUES> 784,759<F7>
<CGS> 0<F3>
<TOTAL-COSTS> 0<F4>
<OTHER-EXPENSES> 284,673<F8>
<LOSS-PROVISION> 99,907<F9>
<INTEREST-EXPENSE> 245,718<F10>
<INCOME-PRETAX> 143,816
<INCOME-TAX> 54,413
<INCOME-CONTINUING> 89,403
<DISCONTINUED> 0<F3>
<EXTRAORDINARY> 0<F3>
<CHANGES> 0<F3>
<NET-INCOME> 89,403
<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>
