E-Z-GO 2006 Annual Report Download - page 41

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20
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
During 2006, the Finance segment generated significant growth in its owned and managed finance receivables. Owned finance receivables grew
by $1.5 billion, up 23% from 2005 and we expect continued growth in 2007. Portfolio quality statistics reflected continued improvements in
2006. Our nonperforming assets as a percentage of total finance assets decreased to 1.28% at the end of 2006, compared with 1.53% at the end
of 2005 and 2.18% at the end of 2004. While portfolio quality statistics continue to improve, the collectibility of this segment’s finance receivable
portfolio remains one of its most significant business risks. The continued strength of our portfolio quality, combined with continued reductions
in the level of loan losses, resulted in a reduction of the rate utilized to establish the allowance for losses in several of our portfolios in 2006. This
resulted in a $7 million reduction in the provision for losses during 2006. We expect relative stability in our portfolio statistics during 2007.
Finance Revenues
Revenues in the Finance segment increased $170 million in 2006, compared with 2005. The increase was primarily due to a $103 million
increase related to higher average finance receivables and a $90 million increase from the higher interest rate environment, partially offset by an
$18 million decrease in other income largely due to lower fees and securitization income. Average finance receivables increased $1.3 billion from
levels in the corresponding period in 2005 primarily due to growth in the distribution, golf and aviation finance businesses.
Revenues in the Finance segment increased $83 million in 2005, compared with 2004. The increase was primarily due to higher finance charges
and discounts of $95 million, partially offset by lower prepayment income of $10 million. The increase in finance charges was largely due to a
higher interest rate environment, which accounted for $98 million of the increase, and $62 million related to higher average finance receivables of
$855 million, partially offset by lower relative receivable pricing of $65 million. The increase in average finance receivables was primarily related
to growth in distribution, golf and aviation finance, and asset-based lending, partially offset by reductions in liquidating non-core portfolios.
Finance Segment Profit
Segment profit in the Finance segment increased $39 million in 2006, compared with 2005 due to an increase in net interest margin. The growth
in average finance receivables generated $54 million of higher net margin, which was partially offset by an $18 million decrease in other income.
Segment profit in the Finance segment increased $32 million in 2005, compared with 2004 primarily due to a $29 million decrease in the provi-
sion for loan losses as a result of sustained improvements in portfolio quality and an $18 million increase in net interest margin, which was par-
tially offset by higher selling and administrative expenses of $15 million. The increase in net interest margin was primarily attributable to portfolio
growth. Selling and administrative expenses increased primarily due to $9 million in higher variable compensation associated with portfolio
growth and $5 million related to improved profitability and increased pension and benefits cost.
Finance Portfolio Quality
The following table presents information about the Finance segment’s portfolio quality:
(In millions, except for ratios)
2006 2005 2004
Finance receivables $ 8,310 $ 6,763 $ 5,837
Allowance for losses on finance receivables $ 93 $ 96 $ 99
Nonperforming assets $ 113 $ 111 $ 140
Provision for loan losses $ 26 $ 29 $ 58
Net charge-offs $ 29 $ 32 $ 79
Ratio of nonperforming assets to total finance assets 1.28% 1.53% 2.18%
Ratio of allowance for losses on receivables to nonaccrual finance receivables 123.1% 108.6% 83.7%
60+ days contractual delinquency as a percentage of finance receivables 0.77% 0.79% 1.47%
Nonperforming assets by business are as follows:
(In millions)
2006 2005 2004
Golf finance $ 29 $ 13 $ 26
Resort finance 16 31 53
Asset-based lending 16 6 7
Aviation finance 12 14 12
Distribution finance 7 2 5
Liquidating portfolios 33 45 37
Total nonperforming assets $ 113 $ 111 $ 140