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 March 31, 2004
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 May 4, 2004, there were 10,160,012 shares of the registrant's
common stock, $.50 par value, outstanding.
2
TABLE OF CONTENTS
Item Page
Part I - Financial Information
1. Financial Statements . . . . . . . . . . . . . . . . . . . . . 3
2. Management's Discussion and Analysis of Financial Condition
and Results of Operations. . . . . . . . . . . . . . . . . . 12
4. Controls and Procedures . . . . . . . . . . . . . . . . . . . 25
Part II - Other Information
1. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . 26
6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . 26
AVAILABLE INFORMATION
American General Finance Corporation (AGFC) 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 AGFC) file electronically with the SEC. The
SEC's website is www.sec.gov.
The following reports are available free of charge on our Internet
website www.agfinance.com:
* this Quarterly Report on Form 10-Q; and
* our Annual Report on Form 10-K for the year ended December 31,
2003.
The information on our website is not incorporated by reference into
this report. The website addresses listed above are provided for the
information of the reader and are not intended to be active links.
3
Part I - FINANCIAL INFORMATION
Item 1. Financial Statements
AMERICAN GENERAL FINANCE CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Income
(Unaudited)
Three Months Ended
March 31,
2004 2003
(dollars in thousands)
Revenues
Finance charges $448,098 $430,662
Insurance 45,701 45,708
Other:
Service fee income from a non-subsidiary
affiliate 35,617 568
Miscellaneous 33,428 44,618
Total revenues 562,844 521,556
Expenses
Interest expense 135,556 141,829
Operating expenses:
Salaries and benefits 118,265 97,334
Other operating expenses 69,799 63,120
Provision for finance receivable losses 58,177 69,451
Insurance losses and loss adjustment
expenses 21,127 20,389
Total expenses 402,924 392,123
Income before provision for income taxes 159,920 129,433
Provision for Income Taxes 58,053 45,596
Net Income $101,867 $ 83,837
See Notes to Condensed Consolidated Financial Statements.
4
AMERICAN GENERAL FINANCE CORPORATION AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
March 31, December 31,
2004 2003
(Unaudited)
(dollars in thousands)
Assets
Net finance receivables:
Real estate loans $11,599,553 $10,657,742
Non-real estate loans 2,865,212 2,877,825
Retail sales finance 1,235,695 1,302,922
Net finance receivables 15,700,460 14,838,489
Allowance for finance receivable losses (445,613) (455,402)
Net finance receivables, less allowance
for finance receivable losses 15,254,847 14,383,087
Investment securities 1,347,774 1,307,472
Cash and cash equivalents 212,519 136,223
Notes receivable from parent 288,376 276,666
Other assets 742,776 667,693
Total assets $17,846,292 $16,771,141
Liabilities and Shareholder's Equity
Long-term debt $11,055,402 $10,686,887
Short-term debt 3,492,323 3,184,529
Insurance claims and policyholder
liabilities 430,710 438,362
Other liabilities 619,798 372,416
Accrued taxes 80,000 37,518
Total liabilities 15,678,233 14,719,712
Shareholder's equity:
Common stock 5,080 5,080
Additional paid-in capital 951,175 951,175
Accumulated other comprehensive loss (183) (14,947)
Retained earnings 1,211,987 1,110,121
Total shareholder's equity 2,168,059 2,051,429
Total liabilities and shareholder's equity $17,846,292 $16,771,141
See Notes to Condensed Consolidated Financial Statements.
5
AMERICAN GENERAL FINANCE CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(Unaudited)
Three Months Ended
March 31,
2004 2003
(dollars in thousands)
Cash Flows from Operating Activities
Net income $ 101,867 $ 83,837
Reconciling adjustments:
Provision for finance receivable losses 58,177 69,451
Depreciation and amortization 42,181 44,709
Deferral of finance receivable origination
costs (17,934) (15,211)
Deferred income tax charge 5,752 720
Origination of real estate loans held for sale (20,135) (617,826)
Sales and principal collections of real estate
loans held for sale 35,865 512,627
Change in other assets and other liabilities 155,264 36,035
Change in insurance claims and policyholder
liabilities (7,652) (13,351)
Change in taxes receivable and payable 42,635 34,327
Other, net 4,203 11,585
Net cash provided by operating activities 400,223 146,903
Cash Flows from Investing Activities
Finance receivables originated or purchased (2,673,802) (1,782,462)
Principal collections on finance receivables 1,730,312 1,664,549
Acquisition of Wilmington Finance, Inc. - (93,189)
Investment securities purchased (248,144) (595,331)
Investment securities called and sold 220,980 556,052
Investment securities matured 2,600 7,000
Change in notes receivable from parent (11,710) 5,490
Change in premiums on finance receivables
purchased and deferred charges (2,009) 10,045
Other, net (2,794) (3,731)
Net cash used for investing activities (984,567) (231,577)
Cash Flows from Financing Activities
Proceeds from issuance of long-term debt 764,346 299,580
Repayment of long-term debt (411,500) (640,150)
Change in short-term debt 307,794 525,765
Dividends paid - (897)
Net cash provided by financing activities 660,640 184,298
Increase in cash and cash equivalents 76,296 99,624
Cash and cash equivalents at beginning of period 136,223 144,565
Cash and cash equivalents at end of period $ 212,519 $ 244,189
See Notes to Condensed Consolidated Financial Statements.
6
AMERICAN GENERAL FINANCE CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Comprehensive Income
(Unaudited)
Three Months Ended
March 31,
2004 2003
(dollars in thousands)
Net income $101,867 $ 83,837
Other comprehensive gain:
Net unrealized gains (losses):
Investment securities 15,687 4,311
Interest rate swaps (7,793) (8,281)
Income tax effect:
Investment securities (5,491) (1,499)
Interest rate swaps 2,728 2,899
Net unrealized gains (losses), net of tax 5,131 (2,570)
Reclassification adjustments for
realized (gains) losses included
in net income:
Investment securities (769) 2,852
Interest rate swaps 15,589 21,830
Income tax effect:
Investment securities 269 (998)
Interest rate swaps (5,456) (7,641)
Realized losses included in net income,
net of tax 9,633 16,043
Other comprehensive gain, net of tax 14,764 13,473
Comprehensive income $116,631 $ 97,310
See Notes to Condensed Consolidated Financial Statements.
7
AMERICAN GENERAL FINANCE CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
March 31, 2004
Note 1. Basis of Presentation
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).
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, 2003. To conform to the
2004 presentation, we reclassified certain items in the prior period.
Note 2. 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. 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. We
finalized an independent valuation of the intangibles in second
quarter 2003 and recorded $54.2 million as goodwill and $40.8 million
as other intangibles. Goodwill and other intangibles are both
included in other assets. Other intangibles primarily consisted of
broker relationships and non-compete agreements and had an initial
weighted-average amortization period of 9 years. WFI originates non-
conforming residential real estate loans, primarily through broker
relationships and, to a lesser extent, directly to consumers, and
sells its originated loans to investors with servicing released to the
purchaser. Effective July 1, 2003, WFI and AIG Federal Savings Bank,
a non-subsidiary affiliate, entered into an agreement whereby for a
fee, WFI provides marketing, certain origination processing services,
loan servicing, and related services for the affiliate's origination
and sale of non-conforming residential real estate loans. These WFI
service activities have supplanted much of WFI's origination and sales
activity and are anticipated to do so going forward. WFI provides the
Company with other sources of revenue through its servicing fees and
net gain on sales of real estate loans held for sale. We report any
real estate loans we purchase from AIG Federal Savings Bank that were
generated using WFI's services as originations, rather than as
portfolio acquisitions, because AGFI and AIG Federal Savings Bank
share a common parent.
8
Note 3. Accounting Change
In December 2003, the Accounting Standards Executive Committee (AcSEC)
issued Statement of Position No. 03-3 (SOP 03-3) "Accounting for
Certain Loans or Debt Securities Acquired in a Transfer". SOP 03-3
addresses accounting for differences between contractual cash flows
and cash flows expected to be collected from an investor's initial
investment in loans acquired in a transfer if those differences are
attributable, at least in part, to credit quality. SOP 03-3 limits
the yield that may be accreted (accretable yield) to the excess of the
investor's estimate of undiscounted expected principal, interest, and
other cash flows (cash flows expected at acquisition to be collected)
over the investor's initial investment in the loan. SOP 03-3 requires
that the excess of contractual cash flows over cash flows expected to
be collected (nonaccretable difference) not be recognized as an
adjustment of yield, loss accrual, or valuation allowance. Subsequent
increases in cash flows expected to be collected generally should be
recognized prospectively through adjustment of the loan's yield over
its remaining life. Decreases in cash flows expected to be collected
should be recognized as impairment. SOP 03-3 is effective for loans
acquired in fiscal years beginning after December 15, 2004. For loans
acquired in fiscal years beginning on or before December 15, 2004, SOP
03-3 should be applied prospectively for fiscal years beginning after
December 15, 2004 for decreases in cash flows expected to be
collected. The AcSEC has encouraged early adoption of SOP 03-3 by
affected companies. We have not yet determined our date of adoption
or the effect it will have on our results of operations or financial
position in future periods.
9
Note 4. Finance Receivables
Components of net finance receivables by type were as follows:
March 31, 2004
Real Non-real Retail
Estate Estate Sales
Loans Loans Finance Total
(dollars in thousands)
Gross receivables $11,545,781 $3,172,032 $1,357,204 $16,075,017
Unearned finance charges
and points and fees (130,342) (374,069) (132,289) (636,700)
Accrued finance charges 80,268 35,656 10,806 126,730
Deferred origination costs 22,213 26,843 - 49,056
Premiums, net of discounts 81,633 4,750 (26) 86,357
Total $11,599,553 $2,865,212 $1,235,695 $15,700,460
December 31, 2003
Real Non-real Retail
Estate Estate Sales
Loans Loans Finance Total
(dollars in thousands)
Gross receivables $10,598,133 $3,191,045 $1,436,756 $15,225,934
Unearned finance charges
and points and fees (131,037) (387,049) (145,056) (663,142)
Accrued finance charges 80,111 39,806 11,664 131,581
Deferred origination costs 19,424 28,244 - 47,668
Premiums, net of discounts 91,111 5,779 (442) 96,448
Total $10,657,742 $2,877,825 $1,302,922 $14,838,489
Note 5. Allowance for Finance Receivable Losses
Changes in the allowance for finance receivable losses were as
follows:
Three Months Ended
March 31,
2004 2003
(dollars in thousands)
Balance at beginning of period $455,402 $453,668
Provision for finance receivable losses 58,177 69,451
Charge-offs (79,783) (82,608)
Recoveries 11,817 10,157
Balance at end of period $445,613 $450,668
10
Note 6. 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
the rates that 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 net income during the three months ended March 31, 2004 or
2003.
Note 7. Accumulated Other Comprehensive Loss
Components of accumulated other comprehensive loss were as follows:
March 31, December 31,
2004 2003
(dollars in thousands)
Net unrealized losses on interest
rate swaps $(50,518) $(55,586)
Net unrealized gains on investment
securities 50,335 40,639
Total $ (183) $(14,947)
Note 8. 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, from AIG Federal
Savings Bank, a non-subsidiary affiliate, private label receivables
under a participation agreement and real estate loans under a purchase
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 provide
for a fee, marketing, certain origination processing services, and
loan servicing for AIG Federal Savings Bank and originate real estate
loans through brokers for sale to investors. We offer credit and non-
credit insurance products to our eligible consumer finance customers.
The insurance segment writes and reinsures 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 March 31, 2004:
Consumer Total
Finance Insurance Segments
(dollars in thousands)
Revenues:
External:
Finance charges $480,346 $ - $480,346
Insurance 203 45,498 45,701
Other 34,057 24,259 58,316
Intercompany 20,719 (18,096) 2,623
Pretax income 151,372 22,148 173,520
For the three months ended March 31, 2003:
Consumer Total
Finance Insurance Segments
(dollars in thousands)
Revenues:
External:
Finance charges $458,643 $ - $458,643
Insurance 226 45,482 45,708
Other 17,597 22,490 40,087
Intercompany 21,454 (18,049) 3,405
Pretax income 132,703 21,380 154,083
Reconciliations of total segment pretax income to the condensed
consolidated financial statement amounts were as follows:
Three Months Ended
March 31,
2004 2003
(dollars in thousands)
Pretax income:
Segments $173,520 $154,083
Corporate (13,854) (15,239)
Adjustments 254 (9,411)
Consolidated pretax income $159,920 $129,433
Adjustments for pretax income include realized gains (losses) and
certain other investment revenue, 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. Adjustments for pretax income in 2003 also
included pension expense.
12
Note 9. Legal Contingencies
AGFC and certain of its subsidiaries are parties to various lawsuits
and proceedings, including certain purported 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, if any, 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.
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) for interim
periods. 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.
13
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 and invest
cash flows from the insurance business segment;
* 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, and
credit losses;
* levels of unemployment and personal bankruptcies;
* our ability to access capital markets and maintain our credit
rating position;
* 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 businesses;
* changes in our ability to attract and retain employees or key
executives to support our businesses; and
* natural or accidental events 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 SEC. 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.
14
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,
qualitative factors, 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,
the analysis of the trends in credit quality, and the current economic
conditions considered by the Credit Strategy and Policy Committee to
support its conclusions. See Provision for Finance Receivable Losses
for further information on the allowance for finance receivable
losses.
OFF-BALANCE SHEET ARRANGEMENTS
We do not have any material off-balance sheet arrangements as defined
by SEC 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.
Principal sources and uses of cash were as follows:
Three Months Ended
March 31,
2004 2003
(dollars in millions)
Principal sources of cash:
Operations $ 400.2 $146.9
Net issuances of debt 660.6 185.2
Total $1,060.8 $332.1
Principal uses of cash:
Net originations and purchases
of finance receivables $ 943.5 $117.9
Dividends paid - 0.9
Total $ 943.5 $118.8
Net originations and purchases of finance receivables and net
issuances of debt increased for the three months ended March 31, 2004
when compared to the same period in 2003 primarily due to increases in
WFI-related real estate loan production.
15
We believe that our overall sources of liquidity will continue to be
sufficient to satisfy our foreseeable operational requirements and
financial obligations. The principal 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 by continuing to operate the Company by utilizing the following
existing 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
March 31, 2004, we had $8.3 billion of long-term debt securities
registered under the Securities Act of 1933 that had not yet been
issued. We also maintain committed bank credit facilities and have
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.
Capital Resources
March 31,
2004 2003
Amount Percent Amount Percent
(dollars in millions)
Long-term debt $11,055.4 66% $ 9,230.8 63%
Short-term debt 3,492.3 21 3,586.9 24
Total debt 14,547.7 87 12,817.7 87
Equity 2,168.1 13 1,906.3 13
Total capital $16,715.8 100% $14,724.0 100%
Net finance receivables $15,700.5 $13,585.3
Debt to equity ratio 6.71x 6.72x
Debt to tangible equity ratio 7.47x 7.50x
Reconciliations of equity to tangible equity were as follows:
March 31,
2004 2003
(dollars in millions)
Equity $ 2,168.1 $ 1,906.3
Goodwill (220.5) (252.6)
Accumulated other comprehensive loss 0.2 55.5
Tangible equity $ 1,947.8 $ 1,709.2
16
Our capital varies primarily 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. AGFC
has historically paid dividends to (or received capital contributions
from) its parent to manage our leverage of debt to tangible equity to
a targeted amount. Certain AGFC financing agreements effectively
limit the amount of dividends AGFC may pay. These agreements have not
prevented AGFC from managing its capital to currently targeted
leverage of 7.5 to 1.
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 issuances 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. At March 31, 2004, short-term debt included $3.0 billion
of commercial paper. AGFC also sells extendible commercial notes with
initial maturities of up to 90 days, which may be extended by AGFC to
390 days. At March 31, 2004, short-term debt included $536.0 million
of extendible commercial notes.
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 March 31, 2004, AGFC had committed credit facilities
totaling $3.0 billion, including a facility under which AGFI is an
eligible borrower for up to $300 million. The annual commitment fees
for the facilities are based upon AGFC's long-term credit ratings and
averaged 0.07% at March 31, 2004.
At March 31, 2004, AGFC and certain of its subsidiaries also had an
uncommitted credit facility totaling $50.0 million which was shared
with AGFI and could be increased depending upon lender ability to
participate its loans under the facility.
There were no amounts outstanding under any facility at March 31, 2004
or March 31, 2003. AGFC does not guarantee any borrowings of AGFI.
17
ANALYSIS OF OPERATING RESULTS AND FINANCIAL CONDITION
Net Income
Three Months Ended
March 31,
2004 2003
(dollars in millions)
Net income $101.9 $ 83.8
Amount change $ 18.1 $ 5.8
Percent change 22% 8%
Return on average assets 2.36% 2.16%
Return on average equity 19.30% 18.12%
Ratio of earnings to fixed charges 2.14x 1.88x
See Note 8. 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
were as follows:
Finance Charges
Three Months Ended
March 31,
2004 2003
(dollars in millions)
Finance charges $ 448.1 $ 430.7
Amount change $ 17.4 $ 17.0
Percent change 4% 4%
Average net receivables $15,223.8 $13,553.7
Yield 11.83% 12.85%
Finance charges increased due to the following:
Three Months Ended
March 31,
2004 2003
(dollars in millions)
Increase in average net receivables $ 43.6 $ 59.4
Decrease in yield (30.2) (42.4)
Increase in number of days 4.0 -
Total $ 17.4 $ 17.0
18
Average net receivables by type and growth in average net receivables
when compared to the same period for the previous year were as
follows:
Three Months Ended March 31,
2004 2003
Amount Growth Amount Growth
(dollars in millions)
Real estate loans $11,084.4 $1,707.6 $ 9,376.8 $1,898.4
Non-real estate loans 2,867.3 16.1 2,851.2 46.6
Retail sales finance 1,272.1 (53.6) 1,325.7 (57.6)
Total $15,223.8 $1,670.1 $13,553.7 $1,887.4
Percent change 12% 16%
The historically low interest rate environment contributed to the
increases in both originations and liquidations of our real estate
loans. WFI-related real estate loan production also increased real
estate loan originations by $2.7 billion during the last twelve
months. Real estate loan acquisitions declined during the last twelve
months primarily due to an extremely competitive pricing environment.
Yield by type and changes in yield in basis points (bp) when compared
to the same period for the previous year were as follows:
Three Months Ended March 31,
2004 2003
Yield Change Yield Change
Real estate loans 9.03% (94) bp 9.97% (141) bp
Non-real estate loans 21.51 2 21.49 (43)
Retail sales finance 14.39 (26) 14.65 (26)
Total 11.83 (102) 12.85 (148)
Yield decreased for the three months ended March 31, 2004 when
compared to the same period in 2003 primarily due to a lower real
estate loan yield resulting from the low interest rate environment and
a higher proportion of average net receivables that are real estate
loans.
Insurance Revenues
Insurance revenues were as follows:
Three Months Ended
March 31,
2004 2003
(dollars in millions)
Earned premiums $44.7 $45.1
Commissions 1.0 0.6
Total $45.7 $45.7
Amount change $ - $ 0.2
Percent change - % - %
19
Other Revenues
Other revenues were as follows:
Three Months Ended
March 31,
2004 2003
(dollars in millions)
Service fee income from a non-subsidiary
affiliate $35.6 $ 0.6
Miscellaneous:
Investment revenue 25.3 19.7
Interest revenue - notes receivable
from AGFI 3.7 3.3
Net gain on sales of real estate loans
held for sale 3.5 19.2
Writedowns on real estate owned (2.3) (2.1)
Net interest income on real estate
loans held for sale 0.3 3.2
Net recovery on sales of real estate owned 0.3 0.3
Other 2.6 1.0
Total $69.0 $45.2
Amount change $23.8 $15.0
Percent change 53% 50%
Other revenues increased for the three months ended March 31, 2004
when compared to the same period in 2003 primarily due to higher
service fee income from a non-subsidiary affiliate and investment
revenue, partially offset by lower net gain on sales of real estate
loans held for sale. Effective July 1, 2003, WFI and AIG Federal
Savings Bank, a non-subsidiary affiliate, entered into an agreement
whereby for a fee, WFI provides marketing, certain origination
processing services, loan servicing, and related services for the
affiliate's origination and sale of non-conforming residential real
estate loans. These WFI service activities have supplanted much of
WFI's origination and sales activity.
Investment revenue was affected by the following:
Three Months Ended
March 31,
2004 2003
(dollars in millions)
Average invested assets $1,339.1 $1,291.8
Adjusted portfolio yield 7.14% 6.68%
Net realized gains (losses) on
investments $ 0.8 $ (2.9)
20
Interest Expense
The impact of using interest rate swap agreements to fix floating-rate
debt or float fixed-rate debt is included in interest expense and the
related borrowing statistics below.
Three Months Ended
March 31,
2004 2003
(dollars in millions)
Interest expense $ 135.6 $ 141.8
Amount change $ (6.2) 5.8
Percent change (4)% 4%
Average borrowings $14,038.0 $12,721.0
Borrowing cost 3.87% 4.46%
Interest expense (decreased) increased due to the following:
Three Months Ended
March 31,
2004 2003
(dollars in millions)
Decrease in borrowing cost $(20.9) $(19.1)
Increase in average borrowings 14.7 24.9
Total $ (6.2) $ 5.8
Average borrowings by type and changes in average borrowings when
compared to the same period for the previous year were as follows:
Three Months Ended March 31,
2004 2003
Amount Change Amount Change
(dollars in millions)
Long-term debt $10,484.8 $1,192.1 $ 9,292.7 $2,786.8
Short-term debt 3,553.2 124.9 3,428.3 (818.1)
Total $14,038.0 $1,317.0 $12,721.0 $1,968.7
Percent change 10% 18%
AGFC issued $3.2 billion of long-term debt during the last twelve
months. The proceeds of these long-term debt issuances were used to
support finance receivable growth and to refinance maturing debt.
21
Borrowing cost by type and changes in borrowing cost in basis points
when compared to the same period for the previous year were as
follows:
Three Months Ended March 31,
2004 2003
Rate Change Rate Change
Long-term debt 4.28% (76) bp 5.04% (123) bp
Short-term debt 2.65 (24) 2.89 (34)
Total 3.87 (59) 4.46 (60)
Federal Reserve actions from 2001 through June 2003 created the lowest
interest rate environment in 46 years and resulted in lower long-term
debt rates as new issuances were at substantially lower rates than
long-term debt being refinanced. Since June 2003, market interest
rates have remained relatively stable.
Operating Expenses
Operating expenses were as follows:
Three Months Ended
March 31,
2004 2003
(dollars in millions)
Salaries and benefits $118.3 $ 97.3
Other 69.8 63.2
Total $188.1 $160.5
Amount change $ 27.6 $ 19.7
Percent change 17% 14%
Operating expenses as a percentage
of average net receivables 4.94% 4.74%
Operating expenses increased for the three months ended March 31, 2004
when compared to the same period in 2003 primarily due to growth in
WFI operations and higher salaries and benefits and advertising
expenses. The increase in salaries and benefits reflected
approximately 470 WFI employees hired during the last twelve months.
The increase in operating expenses as a percentage of average net
receivables for the three months ended March 31, 2004 when compared to
the same period in 2003 reflected growth in WFI operations, partially
offset by continued emphasis on controlling operating expenses.
Approximately $29.7 million of the Company's operating expenses for
the three months ended March 31, 2004 were directly related to WFI
operations, compared to $14.2 million for the same period in 2003.
22
Provision for Finance Receivable Losses
At or for the
Three Months Ended
March 31,
2004 2003
(dollars in millions)
Provision for finance receivable
losses $ 58.2 $ 69.5
Amount change $(11.3) $ (0.1)
Percent change (16)% -%
Net charge-offs $ 68.0 $ 72.5
Charge-off ratio 1.80% 2.14%
Charge-off coverage 1.64x 1.56x
60 day+ delinquency $464.0 $509.9
Delinquency ratio 2.89% 3.65%
Allowance for finance receivable
losses $445.6 $450.7
Allowance ratio 2.84% 3.32%
Net charge-offs by type and changes in net charge-offs when compared
to the same period for the previous year were as follows:
Three Months Ended March 31,
2004 2003
Amount Change Amount Change
(dollars in millions)
Real estate loans $14.6 $ 2.3 $12.3 $0.2
Non-real estate loans 43.3 (5.3) 48.6 2.0
Retail sales finance 10.1 (1.5) 11.6 0.9
Total $68.0 $(4.5) $72.5 $3.1
Non-real estate loan and retail sales finance net charge-offs
decreased for the three months ended March 31, 2004 when compared to
the same period in 2003 primarily due to the improving economy. Real
estate loan net charge-offs increased for the three months ended March
31, 2004 when compared to the same period in 2003 primarily due to
increases in real estate loan average net receivables of $1.7 billion,
or 18%.
Charge-off ratios by type and changes in charge-off ratios in basis
points when compared to the same period for the previous year were as
follows:
Three Months Ended March 31,
2004 2003
Ratio Change Ratio Change
Real estate loans 0.53% - bp 0.53% (12) bp
Non-real estate loans 6.04 (73) 6.77 17
Retail sales finance 3.14 (32) 3.46 40
Total 1.80 (34) 2.14 (23)
23
The improvement in the charge-off ratio for the three months ended
March 31, 2004 when compared to the same period in 2003 was primarily
due to the improving economy and a higher proportion of average net
receivables that were real estate loans.
Delinquency by type and changes in delinquency when compared to the
same period for the previous year were as follows:
March 31,
2004 2003
Amount Change Amount Change
(dollars in millions)
Real estate loans $287.9 $(23.0) $310.9 $59.0
Non-real estate loans 143.2 (17.0) 160.2 1.2
Retail sales finance 32.9 (5.9) 38.8 -
Total $464.0 $(45.9) $509.9 $60.2
Delinquency at March 31, 2004 was favorably impacted by the improving
economy.
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:
March 31,
2004 2003
Ratio Change Ratio Change
Real estate loans 2.49% (81) bp 3.30% (6) bp
Non-real estate loans 4.51 (63) 5.14 (2)
Retail sales finance 2.43 (30) 2.73 14
Total 2.89 (76) 3.65 (7)
The delinquency ratio at March 31, 2004 decreased when compared to
March 31, 2003 primarily due to the improving economy and a higher
proportion of net finance receivables that were real estate loans.
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 decrease in the
allowance for finance receivable losses at March 31, 2004 when
compared to March 31, 2003 was due to the following:
* 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; and
* net decreases to the allowance for finance receivable losses
through the provision for finance receivable losses during the
period totaling $2.4 million (these decreases were in response
to our lower levels of delinquency).
24
The allowance as a percentage of net finance receivables at March 31,
2004 decreased primarily due to the improving economy and a higher
proportion of net finance receivables that were real estate loans.
Charge-off coverage, which compares the allowance for finance
receivable losses to net charge-offs (annualized), improved for the
three months ended March 31, 2004 when compared to the same period in
2003 due to lower net charge-offs.
Insurance Losses and Loss Adjustment Expenses
Insurance losses and loss adjustment expenses were as follows:
Three Months Ended
March 31,
2004 2003
(dollars in millions)
Claims incurred $22.4 $22.6
Change in benefit reserves (1.3) (2.2)
Total $21.1 $20.4
Amount change $ 0.7 $(1.6)
Percent change 4% (7)%
Provision for Income Taxes
Three Months Ended
March 31,
2004 2003
(dollars in millions)
Provision for income taxes $ 58.1 $ 45.6
Amount change $ 12.5 $ 2.5
Percent change 27% 6%
Pretax income $159.9 $129.4
Effective income tax rate 36.30% 35.23%
Provision for income taxes increased for the three months ended March
31, 2004 when compared to the same period in 2003 due to higher
taxable income and a higher effective income tax rate.
Asset/Liability Management
In an effort to reduce the risk associated with unfavorable changes in
interest rates not met by favorable changes in finance charge yields
of our finance receivables, we monitor the anticipated cash flows of
our assets and liabilities, principally our finance receivables and
debt. 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.
25
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, long-term debt. To
supplement fixed-rate debt issuances, AGFC also alters the nature of
certain floating-rate funding by using interest rate swap agreements
to create synthetic 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 40% of our borrowings at March 31, 2004 compared to
43% at March 31, 2003. Adjustable-rate net finance receivables
represented 25% of our net finance receivables at March 31, 2004
compared to 24% at March 31, 2003.
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 March 31, 2004 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, evaluates the
effectiveness of our disclosure controls and procedures as of the
end of each quarter. Based on an evaluation of the disclosure
controls and procedures as of March 31, 2004, 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 during the three months ended March 31, 2004,
that has materially affected, or is reasonably likely to
materially affect, the Company's internal control over financial
reporting.
26
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
See Note 9. 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 28
herein.
(b) Reports on Form 8-K.
Current Report on Form 8-K dated March 26, 2004 with respect to
the issuance from time to time of up to $7.5 billion aggregate
principal amount of AGFC's Medium-Term Notes, Series I.
27
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: May 4, 2004 By /s/ Donald R. Breivogel, Jr.
Donald R. Breivogel, Jr.
Senior Vice President and Chief
Financial Officer
(Duly Authorized Officer and
Principal Financial Officer)
28
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