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, 1999
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, 1999, 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,
1999 1998 1999 1998
(dollars in thousands)
<S> <C> <C> <C> <C>
Revenues
Finance charges $363,924 $343,612 $1,077,349 $1,002,076
Insurance 48,157 44,290 136,684 131,630
Other 23,855 19,683 68,730 58,638
Total revenues 435,936 407,585 1,282,763 1,192,344
Expenses
Interest expense 143,699 130,398 420,079 376,116
Operating expenses 133,115 129,767 397,820 381,317
Provision for finance
receivable losses 50,327 52,706 150,225 152,613
Insurance losses and loss
adjustment expenses 23,693 20,736 63,127 64,504
Total expenses 350,834 333,607 1,031,251 974,550
Income before provision for
income taxes 85,102 73,978 251,512 217,794
Provision for Income Taxes 30,989 26,451 91,578 80,864
Net Income $ 54,113 $ 47,527 $ 159,934 $ 136,930
<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,
1999 1998
(dollars in thousands)
<S> <C> <C>
Assets
Finance receivables, net of unearned
finance charges:
Real estate loans $ 6,404,292 $ 5,757,185
Non-real estate loans 2,513,045 2,560,565
Retail sales finance 1,258,406 1,339,367
Net finance receivables 10,175,743 9,657,117
Allowance for finance receivable losses (386,180) (382,450)
Net finance receivables, less allowance
for finance receivable losses 9,789,563 9,274,667
Investment securities 990,072 996,599
Cash and cash equivalents 179,461 148,002
Other assets 776,264 753,655
Total assets $11,735,360 $11,172,923
Liabilities and Shareholder's Equity
Long-term debt $ 5,505,037 $ 5,176,965
Short-term notes payable:
Commercial paper 3,727,250 3,485,648
Banks and other 201,000 198,000
Deposits 38,328 1,874
Insurance claims and policyholder
liabilities 449,033 437,079
Other liabilities 327,584 348,866
Accrued taxes 23,325 21,086
Total liabilities 10,271,557 9,669,518
Shareholder's equity:
Common stock 1,000 1,000
Additional paid-in capital 822,497 822,497
Accumulated other comprehensive income 3,881 39,419
Retained earnings 636,425 640,489
Total shareholder's equity 1,463,803 1,503,405
Total liabilities and shareholder's equity $11,735,360 $11,172,923
<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,
1999 1998
(dollars in thousands)
<S> <C> <C>
Cash Flows from Operating Activities
Net income $ 159,934 $ 136,930
Reconciling adjustments:
Provision for finance receivable losses 150,225 152,613
Depreciation and amortization 96,598 75,529
Deferral of finance receivable origination
costs (38,529) (33,536)
Deferred income tax charge 6,312 8,836
Change in other assets and other liabilities (36,337) (11,798)
Change in insurance claims and policyholder
liabilities 11,954 (2,955)
Change in taxes receivable and payable 8,664 23,127
Other, net 18,109 (14,494)
Net cash provided by operating activities 376,930 334,252
Cash Flows from Investing Activities
Finance receivables originated or purchased (4,484,339) (4,488,116)
Principal collections on finance receivables 3,817,276 3,549,880
Acquisition of Standard Pacific Savings, F.A. 44,528 -
Acquisition of HSA Residential Mortgage
Services of Texas, Inc. - (25,600)
Investment securities purchased (264,724) (168,784)
Investment securities called, matured and sold 200,052 130,776
Change in premiums on finance receivables
purchased and deferred charges (26,351) (95,474)
Other, net (28,276) (14,502)
Net cash used for investing activities (741,834) (1,111,820)
Cash Flows from Financing Activities
Proceeds from issuance of long-term debt 679,518 1,128,506
Repayment of long-term debt (354,286) (814,874)
Change in deposits (9,473) (691)
Change in short-term notes payable 244,602 503,346
Capital contribution from parent - 14,000
Dividends paid (163,998) (31,600)
Net cash provided by financing activities 396,363 798,687
Increase in cash and cash equivalents 31,459 21,119
Cash and cash equivalents at beginning of period 148,002 105,695
Cash and cash equivalents at end of period $ 179,461 $ 126,814
Supplemental Disclosure of Cash Flow
Information
Income taxes paid $ 79,319 $ 50,303
Interest paid $ 437,839 $ 391,397
<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,
1999 1998 1999 1998
(dollars in thousands)
<S> <C> <C> <C> <C>
Net income $ 54,113 $ 47,527 $159,934 $136,930
Other comprehensive income:
Net unrealized (losses)
gains on investment
securities (14,004) 18,856 (54,748) 19,676
Income tax effect 4,831 (6,600) 19,167 (6,887)
Net unrealized (losses)
gains on investment
securities, net of tax (9,173) 12,256 (35,581) 12,789
Reclassification adjustment
for realized losses
included in net income 1,025 391 66 297
Income tax effect (282) (137) (23) (104)
Realized losses included in
net income, net of tax 743 254 43 193
Other comprehensive (loss)
income, net of tax (8,430) 12,510 (35,538) 12,982
Comprehensive income $ 45,683 $ 60,037 $124,396 $149,912
<FN>
<F1>
See Notes to Condensed Consolidated Financial Statements.
</FN>
</TABLE>
<PAGE>
<PAGE> 6
AMERICAN GENERAL FINANCE, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
September 30, 1999
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 all 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, 1999 and December 31, 1998, its consolidated
results of operations for the three months and nine months ended September
30, 1999 and 1998, its consolidated cash flows for the nine months ended
September 30, 1999 and 1998, and its consolidated comprehensive income for
the three months and nine months ended September 30, 1999 and 1998. 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,
1998.
To conform with the 1999 presentation, certain items in the prior period
have been reclassified.
Note 3. Accounting Changes
In June 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (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 to be reported as earnings or other comprehensive
income, depending upon the intended use of the derivative instrument.
In June 1999, the FASB issued SFAS 137, "Accounting for Derivative
Instruments and Hedging Activities - Deferral of the Effective Date of FASB
Statement No. 133," which defers the effective date of SFAS 133 for one
year, to years beginning after June 15, 2000. Adoption of SFAS 133 is not
expected to have a material impact on the Company's consolidated results
of operations or financial position.
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<PAGE> 7
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
has generally limited its use of derivative financial instruments 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
certain amounts of floating-rate debt to a fixed-rate basis. At September
30, 1999, interest rate swap agreements in which AGFC contracted to pay
interest at fixed rates and receive interest at floating rates totaled $1.3
billion in notional amount, with a weighted average pay rate of 6.70% and
a weighted average receive rate of 5.48%.
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, 1999, 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 1999 or 1998.
Note 5. Tax Return Examinations
The Company is part of the consolidated Federal income tax return that
American General and the majority of its subsidiaries file. The Internal
Revenue Service (IRS) has completed examinations of American General's tax
returns through 1988. During 1999, American General and the IRS reached
a settlement of all contested issues through 1988, which resulted in a
change in the tax basis of assets acquired in a 1988 taxable purchase
business combination. To reflect the new tax basis, the Company reduced
deferred tax liabilities by $70.3 million and reduced goodwill by the same
amount, in accordance with SFAS 109, "Accounting for Income Taxes." The
IRS is currently examining American General's tax returns for 1989 through
1996.
Note 6. Segment Information
The Company has three segments: consumer branches, centralized real
estate, and insurance. The Company's segments are managed separately
because they offer different financial service products. The consumer
branch operation originates and acquires home equity and consumer loans,
extends lines of credit, offers retail sales financing to merchants, and
sells credit and non-credit insurance products. The centralized real
estate operation acquires individual first and second mortgage loans
originated by real estate brokers and purchases portfolios of mortgage
loans originated by various real estate lenders. The insurance operation
writes and assumes credit and non-credit insurance through products that
are sold principally by the consumer branches.
<PAGE>
<PAGE> 8
The following tables display information about the Company's segments as
well as a reconciliation of total segment pretax income to the condensed
consolidated financial statement amounts.
Three Months Ended September 30, 1999
Consumer Centralized Total
Branches Real Estate Insurance Segments
(dollars in thousands)
Revenues:
External:
Finance charges $340,672 $ 38,028 $ - $378,700
Insurance 401 - 47,756 48,157
Other 1,707 2,317 18,662 22,686
Intercompany 20,116 243 (19,756) 603
Pretax income 89,858 2,571 14,797 107,226
Three Months Ended September 30, 1998
Consumer Centralized Total
Branches Real Estate Insurance Segments
(dollars in thousands)
Revenues:
External:
Finance charges $315,305 $ 36,911 $ - $352,216
Insurance 482 - 43,808 44,290
Other (4) 1,072 18,459 19,527
Intercompany 17,706 208 (17,218) 696
Pretax income 60,387 6,058 17,229 83,674
Nine Months Ended September 30, 1999
Consumer Centralized Total
Branches Real Estate Insurance Segments
(dollars in thousands)
Revenues:
External:
Finance charges $1,000,860 $117,762 $ - $1,118,622
Insurance 1,255 - 135,429 136,684
Other 1,279 5,750 58,853 65,882
Intercompany 55,142 337 (53,650) 1,829
Pretax income 237,265 15,741 54,536 307,542
Nine Months Ended September 30, 1998
Consumer Centralized Total
Branches Real Estate Insurance Segments
(dollars in thousands)
Revenues:
External:
Finance charges $936,530 $ 91,618 $ - $1,028,148
Insurance 1,457 - 130,173 131,630
Other 227 1,063 56,611 57,901
Intercompany 52,697 414 (51,120) 1,991
Pretax income 183,283 18,326 51,793 253,402
<PAGE>
<PAGE> 9
Reconciliation of total segment pretax income to the condensed consolidated
financial statement amounts is summarized below:
Three Months Ended Nine Months Ended
September 30, September 30,
1999 1998 1999 1998
Pretax income:
Segments $107,226 $ 83,674 $307,542 $253,402
Corporate (22,124) (9,696) (56,030) (35,608)
Total consolidated
pretax income $ 85,102 $ 73,978 $251,512 $217,794
Note 7. Acquisition of Standard Pacific Savings, F.A.
In May 1999, the Company acquired Standard Pacific Savings, F.A. from
Standard Pacific Corporation. Upon acquisition, the Office of Thrift
Supervision granted approval to rename the institution American General
Bank, FSB (AG Bank). AG Bank is currently operating as a traditional
thrift, offering deposit and savings products, providing residential
mortgage and home equity lending, and financing private label receivables.
Note 8. Legal Contingencies
Satellite Dish Litigation
On May 18, 1999, the Chancery Court of the First Judicial District of Jones
County, Mississippi in a case captioned Clayton D. Smith, et.al. v. Delta
TV Corporation, Don Acy, US Electronics, American General Financial Center,
Civil Action No. 96-0254, rendered a judgment awarding approximately
$500,000 in compensatory damages and $167 million in punitive damages
against A.G. Financial Service Center, Inc. (Financial Service Center).
Financial Service Center is a subsidiary of AGFI and formerly was named
American General Financial Center. The lawsuit was filed on November 15,
1996, by 29 individuals who in the mid-1990s each purchased a satellite
dish for approximately $2,500 from independent, unaffiliated dealers and
distributors who arranged financing for the satellite dishes through
Financial Service Center. Financial Service Center believes the judgment
is unwarranted and contrary to law. Financial Service Center has appealed
the judgment and believes that it has substantial bases for success on
appeal. Financial Service Center, together with AGFI and certain other
subsidiaries, currently are named as defendants in other pending cases,
most of which are in Mississippi, involving the financing of satellite
dishes.
On August 19, 1999, Financial Service Center filed a voluntary petition
to reorganize under Chapter 11 of the United States Bankruptcy Code with
the United States Bankruptcy Court for the Southern District of Indiana.
The decision to reorganize was necessitated by the judgment rendered
against Financial Service Center by the Mississippi state court. The
filing for reorganization under Chapter 11 is limited to Financial Service
Center and intended to provide a fair and orderly process for managing the
appeal and the other claims against Financial Service Center. Prior to
the bankruptcy filing, Financial Service Center had assets of
approximately $7 million.
<PAGE>
<PAGE> 10
Although substantial risks and uncertainties remain with respect to the
ultimate outcome of these cases, internal and external legal counsel have
advised the Company that it is not probable within the meaning of SFAS 5,
"Accounting for Contingencies," that the Company will ultimately incur a
material liability in connection with these cases. Accordingly, no
provision has been made in the condensed consolidated financial statements
related to this contingency.
Other
AGFI and certain of its subsidiaries are parties to various other lawsuits
and proceedings, including class action lawsuits, arising in the ordinary
course of business. Many of these lawsuits and proceedings, including
numerous cases involving the financing of satellite dishes, arise in
jurisdictions, such as Alabama and Mississippi and other jurisdictions,
that permit damage awards disproportionate to the actual economic damages
alleged to have been 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, 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 some jurisdictions
continues to create the potential for an unpredictable judgment in any
given suit.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
LIQUIDITY AND CAPITAL RESOURCES
Overview
The Company's sources of funds include operations, issuances of long-term
debt, short-term borrowings in the commercial paper market, and borrowings
from banks under credit facilities. American General has also contributed
capital to the Company when needed for finance receivable growth or other
circumstances. 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.
<PAGE>
<PAGE> 11
Liquidity
The following table shows principal sources and uses of cash flow:
Nine Months Ended
September 30,
1999 1998
(dollars in thousands)
Principal sources of cash flow:
Operations $376.9 $ 334.3
Net issuance of debt 560.4 816.3
Capital contributions - 14.0
Principal sources of cash flow $937.3 $1,164.6
Principal uses of cash flow:
Net originations and purchases
of finance receivables $667.1 $ 938.2
Dividends paid 164.0 31.6
Increase in premiums on finance
receivables purchased and
deferred charges 26.4 95.5
Principal uses of cash flow $857.5 $1,065.3
Capital Resources
The Company's capital requirements vary directly with the level of net
finance receivables. The mix of capital between debt and equity is based
primarily upon maintaining leverage that supports cost-effective funding.
At September 30, 1999, the Company's capital totaled $10.9 billion,
consisting of $9.5 billion of debt and $1.4 billion of equity, compared to
$9.5 billion at September 30, 1998, consisting of $8.1 billion of debt and
$1.4 billion of equity.
The Company issues a combination of fixed-rate debt, principally long-term,
and floating-rate debt, principally short-term. AGFC obtains most of the
Company's fixed-rate debt through issuances of medium-term notes and
underwritten debt offerings with maturities generally ranging from two to
ten years. AGFC and one of its subsidiaries obtain most of the Company's
floating-rate debt through sales of commercial paper. Commercial paper,
with maturities ranging from 1 to 270 days, is sold directly to banks,
insurance companies, corporations, and other institutional investors. AGFC
also sells extendible commercial notes with initial maturities of up to 90
days, which may be extended by AGFC to 390 days.
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.
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<PAGE> 12
Dividends have been paid (or capital contributions have been received) to
maintain the Company's leverage of debt to tangible equity (equity less
goodwill and net unrealized gains or losses on investment securities) to
7.50 to 1. The debt to tangible equity ratio at September 30, 1999 was
7.52 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 AGFC financing agreements limit the amount of dividends AGFC
may pay.
Liquidity 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. The Company is an eligible borrower under committed credit
facilities extended to American General and certain of its subsidiaries
(the "shared committed facilities"). At September 30, 1999, 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 the shared committed facilities. The Company also has uncommitted
credit facilities and is an eligible borrower under uncommitted credit
facilities extended to American General and certain of its subsidiaries
(the "shared uncommitted facilities"). Available borrowings under all
facilities are reduced by any outstanding borrowings.
Information concerning the credit facilities follows:
September 30,
1999 1998
(dollars in millions)
Committed credit facilities:
Shared committed facilities $5,000.0 $5,000.0
Borrowings - -
Remaining availability $5,000.0 $5,000.0
Uncommitted credit facilities:
Company uncommitted facilities $ 361.0 $ 318.5
Shared uncommitted facilities 50.0 200.0
Borrowings (200.0) (140.0)
Remaining availability $ 211.0 $ 378.5
A subsidiary of AGFI arranges interim financing for third-party mortgage
originators through a purchase facility. At September 30, 1999, this
facility totaled $250.0 million with remaining availability of $70.0
million.
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<PAGE> 13
Year 2000 Contingency
Internal Systems. The Company has modified its internal systems to achieve
Year 2000 readiness and has executed a plan to minimize the risk of a
significant negative impact on its operations.
The Company's plan included 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; and (5) return the systems
to operations. As of September 30, 1999, these activities had been
substantially completed, making the Company's critical systems Year 2000
ready.
The Company will continue to test its systems through fourth quarter 1999
to maintain Year 2000 readiness. In addition, the Company is currently
implementing plans for the century transition. These plans restrict
systems modifications from November 1999 through January 2000, create
rapid response teams to address problems, and limit vacations for certain
business and systems personnel.
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 third parties' Year 2000 readiness.
The Company has developed a plan to assess and mitigate the risks
associated with the potential failure of third parties to achieve Year
2000 readiness. The Company's plan includes the following: (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; and (4) where
feasible, take reasonable precautions to protect against the receipt of
non-Year 2000 ready data from third parties. As of September 30, 1999,
these activities had been substantially completed. Where necessary,
critical third party dependencies have been included in the Company's
contingency plan. Due to the various stages of Year 2000 readiness for
these critical third-party dependencies, the Company's activities related
to critical third parties will continue, as necessary, into early 2000.
Contingency Plan. The Company's contingency planning process, which was
designed to reduce the risk of Year 2000-related business failures relating
to internal systems and third party relationships, included the following
activities: (1) evaluate the consequences of failure of critical business
processes with significant exposure to Year 2000 risk; (2) determine the
probability of a Year 2000-related failure for those critical processes
that have a high consequence of failure; (3) develop an action plan to
complete contingency plan for critical processes that rank high in
consequence and probability of failure; and (4) complete the applicable
contingency plan. As of September 30, 1999, these activities had been
substantially completed. The contingency plan will continue to be tested
and updated, as necessary, into early 2000.
<PAGE>
<PAGE> 14
Risks and Uncertainties. Based on the Year 2000 readiness of its internal
systems, century transition plans, plans to deal with third party
relationships, and contingency plan, 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
Year 2000 readiness is not achieved due to the Company's failure to
maintain critical systems as Year 2000 ready, failure of critical third
parties to achieve Year 2000 readiness on a timely basis, failure of
contingency plan to reduce Year 2000-related business failures, or other
unforeseen circumstances in completing the Company's plans, 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, 1999, the Company has incurred and expensed
pretax expenses of $7.8 million related to Year 2000 readiness, including
$1.5 million incurred year-to-date in 1999 and $2.9 million incurred in
the first nine months of 1998. The Company currently anticipates that it
will incur future costs of approximately $1.3 million (pretax) to complete
any activities related to third party relationships and contingency plan
and to maintain Year 2000 readiness into early 2000. In addition, the
Company has elected to accelerate the planned replacement of certain
systems as part of its Year 2000 plan. Costs of the replacement systems
were capitalized and are being amortized over their useful lives, recorded
as operating leases, or expensed as incurred in accordance with the
Company's normal accounting policies. The replacement costs incurred in
1998 totaled $2.1 million and are anticipated to be immaterial for 1999.
<PAGE>
<PAGE> 15
SELECTED FINANCIAL INFORMATION
The following table shows selected financial information of the Company:
Three Months Ended Nine Months Ended
September 30, September 30,
1999 1998 1999 1998
(dollars in thousands)
Average finance receivables
net of unearned finance
charges (average net
receivables) $10,018,335 $8,678,694 $9,867,187 $8,307,683
Average borrowings $9,280,810 $7,946,247 $9,052,650 $7,584,573
Yield - finance charges
(annualized) as a
percentage of average
net receivables 14.45% 15.75% 14.59% 16.11%
Borrowing cost - interest
expense (annualized) as
a percentage of average
borrowings 6.18% 6.55% 6.19% 6.62%
Interest spread - yield
less borrowing cost 8.27% 9.20% 8.40% 9.49%
Insurance revenues
(annualized) as a
percentage of average
net receivables 1.92% 2.04% 1.85% 2.11%
Operating expenses
(annualized) as a
percentage of average
net receivables 5.31% 5.98% 5.38% 6.12%
Return on average assets
(annualized) 1.87% 1.87% 1.87% 1.88%
Return on average equity
(annualized) 14.77% 13.96% 14.26% 13.89%
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 2.02% 2.44% 2.04% 2.58%
<PAGE>
<PAGE> 16
Selected Financial Information (Continued)
At or for the
Nine Months Ended
September 30,
1999 1998
Allowance ratio - allowance for finance
receivable losses as a percentage of
net finance receivables 3.80% 4.15%
Delinquency ratio - finance receivables 60
days or more past due as a percentage of
related receivables 3.67% 3.75%
Ratio of earnings to fixed charges (refer
to Exhibit 12 for calculations) 1.58 1.57
Debt to tangible equity ratio - debt to
equity less goodwill and net unrealized
gains or losses on investment securities 7.52 7.56
Debt to equity ratio 6.47 5.79
ANALYSIS OF OPERATING RESULTS
Net Income
Net income increased $6.6 million, or 14%, for the three months ended
September 30, 1999 and $23.0 million, or 17%, for the nine months ended
September 30, 1999 when compared to the same periods in 1998. See Note 6.
of the Notes to Condensed Consolidated Financial Statements in Part I for
information on the results of the Company's business segments.
During 1999 and 1998, the Company continued to improve credit quality
results through extensive use of its credit risk management systems and
the shift toward a higher percentage of real estate loans. At September
30, 1999, real estate loans accounted for 63% of total net finance
receivables outstanding compared to 56% at September 30, 1998.
Factors that specifically affected the Company's operating results are as
follows:
Finance Charges
Finance charges increased $20.3 million, or 6%, for the three months ended
September 30, 1999 and $75.3 million, or 8%, for the nine months ended
September 30, 1999 when compared to the same periods in 1998 due to higher
average net receivables, partially offset by lower yield. Average net
receivables increased $1.3 billion, or 15%, for the three months ended
September 30, 1999 and $1.6 billion, or 19%, for the nine months ended
September 30, 1999 when compared to the same periods in 1998 primarily due
to growth in real estate loans. Yield decreased 130 basis points for the
three months ended September 30, 1999 and 152 basis points for the nine
months ended September 30, 1999 when compared to the same periods in 1998
primarily due to the larger proportion of finance receivables that are real
estate loans, which generally have lower yields.
<PAGE>
<PAGE> 17
Insurance Revenues
Insurance revenues increased $3.9 million, or 9%, for the three months
ended September 30, 1999 and $5.1 million, or 4%, for the nine months ended
September 30, 1999 when compared to the same periods in 1998 primarily due
to higher earned premiums. Earned premiums increased primarily due to
higher related loan volume.
Other Revenues
Other revenues increased $4.2 million, or 21%, for the three months ended
September 30, 1999 and $10.1 million, or 17%, for the nine months ended
September 30, 1999 when compared to the same periods in 1998 primarily due
to increases in mortgage set-up/warehousing fees and investment revenue.
The increase in mortgage set-up/warehousing fees was due to revenue earned
by a subsidiary of AGFI which arranges interim financing for third-party
mortgage originators through a purchase facility. The increase in
investment revenue for the three months ended September 30, 1999 reflected
growth in average invested assets, partially offset by lower adjusted
portfolio yield and higher realized losses. The increase in investment
revenue for the nine months ended September 30, 1999 reflected growth in
average invested assets and lower realized losses, partially offset by
lower adjusted portfolio yield.
Interest Expense
Interest expense increased $13.3 million, or 10%, for the three months
ended September 30, 1999 and $44.0 million, or 12%, for the nine months
ended September 30, 1999 when compared to the same periods in 1998 due to
higher average borrowings, partially offset by lower borrowing cost.
Average borrowings increased $1.3 billion, or 17%, for the three months
ended September 30, 1999 and $1.5 billion, or 19%, for the nine months
ended September 30, 1999 when compared to the same periods in 1998
primarily to support finance receivable growth. Borrowing cost decreased
37 basis points for the three months ended September 30, 1999 and 43 basis
points for the nine months ended September 30, 1999 when compared to the
same periods in 1998 due to lower rates on both long-term and short-term
debt.
Operating Expenses
Operating expenses increased $3.3 million, or 3%, for the three months
ended September 30, 1999 and $16.5 million, or 4%, for the nine months
ended September 30, 1999 when compared to the same periods in 1998
primarily due to increases in litigation expenses and amortization of
intangibles, partially offset by higher deferred loan origination costs.
See Note 8. of the Notes to Condensed Consolidated Financial Statements in
Part I for further information on litigation.
<PAGE>
<PAGE> 18
Provision for Finance Receivable Losses
Provision for finance receivable losses decreased $2.4 million, or 5%, for
the three months ended September 30, 1999 and $2.4 million, or 2% for the
nine months ended September 30, 1999 when compared to the same periods in
1998. The decrease in provision for finance receivable losses for the
three months ended September 30, 1999 was due to lower net charge-offs in
third quarter 1999. The decrease in provision for finance receivable
losses for the nine months ended September 30, 1999 was due to lower net
charge-offs in 1999, partially offset by a $7.5 million reduction in the
amounts provided for the allowance for finance receivable losses in 1998.
Net charge-offs decreased to $50.3 million for the three months ended
September 30, 1999 and $150.2 million for the nine months ended September
30, 1999 compared to $52.7 million and $160.1 million, respectively, for
the same periods in 1998. The following table shows charge-off ratios by
type of finance receivable:
Three Months Ended Nine Months Ended
September 30, September 30,
1999 1998 1999 1998
Real estate loans 0.69% 0.70% 0.58% 0.70%
Non-real estate loans 5.07 5.40 5.23 5.55
Total loans 1.94 2.34 1.94 2.46
Retail sales finance 2.54 2.98 2.70 3.22
Total charge-off ratio 2.02 2.44 2.04 2.58
The decrease in the charge-off ratios reflected the results of past and
ongoing credit quality improvement efforts, including improved credit risk
management systems and an increased proportion of real estate loans.
At September 30, 1999, delinquencies were $393.1 million compared to $352.7
million at September 30, 1998. The higher delinquencies reflected the
continued maturing of purchased real estate loan portfolios and general
economic conditions. The following table shows delinquency ratios by type
of finance receivable:
September 30,
1999 1998
Real estate loans 3.28% 3.07%
Non-real estate loans 5.43 5.71
Total loans 3.94 4.04
Retail sales finance 1.97 2.26
Total delinquency ratio 3.67 3.75
At September 30, 1999, the allowance for finance receivable losses was
$386.2 million compared to $365.2 million at September 30, 1998. The
allowance ratio at September 30, 1999 was 3.80% compared to 4.15% at
September 30, 1998. 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> 19
Insurance Losses and Loss Adjustment Expenses
Insurance losses and loss adjustment expenses increased $3.0 million, or
14%, for the three months ended September 30, 1999 and decreased $1.4
million, or 2%, for the nine months ended September 30, 1999 when compared
to the same periods in 1998. The increase in insurance benefits and losses
for the three months ended September 30, 1999 was due to increases in
provision for future benefits and claims. Provision for future benefits
increased $2.8 million for the three months ended September 30, 1999 due
to increased sales of non-credit insurance products. Claims increased $.2
million for the three months ended September 30, 1999 primarily due to
unfavorable loss experience in third quarter 1999. The decrease in
insurance benefits and losses for the nine months ended September 30, 1999
was due to lower claims, partially offset by higher provision for future
benefits. Claims decreased $5.8 million for the nine months ended
September 30, 1999 primarily due to favorable loss experience on credit
insurance. Provision for future benefits increased $4.4 million for the
nine months ended September 30, 1999 due to increased sales of non-credit
insurance products.
Provision for Income Taxes
The provision for income taxes increased $4.5 million, or 17%, for the
three months ended September 30, 1999 and $10.7 million, or 13%, for the
nine months ended September 30, 1999 when compared to the same periods in
1998. The increase in provision for income taxes for the three months
ended September 30, 1999 was due to higher taxable income and effective tax
rate. The increase for the nine months ended September 30, 1999 was due
to higher taxable income, partially offset by lower effective tax rate.
The effective tax rate was 36.41% for the three and nine months ended
September 30, 1999 compared to 35.76% and 37.13%, respectively, for the
same periods in 1998.
Forward-looking Statements
All statements, trend analyses, and other information contained in this
report 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 or the ability of third
parties to achieve and maintain Year 2000 readiness for critical systems
and operations; (4) the ability to secure necessary regulatory approvals;
and (5) adverse litigation results or resolution of litigation. 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,
<PAGE>
<PAGE> 20
future developments, or otherwise.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
See Note 8. of the Notes to Condensed Consolidated Financial Statements in
Part I of this Form 10-Q.
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.
Current Report on Form 8-K dated August 19, 1999, with respect to a
voluntary petition filed by A.G. Financial Service Center, Inc. to
reorganize under Chapter 11 of the United States Bankruptcy Code.
<PAGE>
<PAGE> 21
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, 1999 By /s/ Robert A. Cole
Robert A. Cole
Senior Vice President and Chief
Financial Officer
(Duly Authorized Officer and Principal
Financial Officer)
<PAGE>
<PAGE> 22
Exhibit Index
Exhibits Page
(12) Computation of Ratio of Earnings to Fixed Charges. 23
(27) Financial Data Schedule. 24
<PAGE>
<PAGE> 23
Exhibit 12
<TABLE>
AMERICAN GENERAL FINANCE, INC. AND SUBSIDIARIES
Computation of Ratio of Earnings to Fixed Charges
(Unaudited)
<CAPTION>
Nine Months Ended
September 30,
1999 1998
(dollars in thousands)
<S> <C> <C>
Earnings:
Income before provision for income
taxes $251,512 $217,794
Interest expense 420,079 376,116
Implicit interest in rents 11,258 8,314
Total earnings $682,849 $602,224
Fixed charges:
Interest expense $420,079 $376,116
Implicit interest in rents 11,258 8,314
Total fixed charges $431,337 $384,430
Ratio of earnings to fixed charges 1.58 1.57
</TABLE>
<TABLE> <S> <C>
<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-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 177,825
<SECURITIES> 988,421
<RECEIVABLES> 9,958,672<F1>
<ALLOWANCES> 385,718<F2>
<INVENTORY> 0<F3>
<CURRENT-ASSETS> 0<F4>
<PP&E> 0<F4>
<DEPRECIATION> 0<F4>
<TOTAL-ASSETS> 11,532,389
<CURRENT-LIABILITIES> 0<F4>
<BONDS> 5,443,026<F5>
0<F3>
0<F3>
<COMMON> 1,000
<OTHER-SE> 1,447,114<F6>
<TOTAL-LIABILITY-AND-EQUITY> 11,532,389
<SALES> 0<F3>
<TOTAL-REVENUES> 846,827<F7>
<CGS> 0<F3>
<TOTAL-COSTS> 0<F4>
<OTHER-EXPENSES> 304,139<F8>
<LOSS-PROVISION> 99,898<F9>
<INTEREST-EXPENSE> 276,380<F10>
<INCOME-PRETAX> 166,410
<INCOME-TAX> 60,589
<INCOME-CONTINUING> 105,821
<DISCONTINUED> 0<F3>
<EXTRAORDINARY> 0<F3>
<CHANGES> 0<F3>
<NET-INCOME> 105,821
<EPS-BASIC> 0<F3>
<EPS-DILUTED> 0<F3>
<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.
</FN>
</TABLE>
