Consolidated Financial Highlights:
Total Net Revenue
* Total net revenue was $770.9 million for the quarter ($791.7 million
excluding noteworthy items), versus $655.2 million last year ($667.9
million) and $748.9 million last quarter, principally reflecting
improved other revenue, including strong fee and other income, as well
as higher syndication and participation fees.
Net Finance Revenue
* Net finance revenue was up $1.1 million and $44.4 million from last
quarter and last year due to asset growth.
* Net finance revenue as a percentage of average earning assets was 2.99%,
down from 3.16% last quarter and 3.41% last year, as yields on loans and
operating leases improved but were offset by increased borrowing costs.
The decline from last quarter was primarily due to the previously
mentioned debt prepayment, lower yield related fees, along with a
decline due to business mix and higher short-term interest rates. Year-
to-date, net finance revenue was 3.17% for 2006 and 3.41% for 2005.
* Operating lease net revenue was 6.53% of average operating leases,
compared to 6.48% last quarter and 6.04% last year. The increasing trend
reflects higher rents on aerospace and rail equipment. Through September
30, operating lease net revenues were 6.53% for 2006 and 5.95% for 2005.
Other Revenue
* Other revenue increased to $324.7 million ($339.7 million excluding
charges on certain transportation assets transferred to held for sale)
from $303.5 million last quarter, and $239.5 million last year ($252.1
million excluding losses on derivatives that were terminated, gain on
real estate investment sale, charges on transportation assets and
manufactured housing assets held for sale and hurricane-related
impairment on securitization retained interests). The revenue increases
included strong fee and other income, higher syndication and
participation fees in Corporate Finance, merger and advisory fees, and
higher revenue in small business lending and home lending. For the nine
months of 2006, other revenue totaled $888.3 million ($903.3 million
excluding charges on transportation assets transferred to held for sale)
compared to $848.6 million last year ($760.5 million excluding items
noted above).
Credit Quality
* Net charge-offs were 0.47% of average finance receivables, up from 0.35%
last quarter and essentially flat with last year. Year-to-date net
charge-offs were 0.40%, down from 0.50% last year. In four of our five
segments, net charge-offs were down or relatively flat. Net charge-offs
in Trade Finance were higher, as we charged off an account that was
classified as non-performing last quarter. Overall, net charge-offs
continue to benefit from strong recoveries.
* Total 60+ day owned delinquencies were 2.21% of finance receivables
(1.86% excluding student lending) at September 30, 2006, up from 1.99%
(1.78%) last quarter and 1.76% (1.62%) last year. Commercial loan
delinquency was relatively stable, while the consumer delinquency
increases reflect continued seasoning of the home and student lending
portfolios. However, student loan delinquencies are not indicative of
potential loss due to the underlying U.S. government guarantee.
* Non-performing assets (non-accrual loans plus repossessed assets) were
1.44% of finance receivables (1.69% excluding student lending), compared
to 1.39% (1.62%) last quarter and 1.28% (1.43%) last year. Non-
performing asset levels reflect changes consistent with those discussed
in the delinquency discussion above. Transportation Finance levels were
lower as the prior year included bankrupt air carrier exposures that
were subsequently charged-off.
* The provision for credit losses was $72.5 million, versus $48.2 million
last quarter and $69.9 million in the prior year quarter, which included
a provision of $34.6 million for estimated hurricane losses.
* The credit loss provision in excess of charge-offs was $12.6 million and
$9.1 million for the quarter and nine months ended September 30, 2006,
reflecting asset growth and higher delinquencies. These amounts compare
to reserve reductions of $12.7 million and $23.2 million for the prior
year periods (excluding specific prior year hurricane reserves).
* The reserve for credit losses was 1.45% of finance receivables excluding
student loans, compared to 1.51% last quarter, and 1.70% last year. The
decline from last quarter reflects the seasonal growth in short-term
factoring receivables and lower reserves required for impaired loans.
Salaries and General Operating Expenses
* The efficiency ratio was 44.4% excluding the noteworthy items outlined
previously (46.7% including items), compared to 46.0% last quarter and
42.9% last year. The ratio improved from last quarter as revenue gains
outpaced expense growth. The deterioration versus prior year reflects
the build out of our sales force, where incremental revenues typically
lag the initial expense.
* Total salaries and general operating expenses for the quarter were
$351.7 million excluding the severance charge ($360.2 million including
it) versus $344.8 million last quarter and $281.1 million a year ago.
The September and June 2006 quarters include charges of $7.8 million and
$6.6 million, respectively, relating to the expensing of stock options.
The sequential increase is due to higher salary expense, partially
offset by lower marketing, advertising and origination expense
capitalization. Year-to-date increases over last year reflect higher
investments made in sales and marketing, including incentive based
compensation, and increases in occupancy, legal and professional fees.
* Employee headcount totaled approximately 7,200 at September 30, 2006 up
from 7,015 at June 30, 2006 and 6,165 at September 30, 2005. The
increase from last quarter is due to additional sales personnel, as well
as operational personnel to bring servicing in-house in student lending,
growth of our international operations and general support personnel.
The increase over last year is due to additions to our sales force and
infrastructure, as well as acquisitions.
Effective Tax Rate
* The effective tax rate was 28.9%, compared to 31.4% last quarter and
34.6% last year. The rate reduction from last year reflects the
continued relocation and funding of certain aerospace assets offshore,
improved international earnings and lower state and local taxes. For the
nine months, the effective tax rate was 30.7% compared to 35.0% last
year. (The effective tax rates above exclude deferred tax liability
releases and the other noteworthy items discussed previously). On this
basis, we expect the on-going rate to approximate 31%.
Volume and Assets
* Origination volume for the quarter, excluding factoring, increased 39.8%
to a record $11.0 billion, due to strong originations across most
businesses. Year-to-date origination volumes were up 37.7%.
* Managed assets were $71.9 billion at September 30, 2006, up 6% from
June 30, 2006 and 17% from last year. Commercial Finance grew 8% and 15%
from last quarter and last year, reflecting broad-based growth in
Corporate Finance, while Specialty Finance growth (4% and 21%) was
driven by the consumer businesses.
* The increase in held for sale assets reflects our on-going capital
optimization initiatives.
Segment Results:
Certain expenses are not allocated to the operating segments. These
non- allocated expenses, which are reported in Corporate and Other, consist
primarily of the following: (1) provisions for credit losses in excess of
net- charge-offs; (2) equity-based compensation; and (3) certain funding
costs, as the segment results reflect debt transfer pricing that matches
assets and liabilities from an interest rate and maturity perspective.
Corporate and other
* Corporate and other includes third quarter expenses not allocated to
segments such as: stock option expense of $7.8 million, $7.5 million in
dividends on preferred securities, a $20 million provision for credit
losses, and the previously mentioned severance charge.
* The higher Corporate and other losses in 2006 reflect higher unallocated
operating expenses, as well as a $115 million pre-tax gain on a sale of
a real estate investment in 2005.
* Corporate and other expenses reduced return on equity by approximately
4% for the third quarter and 5% for the prior quarter. The decrease from
last quarter was due to lower unallocated expenses, principally staff
costs. The dampening of return on equity related to corporate expenses
was significantly lower in 2005 due to last year's gain on sale of a
real estate investment and lower unallocated funding costs.
Specialty Finance Group
Vendor Finance
* Total net revenues increased to $221.6 million from $188.0 million
($208.0 million excluding a charge related to receivables transferred to
held for sale) last year, but declined from $226.0 million last quarter.
* Net finance revenue after depreciation was essentially flat to last
quarter and down 15 basis points ("bps") from last year, which included
revenues related to non-strategic assets with high margins that were
sold in the fourth quarter. Net finance revenue declined to $124.9
million from $127.1 million last quarter and $139.1 million last year.
* Other revenue increased 40% from last year, reflecting strong asset sale
and syndication activity in our global operations.
* Credit metrics remained strong. Net charge-offs improved from last year
in the U.S., offset by higher international charge-offs. Both
delinquencies and non-performings were relatively flat to prior quarter
and down from last year.
* New business volume, excluding Dell in the U.S., grew 7% over last year
on the addition of new vendors and increased penetration of existing
relationships around the world. Dell volumes declined due to lower
overall Dell financed sales volumes. Volume from the international
operations grew 18%.
* Return on risk-adjusted capital was 23.5% versus 19.9% (23.9% excluding
the item above) in 2005.
Consumer and Small Business Lending
* Total net revenues increased to $144.7 million from $103.7 million last
year and $127.1 million last quarter.
* Net finance revenue was down 12 bps from prior quarter and 23 bps from
last year primarily due to higher growth in Student Loan Xpress. Net
finance revenue increased to $86.1 million from $84.7 million last
quarter and $64.2 million last year.
* Other revenue was up 48% on gains from loan sales and syndications.
* Net charge-offs as a percentage of average finance receivables were down
from last year. Delinquencies and non-performing assets increased due to
portfolio seasoning.
* New business volume increased 60% over last year on strong originations
at Student Loan Xpress. Student Loan Xpress is the preferred lender at
approximately 1,200 schools, up from 817 last year.
* Return on risk-adjusted capital was 16.7% versus 11.4% in 2005.
Commercial Finance Group
Corporate Finance
* Total net revenues increased to $232.4 million from $162.9 million last
year and $194.1 million last quarter.
* Net finance revenue after depreciation decreased 29 bps from prior
quarter as yield related and prepayment fees were lower. The net finance
revenue percentage was essentially flat with the prior year. Net finance
revenue increased to $136.0 million from $135.7 million last quarter and
$106.5 million last year.
* Other revenue increased $38.0 million, 65%, over last quarter and $40.0
million, 71%, over prior year on higher fee income, including
syndication and participation fees in communications, media and
entertainment and healthcare, along with higher advisory fees.
* Net charge-offs remained low, as recoveries mostly offset charge-offs.
Delinquencies and non-performing assets trended up slightly.
* Volume was up over 100% from last year and up across all businesses, led
by healthcare.
* Return on risk adjusted capital was 17.6% up from 16.4% last year.
Transportation Finance
* Total net revenues were $61.8 million ($82.6 million excluding loss on
assets transferred to held for sale and the debt prepayment charge)
versus $73.3 million last year (excluding loss on out of production
aircraft), and $96.5 million last quarter.
* Net finance revenue after depreciation increased 5 bps from last
quarter, excluding the charge to prepay debt associated with
transferring planes into our international operations. Net finance
revenue decreased 9 bps from last year, which included a large
prepayment fee. Rental rates continue to improve on aerospace and rail
leases and our fleet remains nearly fully utilized. Net finance revenue
declined to $59.8 million from $63.3 million last quarter and $62.1
million last year. Net finance revenue increased to $65.6 million
(excluding the prepayment charge) from $63.3 million last quarter but
was down from $62.1 million last year, which included a large
prepayment fee.
* Other revenue was down $31 million from last quarter as insurance
proceeds were included in last quarter and the current quarter includes
a $15 million write down on assets transferred to held for sale.
Excluding the write down, other revenue was up 50% over prior year.
* Credit metrics remained strong. There were no charge-offs for the
quarter, while delinquencies and non-performing accounts were down from
last quarter and last year. Last year included two large bankrupt
aerospace carriers.
* Aircraft demand remains solid as all aircraft are on contract. During
the quarter we announced the purchase of five additional aircraft.
* Return on risk-adjusted capital improved to 15.4% (excluding the
noteworthy items) from 12.0% last year, reflecting improved aerospace
profitability.
Trade Finance
* Total net revenues increased to $117.1 million from $113.1 million last
year and $106.9 million last quarter.
* Net finance revenue decreased 28 bps from the prior quarter reflecting
seasonality in receivable balances and cash collections, but was up 56
bps from the prior year. Net finance revenue increased to $39.8 million
from approximately $37 million last quarter and last year.
* Other revenue was up $8 million over prior quarter on seasonal volume
growth and flat to prior year, as volume growth was offset by lower
commission rates.
* Net charge-offs were up from last quarter, as we wrote down an account
that was classified as non-performing last quarter. Delinquencies and
non-performing accounts were down from last quarter.
* The prior quarter European acquisition helped increase factored volumes
versus last quarter and last year.
* Return on risk adjusted capital declined to 24.8% from 27.2% last year. |
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