GE 2010 Annual Report Download - page 77

GE 2010 ANNUAL REPORT 75
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larger-balance, non-homogeneous loans and leases, we consider
the financial status, payment history, collateral value, industry
conditions and guarantor support related to specific customers.
Any delinquencies or bankruptcies are indications of potential
impairment requiring further assessment of collectibility. We
routinely receive financial as well as rating agency reports on our
customers, and we elevate for further attention those customers
whose operations we judge to be marginal or deteriorating. We
also elevate customers for further attention when we observe a
decline in collateral values for asset-based loans. While collateral
values are not always available, when we observe such a decline,
we evaluate relevant markets to assess recovery alternatives—
for example, for real estate loans, relevant markets are local;
for commercial aircraft loans, relevant markets are global.
Measurement of the loss on our impaired loans is based on the
present value of expected future cash flows discounted at the loan’s
effective interest rate or the fair value of collateral, net of
expected selling costs if the loan is determined to be collateral
dependent. We determine whether a loan is collateral dependent
if the repayment of the loan is expected to be provided solely by
the underlying collateral. Our review process can often result in
reserves being established in advance of a modification of terms
or designation as a TDR. After providing for specific incurred
losses, we then determine an allow ance for losses that have been
incurred in the balance of the portfolio but cannot yet be identi-
fied to a specific loan or lease. This estimate is based upon various
statistical analyses considering historical and projected default
rates and loss severity and aging, as well as our view on current
market and economic conditions. It is prepared by each respec-
tive line of business. For Real Estate, this includes converting
economic indicators into real estate market indicators that are
calibrated by market and asset class and which are used to pro-
ject expected performance of the portfolio based on specific
loan portfolio metrics.
We consider multiple factors in evaluating the adequacy of
our allowance for losses on Real Estate financing receivables,
including loan-to-value ratios, collateral values at the individual
loan level, debt service coverage ratios, delinquency status, and
economic factors including interest rate and real estate market
forecasts. In addition to evaluating these factors, we deem a Real
Estate loan to be impaired if its projected loan-to-value ratio at
maturity is in excess of 100%, even if the loan is currently paying
in accordance with its contractual terms. The allowance for losses
on Real Estate financing receivables is based on a discounted
cash flow methodology, except in situations where the loan is
within 24 months of maturity or foreclosure is deemed probable,
in which case reserves are based on collateral values. If foreclo-
sure is deemed probable or if repayment is dependent solely on
the sale of collateral, we deduct estimated selling costs from the
fair value of the underlying collateral values. Collateral values for
our Real Estate loans are determined based upon internal cash
flow estimates discounted at an appropriate rate and corrobo-
rated by external appraisals, as appropriate. Collateral valuations
are updated at least semi-annually, or more frequently, for higher
risk loans. A substantial majority of our Real Estate impaired loans
have specific reserves that are determined based on the underly-
ing collateral values. For further discussion on determining fair
value see the Fair Value Measurements section below.
acquisition. In addition, nonearning receivables exclude loans that
are paying on a cash accounting basis but classified as nonaccrual
and impaired. “Nonaccrual” financing receivables include all
nonearning receivables and are those on which we have stopped
accruing interest. We stop accruing interest at the earlier of the
time at which collection of an account becomes doubtful or
the account becomes 90 days past due. Recently restructured
financing receivables are not considered delinquent when pay-
ments are brought current according to the restructured terms,
but may remain classified as nonaccrual until there has been a
period of satisfactory payment performance by the borrower
and future payments are reasonably assured of collection.
When we repossess collateral in satisfaction of a loan, we
write down the receivable against the allowance for losses.
Repossessed collateral is included in the caption “All other assets”
in the Statement of Financial Position and carried at the lower of
cost or estimated fair value less costs to sell.
We write off unsecured closed-end installment loans at
120 days contractually past due and unsecured open-ended
revolving loans at 180 days contractually past due. We write
down consumer loans secured by collateral other than residential
real estate when such loans are 120 days past due. Consumer
loans secured by residential real estate (both revolving and
closed-end loans) are written down to the fair value of collateral,
less costs to sell, no later than when they become 360 days past
due. Unsecured consumer loans in bankruptcy are written off
within 60 days of notification of filing by the bankruptcy court or
within contractual write-off periods, whichever occurs earlier.
Write-offs on larger-balance impaired commercial loans are
based on amounts deemed uncollectible and are reviewed quar-
terly. Write-offs on Real Estate loans are recorded upon initiation
of foreclosure or early settlement by the borrower, or in some
cases, based on the passage of time depending on specific facts
and circumstances. In Commercial Lending and Leasing (CLL),
loans are written off when deemed uncollectible (e.g., when the
borrower enters restructuring, collateral is to be liquidated or at
180 days past due for smaller-balance homogeneous loans).
Our consumer loan portfolio consists of smaller-balance
homogeneous loans including card receivables, installment loans,
auto loans and leases and residential mortgages. We collectively
evaluate each portfolio for impairment quarterly. The allowance
for losses on these receivables is established through a process
that estimates the probable losses inherent in the portfolio based
upon statistical analyses of portfolio data. These analyses include
migration analysis, in which historical delinquency and credit loss
experience is applied to the current aging of the portfolio,
together with other analyses that reflect current trends and
conditions. We also consider overall portfolio indicators including
nonearning loans, trends in loan volume and lending terms, credit
policies and other observable environmental factors such as
unemployment rates and home price indices.
Our commercial loan and lease portfolio consists of a variety
of loans and leases, including both larger-balance, non-homoge-
neous loans and leases and smaller-balance homogeneous
commercial and equipment loans and leases. Losses on such
loans and leases are recorded when probable and estimable. We
routinely evaluate our entire portfolio for potential specific credit
or collection issues that might indicate an impairment. For