E-Z-GO 2008 Annual Report Download - page 39

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26
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Finance Revenues
Revenues in the Finance segment decreased $152 million in 2008, compared with 2007, primarily due to the following:
• A $163 million impact from lower market interest rates;
• $20 million in lower securitization gains, net of impairments; and
• A lower gain on the sale of a leveraged lease investment of $16 million.
These decreases were partially offset by the $24 million benefit from variable-rate receivable interest rate floors and a $21 million impact from
higher average finance receivables of $258 million.
Revenues in the Finance segment increased $77 million in 2007, compared with 2006. Our revenue growth was primarily attributed to the
following factors:
• Higher average nance receivables of $722 million, primarily due to growth in the aviation and resort nance businesses, which resulted in
additional revenues of $66 million;
• A $21 million gain on the sale of a leveraged lease investment; and
• A $20 million increase in securitization income, primarily related to a $588 million increase in the level of receivables sold into the
distribution finance revolving securitization.
These increases were partially offset by a $17 million decrease in portfolio yields related to competitive pricing pressures, $13 million in lower
leveraged lease earnings due to an unfavorable cumulative earnings adjustment attributable to the recognition of residual value impairments, and
an $8 million reduction in leveraged lease earnings from the adoption of FSP No. 13-2, “Accounting for a Change or Projected Change in the
Timing of Cash Flows Relating to Income Taxes Generated by a Leveraged Lease Transaction” in 2007.
Finance Segment Profit
Segment profit in the Finance segment decreased $272 million in 2008, compared with 2007, primarily due to a $201 million increase in the
provision for loan losses, a $51 million impact of higher borrowing costs, relative to market rates, $20 million in lower securitization gains, net of
impairments, a $16 million lower gain on the sale of a leveraged lease investment, partially offset by a $24 million benefit from variable-rate
receivable interest rate floors.
We increased the allowance for loan losses significantly during 2008 in response to weakening general market conditions, declining collateral
values and the lack of liquidity available to our borrowers and their customers. We also increased our estimate of credit losses as a result of our
decision to exit portions of the finance businesses in the fourth quarter, which we believe will negatively impact credit losses over the duration of
our portfolio. The increases in provision for loan losses were primarily a result of an $81 million increase in defaults in the marine and
recreational vehicles distribution finance portfolios, a $21 million increase for the resort finance portfolio, a $19 million reserve established for
one account in the golf finance portfolio and a $16 million reserve for one account in the asset-based lending portfolio.
Borrowing costs increased relative to the target Federal Funds rate as credit market volatility significantly impacted the historical relationships
between market indices. The increase was primarily driven by an increase in the spread between the London Interbank Offered Rate (LIBOR) and
the target Federal Funds rate and from increased borrowing spreads on issuances of commercial paper in comparison with 2007. These increases
were partially offset by increased receivable pricing as a result of variable-rate receivables with interest rate floors.
Segment profit in the Finance segment increased $12 million in 2007, compared with 2006, primarily due to a $30 million increase in net interest
margin, partially offset by an $11 million increase in selling and administrative expenses, largely attributable to finance receivable portfolio
growth and a $7 million increase in provision for loan losses, reflecting an increase in nonperforming assets and net charge-offs in the
distribution finance portfolio. Net interest margin increased due to a number of factors, including the following:
• An increase of $56 million in securitization and other fee income as described above, and
• An increase of $30 million related to growth in average nance receivables;
• Partially offset by a $17 million decrease in portfolio yields related to competitive pricing pressures;
• Lower leveraged lease earnings of $13 million due to an unfavorable cumulative earnings adjustment attributable to the recognition of
residual value impairments;
• Higher borrowing costs of $11 million relative to the Federal Funds rate;
• A reduction in leveraged lease earnings of $8 million from the adoption of a new accounting standard; and
• Lower leveraged lease earnings of $7 million due to a gain in 2006 on the sale of an option related to a leveraged lease asset.