E-Z-GO 2010 Annual Report Download - page 39

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losses, net of gains and $28 million in lower securitization losses, net of gains. These improvements were partially offset by the
impact of lower gains on debt extinguishment of $54 million, a $16 million impact from lower interest rates on debt and $16 million in
lower accretion of the valuation allowance on finance receivables held for sale. In addition, as we effected the exit of our non-captive
finance business, our lower average finance receivables had a $52 million unfavorable impact on segment profit, along with $39
million in lower servicing fees, investment and other income and a $26 million impact related to variable-rate receivable interest rate
floors. These factors were partially offset by lower operating and administrative expenses of $41 million, primarily due to lower
compensation expense associated with the workforce reduction.
In 2009, the Finance segment’s loss increased $244 million, 488%, compared with 2008, primarily due to a $157 million impact from
higher portfolio losses, $70 million in lower securitization gains, net of impairments, $37 million in higher suspended earnings on nonaccrual
finance receivables and a $33 million increase in provision for loan losses, partially offset by $55 million in gains on debt extinguishment. In
2009 and 2008, we increased the provision for loan losses significantly in response to the economic recession, 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 business in the fourth quarter of 2008, which we believe will negatively impact credit losses over the duration of our
portfolio. In 2009, the increase was primarily due to an increase in both the rate and severity of defaults resulting from the economic recession
and due to declining aircraft values. The increase was partially offset by a $73 million decrease in the provision for the distribution finance
portfolio largely due to the liquidation of 68% of its managed finance receivables in 2009.
Finance Portfolio Quality
The following table reflects information about the Finance segment’s credit performance related to finance receivables held for
investment. Finance receivables held for sale are reflected at the lower of cost or fair value on the Consolidated Balance Sheets and
are not included in the credit performance statistics below:
(Dollars in millions)
January 1,
2011
January 2,
2010
Finance receivables
$ 4,213
$ 6,206
Nonaccrual finance receivables
850
1,040
Allowance for losses
342
341
Ratio of nonaccrual finance receivables to finance receivables
20.17%
16.75%
Ratio of allowance for losses on impaired nonaccrual finance receivables to impaired nonaccrual finance
receivables
23.82%
15.57%
Ratio of allowance for losses on finance receivables to nonaccrual finance receivables
40.30%
32.80%
Ratio of allowance for losses on finance receivables to finance receivables
8.13%
5.49%
60+ days contractual delinquency as a percentage of finance receivables
9.77%
9.17%
60+ days contractual delinquency
$ 411
$ 569
Repossessed assets and properties
157
119
Operating assets received in satisfaction of troubled finance receivables
107
112
At the end of 2010, finance receivables included $1.9 billion in finance receivables held for investment in the non-captive business,
compared with $3.3 billion at the end of 2009. In addition, finance receivables held for sale by the non-captive business totaled $0.4
billion at the end of 2010, compared with $0.8 billion at the end of 2009. These decreases were due to the continued exit of this
business as discussed above.
Nonaccrual finance receivables include accounts that are contractually delinquent by more than three months, unless collection of
principal and interest is not doubtful as well as accounts whose credit quality indicators other than delinquency suggest full collection
of principal and interest is doubtful. We believe that the percentage of nonaccrual finance receivables generally will remain high as
we execute our non-captive liquidation plan. The liquidation plan is also likely to result in a slower rate of liquidation for nonaccrual
finance receivables. Nonaccrual finance receivables decreased $190 million from the 2009 year-end balance, with a $117 million
reduction in the aviation product line, a $55 million reduction in the distribution finance line and a $35 million reduction in the golf
mortgage product line. These net reductions were primarily due to the resolution of several significant accounts through the
repossession of collateral, restructure of finance receivables and cash collections, partially offset by new finance receivables identified
as nonaccrual in 2010. See Note 4 to the Consolidated Financial Statements for more detailed information on the nonaccrual finance
receivables by product line, along with a summary of finance receivables held for investment based on our internally assigned credit
quality indicators.
The percentage of contractual delinquency increased primarily due to one significant revolving notes receivable loan in the timeshare
product line, which has been classified as nonaccrual since 2009 but was not contractually past due until the borrower’s bankruptcy
filing in 2010, partially offset by a reduction in delinquencies in the aviation and golf mortgage product lines, primarily resulting from
the repossession and foreclosure of collateral. In the timeshare product line, revolving notes receivable loans often remain
contractually current despite significant uncertainty regarding the eventual collection of full principal and interest because we are
entitled to receive all of the cash flows from the underlying consumer notes receivable, which serve as the collateral for our loan. See
page 54 in Note 4 to the Consolidated Financial Statements for a summary of delinquencies by aging category.