GE 2011 Annual Report Download - page 81

GE 2011 ANNUAL REPORT 79
    
and market sectors, collateral values (including housing price
indices as applicable), and the present and expected future levels
of interest rates. The underlying assumptions, estimates and
assessments we use to provide for losses are updated periodi-
cally to refl ect our view of current conditions. Changes in such
estimates can signifi cantly affect the allowance and provision for
losses. It is possible that we will experience credit losses that are
different from our current estimates. Write-offs are deducted
from the allowance for losses when we judge the principal to be
uncollectible and subsequent recoveries are added to the allow-
ance at the time cash is received on a written-off account.
“Impaired” loans are defi ned as larger balance or restructured
loans for which it is probable that the lender will be unable to col-
lect all amounts due according to the original contractual terms
of the loan agreement.
“Troubled debt restructurings” (TDRs) are those loans for
which we have granted a concession to a borrower experiencing
fi nancial diffi culties where we do not receive adequate compen-
sation. Such loans are classifi ed as impaired, and are individually
reviewed for specifi c reserves.
“Nonaccrual fi nancing receivables” 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. Although
we stop accruing interest in advance of payments, we recognize
interest income as cash is collected when appropriate provided
the amount does not exceed that which would have been earned
at the historical effective interest rate. Recently restructured
fi nancing receivables are not considered delinquent when pay-
ments are brought current according to the restructured terms,
but may remain classifi ed as nonaccrual until there has been a
period of satisfactory payment performance by the borrower and
future payments are reasonably assured of collection.
“Nonearning fi nancing receivables” are a subset of nonac-
crual fi nancing receivables for which cash payments are not
being received or for which we are on the cost recovery method
of accounting (i.e., any payments are accounted for as a reduc-
tion of principal). This category excludes loans purchased at a
discount (unless they have deteriorated post acquisition). Under
Accounting Standards Codifi cation (ASC) 310, Receivables, these
loans are initially recorded at fair value and accrete interest
income over the estimated life of the loan based on reasonably
estimable cash fl ows even if the underlying loans are contractu-
ally delinquent at acquisition.
“Delinquent” receivables are those that are 30 days or more
past due based on their contractual terms.
The same fi nancing receivable may meet more than one of the
defi nitions above. Accordingly, these categories are not mutually
exclusive and it is possible for a particular loan to meet the defi ni-
tions of a TDR, impaired loan, nonaccrual loan and nonearning loan
and be included in each of these categories. The categorization of
a particular loan also may not be indicative of the potential for loss.
Our consumer loan portfolio consists of smaller-balance,
homogeneous loans, including credit card receivables, install-
ment 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 refl ect
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 loans
and leases. Losses on such loans and leases are recorded when
probable and estimable. We routinely evaluate our entire portfolio
for potential specifi c credit or collection issues that might indicate
an impairment.
For larger-balance, non-homogeneous loans and leases, we
consider the fi nancial status, payment history, collateral value,
industry conditions and guarantor support related to specifi c
customers. Any delinquencies or bankruptcies are indications of
potential impairment requiring further assessment of collectibil-
ity. We routinely receive fi nancial 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 deterio-
rating. 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 alter-
natives—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 commercial loans
is based on the present value of expected future cash fl ows dis-
counted 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 col-
lateral 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
modifi cation of terms or designation as a TDR. After providing
for specifi c incurred losses, we then determine an allowance for
losses that have been incurred in the balance of the portfolio but
cannot yet be identifi ed to a specifi c 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 respective 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 project expected performance of the portfolio based on spe-
cifi c loan portfolio metrics.
We consider multiple factors in evaluating the adequacy of
our allowance for losses on Real Estate fi nancing 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