SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-K
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1997
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)
Registrant's telephone number, including area code: (812) 424-8031
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
6-3/8% Senior Notes due March 1, 2003 New York Stock Exchange
8.45% Senior Notes due October 15, 2009 New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
None
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, and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K [ ]. Not applicable.
The registrant meets the conditions set forth in General Instructions
I(1)(a) and (b) of Form 10-K and is therefore filing this Form 10-K with
the reduced disclosure format.
At March 19, 1998, no common stock of the registrant was held by a
non-affiliate.
At March 19, 1998, 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. Business . . . . . . . . . . . . . . . . . . . . . . . 3
2. Properties . . . . . . . . . . . . . . . . . . . . . . 17
3. Legal Proceedings . . . . . . . . . . . . . . . . . . 17
4. Submission of Matters to a Vote of Security Holders. . *
Part II 5. Market for Registrant's Common Equity and Related
Stockholder Matters . . . . . . . . . . . . . . . . 18
6. Selected Financial Data . . . . . . . . . . . . . . . 18
7. Management's Discussion and Analysis of Financial
Condition and Results of Operations. . . . . . . . . 19
7A. Quantitative and Qualitative Disclosures About
Market Risk . . . . . . . . . . . . . . . . . . . . 30
8. Financial Statements and Supplementary Data . . . . . 31
9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure . . . . . . . **
Part II 10. Directors and Executive Officers of the Registrant . . *
11. Executive Compensation . . . . . . . . . . . . . . . . *
12. Security Ownership of Certain Beneficial Owners
and Management . . . . . . . . . . . . . . . . . . . *
13. Certain Relationships and Related Transactions . . . . *
Part IV 14. Exhibits, Financial Statement Schedules, and Reports
on Form 8-K . . . . . . . . . . . . . . . . . . . . 61
* Items 4, 10, 11, 12, and 13 are not included, as per conditions
met by Registrant set forth in General Instructions I(1)(a) and
(b) of Form 10-K.
** Item 9 is not included, as no information was required by Item
304 of Regulation S-K.
3
PART I
Item 1. Business.
GENERAL
American General Finance Corporation will be referred to in this document
as "AGFC" or collectively, with its subsidiaries, whether directly or
indirectly owned, as the "Company". AGFC was incorporated in Indiana in
1927 as successor to a business started in 1920. All of the common stock
of AGFC is owned by American General Finance, Inc. (AGFI), which was
incorporated in Indiana in 1974. Since 1982, AGFI has been a direct or
indirect wholly-owned subsidiary of American General Corporation (American
General), the parent company of one of the nation's largest diversified
financial services organizations. Headquartered in Houston, Texas,
American General's operating subsidiaries are leading providers of
retirement services, life insurance, and consumer loans. American General,
a Texas corporation, is the successor to American General Insurance
Company, an insurance company incorporated in Texas in 1926.
AGFC is a financial services holding company with subsidiaries engaged
primarily in the consumer finance and credit insurance business. The
Company conducts the credit insurance business as part of the consumer
finance business through Merit Life Insurance Co. (Merit) and Yosemite
Insurance Company (Yosemite), which are both subsidiaries of AGFC.
At December 31, 1997, the Company had 1,322 offices in 40 states, Puerto
Rico, and the U.S. Virgin Islands and approximately 8,300 employees. The
Company's executive offices are located in Evansville, Indiana.
Selected Financial Information
The Company reclassified credit card and certain private label finance
receivables to assets held for sale on December 31, 1996. Because the
reclassification was effective on the last day of the year, it had no
effect on average net receivables; yield; finance receivable loss
experience; and finance receivables originated, renewed, and purchased for
1996. See Consumer Finance Operations for further information on this
reclassification.
The following table shows selected financial information of the Company:
Years Ended December 31,
1997 1996 1995
(dollars in thousands)
Average finance receivables net
of unearned finance charges
(average net receivables) $7,340,902 $7,930,169 $8,269,663
Average borrowings $6,949,021 $6,989,745 $7,209,923
4
Item 1. Continued
At or for the
Years Ended December 31,
1997 1996 1995
Yield - finance charges as a
percentage of average net
receivables 16.80% 17.84% 18.01%
Borrowing cost - interest
expense as a percentage
of average borrowings 6.82% 6.90% 7.03%
Interest spread - yield
less borrowing cost 9.98% 10.94% 10.98%
Insurance revenues as a
percentage of average
net receivables 2.57% 2.60% 2.69%
Operating expenses as a
percentage of average
net receivables 6.36% 6.27% 5.64%
Allowance ratio - allowance for
finance receivable losses as
a percentage of net finance
receivables 4.64% 5.18% 5.88%
Charge-off ratio - charge-offs net
of recoveries as a percentage of
the average of net finance
receivables at the beginning of
each month during the period 3.62% 5.51% 3.77%
Delinquency ratio - finance
receivables 60 days or more
past due as a percentage
of related receivables 3.61% 3.84% 4.15%
Return on average assets 1.51% .55% .98%
Return on average equity 10.16% 3.55% 6.49%
Ratio of earnings to fixed charges
(refer to Exhibit 12 herein
for calculations) 1.44 1.16 1.24
Debt to tangible equity ratio -
debt to equity less goodwill
and net unrealized gains or
losses on fixed-maturity
investment securities 6.54 7.08 6.43
Debt to equity ratio 5.16 5.57 5.02
5
Item 1. Continued
CONSUMER FINANCE OPERATIONS
Through its finance subsidiaries, the Company makes loans directly to
individuals, purchases retail sales contract obligations of individuals,
and offers private label services.
In its lending operations, the Company generally takes a security interest
in real property and/or personal property of the borrower. Of the loans
outstanding at December 31, 1997, 92% were secured by such property. At
December 31, 1997, mortgage loans accounted for 62% of the amount of loans
outstanding and 12% of the number of loans outstanding, compared to 60% and
14%, respectively, at December 31, 1996. Loans secured by real property
generally have maximum original terms of 180 months. Such loans with
maximum original terms exceeding 180 months generally contain call
provisions at various times throughout the contract. Loans secured by
personal property or that are unsecured generally have maximum original
terms of 60 months.
In its retail operations, the Company purchases retail sales contracts
arising from the retail sale of consumer goods and services and purchases
private label receivables originated by American General Financial Center
(AGFC-Utah), a subsidiary of AGFI, pursuant to a participation agreement.
Retail sales contracts are primarily closed-end accounts which consist of a
single purchase. Private label are open-end revolving accounts that can be
used for repeated purchases. Retail sales contracts are secured by the
real property or personal property giving rise to the contract and
generally have a maximum original term of 60 months. Private label are
secured by a purchase money security interest in the goods purchased and
generally require minimum monthly payments based on current balances.
In fourth quarter 1996, the Company decided to offer for sale $874.8
million of non-strategic, underperforming finance receivable portfolios,
consisting of $520.3 million of credit card and $354.5 million of private
label finance receivables. The Company reclassified these finance
receivables and $70.0 million of allowance for finance receivable losses to
assets held for sale on December 31, 1996. In June 1997, the Company sold
all of the assets held for sale (with a remaining balance of $658.1
million) and $81.4 million of other private label finance receivables. See
Note 10. of the Notes to Consolidated Financial Statements in Item 8. for
further information on the reclassification and subsequent sale of non-
strategic assets.
Prior to such sale, the Company purchased MasterCard and VISA credit card
receivables originated by AGFC-Utah pursuant to a participation agreement.
Credit cards were unsecured and required minimum monthly payments based on
current balances.
6
Item 1. Continued
Finance Receivables
All finance receivable data in this report (except as otherwise indicated)
is calculated on a net basis -- that is, after deduction of unearned
finance charges but before deduction of an allowance for finance receivable
losses.
Effective January 1, 1997, certain real estate loans having advances of
less than $10,000 and high loan-to-value ratios were reclassified from real
estate to non-real estate loans. From a servicing and collection
standpoint, these loans are administered more like non-real estate loans
than real estate loans. This reclassification affected $251.8 million of
loans at January 1, 1997.
The following table shows the amount, number, and average size of finance
receivables originated, renewed, and purchased during the period by type of
finance receivable:
Years Ended December 31,
1997 1996 1995
Amount (in thousands):
Real estate loans $1,542,498 $1,314,022 $1,260,673
Non-real estate loans 2,392,730 2,179,930 2,950,065
Retail sales contracts 1,163,867 1,009,482 1,492,393
Private label 255,485 336,550 624,212
Credit cards - 502,379 567,090
Total originated and renewed 5,354,580 5,342,363 6,894,433
Net purchased (transferred) (a) 600,174 945,193 (171,767)
Total originated, renewed,
and purchased $5,954,754 $6,287,556 $6,722,666
Number:
Real estate loans 58,136 65,647 72,562
Non-real estate loans 888,382 945,124 1,443,915
Retail sales contracts 811,958 772,365 1,240,157
Private label 137,361 201,888 433,165
Total 1,895,837 1,985,024 3,189,799
Average size (to nearest dollar):
Real estate loans $26,533 $20,016 $17,374
Non-real estate loans 2,693 2,307 2,043
Retail sales contracts 1,433 1,307 1,203
Private label 1,860 1,667 1,441
(a) See Note 4. of the Notes to Consolidated Financial Statements in
Item 8. for information on purchases and transfers of finance
receivables from affiliates.
7
Item 1. Continued
The following table shows the amount, number, and average size of finance
receivables at the end of the period by type of finance receivable:
December 31,
1997 1996 1995
Amount (in thousands):
Real estate loans $4,067,500 $3,652,106 $2,817,258
Non-real estate loans 2,502,051 2,459,660 2,694,369
Retail sales contracts 1,006,794 954,975 1,189,272
Private label 250,691 376,580 942,706
Credit cards - - 557,603
Total $7,827,036 $7,443,321 $8,201,208
Number:
Real estate loans 158,034 194,689 163,803
Non-real estate loans 1,107,869 1,214,791 1,426,394
Retail sales contracts 841,349 862,047 1,143,310
Private label 200,505 276,184 504,184
Credit cards - - 449,591
Total 2,307,757 2,547,711 3,687,282
Average size (to nearest dollar):
Real estate loans $25,738 $18,759 $17,199
Non-real estate loans 2,258 2,025 1,889
Retail sales contracts 1,197 1,108 1,040
Private label 1,250 1,364 1,870
Credit cards - - 1,240
Average Net Receivables and Yield
Finance charges on discounted finance receivables and interest on interest-
bearing finance receivables are recognized as revenue on the accrual basis
using the interest method. The accrual of revenue is suspended when the
fourth contractual payment becomes past due for loans and retail sales
contracts and when the sixth contractual payment becomes past due for
private label. For credit cards, the accrual of revenue was suspended when
the sixth contractual payment became past due. Extension fees and late
charges are recognized as revenue when received.
Nonrefundable points and fees on loans are recognized as revenue on the
accrual basis using the interest method over the lesser of the contractual
term or the estimated life based upon prepayment experience. If a loan
liquidates before amortization is completed, any unamortized fees are
recognized as revenue at the date of liquidation.
8
Item 1. Continued
The Company defers costs associated with the origination of certain finance
receivables. Deferred origination costs are included in finance
receivables and are amortized to revenue on the accrual basis using the
interest method over the lesser of the contractual term or the estimated
life based upon prepayment experience. If a finance receivable liquidates
before amortization is completed, any unamortized costs are charged to
revenue at the date of liquidation.
The following table shows average net receivables and yield by type of
finance receivable:
Years Ended December 31,
1997 1996 1995
(dollars in thousands)
Real estate loans:
Average net receivables $3,627,736 $3,044,966 $2,839,151
Yield 13.69% 14.80% 15.01%
Non-real estate loans:
Average net receivables $2,486,771 $2,487,112 $2,743,997
Yield 21.88% 22.31% 21.83%
Total loans:
Average net receivables $6,114,507 $5,532,078 $5,583,148
Yield 17.02% 18.18% 18.36%
Retail sales contracts:
Average net receivables $ 924,838 $1,033,800 $1,229,931
Yield 15.97% 16.88% 17.14%
Private label:
Average net receivables $ 301,557 $ 835,191 $ 949,979
Yield 14.92% 15.15% 15.35%
Total retail sales finance:
Average net receivables $1,226,395 $1,868,991 $2,179,910
Yield 15.71% 16.11% 16.36%
Credit cards:
Average net receivables $ - $ 529,100 $ 506,605
Yield - % 20.41% 21.28%
Total:
Average net receivables $7,340,902 $7,930,169 $8,269,663
Yield 16.80% 17.84% 18.01%
9
Item 1. Continued
Finance Receivable Credit Quality Information
The Company's policy is to charge off each month loan accounts, except
those secured by real estate, on which little or no collections were made
in the prior six-month period. Retail sales contracts are charged off when
six installments are past due, and private label accounts are charged off
when 180 days past due. Credit card accounts were charged off when 180
days past due. In the case of loans secured by real estate, foreclosure
proceedings are instituted when four monthly installments are past due.
When foreclosure is completed and the Company has obtained title to the
property, the real estate is established as an asset valued at fair value,
and any loan amount in excess of that value is charged off. The charge-off
period is occasionally extended for individual accounts when, in the
opinion of management, such treatment is warranted.
The following table shows finance receivable loss experience by type of
finance receivable:
Years Ended December 31,
1997 1996 1995
(dollars in thousands)
Real estate loans:
Net charge-offs $ 31,849 $ 36,352 $ 23,240
Charge-off ratio .88% 1.21% 0.82%
Non-real estate loans:
Net charge-offs $178,644 $223,580 $165,087
Charge-off ratio 7.17% 8.96% 6.11%
Total loans:
Net charge-offs $210,493 $259,932 $188,327
Charge-off ratio 3.45% 4.72% 3.38%
Retail sales contracts:
Net charge-offs $ 36,897 $ 52,939 $ 35,392
Charge-off ratio 4.00% 5.07% 2.89%
Private label:
Net charge-offs $ 17,563 $ 72,512 $ 51,115
Charge-off ratio 5.76% 8.59% 5.39%
Total retail sales finance:
Net charge-offs $ 54,460 $125,451 $ 86,507
Charge-off ratio 4.44% 6.65% 3.98%
Credit cards:
Net charge-offs $ - $ 51,386 $ 36,206
Charge-off ratio - % 9.68% 7.19%
Total:
Net charge-offs $264,953 $436,769 $311,040
Charge-off ratio 3.62% 5.51% 3.77%
10
Item 1. Continued
The following table shows delinquency (finance receivables 60 days or more
past due including unearned finance charges and excluding deferred
origination costs, a fair value adjustment on finance receivables, and
accrued interest) based on contract terms in effect at the respective dates
by type of finance receivable:
December 31,
1997 1996 1995
(dollars in thousands)
Real estate loans $107,066 $ 83,239 $ 59,517
% of related receivables 2.59% 2.23% 2.01%
Non-real estate loans $160,700 $179,719 $197,662
% of related receivables 5.71% 6.43% 6.37%
Total loans $267,766 $262,958 $257,179
% of related receivables 3.85% 4.03% 4.24%
Retail sales contracts $ 27,906 $ 33,675 $ 43,171
% of related receivables 2.30% 2.90% 3.01%
Private label $ 8,024 $ 12,567 $ 48,430
% of related receivables 3.17% 3.32% 4.77%
Total retail sales finance $ 35,930 $ 46,242 $ 91,601
% of related receivables 2.45% 3.01% 3.76%
Credit cards $ - $ - $ 28,520
% of related receivables - % - % 4.85%
Total $303,696 $309,200 $377,300
% of related receivables 3.61% 3.84% 4.15%
The Company maintains the allowance for finance receivable losses at a
level based on periodic evaluation of the finance receivable portfolio and
reflects an amount that, in management's opinion, is adequate to absorb
anticipated losses in the existing portfolio. In evaluating the portfolio,
management considers numerous factors including current economic
conditions, prior finance receivable loss and delinquency experience, the
composition of the finance receivable portfolio, and an estimate of
anticipated finance receivable losses.
11
Item 1. Continued
The following table shows changes in the allowance for finance receivable
losses:
At or for the
Years Ended December 31,
1997 1996 1995
(dollars in thousands)
Balance at beginning of year $385,272 $482,243 $225,922
Provision for finance receivable
losses 242,453 409,646 573,698
Allowance reclassified to assets
held for sale - (70,000) -
Allowance related to net acquired
(transferred) receivables 354 152 (6,337)
Charge-offs, net of recoveries (264,953) (436,769) (311,040)
Balance at end of year $363,126 $385,272 $482,243
Allowance ratio 4.64% 5.18% 5.88%
See Management's Discussion and Analysis in Item 7. for further information
on finance receivable loss and delinquency experience and the related
allowance for finance receivable losses.
Geographic Distribution
Geographic diversification of finance receivables reduces the concentration
of credit risk associated with a recession in any one region. The largest
concentrations of net finance receivables were as follows:
December 31,
1997 1996 1995
Amount Percent Amount Percent Amount Percent
(dollars in thousands)
California $ 842,690 10.77% $ 697,734 9.37% $ 886,974 10.82%
N. Carolina 696,261 8.90 672,021 9.03 737,630 8.99
Florida 518,837 6.63 534,936 7.19 626,519 7.64
Ohio 465,489 5.95 454,290 6.10 439,522 5.36
Indiana 438,369 5.60 397,698 5.34 454,892 5.55
Illinois 434,029 5.55 452,508 6.08 489,840 5.97
Virginia 356,928 4.56 350,349 4.71 392,146 4.78
Georgia 310,485 3.97 312,377 4.20 372,963 4.55
Other 3,763,948 48.07 3,571,408 47.98 3,800,722 46.34
$7,827,036 100.00% $7,443,321 100.00% $8,201,208 100.00%
12
Item 1. Continued
Sources of Funds
The Company funds its consumer finance operations principally through net
cash flows from operating activities, issuances of long-term debt, short-
term borrowings in the commercial paper market, and borrowings from banks.
Average Borrowings and Borrowing Cost
The following table shows average borrowings and interest expense as a
percentage of average borrowings by type of debt:
Years Ended December 31,
1997 1996 1995
(dollars in thousands)
Long-term debt:
Average borrowings $4,022,819 $4,680,197 $4,840,860
Borrowing cost 7.34% 7.28% 7.27%
Short-term debt:
Average borrowings $2,926,202 $2,309,548 $2,369,063
Borrowing cost 6.12% 6.13% 6.54%
Total:
Average borrowings $6,949,021 $6,989,745 $7,209,923
Borrowing cost 6.82% 6.90% 7.03%
The Company's use of interest rate swap agreements, which are included in
short-term borrowing cost above, is described in Note 13. of the Notes to
Consolidated Financial Statements in Item 8.
Contractual Maturities
Contractual maturities of net finance receivables and debt at December 31,
1997 were as follows:
Net Finance
Receivables Debt
(dollars in thousands)
Due in:
1998 $2,324,819 $3,967,848
1999 1,436,886 562,089
2000 906,835 1,273,033
2001 504,978 39,907
2002 315,324 546,503
2003 and thereafter 2,338,194 709,777
Total $7,827,036 $7,099,157
See Note 5. of the Notes to Consolidated Financial Statements in Item 8.
for further information on principal cash collections of finance
receivables.
13
Item 1. Continued
INSURANCE OPERATIONS
Merit is a life and health insurance company domiciled in Indiana and
licensed in 43 states, the District of Columbia, and the U.S. Virgin
Islands. Merit writes or assumes (through affiliated and non-affiliated
insurance companies) credit life, credit accident and health, and non-
credit insurance coverages.
Yosemite is a property and casualty insurance company domiciled in
California and licensed in 42 states and principally underwrites credit-
related property and casualty coverages.
Both Merit and Yosemite market their products through the consumer finance
network of the Company. The credit life insurance policies insure the life
of the borrower in an amount typically equal to the unpaid balance of the
obligation and provide for payment in full to the lender of the insured's
obligation in the event of death. The credit accident and health insurance
policies provide for the payment to the lender of the installments on the
insured's obligation coming due during a period of disability due to
illness or injury. The credit-related property and casualty insurance is
written to protect property pledged as security for the obligation and to
provide for the payment to the lender of the installments on the insured's
obligation coming due during a period of unemployment. The purchase by the
borrower of credit life, credit accident and health, and credit property
and casualty insurance is voluntary with the exception of creditor placed
property damage coverage for automobiles, large equipment, dwellings, and
real estate pledged as collateral. In these instances, property damage
coverage is provided under the terms of the lending agreement if the
borrower does not provide evidence of coverage with another insurance
carrier. The non-credit insurance policies are primarily ordinary life
level term coverage. The purchase of this coverage is voluntary. Premiums
for insurance products are most often financed as part of the insured's
obligation to the lender but may be paid in cash by the borrower.
Merit and Yosemite have from time to time entered into reinsurance
agreements with other insurance companies, including certain other American
General subsidiaries, for assumptions of various annuities and non-credit,
group, credit life, credit accident and health, and credit property and
casualty insurance on a coinsurance basis. The reserves attributable to
this business fluctuate over time and in certain instances are subject to
recapture by the ceding company. At December 31, 1997, reserves on the
books of Merit and Yosemite attributable to these reinsurance agreements
totaled $109.2 million.
14
Item 1. Continued
The following tables show information concerning the insurance operations:
Life Insurance in Force December 31,
1997 1996 1995
(dollars in thousands)
Credit life $2,387,084 $2,629,019 $3,053,300
Non-credit life 3,910,534 3,936,856 3,564,214
Total $6,297,618 $6,565,875 $6,617,514
Premiums Earned Years Ended December 31,
1997 1996 1995
(dollars in thousands)
Credit insurance premiums earned
in connection with consumer
finance operations:
Credit life $ 33,269 $ 39,005 $ 44,682
Credit accident and health 45,687 52,379 59,442
Property 54,292 57,895 51,438
Other insurance premiums earned:
Non-credit life 46,190 47,325 50,116
Premiums assumed under
coinsurance agreements 5,177 4,750 11,006
Total $184,615 $201,354 $216,684
Premiums Written Years Ended December 31,
1997 1996 1995
(dollars in thousands)
Credit insurance premiums
written in connection with
consumer finance operations:
Credit life $ 28,057 $ 28,864 $ 44,086
Credit accident and health 39,401 39,217 56,175
Property 47,029 52,230 65,059
Other insurance premiums written:
Non-credit life 46,190 47,325 50,116
Premiums assumed under
coinsurance agreements 5,177 4,750 11,006
Total $165,854 $172,386 $226,442
15
Item 1. Continued
Investments and Investment Results
The following table shows the investment results of the insurance
operations:
Years Ended December 31,
1997 1996 1995
(dollars in thousands)
Net investment revenue (a) $ 67,837 $ 64,860 $ 62,880
Average invested assets (b) $924,411 $885,741 $817,254
Adjusted portfolio yield (c) 8.07% 8.07% 8.41%
Net realized gains (losses)
on investments (d) $ 1,071 $ (909) $ 876
(a) Net investment revenue is after deduction of investment expense but
before net realized gains or losses on investments and provision for
income taxes.
(b) Average invested assets excludes the effect of Statement of Financial
Accounting Standards (SFAS) 115.
(c) Adjusted portfolio yield is calculated based upon the definitions of
net investment revenue and average invested assets listed in (a) and
(b) above and also includes an adjustment for tax-exempt investments.
(d) Includes net realized gains or losses on investment securities and
other invested assets before provision for income taxes.
See Note 7. of the Notes to Consolidated Financial Statements in Item 8.
for information regarding investment securities for all operations of the
Company.
REGULATION
Consumer Finance
Various state laws regulate the consumer lending and retail sales financing
businesses. The degree and nature of such regulation varies from state to
state. The laws under which a substantial amount of the Company's business
is conducted provide for state licensing of lenders; impose maximum term,
amount, interest rate, and other charge limitations; and enumerate whether
and under what circumstances insurance and other ancillary products may be
sold in connection with a lending transaction. Certain of these laws
prohibit the taking of liens on real estate except liens resulting from
judgments.
16
Item 1. Continued
The Company also is subject to various federal regulations, including the
Federal Consumer Credit Protection Act (governing disclosure of applicable
charges and other finance receivable terms), the Equal Credit Opportunity
Act (prohibiting discrimination against credit-worthy applicants), the Fair
Credit Reporting Act (governing the accuracy and use of credit bureau
reports), and certain Federal Trade Commission rules.
Insurance
State authorities regulate and supervise the Company's insurance
subsidiaries. The extent of such regulation varies but relates primarily
to conduct of business, types of products offered, standards of solvency,
payment of dividends, licensing, deposits of securities for the benefit of
policyholders, the approval of policy forms and premium rates, periodic
examination of the affairs of insurers, form and content of required
financial reports and establishment of reserves required to be maintained
for unearned premiums, losses, and other purposes. Substantially all of
the states in which the Company operates regulate the rates of premiums
charged for credit life and credit accident and health insurance. State
insurance laws and regulations also prescribe the nature, quality and
percentage of various types of investments which the Company's insurance
subsidiaries may make.
COMPETITION
Consumer Finance
The consumer finance industry is highly competitive. The Company competes
with other consumer finance companies, industrial banks, industrial loan
companies, commercial banks, sales finance companies, savings and loan
associations, credit unions, mutual or cooperative agencies, and others.
See Competitive Factors in Item 7. for more information.
Insurance
The Company's insurance operations are primarily supplementary to the
consumer finance operations. As such, competition for the insurance
operations is relatively limited.
17
Item 2. Properties.
The Company's investment in real estate and tangible property is not
significant in relation to its total assets due to the nature of its
business. AGFI and certain of its subsidiaries own real estate on which
AGFC and other affiliates conduct business. The Company generally conducts
branch office operations in leased premises. Lease terms ordinarily range
from three to five years.
The Company's exposure to environmental regulation arises from its
ownership of such properties and properties obtained through foreclosure.
The Company monitors properties for compliance with federal and local
environmental guidelines. The Company estimates that potential costs
related to any environmental clean-up are immaterial.
Item 3. Legal Proceedings.
California v. Ochoa
In March 1994, a subsidiary of AGFI and a subsidiary of AGFC were named as
defendants in a lawsuit, The People of the State of California
("California") V. Luis Ochoa, Skeeters Automotive, Morris Plan, Creditway
of America, Inc., and American General Finance, filed in the Superior Court
of California, County of San Joaquin, Case No. 271130. California is
seeking injunctive relief, a civil penalty of not less than $5,000 per day
or not less than $250,000 for violation of its Health and Safety Code in
connection with the failure to register and remove underground storage
tanks on property acquired through a foreclosure proceeding by a subsidiary
of AGFI, and a civil penalty of $2,500 for each act of unfair competition
prohibited by its Business and Professions Code, but not less than
$250,000, plus costs. The Company believes that the total amounts that
would ultimately be paid, if any, arising from this environmental claim
would have no material effect on the Company's consolidated results of
operations and financial position.
Other
AGFC and certain of its subsidiaries are parties to various other lawsuits
and proceedings arising in the ordinary course of business. Many of these
lawsuits and proceedings arise in jurisdictions, such as Alabama, that
permit damage awards disproportionate to the actual economic damages
incurred. Based upon information presently available, the Company believes
that the total amounts that will ultimately be paid, if any, arising from
these lawsuits and proceedings will not have a material adverse effect on
the Company's consolidated results of operations and financial position.
However, it should be noted that the frequency of large damage awards,
including large punitive damage awards, that bear little or no relation to
actual economic damages incurred by plaintiffs in jurisdictions like
Alabama continues to increase and creates the potential for an
unpredictable judgment in any given suit.
18
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters.
No trading market exists for AGFC's common stock because AGFI owns all
AGFC's common stock. AGFC declared the following cash dividends on its
common stock:
Quarter Ended 1997 1996
(dollars in thousands)
March 31 $ - $ 29,007
June 30 115,317 35,358
September 30 21,820 50,189
December 31 - 33,020
$137,137 $147,574
See Management's Discussion and Analysis in Item 7., as well as Note 17. of
Notes to Consolidated Financial Statements in Item 8., with respect to
limitations on the ability of AGFC and its subsidiaries to pay dividends.
Item 6. Selected Financial Data.
The following selected financial data are taken from the Company's
consolidated financial statements. The data should be read in conjunction
with the consolidated financial statements and related notes in Item 8.,
Management's Discussion and Analysis in Item 7., and other financial
information in Item 1.
At or for the Years Ended December 31,
1997 1996 1995 1994 1993(a)
(dollars in thousands)
Total revenues $1,511,943 $1,708,673 $1,789,184 $1,388,075 $1,212,917
Net income (b) 137,071 50,959 92,293 243,300 189,628
Total assets 9,240,605 9,502,589 9,485,477 8,918,698 7,504,798
Long-term debt 3,941,486 4,416,637 4,935,894 4,265,226 3,965,772
(a) The Company adopted three new accounting standards through cumulative
adjustments as of January 1, 1993, resulting in a one-time reduction
of net income of $12.6 million.
(b) Per share information is not included because all of AGFC's common
stock is owned by AGFI.
19
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
Management's Discussion and Analysis of Financial Condition and Results of
Operations should be read in conjunction with the consolidated financial
statements and related notes in Item 8. and other financial information in
Item 1.
LIQUIDITY AND CAPITAL RESOURCES
Overview
The Company's sources of funds include operations, issuances of fixed-rate
and floating-rate debt, borrowings under credit facilities, and the sale of
securitized finance receivables. Management believes that the overall
sources of liquidity available to the Company will continue to be
sufficient to satisfy its foreseeable financial obligations and operational
requirements.
Liquidity
Operating cash flow, which includes net income adjusted for non-cash
revenues and expenses, totaled $514.3 million in 1997 compared to $589.9
million in 1996 and $638.1 million in 1995. Operating cash flow combined
with the proceeds from the sale of non-strategic assets, the net
collections on assets held for sale, and capital contributions from AGFI
generated cash flow of $1.3 billion for 1997. This cash flow was used
principally to finance the net originations and purchases of finance
receivables and the net purchases and transfers of assets from affiliates
of $685.9 million, to fund the net repayments of debt of $336.0 million, to
pay dividends to AGFI of $137.1 million, and to repurchase $100.0 million
of securitized finance receivables.
Operating cash flow combined with the net proceeds of increased debt, the
change in notes receivable from parent, the proceeds of securitized finance
receivables sold in 1995, and a 1995 capital contribution from AGFI,
generated cash flow of $766.7 million in 1996 compared to $1.2 billion in
1995. These cash flows were used principally to fund the net originations
and purchases of finance receivables and the net purchases and transfers of
assets from affiliates of $533.7 million in 1996 and $890.9 million in 1995
and to pay dividends to AGFI of $147.6 million in 1996 and $108.5 million
in 1995.
Dividends are typically paid to manage the Company's leverage to a target
of 6.5 to 1 of debt to tangible equity (equity less goodwill and net
unrealized gains or losses on fixed-maturity investment securities). The
debt to tangible equity ratio at December 31, 1997 was 6.54 to 1. Certain
of AGFC's financing agreements effectively limit the amount of dividends
AGFC may pay; however, management does not expect those limits to affect
AGFC's ability to maintain the Company's targeted leverage. See Note 17.
of the Notes to Consolidated Financial Statements in Item 8. for
information on dividend restrictions.
20
Item 7. Continued
Capital Resources
The Company's capital requirements vary directly with the level of net
finance receivables. The targeted mix of capital between debt and equity
is based primarily upon maintaining leverage that supports cost-effective
funding. At December 31, 1997, the Company's capital totaled $8.5 billion,
consisting of $7.1 billion of debt and $1.4 billion of equity, compared to
$8.8 billion at December 31, 1996, consisting of $7.4 billion of debt and
$1.4 billion of equity.
The Company issues a combination of fixed-rate debt, principally long-term,
and floating-rate debt, principally short-term. AGFC and one of its
subsidiaries sell commercial paper notes with maturities ranging from 1 to
270 days directly to banks, insurance companies, corporations, and other
institutional investors. AGFC may also offer medium-term notes with
original maturities of nine months or longer to certain institutional
investors. AGFC obtains the remainder of its funds primarily through
underwritten public debt offerings with maturities generally ranging from
three to ten years.
Credit Ratings
AGFC's strong debt and commercial paper ratings enhance its access to
capital markets. On February 23, 1998, AGFC's ratings were as follows:
Long-term Debt Commercial Paper
Duff & Phelps A+ (Strong) D-1+ (Highest)
Fitch - F-1+ (Highest)
Moody's A2 (Strong) P-1 (Highest)
Standard & Poor's A+ (Strong) A-1 (Strong)
Credit Facilities
The Company maintains credit facilities to support the issuance of
commercial paper and to provide an additional source of funds for operating
requirements. At December 31, 1997, credit facilities, including
facilities shared with American General and AGFI, totaled $4.3 billion,
with remaining availability to the Company of $4.3 billion. See Note 12.
of the Notes to Consolidated Financial Statements in Item 8. for additional
information on credit facilities.
Securitization
In April 1997, the Company repurchased all $100.0 million of the private
label and credit card receivables that had previously been sold through
securitization. No gain or loss resulted from the repurchase transaction.
Of the $100.0 million repurchased, approximately $70.0 million was
classified as assets held for sale in April 1997. The repurchase
facilitated the sale of the credit card portfolio included in assets held
for sale and sold in June 1997.
21
Item 7. Continued
ANALYSIS OF OPERATING RESULTS
Net Income
Net income increased $86.1 million, or 169%, for 1997 and decreased $41.3
million, or 45%, for 1996 when compared to the respective previous year.
Net income has fluctuated over the past two years due to the decline in the
Company's finance receivable credit quality beginning in 1995 and
management's related actions to address credit quality. The Company's
strategy in prior years of emphasizing higher-yielding finance receivables,
which are characterized by higher credit risk, combined with the decline in
consumer credit quality throughout the industry, resulted in the Company's
delinquencies and net charge-offs increasing to higher than anticipated
levels beginning in the third quarter of 1995. Due to these increases in
delinquencies and net charge-offs, management initiated a comprehensive
review of the Company in the fourth quarter of 1995. This review consisted
of extensive internal analysis, together with finance receivable loss
development projections supplied by outside credit consultants. The
results of the analysis indicated a need for an increase in the allowance
for finance receivable losses. Accordingly, the Company recorded a $216.0
million increase in the allowance for finance receivable losses in fourth
quarter 1995.
In addition, the Company adopted an action program for improving credit
quality that included raising underwriting standards, expanding the use of
credit scoring, slowing branch expansion, stressing collections, improving
branch office training, and rebalancing the finance receivable portfolio
credit risk. Strategies for rebalancing the portfolio credit risk included
slowing growth, de-emphasizing some higher risk portfolios, and increasing
the proportion of real estate secured receivables.
To increase its focus on core operations, the Company decided in the fourth
quarter of 1996 to offer for sale $874.8 million of non-strategic,
underperforming finance receivable portfolios, consisting of $520.3 million
of credit card and $354.5 million of private label finance receivables.
The Company reclassified these finance receivables and $70 million of
allowance for finance receivable losses to assets held for sale on December
31, 1996. The Company hired an outside advisor to market the portfolios.
Based on negotiations with prospective purchasers subsequent to year end
1996, the Company determined that an aftertax charge to operations of $88.1
million was necessary to reduce the carrying amount of the assets held for
sale to net realizable value. This charge was recorded in fourth quarter
1996. In June 1997, the Company sold all of the assets held for sale (with
a remaining balance of $658.1 million) and $81.4 million of other private
label finance receivables. In connection with these sales, the Company
took an aftertax charge of $27.0 million in second quarter 1997. This
additional loss primarily resulted from establishing a liability for
estimated future payments to the purchaser of the credit card portfolio
under a five-year loss sharing arrangement. See Note 10. of the Notes to
Consolidated Financial Statements in Item 8. for further information on the
reclassification and subsequent sale of non-strategic assets.
22
Item 7. Continued
Net finance receivables totaled $7.8 billion at December 31, 1997, an
increase of $383.7 million from December 31, 1996 primarily due to real
estate loan growth during 1997, partially offset by the liquidation of
underperforming receivables. At December 31, 1997, real estate loans
accounted for 52% of total net finance receivables compared to 49% at
December 31, 1996.
Results of the action program to improve credit quality became evident in
1997. Although yield decreased 104 basis points in 1997 when compared to
1996, this was offset by a 189 basis point improvement in the charge-off
ratio. The delinquency ratio also improved to 3.61% at December 31, 1997
from 3.84% a year earlier.
Factors which specifically affected the Company's operating results are as
follows:
Finance Charges
Finance charge revenues decreased $181.2 million, or 13%, for 1997 and
$74.9 million, or 5%, for 1996 when compared to the respective previous
year due to decreases in both average net receivables and yield. The
exclusion of finance charges related to the assets held for sale for 1997
totaled $75.0 million.
Average net receivables decreased $589.3 million, or 7%, during 1997 when
compared to 1996 primarily due to the action program for improving credit
quality, which included the reclassification and sales of certain finance
receivables and the liquidation of underperforming receivables, partially
offset by growth during 1997, primarily in real estate loans. Average net
receivables decreased $339.5 million, or 4%, during 1996 when compared to
1995 primarily due to the AGFC dividend of two subsidiaries operating in
Alabama to AGFI on December 31, 1995 and the action program to improve
credit quality. Finance receivables originated and renewed decreased
during 1996 when compared to 1995. This was partially offset by an
increase in finance receivables purchased, primarily real estate loans.
Yield decreased 104 basis points during 1997 and 17 basis points during
1996 when compared to the respective previous year primarily due to the
action program to improve credit quality, including increasing the
proportion of finance receivables that are real estate loans, which
generally have lower yields.
Insurance Revenues
Insurance revenues decreased $17.6 million, or 9%, for 1997 and $16.1
million, or 7%, for 1996 when compared to the respective previous year.
The decreases in insurance revenues for 1997 and 1996 when compared to the
respective previous year were primarily due to decreases in earned
premiums. Earned premiums decreased primarily due to a decrease in related
loan volume during 1996 resulting from the action program to improve credit
quality.
23
Item 7. Continued
Other Revenues
Other revenues increased $2.1 million, or 2%, for 1997 and $10.5 million,
or 14%, for 1996 when compared to the respective previous year.
The increase in other revenues for 1997 when compared to 1996 was primarily
due to an increase in investment revenue, partially offset by a decrease in
interest revenue on notes receivable from parent. Investment revenue
increased for 1997 when compared to 1996 primarily due to growth in average
invested assets for the insurance operations of $38.7 million and realized
gains on investments of $1.1 million for 1997 compared to $.9 million of
realized losses on investments for 1996. Adjusted portfolio yield remained
at near the same level for 1997 when compared to 1996.
The increase in other revenues for 1996 when compared to 1995 was primarily
due to an increase in interest revenue on notes receivable from parent
resulting from the AGFC dividend of the common stock of two subsidiaries
operating in Alabama to AGFI on December 31, 1995. AGFI supports the
transferred assets with funding provided by AGFC through an intercompany
note. The increase in other revenues for 1996 also reflected a slight
increase in investment revenue on the invested assets for the insurance
operations primarily due to growth in average invested assets of $68.5
million, partially offset by realized losses on investments of $.9 million
for 1996 compared to $.9 million of realized gains on investments for 1995
and a decrease in adjusted portfolio yield of 34 basis points. The
increase in other revenues for 1996 was partially offset by the gain
recorded in 1995 for the securitized finance receivables sold.
Interest Expense
Interest expense decreased $31.4 million, or 7%, for 1997 and $24.3
million, or 5%, for 1996 when compared to the respective previous year.
The decrease in interest expense for 1997 when compared to 1996 was due to
the exclusion of interest expense related to the assets held for sale
totaling $23.2 million, the decline in borrowing cost, and a decrease in
average borrowings. Borrowing cost decreased 8 basis points for 1997 when
compared to 1996 primarily due to an increased proportion of short-term
debt at lower rates. Average borrowings decreased $40.7 million, or 1%,
for 1997 when compared to 1996 primarily due to the sales of certain
finance receivables during second quarter 1997, substantially offset by
growth in real estate loans during 1997.
The decrease in interest expense for 1996 when compared to 1995 was due to
decreases in average borrowings and borrowing cost. Average borrowings
decreased $220.2 million, or 3%, for 1996 when compared to 1995 primarily
due to the decrease in average net receivables. The borrowing cost
decreased 13 basis points for 1996 when compared to 1995 due to a decrease
in short-term borrowing cost, with long-term borrowing cost remaining near
the same level.
24
Item 7. Continued
Operating Expenses
Operating expenses decreased $30.4 million, or 6%, for 1997 and increased
$30.8 million, or 7%, for 1996 when compared to the respective previous
year.
The decrease in operating expenses for 1997 when compared to 1996 was
primarily due to the exclusion of expenses to service the assets held for
sale totaling $18.2 million, certain non-recurring operating expenses
associated with discontinued initiatives that negatively impacted the
financial results for 1996 by $8.9 million, and the action program to
improve credit quality and reduce expenses.
The increase in operating expenses for 1996 when compared to 1995 was
primarily due to the decrease in deferral of finance receivable origination
costs, growth in the business that occurred in the first three quarters of
1995 and in 1994, certain non-recurring operating expenses associated with
discontinued initiatives, and increased collection efforts on the higher
level of delinquent finance receivables during 1996. The increase in
operating expenses for 1996 was partially offset by the dividend of the
subsidiaries operating in Alabama and the action program to improve credit
quality and reduce expenses.
The action program implemented in fourth quarter 1995 contributed to a
workforce reduction of approximately 800 positions during 1997 and 700
positions during 1996 and a net decrease of 32 branch offices during 1997
and 19 branch offices during 1996.
Provision for Finance Receivable Losses
Provision for finance receivable losses decreased $167.2 million, or 41%,
for 1997 and $164.1 million, or 29%, for 1996 when compared to the
respective previous year.
The decrease in provision for finance receivable losses for 1997 when
compared to 1996 was primarily due to a decrease in net charge-offs
totaling $171.8 million. The decrease in net charge-offs was primarily due
to reductions in charge-off levels for the core branch network and also
reflected the exclusion of net charge-offs related to the assets held for
sale totaling $58.6 million.
The decrease in provision for finance receivable losses for 1996 when
compared to 1995 was due to the large provision for finance receivable
losses required in fourth quarter 1995 to increase the allowance for
finance receivable losses by $216.0 million as previously discussed.
Net charge-offs from finance receivables for 1997 decreased to $265.0
million from $436.8 million for 1996 and $311.0 million for 1995. The
charge-off ratio for 1997 decreased to 3.62% compared to 5.51% for 1996 and
3.77% for 1995. Excluding the portfolios held for sale, the charge-off
ratio was 4.72% for 1996.
At December 31, 1997, delinquencies were $303.7 million compared to $309.2
million at the end of 1996 and $377.3 million at the end of 1995. The
25
Item 7. Continued
delinquency ratio at December 31, 1997 decreased to 3.61% compared to 3.84%
at the end of 1996 and 4.15% at the end of 1995. The decrease in the
delinquency ratio for 1996 when compared to 1995 was primarily due to the
reclassification of certain finance receivables to assets held for sale.
The allowance for finance receivable losses decreased to $363.1 million at
December 31, 1997 from $385.3 million at December 31, 1996. The allowance
ratio at December 31, 1997 was 4.64% compared to 5.18% at December 31,
1996. The decrease in the allowance ratio for 1997 reflects the results of
the action program to improve credit quality, including the increased
proportion of real estate loans. The Company maintains the allowance for
finance receivable losses at a level based on periodic evaluation of the
finance receivable portfolio and reflects an amount that, in management's
opinion, is adequate to absorb anticipated losses in the existing
portfolio.
Loss on Non-strategic Assets
In conjunction with the action program to improve credit quality, the
Company decided in fourth quarter 1996 to offer for sale credit card and
certain private label finance receivables. Effective December 31, 1996,
the Company reclassified these finance receivables and an associated
allowance for finance receivable losses to assets held for sale and
recognized a loss. In June 1997, the Company sold all of the assets held
for sale and other private label finance receivables and recorded an
additional loss. See Analysis of Operating Results - Net Income and Note
10. of the Notes to Consolidated Financial Statements in Item 8. for
further information on the reclassification and subsequent sale of non-
strategic assets.
Insurance Losses and Loss Adjustment Expenses
Insurance losses and loss adjustment expenses decreased $9.4 million, or
9%, for 1997 and $14.0 million, or 12%, for 1996 when compared to the
respective previous year due to decreases in provision for future benefits
and in claims paid.
Provision for future benefits decreased $3.7 million for 1997 and $9.2
million for 1996 due to reduced sales of non-credit insurance products.
Claims decreased $5.7 million for 1997 and $4.8 million for 1996 primarily
due to favorable loss experience on credit insurance and decreased
business.
Provision for Income Taxes
Provision for income taxes increased $50.4 million, or 176%, for 1997 and
decreased $4.7 million, or 14%, for 1996 when compared to the respective
previous year.
The increase in the provision for income taxes for 1997 when compared to
1996 was primarily due to higher taxable income.
26
Item 7. Continued
The decrease in the provision for income taxes for 1996 when compared to
1995 was primarily due to lower taxable income, partially offset by a non-
recurring state income tax adjustment recorded in 1995. During 1995, the
Company recognized net operating loss (NOL) carryforwards with respect to
one state resulting from the state's audit of a return and the state's
acceptance of an amended return. The Company recognized a net reduction of
$16.6 million in 1995 state income tax expense primarily related to these
carryforwards. At December 31, 1997 and 1996, the state NOL carryforwards
remaining were $627.9 million and $634.7 million, respectively, which
expire in the years 2005 and 2006.
ANALYSIS OF FINANCIAL CONDITION
At December 31, 1997, the Company's assets were distributed as follows:
80.77% in net finance receivables, less allowance for finance receivable
losses; 10.05% in investment securities; 3.44% in other assets; 2.75% in
acquisition-related goodwill; 2.00% in notes receivable from parent; and
.99% in cash and cash equivalents.
Asset Quality
The Company believes that its geographic diversification reduces the risk
associated with a recession in any one region. In addition, 94% of the
finance receivables at December 31, 1997 were secured by real property or
personal property.
The Company's allowance ratio decrease for 1997 reflects the results of the
action program to improve credit quality, including the increased
proportion of real estate loans. See Analysis of Operating Results for
further information on allowance ratio, delinquency ratio, and charge-off
ratio. While finance receivables have some exposure to further economic
uncertainty, management believes that in the present environment, the
allowance for finance receivable losses is adequate to absorb anticipated
losses in the existing portfolio.
Investment securities principally represent the investment portfolio of the
Company's insurance operations. The investment strategy is to optimize
after-tax returns on invested assets, subject to the constraints of safety,
liquidity, diversification, and regulation.
The largest intangible asset is acquisition-related goodwill which is
charged to expense in equal amounts over 20 to 40 years. See Note 2. of
the Notes to Consolidated Financial Statements in Item 8. for further
information on goodwill.
Operating Requirements
The Company's principal operating requirements for cash include funding
finance receivables, payment of interest, payment of operating expenses and
income taxes, and contractual obligations to policyholders. The principal
sources of cash include collections of finance receivables and finance
charges, proceeds from the issuances of fixed-rate and floating-rate debt,
27
Item 7. Continued
and borrowings under credit facilities. The overall sources of cash
available to the Company are expected to be more than sufficient to satisfy
operating requirements in 1998.
Capital Requirements
The Company expects to finance long-term debt repayments and maturities
plus normal refinancing of short-term debt and any funds required to
support growth in finance receivables through the issuance of long-term and
short-term debt and surplus operating cash.
Asset/Liability Management
The Company manages anticipated cash flows of its assets and liabilities in
an effort to reduce the risk associated with unfavorable changes in
interest rates. The Company's mix of fixed-rate and floating-rate debt is
determined by management based, in part, on the nature of the assets being
supported. The Company limits its exposure to market interest rate
increases by fixing interest rates that it pays for term periods. The
primary means by which the Company accomplishes this is through the
issuance of fixed-rate debt. To supplement fixed-rate debt issuances, AGFC
also uses interest rate swap agreements to synthetically create fixed-rate
debt by altering the nature of floating-rate funding, thereby limiting its
exposure to adverse interest rate movements. In addition, AGFC uses
treasury rate lock agreements to hedge against the risk of rising interest
rates on anticipated long-term debt issuances.
BUSINESS ENVIRONMENT FACTORS
The Company operates in a business environment in which effective and
efficient managerial performance, and a prudent lending and investment
strategy are essential. The three most relevant environmental factors
affecting the Company are economic, regulatory, and competitive.
Economic Factors
The three key economic factors that affect the results of the Company are
interest rates, inflation, and recession/recovery.
Interest Rates. Interest rates in the United States generally remained at
nearly the same levels in 1997 when compared to 1996 and decreased in 1996
from 1995. The Company's finance receivables, investment securities, long-
term debt, and short-term debt react over varying periods of time to
movements in interest rates. See Analysis of Operating Results for further
information on the changes in yield, adjusted portfolio yield, and
borrowing cost.
The Company believes that it is difficult to assess or predict the overall
effects of any given change in interest rates due to the following
uncertainties: 1) whether such a movement results in a convergence,
divergence, or tandem movement in the long-term/short-term yield curves,
28
Item 7. Continued
2) market opportunities for both investment and funding alternatives that
may or may not exist at the time such a movement occurs, and 3) the level
of interest rates relative to the finance receivable portfolio yield, the
return on invested assets, and the borrowing cost when such a movement in
interest rates occurs.
Inflation. Inflation and inflationary expectations are factors that to
some extent affect the Company's revenue and expenses and are factors
implicit in interest rates. During each of the last three years, the
Company operated in a low inflation environment.
Revenue generated from interest rates charged on most of the Company's
finance receivable types is relatively insensitive to movements in interest
rate levels caused by inflation. However, real estate loans are
particularly subject to refinancing when market interest rates trend lower.
Net investment revenue and realized gains or losses on the Company's
investment securities, and borrowing cost on the Company's long-term and
short-term debt, are relatively sensitive over varying periods of time to
movements in general interest rate levels caused by inflation. The
Company's operating expenses are no more or less sensitive to the effects
of inflation than would be experienced by businesses in general.
Economic Cycle. The Company believes that its relatively conservative
lending policies, its conservative insurance underwriting and investment
policies, and its geographic diversification mitigate the potential impact
of defaults on finance receivables and investments in any downturn of the
U.S. economic cycle.
During 1997, the rate of increase in U.S. consumer debt moderated from the
rates of increase during 1996 and 1995. Lenders are beginning to exercise
restraint in extending credit as a result of the increased frequency of
personal bankruptcy filings, and consumers are apparently lessening their
credit demands. The recently lower interest rate environment may
accelerate refinancings on real estate loans in the Company's portfolio
during 1998. The Company believes that there will be moderate economic
growth for the country in general during 1998. Although this economic
outlook suggests that growth in net receivables from internal initiatives
will also be moderate during 1998, management anticipates that improvements
in loan production and portfolio acquisitions will favorably impact net
receivable growth in 1998.
Regulatory Factors
The regulatory environment of the consumer finance and insurance industries
is described in Item 1. Taxation is another regulatory factor affecting
the Company. A risk to any business is that changes in state and federal
tax laws or regulations may affect the way that the business operates.
Since tax laws affect not only the way that the Company is taxed but also
the design of many of its products, these laws and regulations and the way
they are interpreted are of concern to the Company. The Company monitors
federal and state tax legislation and responds with appropriate tax
planning in order to minimize the impact of taxation.
29
Item 7. Continued
Competitive Factors
Consumer finance companies compete with other types of financial
institutions which offer similar products and services. Competition in
financial services markets also continues to intensify due to an increase
in the number and sophistication of financial products, technological
improvements, and more rapid communication.
The Company has positioned itself to meet the continuing challenge of
competition in three primary ways:
Customer Focus. The Company focuses on selling financial service products
to low- to middle-income consumers.
Customer Service. The Company concentrates on delivering quality service
to its customers. This is done through one of the industry's largest
domestic branch networks.
Productivity. The Company continuously monitors performance of its
branches and products and makes organizational and procedural changes as
necessary to manage marketing and cost effectiveness.
Year 2000 Contingency
The Company is in the process of modifying its computer systems to be Year
2000 compliant. During 1997, the Company incurred and expensed $.5 million
related to this project. The Company estimates that it will incur future
costs in excess of $6.6 million for additional internal staff, third-party
vendors, and other expenses to render its systems Year 2000 compliant.
The Company expects to substantially complete this project during 1998.
However, risks and uncertainties exist in most significant systems
development projects. If conversion of the Company's systems is not
completed on a timely basis, due to nonperformance by third-party vendors
or other unforeseen circumstances, the Year 2000 issue could have a
material adverse impact on the operations of the Company.
30
Item 7. Continued
FORWARD-LOOKING STATEMENTS
The statements contained in this filing on Form 10-K that are not
historical facts are forward-looking statements within the meaning of the
Private Securities Litigation Reform Act. Forward-looking statements are
made based upon management's current expectations and beliefs concerning
future developments and their potential effects upon the Company. There
can be no assurance that future developments affecting the Company will be
those anticipated by management. Actual results may differ materially from
those included in the forward-looking statements.
These forward-looking statements involve risks and uncertainties including,
but not limited to, the following: changes in general economic conditions,
including the performance of financial markets, interest rates, and the
level of personal bankruptcies; competitive, regulatory, or tax changes
that affect the cost of or demand for the Company's products; adverse
litigation results; the Company's ability to render its computer systems
Year 2000 compliant; and the Company's failure to achieve anticipated
levels of expense savings from cost-saving initiatives. Readers are also
directed to other risks and uncertainties discussed in documents filed by
the Company with the Securities and Exchange Commission.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
The following table provides information on the Company's financial
instruments at December 31, 1997, including derivative financial
instruments, that are sensitive to changes in interest rates. Projected
principal cash flows and weighted average interest rates for finance
receivables and fixed-maturity securities are presented by contractual
maturities. Projected principal cash flows and weighted average interest
rates for long-term debt are presented by expected maturity date. Notional
amounts and weighted average interest rates for interest rate swap
agreements are presented by contractual maturity dates. Notional amounts
and weighted average interest rates for treasury rate lock agreements are
presented by maturity dates of the underlying securities. Notional amounts
are used to calculate the contractual cash flows to be exchanged under the
contracts. Weighted average variable rates are based on rates in effect
at December 31, 1997.
31
Item 7A. Continued
Maturity Date Fair
There- Value
1998 1999 2000 2001 2002 after Total 12/31/97
(dollars in millions)
Assets
Net finance receivables
Fixed rate $2,081 $1,334 $ 836 $ 458 $ 281 $1,969 $6,959 $7,063
Avg. interest rate 21.38% 20.93% 18.53% 15.53% 13.04% 13.04% 17.87%
Variable rate $ 43 $ 34 $ 28 $ 23 $ 18 $ 249 $ 395 $ 401
Avg. interest rate 12.46% 12.50% 12.48% 12.45% 12.41% 12.09% 12.23%
Fixed-maturity securities
Fixed rate $ 23 $ 31 $ 40 $ 53 $ 93 $ 669 $ 909 $ 913
Avg. interest rate 6.70% 7.86% 7.21% 7.46% 7.40% 6.39% 6.65%
Variable rate $ - $ - $ - $ - $ 3 $ 7 $ 10 $ 10
Avg. interest rate - % - % - % - % 7.70% 5.24% 5.99%
Liabilities
Long-term debt
Fixed rate $ 810 $ 563 $1,275 $ 40 $ 548 $ 713 $3,949 $4,047
Avg. interest rate 7.55% 7.33% 6.79% 6.21% 6.77% 7.48% 7.14%
Short-term debt $3,158 $ - $ - $ - $ - $ - $3,158 $3,158
Avg. interest rate 5.87% - % - % - % - % - % 5.87%
Derivatives
Interest rate swaps
Pay fixed/receive variable
Notional amount $ 265 $ 50 $ 225 $ - $ 200 $ 200 $ 940 $ (30)
Avg. receive rate 5.62% 5.72% 5.70% - % 5.72% 5.72% 5.69%
Avg. pay rate 7.08% 9.39% 8.80% - % 6.93% 6.16% 7.39%
Treasury rate locks
Notional amount $ - $ - $ - $ - $ 198 $ 192 $ 390 $ (2)
Avg. interest rate - % - % - % - % 5.86% 5.77% 5.82%
Item 8. Financial Statements and Supplementary Data.
The Report of Independent Auditors and the related consolidated financial
statements are presented on the following pages.
32
REPORT OF INDEPENDENT AUDITORS
The Board of Directors
American General Finance Corporation
We have audited the accompanying consolidated balance sheets of American
General Finance Corporation (a wholly-owned subsidiary of American General
Finance, Inc.) and subsidiaries as of December 31, 1997 and 1996, and the
related consolidated statements of income, shareholder's equity and cash
flows for each of the three years in the period ended December 31, 1997.
Our audit also included the financial statement schedule listed in the
Index at Item 14(a). These financial statements and schedule are the
responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements and schedule based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial
position of American General Finance Corporation and subsidiaries at
December 31, 1997 and 1996, and the consolidated results of their
operations and their cash flows for each of the three years in the period
ended December 31, 1997, in conformity with generally accepted accounting
principles. Also, in our opinion, the related financial statement
schedule, when considered in relation to the basic financial statements
taken as a whole, presents fairly, in all material respects, the
information set forth therein.
ERNST & YOUNG, LLP
Indianapolis, Indiana
February 23, 1998
33
American General Finance Corporation and Subsidiaries
Consolidated Balance Sheets
December 31,
1997 1996
(dollars in thousands)
Assets
Finance receivables, net of unearned
finance charges (Note 5.):
Real estate loans $4,067,500 $3,652,106
Non-real estate loans 2,502,051 2,459,660
Retail sales contracts 1,006,794 954,975
Private label 250,691 376,580
Net finance receivables 7,827,036 7,443,321
Allowance for finance receivable
losses (Note 6.) (363,126) (385,272)
Net finance receivables, less allowance
for finance receivable losses 7,463,910 7,058,049
Investment securities (Note 7.) 928,411 879,133
Cash and cash equivalents 91,076 90,197
Notes receivable from parent (Note 8.) 185,028 173,235
Goodwill (Note 9.) 254,417 263,171
Other assets (Note 9.) 317,763 370,097
Assets held for sale (Note 10.) - 668,707
Total assets $9,240,605 $9,502,589
Liabilities and Shareholder's Equity
Long-term debt (Note 11.) $3,941,486 $4,416,637
Commercial paper (Notes 12. and 13.) 3,157,671 3,015,920
Insurance claims and policyholder
liabilities 436,859 456,430
Other liabilities 308,601 263,154
Accrued taxes 21,073 15,525
Total liabilities 7,865,690 8,167,666
Shareholder's equity:
Common stock (Note 16.) 5,080 5,080
Additional paid-in capital 718,914 691,914
Net unrealized gains on investment
securities (Note 7.) 34,512 21,454
Retained earnings (Note 17.) 616,409 616,475
Total shareholder's equity 1,374,915 1,334,923
Total liabilities and shareholder's equity $9,240,605 $9,502,589
<FN>
<F1>
See Notes to Consolidated Financial Statements.
</FN>
34
American General Finance Corporation and Subsidiaries
Consolidated Statements of Income
Years Ended December 31,
1997 1996 1995
(dollars in thousands)
Revenues
Finance charges $1,233,387 $1,414,590 $1,489,466
Insurance 188,574 206,170 222,282
Other 89,982 87,913 77,436
Total revenues 1,511,943 1,708,673 1,789,184
Expenses
Interest expense 450,914 482,343 506,618
Operating expenses 466,791 497,204 466,399
Provision for finance receivable
losses 242,453 409,646 573,698
Loss on non-strategic assets 42,225 137,036 -
Insurance losses and loss
adjustment expenses 93,447 102,811 116,829
Total expenses 1,295,830 1,629,040 1,663,544
Income before provision for income
taxes 216,113 79,633 125,640
Provision for Income Taxes
(Note 15.) 79,042 28,674 33,347
Net Income $ 137,071 $ 50,959 $ 92,293
<FN>
<F1>
See Notes to Consolidated Financial Statements.
</FN>
35
American General Finance Corporation and Subsidiaries
Consolidated Statements of Shareholder's Equity
Years Ended December 31,
1997 1996 1995
(dollars in thousands)
Common Stock
Balance at beginning of year $ 5,080 $ 5,080 $ 5,080
Balance at end of year 5,080 5,080 5,080
Additional Paid-in Capital
Balance at beginning of year 691,914 691,914 611,914
Capital contributions from parent 27,000 - 80,000
Balance at end of year 718,914 691,914 691,914
Net Unrealized Gains (Losses)
on Investment Securities
Balance at beginning of year 21,454 38,412 (18,407)
Change during year 13,058 (16,958) 56,819
Balance at end of year 34,512 21,454 38,412
Retained Earnings
Balance at beginning of year 616,475 713,090 729,430
Net income 137,071 50,959 92,293
Common stock dividends (137,137) (147,574) (108,633)
Balance at end of year 616,409 616,475 713,090
Total Shareholder's Equity $1,374,915 $1,334,923 $1,448,496
<FN>
<F1>
See Notes to Consolidated Financial Statements.
</FN>
36
American General Finance Corporation and Subsidiaries
Consolidated Statements of Cash Flows
Years Ended December 31,
1997 1996 1995
(dollars in thousands)
Cash Flows from Operating Activities
Net Income $ 137,071 $ 50,959 $ 92,293
Reconciling adjustments to net cash
provided by operating activities:
Provision for finance receivable losses 242,453 409,646 573,698
Depreciation and amortization 75,971 87,129 107,288
Deferral of finance receivable
origination costs (38,218) (49,129) (73,711)
Deferred federal income tax charge (benefit) 57,807 (40,681) (69,570)
Deferred state income tax charge (benefit) 1,760 (2,216) (16,550)
Change in other assets and other liabilities (29,080) (21,891) 31,693
Change in insurance claims and
policyholder liabilities (19,571) (27,541) 17,088
Loss on non-strategic assets 42,225 137,036 -
Gain on securitized finance receivables sold - - (4,552)
Operations related to assets held for sale 39,905 - -
Other, net 4,014 46,608 (19,627)
Net cash provided by operating activities 514,337 589,920 638,050
Cash Flows from Investing Activities
Finance receivables originated or purchased (4,927,348) (5,249,595) (5,776,614)
Principal collections on finance receivables 4,251,026 4,778,076 4,916,984
Net collections on assets held for sale 61,266 - -
Securitized finance receivables (purchased) sold (100,000) - 100,000
Sale of non-strategic assets 732,504 - -
Investment securities purchased (129,158) (188,657) (199,587)
Investment securities called, matured and sold 104,491 169,350 108,656
Change in notes receivable from parent (11,793) 13,803 -
Net purchases and transfers of assets
from affiliates (9,536) (62,176) (31,259)
Other, net (38,724) (64,253) (45,148)
Net cash used for investing activities (67,272) (603,452) (926,968)
Cash Flows from Financing Activities
Proceeds from issuance of long-term debt 726,950 77,817 1,567,933
Repayment of long-term debt (1,204,750) (600,260) (900,760)
Change in short-term notes payable 141,751 685,449 (299,992)
Capital contribution from parent 27,000 - 80,000
Dividends paid (137,137) (147,574) (108,509)
Net cash (used for) provided by
financing activities (446,186) 15,432 338,672
Increase in cash and cash equivalents 879 1,900 49,754
Cash and cash equivalents at beginning of year 90,197 88,297 38,543
Cash and cash equivalents at end of year $ 91,076 $ 90,197 $ 88,297
Supplemental Disclosure of Cash Flow Information
Income taxes paid $ 38,363 $ 41,187 $ 156,506
Interest paid $ 473,452 $ 484,813 $ 489,475
<FN>
<F1>
See Notes to Consolidated Financial Statements.
</FN>
37
American General Finance Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 1997
Note 1. Nature of Operations
American General Finance Corporation will be referred to in these Notes to
Consolidated Financial Statements as "AGFC" or collectively, with its
subsidiaries, whether directly or indirectly owned, as the "Company". AGFC
is a wholly-owned subsidiary of American General Finance, Inc. (AGFI).
AGFC is a financial services holding company with subsidiaries engaged
primarily in the consumer finance and credit insurance business. In this
business, the Company makes loans directly to individuals, purchases retail
sales contract obligations of individuals, offers private label services,
and markets insurance products through the consumer finance network. At
December 31, 1997, the Company had 1,322 offices in 40 states, Puerto Rico
and the U.S. Virgin Islands and approximately 8,300 employees.
In its lending operations, the Company makes loans directly to individuals
and generally takes a security interest in real property and/or personal
property of the borrower. In its retail operations, the Company purchases
retail sales contracts arising from the retail sale of consumer goods and
services by approximately 15,000 retail merchants and purchases private
label receivables originated by American General Financial Center (AGFC-
Utah), a subsidiary of AGFI, arising from the sales by approximately 300
retail merchants pursuant to a participation agreement. Retail sales
contracts are secured by the real property or personal property giving rise
to the contract. Private label are secured by a purchase money security
interest in the goods purchased. In its insurance operations, the Company
writes and assumes credit life, credit accident and health, non-credit
insurance coverages and credit-related property and casualty insurance on
its consumer finance customers and property pledged as collateral.
In fourth quarter 1996, the Company decided to offer for sale $874.8
million of non-strategic, underperforming finance receivable portfolios,
consisting of $520.3 million of credit card and $354.5 million of private
label finance receivables. The Company reclassified these finance
receivables and $70.0 million of allowance for finance receivable losses to
assets held for sale on December 31, 1996. In June 1997, the Company sold
all of the assets held for sale (with a remaining balance of $658.1
million) and $81.4 million of other private label finance receivables. See
Note 10. for further information on the reclassification and subsequent
sale of non-strategic assets.
Prior to such sale, the Company purchased MasterCard and VISA credit card
receivables originated by AGFC-Utah pursuant to a participation agreement.
Credit cards were unsecured.
The Company funds its operations principally through net cash flows from
operating activities, issuances of long-term debt, short-term borrowings in
the commercial paper market, and borrowings from banks.
At December 31, 1997, the Company had $7.8 billion of net finance
receivables due from approximately 2.3 million customer accounts and $6.3
billion of credit and non-credit life insurance in force covering
approximately 1.3 million customer accounts.
38
Notes to Consolidated Financial Statements, Continued
Note 2. Summary of Significant Accounting Policies
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements have been prepared in accordance with
generally accepted accounting principles and include the accounts of AGFC
and its subsidiaries. The subsidiaries are all wholly-owned and all
intercompany items have been eliminated. All of the issued and outstanding
common stock of AGFC is owned by AGFI, a holding company organized to
acquire AGFC in a reorganization during 1974. AGFI is a wholly-owned
subsidiary of American General Corporation (American General).
RECLASSIFICATIONS
Effective January 1, 1997, certain real estate loans having advances of
less than $10,000 and high loan-to-value ratios were reclassified from real
estate to non-real estate loans. From a servicing and collection
standpoint, these loans are administered more like non-real estate loans
than real estate loans. This reclassification affected $251.8 million of
loans at January 1, 1997.
FINANCE OPERATIONS
Revenue Recognition
Finance charges on discounted finance receivables and interest on interest-
bearing finance receivables are recognized as revenue on the accrual basis
using the interest method. The accrual of revenue is suspended when the
fourth contractual payment becomes past due for loans and retail sales
contracts and when the sixth contractual payment becomes past due for
private label. For credit cards, the accrual of revenue was suspended when
the sixth contractual payment became past due. Extension fees and late
charges are recognized as revenue when received.
Nonrefundable points and fees on loans are recognized as revenue on the
accrual basis using the interest method over the lesser of the contractual
term or the estimated life based upon prepayment experience. If a loan
liquidates before amortization is completed, any unamortized fees are
recognized as revenue at the date of liquidation.
The Company defers costs associated with the origination of certain finance
receivables. Deferred origination costs are included in finance
receivables and are amortized to revenue on the accrual basis using the
interest method over the lesser of the contractual term or the estimated
life based upon prepayment experience. If a finance receivable liquidates
before amortization is completed, any unamortized costs are charged to
revenue at the date of liquidation.
39
Notes to Consolidated Financial Statements, Continued
Allowance For Finance Receivable Losses
The Company maintains the allowance for finance receivable losses at a
level based on periodic evaluation of the finance receivable portfolio and
reflects an amount that, in management's opinion, is adequate to absorb
anticipated losses in the existing portfolio. In evaluating the portfolio,
management considers numerous factors, including current economic
conditions, prior finance receivable loss and delinquency experience, the
composition of the finance receivable portfolio, and an estimate of
anticipated finance receivable losses.
The Company's policy is to charge off each month loan accounts, except
those secured by real estate, on which little or no collections were made
in the prior six-month period. Retail sales contracts are charged off when
six installments are past due, and private label accounts are charged off
when 180 days past due. Credit card accounts were charged off when 180
days past due. In the case of loans secured by real estate, foreclosure
proceedings are instituted when four monthly installments are past due.
When foreclosure is completed and the Company has obtained title to the
property, the real estate is established as an asset valued at fair value,
and any loan amount in excess of that value is charged off. The charge-off
period is occasionally extended for individual accounts when, in the
opinion of management, such treatment is warranted.
INSURANCE OPERATIONS
Revenue Recognition
The Company's insurance subsidiaries write and assume credit life and
credit accident and health insurance, non-credit insurance, and property
and casualty insurance. Premiums on credit life insurance are recognized
as revenue using the sum-of-the-digits or actuarial methods, except in the
case of level-term contracts, which are recognized as revenue using the
straight-line method over the lives of the policies. Premiums on credit
accident and health insurance are recognized as revenue using an average of
the sum-of-the-digits and the straight-line methods. Non-credit life
insurance premiums are recognized when collected but not before their due
dates. Premiums on property and casualty insurance are recognized as
revenue using the straight-line method over the terms of the policies or
appropriate shorter periods.
Policy Reserves
Policy reserves for credit life and credit accident and health insurance
equal related unearned premiums. Claim reserves are based on Company
experience. Liabilities for future life insurance policy benefits
associated with non-credit life contracts are accrued when premium revenue
is recognized and are computed on the basis of assumptions as to investment
yields, mortality, and surrenders. Annuity reserves are computed on the
basis of assumptions as to investment yields and mortality. Reserves for
losses and loss adjustment expenses for property and casualty insurance are
estimated based upon claims reported plus estimates of incurred but not
reported claims. Non-credit life, group annuity, and accident and health
40
Notes to Consolidated Financial Statements, Continued
insurance reserves assumed under coinsurance agreements are established on
the bases of various tabular and unearned premium methods.
Acquisition Costs
Insurance acquisition costs, principally commissions, reinsurance fees, and
premium taxes, are deferred and charged to expense over the terms of the
related policies or reinsurance agreements.
Reinsurance
The Company's insurance subsidiaries enter into reinsurance agreements
among themselves and other insurers, including other insurance subsidiaries
of American General. The annuity, credit life, and credit accident and
health reserves attributable to this business with the subsidiaries of
American General were $61.0 million and $60.8 million at December 31, 1997
and 1996, respectively. The Company's insurance subsidiaries assumed from
other insurers $38.6 million, $47.5 million, and $59.9 million of
reinsurance premiums during 1997, 1996, and 1995, respectively. The
Company's ceded reinsurance activities were not significant during the last
three years.
GAAP vs. Statutory Accounting
Statutory accounting practices differ from generally accepted accounting
principles, primarily in the following respects: credit life insurance
reserves are maintained on the basis of mortality tables; non-credit life
and group annuity insurance reserves are based on statutory requirements;
insurance acquisition costs are expensed when incurred rather than expensed
over the related contract period; deferred income taxes are not recorded on
temporary differences in the recognition of revenue and expense; certain
intangible assets resulting from a purchase and the related amortization
are not reflected in statutory financial statements; investments in fixed-
maturity securities are carried at amortized cost; and an asset valuation
reserve and interest maintenance reserve are required for Merit Life
Insurance Co. (Merit), a wholly-owned subsidiary of AGFC. The following
compares net income and shareholder's equity determined under statutory
accounting practices with those determined under generally accepted
accounting principles:
Net Income Shareholder's Equity
Years Ended December 31, December 31,
1997 1996 1995 1997 1996
(dollars in thousands)
Statutory accounting
practices $58,157 $79,157 $42,006 $457,702 $394,708
Generally accepted
accounting principles 62,312 59,625 58,245 614,679 539,307
41
Notes to Consolidated Financial Statements, Continued
INVESTMENT SECURITIES
Valuation
All investment securities are currently classified as available-for-sale
and recorded at fair value. After adjusting related balance sheet accounts
as if the unrealized gains and losses on investment securities had been
realized, the net adjustment is recorded in net unrealized gains or losses
on investment securities within shareholder's equity. If the fair value of
an investment security classified as available-for-sale declines below its
cost and this decline is considered to be other than temporary, the
investment security is reduced to its fair value, and the reduction is
recorded as a realized loss.
Realized Gains and Losses on Investments
Realized gains and losses on investments are recognized using the specific
identification method and include declines in fair value of investments
below cost that are considered other than temporary. Realized gains and
losses on investments are included in other revenues.
OTHER
Cash Equivalents
The Company considers all short-term investments with a maturity at date of
purchase of three months or less to be cash equivalents.
Goodwill
Acquisition-related goodwill is charged to expense in equal amounts over 20
to 40 years. The carrying value of goodwill is regularly reviewed for
indicators of impairment in value, which in the view of management are
other than temporary, including unexpected or adverse changes in the
following: 1) the economic or competitive environments in which the
Company operates, 2) profitability analyses, and 3) cash flow analyses. If
facts and circumstances suggest that goodwill is impaired, the Company
assesses the fair value of the underlying business and reduces goodwill to
an amount that results in the book value of the Company approximating fair
value.
Income Taxes
Deferred tax assets and liabilities are established for temporary
differences between the financial reporting basis and the tax basis of
assets and liabilities, at the enacted tax rates expected to be in effect
when the temporary differences reverse. The effect of a tax rate change is
recognized in income in the period of enactment.
42
Notes to Consolidated Financial Statements, Continued
A valuation allowance for deferred tax assets is provided if all or some
portion of the deferred tax asset may not be realized. An increase or
decrease in a valuation allowance that results from a change in
circumstances that causes a change in judgement about the realizability of
the related deferred tax asset is included in income. A change related to
fluctuations in fair value of available-for-sale investment securities is
included in net unrealized gains or losses on investment securities in
shareholder's equity.
Derivative Financial Instruments
The Company accounts for its derivative financial instruments as hedges.
Hedge accounting requires a high correlation between changes in fair values
or cash flows of the derivative financial instrument and the specific item
being hedged, both at inception and throughout the life of the hedge.
The difference between amounts payable and receivable on interest rate swap
agreements is recorded on the accrual basis as an adjustment to interest
expense over the life of the agreements. The related amount payable to or
receivable from counterparties is included in other liabilities or other
assets. The net settlement amount for treasury rate lock agreements is
deferred and included in the measurement of the anticipated transaction
when it occurs.
The fair values of interest rate swap and treasury rate lock agreements are
not recognized in the consolidated balance sheet, which is consistent with
the treatment of the related debt that is hedged.
Any gain or loss from early termination of an interest rate swap agreement
is deferred and amortized into income over the remaining term of the
related debt. If the underlying debt is extinguished, any related gain or
loss on interest rate swap agreements is recognized in income.
Use of Estimates
Management makes estimates and assumptions in preparing financial
statements that affect amounts reported in the financial statements and
disclosures of contingent assets and liabilities. Ultimate results could
differ from these estimates.
Fair Value of Financial Instruments
The fair values disclosed in Note 21. are based on estimates using
discounted cash flows when quoted market prices are not available. The
valuation techniques employed are significantly affected by the assumptions
used, including the discount rate and estimates of future cash flows. In
that regard, the derived fair value estimates cannot be substantiated by
comparison to independent markets and, in many cases, could not be realized
in immediate settlement of the instrument. The fair value amounts
presented can be misinterpreted, and care should be exercised in drawing
conclusions from such data.
43
Notes to Consolidated Financial Statements, Continued
Note 3. Accounting Changes
In June 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) 130, "Reporting
Comprehensive Income" which establishes standards for reporting and
displaying comprehensive income and its components in the financial
statements. This statement is effective for interim and annual periods
beginning after December 15, 1997. Reclassification of financial
statements for all periods presented will be required upon adoption.
Application of this statement will not change recognition or measurement of
net income and, therefore, will not impact the Company's consolidated
results of operations or financial position.
In June 1997, the FASB also issued SFAS 131, "Disclosures about Segments of
an Enterprise and Related Information" which changes the way companies
report segment information. This statement is effective for years
beginning after December 15, 1997, but need not be applied to interim
financial statements in the initial year of application. Restatement of
comparative information for all periods presented will be required upon
adoption. Adoption of this statement will result in more detailed
disclosures but will not have an impact on the Company's consolidated
results of operations or financial position.
During 1997, the Company adopted SFAS 125, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities." This
statement provides accounting standards for determining whether transfers
of financial assets are treated as sales or secured borrowings and when a
liability should be considered extinguished. Adoption of this standard did
not have a material impact on the Company's consolidated financial
statements.
Note 4. Net Purchases and Transfers of Assets from Affiliates
A subsidiary of AGFC purchased finance receivables and other assets from a
subsidiary of AGFI for $9.5 million during 1997. Subsidiaries of AGFC
purchased assets, primarily finance receivables, from subsidiaries of
American General for $62.2 million during 1996 and $29.3 million during
1995.
During 1995, AGFI transferred one of its subsidiaries to a subsidiary of
AGFC. On December 31, 1995, AGFC dividended the common stock of two
subsidiaries operating in Alabama to AGFI. AGFI supported the transferred
assets with funding provided by AGFC through an intercompany note. At
December 31, 1995, such subsidiaries had 34 offices and total assets of
$188.4 million, including net finance receivables of $196.4 million. See
Note 8. for information on notes receivable from AGFI.
44
Notes to Conolidated Financial Statements, Continued
The cash paid for the net purchases and transfers of assets from affiliates
as shown in the Consolidated Statements of Cash Flows consisted of the
following:
1997 1996 1995
(dollars in thousands)
Net finance receivables,
less allowance for finance
receivable losses $ 8,281 $ 59,448 $(157,601)
Other assets 1,255 2,728 188,860
Cash paid $ 9,536 $ 62,176 $ 31,259
Note 5. Finance Receivables
Loans collateralized by security interests in real estate generally have
maximum original terms of 180 months. Such loans with maximum original
terms exceeding 180 months generally contain call provisions at various
times throughout the contract. Loans collateralized by consumer goods,
automobiles or other chattel security, and loans that are unsecured,
generally have maximum original terms of 60 months. Retail sales contracts
are collateralized principally by consumer goods and automobiles, and
generally have maximum original terms of 60 months. Private label are
secured by a purchase money security interest in the goods purchased and
generally require minimum monthly payments based upon current balances.
Credit card receivables were unsecured and required minimum monthly
payments based upon current balances. At December 31, 1997, 94% of the
finance receivables were secured by the real and/or personal property of
the borrower. At December 31, 1997, mortgage loans accounted for 62% of
the amount of loans outstanding and 12% of the number of loans outstanding.
Contractual maturities of finance receivables at December 31, 1997 were as
follows:
Amount Percent
(dollars in thousands)
1998 $2,324,819 29.70%
1999 1,436,886 18.36
2000 906,835 11.59
2001 504,978 6.45
2002 315,324 4.03
2003 and thereafter 2,338,194 29.87
$7,827,036 100.00%
Experience of the Company has shown that a substantial portion of finance
receivables will be renewed, converted, or paid in full prior to maturity.
Accordingly, the preceding information as to contractual maturities should
not be considered as a forecast of future cash collections.
45
Notes to Consolidated Financial Statements, Continued
Principal cash collections and such collections as a percentage of average
net receivables were as follows (retail sales contracts and private label
comprise retail sales finance):
1997 1996 1995
(dollars in thousands)
Loans:
Principal cash collections $2,802,268 $2,584,894 $2,580,965
Percent of average net receivables 45.83% 46.73% 46.23%
Retail sales finance:
Principal cash collections $1,448,758 $1,736,907 $1,881,894
Percent of average net receivables 118.13% 92.93% 86.33%
Credit cards:
Principal cash collections $ - $ 456,275 $ 454,125
Percent of average net receivables - % 86.24% 89.64%
Geographic diversification of finance receivables reduces the concentration
of credit risk associated with a recession in any one region. The largest
concentrations of net finance receivables were as follows:
December 31, 1997 December 31, 1996
Amount Percent Amount Percent
(dollars in thousands) (dollars in thousands)
California $ 842,690 10.77% $ 697,734 9.37%
N. Carolina 696,261 8.90 672,021 9.03
Florida 518,837 6.63 534,936 7.19
Ohio 465,489 5.95 454,290 6.10
Indiana 438,369 5.60 397,698 5.34
Illinois 434,029 5.55 452,508 6.08
Virginia 356,928 4.56 350,349 4.71
Georgia 310,485 3.97 312,377 4.20
Other 3,763,948 48.07 3,571,408 47.98
$7,827,036 100.00% $7,443,321 100.00%
Unused credit limits on private label extended by AGFC-Utah to its
customers were $2.7 billion and $3.1 billion at December 31, 1997 and 1996,
respectively. These amounts, in part or in total, can be cancelled at the
discretion of AGFC-Utah, and are not indicative of the amount expected to
be funded. Any such amounts of credit limits on private label that would
be funded would be fully participated to the Company pursuant to a
participation agreement.
Unused credit limits on loan and retail sales contracts revolving lines of
credit extended by the Company to its customers were $225.3 million and
$226.5 million at December 31, 1997 and 1996, respectively. These amounts,
in part or in total, can be cancelled at the discretion of the Company, and
are not indicative of the amount expected to be funded.
46
Notes to Consolidated Financial Statements, Continued
Note 6. Allowance for Finance Receivable Losses
Changes in the allowance for finance receivable losses are detailed below.
See Management's Discussion and Analysis in Item 7. for discussion of
activity.
Years Ended December 31,
1997 1996 1995
(dollars in thousands)
Balance at beginning of year $385,272 $482,243 $225,922
Provision for finance receivable
losses 242,453 409,646 573,698
Allowance reclassified to assets
held for sale - (70,000) -
Allowance related to net acquired
(transferred) receivables 354 152 (6,337)
Charge-offs, net of recoveries (264,953) (436,769) (311,040)
Balance at end of year $363,126 $385,272 $482,243
Management believes the adequacy of the allowance for finance receivable
losses is a material estimate and that it is reasonably possible a material
change to such estimate could occur in the near term due to changes in the
economy and other conditions that influence the Company's net charge-offs.
See Note 2. for information on the determination of the allowance for
finance receivable losses.
Note 7. Investment Securities
At December 31, 1997 and 1996, all investment securities were classified as
available-for-sale and reported at fair value. Investment securities were
as follows at December 31:
Fair Value Amortized Cost
1997 1996 1997 1996
(dollars in thousands)
Fixed-maturity investment
securities:
Bonds:
Corporate securities $507,844 $450,754 $482,620 $435,877
Mortgage-backed securities 177,727 202,974 170,929 199,482
States and political
subdivisions 173,081 167,374 163,615 161,647
Other 45,222 45,525 34,018 36,721
Redeemable preferred stocks 18,737 7,235 18,400 7,135
Total 922,611 873,862 869,582 840,862
Non-redeemable preferred
stocks 2,332 2,271 2,264 2,264
Other long-term investments 3,468 3,000 3,468 3,000
Total investment securities $928,411 $879,133 $875,314 $846,126
47
Notes to Consolidated Financial Statements, Continued
At December 31, the gross unrealized gains and losses on investment
securities were as follows:
Gross Gross
Unrealized Gains Unrealized Losses
1997 1996 1997 1996
(dollars in thousands)
Fixed-maturity investment
securities:
Bonds:
Corporate securities $25,730 $17,175 $ 506 $ 2,298
Mortgage-backed securities 6,932 4,687 134 1,195
State and political
subdivisions 9,466 6,106 - 379
Other 11,210 8,851 6 47
Redeemable preferred stocks 431 138 94 38
Total 53,769 36,957 740 3,957
Non-redeemable preferred
stocks 68 7 - -
Total investment securities $53,837 $36,964 $ 740 $ 3,957
During the years ended December 31, 1997, 1996, and 1995, investment
securities with a fair value of $104.5 million, $169.4 million, and $108.7
million, respectively, were sold or redeemed. The gross realized gains on
such investment securities sales or redemptions totaled $1.5 million, $1.8
million, and $1.3 million, respectively. The gross realized losses on
investments totaled $.4 million, $3.1 million and $.6 million,
respectively.
The contractual maturities of fixed-maturity securities at December 31,
1997 were as follows:
Fair Amortized
Value Cost
(dollars in thousands)
Fixed maturities, excluding
mortgage-backed securities:
Due in 1 year or less $ 13,675 $ 13,512
Due after 1 year through 5 years 140,529 134,706
Due after 5 years through 10 years 477,652 450,458
Due after 10 years 113,028 99,977
Mortgage-backed securities 177,727 170,929
Total $922,611 $869,582
Actual maturities may differ from contractual maturities since borrowers
may have the right to call or prepay obligations. Company requirements and
investment strategies may result in the sale of investments before
maturity.
48
Notes to Consolidated Financial Statements, Continued
Certain of the bonds were on deposit with regulatory authorities. The
carrying values of such bonds were $8.4 million and $8.3 million at
December 31, 1997 and 1996, respectively.
Note 8. Notes Receivable from Parent
Notes receivable from AGFI totaled $185.0 million and $173.2 million at
December 31, 1997 and 1996, respectively. Interest revenue on notes
receivable from parent for the years ended December 31, 1997, 1996, and
1995, totaled $16.8 million, $19.4 million, and $2.2 million, respectively.
Note 9. Costs In Excess of Net Assets Acquired
Goodwill, resulting from the excess of the purchase price paid over the
fair value of separately identified tangible and intangible net assets
acquired, totaled $254.4 million and $263.2 million at December 31, 1997
and 1996, respectively. Accumulated amortization totaled $84.7 million and
$75.9 million at December 31, 1997 and 1996, respectively.
Included in other assets is a customer base valuation of $30.5 million and
$18.5 million at December 31, 1997 and 1996, respectively, which is being
amortized to operating expenses on a straight-line basis over 6 to 25
years.
Note 10. Assets Held for Sale
During fourth quarter 1996, the Company decided to offer for sale $874.8
million of non-strategic, underperforming finance receivable portfolios,
consisting of $520.3 million of credit card and $354.5 million of private
label finance receivables. The Company reclassified these finance
receivables and $70.0 million of allowance for finance receivable losses to
assets held for sale on December 31, 1996.
The Company hired an outside advisor to market the portfolios. Based on
negotiations with prospective purchasers subsequent to year end 1996, the
Company determined that a write-down of $137.0 million ($88.1 million
aftertax) at December 31, 1996 was necessary to reduce the carrying amount
of the assets held for sale to net realizable value, after considering
related expenses.
In April 1997, the Company repurchased $100.0 million of private label and
credit card receivables that previously had been sold through
securitization. No gain or loss resulted from this transaction. These
repurchased credit card receivables were offered for sale along with the
Company's other credit card receivables, which increased the carrying
amount of assets held for sale by approximately $70.0 million in April
1997.
49
Notes to Consolidated Financial Statements, Continued
In June 1997, the Company sold all of the assets held for sale (with a
remaining balance of $658.1 million) and $81.4 million of other private
label finance receivables. In connection with these sales, the Company
recorded a loss of $42.2 million ($27.0 million aftertax) in second quarter
1997. This loss primarily resulted from establishing a liability for
estimated future payments to the purchaser of the credit card portfolio
under a five-year loss sharing arrangement.
Unused credit limits on credit card assets held for sale extended by AGFC-
Utah to its customers were $2.2 billion at December 31, 1996. These
amounts, in part or in total, could be cancelled at the discretion of AGFC-
Utah, and were not indicative of the amount expected to be funded. The
unused credit limits on private label assets held for sale were terminated
during 1996.
Note 11. Long-term Debt
Long-term debt consisted of senior debt at December 31, 1997 and 1996. The
carrying value and fair value of AGFC's long-term debt at December 31 were
as follows:
Carrying Value Fair Value
1997 1996 1997 1996
(dollars in thousands)
Senior debt $3,941,486 $4,416,637 $4,047,006 $4,525,262
The weighted average interest rates on long-term debt were as follows:
Years Ended December 31, December 31,
1997 1996 1995 1997 1996
Senior debt 7.34% 7.28% 7.27% 7.18% 7.15%
Senior subordinated debt - - 6.44 - -
Total 7.34% 7.28% 7.27% 7.18% 7.15%
Maturities of long-term debt at December 31, 1997 were as follows:
Carrying Value
(dollars in thousands)
1998 $ 810,177
1999 562,089
2000 1,273,033
2001 39,907
2002 546,503
2003-2007 411,643
2008-2009 298,134
Total $3,941,486
50
Notes to Consolidated Financial Statements, Continued
A certain debt issue of AGFC is repayable prior to maturity at par, at the
option of the holder. If this issue was so repaid, the amounts above would
increase $149.2 million in 1999 and would decrease $149.2 million in 2009.
Certain debt agreements contain restrictions on consolidated retained
earnings for certain purposes (see Note 17.).
Note 12. Short-term Notes Payable and Credit Facilities
AGFC and one of its subsidiaries issue commercial paper with terms ranging
from 1 to 270 days. Information concerning short-term notes payable for
commercial paper and to banks was as follows:
1997 1996 1995
(dollars in thousands)
Maximum borrowings at any month end $3,176,805 $3,015,920 $2,644,804
Average borrowings $2,923,726 $2,305,848 $2,368,904
Weighted average interest rate,
at December 31:
Stated rate on face of note 5.80% 5.54% 5.73%
Semi-annual bond equivalent rate 5.87% 5.60% 5.83%
Weighted average interest rate,
giving effect to interest
rate swap agreements and
commitment fees at December 31, 6.47% 6.01% 6.44%
The Company maintains credit facilities to support the issuance of
commercial paper and to provide an additional source of funds for operating
requirements. At December 31, 1997 and 1996, the Company was an eligible
borrower under $4.0 billion and $2.8 billion, respectively, of committed
credit facilities extended to American General and certain of its
subsidiaries (the "shared committed facilities"). At December 31, 1996,
the Company also had committed credit facilities totaling $700.0 million.
The annual commitment fees for all committed facilities ranged from .05% to
.07%. The Company pays only an allocated portion of the commitment fees
for the shared committed facilities. At December 31, 1997 and 1996, the
Company also had $141.0 million and $346.0 million, respectively, of
uncommitted credit facilities and was an eligible borrower under $200.0
million and $165.0 million, respectively, of uncommitted credit facilities
extended to American General and certain of its subsidiaries. Available
borrowings under all facilities are reduced by any outstanding borrowings.
At December 31, 1997, there were no borrowings under any credit facilities.
At December 31, 1996, long-term borrowings outstanding under all credit
facilities totaled $9.0 million with remaining availability to the Company
of $3.5 billion in committed facilities and $502.0 million in uncommitted
facilities.
51
Notes to Consolidated Financial Statements, Continued
Note 13. Derivative Financial Instruments
AGFC makes limited use of derivative financial instruments to manage the
cost of its debt and is neither a dealer nor a trader in derivative
financial instruments. AGFC's use of derivative financial instruments is
generally limited to interest rate swap and treasury rate lock agreements.
AGFC uses interest rate swap agreements to reduce its exposure to adverse
future fluctuations in interest expense rates by effectively converting
short-term and certain long-term floating-rate debt to a fixed-rate basis.
Such floating-rate obligations are recorded at amortized cost.
Fixed interest rates contracted to be paid on interest rate swap agreements
approximated the rates on fixed-rate term debt with maturities similar to
the derivative financial instruments at the date of contract. Accordingly,
AGFC's use of interest rate swap agreements did not have a material effect
on the Company's weighted-average interest rate or reported interest
expense in any of the three years ended December 31, 1997.
Interest rate swap agreements in which AGFC contracted to pay interest at
fixed rates and receive interest at floating rates were $940.0 million,
$540.0 million, and $590.0 million in notional amounts at December 31,
1997, 1996, and 1995, respectively. The weighted average interest rate
payable was 7.39%, 8.05%, and 8.07% at December 31, 1997, 1996, and 1995,
respectively. The weighted average interest rate receivable was 5.69%,
5.92%, and 5.90% at December 31, 1997, 1996, and 1995, respectively.
These agreements mature at various dates and had the respective fixed rates
at December 31, 1997 as shown in the table below:
Notional Weighted Average
Amount Interest Rate
(dollars in
thousands)
1998 $265,000 7.08%
1999 50,000 9.39
2000 225,000 8.80
2002 200,000 6.93
2004 200,000 6.16
$940,000 7.39%
52
Notes to Consolidated Financial Statements, Continued
The rollforward of notional amounts for interest rate swap agreements was
as follows:
Notional Amounts
1997 1996 1995
(dollars in thousands)
Balance at beginning of year $540,000 $590,000 $390,000
New contracts 425,000 - 200,000
Expired contracts (25,000) (50,000) -
Balance at end of year $940,000 $540,000 $590,000
Treasury rate lock agreements are used to hedge against the risk of rising
interest rates on anticipated long-term debt issuances. These agreements
provide for future cash settlements that are a function of specified U.S.
Treasury rates. During 1997, AGFC entered into treasury rate lock
agreements with settlement dates in 1998. At December 31, 1997, the
notional amount of these agreements was $390.0 million. AGFC's use of
treasury rate lock agreements did not have a material effect on the
Company's weighted-average interest rate or reported interest expense in
1997.
AGFC is exposed to credit risk in the event of non-performance by
counterparties to derivative financial instruments. AGFC limits its
exposure to credit risk by entering into agreements with counterparties
having strong credit ratings and by basing the amount and term of an
agreement on these credit ratings. Furthermore, AGFC regularly monitors
counterparty credit ratings throughout the term of the agreements.
AGFC's credit exposure on derivative financial instruments is limited to
the fair value of the agreements that are favorable to the Company. See
Note 21. for the fair values of the interest rate swap and treasury rate
lock agreements. AGFC does not expect any counterparty to fail to meet its
obligation; however, non-performance would not have a material impact on
the consolidated results of operations and financial position of the
Company.
AGFC's exposure to market risk is mitigated by the offsetting effects of
changes in the value of the agreements and of the underlying debt to which
they relate.
Note 14. Short-term Notes Payable - Parent
Borrowings from American General primarily provide overnight operating
liquidity when American General is in a surplus cash position. Borrowings
from AGFI primarily provide operating funds for lending activities. All
such borrowings are made on a due on demand basis at short-term rates based
on overnight bank investment rates or bank prime rates. At December 31,
1997, 1996 and 1995, AGFC had no borrowings outstanding with American
General or AGFI.
53
Notes to Consolidated Financial Statements, Continued
Information concerning such borrowings was as follows:
1997 1996 1995
(dollars in thousands)
Maximum borrowings at any month end $ - $ - $ -
Average borrowings $2,476 $3,700 $ 159
Weighted average interest rate (total
interest expense divided by average
borrowings) 5.24% 5.16% 6.05%
Note 15. Income Taxes
AGFC and all of its subsidiaries file a consolidated federal income tax
return with American General and the majority of its subsidiaries. AGFC
and its subsidiaries provide for federal income taxes as if filing a
separate tax return, and pay such amounts to American General in accordance
with a tax sharing agreement.
Provision for income taxes is summarized as follows:
Years Ended December 31,
1997 1996 1995
(dollars in thousands)
Federal
Current $ 15,679 $ 67,675 $121,743
Deferred 57,807 (40,681) (69,570)
Total federal 73,486 26,994 52,173
State 5,556 1,680 (18,826)
Total $ 79,042 $ 28,674 $ 33,347
The U.S. statutory federal income tax rate differs from the effective
income tax rate as follows:
Years Ended December 31,
1997 1996 1995
Statutory federal income tax rate 35.00% 35.00% 35.00%
Benefit of state net operating
loss (NOL) carryforwards - - (9.11)
Amortization of goodwill 1.42 3.85 2.61
Nontaxable investment income (1.28) (3.25) (1.94)
State income taxes 1.67 1.37 (.63)
Other, net (.24) (.96) .61
Effective income tax rate 36.57% 36.01% 26.54%
54
Notes to Consolidated Financial Statements, Continued
During 1995, the Company recognized NOL carryforwards with respect to one
state resulting from the state's audit of a return and the state's
acceptance of an amended return. The Company recognized a net reduction of
$16.6 million in 1995 state income tax expense primarily related to these
carryforwards. At December 31, 1997 and 1996, the state NOL carryforwards
remaining were $627.9 million and $634.7 million, respectively, which
expire in the years 2005 and 2006.
The net deferred tax asset at December 31, 1997 of $194.5 million was net
of deferred tax liabilities totaling $150.8 million. The net deferred tax
asset at December 31, 1996 of $118.1 million was net of deferred tax
liabilities totaling $137.1 million. The most significant deferred tax
assets relate to the provision for finance receivable losses, the benefit
of the loss on the sale of non-strategic assets and the state NOL
carryforwards, and insurance premiums recorded for financial reporting
purposes. A valuation allowance of $39.5 million ($25.7 million aftertax)
was recognized at December 31, 1995 related to the state NOL carryforwards.
At December 31, 1996 and 1997, the valuation allowance remained at $39.5
million.
Note 16. Capital Stock
AGFC has two classes of capital stock: special shares (without par value,
25 million shares authorized) which may be issued in series with such
dividend, liquidation, redemption, conversion, voting and other rights as
the board of directors may determine prior to issuance; and common shares
($.50 par value, 25 million shares authorized). Issued shares were as
follows:
Special Shares - At December 31, 1997 and 1996, there were no shares issued
and outstanding.
Common Shares - At December 31, 1997 and 1996, there were 10,160,012 shares
issued and outstanding.
Note 17. Retained Earnings
State laws restrict AGFC's insurance subsidiaries as to the amounts they
may pay as dividends without prior notice to, or in some cases prior
approval from, their respective state insurance departments. At December
31, 1997, the maximum amount of dividends which the Company's insurance
subsidiaries may pay in 1998 without prior approval was $59.9 million. At
December 31, 1997, AGFC's insurance subsidiaries had statutory capital and
surplus of $457.7 million. Merit had $52.7 million of accumulated earnings
at December 31, 1997 for which no federal income tax provisions have been
required. Merit would be liable for federal income taxes on such earnings
if they were distributed as dividends or exceeded limits prescribed by tax
laws. No distributions are presently contemplated from these earnings. If
such earnings were to become taxable at December 31, 1997, the federal
income tax would approximate $18.4 million.
55
Notes to Consolidated Financial Statements, Continued
Certain of AGFC's financing agreements effectively limit the amount of
dividends AGFC may pay. Under the most restrictive provision of such
agreements, $335.9 million of the retained earnings of AGFC at December 31,
1997, was free from such restrictions.
Note 18. Benefit Plans
RETIREMENT INCOME PLANS
The Company participates in the American General Retirement Plans (AGRP),
which are noncontributory defined benefit pension plans covering most
employees. Pension benefits are based on the participant's compensation
and length of credited service. American General's funding policy is to
contribute annually no more than the maximum deductible for federal income
tax purposes.
Equity and fixed-maturity securities were 63% and 28%, respectively, of the
plans' assets at the plans' most recent balance sheet dates. Additionally,
5% of plan assets were invested in general investment accounts of American
General subsidiaries through deposit administration insurance contracts.
The pension plans have purchased annuity contracts from American General
subsidiaries to provide benefits to certain retirees. Benefits paid to
retirees under these contracts were $2.1 million, $2.1 million, and $2.2
million for the years ended December 31, 1997, 1996, and 1995,
respectively.
Pension plan activity allocated to the Company for 1997, 1996, and 1995 was
immaterial. Because net plan assets are not calculated separately for the
Company, the remainder of the information presented herein is for AGFI.
AGFI accounts for its participation in the AGRP as if it had its own plans.
The following table shows AGFI's portion of the plans' funded status:
December 31,
1997 1996 1995
(dollars in thousands)
Accumulated benefit obligation (a) $59,655 $51,936 $46,406
Projected benefit obligation $70,864 $62,887 $56,395
Plan assets at fair value 86,418 71,450 60,968
Plan assets in excess of projected
benefit obligation 15,554 8,563 4,573
Other unrecognized items, net (10,905) (2,709) 2,894
Prepaid pension expense $ 4,649 $ 5,854 $ 7,467
(a) Accumulated benefit obligation is over 92% vested.
56
Notes to Consolidated Financial Statements, Continued
Net pension expense included the following components for the years ended
December 31:
1997 1996 1995
(dollars in thousands)
Service cost $ 3,150 $ 3,194 $ 2,241
Interest cost 4,800 4,480 3,624
Actual return on plan assets (16,300) (11,288) (11,283)
Net amortization and deferral 10,113 5,417 5,233
Total pension expense (income) $ 1,763 $ 1,803 $ (185)
Additional assumptions concerning the determination of net pension costs
were as follows:
1997 1996 1995
Weighted average discount rate 7.25% 7.50% 7.25%
Expected long-term rate of
return on plan assets 10.00 10.00 10.00
Rate of increase in
compensation levels 4.00 4.00 4.00
POSTRETIREMENT BENEFITS OTHER THAN PENSIONS
The Company participates in American General's life, medical, supplemental
major medical, and dental plans for certain retired employees. Most plans
are contributory, with retiree contributions adjusted annually to limit
employer contributions to predetermined amounts. American General and its
subsidiaries have reserved the right to change or eliminate these benefits
at any time.
American General's life plans are insured for a two-year period. A portion
of the retiree medical and dental plans is funded through a voluntary
employees' beneficiary association (VEBA); the remainder is unfunded and
self-insured. All of the retiree medical and dental plans' assets held in
the VEBA were invested in readily marketable securities at the plans' most
recent balance sheet date.
Postretirement benefits other than pension plan activity incurred by the
Company for 1997, 1996, and 1995 was $.5 million, $.5 million, and $.6
million, respectively.
Because plan information is not calculated separately for the Company, the
remainder of the information presented herein is for AGFI.
57
Notes to Consolidated Financial Statements, Continued
AGFI accounts for its participation in the plans as if it had its own
plans. The following table shows AGFI's portion of the plans' combined
funded status:
December 31,
1997 1996
(dollars in thousands)
Actuarial present value of benefit
obligation:
Retirees $1,081 $1,152
Active plan participants 5,487 4,461
Accumulated postretirement benefit
obligation 6,568 5,613
Plan assets at fair value 133 90
Accumulated postretirement benefit
obligation in excess of plan
assets at fair value 6,435 5,523
Other unrecognized items, net 970 1,512
Accrued postretirement benefit cost $7,405 $7,035
The weighted-average discount rate used in determining the accumulated
postretirement benefit obligation for the years ended December 31, 1997 and
1996 was 7.25% and 7.50%, respectively. Postretirement benefit expense in
1997, 1996, and 1995 was $.7 million, $.7 million, and $.6 million,
respectively.
Note 19. Lease Commitments, Rent Expense and Contingent Liabilities
The approximate annual rental commitments for leased office space,
automobiles and data processing and related equipment accounted for as
operating leases, excluding leases on a month-to-month basis, are as
follows: 1998, $36.8 million; 1999, $23.7 million; 2000, $16.4 million;
2001, $9.1 million; 2002, $3.9 million; and subsequent to 2002, $12.7
million.
Taxes, insurance and maintenance expenses are obligations of the Company
under certain leases. In the normal course of business, leases that expire
will be renewed or replaced by leases on other properties; therefore,
future minimum annual rental commitments will probably not be less than the
amount of rental expense incurred in 1997. Rental expense incurred for the
years ended December 31, 1997, 1996, and 1995, was $40.8 million, $43.9
million, and $44.2 million, respectively.
AGFC and certain of its subsidiaries are parties to various lawsuits and
proceedings arising in the ordinary course of business. Many of these
lawsuits and proceedings arise in jurisdictions, such as Alabama, that
permit damage awards disproportionate to the actual economic damages
incurred. Based upon information presently available, the Company believes
that the total amounts that will ultimately be paid, if any, arising from
these lawsuits and proceedings will not have a material adverse effect on
the Company's consolidated results of operations and financial position.
58
Notes to Consolidated Financial Statements, Continued
However, it should be noted that the frequency of large damage awards,
including large punitive damage awards, that bear little or no relation to
actual economic damages incurred by plaintiffs in jurisdictions like
Alabama continues to increase and creates the potential for an
unpredictable judgment in any given suit.
Note 20. Interim Financial Information (Unaudited)
Unaudited interim information is summarized below:
Total Revenues
Three Months Ended 1997 1996
(dollars in thousands)
March 31 $ 380,383 $ 435,105
June 30 376,353 427,791
September 30 378,010 422,755
December 31 377,197 423,022
Total $1,511,943 $1,708,673
Income Before Provision
for Income Taxes
Three Months Ended 1997 1996
(dollars in thousands)
March 31 $ 66,214 $ 47,428
June 30 25,519 (a) 54,499
September 30 68,657 72,637
December 31 55,723 (94,931) (b)
Total $ 216,113 $ 79,633
Net Income
Three Months Ended 1997 1996
(dollars in thousands)
March 31 $ 41,761 $ 29,885
June 30 16,196 (a) 34,355
September 30 43,511 46,569
December 31 35,603 (59,850) (b)
Total $ 137,071 $ 50,959
(a) Includes loss on sale of non-strategic assets of $42.2 million ($27.0
million aftertax).
(b) Includes loss on assets held for sale of $137.0 million ($88.1 million
aftertax).
59
Notes to Consolidated Financial Statements, Continued
Note 21. Fair Value of Financial Instruments
The carrying values and estimated fair values of certain of the Company's
financial instruments are presented below. The reader should exercise care
in drawing conclusions based on fair value, since the fair values presented
below do not include the value associated with all of the Company's assets
and liabilities.
December 31, 1997 December 31, 1996
Carrying Fair Carrying Fair
Value Value Value Value
Assets (dollars in thousands)
Net finance receivables,
less allowance for finance
receivable losses $7,463,910 $7,463,910 $7,058,049 $7,058,049
Investment securities 928,411 928,411 879,133 879,133
Cash and cash equivalents 91,076 91,076 90,197 90,197
Assets held for sale - - 668,707 668,707
Liabilities
Long-term debt (3,941,486) (4,047,006) (4,416,637) (4,525,262)
Commercial paper (3,157,671) (3,157,671) (3,015,920) (3,015,920)
Off-Balance Sheet Financial
Instruments
Unused credit limits - - - -
Interest rate swap agreements - (29,690) - (30,314)
Treasury rate lock agreements - (1,610) - -
VALUATION METHODOLOGIES AND ASSUMPTIONS
The following methods and assumptions were used in estimating the fair
value of the Company's financial instruments.
Finance Receivables
Fair value of net finance receivables (which approximates carrying amount
less allowance for finance receivable losses) was estimated using projected
cash flows, computed by category of finance receivable, discounted at the
weighted-average interest rates currently being offered for similar finance
receivables. Cash flows were based on contractual payment terms adjusted
for delinquencies and finance receivable losses. The fair value estimate
does not reflect the value of the underlying customer relationships or the
related distribution system.
60
Notes to Consolidated Financial Statements, Continued
Investment Securities
Fair values of investment securities are based on quoted market prices,
where available. For investment securities not actively traded, fair
values were estimated using values obtained from independent pricing
services or, in the case of some private placements, by discounting
expected future cash flows using a current market rate applicable to yield,
credit quality, and average life of the investments.
Cash and Cash Equivalents
The carrying amounts reported in the Consolidated Balance Sheets for cash
and cash equivalents approximate those assets' fair values.
Assets Held for Sale
The carrying amounts reported in the Consolidated Balance Sheets for assets
held for sale approximate the assets' fair value.
Long-term Debt
The fair values of the Company's long-term borrowings are estimated using
cash flows discounted at current borrowing rates.
Commercial Paper
The carrying value of commercial paper approximates the fair value.
Unused Customer Credit Lines
The unused credit lines available to the Company's and AGFC-Utah's
customers are considered to have no fair value. The interest rates charged
on these facilities can either be changed at AGFC-Utah's discretion, such
as for private label, or are adjustable and reprice frequently, such as for
loan and retail sales contracts revolving lines of credit. Furthermore,
these amounts, in part or in total, can be cancelled at the discretion of
the Company and AGFC-Utah. The interest rates charged on credit cards
could have been changed at AGFC-Utah's discretion, and the unused credit
lines could have been cancelled at the discretion of AGFC-Utah.
Derivative Financial Instruments
Fair values for the Company's interest rate swap and treasury rate lock
agreements are estimated using cash flows discounted at current market
rates.
61
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) (1) and (2) The following consolidated financial statements of American
General Finance Corporation and subsidiaries are included in Item 8:
Consolidated Balance Sheets, December 31, 1997 and 1996
Consolidated Statements of Income, years ended December 31, 1997,
1996, and 1995
Consolidated Statements of Shareholder's Equity, years ended
December 31, 1997, 1996, and 1995
Consolidated Statements of Cash Flows, years ended December 31,
1997, 1996, and 1995
Notes to Consolidated Financial Statements
Schedule I--Condensed Financial Information of Registrant is included
in Item 14(d).
All other schedules for which provision is made in the applicable
accounting regulations of the Securities and Exchange Commission have
been omitted, because they are inapplicable, or the required
information is included in the consolidated financial statements or
notes.
(3) Exhibits:
Exhibits are listed in the Exhibit Index beginning on page 67
herein.
(b) Reports on Form 8-K
Current Report on Form 8-K dated October 22, 1997, with respect to the
issuance of an Earnings Release announcing certain unaudited financial
results of the Company for the quarter ended September 30, 1997.
Current Report on Form 8-K dated January 9, 1998, with respect to the
authorization for issuance of $200 million aggregate principal amount
of the Company's 5.90% Senior Notes due January 15, 2003.
Current Report on Form 8-K dated January 27, 1998, with respect to the
issuance of an Earnings Release announcing certain unaudited financial
results of the Company for the year ended December 31, 1997.
Current Report on Form 8-K dated March 5, 1998, with respect to the
authorization for issuance of $200 million aggregate principal amount
of the Company's 6.20% Senior Notes due March 15, 2003.
(c) Exhibits
The exhibits required to be included in this portion of Item 14. are
submitted as a separate section of this report.
62
Item 14(d).
Schedule I - Condensed Financial Information of Registrant
American General Finance Corporation
Condensed Balance Sheets
December 31,
1997 1996
(dollars in thousands)
Assets
Finance receivables, net of unearned
finance charges:
Loans $ 716,277 $1,236,881
Retail sales finance 111,848 216,182
Net finance receivables 828,125 1,453,063
Allowance for finance receivable losses (14,988) (32,829)
Net finance receivables, less allowance
for finance receivable losses 813,137 1,420,234
Cash and cash equivalents 51,496 51,470
Investments in subsidiaries 2,668,839 2,807,470
Receivable from parent and subsidiaries 5,255,541 4,400,300
Notes receivable from parent and
subsidiaries 185,027 173,235
Other assets 112,961 144,539
Total assets $9,087,001 $8,997,248
Liabilities and Shareholder's Equity
Senior long-term debt, 5.09% - 10.05%,
due 1998 - 2009 $3,941,486 $4,407,637
Short-term notes payable:
Commercial paper 2,914,743 2,767,189
Notes payable to subsidiaries 676,449 309,794
Other liabilities 179,408 177,705
Total liabilities 7,712,086 7,662,325
Shareholder's equity:
Common stock 5,080 5,080
Additional paid-in capital 718,914 691,914
Other equity 34,512 21,454
Retained earnings 616,409 616,475
Total shareholder's equity 1,374,915 1,334,923
Total liabilities and shareholder's equity $9,087,001 $8,997,248
<FN>
<F1>
See Notes to Condensed Financial Statements.
</FN>
63
Schedule I, Continued
American General Finance Corporation
Condensed Statements of Income
Years Ended December 31,
1997 1996 1995
(dollars in thousands)
Revenues
Interest received from affiliates $728,068 $578,400 $579,671
Dividends received from subsidiaries 195,334 60,970 128,000
Finance charges 992 1,372 717
Other 15,446 19,038 20,481
Total revenues 939,840 659,780 728,869
Expenses
Interest expense 524,462 495,498 513,223
Operating expenses 10,815 13,542 13,040
Total expenses 535,277 509,040 526,263
Income before income taxes and
equity in overdistributed net
income of subsidiaries 404,563 150,740 202,606
Provision for Income Taxes 73,348 31,537 26,179
Income before equity in overdistributed
net income of subsidiaries 331,215 119,203 176,427
Equity in Overdistributed Net Income
of Subsidiaries (194,144) (68,244) (84,134)
Net Income $137,071 $ 50,959 $ 92,293
<FN>
<F1>
See Notes to Condensed Financial Statements.
</FN>
64
Schedule I, Continued
American General Finance Corporation
Condensed Statements of Cash Flows
Years Ended December 31,
1997 1996 1995
(dollars in thousands)
Cash Flows from Operating Activities
Net Income $ 137,071 $ 50,959 $ 92,293
Reconciling adjustments to net cash
provided by operating activities:
Equity in overdistributed net income
of subsidiaries 194,144 68,244 84,134
Change in other assets and other
liabilities 43,066 11,109 (142,843)
Other, net (5,192) (13,999) (17,782)
Net cash provided by operating activities 369,089 116,313 15,802
Cash Flows from Investing Activities
Finance receivables originated or purchased
from subsidiaries (720,788) (1,261,633) (1,358,250)
Principal collections on finance receivables 78,274 85,678 97,243
Finance receivables sold to subsidiaries 1,253,983 1,308,035 -
Capital contributions to subsidiaries,
net of return of capital (42,456) 40,662 (5,785)
Change in receivable from parent
and subsidiaries (855,241) (375,559) 1,154,989
Purchase of assets from affiliate (9,536) - -
Other, net 3,221 (27,473) (5,911)
Net cash used for investing activities (292,543) (230,290) (117,714)
Cash Flows from Financing Activities
Proceeds from issuance of long-term debt 726,950 77,817 1,532,033
Repayment of long-term debt (1,195,750) (540,860) (765,160)
Change in commercial paper 147,554 611,910 (450,739)
Change in notes receivable or payable
with parent and subsidiaries 354,863 110,826 (194,518)
Capital contributions from parent 27,000 - 80,000
Dividends paid (137,137) (147,574) (108,509)
Net cash (used for) provided by
financing activities (76,520) 112,119 93,107
Increase (decrease) in cash and cash equivalents 26 (1,858) (8,805)
Cash and cash equivalents at beginning of year 51,470 53,328 62,133
Cash and cash equivalents at end of year $ 51,496 $ 51,470 $ 53,328
<FN>
<F1>
See Notes to Condensed Financial Statements.
</FN>
65
Schedule I, Continued
American General Finance Corporation
Notes to Condensed Financial Statements
December 31, 1997
Note 1. Accounting Policies
AGFC's investments in subsidiaries are stated at cost plus the equity in
undistributed net income of subsidiaries since the date of the acquisition.
The condensed financial statements of the registrant should be read in
conjunction with AGFC's consolidated financial statements.
Note 2. Receivable from Subsidiaries
AGFC provides funding to its subsidiaries for lending activities. Such
funding is made at 215 basis points over the borrowing cost rate.
Note 3. Long-Term Debt
Senior long-term debt maturities for the five years after December 31,
1997, were as follows: 1998, $810.2 million; 1999, $562.1 million; 2000,
$1.3 billion; 2001, $39.9 million; and 2002, $546.5 million.
66
Signatures
Pursuant to the requirements of Section 13 or 15(d) 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 on March
19, 1998.
AMERICAN GENERAL FINANCE CORPORATION
By: /s/ Robert A. Cole
Robert A. Cole
(Senior Vice President and
Chief Financial Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities indicated on March 19, 1998.
/s/ Frederick W. Geissinger /s/ Jerry L. Gilpin
Frederick W. Geissinger Jerry L. Gilpin
(President and Chief Executive (Director)
Officer and Director - Principal
Executive Officer)
/s/ Philip M. Hanley
Philip M. Hanley
/s/ Robert A. Cole (Director)
Robert A. Cole
(Senior Vice President and
Chief Financial Officer and /s/ Bennie D. Hendrix
Director - Principal Financial Bennie D. Hendrix
Officer) (Director)
/s/ George W. Schmidt /s/ Larry R. Klaholz
George W. Schmidt Larry R. Klaholz
(Controller and Assistant Secretary - (Director)
Principal Accounting Officer)
/s/ W. Tal Bratton Jon P. Newton
W. Tal Bratton (Director)
(Director)
/s/ Ray W. Sims
Ray W. Sims
James S. D'Agostino Jr. (Director)
(Director)
67
Exhibit Index
Exhibits Page
(3) a. Restated Articles of Incorporation of American General Finance
Corporation (formerly Credithrift Financial Corporation) dated
July 22, 1988 and amendments thereto dated August 25, 1988 and
March 20, 1989. Incorporated by reference to Exhibit (3)a filed
as a part of the Company's Annual Report on Form 10-K for the year
ended December 31, 1988 (File No. 1-6155).
b. By-laws of American General Finance Corporation. Incorporated by
reference to Exhibit (3)b filed as a part of the Company's Annual
Report on Form 10-K for the year ended December 31, 1992 (File No.
1-6155).
(4) a. The following instruments are filed pursuant to Item 601(b)(4)(ii)
of Regulation S-K, which requires with certain exceptions that all
instruments be filed which define the rights of holders of long-
term debt of the Company and its consolidated subsidiaries. In
the aggregate, the outstanding issuances of debt under the
Indenture referred to under item (1) below exceed 10% of the total
assets of the Company on a consolidated basis.
(1) Indenture dated as of October 1, 1994 from American General
Finance Corporation to The Chase Manhattan Bank.
Incorporated by reference to Exhibit 4(a) filed as a part of
the Company's Registration Statement on Form S-3
(Registration No. 33-55803).
(a) Resolutions and form of note for senior notes, 8% due
February 15, 2000. Incorporated by reference to
Exhibits 4(a) and 4(b) filed as a part of the
Company's Current Report on Form 8-K dated February 3,
1995 (File No. 1-6155).
(b) Resolutions and forms of notes for (senior) Medium-
Term Notes, Series D. Incorporated by reference to
Exhibits 4(a), 4(b) and 4(c) filed as a part of the
Company's Current Report on Form 8-K dated February
13, 1995 (File No. 1-6155).
(c) Resolutions and form of note for senior notes, 7 1/4%
due March 1, 1998. Incorporated by reference to
Exhibits 4(a) and 4(b) filed as a part of the
Company's Current Report on Form 8-K dated February
27, 1995 (File No. 1-6155).
(d) Resolutions and form of note for senior notes, 7 1/4%
due April 15, 2000. Incorporated by reference to
Exhibits 4(a) and 4(b) filed as a part of the
Company's Current Report on Form 8-K dated April 11,
1995 (File No. 1-6155).
68
Exhibit Index, Continued
Exhibits Page
(e) Resolutions and form of note for senior notes, 7 1/4%
due May 15, 2005. Incorporated by reference to
Exhibits 4(a) and 4(b) filed as a part of the
Company's Current Report on Form 8-K dated May 5, 1995
(File No. 1-6155).
(f) Resolutions for (senior) Medium-Term Notes, Series D.
Incorporated by reference to Exhibit 4 filed as a part
of the Company's Current Report on Form 8-K dated
November 16, 1995 (File No. 1-6155).
(g) Resolutions and form of note for senior notes, 6 1/8%
due September 15, 2000. Incorporated by reference to
Exhibits 4(a) and 4(b) filed as a part of the
Company's Current Report on Form 8-K dated September
17, 1997 (File No. 1-6155).
(h) Resolutions and form of note for senior notes, 5.90%
due January 15, 2003. Incorporated by reference to
Exhibits 4(a) and 4(b) filed as a part of the
Company's Current Report on Form 8-K dated January 9,
1998 (File No. 1-6155).
b. In accordance with Item 601(b)(4)(iii) of Regulation S-K,
certain other instruments defining the rights of holders of
long-term debt of the Company and its subsidiaries have not
been filed as exhibits to this Annual Report on Form 10-K
because the total amount of securities authorized and
outstanding under each such instrument does not exceed 10% of
the total assets of the Company on a consolidated basis. The
Company hereby agrees to furnish a copy of each such instrument
to the Securities and Exchange Commission upon request
therefor.
(12) Computation of ratio of earnings to fixed charges. 69
(23) Consent of Ernst & Young LLP, Independent Auditors 70
(27) Financial Data Schedule 71