UNITED STATES 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, 2003 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 Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Securities Exchange Act of 1934). Yes No X 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 July 30, 2003, there were 10,160,012 shares of the registrant's common stock, $.50 par value, outstanding. 2 TABLE OF CONTENTS Item Page Part I 1. Financial Statements . . . . . . . . . . . . . . . . 3 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. . . . . . . . 13 4. Controls and Procedures . . . . . . . . . . . . . . 28 Part II 1. Legal Proceedings . . . . . . . . . . . . . . . . . 29 6. Exhibits and Reports on Form 8-K . . . . . . . . . . 29 AVAILABLE INFORMATION The Company files annual, quarterly, and current reports and other information with the Securities and Exchange Commission (the SEC). The SEC maintains a website that contains annual, quarterly, and current reports and other information that issuers (including the Company) file electronically with the SEC. The SEC's website is www.sec.gov. Our annual report on Form 10-K for the year ended December 31, 2002 and our 2003 quarterly reports on Form 10-Q are available free of charge on our Internet website www.agfinance.com. The information on the Company's website is not incorporated by reference into this report. 3 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, 2003 2002 2003 2002 (dollars in thousands) Revenues Finance charges $423,435 $412,979 $ 854,097 $826,661 Insurance 42,672 48,050 88,380 93,550 Other 88,574 27,931 133,760 58,124 Total revenues 554,681 488,960 1,076,237 978,335 Expenses Interest expense 134,615 137,134 276,444 273,086 Operating expenses 169,843 137,797 330,297 278,621 Provision for finance receivable losses 74,655 71,099 144,106 140,696 Insurance losses and loss adjustment expenses 15,160 19,811 35,549 41,793 Total expenses 394,273 365,841 786,396 734,196 Income before provision for income taxes 160,408 123,119 289,841 244,139 Provision for Income Taxes 57,983 43,832 103,579 86,899 Net Income $102,425 $ 79,287 $ 186,262 $157,240 See Notes to Condensed Consolidated Financial Statements. 4 AMERICAN GENERAL FINANCE CORPORATION AND SUBSIDIARIES Condensed Consolidated Balance Sheets June 30, December 31, 2003 2002 (Unaudited) (dollars in thousands) Assets Net finance receivables: Real estate loans $ 9,438,117 $ 9,313,496 Non-real estate loans 2,819,400 2,905,339 Retail sales finance 1,262,459 1,355,503 Net finance receivables 13,519,976 13,574,338 Allowance for finance receivable losses (449,963) (453,668) Net finance receivables, less allowance for finance receivable losses 13,070,013 13,120,670 Investment securities 1,293,694 1,227,156 Cash and cash equivalents 263,063 144,565 Notes receivable from parent 266,345 269,240 Other assets 927,316 639,091 Total assets $15,820,431 $15,400,722 Liabilities and Shareholder's Equity Long-term debt $ 9,331,859 $ 9,566,256 Short-term debt 3,579,372 3,061,141 Insurance claims and policyholder liabilities 449,851 472,348 Other liabilities 501,389 453,487 Accrued taxes 46,508 37,562 Total liabilities 13,908,979 13,590,794 Shareholder's equity: Common stock 5,080 5,080 Additional paid-in capital 951,175 951,175 Accumulated other comprehensive loss (34,000) (68,938) Retained earnings 989,197 922,611 Total shareholder's equity 1,911,452 1,809,928 Total liabilities and shareholder's equity $15,820,431 $15,400,722 See Notes to Condensed Consolidated Financial Statements. 5 AMERICAN GENERAL FINANCE CORPORATION AND SUBSIDIARIES Condensed Consolidated Statements of Cash Flows (Unaudited) Six Months Ended June 30, 2003 2002 (dollars in thousands) Cash Flows from Operating Activities Net income $ 186,262 $ 157,240 Reconciling adjustments: Provision for finance receivable losses 144,106 140,696 Depreciation and amortization 94,247 72,162 Deferral of finance receivable origination costs (31,597) (28,582) Deferred income tax charge 285 8,322 Origination of real estate loans held for sale (1,417,697) - Sales and principal collections of real estate loans held for sale 1,280,593 - Net gain on sale of finance receivables to AGFI subsidiary for securitization (20,661) - Change in other assets and other liabilities (6,009) 69,733 Change in insurance claims and policyholder liabilities (22,497) (24,463) Change in taxes receivable and payable 4,567 (29,191) Other, net 8,648 10,203 Net cash provided by operating activities 220,247 376,120 Cash Flows from Investing Activities Finance receivables originated or purchased (3,760,694) (3,243,618) Principal collections on finance receivables 3,359,436 3,039,767 Sale of finance receivables to AGFI subsidiary for securitization 284,731 - Acquisition of Wilmington Finance, Inc. (93,189) - Investment securities purchased (294,558) (403,234) Investment securities called and sold 244,236 345,932 Investment securities matured 13,800 11,975 Change in notes receivable from parent 2,895 (3,794) Change in premiums on finance receivables purchased and deferred charges 6,852 (12,762) Other, net (7,158) (4,919) Net cash used for investing activities (243,649) (270,653) Cash Flows from Financing Activities Proceeds from issuance of long-term debt 918,995 1,195,057 Repayment of long-term debt (1,175,650) (487,457) Change in short-term debt 518,231 (675,458) Dividends paid (119,676) (151,888) Net cash provided by (used for) financing activities 141,900 (119,746) Increase (decrease) in cash and cash equivalents 118,498 (14,279) Cash and cash equivalents at beginning of period 144,565 175,492 Cash and cash equivalents at end of period $ 263,063 $ 161,213 See Notes to Condensed Consolidated Financial Statements. 6 AMERICAN GENERAL FINANCE CORPORATION AND SUBSIDIARIES Condensed Consolidated Statements of Comprehensive Income (Unaudited) Three Months Ended Six Months Ended June 30, June 30, 2003 2002 2003 2002 (dollars in thousands) Net income $102,425 $ 79,287 $186,262 $157,240 Other comprehensive gain (loss): Net unrealized gains (losses): Investment securities 26,617 15,642 30,928 5,400 Interest rate swaps (13,328) (62,560) (21,609) (61,424) Income tax effect: Investment securities (9,315) (4,826) (10,814) (1,242) Interest rate swaps 4,663 21,896 7,562 21,499 Net unrealized gains (losses), net of tax 8,637 (29,848) 6,067 (35,767) Reclassification adjustments for realized losses (gains) included in net income: Investment securities (554) 2,952 2,298 1,684 Interest rate swaps 20,288 26,805 42,118 55,196 Income tax effect: Investment securities 194 (1,033) (804) (589) Interest rate swaps (7,100) (9,382) (14,741) (19,319) Realized losses included in net income, net of tax 12,828 19,342 28,871 36,972 Other comprehensive gain (loss), net of tax 21,465 (10,506) 34,938 1,205 Comprehensive income $123,890 $ 68,781 $221,200 $158,445 See Notes to Condensed Consolidated Financial Statements. 7 AMERICAN GENERAL FINANCE CORPORATION AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements June 30, 2003 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. The statements 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 an indirect wholly owned subsidiary of American International Group, Inc. (AIG). Note 2. Adjustments and Reclassifications We made all adjustments, consisting only of normal recurring adjustments, that we considered necessary for a fair statement of the Company's condensed consolidated financial statements. These 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, 2002. To conform to the 2003 presentation, we reclassified certain items in the prior period. Note 3. Acquisition Effective January 1, 2003, we acquired 100% of the common stock of Wilmington Finance, Inc. (WFI), a majority owned subsidiary of WSFS Financial Corporation, in a purchase business combination. WFI originates non-conforming residential real estate loans nationally, primarily through broker relationships and, to a lesser extent, directly to consumers, and sells its originated loans to third party investors with servicing released to the purchaser. WFI provides the Company with another source of revenue through its gains on real estate loan sales. The purchase price was $120.8 million, consisting of $25.8 million for net assets and $95.0 million for intangibles. The majority of the tangible assets acquired were real estate loans held for sale. We included the results of WFI's operations in our financial statements beginning January 1, 2003, the effective date of the acquisition, and originally classified the $95.0 million of intangibles as goodwill pending an independent valuation. We finalized an independent valuation of the intangibles in second quarter 2003 and reclassified $40.8 million from goodwill to WFI other intangibles. Goodwill and WFI other intangibles are both included in other assets. WFI other intangibles primarily consisted of broker relationships and non-compete agreements and had an initial weighted-average amortization period of 9 years. 8 Changes in goodwill by business segment were as follows: Consumer Finance Insurance Total (dollars in thousands) Balance December 31, 2002 $145,491 $ 12,104 $157,595 Acquisition of WFI 95,000 - 95,000 Reclassification to WFI other intangibles (40,850) - (40,850) Balance June 30, 2003 $199,641 $ 12,104 $211,745 WFI other intangibles of $37.0 million at June 30, 2003 are net of accumulated amortization of $3.8 million recognized during second quarter 2003. At January 1, 2003, estimated WFI other intangibles amortization expense for the next five years was as follows: WFI Other Intangibles Amortization Expense (dollars in thousands) 2003 $7,662 2004 7,212 2005 6,087 2006 3,629 2007 3,629 Note 4. Accounting Change In November 2002, the Financial Accounting Standards Board issued Interpretation No. 45 (FIN 45), "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others". FIN 45 elaborates on the disclosures to be made by a guarantor in its financial statements about its obligations under certain guarantees that it has issued. It also clarifies that a guarantor is required to recognize, at the inception of a guarantee, a liability for the fair value of the obligation undertaken in issuing the guarantee. Certain guarantee contracts are excluded from both the disclosure and recognition requirements of FIN 45, including, among others, residual value guarantees under capital lease arrangements and loan commitments. The disclosure requirements of FIN 45 were effective as of December 31, 2002. The recognition requirements of FIN 45 are to be applied prospectively to guarantees issued or modified after December 31, 2002. The adoption of FIN 45 did not have a material impact on our consolidated results of operations, financial position, or liquidity. 9 Note 5. Finance Receivables Components of net finance receivables by type were as follows: June 30, 2003 Real Non-real Retail Estate Estate Sales Loans Loans Finance Total (dollars in thousands) Gross receivables $9,368,828 $3,126,682 $1,399,431 $13,894,941 Unearned finance charges and points and fees (135,628) (386,787) (148,543) (670,958) Accrued finance charges 75,924 37,475 11,731 125,130 Deferred origination costs 14,612 33,926 - 48,538 Premiums, net of discounts 114,381 8,104 (160) 122,325 Total $9,438,117 $2,819,400 $1,262,459 $13,519,976 December 31, 2002 Real Non-real Retail Estate Estate Sales Loans Loans Finance Total (dollars in thousands) Gross receivables $9,224,803 $3,244,413 $1,507,184 $13,976,400 Unearned finance charges and points and fees (145,039) (431,812) (166,922) (743,773) Accrued finance charges 77,852 41,006 12,953 131,811 Deferred origination costs 12,447 35,441 - 47,888 Premiums, net of discounts 143,433 16,291 2,288 162,012 Total $9,313,496 $2,905,339 $1,355,503 $13,574,338 Note 6. Allowance for Finance Receivable Losses Changes in the allowance for finance receivable losses were as follows: Three Months Ended Six Months Ended June 30, June 30, 2003 2002 2003 2002 (dollars in thousands) Balance at beginning of period $450,668 $440,253 $453,668 $438,860 Provision for finance receivable losses 74,655 71,099 144,106 140,696 Allowance related to sale of finance receivables to AGFI subsidiary for securitization (2,705) - (2,705) - Allowance related to net acquired receivables - 10 - 1,197 Charge-offs (82,347) (80,802) (164,955) (160,019) Recoveries 9,692 9,703 19,849 19,529 Balance at end of period $449,963 $440,263 $449,963 $440,263 10 Note 7. Derivative Financial Instruments AGFC uses derivative financial instruments in managing 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. These interest rate swap agreements are designated and qualify as cash flow hedges or fair value hedges. AGFC uses interest rate swap agreements to limit our exposure to market interest rate risk in the funding of our operations. Most of our swaps synthetically convert certain short-term or floating-rate debt to a long-term fixed-rate. The synthetic long-term fixed rates achieved through interest rate swap agreements are slightly lower than could have been achieved by issuing comparable fixed-rate, long-term debt. Additionally, AGFC has swapped fixed-rate, long-term debt to floating- rate, long-term debt. As an alternative to funding without these derivative financial instruments, AGFC's interest rate swap agreements did not have a material effect on the Company's other revenues, interest expense, or net income during the six months ended June 30, 2003 or 2002. Note 8. Accumulated Other Comprehensive Loss The components of accumulated other comprehensive loss were as follows: June 30, December 31, 2003 2002 (dollars in thousands) Net unrealized losses on interest rate swaps $(85,574) $(98,904) Net unrealized gains on investment securities 51,574 29,966 Total $(34,000) $(68,938) Note 9. 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 segment makes home equity loans, originates secured and unsecured consumer loans, extends lines of credit, and purchases retail sales contracts from, and provides revolving retail services for, retail merchants. We also purchase private label receivables originated by a non-subsidiary affiliate of ours, under a participation agreement. 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 originate real estate loans through brokers for sale to third party investors. We offer credit and non-credit insurance to our consumer finance customers. The insurance segment writes and assumes credit and non-credit insurance through products that are offered principally by the consumer finance segment. 11 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, 2003: Consumer Total Finance Insurance Segments (dollars in thousands) Revenues: External: Finance charges $454,131 $ - $454,131 Insurance 219 42,453 42,672 Other 33,231 20,436 53,667 Intercompany 22,477 (16,832) 5,645 Pretax income 133,126 20,996 154,122 For the three months ended June 30, 2002: Consumer Total Finance Insurance Segments (dollars in thousands) Revenues: External: Finance charges $432,747 $ - $432,747 Insurance 254 47,796 48,050 Other (2,653) 23,058 20,405 Intercompany 19,889 (19,308) 581 Pretax income 120,450 24,045 144,495 For the six months ended June 30, 2003: Consumer Total Finance Insurance Segments (dollars in thousands) Revenues: External: Finance charges $912,774 $ - $912,774 Insurance 445 87,935 88,380 Other 50,828 42,926 93,754 Intercompany 43,931 (34,881) 9,050 Pretax income 265,829 42,376 308,205 For the six months ended June 30, 2002: Consumer Total Finance Insurance Segments (dollars in thousands) Revenues: External: Finance charges $869,828 $ - $869,828 Insurance 519 93,031 93,550 Other (6,846) 44,957 38,111 Intercompany 38,429 (37,286) 1,143 Pretax income 250,611 43,062 293,673 12 Reconciliations of total segment pretax income to the condensed consolidated financial statement amounts were as follows: Three Months Ended Six Months Ended June 30, June 30, 2003 2002 2003 2002 (dollars in thousands) Pretax income: Segments $154,122 $144,495 $308,205 $293,673 Corporate 5,909 (17,812) (9,330) (45,063) Adjustments 377 (3,564) (9,034) (4,471) Consolidated pretax income $160,408 $123,119 $289,841 $244,139 Adjustments for pretax income include realized gains (losses) and certain other investment revenue, pension expense, interest expense due to releveraging of debt, and provision for finance receivable losses due to redistribution of amounts provided for the allowance for finance receivable losses. Note 10. 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, such as 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 arising from these lawsuits and proceedings will not have a material adverse effect on our consolidated results of operations or financial position. However, the continued occurrences of large damage awards in general in the United States, including large punitive damage awards that bear little or no relation to actual economic damages incurred by plaintiffs in some jurisdictions, create the potential for an unpredictable judgment in any given suit. 13 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. REPORT OF MANAGEMENT'S RESPONSIBILITY The Company's management is responsible for the integrity and fair presentation of our condensed consolidated financial statements and all other financial information presented in this report. We prepared our condensed consolidated financial statements using accounting principles generally accepted in the United States (GAAP). We made estimates and assumptions that affect amounts recorded in the financial statements and disclosures of contingent assets and liabilities. The Company's management is responsible for establishing and maintaining an internal control structure and procedures for financial reporting. These systems are designed to provide reasonable assurance that assets are safeguarded from loss or unauthorized use, that transactions are recorded according to GAAP under management's direction and that financial records are reliable to prepare financial statements. We support the internal control structure with careful selection, training and development of qualified personnel. The Company's employees are subject to AIG's Code of Conduct designed to assure that all employees perform their duties with honesty and integrity. We do not allow loans to executive officers. The systems include a documented organizational structure and policies and procedures that we communicate throughout the Company. Our internal auditors report directly to AIG to strengthen independence. They continually monitor the operation of our internal controls and report their findings to the Company's management and AIG's internal audit department. We take prompt action to correct control deficiencies and address opportunities for improving the system. The Company's management assesses the adequacy of our internal control structure quarterly. Based on these assessments, management has concluded that the internal control structure and the procedures for financial reporting have functioned effectively and that the condensed consolidated financial statements fairly present our consolidated financial position and the results of our operations for the periods presented. 14 FORWARD-LOOKING STATEMENTS This quarterly report on Form 10-Q and our other publicly available documents may include, and the Company's officers and representatives may from time to time make, statements which may constitute "forward- looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. These statements are not historical facts but instead represent only our belief regarding future events, many of which are inherently uncertain and outside of our control. These statements may address, among other things, the Company's strategy for growth, product development, regulatory approvals, market position, financial results and reserves. The Company's actual results and financial condition may differ, possibly materially, from the anticipated results and financial condition indicated in these forward- looking statements. The important factors, many of which are outside of our control, which could cause the Company's actual results to differ, possibly materially, include, but are not limited to, the following: * changes in general economic conditions, including the interest rate environment in which we conduct business and the financial markets through which we access capital; * changes in the competitive environment in which we operate, including the demand for our products, customer responsiveness to our distribution channels and the formation of business combinations among our competitors; * the effectiveness of our credit risk scoring models in assessing the risk of customer unwillingness or inability to repay; * shifts in collateral values, contractual delinquencies, credit losses and the levels of unemployment and personal bankruptcies; * changes in laws or regulations that affect our ability to conduct business or the manner in which we conduct business, such as licensing requirements, pricing limitations or restrictions on the method of offering products; * the costs and effects of any litigation or governmental inquiries or investigations that are determined adversely to the Company; * changes in accounting standards or tax policies and practices and the application of such new policies and practices to the manner in which we conduct business; * our ability to integrate the operations of our acquisitions into our business; * changes in our ability to attract and retain employees or key executives to support our businesses; and * natural events and acts of God such as fires or floods affecting our branches or other operating facilities. Readers are also directed to other risks and uncertainties discussed in other documents we file with the Securities and Exchange Commission. We are under no obligation to (and expressly disclaim any such obligation to) update or alter any forward-looking statement, whether written or oral, that may be made from time to time, whether as a result of new information, future events or otherwise. 15 CRITICAL ACCOUNTING POLICIES Our Credit Strategy and Policy Committee evaluates our finance receivable portfolio monthly. The Credit Strategy and Policy Committee exercises its judgment, based on quantitative analyses and each committee member's experience in the consumer finance industry, when determining the amount of the allowance for finance receivable losses. If its review concludes that an adjustment is necessary, we charge or credit this adjustment to expense through the provision for finance receivable losses. We consider this estimate to be a critical accounting estimate that affects the net income of the Company in total and the pretax operating income of our consumer finance business segment. We document the adequacy of the allowance for finance receivable losses and the analysis of the trends in credit quality considered by the Credit Strategy and Policy Committee to support its conclusions. OFF-BALANCE SHEET ARRANGEMENTS We do not have any material off-balance sheet arrangements as defined by Securities and Exchange Commission rules. 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 sales of finance receivables for securitizations. AGFC has also historically received capital contributions from its parent to support finance receivable growth and maintain targeted leverage. In second quarter 2003, AGFC began issuing long-term debt under a retail note program. These senior, unsecured notes are sold by brokers to individual investors for a minimum investment of $1,000 and increments of $1,000. Also in second quarter 2003, a consolidated special purpose subsidiary of AGFI purchased $266.8 million of real estate loans from seven subsidiaries of AGFC. 16 Principal sources and uses of cash were as follows: Six Months Ended June 30, 2003 2002 (dollars in millions) Principal sources of cash: Operations $220.2 $376.1 Sale of finance receivables to AGFI subsidiary for securitization 284.7 - Net issuance of debt 261.6 32.1 Total $766.5 $408.2 Principal uses of cash: Net originations and purchases of finance receivables $401.3 $203.9 Dividends paid 119.7 151.9 Total $521.0 $355.8 We believe that our overall sources of liquidity will continue to be sufficient to satisfy our foreseeable operational requirements and financial obligations. The principal risk factors that could decrease our sources of liquidity are delinquent payments from our customers and an inability to access capital markets. The principal factors that could increase our cash needs are significant increases in net originations and purchases of finance receivables. We intend to mitigate liquidity risk factors by continuing to operate the Company within the following strategies: * maintain a finance receivable portfolio comprised mostly of real estate loans, which generally represent a lower risk of customer non-payment; * originate and monitor finance receivables with our proprietary credit risk management system; * maintain an investment securities portfolio of predominantly investment grade, liquid securities; and * maintain a capital structure appropriate to our asset base. Consistent execution of our business strategies should result in continued profitability, strong credit ratings, and investor confidence. These results should allow continued access to capital markets for issuances of our commercial paper and long-term debt. At June 30, 2003, we had $3.4 billion of long-term debt securities registered under the Securities Act of 1933 and available for issuance. We also maintain committed bank credit facilities and the ability to sell a portion of our finance receivables for securitization to provide additional sources of liquidity for needs potentially not met through other funding sources. 17 Capital Resources June 30, 2003 2002 Amount Percent Amount Percent (dollars in millions) Long-term debt $ 9,331.8 63% $ 7,010.1 56% Short-term debt 3,579.4 24 3,903.2 32 Total debt 12,911.2 87 10,913.3 88 Equity 1,911.5 13 1,552.1 12 Total capital $14,822.7 100% $12,465.4 100% Net finance receivables $13,520.0 $11,770.3 Debt to equity ratio 6.75x 7.03x Debt to tangible equity ratio 7.45x 7.50x Reconciliations of equity to tangible equity were as follows: June 30, 2003 2002 (dollars in millions) Equity $ 1,911.5 $ 1,552.1 Goodwill (211.8) (157.6) Accumulated other comprehensive loss 34.0 60.5 Tangible equity $ 1,733.7 $ 1,455.0 Our capital varies with the level of net finance receivables. The increase in total capital at June 30, 2003 when compared to June 30, 2002 was greater than our finance receivable growth for the same period due to capital required to support the acquisition of WFI and its operations. 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 funding through public issuances of long-term debt with maturities generally ranging from three to ten years. Most floating-rate funding is through AGFC sales and refinancing of commercial paper and through AGFC issuance of long-term, floating-rate debt. Commercial paper, with maturities ranging from 1 to 270 days, is sold to banks, insurance companies, corporations, and other accredited investors. AGFC also sells extendible commercial notes with initial maturities of up to 90 days, which may be extended by AGFC to 390 days. At June 30, 2003, short-term debt included $407.3 million of extendible commercial notes. 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 a 7.5 to 1 target. Certain AGFC financing agreements effectively limit the amount of dividends AGFC may pay. These agreements have not prevented AGFC from managing its capital to targeted leverage. 18 Liquidity Facilities We maintain credit facilities to support the issuance of commercial paper and to provide an additional source of funds for operating requirements. At June 30, 2003, AGFC had committed credit facilities totaling $3.0 billion, including a facility under which AGFI is an eligible borrower for up to $300.0 million. The annual commitment fees for the facilities currently average 0.07% and are based upon AGFC's long-term credit ratings. At June 30, 2003, AGFC and certain of its subsidiaries also had uncommitted credit facilities (including shared uncommitted facilities with AGFI) totaling $53.0 million which could be increased depending upon lender ability to participate its loans under the facilities. Available borrowings under all facilities are reduced by any outstanding borrowings. There were no amounts outstanding at June 30, 2003 or June 30, 2002. AGFC guarantees its subsidiary borrowings under uncommitted credit facilities. AGFC does not guarantee any borrowings of AGFI. ANALYSIS OF OPERATING RESULTS AND FINANCIAL CONDITION Net Income Three Months Ended Six Months Ended June 30, June 30, 2003 2002 2003 2002 (dollars in millions) Net income $102.4 $ 79.3 $186.3 $157.2 Amount change $ 23.1 $ 7.1 $ 29.1 $ 16.9 Percent change 29% 10% 18% 12% Return on average assets (annualized) 2.59% 2.37% 2.37% 2.35% Return on average equity (annualized) 21.12% 20.24% 19.66% 20.04% Ratio of earnings to fixed charges 2.01x 1.87x See Note 9. of the Notes to Condensed Consolidated Financial Statements for information on the results of the Company's business segments. 19 Factors that specifically affected the Company's operating results were as follows: Finance Charges Three Months Ended Six Months Ended June 30, June 30, 2003 2002 2003 2002 (dollars in millions) Finance charges $ 423.4 $ 413.0 $ 854.1 $ 826.7 Amount change $ 10.4 $ (6.0) $ 27.4 $ (1.2) Percent change 3% (1)% 3% -% Average net receivables $13,457.6 $11,677.0 $13,505.7 $11,671.7 Yield 12.61% 14.18% 12.73% 14.26% Finance charges increased (decreased) due to the following: Three Months Ended Six Months Ended June 30, June 30, 2003 2002 2003 2002 (dollars in millions) Increase in average net receivables $ 54.6 $ 4.3 $114.0 $ 9.7 Decrease in yield (44.2) (10.3) (86.6) (10.9) Total $ 10.4 $ (6.0) $ 27.4 $ (1.2) Average net receivables by type and growth in average net receivables when compared to the same periods for the previous year were as follows: Three Months Ended June 30, 2003 2002 Amount Growth Amount Growth (dollars in millions) Real estate loans $ 9,384.5 $1,782.4 $ 7,602.1 $ 407.1 Non-real estate loans 2,810.8 53.1 2,757.7 (141.7) Retail sales finance 1,262.3 (54.9) 1,317.2 (28.0) Total $13,457.6 $1,780.6 $11,677.0 $ 237.4 Percent change 15% 2% Six Months Ended June 30, 2003 2002 Amount Growth Amount Growth (dollars in millions) Real estate loans $ 9,380.6 $1,840.3 $ 7,540.3 $ 403.0 Non-real estate loans 2,831.1 49.9 2,781.2 (129.9) Retail sales finance 1,294.0 (56.2) 1,350.2 (23.5) Total $13,505.7 $1,834.0 $11,671.7 $ 249.6 Percent change 16% 2% 20 In 2002, the low interest rate environment caused significant increases in both originations and liquidations of our real estate loans. However, we took advantage of the record real estate loan refinancings that occurred in the market in general and acquired $1.9 billion of real estate loan portfolios from third party originators during the last half of 2002. Yield by type and changes in yield in basis points (bp) when compared to the same periods for the previous year were as follows: Three Months Ended June 30, 2003 2002 Yield Change Yield Change Real estate loans 9.70% (163) bp 11.33% (68) bp Non-real estate loans 21.34 (41) 21.75 22 Retail sales finance 14.82 6 14.76 55 Total 12.61 (157) 14.18 (50) Six Months Ended June 30, 2003 2002 Yield Change Yield Change Real estate loans 9.83% (152) bp 11.35% (53) bp Non-real estate loans 21.41 (43) 21.84 31 Retail sales finance 14.74 (10) 14.84 91 Total 12.73 (153) 14.26 (33) Yield decreased for the three and six months ended June 30, 2003 when compared to the same periods in 2002 primarily reflecting a lower real estate loan yield resulting from the low interest rate environment. Insurance Revenues Insurance revenues were as follows: Three Months Ended Six Months Ended June 30, June 30, 2003 2002 2003 2002 (dollars in millions) Earned premiums $42.1 $47.5 $87.2 $92.5 Commissions 0.6 0.6 1.2 1.1 Total $42.7 $48.1 $88.4 $93.6 Amount change $(5.4) $(2.1) $(5.2) $(4.7) Percent change (11)% (4)% (6)% (5)% Earned premiums decreased for the three and six months ended June 30, 2003 when compared to the same periods in 2002 due to the release of premiums resulting from the termination of a reinsurance agreement and lower premium volume. Premium volume decreased due to customers purchasing fewer non-credit insurance products. 21 Other Revenues Other revenues were as follows: Three Months Ended Six Months Ended June 30, June 30, 2003 2002 2003 2002 (dollars in millions) Net gain on sale of real estate loans held for sale $ 33.7 $ - $ 52.9 $ - Investment revenue 21.2 21.2 40.9 44.1 Net gain on sale of finance receivables to AGFI subsidiary for securitization 20.7 - 20.7 - Net interest income on real estate loans held for sale 6.1 - 9.3 - Interest revenue - notes receivable from AGFI 3.5 3.9 6.7 8.1 Writedowns on real estate owned (1.7) (2.3) (3.9) (4.3) Net gains on real estate owned sales 0.9 0.9 1.2 1.5 Other 4.2 4.2 6.0 8.7 Total $ 88.6 $ 27.9 $ 133.8 $ 58.1 Amount change $ 60.7 $ 2.8 $ 75.7 $ 2.2 Percent change 217% 11% 130% 4% Average invested assets $1,298.0 $1,244.5 $1,294.9 $1,241.0 Adjusted portfolio yield 5.94% 7.50% 6.32% 7.05% Net realized gains (losses) on investments $ 0.6 $ (3.0) $ (2.3) $ (1.7) Other revenues increased for the three and six months ended June 30, 2003 when compared to the same periods in 2002 primarily due to net gain on sale of real estate loans held for sale, net gain on sale of finance receivables to a subsidiary of AGFI for securitization, and net interest income on real estate loans held for sale in 2003. The increases in net gain on sale of real estate loans held for sale and net interest income on real estate loans held for sale were due to the acquisition of WFI in first quarter 2003. Interest Expense Three Months Ended Six Months Ended June 30, June 30, 2003 2002 2003 2002 (dollars in millions) Interest expense $ 134.6 $ 137.1 $ 276.4 $ 273.1 Amount change $ (2.5) $ (19.9) $ 3.3 $ (51.1) Percent change (2)% (13)% 1% (16)% Average borrowings $12,798.7 $10,755.8 $12,759.8 $10,754.1 Borrowing cost 4.21% 5.10% 4.34% 5.08% 22 Interest expense (decreased) increased due to the following: Three Months Ended Six Months Ended June 30, June 30, 2003 2002 2003 2002 (dollars in millions) Increase in average borrowings $ 26.0 $ 5.5 $ 50.9 $ 11.0 Decrease in borrowing cost (28.5) (25.4) (47.6) (62.1) Total $ (2.5) $(19.9) $ 3.3 $(51.1) Average borrowings by type and changes in average borrowings when compared to the same periods for the previous year were as follows: Three Months Ended June 30, 2003 2002 Amount Change Amount Change (dollars in millions) Long-term debt $ 9,220.1 $2,294.0 $ 6,926.1 $1,254.9 Short-term debt 3,578.6 (251.1) 3,829.7 (893.2) Total $12,798.7 $2,042.9 $10,755.8 $ 361.7 Percent change 19% 3% Six Months Ended June 30, 2003 2002 Amount Change Amount Change (dollars in millions) Long-term debt $ 9,256.4 $2,539.2 $ 6,717.2 $1,077.0 Short-term debt 3,503.4 (533.5) 4,036.9 (725.6) Total $12,759.8 $2,005.7 $10,754.1 $ 351.4 Percent change 19% 3% AGFC issued $3.4 billion of long-term debt during the last half of 2002. The proceeds of these long-term debt issuances were used to support finance receivable growth and to refinance maturing debt. 23 Borrowing cost by type and changes in borrowing cost in basis points when compared to the same periods for the previous year were as follows: Three Months Ended June 30, 2003 2002 Rate Change Rate Change Long-term debt 4.78% (141) bp 6.19% (53) bp Short-term debt 2.76 (38) 3.14 (209) Total 4.21 (89) 5.10 (95) Six Months Ended June 30, 2003 2002 Rate Change Rate Change Long-term debt 4.92% (130) bp 6.22% (51) bp Short-term debt 2.83 (35) 3.18 (250) Total 4.34 (74) 5.08 (117) Federal Reserve actions lowered the federal funds rate 50 basis points in November 2002 and 25 basis points in June 2003 which resulted in lower short-term debt rates and lower rates on floating-rate long-term debt for 2003. Federal Reserve actions from 2001 through June 2003 created the lowest interest rate environment in 45 years and resulted in lower long-term debt rates as new issuances were at substantially lower rates than long-term debt being refinanced. Operating Expenses Operating expenses were as follows: Three Months Ended Six Months Ended June 30, June 30, 2003 2002 2003 2002 (dollars in millions) Salaries and benefits $100.3 $ 77.1 $197.6 $156.2 Other 69.5 60.7 132.7 122.4 Total $169.8 $137.8 $330.3 $278.6 Amount change $ 32.0 $ 1.7 $ 51.7 $ 10.6 Percent change 23% 1% 19% 4% Operating expenses (annualized) as a percentage of average net receivables 5.05% 4.72% 4.89% 4.77% 24 Salaries and benefits increased for the three and six months ended June 30, 2003 when compared to the same periods in 2002 primarily due to the addition of approximately 500 WFI employees in first quarter 2003, competitive compensation, and rising benefit costs. The increase in operating expenses as a percentage of average net receivables for the three and six months ended June 30, 2003 when compared to the same periods in 2002 reflected increased operating expenses due to the acquisition of WFI. WFI originations are classified as real estate loans held for sale, which are included in other assets and not in net finance receivables. Provision for Finance Receivable Losses At or for the Three Months Ended Six Months Ended June 30, June 30, 2003 2002 2003 2002 (dollars in millions) Provision for finance receivable losses $74.7 $71.1 $144.1 $140.7 Amount change $ 3.6 $ 3.7 $ 3.4 $ 14.6 Percent change 5% 6% 2% 12% Net charge-offs $72.7 $71.1 $145.1 $140.5 Charge-off ratio 2.16% 2.44% 2.15% 2.41% Charge-off coverage 1.55x 1.55x 1.55x 1.56x 60 day+ delinquency $517.6 $446.1 Delinquency ratio 3.73% 3.64% Allowance for finance receivable losses $450.0 $440.3 Allowance ratio 3.33% 3.74% Net charge-offs by type and changes in net charge-offs when compared to the same periods for the previous year were as follows: Three Months Ended June 30, 2003 2002 Amount Change Amount Change (dollars in millions) Real estate loans $14.6 $ 2.3 $12.3 $ 0.1 Non-real estate loans 46.9 (1.0) 47.9 8.2 Retail sales finance 11.2 0.3 10.9 1.4 Total $72.7 $ 1.6 $71.1 $ 9.7 Six Months Ended June 30, 2003 2002 Amount Change Amount Change (dollars in millions) Real estate loans $ 26.9 $ 2.5 $ 24.4 $ 1.3 Non-real estate loans 95.5 1.0 94.5 15.5 Retail sales finance 22.7 1.1 21.6 3.6 Total $145.1 $ 4.6 $140.5 $ 20.4 25 Charge-off ratios by type and changes in charge-off ratios in basis points when compared to the same periods for the previous year were as follows: Three Months Ended June 30, 2003 2002 Ratio Change Ratio Change Real estate loans 0.62% (3) bp 0.65% (2) bp Non-real estate loans 6.68 (28) 6.96 148 Retail sales finance 3.53 22 3.31 46 Total 2.16 (28) 2.44 29 Six Months Ended June 30, 2003 2002 Ratio Change Ratio Change Real estate loans 0.57% (8) bp 0.65% - bp Non-real estate loans 6.73 (4) 6.77 135 Retail sales finance 3.49 31 3.18 57 Total 2.15 (26) 2.41 31 The decrease in total charge-off ratio for the three and six months ended June 30, 2003 when compared to the same periods in 2002 reflected a higher proportion of average net receivables that are real estate loans. The improvement in real estate loan charge-off ratio reflected purchases of higher quality real estate loans during the last half of 2002. Delinquency by type and changes in delinquency when compared to the same period for the previous year were as follows: June 30, 2003 2002 Amount Change Amount Change (dollars in millions) Real estate loans $317.1 $65.9 $251.2 $26.6 Non-real estate loans 163.5 6.0 157.5 15.2 Retail sales finance 37.0 (0.4) 37.4 7.2 Total $517.6 $71.5 $446.1 $49.0 26 Delinquency ratios by type and changes in delinquency ratios in basis points when compared to the same period for the previous year were as follows: June 30, 2003 2002 Ratio Change Ratio Change Real estate loans 3.38% 11 bp 3.27% 18 bp Non-real estate loans 5.23 14 5.09 71 Retail sales finance 2.65 10 2.55 60 Total 3.73 9 3.64 35 The delinquency ratio at June 30, 2003 increased when compared to June 30, 2002 primarily due to the sale of real estate loans to a subsidiary of AGFI for securitization in second quarter 2003. Our Credit Strategy and Policy Committee evaluates our finance receivable portfolio monthly to determine the appropriate level of the allowance for finance receivable losses. We believe the amount of the allowance for finance receivable losses is the most significant estimate we make. In our opinion, the allowance is adequate to absorb losses inherent in our existing portfolio. The increase in the allowance for finance receivable losses at June 30, 2003 when compared to June 30, 2002 was due to the net result of the following: * increase to the allowance for finance receivable losses during third quarter 2002 of $7.4 million resulting from a purchase business combination; * net increases to the allowance for finance receivable losses through the provision for finance receivable losses during the period totaling $5.0 million (these increases were in response to our increased delinquency and net charge-offs and the higher levels of both unemployment and personal bankruptcies in the United States); and * decrease to the allowance for finance receivable losses during second quarter 2003 of $2.7 million resulting from the sale of finance receivables to a subsidiary of AGFI for securitization. The allowance as a percentage of net finance receivables declined in 2003 reflecting purchases of higher quality real estate loans during the last half of 2002. Charge-off coverage, which compares the allowance for finance receivable losses to net charge-offs (annualized), remained near the same for the three and six months ended June 30, 2003 when compared to the same periods in 2002 reflecting slightly higher net charge-offs, offset by increases to allowance for finance receivable losses. 27 Insurance Losses and Loss Adjustment Expenses Insurance losses and loss adjustment expenses were as follows: Three Months Ended Six Months Ended June 30, June 30, 2003 2002 2003 2002 (dollars in millions) Claims incurred $19.4 $19.4 $42.0 $43.4 Change in benefit reserves (4.2) 0.4 (6.5) (1.6) Total $15.2 $19.8 $35.5 $41.8 Amount change $(4.6) $(1.2) $(6.3) $(2.4) Percent change (23)% (6)% (15)% (6)% The decline in benefit reserves for the three and six months ended June 30, 2003 when compared to the same periods in 2002 reflected the release of benefit reserves resulting from the termination of a reinsurance agreement and lower premium volume of our non-credit life products. Provision for Income Taxes Three Months Ended Six Months Ended June 30, June 30, 2003 2002 2003 2002 (dollars in millions) Provision for income taxes $ 58.0 $ 43.8 $103.6 $ 86.9 Amount change $ 14.2 $ 3.1 $ 16.7 $ 7.6 Percent change 32% 8% 19% 10% Pretax income $160.4 $123.1 $289.8 $244.1 Effective income tax rate 36.15% 35.60% 35.74% 35.59% Provision for income taxes increased for the three and six months ended June 30, 2003 when compared to the same periods in 2002 primarily due to higher taxable income. Asset/Liability Management We manage anticipated cash flows of our assets and liabilities, principally our finance receivables and debt, in an effort to reduce the risk associated with unfavorable changes in interest rates not met by changes in finance charge yields of our finance receivables. We fund finance receivables with a combination of fixed-rate and floating- rate debt and equity. Management determines the mix of fixed-rate and floating-rate debt based, in part, on the nature of the finance receivables being supported. 28 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 by issuing fixed-rate debt. To supplement fixed-rate debt issuances, AGFC also alters the nature of certain floating-rate funding by using interest rate swap agreements to synthetically create fixed-rate, long-term debt, thereby limiting our exposure to market interest rate increases. Additionally, AGFC has swapped fixed-rate, long-term debt to floating-rate, long-term debt. Including the effect of interest rate swap agreements that effectively fix floating-rate debt or float fixed-rate debt, our floating-rate debt represented 43% of our average borrowings for the three months ended June 30, 2003 and 41% of our average borrowings for the six months ended June 30, 2003 compared to 32% for the three months ended June 30, 2002 and 33% for the six months ended June 30, 2002. Item 4. Controls and Procedures. (a) Evaluation of disclosure controls and procedures The conclusions of our principal executive officer and principal financial officer about the effectiveness of the Company's disclosure controls and procedures based on their evaluation of these controls and procedures as of June 30, 2003 are as follows: The Company's disclosure controls and procedures are designed to ensure that information required to be disclosed by the Company is recorded, processed, summarized and reported within required timeframes. The Company's disclosure controls and procedures include controls and procedures designed to ensure that information required to be disclosed is accumulated and communicated to the Company's management, including its principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure. The Company's management, including its principal executive officer and principal financial officer, assesses the adequacy of our disclosure controls and procedures as of the end of each quarter. Based on these assessments, the Company's principal executive officer and principal financial officer have concluded that the disclosure controls and procedures have functioned effectively and that the condensed consolidated financial statements fairly present our consolidated financial position and the results of our operations for the periods presented. (b) Changes in internal control over financial reporting There was no change in the Company's internal control over financial reporting, that occurred during the three months ended June 30, 2003, that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting. 29 PART II - OTHER INFORMATION Item 1. Legal Proceedings. See Note 10. 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. Exhibits are listed in the Exhibit Index beginning on page 31 herein. (b) Reports on Form 8-K. No Current Reports on Form 8-K were filed during the second quarter of 2003. 30 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: July 30, 2003 By /s/ Donald R. Breivogel, Jr. Donald R. Breivogel, Jr. Senior Vice President and Chief Financial Officer (Duly Authorized Officer and Principal Financial Officer) 31 Exhibit Index Exhibit (12) Computation of Ratio of Earnings to Fixed Charges (31.1) Rule 13a-14(a)/15d-14(a) Certifications (31.2) Rule 13a-14(a)/15d-14(a) Certifications (32) Section 1350 Certifications