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, 2001
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 1-6155
AMERICAN GENERAL FINANCE CORPORATION
(Exact name of registrant as specified in its charter)
Indiana 35-0416090
(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 14, 2001, there were 10,160,012 shares of the registrant's
common stock, $.50 par value, outstanding.
2
Part I - FINANCIAL INFORMATION
Item 1. Financial Statements
AMERICAN GENERAL FINANCE CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Income
(Unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
2001 2000 2001 2000
(dollars in thousands)
Revenues
Finance charges $418,984 $388,203 $827,894 $768,838
Insurance 50,203 48,752 98,281 96,919
Other 25,059 31,021 55,914 66,913
Total revenues 494,246 467,976 982,089 932,670
Expenses
Interest expense 156,966 167,113 324,204 327,654
Operating expenses 136,094 131,877 268,001 264,852
Provision for finance
receivable losses 67,356 47,699 126,060 95,497
Insurance losses and loss
adjustment expenses 20,978 22,097 44,236 47,084
Total expenses 381,394 368,786 762,501 735,087
Income before provision for
income taxes 112,852 99,190 219,588 197,583
Provision for Income Taxes 40,698 36,158 79,259 71,778
Net Income $ 72,154 $ 63,032 $140,329 $125,805
See Notes to Condensed Consolidated Financial Statements.
3
AMERICAN GENERAL FINANCE CORPORATION AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(Unaudited)
June 30, December 31,
2001 2000
(dollars in thousands)
Assets
Net finance receivables:
Real estate loans $ 7,246,527 $ 7,040,925
Non-real estate loans 2,903,100 2,970,233
Retail sales finance 1,348,325 1,416,667
Net finance receivables 11,497,952 11,427,825
Allowance for finance receivable losses (388,336) (372,825)
Net finance receivables, less allowance
for finance receivable losses 11,109,616 11,055,000
Investment securities 1,162,456 1,105,427
Cash and cash equivalents 164,068 134,539
Notes receivable from parent 269,757 261,321
Other assets 592,877 636,866
Total assets $13,298,774 $13,193,153
Liabilities and Shareholder's Equity
Long-term debt $ 5,917,465 $ 5,667,567
Commercial paper 4,634,349 4,846,445
Insurance claims and policyholder
liabilities 507,374 519,447
Other liabilities 457,607 349,413
Accrued taxes 30,683 23,987
Total liabilities 11,547,478 11,406,859
Shareholder's equity:
Common stock 5,080 5,080
Additional paid-in capital 877,526 877,514
Accumulated other comprehensive (loss)
income (34,129) 2,628
Retained earnings 902,819 901,072
Total shareholder's equity 1,751,296 1,786,294
Total liabilities and shareholder's equity $13,298,774 $13,193,153
See Notes to Condensed Consolidated Financial Statements.
4
AMERICAN GENERAL FINANCE CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(Unaudited)
Six Months Ended
June 30,
2001 2000
(dollars in thousands)
Cash Flows from Operating Activities
Net income $ 140,329 $ 125,805
Reconciling adjustments:
Provision for finance receivable losses 126,060 95,497
Depreciation and amortization 69,594 69,287
Deferral of finance receivable origination
costs (26,943) (26,110)
Deferred income tax charge 96 753
Change in other assets 51,191 80,763
Change in other liabilities 2,732 77,978
Change in insurance claims and policyholder
liabilities (12,073) 12,719
Change in taxes receivable and payable 11,222 10,312
Other, net 63,458 2,711
Net cash provided by operating activities 425,666 449,715
Cash Flows from Investing Activities
Finance receivables originated or purchased (3,071,343) (3,330,044)
Principal collections on finance receivables 2,873,445 2,598,094
Investment securities purchased (602,488) (172,747)
Investment securities called, matured and sold 496,349 110,594
Change in notes receivable from parent (8,436) (53,071)
Change in premiums on finance receivables
purchased and deferred charges (8,572) (7,460)
Other, net (6,139) (9,243)
Net cash used for investing activities (327,184) (863,877)
Cash Flows from Financing Activities
Proceeds from issuance of long-term debt 596,869 830,754
Repayment of long-term debt (348,675) (696,985)
Change in short-term notes payable (212,096) 364,528
Change in short-term collateralized financing 33,531 14,313
Dividends paid (138,582) (60,960)
Net cash (used for) provided by financing
activities (68,953) 451,650
Increase in cash and cash equivalents 29,529 37,488
Cash and cash equivalents at beginning of period 134,539 118,151
Cash and cash equivalents at end of period $ 164,068 $ 155,639
Supplemental Disclosure of Cash Flow
Information
Income taxes paid $ 68,815 $ 60,086
Interest paid $ 332,668 $ 326,152
See Notes to Condensed Consolidated Financial Statements.
5
AMERICAN GENERAL FINANCE CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Comprehensive Income
(Unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
2001 2000 2001 2000
(dollars in thousands)
Net income $ 72,154 $ 63,032 $140,329 $125,805
Other comprehensive gain (loss):
Net unrealized gains (losses):
Investment securities (15,276) (4,351) (4,861) (8,127)
Interest rate swaps:
Transition adjustment - - (42,103) -
Current period 33,915 - (12,523) -
Minimum pension liability - - (535) -
Income tax effect:
Investment securities 5,348 1,526 1,703 2,847
Interest rate swaps:
Transition adjustment - - 14,736 -
Current period (11,870) - 4,384 -
Minimum pension liability - - 187 -
Net unrealized gains (losses),
net of tax 12,117 (2,825) (39,012) (5,280)
Reclassification adjustments
for realized losses (gains)
included in net income:
Investment securities 4,987 1,381 3,470 (2,290)
Income tax effect:
Investment securities (1,746) (483) (1,215) 802
Realized losses (gains)
included in net income,
net of tax 3,241 898 2,255 (1,488)
Other comprehensive gain (loss),
net of tax 15,358 (1,927) (36,757) (6,768)
Comprehensive income $ 87,512 $ 61,105 $103,572 $119,037
See Notes to Condensed Consolidated Financial Statements.
6
AMERICAN GENERAL FINANCE CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
June 30, 2001
Note 1. Principles of Consolidation
American General Finance Corporation will be referred to as "AGFC" or
collectively with its subsidiaries, whether directly or indirectly
owned, as the "Company" or "we". We prepared our condensed
consolidated financial statements using accounting principles generally
accepted in the United States for interim periods. They include the
accounts of AGFC and its subsidiaries, all of which are wholly owned.
We eliminated all intercompany items. AGFC is a wholly owned
subsidiary of American General Finance, Inc. (AGFI). 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, 2001 and December 31, 2000,
our consolidated results of operations for the three months and six
months ended June 30, 2001 and 2000, our consolidated cash flows for
the six months ended June 30, 2001 and 2000, and our consolidated
comprehensive income for the three months and six months ended June 30,
2001 and 2000. 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, 2000.
To conform to the 2001 presentation, we reclassified certain items in
the prior period.
Note 3. Accounting Change
In second quarter 2001, we adopted Emerging Issues Task Force (EITF)
Issue 99-20, "Recognition of Interest Income and Impairment on
Purchased and Retained Beneficial Interests in Securitized Financial
Assets." EITF 99-20 provides guidance on the calculation of interest
income and the recognition of impairments related to beneficial
interests held in our investment portfolio. Beneficial interests are
investments that represent rights to receive specified cash flows from
a pool of underlying assets (i.e., collateralized debt obligations).
As a result of applying the impairment provisions of EITF 99-20, we
recorded a $1.0 million ($.6 million aftertax) write-down of the
carrying value of certain collateralized debt obligations to other
income.
Note 4. Future Accounting Changes
In July 2001, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards (SFAS) 141, "Business
Combinations," and SFAS 142, "Goodwill and Other Intangible Assets."
SFAS 141 eliminates the pooling of interests method of accounting for
business combinations except for qualifying business combinations that
were initiated prior to July 1, 2001. This standard also requires that
intangible assets be accounted for separately from goodwill, for
7
acquisitions after July 1, 2001. Since the American International
Group, Inc. (AIG) acquisition of American General was initiated prior
to July 1, 2001, SFAS 141 will not change the accounting for American
General's proposed acquisition by AIG, which will be accounted for as a
pooling of interests.
SFAS 142 provides that goodwill and other intangible assets with
indefinite lives are no longer to be amortized. These assets are to be
reviewed for impairment annually, or more frequently if impairment
indicators are present. Separable intangible assets that have finite
lives will continue to be amortized over their useful lives. The
amortization provisions of SFAS 142 apply to goodwill and intangible
assets acquired after June 30, 2001. Amortization of goodwill and
intangible assets acquired prior to July 1, 2001 will continue through
December 31, 2001. We will adopt SFAS 142 on January 1, 2002, after
which the Company's earnings will not be impacted by goodwill
amortization. Impairment testing is required during the first year of
adoption, and resulting impairment losses, if any, may be reported as
the cumulative effect of an accounting change. We have not yet
determined if the required impairment testing related to the Company's
goodwill and other intangible assets will require a write-down of any
such assets.
Note 5. Merger
As previously announced, on March 11, 2001, American General,
Prudential plc (Prudential), a public limited company incorporated in
England and Wales, entered into an Agreement and Plan of Merger (the
Prudential Agreement), pursuant to which American General would become
a wholly owned subsidiary of Prudential. On May 11, 2001, these
parties together with American International Group, Inc. (AIG), a
Delaware corporation, entered into a Tri-Party Agreement, pursuant to
which, among other things, the Prudential Agreement has been
terminated. In accordance with the terms of the Prudential Agreement,
American General concurrently paid Prudential the $600 million
termination fee mandated by that agreement.
On May 11, 2001, American General and AIG entered into an Agreement and
Plan of Merger (the AIG Agreement), pursuant to which American General
will become a wholly owned subsidiary of AIG. Under the terms of the
AIG Agreement, which has been approved by the boards of directors of
AIG and American General, American General shareholders will receive
AIG common stock according to an exchange ratio that will be determined
based on the 10-day average price of AIG's common stock ending three
business days prior to closing (the AIG Average Price). This exchange
ratio will provide American General shareholders with AIG common stock
valued at $46 per American General share as long as the AIG Average
Price is between $76.20 and $84.22. If the AIG Average Price is
between $76.20 and $84.22, the exchange ratio will be equal to $46
divided by the AIG Average Price. If the AIG Average Price is equal to
or less than $76.20 or equal to or more than $84.22, American General
shareholders will receive 0.6037 or 0.5462 AIG shares, respectively.
The AIG Agreement is subject to various regulatory approvals, as well
as the approval of American General shareholders. The American General
shareholder meeting to vote on the transaction is scheduled for August
15, 2001. A number of regulatory approvals have been received and all
remaining approvals are expected in August, with the transaction
expected to close as soon as possible thereafter.
8
Note 6. Derivative Financial Instruments
To protect against interest rate fluctuations, AGFC uses derivative
financial instruments in managing the cost of its debt. AGFC has
generally limited its use of derivative financial instruments to
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.
Effective January 1, 2001, we adopted 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 are reported in net income or
comprehensive income, depending upon the intended use of the derivative
instrument.
Upon adoption of SFAS 133, we recorded aftertax cumulative adjustments
to recognize the fair value of interest rate swap agreements related to
debt in the balance sheet, which reduced accumulated other
comprehensive income in shareholder's equity $27.4 million. Since we
anticipate holding the swaps for their full term, we do not expect this
amount to impact earnings in future periods.
Our interest rate swap agreements are designated and qualify as cash
flow hedges. We report the effective portion of the gain or loss on
the instrument as a component of comprehensive income. We report any
ineffectiveness in other revenues.
As an alternative to fixed-rate term debt, our interest rate swap
agreements did not have a material effect on other revenues, interest
expense, or net income during the six months ended June 30, 2001 or
2000.
Note 7. Segment Information
We have two business segments: consumer finance and insurance. Our
segments are defined by the type of financial service product offered.
The consumer finance operation makes home equity loans, originates
secured and unsecured consumer loans, extends lines of credit,
purchases retail sales contracts from retail merchants, and provides
revolving retail and private label services for retail merchants. To
supplement our lending and retail sales financing activities, we
purchase portfolios of real estate loans, non-real estate loans, and
retail sales finance receivables. We also sell credit and non-credit
insurance to our consumer finance customers. The insurance operation
writes and assumes credit and non-credit insurance through products
that are sold principally by the consumer finance operation.
Because segment information is not calculated separately for the
Company, the remaining information is for AGFI and its subsidiaries.
The following tables display information about AGFI and its
subsidiaries' segments as well as a reconciliation of their total
segment pretax income to their condensed consolidated financial
statement amounts.
9
For the three months ended June 30, 2001:
Consumer Total
Finance Insurance Segments
(dollars in thousands)
Revenues:
External:
Finance charges $447,964 $ - $447,964
Insurance 279 49,924 50,203
Other (2,215) 24,646 22,431
Intercompany 20,648 (19,848) 800
Pretax income 109,405 25,711 135,116
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 six months ended June 30, 2001:
Consumer Total
Finance Insurance Segments
(dollars in thousands)
Revenues:
External:
Finance charges $887,623 $ - $887,623
Insurance 560 97,721 98,281
Other (4,670) 47,553 42,883
Intercompany 40,450 (38,880) 1,570
Pretax income 217,395 46,012 263,407
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
10
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,
2001 2000 2001 2000
(dollars in thousands)
Pretax income:
Segments $135,116 $ 67,021 $263,407 $183,153
Corporate (18,455) (20,329) (43,805) (44,282)
Adjustments (7,610) (3,599) (8,304) (2,127)
Total consolidated
pretax income $109,051 $ 43,093 $211,298 $136,744
Note 8. Legal Contingencies
AGFC and certain of its subsidiaries are parties to various lawsuits
and proceedings, including certain class action claims, arising in the
ordinary course of business. In addition, many of these proceedings are
pending in jurisdictions 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 arising from these lawsuits and proceedings
will not have a material adverse effect on our 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, and borrowings
from banks under credit facilities. AGFI has also contributed capital
to AGFC when needed for finance receivable growth or other
circumstances.
11
The following table shows principal sources and uses of cash:
Six Months Ended
June 30,
2001 2000
(dollars in millions)
Principal sources of cash:
Operations $425.7 $449.7
Net issuance of debt 36.1 498.3
Principal sources of cash $461.8 $948.0
Principal uses of cash:
Net originations and purchases
of finance receivables $197.9 $732.0
Dividends paid 138.6 61.0
Principal uses of cash $336.5 $793.0
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,
2001 2000
(dollars in millions)
Long-term debt $ 5,917.5 $ 5,845.2
Short-term debt 4,634.3 4,611.1
Total debt 10,551.8 10,456.3
Equity 1,751.3 1,760.0
Total capital $12,303.1 $12,216.3
Net finance receivables $11,498.0 $11,356.4
Debt to tangible equity ratio 6.49 6.51
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 our fixed-
rate debt through issuances of medium-term notes and underwritten debt
offerings with maturities generally ranging from two to ten years.
AGFC obtains 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.
12
AGFC has paid dividends to (or received capital contributions from)
AGFI to manage our leverage of debt to tangible equity (equity less
goodwill and accumulated other comprehensive income) to 6.50 to 1. An
AGFC financing agreement limits the amount of dividends AGFC may pay.
This agreement has not prevented us from managing our 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. AGFC is an eligible borrower under committed
credit facilities extended to American General and certain of its
subsidiaries (the "shared committed facilities"). At June 30, 2001,
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. AGFC and certain
subsidiaries also have uncommitted credit facilities. In addition,
AGFC 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:
June 30,
2001 2000
(dollars in millions)
Committed credit facilities:
Shared committed facilities $6,200.0 $5,600.0
Borrowings - -
Remaining availability $6,200.0 $5,600.0
Uncommitted credit facilities:
Company uncommitted facilities $ 1.0 $ 51.0
Shared uncommitted facilities 100.0 50.0
Borrowings - -
Remaining availability $ 101.0 $ 101.0
In July 2001, we refinanced $1.0 billion of short-term debt with the
issuance of $1.0 billion of long-term debt. Subsequent to this
transaction, we reduced our credit facilities to $5.25 billion to
reflect the Company's lower commercial paper borrowings and in
anticipation of the acquisition by AIG.
13
ANALYSIS OF OPERATING RESULTS AND FINANCIAL CONDITION
Net Income
Three Months Ended Six Months Ended
June 30, June 30,
2001 2000 2001 2000
(dollars in millions)
Net income $ 72.2 $ 63.0 $140.3 $125.8
Return on average
assets (annualized) 2.17% 1.95% 2.11% 1.97%
Return on average
equity (annualized) 16.47% 14.63% 15.93% 14.63%
Ratio of earnings to
fixed charges 1.66x 1.59x
Net income increased $9.2 million, or 14%, for the three months ended
June 30, 2001 and $14.5 million, or 12%, for the six months ended June
30, 2001 when compared to the same periods in 2000. See Note 7. 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,
2001 2000 2001 2000
(dollars in millions)
Finance charges $ 419.0 $ 388.2 $ 827.9 $ 768.8
Average net receivables $11,439.6 $11,028.6 $11,422.1 $10,906.7
Yield 14.68% 14.14% 14.59% 14.16%
Finance charges increased $30.8 million, or 8%, for the three months
ended June 30, 2001 and $59.1 million, or 8%, for the six months ended
June 30, 2001 when compared to the same periods in 2000 primarily due
to higher average net receivables and yield.
The following table shows average net receivables by type:
Three Months Ended Six Months Ended
June 30, June 30,
2001 2000 2001 2000
(dollars in millions)
Real estate loans $ 7,195.0 $ 7,053.1 $ 7,137.3 $ 7,011.0
Non-real estate loans 2,899.4 2,640.6 2,911.1 2,568.8
Retail sales finance 1,345.2 1,334.9 1,373.7 1,326.9
Total average net
receivables $11,439.6 $11,028.6 $11,422.1 $10,906.7
Average net receivables increased $411.0 million, or 4%, for the three
months ended June 30, 2001 and $515.4 million, or 5%, for the six
months ended June 30, 2001 when compared to the same periods in 2000
primarily due to higher non-real estate loan average net receivables.
14
The following table shows yield by type of finance receivable:
Three Months Ended Six Months Ended
June 30, June 30,
2001 2000 2001 2000
Real estate loans 12.01% 11.32% 11.88% 11.28%
Non-real estate loans 21.53 21.84 21.53 22.02
Retail sales finance 14.21 13.79 13.93 14.14
Total yield 14.68 14.14 14.59 14.16
Yield increased 54 basis points for the three months ended June 30,
2001 and 43 basis points for the six months ended June 30, 2001 when
compared to the same periods in 2000 reflecting a higher real estate
loan yield. Real estate loan yield increased due to higher yield on
real estate loans originated, renewed, and purchased during 2000 and
the first half of 2001 in response to the Federal Reserve's overall 175
basis point federal funds rate increase between June 1999 and May 2000.
We expect real estate loan yield to flatten and decrease in response to
the Federal Reserve's overall 275 basis point federal funds rate
decrease between December 2000 and June 2001.
Insurance Revenues
Three Months Ended Six Months Ended
June 30, June 30,
2001 2000 2001 2000
(dollars in millions)
Insurance revenues $50.2 $48.8 $98.3 $96.9
Premiums earned $49.5 $47.9 $97.2 $95.4
Insurance revenues
(annualized) as a
percentage of
average net
receivables 1.76% 1.77% 1.72% 1.78%
Insurance revenues increased $1.4 million, or 3%, for the three months
ended June 30, 2001 and $1.4 million, or 1%, for the six months ended
June 30, 2001 when compared to the same periods in 2000 primarily due
to higher earned premiums.
Other Revenues
Three Months Ended Six Months Ended
June 30, June 30,
2001 2000 2001 2000
(dollars in millions)
Other revenues $25.1 $31.0 $55.9 $66.9
Investment revenue $19.1 $20.4 $43.3 $45.7
Interest revenue -
notes receivable
from AGFI $ 5.5 $ 8.6 $11.8 $16.6
15
Other revenues decreased $5.9 million, or 19%, for the three months
ended June 30, 2001 and $11.0 million, or 16%, for the six months ended
June 30, 2001 when compared to the same periods in 2000 primarily due
to lower interest revenue on notes receivable from AGFI, net losses on
foreclosed real estate in 2001 compared to net gains in 2000, and lower
investment revenue. The decrease in interest revenue on notes
receivable from AGFI for the three and six months ended June 30, 2001
when compared to the same periods in 2000 reflected significantly lower
interest rates. The decrease in investment revenue for the three
months ended June 30, 2001 when compared to the same period in 2000
reflected higher realized losses, partially offset by growth in average
invested assets and higher adjusted portfolio yield. The decrease in
investment revenue for the six months ended June 30, 2001 when compared
to the same period in 2000 reflected net realized losses in 2001
compared to net realized gains in 2000 and lower adjusted portfolio
yield, partially offset by growth in average invested assets.
Interest Expense
Three Months Ended Six Months Ended
June 30, June 30,
2001 2000 2001 2000
(dollars in millions)
Interest expense $ 157.0 $ 167.1 $ 324.2 $ 327.7
Average borrowings $10,394.1 $10,248.6 $10,402.7 $10,119.0
Borrowing cost 6.05% 6.53% 6.25% 6.48%
Interest expense decreased $10.1 million, or 6%, for the three months
ended June 30, 2001 and $3.5 million, or 1%, for the six months ended
June 30, 2001 when compared to the same periods in 2000 primarily due
to lower borrowing cost, partially offset by higher average borrowings.
Borrowing cost decreased 48 basis points for the three months ended
June 30, 2001 and 23 basis points for the six months ended June 30,
2001 when compared to the same periods in 2000 due to lower rates on
short-term debt, partially offset by higher rates on long-term debt.
The Federal Reserve raised the federal funds rate a total of 175 basis
points between June 1999 and May 2000 and then lowered rates a total of
275 basis points between December 2000 and June 2001. This resulted in
large movements in our short-term floating-rate borrowing cost.
Average borrowings increased $145.5 million, or 1%, for the three
months ended June 30, 2001 and $283.7 million, or 3%, for the six
months ended June 30, 2001 when compared to the same periods in 2000
primarily to support higher non-real estate loan average net
receivables.
Operating Expenses
Three Months Ended Six Months Ended
June 30, June 30,
2001 2000 2001 2000
(dollars in millions)
Operating expenses $136.1 $131.9 $268.0 $264.9
Operating expenses
(annualized) as a
percentage of
average net
receivables 4.76% 4.78% 4.69% 4.86%
16
Operating expenses increased $4.2 million, or 3%, for the three months
ended June 30, 2001 and $3.1 million, or 1%, for the six months ended
June 30, 2001 when compared to the same periods in 2000 primarily due
to higher salaries. The improvement in operating expenses as a
percentage of average net receivables for the six months ended June 30,
2001 when compared to the same period in 2000 reflects improvement in
operating efficiencies.
Provision for Finance Receivable Losses
At or for the
Three Months Ended Six Months Ended
June 30, June 30,
2001 2000 2001 2000
(dollars in millions)
Provision for finance
receivable losses $67.4 $47.7 $126.1 $ 95.5
Net charge-offs $61.4 $47.7 $120.1 $ 95.5
60 day+ delinquency $397.1 $361.4
Allowance for finance
receivable losses $388.3 $372.8
Provision for finance receivable losses increased $19.7 million, or
41%, for the three months ended June 30, 2001 and $30.6 million, or
32%, for the six months ended June 30, 2001 when compared to the same
periods in 2000 due to higher net charge-offs and increases to the
allowance for finance receivable losses in second quarter 2001 totaling
$6.0 million.
The following table shows charge-off ratios by type of finance
receivable:
Three Months Ended Six Months Ended
June 30, June 30,
2001 2000 2001 2000
Real estate loans 0.67% 0.64% 0.65% 0.65%
Non-real estate loans 5.48 4.54 5.42 4.62
Retail sales finance 2.85 1.94 2.61 2.01
Total charge-off ratio 2.15 1.73 2.10 1.75
The increase in the charge-off ratio for the three months and six
months ended June 30, 2001 when compared to the same periods in 2000
was primarily due to higher net charge-offs on non-real estate loans
reflecting the maturation of non-real estate loans purchased in second
quarter 2000, which were primarily current receivables when purchased,
and slowing economic conditions.
The following table shows delinquency ratios by type of finance
receivable:
June 30,
2001 2000
Real estate loans 3.09% 3.05%
Non-real estate loans 4.38 3.74
Retail sales finance 1.95 1.54
Total delinquency ratio 3.29 3.04
17
The increase in the delinquency ratio at June 30, 2001 when compared to
June 30, 2000 reflected the maturation of non-real estate loans
purchased in second quarter 2000, which were primarily current
receivables when purchased, and slowing economic conditions.
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,
2001 2000 2001 2000
Allowance ratio 3.38% 3.28%
Charge-off coverage 1.58x 1.95x 1.62x 1.95x
We periodically evaluate our finance receivable portfolio to determine
the appropriate level of the allowance for finance receivable losses.
In our opinion, the allowance is adequate to absorb anticipated losses
in our existing portfolio. The increase in the allowance as a
percentage of net finance receivables at June 30, 2001 when compared to
June 30, 2000 reflected increases to the allowance for finance
receivable losses through the provision for finance receivable losses
in second quarter 2001 totaling $6.0 million. We increased the
allowance for finance receivable losses in response to higher net
charge-offs and delinquency and the levels of unemployment and consumer
bankruptcies in the United States in general. Charge-off coverage,
which compares the allowance for finance receivable losses to net
charge-offs (annualized), declined for the three months and six months
ended June 30, 2001 when compared to the same periods in 2000 primarily
due to higher net charge-offs.
Insurance Losses and Loss Adjustment Expenses
Three Months Ended Six Months Ended
June 30, June 30,
2001 2000 2001 2000
(dollars in millions)
Claims incurred $20.3 $19.8 $44.2 $42.5
Change in benefit
reserves 0.7 2.3 - 4.6
Insurance losses and
loss adjustment
expenses $21.0 $22.1 $44.2 $47.1
Insurance losses and loss adjustment expenses decreased $1.1 million,
or 5%, for the three months ended June 30, 2001 and $2.9 million, or
6%, for the six months ended June 30, 2001 when compared to the same
periods in 2000 due to a decrease in provision for future benefits,
partially offset by an increase in claims. Provision for future
benefits decreased $1.6 million for the three months ended June 30,
2001 and $4.6 million for the six months ended June 30, 2001 due to
decreased sales of non-credit insurance products. Claims increased $.5
million for the three months ended June 30, 2001 and $1.7 million for
the six months ended June 30, 2001 primarily due to increased loss
experience.
18
Provision for Income Taxes
Three Months Ended Six Months Ended
June 30, June 30,
2001 2000 2001 2000
(dollars in millions)
Provision for income
taxes $ 40.7 $ 36.2 $ 79.3 $ 71.8
Pretax income $112.9 $ 99.2 $219.6 $197.6
Effective income
tax rate 36.06% 36.45% 36.09% 36.33%
The provision for income taxes increased $4.5 million, or 13%, for the
three months ended June 30, 2001 and $7.5 million, or 10%, for the six
months ended June 30, 2001 when compared to the same periods in 2000
primarily due to higher taxable income.
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 34%
of our average borrowings for the three months and six months ended
June 30, 2001 compared to 37% for the three months ended June 30, 2000
and 35% for the six months ended June 30, 2000. These percentages
include the effect of interest rate swap agreements that converted
floating-rate debt to a fixed rate.
On July 16, 2001, AGFC issued $1.0 billion of fixed-rate, five-year
medium-term notes. The proceeds were used to repay floating-rate
commercial paper. This action reduced the ratio of floating-rate debt
to total debt to approximately 22% at that date.
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.
19
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, accounting, or tax changes that affect the
cost of, or demand for, our products; (4) our ability to secure
necessary court and regulatory approvals; (5) our ability to realize
projected expense savings; (6) adverse litigation results or resolution
of litigation, including proceedings related to satellite dish
financing; (7) the formation of strategic alliances or business
combinations among our competitors or our business partners; and (8)
American General's ability to obtain shareholder and regulatory
approvals to complete the acquisition by AIG. 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 2000 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, 2001. See Note 6. of the Notes to
Condensed Consolidated Financial Statements for information about our
derivative financial instruments. See Analysis of Operating Results
and Financial Condition - Asset/Liability Management in Item 2.
Management's Discussion and Analysis of Financial Condition and Results
of Operations regarding the reduction in the floating-rate debt that
occurred after June 30, 2001.
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.
(b) Reports on Form 8-K.
Current Report on Form 8-K dated April 25, 2001, with respect to
the issuance of an Earnings Release announcing certain unaudited
financial results of the Company for the quarter ended March 31,
2001.
20
Current Report on Form 8-K dated July 27, 2001, with respect to
the issuance of an Earnings Release announcing certain unaudited
financial results of the Company for the quarter ended June 30,
2001.
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 CORPORATION
(Registrant)
Date: August 14, 2001 By /s/ Donald R. Breivogel, Jr.
Donald R. Breivogel, Jr.
Vice President, Chief Financial
Officer and Treasurer
(Duly Authorized Officer and
Principal Financial Officer)
22
Exhibit Index
Exhibit
(12) Computation of Ratio of Earnings to Fixed Charges.