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, 2000
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 8, 2000, 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,
2000 1999 2000 1999
(dollars in thousands)
<S> <C> <C> <C> <C>
Revenues
Finance charges $398,255 $356,031 $788,855 $713,425
Insurance 48,752 45,593 96,919 88,527
Other 22,250 22,567 50,740 44,875
Total revenues 469,257 424,191 936,514 846,827
Expenses
Interest expense 169,975 138,835 333,116 276,380
Operating expenses 135,649 131,036 272,558 264,705
Provision for finance
receivable losses 48,443 48,088 97,012 99,898
Insurance losses and loss
adjustment expenses 22,097 19,561 47,084 39,434
Other charge 50,000 - 50,000 -
Total expenses 426,164 337,520 799,770 680,417
Income before provision for
income taxes 43,093 86,671 136,744 166,410
Provision for Income Taxes 16,418 31,557 50,545 60,589
Net Income $ 26,675 $ 55,114 $ 86,199 $105,821
<FN>
<F1>
See Notes to Condensed Consolidated Financial Statements.
</FN>
</TABLE>
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<TABLE>
AMERICAN GENERAL FINANCE, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(Unaudited)
<CAPTION>
June 30, December 31,
2000 1999
(dollars in thousands)
<S> <C> <C>
Assets
Finance receivables, net of unearned
finance charges:
Real estate loans $ 7,248,536 $ 7,104,227
Non-real estate loans 2,989,099 2,576,081
Retail sales finance 1,405,954 1,349,689
Net finance receivables 11,643,589 11,029,997
Allowance for finance receivable losses (383,415) (395,626)
Net finance receivables, less allowance
for finance receivable losses 11,260,174 10,634,371
Investment securities 1,040,318 988,563
Cash and cash equivalents 188,062 146,710
Other assets 888,127 865,663
Total assets $13,376,681 $12,635,307
Liabilities and Shareholder's Equity
Long-term debt $ 5,850,198 $ 5,716,991
Short-term notes payable:
Commercial paper 4,631,026 4,245,961
Banks and other 235,000 211,559
Deposits 36,545 32,118
Insurance claims and policyholder
liabilities 474,819 462,100
Other liabilities 545,207 416,572
Accrued taxes 24,211 22,771
Total liabilities 11,797,006 11,108,072
Shareholder's equity:
Common stock 1,000 1,000
Additional paid-in capital 876,708 876,708
Accumulated other comprehensive loss (13,457) (6,696)
Retained earnings 715,424 656,223
Total shareholder's equity 1,579,675 1,527,235
Total liabilities and shareholder's equity $13,376,681 $12,635,307
<FN>
<F1>
See Notes to Condensed Consolidated Financial Statements.
</FN>
</TABLE>
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<TABLE>
AMERICAN GENERAL FINANCE, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(Unaudited)
<CAPTION>
Six Months Ended
June 30,
2000 1999
(dollars in thousands)
<S> <C> <C>
Cash Flows from Operating Activities
Net income $ 86,199 $ 105,821
Reconciling adjustments:
Provision for finance receivable losses 97,012 99,898
Depreciation and amortization 71,899 63,628
Deferral of finance receivable origination
costs (26,779) (25,421)
Deferred income tax charge 825 3,657
Change in other assets (12,946) (32,283)
Change in other liabilities 128,639 37,566
Change in insurance claims and policyholder
liabilities 12,719 4,399
Change in taxes receivable and payable (9,992) 1,546
Other, net 2,888 24,042
Net cash provided by operating activities 350,464 282,853
Cash Flows from Investing Activities
Finance receivables originated or purchased (3,403,505) (2,921,400)
Principal collections on finance receivables 2,655,241 2,513,266
Acquisition of Standard Pacific Savings, F.A. - 44,528
Investment securities purchased (178,568) (173,355)
Investment securities called, matured and sold 117,716 123,842
Change in premiums on finance receivables
purchased and deferred charges (7,401) (12,947)
Other, net (9,958) (16,328)
Net cash used for investing activities (826,475) (442,394)
Cash Flows from Financing Activities
Proceeds from issuance of long-term debt 830,754 454,867
Repayment of long-term debt (699,324) (190,729)
Change in deposits 4,427 1,216
Change in short-term notes payable 408,506 58,014
Dividends paid (27,000) (134,004)
Net cash provided by financing activities 517,363 189,364
Increase in cash and cash equivalents 41,352 29,823
Cash and cash equivalents at beginning of period 146,710 148,002
Cash and cash equivalents at end of period $ 188,062 $ 177,825
Supplemental Disclosure of Cash Flow
Information
Income taxes paid $ 58,063 $ 55,679
Interest paid $ 331,692 $ 264,918
<FN>
<F1>
See Notes to Condensed Consolidated Financial Statements.
</FN>
</TABLE>
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<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,
2000 1999 2000 1999
(dollars in thousands)
<S> <C> <C> <C> <C>
Net income $ 26,675 $ 55,114 $ 86,199 $105,821
Other comprehensive income:
Net unrealized losses on
investment securities (4,340) (25,086) (8,115) (40,744)
Income tax effect 1,521 8,842 2,842 14,336
Net unrealized losses on
investment securities,
net of tax (2,819) (16,244) (5,273) (26,408)
Reclassification adjustment
for realized losses (gains)
included in net income 1,381 (654) (2,290) (959)
Income tax effect (483) 166 802 259
Realized losses (gains)
included in net income,
net of tax 898 (488) (1,488) (700)
Other comprehensive loss,
net of tax (1,921) (16,732) (6,761) (27,108)
Comprehensive income $ 24,754 $ 38,382 $ 79,438 $ 78,713
<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
June 30, 2000
Note 1. Principles of Consolidation
American General Finance, Inc. will be referred to as "AGFI" or
collectively with its subsidiaries, whether directly or indirectly owned,
as the "Company" or "we". We prepared the accompanying unaudited condensed
consolidated financial statements using generally accepted accounting
principles for interim periods. They include the accounts of AGFI and its
subsidiaries, all of which are wholly owned. We eliminated all
intercompany items. We did not include per share information because AGFI
is a wholly-owned subsidiary of American General Corporation (American
General).
Note 2. Adjustments and Reclassifications
Our condensed consolidated financial statements include all adjustments,
consisting only of normal recurring adjustments, that we considered
necessary for a fair presentation of the Company's consolidated financial
position at June 30, 2000 and December 31, 1999, our consolidated results
of operations for the three months and six months ended June 30, 2000 and
1999, our consolidated cash flows for the six months ended June 30, 2000
and 1999, and our consolidated comprehensive income for the three months
and six months ended June 30, 2000 and 1999. Our condensed consolidated
financial statements should be read in conjunction with the consolidated
financial statements and related notes included in our Annual Report on
Form 10-K for the year ended December 31, 1999.
To conform with the 2000 presentation, we reclassified certain items in the
prior period.
Note 3. Accounting Changes
In June 1998, the Financial Accounting Standards Board 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 in the balance sheet. Changes
in the fair value of a derivative instrument will be reported as earnings
or other comprehensive income, depending upon the intended use of the
derivative instrument. We will adopt SFAS 133 on January 1, 2001. We do
not expect adoption to have a material impact on the Company's consolidated
results of operations or financial position.
Note 4. Derivative Financial Instruments
Our 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 agreements.
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<PAGE> 7
AGFC uses interest rate swap agreements to reduce its exposure to market
interest rate increases by synthetically converting certain floating-rate
debt to a fixed-rate basis. At June 30, 2000, interest rate swap
agreements in which AGFC contracted to pay interest at fixed rates and
receive interest at floating rates totaled $1.7 billion in notional amount,
with a weighted average pay rate of 6.95% and a weighted average receive
rate of 6.76%.
As an alternative to fixed-rate term debt, AGFC's interest rate swap
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 2000
or 1999.
Note 5. Segment Information
We have two business segments: consumer finance and insurance. Our
segments are defined by financial service product. During first quarter
2000, the centralized real estate operation was decentralized and merged
into the consumer branches operation. The resulting new segment has been
named the consumer finance operation. The consumer finance operation
originates home equity and consumer loans, purchases loans and portfolios
of loans originated by various lenders, extends lines of credit, offers
retail sales financing to merchants, and sells credit and non-credit
insurance products. The insurance operation writes and assumes credit and
non-credit insurance through products that are sold principally by the
consumer finance operation.
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.
For the three months ended June 30, 2000:
Consumer Total
Finance Insurance Segments
(dollars in thousands)
Revenues:
External:
Finance charges $415,198 $ - $415,198
Insurance 363 48,389 48,752
Other (536) 22,133 21,597
Intercompany 16,893 (16,093) 800
Pretax income 42,429 24,592 67,021
For the three months ended June 30, 1999:
Consumer Total
Finance Insurance Segments
(dollars in thousands)
Revenues:
External:
Finance charges $368,729 $ - $368,729
Insurance 411 45,182 45,593
Other 774 20,041 20,815
Intercompany 17,609 (16,994) 615
Pretax income 79,256 21,331 100,587
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For the six months ended June 30, 2000:
Consumer Total
Finance Insurance Segments
(dollars in thousands)
Revenues:
External:
Finance charges $824,064 $ - $824,064
Insurance 610 96,309 96,919
Other (94) 44,153 44,059
Intercompany 36,287 (34,712) 1,575
Pretax income 139,768 43,385 183,153
For the six months ended June 30, 1999:
Consumer Total
Finance Insurance Segments
(dollars in thousands)
Revenues:
External:
Finance charges $739,922 $ - $739,922
Insurance 854 87,673 88,527
Other 3,330 39,909 43,239
Intercompany 35,120 (33,894) 1,226
Pretax income 160,441 39,457 199,898
Reconciliation of total segment pretax income to the condensed consolidated
financial statement amounts is summarized below:
Three Months Ended Six Months Ended
June 30, June 30,
2000 1999 2000 1999
(dollars in thousands)
Pretax income:
Segments $ 67,021 $100,587 $183,153 $199,898
Corporate (20,329) (12,227) (44,282) (29,272)
Adjustments (3,599) (1,689) (2,127) (4,216)
Total consolidated
pretax income $ 43,093 $ 86,671 $136,744 $166,410
Note 6. Other Charge
In late June 2000, we discovered a potential fraud committed against a
subsidiary that conducts mortgage warehouse lending activities in our
consumer finance operation. Recent mortgages processed by one originator
allegedly had been funded based on fraudulent information. In July, the
originator's license was suspended and the originator and its parent
company filed for bankruptcy. Based on the available information, we
recorded a charge of $50.0 million ($32.5 million aftertax) for our
estimated loss related to this alleged fraud. We are pursuing all
appropriate remedies to recover this loss, including insurance recovery
and legal action.
Note 7. Legal Contingencies
Satellite Dish Litigation
In the mid-1990s, one of our subsidiaries, A.G. Financial Service Center,
Inc. (Financial Service Center), formerly named American General Financial
Center, provided financing for satellite dishes sold by independent
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<PAGE> 9
unaffiliated dealers. 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 (the Clayton Smith
matter), rendered a judgment awarding approximately $500,000 in
compensatory damages and $167 million in punitive damages against Financial
Service Center. The lawsuit was filed on November 15, 1996, by 29
individuals who had each purchased a satellite dish. Financial Service
Center, together with certain other American General companies, currently
are named as defendants in other pending cases involving the financing of
satellite dishes.
In August 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
was intended to provide a fair and orderly process for managing the claims
against Financial Service Center.
In January 2000, settlement agreements were entered into in connection with
the Clayton Smith matter and other pending cases relating to satellite dish
financing. Accordingly, we recorded a charge of $57.0 million ($36.2
million aftertax) in fourth quarter 1999 to cover the proposed settlements
and other litigation. Resolution of the satellite dish litigation within
the recorded charge is dependent upon a number of factors, including
obtaining the bankruptcy court's approval of Financial Service Center's
plan of reorganization. If court approvals are obtained and appeals are
not taken, we expect that the settlements will be final in third quarter
2000.
Other
AGFI and certain of its subsidiaries are parties to various other lawsuits
and proceedings, including certain class action claims, arising in the
ordinary course of business. In addition, many of these claims arise in
jurisdictions, such as Alabama and Mississippi, that permit damage awards
disproportionate to the actual economic damages alleged to have been
incurred. Based upon information presently available, we believe 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
Liquidity
Our sources of funds include operations, issuances of long-term debt,
short-term borrowings in the commercial paper market, borrowings from banks
under credit facilities, and acceptance of bank demand and time deposits.
American General has also contributed capital to AGFI when needed for
finance receivable growth or other circumstances.
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The following table shows principal sources and uses of cash:
Six Months Ended
June 30,
2000 1999
(dollars in millions)
Principal sources of cash:
Operations $350.5 $282.9
Net issuance of debt 544.4 323.4
Principal sources of cash $894.9 $606.3
Principal uses of cash:
Net originations and purchases
of finance receivables $748.3 $408.1
Dividends paid 27.0 134.0
Principal uses of cash $775.3 $542.1
We believe that our overall sources of liquidity will continue to be
sufficient to satisfy our foreseeable financial obligations and operational
requirements.
Capital Resources
June 30,
2000 1999
(dollars in millions)
Long-term debt $ 5,850.2 $ 5,443.0
Short-term debt 4,866.0 3,741.7
Deposits 36.5 49.0
Total debt 10,752.7 9,233.7
Equity 1,579.7 1,448.1
Total capital $12,332.4 $10,681.8
Net finance receivables $11,643.6 $ 9,958.7
Debt to tangible equity ratio 7.69 7.49
Our capital varies directly with the level of net finance receivables. The
capital mix of debt and equity is based primarily upon maintaining leverage
that supports cost-effective funding.
We issue a combination of fixed-rate debt, principally long-term, and
floating-rate debt, principally short-term. AGFC obtains most of our
fixed-rate debt through issuances of medium-term notes and underwritten
debt offerings with maturities generally ranging from two to ten years.
AGFI, AGFC, and one of AGFC's subsidiaries obtain most of our 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.
AGFI has paid dividends to (or received capital contributions from)
American General to manage our leverage of debt to tangible equity (equity
less goodwill and net unrealized gains or losses on investment securities)
to 7.50 to 1. At June 30, 2000, the debt to tangible equity ratio
exceeded the Company's target as a result of a $50.0 million ($32.5
million aftertax) charge for the estimated loss from an alleged fraud
against our mortgage warehouse lending subsidiary. See Note 6. of the
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<PAGE> 11
Notes to Condensed Consolidated Financial Statements for information on
the loss. AGFI's ability to pay dividends is substantially dependent on
the receipt of dividends or other funds from its subsidiaries, primarily
AGFC. An AGFC financing agreement limits the amount of dividends AGFC may
pay but has not prevented the Company from managing its capital to
targeted leverage.
Liquidity Facilities
We participate in credit facilities to support the issuance of commercial
paper and to provide an additional source of funds for operating
requirements. AGFI and AGFC are eligible borrowers under committed credit
facilities extended to American General and certain of its subsidiaries
(the "shared committed facilities"). At June 30, 2000, the annual
commitment fees for the shared committed facilities ranged from .05% to
.07%. We pay only an allocated portion of the commitment fees for the
shared committed facilities. AGFI and certain subsidiaries also have
uncommitted credit facilities. In addition, AGFI and AGFC are eligible
borrowers 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:
June 30,
2000 1999
(dollars in millions)
Committed credit facilities:
Shared committed facilities $5,600.0 $5,000.0
Borrowings - -
Remaining availability $5,600.0 $5,000.0
Uncommitted credit facilities:
Company uncommitted facilities $ 271.0 $ 361.0
Shared uncommitted facilities 50.0 150.0
Borrowings (235.0) (180.0)
Remaining availability $ 86.0 $ 331.0
In addition, our mortgage warehouse lending subsidiary arranges interim
financing for third-party mortgage originators through a purchase
facility. At June 30, 2000, this facility totaled $250.0 million with
remaining availability of $15.0 million.
ANALYSIS OF OPERATING RESULTS AND FINANCIAL CONDITION
Net Income
Three Months Ended Six Months Ended
June 30, June 30,
2000 1999 2000 1999
(dollars in millions)
Net income $ 26.7 $ 55.1 $ 86.2 $105.8
Return on average
assets (annualized) .82% 1.93% 1.34% 1.87%
Return on average
equity (annualized) 6.78% 14.63% 11.06% 14.00%
Ratio of earnings to
fixed charges 1.40x 1.59x
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See Note 6. of the Notes to Condensed Consolidated Financial Statements for
information on a $50.0 million ($32.5 million aftertax) charge for the
estimated loss from an alleged fraud against our mortgage warehouse
lending subsidiary. Without this non-recurring charge, net income for the
three months ended June 30, 2000 would have been $59.2 million, an
increase of $4.1 million, or 7%, over the same period in 1999. Similarly,
net income for the six months ended June 30, 2000 would have been $118.7
million, an increase of $12.9 million, or 12%, over the same period in
1999. Including this non-recurring charge, net income decreased $28.4
million, or 52%, for the three months ended June 30, 2000 and $19.6
million, or 19%, for the six months ended June 30, 2000 when compared to
the same periods in 1999. See Note 5. of the Notes to Condensed
Consolidated Financial Statements for information on the results of the
Company's business segments.
Factors that specifically affected the Company's operating results are as
follows:
Finance Charges
Three Months Ended Six Months Ended
June 30, June 30,
2000 1999 2000 1999
(dollars in millions)
Finance charges $ 398.3 $ 356.0 $ 788.9 $ 713.4
Average net receivables $11,305.1 $ 9,862.4 $11,181.4 $ 9,791.6
Yield 14.15% 14.47% 14.17% 14.66%
Finance charges increased $42.3 million, or 12%, for the three months ended
June 30, 2000 and $75.5 million, or 11%, for the six months ended June 30,
2000 when compared to the same periods in 1999 primarily due to higher
average net receivables, partially offset by lower yield.
The following table shows average net receivables by type of finance
receivable:
Three Months Ended Six Months Ended
June 30, June 30,
2000 1999 2000 1999
(dollars in millions)
Real estate loans $ 7,240.5 $ 6,131.2 $ 7,197.7 $ 6,014.2
Non-real estate loans 2,690.9 2,482.9 2,618.5 2,501.4
Retail sales finance 1,373.7 1,248.3 1,365.2 1,276.0
Total average net
receivables $11,305.1 $ 9,862.4 $11,181.4 $ 9,791.6
Average net receivables increased $1.4 billion, or 15%, for the three
months ended June 30, 2000 and $1.4 billion, or 14%, for the six months
ended June 30, 2000 when compared to the same periods in 1999.
The following table shows yield by type of finance receivable:
Three Months Ended Six Months Ended
June 30, June 30,
2000 1999 2000 1999
Real estate loans 11.34% 11.51% 11.29% 11.70%
Non-real estate loans 21.86% 21.93% 22.05% 22.02%
Retail sales finance 13.85% 14.17% 14.19% 14.14%
Total yield 14.15% 14.47% 14.17% 14.66%
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Yield decreased 32 basis points for the three months ended June 30, 2000
and 49 basis points for the six months ended June 30, 2000 when compared
to the same periods in 1999 reflecting the larger proportion of average net
receivables in real estate loans, which generally have lower yields, and
a decline in real estate loan yield.
Insurance Revenues
Three Months Ended Six Months Ended
June 30, June 30,
2000 1999 2000 1999
(dollars in millions)
Insurance revenues $ 48.8 $ 45.6 $ 96.9 $ 88.5
Premiums earned $ 47.9 $ 44.7 $ 95.4 $ 86.9
Insurance revenues
(annualized)as a
percentage of
average net
receivables 1.72% 1.85% 1.73% 1.81%
Insurance revenues increased $3.2 million, or 7%, for the three months
ended June 30, 2000 and $8.4 million, or 9%, for the six months ended June
30, 2000 when compared to the same periods in 1999 primarily due to higher
earned premiums. Earned premiums increased primarily due to higher written
premium volume in 1999 and 2000.
Other Revenues
Three Months Ended Six Months Ended
June 30, June 30,
2000 1999 2000 1999
(dollars in millions)
Other revenues $ 22.3 $ 22.6 $ 50.7 $ 44.9
Investment revenue $ 20.9 $ 20.6 $ 46.6 $ 40.7
Other revenues decreased $.3 million, or 1%, for the three months ended
June 30, 2000 and increased $5.8 million, or 13%, for the six months ended
June 30, 2000 when compared to the same periods in 1999. The increase in
other revenues for the six months ended June 30, 2000 was primarily due to
higher investment revenue reflecting growth in average invested assets,
higher realized gains, and higher adjusted portfolio yield.
Interest Expense
Three Months Ended Six Months Ended
June 30, June 30,
2000 1999 2000 1999
(dollars in millions)
Interest expense $ 170.0 $ 138.8 $ 333.1 $ 276.4
Average borrowings $10,430.3 $ 9,001.5 $10,299.9 $ 8,937.6
Borrowing cost 6.52% 6.17% 6.47% 6.20%
Interest expense increased $31.2 million, or 22%, for the three months
ended June 30, 2000 and $56.7 million, or 21%, for the six months ended
June 30, 2000 when compared to the same periods in 1999 primarily due to
higher average borrowings and higher borrowing cost. Average borrowings
increased $1.4 billion, or 16%, for the three months ended June 30, 2000
and $1.4 billion, or 15%, for the six months ended June 30, 2000 when
compared to the same periods in 1999 primarily to support finance
receivable growth. Borrowing cost increased 35 basis points for the three
months ended June 30, 2000 and 27 basis points for the six months ended
June 30, 2000 when compared to the same periods in 1999 due to higher
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<PAGE> 14
rates on short-term debt, partially offset by lower rates on long-term
debt.
Operating Expenses
Three Months Ended Six Months Ended
June 30, June 30,
2000 1999 2000 1999
(dollars in millions)
Operating expenses $135.6 $131.0 $272.6 $264.7
Operating expenses
(annualized)as a
percentage of
average net
receivables 4.80% 5.31% 4.88% 5.41%
Operating expenses increased $4.6 million, or 4%, for the three months
ended June 30, 2000 and $7.9 million, or 3%, for the six months ended June
30, 2000 when compared to the same periods in 1999 primarily due to
increases in salaries and data processing expenses, partially offset by
lower litigation expenses.
The improvement in operating expenses as a percentage of average net
receivables for the three months and six months ended June 30, 2000 when
compared to the same periods in 1999 reflects continued improvement in
operating efficiencies.
Provision for Finance Receivable Losses
At or for the
Three Months Ended Six Months Ended
June 30, June 30,
2000 1999 2000 1999
(dollars in millions)
Provision for finance
receivable losses $ 48.4 $ 48.1 $ 97.0 $ 99.9
Net charge-offs $ 48.4 $ 48.1 $ 97.0 $ 99.9
60 day+ delinquency $367.3 $370.6
Allowance for finance
receivable losses $383.4 $385.7
Provision for finance receivable losses increased $.3 million, or 1%, for
the three months ended June 30, 2000 and decreased $2.9 million, or 3%, for
the six months ended June 30, 2000 when compared to the same periods in
1999. The decrease in provision for finance receivable losses for the six
months ended June 30, 2000 reflected lower net charge-offs.
The following table shows charge-off ratios by type of finance receivable:
Three Months Ended Six Months Ended
June 30, June 30,
2000 1999 2000 1999
Real estate loans 0.63% 0.57% 0.64% 0.52%
Non-real estate loans 4.54% 5.06% 4.61% 5.32%
Retail sales finance 1.94% 2.57% 2.01% 2.77%
Total charge-off ratio 1.72% 1.96% 1.74% 2.05%
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The decrease in the charge-off ratio for the three months and six months
ended June 30, 2000 when compared to the same periods in 1999 reflected the
results of past and ongoing credit quality improvement efforts, including
consistent adherence to strict underwriting guidelines and an increased
proportion of average net receivables in real estate loans.
The following table shows delinquency ratios by type of finance receivable:
June 30,
2000 1999
Real estate loans 3.00% 3.21%
Non-real estate loans 3.75 5.07
Retail sales finance 1.57 1.88
Total delinquency ratio 3.02 3.53
The decrease in the delinquency ratio at June 30, 2000 when compared to
June 30, 1999 reflected the continued improvement in credit quality and
the higher level of purchased receivables. The decrease in the delinquency
ratio also reflected the sale of fully-reserved delinquent net finance
receivables totaling $27.1 million (gross balances totaling $34.8 million)
in first quarter 2000, consisting of non-real estate loans ($25.0 million)
and retail sales finance ($2.1 million). This sale reduced the delinquency
ratio by approximately 26 basis points at the time of sale.
The following table shows selected statistics relating to the allowance for
finance receivable losses:
At or for the
Three Months Ended Six Months Ended
June 30, June 30,
2000 1999 2000 1999
Allowance ratio 3.29% 3.87%
Charge-off coverage 1.98x 2.01x 1.98x 1.93x
We periodically evaluate our finance receivable portfolio to determine the
level of the allowance for finance receivable losses. In our opinion, the
allowance is adequate to absorb anticipated losses in our existing
portfolio. During second quarter 2000, we increased the allowance for
finance receivable losses $14.8 million by applying the purchase accounting
method for our portfolio acquisitions. The allowance as a percentage of
net finance receivables has continued to decline, reflecting the sale of
fully-reserved net finance receivables totaling $27.1 million in first
quarter 2000 and continued improvement in credit quality. The charge-off
coverage, which compares the allowance for finance receivable losses to net
charge-offs (annualized), has been essentially flat for the three months
and six months ended June 30, 2000 when compared to the same periods in
1999.
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<PAGE> 16
Insurance Losses and Loss Adjustment Expenses
Three Months Ended Six Months Ended
June 30, June 30,
2000 1999 2000 1999
(dollars in millions)
Claims incurred $ 19.8 $ 18.8 $ 42.5 $ 39.4
Change in benefit
reserves $ 2.3 $ .8 $ 4.6 $ -
Insurance losses and loss
adjustment expenses $ 22.1 $ 19.6 $ 47.1 $ 39.4
Insurance losses and loss adjustment expenses increased $2.5 million, or
13%, for the three months ended June 30, 2000 and $7.7 million, or 19%, for
the six months ended June 30, 2000 when compared to the same periods in
1999 due to increases in provision for future benefits and claims.
Provision for future benefits increased $1.5 million for the three months
ended June 30, 2000 and $4.6 million for the six months ended June 30, 2000
due to increased sales of non-credit insurance products. Claims increased
$1.0 million for the three months ended June 30, 2000 and $3.1 million for
the six months ended June 30, 2000 primarily due to unusually low loss
experience in 1999.
Other Charge
In second quarter 2000, we recorded a $50.0 million ($32.5 million
aftertax) charge for the estimated loss on the alleged fraud against our
mortgage warehouse lending subsidiary that was discovered in late June
2000. See Note 6. of the Notes to Condensed Consolidated Financial
Statements for information on the loss.
Provision for Income Taxes
Three Months Ended Six Months Ended
June 30, June 30,
2000 1999 2000 1999
(dollars in millions)
Provision for income
taxes $ 16.4 $ 31.6 $ 50.5 $ 60.6
Pretax income $ 43.3 $ 86.7 $136.7 $166.4
Effective income
tax rate 38.10% 36.41% 36.96% 36.41%
The provision for income taxes decreased $15.2 million, or 48%, for the
three months ended June 30, 2000 and $10.1 million, or 17%, for the six
months ended June 30, 2000 when compared to the same periods in 1999
primarily due to lower taxable income resulting from the $50.0 million
charge for the estimated loss on the alleged fraud against our mortgage
warehouse lending subsidiary. The effective income tax rate rose in 2000
when compared to the 1999 periods primarily due to lower state income tax
benefits.
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<PAGE> 17
Asset/Liability Management
We manage anticipated cash flows of our assets and liabilities in an effort
to reduce the risk associated with unfavorable changes in interest rates.
Management determines the mix of fixed-rate and floating-rate debt based,
in part, on the nature of the assets being supported. We limit our
exposure to market interest rate increases by fixing interest rates that
we pay for term periods. The primary means by which we accomplish 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 certain floating-rate
funding, thereby limiting our exposure to market interest rate increases.
Floating-rate debt represented 38% of our average borrowings for the three
months ended June 30, 2000 and 36% for the six months ended June 30, 2000
compared to 30% for the three months and six months ended June 30, 1999.
These percentages include the effect of interest rate swap agreements that
converted floating-rate debt to a fixed rate.
FORWARD-LOOKING STATEMENTS
All statements, trend analyses, and other information contained in this
report relative to trends in our 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. We have made these forward-looking
statements based upon our current expectations and beliefs concerning
future developments and their potential effects on the Company. There can
be no assurance that future developments affecting the Company will be
those we anticipated. 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) customer responsiveness to both
products and distribution channels; (3) competitive, regulatory, or tax
changes that affect the cost of, or demand for, our products; (4) our
ability to secure necessary court and regulatory approvals; (5) adverse
litigation results or resolution of litigation, including proceedings
related to satellite dish financing; and (6) the formation of strategic
alliances or business combinations among our competitors or business
partners. Readers are also directed to other risks and uncertainties
discussed in other documents we filed with the Securities and Exchange
Commission. We undertake no obligation to update or revise any forward-
looking information, whether as a result of new information, future
developments, or otherwise.
Item 3. Quantitative and Qualitative Disclosures about Market Risk.
Our exposure to market risk is primarily related to changes in interest
rates. Quantitative and qualitative disclosures about our market risk
resulting from changes in interest rates are included in Item 7A. in our
1999 Annual Report on Form 10-K. There have been no material changes in
such risks or our asset/liability management program during the six months
ended June 30, 2000. See Note 4. of the Notes to Condensed Consolidated
Financial Statements for information about significant derivative financial
instrument activity during the year.
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<PAGE> 18
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
See Note 6. 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.
No Current Reports on Form 8-K were filed during the second quarter
of 2000.
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<PAGE> 19
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 8, 2000 By /s/ Robert A. Cole
Robert A. Cole
Senior Vice President and Chief
Financial Officer
(Duly Authorized Officer and Principal
Financial Officer)
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<PAGE> 20
Exhibit Index
Exhibit
(12) Computation of Ratio of Earnings to Fixed Charges.
(27) Financial Data Schedule.
