GENERAL ELECTRIC CAPITAL CORP – 10-Q – Management’s Discussion and Analysis of Financial Condition and Results of Operations.
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A. Results of Operations
In the accompanying analysis of financial information, we sometimes use information derived from consolidated financial information but not presented in our financial statements prepared in accordance with U.S. generally accepted accounting principles (GAAP). Certain of these data are considered "non-GAAP financial measures" under theU.S. Securities and Exchange Commission (SEC) rules. For such measures, we have provided supplemental explanations and reconciliations in Exhibit 99 to this Form 10-Q Report. Unless otherwise indicated, we refer to captions such as revenues and earnings from continuing operations attributable to GECC simply as "revenues" and "earnings" throughout this Management's Discussion and Analysis. Similarly, discussion of other matters in our condensed, consolidated financial statements relates to continuing operations unless otherwise indicated.
Overview
Revenues for the first quarter of 2012 were$11.4 billion , a$1.6 billion (12%) decrease from the first quarter of 2011. Revenues were reduced by$0.2 billion as a result of dispositions. Revenues for the quarter also decreased as a result of the absence of the 2011 gain on sale of a substantial portion of ourGaranti Bank equity investment (2011 Garanti gain) and organic revenue declines, primarily due to lower GE Capital Ending Net Investment (ENI). Earnings were flat in the first quarter of 2012 as result of lower impairments and lower provisions for losses on financing receivables, reflecting improved portfolio quality, partially offset by the absence of the 2011 Garanti gain and operations. Excluding the first quarter 2011 Garanti gain and operations, our earnings increased 27%. Overall, acquisitions contributed$0.1 billion and an insignificant amount to total revenues in the first quarters of 2012 and 2011, respectively. Our earnings in both the first quarters of 2012 and 2011 included an insignificant amount from acquired businesses. We integrate acquisitions as quickly as possible. Only revenues and earnings from the date we complete the acquisition through the end of the fourth following quarter are attributed to such businesses. Dispositions also affected our operations through lower revenues of$0.2 billion and$0.4 billion in the first quarters of 2012 and 2011, respectively. The effects of dispositions on earnings were$0.2 billion and an insignificant amount in the first quarters of 2012 and 2011, respectively. Our effective income tax rate is lower than the U.S. statutory rate primarily because of benefits from lower-taxed global operations, including the use of global funding structures. There is a benefit from global operations as non-U.S. income is subject to local country tax rates that are significantly below the 35% U.S. statutory rate. These non-U.S. earnings have been indefinitely reinvested outside the U.S. and are not subject to current U.S. income tax. The rate of tax on our indefinitely reinvested non-U.S. earnings is below the 35% U.S. statutory rate because we have significant business operations subject to tax in countries where the tax on that income is lower than the U.S. statutory rate and becauseGeneral Electric Capital Corporation (GECC) funds the majority of its non-U.S. operations through foreign companies that are subject to low foreign taxes. We expect our ability to benefit from non-U.S. income taxed at less than the U.S. rate to continue subject to changes of U.S. or foreign law, including, as discussed in Note 10 of the 2011 Form 10-K, the expiration onDecember 31, 2011 of the U.S. tax law provision deferring tax on active financial services income. If this provision is not extended, our tax rate will increase significantly after 2012. In addition, since this benefit depends on management's intention to indefinitely reinvest amounts outside the U.S., our tax provision will increase to the extent we no longer indefinitely reinvest foreign earnings. The provision for income taxes was an expense of$0.2 billion for the first quarter of 2012 (an effective tax rate of 9.4%), compared with$0.4 billion expense for the first quarter of 2011 (an effective tax rate of 19.1%). The tax expense decreased in the first quarter 2012 by$0.2 billion from the absence of the 2011 high-taxed disposition of Garanti, which decreased pre-tax income and contributed to increased benefits from low taxed global operations. (47) --------------------------------------------------------------------------------
Segment Operations
Operating segments comprise our five businesses focused on the broad markets they serve: Commercial Lending and Leasing (CLL), Consumer, Real Estate,Energy Financial Services and GE Capital Aviation Services (GECAS). The Chairman allocates resources to, and assesses the performance of, these five businesses. In addition to providing information on segments in their entirety, we have also provided supplemental information for the geographic regions within the CLL segment for greater clarity. Corporate items and eliminations include unallocated Treasury and Tax operations; Trinity, a group of sponsored special purpose entities; certain consolidated liquidating securitization entities; the effects of eliminating transactions between operating segments; results of our run-off insurance operations remaining in continuing operations attributable to GECC; underabsorbed corporate overhead; certain non-allocated amounts determined by the Chairman; and a variety of sundry items. Corporate items and eliminations is not an operating segment. Rather, it is added to operating segment totals to reconcile to consolidated totals on the financial statements. Segment profit is determined based on internal performance measures used by the Chairman to assess the performance of each business in a given period. In connection with that assessment, the Chairman may exclude matters such as charges for restructuring; rationalization and other similar expenses; acquisition costs and other related charges; technology and product development costs; certain gains and losses from acquisitions or dispositions; and litigation settlements or other charges, responsibility for which preceded the current management team. Segment profit excludes results reported as discontinued operations, earnings attributable to noncontrolling interests of consolidated subsidiaries and accounting changes. Segment profit, which we sometimes refer to as "net earnings", includes interest and income taxes. GE allocates service costs related to its principal pension plans and GE no longer allocates the retiree costs of its postretirement healthcare benefits to its segments. This allocation methodology better aligns segment operating costs to the active employee costs, which are managed by the segments. OnFebruary 22, 2012 , our former parent,General Electric Capital Services, Inc. (GECS), merged with and into GECC. GECC's continuing operations include the run-off insurance operations previously held and managed in our former parent, GECS, and which are reported in corporate items and eliminations. The operating businesses that are reported as segments, including CLL, Consumer, Real Estate,Energy Financial Services and GECAS, are not affected by the merger. Unless otherwise indicated, references toGECC and GE Capital relate to the entities as they exist subsequent to theFebruary 22, 2012 merger.
We have reclassified certain prior-period amounts to conform to the current-period presentation. Refer to the Summary of Operating Segments on page 7 for a reconciliation of the total reportable segments' profit to the consolidated net earnings attributable to the Company.
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CLL Three months ended March 31, (In millions) 2012 2011 Revenues $ 4,442 $ 4,608 Segment profit $ 685 $ 554 At March 31, December 31, March 31, (In millions) 2012 2011 2011 Total assets $ 189,993 $ 193,869 $ 197,467 Three months ended March 31, (In millions) 2012 2011 Revenues Americas $ 2,774 $ 2,726 Europe 852 965 Asia 598 559 Other 218 358 Segment profit Americas $ 542 $ 459 Europe 59 91 Asia 86 33 Other (2) (29) At March 31, December 31, March 31, (In millions) 2012 2011 2011 Total assets Americas $ 113,920 $ 116,034 $ 116,186 Europe 45,512 46,590 48,555 Asia 16,996 17,807 17,795 Other 13,565 13,438 14,931 CLL revenues decreased 4% and net earnings increased 24% in the first quarter of 2012. Revenues were reduced by$0.1 billion as a result of dispositions. Revenues also decreased as a result of organic revenue declines ($0.1 billion ), primarily due to lower ENI. Net earnings increased in the first quarter of 2012, reflecting core increases ($0.1 billion ) and lower provisions for losses on financing receivables. (49) --------------------------------------------------------------------------------
Consumer Three months ended March 31, (In millions) 2012 2011 Revenues $ 3,877 $ 4,823 Segment profit $ 829 $ 1,241 At March 31, December 31, March 31, (In millions) 2012 2011 2011 Total assets $ 135,926 $ 138,534 $ 141,853 Consumer revenues decreased 20% and net earnings decreased 33% in the first quarter of 2012. Revenues were reduced by$0.1 billion as a result of dispositions. Revenues also decreased as a result of the absence of the 2011 Garanti gain ($0.7 billion ) and organic revenue declines ($0.2 billion ), primarily due to lower ENI. The decrease in net earnings resulted from the absence of the 2011 Garanti gain ($0.3 billion ), lower Garanti results ($0.1 billion ) and dispositions ($0.1 billion ), partially offset by lower provisions for losses on financing receivables ($0.1 billion ). Real Estate Three months ended March 31, (In millions) 2012 2011 Revenues $ 836 $ 907 Segment profit $ 56 $ (358) At March 31, December 31, March 31, (In millions) 2012 2011 2011 Total assets $ 59,204 $ 60,873 $ 70,934 Real Estate revenues decreased 8% and net earnings were favorable in the first quarter of 2012. Revenues decreased as a result of organic revenue declines ($0.1 billion ), primarily due to lower ENI, partially offset by increases in net gains on property sales. Real Estate net earnings increased as a result of lower impairments ($0.3 billion ) and core increases ($0.1 billion ). Depreciation expense on real estate equity investments totaled$0.2 billion in both the first quarters of 2012 and 2011. (50)
-------------------------------------------------------------------------------- Energy Financial Services Three months ended March 31, (In millions) 2012 2011 Revenues $ 239 $ 345 Segment profit $ 71 $ 112 At March 31, December 31, March 31, (In millions) 2012 2011 2011 Total assets $ 19,303 $ 18,357 $ 18,821
Energy Financial Services revenues decreased 31% and net earnings decreased 37% in the first quarter of 2012. Revenues decreased as a result of lower gains (
GECAS Three months ended March 31, (In millions) 2012 2011 Revenues $ 1,331 $ 1,325 Segment profit $ 318 $ 306 At March 31, December 31, March 31, (In millions) 2012 2011 2011 Total assets $ 48,720 $ 48,821 $ 48,560
GECAS revenues were flat and net earnings increased 4% in the first quarter of 2012. Revenues for the quarter were flat reflecting organic revenue growth, substantially offset by lower gains. The increase in net earnings resulted primarily from core increases, partially offset by lower gains.
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Corporate Items and Eliminations
Corporate items and eliminations include Treasury operation expense of$0.1 billion for the first quarter of 2012 and an insignificant amount of earnings for the first quarter of 2011. These Treasury results were primarily related to derivative activities that reduce or eliminate interest rate, currency or market risk between financial assets and liabilities.
Corporate items and eliminations include an insignificant amount of unallocated tax benefits for the first quarters of 2012 and 2011, respectively.
Certain amounts included in Corporate items and eliminations are not allocated to the five operating businesses because they are excluded from the measurement of their segment operating performance for internal purposes. Unallocated costs included an insignificant amount in both the first quarters of 2012 and 2011, respectively, primarily related to restructuring and other charges. Discontinued Operations Three months ended March 31, (In millions) 2012 2011 Earnings (loss) from discontinued operations, net of taxes $ (217) $ 35 Discontinued operations primarily comprised GE Money Japan (our Japanese personal loan business, Lake, and our Japanese mortgage and card businesses, excluding our investment inGE Nissen Credit Co., Ltd. ), our U.S. mortgage business (WMC), our U.S. recreational vehicle and marine equipment financing business (Consumer RV Marine), Consumer Mexico, Consumer Singapore, our Consumer home lending operations inAustralia and New Zealand (Australian Home Lending) and our Consumer mortgage lending business inIreland (Consumer Ireland). Results of these businesses are reported as discontinued operations for all periods presented.
Loss from discontinued operations, net of taxes, for the first quarter of 2012, primarily reflected a loss related to the sale of Consumer Ireland.
For additional information related to discontinued operations, see Note 2 to the condensed, consolidated financial statements.
B. Statement of Financial Position
Overview of Financial Position
Major changes in our financial position for the three months ended
· Repayments exceeded new issuances of total borrowings by
collections on financing receivables exceeded originations by
· The U.S. dollar was weaker for most major currencies at
assets and liabilities. Our assets were$573.4 billion atMarch 31, 2012 , an$11.2 billion decrease fromDecember 31, 2011 , and reflect a reduction of net financing receivables of$7.5 billion , primarily through collections exceeding originations ($6.6 billion ), which includes sales, and a decrease in derivative assets ($4.2 billion ).
Our liabilities decreased
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Cash Flows
Our cash and equivalents were$76.2 billion atMarch 31, 2012 , compared with$67.3 billion atMarch 31, 2011 . Our cash from operating activities totaled$4.7 billion for the three months endedMarch 31, 2012 , compared with cash from operating activities of$4.8 billion for the same period of 2011.
Consistent with our plan to reduce our asset levels, cash from investing activities was
GECC cash used for financing activities for the three months endedMarch 31, 2012 of$12.6 billion related primarily to a$9.8 billion reduction in total borrowings, consisting primarily of reductions in long-term borrowings and commercial paper and$2.6 billion of lower deposits at our banks.
Fair Value Measurements
See Note 1 in our 2011 consolidated financial statements for disclosures related to our methodology for fair value measurements. Additional information about fair value measurements is provided in Note 10 to the condensed, consolidated financial statements. AtMarch 31, 2012 , the aggregate amount of investments that are measured at fair value through earnings totaled$5.2 billion and consisted primarily of various assets held for sale in the ordinary course of business, as well as equity investments.
C. Financial Services Portfolio Quality
Investment securities comprise mainly investment grade debt securities supporting obligations to annuitants, policyholders and holders of guaranteed investment contracts (GICs) in our run-off insurance operations and Trinity, investment securities at our treasury operations and investments held in our CLL business collateralized by senior secured loans of high-quality, middle-market companies in a variety of industries. The fair value of investment securities increased to$47.8 billion atMarch 31, 2012 from$47.4 billion atDecember 31, 2011 , primarily due to the impact of lower interest rates and additional purchases in our CLL business. Of the amount atMarch 31, 2012 , we held debt securities with an estimated fair value of$46.9 billion , which included corporate debt securities, asset-backed securities (ABS), residential mortgage-backed securities (RMBS) and commercial mortgage-backed securities (CMBS) with estimated fair values of$26.2 billion ,$5.3 billion ,$2.5 billion and$3.0 billion , respectively. Net unrealized gains on debt securities were$3.3 billion and$3.0 billion atMarch 31, 2012 andDecember 31, 2011 , respectively. This amount included unrealized losses on corporate debt securities, ABS, RMBS and CMBS of$0.4 billion ,$0.1 billion ,$0.2 billion and$0.2 billion , respectively, atMarch 31, 2012 , as compared with$0.6 billion ,$0.2 billion ,$0.3 billion and$0.2 billion , respectively, atDecember 31, 2011 . We regularly review investment securities for impairment using both qualitative and quantitative criteria. We presently do not intend to sell the vast majority of our debt securities and believe that it is not more likely than not that we will be required to sell these securities that are in an unrealized loss position before recovery of our amortized cost. We believe that the unrealized loss associated with our equity securities will be recovered within the foreseeable future. Our RMBS portfolio is collateralized primarily by pools of individual, direct mortgage loans (a majority of which were originated in 2006 and 2005), not other structured products such as collateralized debt obligations. Substantially all of our RMBS are in a senior position in the capital structure of the deals and more than 75% are agency bonds or insured by Monoline insurers (on which we continue to place reliance). Of our total RMBS portfolio at bothMarch 31, 2012 andDecember 31, 2011 , approximately$0.6 billion relates to residential subprime credit, primarily supporting our guaranteed investment contracts. A majority of exposure to residential subprime credit related to investment securities backed by mortgage loans originated in 2006 and 2005. Substantially all of the subprime RMBS were investment grade at the time of purchase and approximately 70% have been subsequently downgraded to below investment grade. (53)
-------------------------------------------------------------------------------- Our CMBS portfolio is collateralized by both diversified pools of mortgages that were originated for securitization (conduit CMBS) and pools of large loans backed by high quality properties (large loan CMBS), a majority of which were originated in 2007 and 2006. The vast majority of the securities in our CMBS portfolio have investment grade credit ratings and the vast majority of the securities are in a senior position in the capital structure. Our ABS portfolio is collateralized by senior secured loans of high-quality, middle-market companies in a variety of industries, as well as a variety of diversified pools of assets such as student loans and credit cards. The vast majority of our ABS are in a senior position in the capital structure of the deals. In addition, substantially all of the securities that are below investment grade are in an unrealized gain position. If there has been an adverse change in cash flows for RMBS, management considers credit enhancements such as Monoline insurance (which are features of a specific security). In evaluating the overall creditworthiness of the Monoline insurer (Monoline), we use an analysis that is similar to the approach we use for corporate bonds, including an evaluation of the sufficiency of the Monoline's cash reserves and capital, ratings activity, whether the Monoline is in default or default appears imminent, and the potential for intervention by an insurance or other regulator. Monolines provide credit enhancement for certain of our investment securities, primarily RMBS and municipal securities. The credit enhancement is a feature of each specific security that guarantees the payment of all contractual cash flows, and is not purchased separately by GE. The Monoline industry continues to experience financial stress from increasing delinquencies and defaults on the individual loans underlying insured securities. We continue to rely on Monolines with adequate capital and claims paying resources. We have reduced our reliance on Monolines that do not have adequate capital or have experienced regulator intervention. AtMarch 31, 2012 , our investment securities insured by Monolines on which we continue to place reliance were$1.5 billion</money>, including $0.3 billion of our$0.6 billion investment in subprime RMBS. AtMarch 31, 2012 , the unrealized loss associated with securities subject to Monoline credit enhancement, for which there is an expected credit loss, was$0.2 billion .
Total pre-tax, other-than-temporary impairment losses during the first quarter of 2012 were an insignificant amount which was recognized in earnings and primarily relates to credit losses on non-U.S. corporate securities and other-than-temporary losses on equity securities.
Total pre-tax, other-than-temporary impairment losses during the first quarter of 2011 were$0.1 billion , of which$0.1 billion was recognized in earnings and primarily relates to credit losses on RMBS, non-U.S. government securities, non-U.S. corporate securities and other-than-temporary losses on equity securities. Our qualitative review attempts to identify issuers' securities that are "at-risk" of other-than-temporary impairment, that is, for securities that we do not intend to sell and it is not more likely than not that we will be required to sell before recovery of our amortized cost, whether there is a possibility of credit loss that would result in an other-than-temporary impairment recognition in the following 12 months. Securities we have identified as "at-risk" primarily relate to investments in RMBS and non-U.S. corporate debt securities across a broad range of industries. The amount of associated unrealized loss on these securities atMarch 31, 2012 , is$0.4 billion . Unrealized losses are not indicative of the amount of credit loss that would be recognized as credit losses are determined based on adverse changes in expected cash flows rather than fair value. For further information relating to how credit losses are calculated, see Note 3 in our 2011 consolidated financial statements. Uncertainty in the capital markets may cause increased levels of other-than-temporary impairments. AtMarch 31, 2012 andDecember 31, 2011 , unrealized losses on investment securities totaled$1.1 billion and$1.6 billion , respectively, including$0.9 billion and$1.2 billion , respectively, aged 12 months or longer. Of the amount aged 12 months or longer atMarch 31, 2012 , more than 65% are debt securities that were considered to be investment grade by the major rating agencies. In addition, of the amount aged 12 months or longer,$0.5 billion and$0.3 billion related to structured securities (mortgage-backed and asset-backed) and corporate debt securities, respectively. With respect to our investment securities that are in an unrealized loss position atMarch 31, 2012 , the majority relate to debt securities held to support obligations to holders of GICs. We presently do not intend to sell the vast majority of our debt securities and believe that it is not more likely than not that we will be required to sell these securities that are in an unrealized loss position before recovery of our amortized cost. For additional information, see Note 3 to the condensed, consolidated financial statements. (54) -------------------------------------------------------------------------------- Financing receivables is our largest category of assets and represents one of our primary sources of revenues. Our portfolio of financing receivables is diverse and not directly comparable to major U.S. banks. A discussion of the quality of certain elements of the financing receivables portfolio follows. Our consumer portfolio is largely non-U.S. and primarily comprises mortgage, sales finance, auto and personal loans in various European and Asian countries. Our U.S. consumer financing receivables comprise 16% of our total portfolio. Of those, approximately 64% relate primarily to credit cards, which are often subject to profit and loss sharing arrangements with the retailer (the results of which are reflected in revenues), and have a smaller average balance and lower loss severity as compared to bank cards. The remaining 36% are sales finance receivables, which provide electronics, recreation, medical and home improvement financing to customers. In 2007, we exited the U.S. mortgage business and we have no U.S. auto or student loans. Our commercial portfolio primarily comprises senior, secured positions with comparatively low loss history. The secured receivables in this portfolio are collateralized by a variety of asset classes, which for our CLL business primarily include: industrial-related facilities and equipment, vehicles, corporate aircraft, and equipment used in many industries, including the construction, manufacturing, transportation, media, communications, entertainment, and healthcare industries. The portfolios in our Real Estate, GECAS andEnergy Financial Services businesses are collateralized by commercial real estate, commercial aircraft and operating assets in the global energy and water industries, respectively. We are in a secured position for substantially all of our commercial portfolio. Losses on financing receivables are recognized when they are incurred, which requires us to make our best estimate of probable losses inherent in the portfolio. The method for calculating the best estimate of losses depends on the size, type and risk characteristics of the related financing receivable. Such an estimate requires consideration of historical loss experience, adjusted for current conditions, and judgments about the probable effects of relevant observable data, including present economic conditions such as delinquency rates, financial health of specific customers 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 periodically to reflect our view of current conditions. Changes in such estimates can significantly affect the allowance and provision for losses. It is possible to experience credit losses that are different from our current estimates.
Our risk management process includes standards and policies for reviewing major risk exposures and concentrations, and evaluates relevant data either for individual loans or financing leases, or on a portfolio basis, as appropriate.
Loans acquired in a business acquisition are recorded at fair value, which incorporates our estimate at the acquisition date of the credit losses over the remaining life of the portfolio. As a result, the allowance for losses is not carried over at acquisition. This may have the effect of causing lower reserve coverage ratios for those portfolios. For purposes of the discussion that follows, "delinquent" receivables are those that are 30 days or more past due based on their contractual terms; and "nonearning" receivables are those that are 90 days or more past due (or for which collection is otherwise doubtful). Nonearning receivables exclude loans purchased at a discount (unless they have deteriorated post acquisition). UnderFinancial Accounting Standards Board (FASB) Accounting Standards Codification (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 flows even if the underlying loans are contractually delinquent at 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 payments 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.
Further information on the determination of the allowance for losses on financing receivables and the credit quality and categorization of our financing receivables is provided in Notes 4 and 12.
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Financing receivables at Nonearning receivables at Allowance for losses at March 31, December 31, March 31, December 31, March 31, December 31, (In millions) 2012 2011 2012 2011 2012 2011 Commercial CLL Americas $ 79,645 $ 80,505 $ 1,664 $ 1,862 $ 802 $ 889 Europe 35,613 36,899 1,354 1,167 458 400 Asia 11,048 11,635 245 269 112 157 Other 382 436 9 11 2 4 Total CLL 126,688 129,475 3,272 3,309 1,374 1,450 Energy Financial Services 5,287 5,912 29 22 25 26 GECAS 11,721 11,901 17 55 14 17 Other 681 1,282 42 65 20 37 Total Commercial 144,377 148,570 3,360 3,451 1,433 1,530 Real Estate Debt(a) 23,518 24,501 522 541 812 949 Business Properties(b) 8,013 8,248 239 249 117 140 Total Real Estate 31,531 32,749 761 790 929 1,089 Consumer Non-U.S. residential mortgages(c) 35,257 35,550 2,863 2,870 498 546 Non-U.S. installment and revolving credit 18,963 18,544 253 263 726 717 U.S. installment and revolving credit 44,283 46,689 876 990 1,845 2,008 Non-U.S. auto 5,166 5,691 30 43 88 101 Other 7,520 7,244 381 419 195 199 Total Consumer 111,189 113,718 4,403
4,585 3,352 3,571 Total $ 287,097 $ 295,037 $ 8,524 $ 8,826 $ 5,714 $ 6,190
(a) Financing receivables included
(b) Our
quality of the borrower and secured by tenant and owner-occupied commercial
properties.
(c) At
Consumer non-U.S. residential mortgage portfolio comprised loans with
introductory, below market rates that are scheduled to adjust at future
dates; with high loan-to-value ratios at inception (greater than 90%); whose
terms permitted interest-only payments; or whose terms resulted in negative
amortization. At origination, we underwrite loans with an adjustable rate to
the reset value. Of these loans, 82% are in our
which comprise mainly loans with interest-only payments, high loan-to-value
ratios at inception and introductory below market rates, have a delinquency
rate of 15%, have a loan-to-value ratio at origination of 76% and have
re-indexed loan-to-value ratios of 84% and 56%, respectively. At March 31,
2012, 7% (based on dollar values) of these loans in our
portfolios have been restructured. (56)
-------------------------------------------------------------------------------- The portfolio of financing receivables, before allowance for losses, was$287.1 billion atMarch 31, 2012 , and$295.0 billion atDecember 31, 2011 . Financing receivables, before allowance for losses, decreased$7.9 billion fromDecember 31, 2011 , primarily as a result of collections exceeding originations ($6.6 billion ) (which includes sales) and write-offs ($1.7 billion ), partially offset by the weaker U.S. dollar ($1.8 billion ) and acquisitions ($0.1 billion ).
Related nonearning receivables totaled
The allowance for losses atMarch 31, 2012 totaled$5.7 billion compared with$6.2 billion atDecember 31, 2011 , representing our best estimate of probable losses inherent in the portfolio. Allowance for losses decreased$0.5 billion fromDecember 31, 2011 , primarily because provisions were lower than write-offs, net of recoveries, by$0.5 billion , which is attributable to a reduction in the overall financing receivables balance and an improvement in the overall credit environment. The allowance for losses as a percent of total financing receivables decreased from 2.1% atDecember 31, 2011 to 2.0% atMarch 31, 2012 primarily due to a decrease in the allowance for losses as discussed above, partially offset by a decline in the overall financing receivables balance as collections exceeded originations. Further information surrounding the allowance for losses related to each of our portfolios is detailed below. (57) --------------------------------------------------------------------------------
The following table provides information surrounding selected ratios related to nonearning financing receivables and the allowance for losses.
Nonearning financing receivables Allowance for losses
Allowance for losses
as a percent of as a percent of as a
percent of
financing receivables nonearning financing total financing at receivables at receivables at March December March December March December 31, 31, 31, 31, 31, 31, 2012 2011 2012 2011 2012 2011 Commercial CLL Americas 2.1 % 2.3 % 48.2 % 47.7 % 1.0 % 1.1 % Europe 3.8 3.2 33.8 34.3 1.3 1.1 Asia 2.2 2.3 45.7 58.4 1.0 1.3 Other 2.4 2.5 22.2 36.4 0.5 0.9 Total CLL 2.6 2.6 42.0 43.8 1.1 1.1 Energy 0.5 0.4 86.2 118.2 0.5 0.4 Financial Services GECAS 0.1 0.5 82.4 30.9 0.1 0.1 Other 6.2 5.1 47.6 56.9 2.9 2.9 Total 2.3 2.3 42.6 44.3 1.0 1.0 Commercial Real Estate Debt 2.2 2.2 155.6 175.4 3.5 3.9 Business 3.0 3.0 49.0 56.2 1.5 1.7 Properties Total Real 2.4 2.4 122.1 137.8 2.9 3.3 Estate Consumer Non-U.S. residential 8.1 8.1 17.4 19.0 1.4 1.5 mortgages Non-U.S. installment and revolving 1.3 1.4 287.0 272.6 3.8 3.9 credit U.S. installment and revolving 2.0 2.1 210.6 202.8 4.2 4.3 credit Non-U.S. auto 0.6 0.8 293.3 234.9 1.7 1.8 Other 5.1 5.8 51.2 47.5 2.6 2.7 Total Consumer 4.0 4.0 76.1 77.9 3.0 3.1 Total 3.0 3.0 67.0 70.1 2.0 2.1
Included below is a discussion of financing receivables, allowance for losses, nonearning receivables and related metrics for each of our significant portfolios.
CLL -Americas . Nonearning receivables of$1.7 billion represented 19.5% of total nonearning receivables atMarch 31, 2012 . The ratio of allowance for losses as a percent of nonearning receivables increased slightly from 47.7% atDecember 31, 2011 , to 48.2% atMarch 31, 2012 , reflecting an overall decrease in nonearning receivables. The ratio of nonearning receivables as a percent of financing receivables decreased from 2.3% atDecember 31, 2011 , to 2.1% atMarch 31, 2012 , primarily due to reduced nonearning exposures in our media, industrial and consumer-facing portfolios. Collateral supporting these nonearning financing receivables primarily includes assets in the restaurant and hospitality, trucking and industrial equipment industries and corporate aircraft, and for our leveraged finance business, equity of the underlying businesses. (58) -------------------------------------------------------------------------------- CLL -Europe . Nonearning receivables of$1.4 billion represented 15.9% of total nonearning receivables atMarch 31, 2012 . The ratio of allowance for losses as a percent of nonearning receivables decreased from 34.3% atDecember 31, 2011 , to 33.8% atMarch 31, 2012 . The decrease reflected an increase in nonearning receivables in our asset-backed lending portfolio, and equipment finance portfolio requiring a relatively lower reserve level based on the strength of the underlying collateral values. This was partially offset by increases in nonearning receivables and the allowance for losses in our Interbanca S.p.A. portfolio. The majority of nonearning receivables are attributable to the Interbanca S.p.A. portfolio, which was acquired in 2009. The loans acquired with Interbanca S.p.A. were recorded at fair value, which incorporates an estimate at the acquisition date of credit losses over their remaining life. Accordingly, these loans generally have a lower ratio of allowance for losses as a percent of nonearning receivables compared to the remaining portfolio. Excluding the nonearning loans attributable to the 2009 acquisition of Interbanca S.p.A., the ratio of allowance for losses as a percent of nonearning receivables decreased from 55.9% atDecember 31, 2011 , to 51.5% atMarch 31, 2012 , primarily due to an increase in nonearning receivables in our asset-backed lending and equipment portfolios. The ratio of nonearning receivables as a percent of financing receivables increased from 3.2% atDecember 31, 2011 , to 3.8% atMarch 31, 2012 , for the reasons described above. Collateral supporting these secured nonearning financing receivables are primarily equity of the underlying businesses for our Interbanca S.p.A. business and equipment for our equipment finance portfolio. CLL -Asia . Nonearning receivables of$0.2 billion represented 2.9% of total nonearning receivables atMarch 31, 2012 . The ratio of allowance for losses as a percent of nonearning receivables decreased from 58.4% atDecember 31, 2011 , to 45.7% atMarch 31, 2012 , primarily due to a decline in reserves as a result of write-offs inJapan , partially offset by collections and write-offs of nonearning receivables in our asset-based financing businesses inJapan . The ratio of nonearning receivables as a percent of financing receivables decreased from 2.3% atDecember 31, 2011 , to 2.2% atMarch 31, 2012 , primarily due to the decline in nonearning receivables related to our asset-based financing businesses inJapan , partially offset by a lower financing receivables balance. Collateral supporting these nonearning financing receivables is primarily commercial real estate, manufacturing equipment, corporate aircraft, and assets in the auto industry. Real Estate - Debt. Nonearning receivables of$0.5 billion represented 6.1% of total nonearning receivables atMarch 31, 2012 . The decrease in nonearning receivables fromDecember 31, 2011 , was driven primarily by the resolution of North American multi-family nonearning loans, as well as European retail and mixed use loans, through payoffs and foreclosures, partially offset by new U.S. hotel delinquencies. The ratio of allowance for losses as a percent of total financing receivables decreased from 3.9% atDecember 31, 2011 to 3.5% atMarch 31, 2012 , driven primarily by write-offs related to settlements and payoffs from impaired loan borrowers and improvement in collateral values. The ratio of allowance for losses as a percent of nonearning receivables decreased from 175.4% to 155.6% reflecting write-offs and resolution of nonearning loans as mentioned above.The Real Estate financing receivables portfolio is collateralized by income-producing or owner-occupied commercial properties across a variety of asset classes and markets. AtMarch 31, 2012 , total Real Estate financing receivables of$31.5 billion were primarily collateralized by owner-occupied properties ($8.0 billion ), office buildings ($6.7 billion ), apartment buildings ($4.3 billion ) and hotel properties ($3.6 billion ). In the first quarter of 2012, commercial real estate markets showed signs of improved stability and liquidity in certain markets; however, the pace of improvement varies significantly by asset class and market and the long term outlook remains uncertain. We have and continue to maintain an intense focus on operations and risk management. Loan loss reserves related to our Real Estate-Debt financing receivables are particularly sensitive to declines in underlying property values. Assuming global property values decline an incremental 1% or 5%, and that decline occurs evenly across geographies and asset classes, we estimate incremental loan loss reserves would be required of less than$0.1 billion and approximately$0.2 billion , respectively. Estimating the impact of global property values on loss performance across our portfolio depends on a number of factors, including macroeconomic conditions, property level operating performance, local market dynamics and individual borrower behavior. As a result, any sensitivity analyses or attempts to forecast potential losses carry a high degree of imprecision and are subject to change. AtMarch 31, 2012 , we had 118 foreclosed commercial real estate properties totaling$0.7 billion . (59) -------------------------------------------------------------------------------- Consumer - Non-U.S. residential mortgages. Nonearning receivables of$2.9 billion represented 33.6% of total nonearning receivables atMarch 31, 2012 . The ratio of allowance for losses as a percent of nonearning receivables decreased from 19.0% atDecember 31, 2011 to 17.4% atMarch 31, 2012 . In the first three months of 2012, our allowance for losses decreased primarily as a result of write-offs in ourHungary andU.K. portfolios while nonearning receivables remained relatively flat. Our non-U.S. mortgage portfolio has a loan-to-value ratio of approximately 75% at origination and the vast majority are first lien positions. OurU.K. andFrance portfolios, which comprise a majority of our total mortgage portfolio, have reindexed loan-to-value ratios of 84% and 56%, respectively. About 4% of these loans are without mortgage insurance and have a reindexed loan-to-value ratio equal to or greater than 100%. Loan-to-value information is updated on a quarterly basis for a majority of our loans and considers economic factors such as the housing price index. AtMarch 31, 2012 , we had in repossession stock 488 houses in theU.K. , which had a value of approximately$0.1 billion . The ratio of nonearning receivables as a percent of financing receivables remained constant at 8.1% atMarch 31, 2012 . Consumer - Non-U.S. installment and revolving credit. Nonearning receivables of$0.3 billion represented 3.0% of total nonearning receivables atMarch 31, 2012 . The ratio of allowance for losses as a percent of nonearning receivables increased from 272.6% atDecember 31, 2011 to 287.0% atMarch 31, 2012 , reflecting higher delinquencies, and lower nonearnings due to collections and write-offs primarily inAustralia and New Zealand . Consumer - U.S. installment and revolving credit. Nonearning receivables of$0.9 billion represented 10.3% of total nonearning receivables atMarch 31, 2012 . The ratio of allowance for losses as a percent of nonearning receivables increased from 202.8% atDecember 31, 2011 , to 210.6% atMarch 31, 2012 as a result of lower entry rates and improved collections resulting in reductions in our nonearning receivables balance. The ratio of nonearning receivables as a percentage of financing receivables decreased from 2.1% atDecember 31, 2011 to 2.0% atMarch 31, 2012 primarily due to lower delinquencies reflecting an improvement in the overall credit environment.
Nonaccrual Financing Receivables
The following table provides details related to our nonaccrual and nonearning financing receivables. 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 becomes doubtful or the account becomes 90 days past due. Substantially all of the differences between nonearning and nonaccrual financing receivables relate to loans which are classified as nonaccrual financing receivables but are paying on a cash accounting basis, and therefore excluded from nonearning receivables. Of our$16.1 billion nonaccrual loans atMarch 31, 2012 ,$7.3 billion are currently paying in accordance with their contractual terms. Nonaccrual Nonearning financing financing (In millions) receivables receivables March 31, 2012 Commercial CLL $ 4,806 $ 3,272 Energy Financial Services 29 29 GECAS 17 17 Other 87 42 Total Commercial 4,939 3,360 Real Estate 6,551 761 Consumer 4,611 4,403 Total $ 16,101 $ 8,524 (60)
--------------------------------------------------------------------------------
Impaired Loans
"Impaired" loans in the table below are defined as larger balance or restructured loans for which it is probable that the lender will be unable to collect all amounts due according to original contractual terms of the loan agreement. The vast majority of our Consumer and a portion of our CLL nonaccrual receivables are excluded from this definition, as they represent smaller balance homogeneous loans that we evaluate collectively by portfolio for impairment. Impaired loans include nonearning receivables on larger balance or restructured loans, loans that are currently paying interest under the cash basis (but are excluded from the nonearning category), and loans paying currently but which have been previously restructured. Specific reserves are recorded for individually impaired loans to the extent we have determined that it is probable that we will be unable to collect all amounts due according to original contractual terms of the loan agreement. Certain loans classified as impaired may not require a reserve because we believe that we will ultimately collect the unpaid balance (through collection or collateral repossession).
Further information pertaining to loans classified as impaired and specific reserves is included in the table below.
(In millions) AtMarch 31 ,December 31, 2012 2011
Loans requiring allowance for losses
Commercial(a) $ 2,206 $ 2,357 Real Estate 4,286 4,957 Consumer 2,908 2,824 Total loans requiring allowance for losses 9,400
10,138
Loans expected to be fully recoverable
Commercial(a) 3,707 3,305 Real Estate 3,953 3,790 Consumer 109 69 Total loans expected to be fully recoverable 7,769
7,164
Total impaired loans $ 17,169 $
17,302
Allowance for losses (specific reserves)
Commercial(a) $ 739 $ 812 Real Estate 674 822 Consumer 660 680 Total allowance for losses (specific reserves) $ 2,073 $
2,314
Average investment during the period $ 17,236 $
18,167
Interest income earned while impaired(b) 190 733 (a) Includes CLL,Energy Financial Services , GECAS and Other. (b) Recognized principally on a cash basis. We regularly review our Real Estate loans for impairment using both quantitative and qualitative factors, such as debt service coverage and loan-to-value ratios. We classify Real Estate loans as impaired when the most recent valuation reflects a projected loan-to-value ratio at maturity in excess of 100%, even if the loan is currently paying in accordance with contractual terms.
Of our
Our impaired loan balance at
(61) --------------------------------------------------------------------------------
At March 31, December 31, (In millions) 2012 2011 Method used to measure impairment Discounted cash flow $ 8,771 $ 8,858 Collateral value 8,398 8,444 Total $ 17,169 $ 17,302
See Note 1 in our 2011 consolidated financial statements for further information on our valuation processes.
Our loss mitigation strategy is intended to minimize economic loss and, at times, can result in rate reductions, principal forgiveness, extensions, forbearance or other actions, which may cause the related loan to be classified as a TDR, and also as impaired. Changes to Real Estate's loans primarily include maturity extensions, principal payment acceleration, changes to collateral terms and cash sweeps, which are in addition to, or sometimes in lieu of, fees and rate increases. The determination of whether these changes to the terms and conditions of our commercial loans meet the TDR criteria includes our consideration of all relevant facts and circumstances. AtMarch 31, 2012 , TDRs included in impaired loans were$13.5 billion , primarily relating to Real Estate ($6.6 billion ), CLL ($4.0 billion ) and Consumer ($2.9 billion ). Real Estate TDRs decreased from$7.0 billion atDecember 31, 2011 to$6.6 billion atMarch 31, 2012 , primarily driven by resolution of TDRs through paydowns, restructuring and foreclosures, partially offset by extensions of loans scheduled to mature during 2012, some of which were classified as TDRs upon modification. For borrowers with demonstrated operating capabilities, we work to restructure loans when the cash flow and projected value of the underlying collateral support repayment over the modified term. We deem loan modifications to be TDRs when we have granted a concession to a borrower experiencing financial difficulty and we do not receive adequate compensation in the form of an effective interest rate that is at current market rates of interest given the risk characteristics of the loan or other consideration that compensates us for the value of the concession. For the three months endedMarch 31, 2012 , we modified$1.1 billion of loans classified as TDRs substantially all in our Debt portfolio. Changes to these loans primarily included maturity extensions, principal payment acceleration, changes to collateral or covenant terms and cash sweeps, which are in addition to, or sometimes in lieu of, fees and rate increases. The limited liquidity and higher return requirements in the real estate market for loans with higher loan-to-value (LTV) ratios has typically resulted in the conclusion that the modified terms are not at current market rates of interest, even if the modified loans are expected to be fully recoverable. We received the same or additional compensation in the form of rate increases and fees for the majority of these TDRs. Of our$3.1 billion of modifications classified as TDRs in the last twelve months,$0.2 billion have subsequently experienced a payment default in the last three months. The substantial majority of the Real Estate TDRs have reserves determined based upon collateral value. Our specific reserves on Real Estate TDRs were$0.5 billion atMarch 31, 2012 and$0.6 billion atDecember 31, 2011 , and were 7.3% and 8.4%, respectively, of Real Estate TDRs. In many situations these loans did not require a specific reserve as collateral value adequately covered our recorded investment in the loan. While these modified loans had adequate collateral coverage, we were still required to complete our TDR classification evaluation on each of the modifications without regard to collateral adequacy. We utilize certain short-term (three months or less) loan modification programs for borrowers experiencing temporary financial difficulties in our Consumer loan portfolio. These loan modification programs are primarily concentrated in our non-U.S. residential mortgage and non-U.S. installment and revolving portfolios. We sold our U.S. residential mortgage business in 2007 and as such, do not participate in the U.S. government-sponsored mortgage modification programs. For the three months endedMarch 31, 2012 , we provided short-term modifications of approximately$0.2 billion of consumer loans for borrowers experiencing financial difficulties, substantially all in our non-U.S. residential mortgage, credit card and personal loan portfolios, which are not classified as TDRs. For these modified loans, we provided insignificant interest rate reductions and payment deferrals, which were not part of the terms of the original contract. We expect borrowers whose loans have been modified under these short-term programs to continue to be able to meet their contractual obligations upon the conclusion of the short-term modification. In addition, we have modified$0.5 billion of Consumer loans for the three months endedMarch 31, 2012 , which are classified as TDRs. Further information on Consumer impaired loans is provided in Note 12 to the condensed, consolidated financial statements. (62) --------------------------------------------------------------------------------
Delinquencies
For additional information on delinquency rates at each of our major portfolios, see Note 12 to the condensed, consolidated financial statements.
GECC Selected European Exposures
AtMarch 31, 2012 , we had$91 billion in net financing receivables to consumer and commercial customers inEurope . The GECC financing receivables portfolio inEurope is well diversified across European geographies and customers. Approximately 87% of the portfolio is secured by collateral and represents approximately 500,000 commercial customers. Several European countries, includingSpain ,Portugal ,Ireland ,Italy ,Greece andHungary ("focus countries"), have been subject to credit deterioration due to weaknesses in their economic and fiscal situations. The carrying value of GECC funded exposures in these focus countries and in the rest ofEurope comprised the following atMarch 31, 2012 . Rest of Total
Financing receivables, before allowance for losses on financing $ 2,263 $ 576 $ 421 $ 7,209 $ 73 $ 3,136 $ 79,024 $ 92,702 receivables Allowance for losses on financing (83) (23) (19) (266) - (114) (1,428) (1,933) receivables Financing receivables, net of allowance
for losses on 2,180 553 402 6,943 73
3,022 77,596 90,769 financing receivables(a)(b) Investments(c)(d) 2 - 13 631 - 167 2,230 3,043 Cost and equity method investments(e) 865 27 341 70 32 5 728 2,068 Derivatives, net of 43 - - 78 - - 110 231 collateral(c)(f) Total funded $ 3,090 $ 580 $ 756 $ 7,722 $ 105 $ 3,194 $ 80,664 $ 96,111 exposures(g)(h) Unfunded $ 37 $ 1 $ 26 $ 301 $ 4 $ 603 $ 7,825 $ 8,797 commitments
(a) Financing receivable amounts are classified based on the location or nature of
the related obligor.
(b) Substantially all relates to non-sovereign obligors. Includes residential
mortgage loans of approximately
purchased credit protection. We have third-party mortgage insurance for
approximately 29% of these residential mortgage loans, substantially all of
which were originated in the
(c) Investments and derivatives are classified based on the location of the parent
of the obligor or issuer.
(d) Includes
to non-financial institutions and
Sovereign issuances totaled
the other focus countries. (e) Substantially all is non-sovereign. (f) Net of cash collateral; entire amount is non-sovereign.
(g) Excludes
global financial institutions based in
agencies or supra national entities, of which
countries, and
European financial institutions on a short-term basis, secured by U.S.
Treasury securities (
(
cash exposure.
(h) Excludes ELTO (
billion), of which
focus countries. These assets are held under long-term investment and
operating strategies, and our ELTO strategies contemplate an ability to
redeploy assets under lease should default by the lessee occur. The values of
these assets could be subject to decline or impairment in the current environment. (63)
-------------------------------------------------------------------------------- We manage counterparty exposure, including credit risk, on an individual counterparty basis. We place defined risk limits around each obligor and review our risk exposure on the basis of both the primary and parent obligor, as well as the issuer of securities held as collateral. These limits are adjusted on an ongoing basis based on our continuing assessment of the credit risk of the obligor or issuer. In setting our counterparty risk limits, we focus on high quality credits and diversification through spread of risk in an effort to actively manage our overall exposure. We actively monitor each exposure against these limits and take appropriate action when we believe that risk limits have been exceeded or there are excess risk concentrations. Our collateral position and ability to work out problem accounts has historically mitigated our actual loss experience. Delinquency experience has been relatively stable in our European commercial and consumer platforms in the aggregate, and we actively monitor and take action to reduce exposures where appropriate. Uncertainties surrounding European markets could have an impact on the judgments and estimates used in determining the carrying value of these assets. Other assets comprise mainly real estate equity properties and investments, equity and cost method investments, derivative instruments and assets held for sale, and totaled$71.7 billion atMarch 31, 2012 , a decrease of$3.9 billion , primarily related to decreases in the fair value of derivative instruments ($4.2 billion ) and the sale of certain held-for-sale real estate and aircraft ($0.8 billion ) , partially offset by the consolidation of an entity involved in power generating activities ($1.3 billion ). During the three months endedMarch 31, 2012 , we recognized an insignificant amount of other-than-temporary impairments of cost and equity method investments, excluding those related to real estate. Included in other assets are Real Estate equity investments of$23.6 billion and$23.9 billion atMarch 31, 2012 andDecember 31, 2011 , respectively. Our portfolio is diversified, both geographically and by asset type. We review the estimated values of our commercial real estate investments at least annually, or more frequently as conditions warrant. Based on the most recent valuation estimates available, the carrying value of ourReal Estate investments exceeded their estimated value by about$2.6 billion . Commercial real estate valuations in 2011 and the first quarter of 2012 showed signs of improved stability and liquidity in certain markets, primarily in the U.S.; however, the pace of improvement varies significantly by asset class and market. Accordingly, there continues to be risk and uncertainty surrounding commercial real estate values. Declines in estimated value of real estate below carrying amount result in impairment losses when the aggregate undiscounted cash flow estimates used in the estimated value measurement are below the carrying amount. As such, estimated losses in the portfolio will not necessarily result in recognized impairment losses. During the first quarter of 2012, Real Estate recognized pre-tax impairments of less than$0.1 billion in its real estate held for investment, which were primarily driven by declining cash flow projections for properties inJapan .Real Estate investments with undiscounted cash flows in excess of carrying value of 0% to 5% atMarch 31, 2012 had a carrying value of$0.6 billion and an associated estimated unrealized loss of approximately$0.1 billion . Continued deterioration in economic conditions or prolonged market illiquidity may result in further impairments being recognized.
Liquidity and Borrowings
We maintain a strong focus on liquidity. We manage our liquidity to help ensure access to sufficient funding to meet our business needs and financial obligations throughout business cycles.
Our liquidity and borrowing plans for GE and GECC are established within the context of our annual financial and strategic planning processes. At GE, our liquidity and funding plans take into account the liquidity necessary to fund our operating commitments, which include primarily purchase obligations for inventory and equipment, payroll and general expenses (including pension funding). We also take into account our capital allocation and growth objectives, including paying dividends, repurchasing shares, investing in research and development and acquiring industrial businesses. At GE, we rely primarily on cash generated through our operating activities and also have historically maintained a commercial paper program that we regularly use to fund operations in the U.S., principally within fiscal quarters. GECC's liquidity position is targeted to meet our obligations under both normal and stressed conditions. GECC establishes a funding plan annually that is based on the projected asset size and cash needs of GE, which over the past few years, has included GE's strategy to reduce its ending net investment inGE Capital . GECC relies on a diversified source of funding, including the unsecured term debt markets, the global commercial paper markets, deposits, secured funding, retail funding products, bank borrowings and securitizations to fund its balance sheet, in addition to cash generated through collection of principal, interest and other payments on our existing portfolio of loans and leases to fund its operating and interest expense costs. (64) -------------------------------------------------------------------------------- Our 2012 funding plan anticipates repayment of principal on outstanding short-term borrowings, including the current portion of our long-term debt ($82.7 billion atDecember 31, 2011 , which includes$2.7 billion of alternative and other funding), through issuance of long-term debt and reissuance of commercial paper, cash on hand, collections of financing receivables exceeding originations, dispositions, asset sales, and deposits and other alternative sources of funding. Long-term maturities were$20 billion in the first quarter of 2012. Interest on borrowings is primarily repaid through interest earned on existing financing receivables. During the first quarter of 2012, we earned interest income on financing receivables of$5.4 billion , which more than offset interest expense of$3.2 billion . We maintain a detailed liquidity policy for GECC which includes a requirement to maintain a contingency funding plan. The liquidity policy defines our liquidity risk tolerance under different stress scenarios based on our liquidity sources and also establishes procedures to escalate potential issues. We actively monitor our access to funding markets and our liquidity profile through tracking external indicators and testing various stress scenarios. The contingency funding plan provides a framework for handling market disruptions and establishes escalation procedures in the event that such events or circumstances arise. We are a savings and loan holding company under U.S. law and became subject toFederal Reserve Board (FRB) supervision onJuly 21, 2011 , the one-year anniversary of the Dodd-Frank Wall Street Reform and Consumer Protection Act. The FRB has recently finalized a regulation that requires certain organizations it supervises to submit annual capital plans for review, including institutions' plans to make capital distributions, such as dividend payments. The applicability and timing of this proposed regulation to GECC is not yet determined; however, the FRB has indicated that it expects to extend these requirements to large savings and loan holding companies through separate rulemaking or by order. While the aforementioned regulations are not final, our capital allocation planning is still subject to FRB review, which could affect the timing of theGE Capital dividend to the parent.
Actions taken to strengthen and maintain our liquidity are described in the following section.
Liquidity Sources
GE maintains liquidity sources that consist of cash and equivalents and a portfolio of high-quality, liquid investments (Liquidity Portfolio) and committed unused credit lines.
GE has consolidated cash and equivalents of$83.7 billion atMarch 31, 2012 , which is available to meet its needs. Of this, approximately$8 billion is held at GE and approximately$76 billion is held at GECC. Most of GE's cash and equivalents are held outside the U.S. and are available to fund operations and other growth of non-U.S. subsidiaries; they are also available to fund our needs in the U.S. on a short-term basis without being subject to U.S. tax. Less than$1 billion of GE cash and equivalents is held in countries with currency controls that may restrict the transfer of funds to the U.S. or limit our ability to transfer funds to the U.S. without incurring substantial costs. These funds are available to fund operations and growth in these countries and we do not currently anticipate a need to transfer these funds to the U.S.
At GECC, about
Under current tax laws, should GE or GECC determine to repatriate cash and equivalents held outside the U.S., we may be subject to additional U.S. income taxes and foreign withholding taxes.
In addition to GE's$83.7 billion of cash and equivalents, we have a centrally-managed portfolio of high-quality, liquid investments with a fair value of$3.6 billion atMarch 31, 2012 . The Liquidity Portfolio is used to manage liquidity and meet our operating needs under both normal and stress scenarios. The investments consist of unencumbered U.S. government securities, U.S. agency securities, securities guaranteed by the government, supranational securities, and a select group of non-U.S. government securities. We believe that we can readily obtain cash for these securities, even in stressed market conditions. (65)
-------------------------------------------------------------------------------- We have committed, unused credit lines totaling$51.6 billion that have been extended to us by 57 financial institutions atMarch 31, 2012 . These lines include$34.5 billion of revolving credit agreements under which we can borrow funds for periods exceeding one year. Additionally,$17.1 billion are 364-day lines that contain a term-out feature that allows us to extend borrowings for one year from the date of expiration of the lending agreement.
At
Funding Plan
GE reduced its
In 2012, we completed issuances of$12.1 billion of senior unsecured debt with maturities up to 22 years (and subsequent toMarch 31, 2012 , an additional$4.1 billion ). Average commercial paper borrowings during the first quarter were$43.5 billion and the maximum amount of commercial paper borrowings outstanding during the first quarter was$46.3 billion . Our commercial paper maturities are funded principally through new issuances. Under theFederal Deposit Insurance Corporation's (FDIC) Temporary Liquidity Guarantee Program (TLGP), theFDIC guaranteed certain senior, unsecured debt issued by GECC on or beforeOctober 31, 2009 for which we paid$2.3 billion of fees to theFDIC for our participation. Our TLGP-guaranteed debt has remaining maturities of$28 billion in 2012. We anticipate funding these and our other long-term debt maturities through a combination of existing cash, new debt issuances, collections exceeding originations, dispositions, asset sales, deposits and other alternative sources of funding. GECC and GE are parties to an Eligible Entity Designation Agreement and GECC is subject to the terms of a Master Agreement, each entered into with theFDIC . The terms of these agreements include, among other things, a requirement that GE and GECC reimburse theFDIC for any amounts that theFDIC pays to holders of GECC debt that is guaranteed by theFDIC . We securitize financial assets as an alternative source of funding. During 2012, we completed$4.1 billion of non-recourse issuances and had maturities of$3.8 billion . AtMarch 31, 2012 , our non-recourse borrowings were$29.5 billion . We have deposit-taking capability at 12 banks outside of the U.S. and two banks in the U.S. -GE Capital Retail Bank (formerlyGE Money Bank ), aFederal Savings Bank (FSB), andGE Capital Financial Inc. , an industrial bank (IB). The FSB and IB currently issue certificates of deposit (CDs) in maturity terms from three months to ten years.
Total alternative funding at
Credit Ratings
OnApril 3, 2012 , Moody's Investors Service (Moody's) announced that it had downgraded the senior unsecured debt rating of GE by one notch from Aa2 to Aa3 and the senior unsecured debt rating of GECC by two notches from Aa2 to A1. The ratings downgrade does not affect GE's and GECC's short-term funding ratings of P-1, which were affirmed by Moody's. Moody's ratings outlook for GE and GECC is stable. We do not anticipate any material operational, funding or liquidity impacts from this ratings downgrade. (66) -------------------------------------------------------------------------------- As further disclosed in our 2011 consolidated financial statements, GECC has fully guaranteed repayment of$4.1 billion of guaranteed investment contract (GIC) obligations of Trinity. As a result of Moody's downgrade, substantially all of these GICs became redeemable by the holders. In addition, another consolidated entity also had issued GICs where proceeds are loaned to GECC and$1.1 billion of these GICs became redeemable by the holders. OnMay 1, 2012 , holders of$2.1 billion in principal amount of GICs redeemed their holdings and GECC made related cash payments. These redemptions were fully considered in our previously discussed liquidity plan. As ofMay 2, 2012 , the contractual redemption period for$0.8 billion of GICs had not yet expired. Subsequent to this contractual redemption period, the remaining outstanding GICs will continue to be subject to the existing terms and maturities of their respective contracts. Additionally, there were other contracts affected by the downgrade with provisions requiring us to provide additional funding, post collateral and make other payments. The total cash and collateral impact of these contracts was less than$0.6 billion . Income Maintenance Agreement As set forth in Exhibit 12 hereto, GECC's ratio of earnings to fixed charges was 1.60:1 during the three months endedMarch 31, 2012 due to higher pre-tax earnings at GECC, which were primarily driven by lower losses and delinquencies. For additional information, see the Income Maintenance Agreement section in the Management's Discussion and Analysis of Financial Condition and Results of Operations in our 2011 consolidated financial statements.
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NATIONAL INTERSTATE CORP – 10-Q – Management’s Discussion and Analysis of Financial Condition and Results of Operations
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