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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, 1996
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
J(1)(a) and (b) of Form 10-K and is therefore filing this Form 10-K with
the reduced disclosure format.
At March 20, 1997, no voting stock of the registrant was held by a
non-affiliate.
At March 20, 1997, 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 . . . . . . . . . . . . . . . . . . . . . . 15
3. Legal Proceedings . . . . . . . . . . . . . . . . . . 16
4. Submission of Matters to a Vote of Security Holders. . *
Part II 5. Market for Registrant's Common Equity and Related
Stockholder Matters . . . . . . . . . . . . . . . . 17
6. Selected Financial Data . . . . . . . . . . . . . . . 17
7. Management's Discussion and Analysis of Financial
Condition and Results of Operations. . . . . . . . . 18
8. Financial Statements and Supplementary Data . . . . . 30
9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure . . . . . . . **
Part III 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 . . . . . . . . . . . . . . . . . . . . 60
* Items 4, 10, 11, 12, and 13 are not included, as per conditions
met by Registrant set forth in General Instructions J(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 under the laws
of the State of 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 under the laws of the State of 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 nations's largest diversified financial services
organizations. Headquartered in Houston, Texas, American General's
operating subsidiaries are leading providers of retirement services,
consumer loans, and life insurance. 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, the subsidiaries of which are
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, 1996, the Company had 1,354 offices in 39 states, Puerto
Rico, and the U.S. Virgin Islands and approximately 9,100 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; therefore,
average net receivables; yield; finance receivable loss experience; and
finance receivables originated, renewed, and purchased for 1996 were not
affected by this reclassification. See Consumer Finance Operations for
further information on this reclassification.
The Company executed the private label and credit card participation
agreement with AGFC-Utah on December 31, 1994; therefore, average net
receivables, yield, and finance receivable loss experience information for
1994 were not affected by the finance receivables acquired pursuant to such
agreement. See Consumer Finance Operations for further information on this
agreement.
The following table shows certain selected financial information of the
Company for the years indicated:
1996 1995 1994
(dollars in thousands)
Average finance receivables net
of unearned finance charges
(average net receivables) $7,930,169 $8,269,663 $6,146,644
Average borrowings $6,989,745 $7,209,923 $6,171,265
4
Item 1. Continued
1996 1995 1994
Yield - finance charges as a
percentage of average net
receivables 17.84% 18.01% 17.42%
Borrowing cost - interest
expense as a percentage
of average borrowings 6.90% 7.03% 6.67%
Interest spread - yield
less borrowing cost 10.94% 10.98% 10.75%
Insurance revenues as a
percentage of average
net receivables 2.60% 2.69% 2.93%
Operating expenses as a
percentage of average
net receivables 6.27% 5.64% 5.44%
Allowance ratio - allowance for
finance receivable losses as
a percentage of net finance
receivables 5.18% 5.88% 2.86%
Charge-off ratio (defined in
"Consumer Finance Operations -
Finance Receivable Loss and
Delinquency Experience" in
Item 1. herein.) 5.51% 3.77% 2.20%
Delinquency ratio - 60 days or more
(defined in "Consumer Finance
Operations - Finance Receivable
Loss and Delinquency Experience"
in Item 1. herein.) 3.84% 4.15% 2.89%
Return on average assets .55% .98% 2.99%
Return on average equity 3.55% 6.49% 19.51%
Ratio of earnings to fixed charges
(refer to Exhibit 12 herein
for calculations) 1.16 1.24 1.92
Debt to tangible equity ratio -
debt to equity less goodwill
and net unrealized gains or
losses on fixed-maturity
investment securities 7.08 6.43 6.52
Debt to equity ratio 5.57 5.02 5.19
5
Item 1. Continued
CONSUMER FINANCE OPERATIONS
Through its subsidiaries, the Company makes loans directly to individuals,
purchases retail sales contract obligations of individuals, and offers
private label services. On December 31, 1994, the Company entered into a
participation agreement whereby the Company purchases all of the private
label and credit card finance receivables originated by American General
Financial Center (AGFC-Utah), a subsidiary of AGFI.
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, 1996, 91% were secured by such property. At
December 31, 1996, mortgage loans (generally second mortgages) accounted
for 60% of the aggregate dollar amount of loans outstanding and 14% of the
total number of loans outstanding, compared to 51% and 10%, respectively,
at December 31, 1995. Loans secured by real property generally have
maximum original terms of 180 months. 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 AGFC-Utah pursuant to the
participation agreement entered into on December 31, 1994. 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 its credit card operations, the Company purchases MasterCard and VISA
credit card receivables originated by AGFC-Utah pursuant to the
participation agreement entered into on December 31, 1994. Credit cards
are unsecured and 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 an associated allowance for finance receivable losses of
$70.0 million to assets held for sale on December 31, 1996. See Note 10.
of the Notes to Consolidated Financial Statements in Item 8. herein for
further information on this reclassification.
Finance Receivables
The table on the following page shows certain information concerning
finance receivables of the Company for the years indicated. 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.
6
Item 1. Continued
Years Ended December 31,
1996 1995 1994
Originated, renewed, and purchased:
Amount (in thousands):
Real estate loans $1,314,022 $1,260,673 $1,167,879
Non-real estate loans 2,179,930 2,950,065 2,979,086
Retail sales contracts 1,009,482 1,492,393 1,444,821
Private label (a) 336,550 624,212 153,639
Credit cards (a) 502,379 567,090 -
Total originated and renewed 5,342,363 6,894,433 5,745,425
Net purchased (transferred)
(a) (b) 945,193 (171,767) 1,293,944
Total originated, renewed,
and purchased $6,287,556 $6,722,666 $7,039,369
(a) Private label and credit card finance receivables purchased from
AGFC-Utah in 1996 and 1995 pursuant to the participation agreement
are treated as originations by the Company. The initial purchase of
$1.3 billion of such finance receivables in 1994 was treated as a
purchase.
(b) Includes purchases of finance receivables from affiliates for 1996,
1995, and 1994 of $59.4 million, $29.3 million, and $1.3 billion,
respectively, and transfer of finance receivables of subsidiaries
dividended to affiliates for 1995 of $196.4 million.
Number:
Real estate loans 65,647 72,562 70,430
Non-real estate loans 945,124 1,443,915 1,509,223
Retail sales contracts 772,365 1,240,157 1,255,599
Private label 201,888 433,165 164,094
Average size (to nearest dollar):
Real estate loans $20,016 $17,374 $16,582
Non-real estate loans 2,307 2,043 1,974
Retail sales contracts 1,307 1,203 1,151
Private label 1,667 1,441 936
7
Item 1. Continued
December 31,
1996 1995 1994
Balance at end of period:
Amount (in thousands):
Real estate loans $3,652,106 $2,817,258 $2,697,980
Non-real estate loans 2,459,660 2,694,369 2,656,386
Retail sales contracts 954,975 1,189,272 1,172,099
Private label 376,580 942,706 900,732
Credit cards - 557,603 479,480
Total $7,443,321 $8,201,208 $7,906,677
Number:
Real estate loans 194,689 163,803 161,859
Non-real estate loans 1,214,791 1,426,394 1,430,150
Retail sales contracts 862,047 1,143,310 1,116,592
Private label 276,184 504,184 405,416
Credit cards - 449,591 403,262
Total 2,547,711 3,687,282 3,517,279
Average size (to nearest dollar):
Real estate loans $18,759 $17,199 $16,669
Non-real estate loans 2,025 1,889 1,857
Retail sales contracts 1,108 1,040 1,050
Private label 1,364 1,870 2,222
Credit cards - 1,240 1,189
Geographic Distribution
See Note 5. of the Notes to Consolidated Financial Statements in Item 8.
herein for information on geographic distribution of finance receivables.
8
Item 1. Continued
Average Net Receivables and Yield
The following table details average net receivables and yield by type of
finance receivable for the years indicated:
1996 1995 1994
(dollars in thousands)
Real estate loans:
Average net receivables $3,044,966 $2,839,151 $2,655,771
Yield 14.80% 15.01% 14.38%
Non-real estate loans:
Average net receivables $2,487,112 $2,743,997 $2,434,290
Yield 22.31% 21.83% 21.30%
Total loans:
Average net receivables $5,532,078 $5,583,148 $5,090,061
Yield 18.18% 18.36% 17.69%
Retail sales contracts:
Average net receivables $1,033,800 $1,229,931 $1,011,151
Yield 16.88% 17.14% 16.25%
Private label:
Average net receivables $ 835,191 $ 949,979 $ 45,432
Yield 15.15% 15.35% 13.11%
Total retail sales finance:
Average net receivables $1,868,991 $2,179,910 $1,056,583
Yield 16.11% 16.36% 16.12%
Credit cards:
Average net receivables $ 529,100 $ 506,605 $ -
Yield 20.41% 21.28% - %
Total:
Average net receivables $7,930,169 $8,269,663 $6,146,644
Yield 17.84% 18.01% 17.42%
9
Item 1. Continued
Finance Receivable Loss and Delinquency Experience
The following table details finance receivable loss experience by type of
finance receivable for the years indicated. See Management's Discussion
and Analysis in Item 7. herein and Note 6. of the Notes to Consolidated
Financial Statements in Item 8. herein for further information on finance
receivable loss and delinquency experience and the related allowance.
Years Ended December 31,
1996 1995 1994
(dollars in thousands)
Real estate loans:
Net charge-offs $ 36,352 $ 23,240 $ 15,387
Charge-off ratio 1.21% 0.82% 0.58%
Non-real estate loans:
Net charge-offs $223,580 $165,087 $ 93,666
Charge-off ratio 8.96% 6.11% 3.92%
Total loans:
Net charge-offs $259,932 $188,327 $109,053
Charge-off ratio 4.72% 3.38% 2.15%
Retail sales contracts:
Net charge-offs $ 52,939 $ 35,392 $ 24,319
Charge-off ratio 5.07% 2.89% 2.44%
Private label:
Net charge-offs $ 72,512 $ 51,115 $ 867
Charge-off ratio 8.59% 5.39% 2.01%
Total retail sales finance:
Net charge-offs $125,451 $ 86,507 $ 25,186
Charge-off ratio 6.65% 3.98% 2.42%
Credit cards:
Net charge-offs $ 51,386 $ 36,206 $ -
Charge-off ratio 9.68% 7.19% - %
Total:
Net charge-offs $436,769 $311,040 $134,239
Charge-off ratio (a) 5.51% 3.77% 2.20%
Allowance for finance
receivable losses (b) $385,272 $482,243 $225,922
Allowance ratio (b) 5.18% 5.88% 2.86%
(a) The charge-off ratio represents charge-offs net of recoveries as a
percentage of the average of the amount of net finance receivables at
the beginning of each month during the period.
(b) Allowance for finance receivable losses represents the balance at the
end of the period. The allowance ratio represents the allowance for
finance receivable losses at the end of the period as a percentage of
net finance receivables.
10
Item 1. Continued
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.
AGFC'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. Credit card and private label accounts are
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 value in excess of that amount is
charged off. The charge-off period is occasionally extended for individual
accounts when, in the opinion of management, such treatment is warranted.
Based upon contract terms in effect at the respective dates, delinquency
(finance receivables any portion of which was 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) was as follows:
December 31,
1996 1995 1994
(dollars in thousands)
Real estate loans $ 83,239 $ 59,517 $ 46,734
% of related receivables 2.23% 2.01% 1.65%
Non-real estate loans $179,719 $197,662 $140,535
% of related receivables 6.43% 6.37% 4.54%
Total loans $262,958 $257,179 $187,269
% of related receivables 4.03% 4.24% 3.16%
Retail sales contracts $ 33,675 $ 43,171 $ 25,227
% of related receivables 2.90% 3.01% 1.73%
Private label $ 12,567 $ 48,430 $ 24,020
% of related receivables 3.32% 4.77% 2.76%
Total retail sales finance $ 46,242 $ 91,601 $ 49,247
% of related receivables 3.01% 3.76% 2.13%
Credit cards $ - $ 28,520 $ 15,454
% of related receivables - % 4.85% 3.25%
Total $309,200 $377,300 $251,970
% of related receivables 3.84% 4.15% 2.89%
11
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.
The spread between the rates charged on finance receivables and the cost of
borrowed funds is one of the major factors determining the Company's
earnings. The Company is limited by statute in most states to a maximum
rate which it may charge in its consumer finance operations.
Average Borrowings and Borrowing Cost
The following table details average borrowings and interest expense as a
percentage of average borrowings by type of debt for the years indicated:
1996 1995 1994
(dollars in thousands)
Long-term debt:
Average borrowings $4,680,197 $4,840,860 $4,095,132
Borrowing cost 7.28% 7.27% 7.33%
Short-term debt:
Average borrowings $2,309,548 $2,369,063 $2,076,133
Borrowing cost 6.13% 6.54% 5.38%
Total:
Average borrowings $6,989,745 $7,209,923 $6,171,265
Borrowing cost 6.90% 7.03% 6.67%
Contractual Maturities
Contractual maturities of finance receivables and debt at December 31, 1996
were as follows:
Net Finance
Receivables Debt
(dollars in thousands)
Due in:
1997 $2,342,392 $4,220,174
1998 1,399,636 809,569
1999 870,329 548,674
2000 486,280 933,935
2001 304,410 39,881
2002 and thereafter 2,040,274 880,324
Total $7,443,321 $7,432,557
12
Item 1. Continued
See Note 5. of the Notes to Consolidated Financial Statements in Item 8.
herein for further information on principal cash collections of finance
receivables. Debt maturities include amounts to fund assets held for sale
in addition to amounts to fund finance receivables.
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 typically cover
the life of the borrower in an amount 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 of the installments on the insured's
obligation to the lender 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 of the installments on the insured's obligation to
the lender 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 property damage
coverage for automobiles, large equipment, dwellings, and commercial 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 has from time to time entered into reinsurance agreements with other
insurance companies, including certain other American General subsidiaries,
for assumptions of various shares of annuities and non-credit, group, and
credit life 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, 1996, life reserves on
the books of Merit attributable to these reinsurance agreements totaled
$69.2 million.
13
Item 1. Continued
The following tables show information concerning the insurance operations
for the years indicated:
Life Insurance in Force December 31,
1996 1995 1994
(dollars in thousands)
Credit life $2,629,019 $3,053,300 $2,899,124
Non-credit life 3,936,856 3,564,214 2,773,928
Total $6,565,875 $6,617,514 $5,673,052
Premiums Earned Years Ended December 31,
1996 1995 1994
(dollars in thousands)
Insurance premiums earned in
connection with affiliated
finance and loan activities:
Credit life $ 39,005 $ 44,682 $ 39,398
Credit accident and health 52,379 59,442 51,983
Property 57,895 51,438 37,847
Other insurance premiums earned:
Non-credit life 47,325 50,116 26,685
Premiums assumed under
coinsurance agreements 4,750 11,006 18,599
Total $201,354 $216,684 $174,512
Premiums Written Years Ended December 31,
1996 1995 1994
(dollars in thousands)
Insurance premiums written in
connection with affiliated
finance and loan activities:
Credit life $ 28,864 $ 44,086 $ 47,864
Credit accident and health 39,217 56,175 64,395
Property 52,230 65,059 55,086
Other insurance premiums written:
Non-credit life 47,325 50,116 26,685
Premiums assumed under
coinsurance agreements 4,750 11,006 18,599
Total $172,386 $226,442 $212,629
14
Item 1. Continued
Investments and Investment Results
The following table summarizes the investment results of the Company's
insurance subsidiaries for the years indicated:
Years Ended December 31,
1996 1995 1994
(dollars in thousands)
Net investment revenue (a) $ 64,860 $ 62,880 $ 56,795
Average invested assets (b) $885,741 $817,254 $730,368
Adjusted portfolio yield (c) 8.07% 8.41% 8.53%
Net realized gains (losses)
on investments (d) $ (909) $ 876 $ (141)
(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.
herein 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. In general, 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.
In addition, certain of these laws prohibit the taking of liens on real
estate except liens resulting from judgments.
The Company also is subject to various types of federal regulation,
including the Federal Consumer Credit Protection Act and the Truth In
Lending Act (governing disclosure of applicable charges and other loan
terms), the Equal Credit Opportunity Act (prohibiting discrimination
15
Item 1. Continued
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, nature of and limitations on investments,
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.
The investment portfolio of the Company's insurance subsidiaries is subject
to state insurance laws and regulations which prescribe the nature, quality
and percentage of various types of investments which may be made by
insurance companies.
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. herein 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.
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.
16
Item 2. Continued
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 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 have no 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.
17
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters.
No trading market exists for AGFC common stock because AGFI owns all AGFC
common stock. AGFC declared the following cash dividends on its common
stock for the years indicated:
Quarter Ended 1996 1995
(dollars in thousands)
March 31 $ 29,007 $ 27,534
June 30 35,358 38,608
September 30 50,189 42,367
December 31 33,020 -
$147,574 $108,509
See Management's Discussion and Analysis in Item 7. herein, as well as Note
17. of Notes to Consolidated Financial Statements in Item 8. herein, 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 derived from the consolidated
financial statements of the Company. The data should be read in
conjunction with the consolidated financial statements and related notes,
Management's Discussion and Analysis in Item 7. herein, and other financial
information included herein.
At or for the Years Ended December 31,
1996 1995 1994 1993(a) 1992
(dollars in thousands)
Total revenues $1,708,673 $1,789,184 $1,388,075 $1,212,917 $1,092,858
Net income (b) 50,959 92,293 243,300 189,628 160,171
Total assets 9,502,589 9,485,477 8,918,698 7,504,798 6,999,570
Long-term debt 4,416,637 4,935,894 4,265,226 3,965,772 3,558,401
(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 the common stock
of AGFC is owned by AGFI.
18
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
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 $589.9 million in 1996 compared to $638.1
million in 1995 and $466.8 million in 1994. Operating cash flow combined
with the net proceeds of increased debt, the change in notes receivable
from parent and affiliate, 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 and $2.3
billion in 1994. 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, $890.9
million in 1995, and $2.1 billion in 1994 and to pay dividends to AGFI of
$147.6 million in 1996, $28.5 million in 1995 (net of an $80.0 million
capital contribution from AGFI), and $97.5 million in 1994.
Dividends paid are typically managed to maintain the Company's targeted
leverage 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, 1996 was 7.08 to 1. The
Company exceeded targeted leverage due to the loss associated with the
fourth quarter 1996 decision to offer for sale certain non-strategic,
underperforming finance receivables. Excluding the impact of recording the
valuation charge to income associated with the assets held for sale on
December 31, 1996, the debt to tangible equity ratio at December 31, 1996
was 6.53 to 1. The Company expects to return to its targeted leverage in
first quarter 1997. 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 pay the amount of dividends
necessary to maintain the Company's targeted leverage. See Note 17. of the
Notes to Consolidated Financial Statements in Item 8. herein for
information on dividend restrictions.
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 year-end 1996, the Company's capital totaled $8.8 billion,
consisting of $7.4 billion of debt and $1.4 billion of equity, compared to
$8.7 billion at year-end 1995, consisting of $7.3 billion of debt and $1.4
billion of equity.
19
Item 7. Continued
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 14, 1997, AGFC's ratings (some of which were
under review by the rating agencies, along with certain of American
General's ratings, resulting from American General's planned merger with
USLIFE Corporation (USLIFE) which is expected to close by June 30, 1997)
were as follows:
Long-term Debt Commercial Paper
Moody's A1 (Strong) P-1 (Highest)
Standard & Poor's A+ (Strong) A-1 (Strong)
Duff & Phelps A+ (Strong) D-1+ (Highest)
Fitch - F-1+ (Highest)
On March 11, 1997, Standard & Poor's Ratings Services indicated that it
expects to reduce its long-term debt ratings of AGFC, along with certain of
American General's ratings, by one notch upon completion of the USLIFE
merger into American General. Also, as of this date, Duff & Phelps Credit
Rating Co. has affirmed AGFC's ratings, while Moody's Investors Service,
Inc. continues to review AGFC's ratings for possible downgrade.
Credit Facilities
The Company maintains credit facilities to support the issuance of
commercial paper by AGFC and to provide an additional source of funds for
operating requirements. At year-end 1996, credit facilities, including
facilities shared with American General and certain of its subsidiaries,
totaled $4.0 billion, with remaining availability to the Company of $4.0
billion. See Note 12. of the Notes to Consolidated Financial Statements in
Item 8. herein for additional information on credit facilities.
Securitization
The Company securitized a portion of its portfolio of private label and
credit card finance receivables to establish additional sources of funding
and liquidity. During 1995, the Company sold $100 million of securitized
finance receivables with limited recourse. At December 31, 1996,
securitized finance receivables sold remained at $100 million. The Company
plans to reacquire these finance receivables and sell a portion of them
with the assets held for sale. See Note 5. of the Notes to Consolidated
20
Item 7. Continued
Financial Statements in Item 8. herein for additional information on
securitization.
ANALYSIS OF OPERATING RESULTS
See Selected Financial Information in Item 1. herein for information on
important aspects of the Company's business and as a frame of reference for
the discussion following.
Net Income
Net income decreased $41.3 million, or 45%, for 1996 and $151.0 million, or
62%, for 1995 when compared to the respective previous year.
The decline in credit quality of the Company's finance receivables
beginning in 1995 and management's related actions have caused net income
to fluctuate over the past two years. As a result of the Company's
strategy in prior years of emphasizing higher-yielding finance receivables,
which are characterized by higher credit risk, delinquencies and net
charge-offs increased to higher than anticipated levels beginning in the
third quarter of 1995. Due to these increases in delinquencies and net
charge-offs, a comprehensive review of the Company was initiated 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, a $216.0 million increase in the allowance for
finance receivable losses was recorded 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.
At December 31, 1996, net finance receivables totaled $7.4 billion, a
decrease of $757.9 million from December 31, 1995 primarily due to the
reclassification of certain finance receivables to assets held for sale,
partially offset by an increase in real estate loans.
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 an associated
allowance for finance receivable losses of $70.0 million 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, the Company determined that an aftertax write-down
of $88.1 million was necessary to reduce the carrying amount of the assets
held for sale to net realizable value, after considering related expenses.
See Note 10. of the Notes to Consolidated Financial Statements in Item 8.
herein for further information on this reclassification.
21
Item 7. Continued
As part of the Company's strategy to rebalance its finance receivable
portfolio, the Company emphasized real estate loan growth during 1996. At
December 31, 1996, real estate secured finance receivables accounted for
49% of total finance receivables compared to 34% at December 31, 1995 due
to the purchases of five real estate loan portfolios totaling $753.7
million, the emphasis on real estate loan growth in the branches, the
reclassification of certain finance receivables to assets held for sale,
and the substantial liquidation of underperforming receivables during 1996.
Operating results for 1996 were below Company expectations primarily due to
the valuation charge to income associated with the assets held for sale,
the above-historical loss rates on finance receivables generated during
1994 and 1995, and the decline in credit fundamentals in the consumer
finance market, including the record level of personal bankruptcies.
During 1996, the Company eliminated certain underperforming non-branch
marketing programs, established higher underwriting standards, revised the
field office incentive compensation system, and increased use of credit
scoring. The Company plans to introduce additional programs during 1997 to
further address credit quality, finance receivable originations, and
expense reduction. In addition to the increased use of industry credit
scoring models, custom scoring models will be implemented during 1997.
Factors which specifically affected the Company's operating results are as
follows:
Finance Charges
Finance charge revenues decreased $74.9 million, or 5%, for 1996 and
increased $418.7 million, or 39%, for 1995 when compared to the respective
previous year.
The decrease in finance charge revenues for 1996 when compared to 1995 was
due to decreases in average net receivables and yields, partially offset by
an additional day in 1996. 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. Due to this action
program, finance receivables originated and renewed decreased when compared
to 1995. This was partially offset by an increase in finance receivables
purchased (primarily real estate secured receivables). The yield decreased
17 basis points during 1996 when compared to 1995 primarily due to the
action program to improve credit quality (including a larger proportion of
the finance receivable portfolio in real estate secured loans which
generally have lower yields) and the increased proportion of non-accrual
delinquent finance receivables during 1996.
The increase in finance charge revenues for 1995 when compared to 1994 was
due to increases in average net receivables and yields. Average net
receivables increased $2.1 billion, or 35%, during 1995 when compared to
1994 primarily due to the addition of participated private label and credit
card finance receivables to the Company's portfolio pursuant to a
participation agreement entered into on December 31, 1994 with AGFC-Utah
and growth in the loan and retail sales finance portfolios resulting from
business development efforts. The yield increased 59 basis points during
22
Item 7. Continued
1995 when compared to 1994 primarily due to higher yield on loans and
retail sales contracts. The loan yield for 1995 increased when compared to
1994 primarily due to higher yield on real estate loans, resulting from the
higher interest rate environment and rate management. The increase in loan
yield for 1995 also reflected the change in the amortization of premiums on
certain purchased finance receivables which were fully amortized in the
second quarter of 1994. The retail sales contracts' yield for 1995
increased when compared to 1994, reflecting improved pricing strategies and
market conditions.
Insurance Revenues
Insurance revenues decreased $16.1 million, or 7%, for 1996 and increased
$42.4 million, or 24%, for 1995 when compared to the respective previous
year.
The decrease in insurance revenues for 1996 when compared to 1995 was
primarily due to a decrease in earned premiums. Earned premiums decreased
primarily due to a decrease in net written premiums which reflected the
decrease in loan volume resulting from the action program to improve credit
quality.
The increase in insurance revenues for 1995 when compared to 1994 was
primarily due to an increase in earned premiums. Earned premiums increased
primarily due to an increase in net written premiums reflecting higher
credit insurance sales on increased loan volume and the introduction of a
new non-credit insurance product in 1995.
Other Revenues
Other revenues increased $10.5 million, or 14%, for 1996 and decreased
$59.9 million, or 44%, for 1995 when compared to the respective previous
year.
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, or 8%, 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.
The decrease in other revenues for 1995 when compared to 1994 was primarily
due to a decrease in interest revenue on notes receivable from parent
partially offset by an increase in investment revenue on the invested
assets for the insurance operations and the gain recorded in 1995 for the
securitized finance receivables sold. The decrease in interest revenue on
23
Item 7. Continued
notes receivable from parent for 1995 when compared to 1994 resulted from
the participation agreement entered into on December 31, 1994 with AGFC-
Utah. Finance receivables under such agreement totaling $1.3 billion at
December 31, 1994 were previously purchased by AGFI with funding provided
by AGFC through an intercompany note. The increase in investment revenue
for 1995 when compared to 1994 was primarily due to growth in average
invested assets for the insurance operations of $86.9 million, or 12%, and
realized gains on investments of $.9 million for 1995 compared to $.1
million of realized losses on investments for 1994, partially offset by a
decrease in adjusted portfolio yield of 12 basis points.
Interest Expense
Interest expense decreased $24.3 million, or 5%, for 1996 and increased
$94.7 million, or 23%, for 1995 when compared to the respective previous
year.
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.
The increase in interest expense for 1995 when compared to 1994 was due to
increases in average borrowings and borrowing cost. Average borrowings
increased $1.0 billion, or 17%, for 1995 when compared to 1994 to fund
asset growth. The borrowing cost increased 36 basis points for 1995 when
compared to 1994 due to an increase in short-term borrowing cost, partially
offset by a decrease in long-term borrowing cost.
Operating Expenses
Operating expenses increased $30.8 million, or 7%, for 1996 and $131.9
million, or 39%, for 1995 when compared to the respective previous year.
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, 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.
Since late 1995, certain underperforming marketing initiatives have either
been restructured or discontinued. Certain non-recurring operating
expenses associated with these programs negatively impacted operating
expenses during 1996 by $8.9 million. The action program implemented in
fourth quarter 1995 (which included emphasizing real estate loan growth)
contributed to a workforce reduction of approximately 700 positions and a
net decrease of 19 branch offices during 1996.
24
Item 7. Continued
The increase in operating expenses for 1995 when compared to 1994 was
primarily due to growth in the business, including growth that occurred in
1994, which resulted in operational staffing increases and increases in
other growth-related expenses. During 1995 (prior to the dividend of the
two subsidiaries operating in Alabama to AGFI on December 31, 1995), the
Company increased its finance receivable portfolio by over 239,000
accounts, increased net receivables by $491.0 million, and opened over 100
new consumer finance offices. During 1995, the Company added 1,900
employees, including 1,100 branch employees and 800 employees to process
the private label and credit card finance receivables resulting from the
participation agreement entered into on December 31, 1994 and the growth in
such activity. The dividend of the subsidiaries operating in Alabama
decreased the Company's finance receivable portfolio by over 69,000
accounts totaling $196.4 million, consumer finance offices by 34 offices,
and branch employees by approximately 200 employees. The increase in
operating expenses for 1995 when compared to 1994 also reflected increased
collection efforts on the higher level of delinquent finance receivables.
Provision for Finance Receivable Losses
Provision for finance receivable losses decreased $164.1 million, or 29%,
for 1996 and increased $418.8 million, or 270%, for 1995 when compared to
the respective previous year.
The decrease in provision for finance receivable losses for 1996 when
compared to 1995 was due to a decrease in the amounts provided for the
allowance for finance receivable losses, partially offset by an increase in
net charge-offs. The increase in provision for finance receivable losses
for 1995 when compared to 1994 was due to increases in amounts provided for
the allowance for finance receivable losses and net charge-offs. The
decline in credit quality beginning in 1995 and management's related
actions have caused net income to fluctuate over the past two years. See
Analysis of Operating Results - Net Income for further information on the
decline in credit quality and management's related actions.
Net charge-offs for 1996 increased to $436.8 million from $311.0 million
for 1995 and $134.2 million for 1994. The charge-off ratio for 1996
increased to 5.51% compared to 3.77% for 1995 and 2.20% for 1994.
At year-end 1996, delinquencies were $309.2 million compared to $377.3
million at 1995 and $252.0 million at 1994. The delinquency ratio at year-
end 1996 decreased to 3.84% compared to 4.15% at 1995 and 2.89% at 1994.
The decrease in delinquency in 1996 was primarily due to the
reclassification of certain finance receivables to assets held for sale.
The allowance for finance receivable losses decreased to $385.3 million at
December 31, 1996 from $482.2 million at December 31, 1995. The allowance
ratio at December 31, 1996 was 5.18% compared to 5.88% at December 31,
1995. The decrease in allowance for finance receivable losses for 1996
reflects management's expected results from the credit quality action
program including the increased proportion of real estate secured loans
which generally have lower net charge-offs and the reclassification of
certain finance receivables to assets held for sale. Based upon an
25
Item 7. Continued
analysis of the finance receivable portfolio, management believes that the
allowance for finance receivable losses is adequate given the current level
of delinquencies and net charge-offs.
Improvement in credit quality in the core U.S. branch operations and
benefits from the increased proportion of finance receivables that are
secured by real estate were somewhat offset by the general deterioration of
credit fundamentals within the consumer finance market. Growth in U.S.
consumer debt moderated in the second half of 1996 but still remains
strong, challenging individuals' abilities to honor their obligations.
U.S. credit card delinquencies are at record levels, as is consumer and
mortgage debt as a percentage of household income. The liberalization of
bankruptcy laws late in 1995 have been cited as a principal reason for a
30% increase in personal bankruptcies in 1996 to a number in excess of 1.1
million filings.
Management believes that the planned sale of the non-strategic,
underperforming finance receivable portfolios combined with the ongoing
action program will address the overall credit quality issues. However,
delinquencies have remained at higher than expected levels, indicating that
charge-offs may continue above historical levels for the near term. In
addition, adverse changes in credit fundamentals within the consumer
finance market, including the current high level of personal bankruptcies,
could negatively impact expected results.
Loss on Assets Held for Sale
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. See Analysis of Operating Results - Net Income and Note
10. of the Notes to Consolidated Financial Statements in Item 8. herein for
further information on this reclassification.
Insurance Losses and Loss Adjustment Expenses
Insurance losses and loss adjustment expenses decreased $14.0 million, or
12%, for 1996 and increased $18.9 million, or 19%, for 1995 when compared
to the respective previous year.
The decrease in insurance losses and loss adjustment expenses for 1996 when
compared to 1995 was due to decreases in provision for future benefits and
in claims paid. Provision for future benefits decreased $9.2 million for
1996 due to reduced sales of non-credit insurance products. Claims for
1996 decreased $4.8 million primarily due to a decrease in loss experience
on credit insurance.
The increase in insurance losses and loss adjustment expenses for 1995 when
compared to 1994 was due to an increase in claims and in provision for
future benefits. Claims for 1995 increased $11.8 million reflecting higher
credit insurance sales. Provision for future benefits increased $7.1
26
Item 7. Continued
million for 1995 primarily due to a new non-credit insurance product sold
beginning in 1995.
Provision for Income Taxes
The provision for income taxes decreased $4.7 million, or 14%, for 1996 and
$112.3 million, or 77%, for 1995 when compared to the respective previous
year.
The decrease in the provision for income taxes for 1996 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 state
net operating loss (NOL) carryforwards 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, 1996 and
1995, the state NOL carryforwards remaining were $634.7 million and $650.9
million, respectively, which expire in the years 2005 and 2006.
The decrease in the provision for income taxes for 1995 when compared to
1994 was primarily due to lower taxable income and the non-recurring state
income tax adjustment previously discussed.
ANALYSIS OF FINANCIAL CONDITION
At December 31, 1996, the Company's assets were distributed as follows:
74.28% in net finance receivables, less allowance for finance receivable
losses, 9.25% in investment securities, 7.04% in assets held for sale,
3.89% in other assets, 2.77% in acquisition-related goodwill, 1.82% in
notes receivable from parent, and .95% 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, 93% of the
loans, retail sales contracts, and private label outstanding at December
31, 1996 are secured by real property or personal property.
During 1995, the Company increased the allowance ratio due to the higher-
than-anticipated increase in delinquencies and net charge-offs. While
delinquencies and net charge-offs have remained at higher than historical
levels during 1996, the allowance for finance receivable losses decreased
reflecting management's expected results from the credit quality action
program including the increased proportion of real estate secured loans
which generally have lower net charge-offs and the reclassification of
certain finance receivables to assets held for sale. See Analysis of
Operating Results for further information on allowance for finance
receivable losses, 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.
27
Item 7. Continued
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. herein for
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,
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 1997.
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, surplus operating cash, and proceeds from the sale of
assets held for sale.
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 has used interest conversion agreements to synthetically create fixed-
rate debt by altering the nature of floating-rate funding, thereby limiting
its exposure to interest rate movements.
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.
28
Item 7. Continued
Economic Factors
The three key economic factors that affect the results of the Company are
interest rates, inflation, and recession/recovery.
Interest Rates. 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. During 1996, interest rates in the United
States generally decreased from 1995, compared to increases during 1995 and
1994 from the historically low levels experienced during 1993.
The Company pursues opportunities created by market conditions regarding
both finance receivable mix and funding alternatives to manage interest
spreads. During 1996, the Company's interest spread decreased slightly
when compared to 1995 due to a decrease in finance receivable yield,
partially offset by a decrease in borrowing cost. Growth in higher
yielding receivables in 1995 and 1994 and a decrease in borrowing cost in
1994 caused the Company's interest spread to increase during 1995 and 1994.
The Company's finance receivable yield decreased during 1996, but increased
during 1995 and 1994. The yield decreased during 1996 primarily due to the
effects of the action program to improve credit quality (including a larger
proportion of the finance receivable portfolio in real estate secured loans
which generally have lower yields). Decreases in interest rates also
facilitated the decrease in yield for 1996. During 1994 and the first
three quarters of 1995, the Company took advantage of market opportunities
to originate non-real estate loans and retail sales finance receivables
with higher yields. Increases in interest rates also facilitated the
increase in yield for 1995 and 1994. The 1995 increase in yield was
partially offset by the aforementioned action program to improve credit
quality.
The movement in interest rates also contributed to a decrease in the
Company's borrowing cost during 1996 and 1994 and an increase during 1995.
Rates on short-term debt, principally commercial paper, decreased during
1996, but increased during 1995 and 1994. During 1996, rates on long-term
debt remained relatively flat, but decreased during 1995 and 1994.
The Company's insurance subsidiaries' average invested assets and net
investment revenue increased in each of the last three years. The return
on invested assets for the insurance operations declined in each of the
last three years primarily due to the generally lower interest rate
environment and the Company's conservative investment policy, both of which
have resulted in lower yielding securities.
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, 2)
market opportunities that may or may not exist at the time such a movement
occurs for both investment and funding alternatives, 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.
29
Item 7. Continued
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. However, market
expectations of inflation apparently contributed to significant increases
in interest rates (particularly short-term rates) during 1994 and the first
half of 1995.
Revenue generated from interest rates charged on most of the Company's
finance receivables (other than real estate secured loans) is relatively
insensitive to movements in interest rate levels caused by inflation. Real
estate secured finance receivables 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 implementation of more
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.
Recent economic statistics suggest that the U. S. economy remains in a
somewhat expansionary mode and that employment is improving in both
absolute and relative terms. However, other data suggest consumers are
becoming overextended in their ability to repay obligations as evidenced by
increased consumer debt outstanding and increased frequency of personal
bankruptcies. The Company believes that there will be limited economic
growth for the country in general during 1997. This economic outlook,
combined with the Company's more conservative lending policies and
portfolio restructuring, indicate that net growth of finance receivables
from internally generated sources will, at best, be minimal for 1997.
Regulatory Factors
The regulatory environment of the consumer finance and insurance industries
is described in Item 1. herein. 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.
30
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
improvement, 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.
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. 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; and failure to achieve the Company's anticipated levels
of expense savings from cost-saving initiatives. The Company's future
results also could be adversely affected if finance receivable volume is
lower than anticipated or if, despite the Company's initiatives to improve
credit quality, finance receivable delinquencies and net charge-offs
increase or remain at current levels for a longer period than anticipated
by management. Failure to dispose of assets held for sale for carrying
value could also adversely affect the Company's future results. Readers
are also directed to other risks and uncertainties discussed in documents
filed by the Company with the Securities and Exchange Commission.
Item 8. Financial Statements and Supplementary Data.
The Report of Independent Auditors and the related consolidated financial
statements are presented on the following pages.
31
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, 1996 and 1995, 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, 1996.
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, 1996 and 1995, and the consolidated results of their
operations and their cash flows for each of the three years in the period
ended December 31, 1996, 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 14, 1997
32
American General Finance Corporation and Subsidiaries
Consolidated Balance Sheets
December 31,
1996 1995
(dollars in thousands)
Assets
Finance receivables, net of unearned
finance charges (Note 5.):
Real estate loans $3,652,106 $2,817,258
Non-real estate loans 2,459,660 2,694,369
Retail sales contracts 954,975 1,189,272
Private label 376,580 942,706
Credit cards - 557,603
Net finance receivables 7,443,321 8,201,208
Allowance for finance receivable
losses (Note 6.) (385,272) (482,243)
Net finance receivables, less allowance
for finance receivable losses 7,058,049 7,718,965
Investment securities (Note 7.) 879,133 883,895
Cash and cash equivalents 90,197 88,297
Notes receivable from parent (Note 8.) 173,235 187,038
Goodwill (Note 9.) 263,171 279,532
Other assets (Note 9.) 370,097 327,750
Assets held for sale (Note 10.) 668,707 -
Total assets $9,502,589 $9,485,477
Liabilities and Shareholder's Equity
Long-term debt (Note 11.) $4,416,637 $4,935,894
Short-term notes payable:
Commercial paper (Notes 12. and 13.) 3,015,920 2,194,771
Banks and other (Notes 12. and 14.) - 135,700
Insurance claims and policyholder
liabilities 456,430 483,971
Other liabilities 263,154 275,683
Accrued taxes 15,525 10,962
Total liabilities 8,167,666 8,036,981
Shareholder's equity:
Common stock (Note 16.) 5,080 5,080
Additional paid-in capital 691,914 691,914
Net unrealized gains on investment
securities (Note 7.) 21,454 38,412
Retained earnings (Note 17.) 616,475 713,090
Total shareholder's equity 1,334,923 1,448,496
Total liabilities and shareholder's equity $9,502,589 $9,485,477
See Notes to Consolidated Financial Statements.
33
American General Finance Corporation and Subsidiaries
Consolidated Statements of Income
Years Ended December 31,
1996 1995 1994
(dollars in thousands)
Revenues
Finance charges $1,414,590 $1,489,466 $1,070,770
Insurance 206,170 222,282 179,927
Other 87,913 77,436 137,378
Total revenues 1,708,673 1,789,184 1,388,075
Expenses
Interest expense 482,343 506,618 411,875
Operating expenses 497,204 466,399 334,467
Provision for finance receivable
losses 409,646 573,698 154,914
Loss on assets held for sale 137,036 - -
Insurance losses and loss
adjustment expenses 102,811 116,829 97,893
Total expenses 1,629,040 1,663,544 999,149
Income before provision for income
taxes 79,633 125,640 388,926
Provision for Income Taxes
(Note 15.) 28,674 33,347 145,626
Net Income $ 50,959 $ 92,293 $ 243,300
See Notes to Consolidated Financial Statements.
34
American General Finance Corporation and Subsidiaries
Consolidated Statements of Shareholder's Equity
Years Ended December 31,
1996 1995 1994
(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 691,914 611,914 611,914
Capital contribution from parent - 80,000 -
Balance at end of year 691,914 691,914 611,914
Net Unrealized Gains (Losses)
on Investment Securities
Balance at beginning of year 38,412 (18,407) 33,740
Change during year (16,958) 56,819 (52,147)
Balance at end of year 21,454 38,412 (18,407)
Retained Earnings
Balance at beginning of year 713,090 729,430 551,155
Net income 50,959 92,293 243,300
Common stock dividends (147,574) (108,633) (65,025)
Balance at end of year 616,475 713,090 729,430
Total Shareholder's Equity $1,334,923 $1,448,496 $1,328,017
See Notes to Consolidated Financial Statements.
35
American General Finance Corporation and Subsidiaries
Consolidated Statements of Cash Flows
Years Ended December 31,
1996 1995 1994
(dollars in thousands)
Cash Flows from Operating Activities
Net Income $ 50,959 $ 92,293 $ 243,300
Reconciling adjustments to net cash
provided by operating activities:
Provision for finance receivable losses 409,646 573,698 154,914
Depreciation and amortization 87,129 107,288 116,091
Deferral of finance receivable
origination costs (49,129) (73,711) (86,581)
Deferred federal income tax benefit (40,681) (69,570) (9,720)
Deferred state income tax benefit (2,216) (16,550) -
Change in other assets and other
liabilities (21,891) 31,693 18,914
Change in insurance claims and
policyholder liabilities (27,541) 17,088 51,395
Loss on assets held for sale 137,036 - -
Gain on finance receivables sold
through securitization - (4,552) -
Other, net 46,608 (19,627) (21,486)
Net cash provided by operating activities 589,920 638,050 466,827
Cash Flows from Investing Activities
Finance receivables originated or purchased (5,249,595) (5,776,614) (4,580,616)
Principal collections on finance receivables 4,778,076 4,916,984 3,678,702
Securitized finance receivables sold - 100,000 -
Investment securities purchased (188,657) (199,587) (161,144)
Investment securities called, matured and sold 169,350 108,656 81,161
Change in notes receivable from parent
and affiliate 13,803 - 585,385
Net purchases and transfers of assets
from affiliates (62,176) (31,259) (1,205,945)
Other, net (64,253) (45,148) (19,280)
Net cash used for investing activities (603,452) (926,968) (1,621,737)
Cash Flows from Financing Activities
Proceeds from issuance of long-term debt 77,817 1,567,933 1,075,544
Repayment of long-term debt (600,260) (900,760) (779,350)
Change in short-term notes payable 685,449 (299,992) 983,002
Capital contribution from parent - 80,000 -
Dividends paid (147,574) (108,509) (97,536)
Net cash provided by financing activities 15,432 338,672 1,181,660
Increase in cash and cash equivalents 1,900 49,754 26,750
Cash and cash equivalents at beginning of year 88,297 38,543 11,793
Cash and cash equivalents at end of year $ 90,197 $ 88,297 $ 38,543
Supplemental Disclosure of Cash Flow Information
Income taxes paid $ 41,187 $ 156,506 $ 160,116
Interest paid $ 484,813 $ 489,475 $ 401,763
See Notes to Consolidated Financial Statements.
36
American General Finance Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 1996
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 financial services holding company with subsidiaries that are 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. On
December 31, 1994, the Company entered into a participation agreement
whereby the Company purchases all of the private label and credit card
finance receivables originated by American General Financial Center (AGFC-
Utah), another subsidiary of the Company's parent, American General
Finance, Inc. (AGFI). At December 31, 1996, the Company had 1,354 offices
in 39 states, Puerto Rico and the U.S. Virgin Islands and approximately
9,100 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 AGFC-Utah (arising from the sales by
approximately 250 retail merchants) pursuant to the participation agreement
entered into on December 31, 1994. 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 credit card operations, the Company purchases
MasterCard and VISA credit card receivables originated by AGFC-Utah
pursuant to the participation agreement entered into on December 31, 1994.
Credit cards are unsecured. 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.
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 an associated allowance for finance receivable losses of
$70.0 million to assets held for sale on December 31, 1996. See Note 10.
for further information on this reclassification.
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.
37
Notes to Consolidated Financial Statements, Continued
At December 31, 1996, the Company had $7.4 billion of net finance
receivables due from approximately 2.5 million customer accounts and $6.6
billion of credit and non-credit life insurance in force covering
approximately 1.5 million customer accounts.
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).
FINANCE OPERATIONS
Revenue Recognition
Revenue on finance receivables is accounted for as follows:
(1) 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 credit cards and private label.
(2) Extension fees and late charges are recognized as revenue when
received.
(3) 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.
Origination Costs
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.
38
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.
AGFC'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. Credit card and private label accounts are
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 value in excess of that amount 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
39
Notes to Consolidated Financial Statements, Continued
estimated based upon claims reported plus estimates of incurred but not
reported claims. Non-credit life, group annuity, and accident and health
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 reserves attributable to this business
with the subsidiaries of American General were $60.8 million and $61.0
million at December 31, 1996 and 1995, respectively. The Company's
insurance subsidiaries assumed from other insurers $47.5 million, $59.9
million, and $51.4 million of reinsurance premiums during 1996, 1995, and
1994, 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 the Company. 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,
1996 1995 1994 1996 1995
(dollars in thousands)
Statutory accounting
practices $79,157 $42,006 $35,466 $394,708 $319,413
Generally accepted
accounting principles 59,625 58,245 46,903 539,307 496,640
40
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. The Company determines the fair value based on an independent
appraisal.
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.
41
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.
Interest Conversion Agreements
The interest differential to be paid or received on interest conversion
agreements is recorded on the accrual basis and is recognized over the life
of the agreements as an adjustment to interest expense. The related amount
payable to or receivable from counterparties is included in other
liabilities or other assets.
The fair values of interest conversion agreements are not recognized in the
consolidated balance sheet, which is consistent with the treatment of the
related funding that is hedged.
Any gain or loss from early termination of an interest conversion agreement
is deferred and amortized into income over the remaining term of the
related funding. If the underlying funding is extinguished, any related
gain or loss on interest conversion agreements is recognized in income.
Use of Estimates
Management makes estimates and assumptions in preparing financial
statements in conformity with generally accepted accounting principles that
affect (1) the reported amounts of assets and liabilities, (2) disclosures
of contingent assets and liabilities and (3) the reported amounts of
revenues and expenses during the reporting periods. Ultimate results could
differ from those 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.
42
Notes to Consolidated Financial Statements, Continued
Note 3. Accounting Changes
In June 1996, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (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. The
statement must be applied prospectively to applicable transactions
occurring after December 31, 1996; however, certain provisions addressing
secured borrowings with a pledge of collateral and transfers of financial
assets that are part of repurchase agreements, dollar rolls, securities
lendings, and similar transactions are effective for transactions after
December 31, 1997. Earlier or retroactive application is not permitted.
The Company does not anticipate a material effect on consolidated results
of operations and financial position related to adoption of this statement.
During 1995, the Company adopted SFAS 121, "Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." This
statement establishes accounting standards for (1) the impairment of long-
lived assets, certain identifiable intangibles, and goodwill related to
those assets to be held and used in the business, and (2) long-lived assets
and certain identifiable intangibles to be disposed of. Adoption of this
standard did not have a material impact on the consolidated financial
statements.
During 1994, the Company adopted SFAS 118, "Accounting by Creditors for
Impairment of a Loan - Income Recognition and Disclosures," and SFAS 119,
"Disclosure about Derivative Financial Instruments and Fair Value of
Financial Instruments." SFAS 118 requires disclosures about the recorded
investment in certain impaired loans and the recognition of related
interest income. SFAS 119 requires additional disclosures about derivative
financial instruments and amends existing fair value disclosure
requirements. Adoption of these standards did not impact the consolidated
financial statements.
Note 4. Net Purchases and Transfers of Assets from Affiliates
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.
On December 31, 1994, the Company entered into a participation agreement
with AGFC-Utah whereby the Company purchased a 100% participation in AGFC-
Utah's credit card and private label finance receivables. (Finance
43
Notes to Consolidated Financial Statements, Continued
receivables purchased from AGFC-Utah in 1996 and 1995 pursuant to the
participation agreement are treated as originations by the Company and are
not included in the table below.)
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:
1996 1995 1994
(dollars in thousands)
Net finance receivables,
less allowance for finance
receivable losses $ 59,448 $(157,601) $1,210,815
Other assets (liabilities) 2,728 188,860 (4,870)
Cash paid $ 62,176 $ 31,259 $1,205,945
Note 5. Finance Receivables
Loans collateralized by security interests in real estate generally have
maximum original terms of 180 months. 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 are unsecured and require minimum monthly payments
based upon current balances. Of the loans, retail sales contracts, and
private label outstanding at December 31, 1996, 93% were secured by the
real or personal property of the borrower. At December 31, 1996, mortgage
loans (generally second mortgages) accounted for 60% of the aggregate
dollar amount of loans outstanding and 14% of the total number of loans
outstanding.
Contractual maturities of finance receivables were as follows:
December 31, 1996
Net Receivables Percent of
Amount Net Receivables
(dollars in thousands)
1997 $2,342,392 31.47%
1998 1,399,636 18.81
1999 870,329 11.69
2000 486,280 6.53
2001 304,410 4.09
2002 and thereafter 2,040,274 27.41
Total $7,443,321 100.00%
44
Notes to Consolidated Financial Statements, Continued
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.
Principal cash collections and such collections as a percentage of average
net receivables for the years indicated were as follows (retail sales
contracts and private label comprise retail sales finance):
1996 1995
(dollars in thousands)
Loans:
Principal cash collections $2,584,894 $2,580,965
Percent of average net receivables 46.73% 46.23%
Retail sales finance:
Principal cash collections $1,736,907 $1,881,894
Percent of average net receivables 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 finance receivables, net of unearned finance charges,
were as follows:
December 31, 1996 December 31, 1995
Location Amount Percent Amount Percent
(dollars in thousands) (dollars in thousands)
California $ 697,734 9.37% $ 886,974 10.82%
N. Carolina 672,021 9.03 737,630 8.99
Florida 534,936 7.19 626,519 7.64
Ohio 454,290 6.10 439,522 5.36
Illinois 452,508 6.08 489,840 5.97
Indiana 397,698 5.34 454,892 5.55
Virginia 350,349 4.71 392,146 4.78
Georgia 312,377 4.20 372,963 4.55
Other 3,571,408 47.98 3,800,722 46.34
$7,443,321 100.00% $8,201,208 100.00%
Unused credit limits on private label extended by AGFC-Utah to it