(Unaudited)

 

	Three months ended June 30						Six months ended June 30
(In millions)	2009			2008			2009			2008
Revenues
Revenues from services (Note 9)	$	12,357		$	17,621		$	25,693		$	34,377
Sales of goods		205			528			478			895
Total revenues		12,562			18,149			26,171			35,272
Costs and expenses
Interest		4,436			6,267			9,526			12,346
Operating and administrative		3,454			4,834			7,312			9,366
Cost of goods sold		164			461			388			778
Investment contracts, insurance losses and
insurance annuity benefits		45			122			118			265
Provision for losses on financing receivables		2,815			1,470			5,137			2,803
Depreciation and amortization		1,939			2,136			4,112			4,257
Total costs and expenses		12,853			15,290			26,593			29,815
Earnings (loss) from continuing operations before
income taxes		(291	)		2,859			(422	)		5,457
Benefit (provision) for income taxes		695			(46	)		1,850			(127	)
Earnings from continuing operations		404			2,813			1,428			5,330
Loss from discontinued operations, net of taxes (Note 2)		(194	)		(336	)		(197	)		(382	)
Net earnings		210			2,477			1,231			4,948
Less net earnings attributable to noncontrolling interests		29			63			79			99
Net earnings attributable to GECC		181			2,414			1,152			4,849
Dividends		−			(889	)		−			(2,019	)
Retained earnings at beginning of period(a)		46,468			41,818			45,497			40,513
Retained earnings at end of period	$	46,649		$	43,343		$	46,649		$	43,343
Amounts attributable to GECC
Earnings from continuing operations	$	375		$	2,750		$	1,349		$	5,231
Loss from discontinued operations, net of taxes		(194	)		(336	)		(197	)		(382	)
Net earnings attributable to GECC	$	181		$	2,414		$	1,152		$	4,849

(a)		Included a cumulative effect adjustment to increase retained earnings by $25 million in 2009.
	See Note 3 for other-than-temporary impairment amounts.
	See accompanying notes.

 

 

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General Electric Capital Corporation and consolidated affiliates

 

1.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

All of the outstanding common stock of General Electric Capital Corporation (GE Capital or GECC) is owned by General Electric Capital Services, Inc. (GECS), all of whose common stock is owned by General Electric Company (GE Company or GE). Our financial statements consolidate all of our affiliates – companies that we control and in which we hold a majority voting interest. We also consolidate the economic interests we hold in certain businesses within companies in which we hold a voting equity interest and are majority owned by our ultimate parent, but which we have agreed to actively manage and control. See Note 1 to the consolidated financial statements in our Annual Report on Form 10-K for the year ended December 31, 2008 (2008 Form 10-K), which discusses our consolidation and financial statement presentation. GECC includes Commercial Lending and Leasing (CLL), Consumer (formerly GE Money), Real Estate, Energy Financial Services and GE Capital Aviation Services (GECAS). During the first quarter of 2009, we transferred Banque Artesia Nederland N.V. (Artesia) from CLL to Consumer. Details of total revenues and segment profit by operating segment can be found on page 42 of this report. We have reclassified certain prior-period amounts to conform to the current-period’s presentation. Unless otherwise indicated, information in these notes to condensed, consolidated financial statements relates to continuing operations.

 

Accounting Changes

 

Effective January 1, 2008, we adopted Financial Accounting Standards Board (FASB) Statement of Financial Accounting Standards (SFAS) 157, Fair Value Measurements, for all financial instruments and non-financial instruments accounted for at fair value on a recurring basis. Effective January 1, 2009, we adopted SFAS 157 for all non-financial instruments accounted for at fair value on a non-recurring basis. SFAS 157 establishes a new framework for measuring fair value and expands related disclosures. See Note 10.

 

On January 1, 2009, we adopted SFAS 141(R), Business Combinations. This standard significantly changes the accounting for business acquisitions both during the period of the acquisition and in subsequent periods. Among the more significant changes in the accounting for acquisitions are the following:

 

·	Acquired in-process research and development (IPR&D) is accounted for as an asset, with the cost recognized as the research and development is realized or abandoned. IPR&D was previously expensed at the time of the acquisition.

 

·	Contingent consideration is recorded at fair value as an element of purchase price with subsequent adjustments recognized in operations. Contingent consideration was previously accounted for as a subsequent adjustment of purchase price.

 

·	Subsequent decreases in valuation allowances on acquired deferred tax assets are recognized in operations after the measurement period. Such changes were previously considered to be subsequent changes in consideration and were recorded as decreases in goodwill.

 

·	Transaction costs are expensed. These costs were previously treated as costs of the acquisition.

 

In April 2009, the FASB issued FASB Staff Position (FSP) FAS 141(R)-1, Accounting for Assets Acquired and Liabilities Assumed in a Business Combination That Arise from Contingencies, which amends the accounting in SFAS 141(R) for assets and liabilities arising from contingencies in a business combination. The FSP is effective January 1, 2009, and requires pre-acquisition contingencies to be recognized at fair value, if fair value can be reasonably determined during the measurement period. If fair value cannot be reasonably determined, the FSP requires measurement based on the recognition and measurement criteria of SFAS 5, Accounting for Contingencies.

 

 

 

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On January 1, 2009, we adopted SFAS 160, Noncontrolling Interests in Consolidated Financial Statements, an amendment of ARB No. 51, which requires us to make certain changes to the presentation of our financial statements. This standard requires us to classify noncontrolling interests (previously referred to as “minority interest”) as part of consolidated net earnings ($29 million and $63 million for the three months ended June 30, 2009 and 2008, respectively, and $79 million and $99 million for the six months ended June 30, 2009 and 2008, respectively) and to include the accumulated amount of noncontrolling interests as part of shareowner’s equity ($2,065 million and $2,383 million at June 30, 2009 and December 31, 2008, respectively). The net earnings amounts we have previously reported are now presented as "Net earnings attributable to GECC". Similarly, in our presentation of shareowner’s equity, we distinguish between equity amounts attributable to the GECC shareowner and amounts attributable to the noncontrolling interests – previously classified as minority interest outside of shareowner’s equity. Beginning January 1, 2009, dividends to noncontrolling interests are classified as financing cash flows. In addition to these financial reporting changes, SFAS 160 provides for significant changes in accounting related to noncontrolling interests; specifically, increases and decreases in our controlling financial interests in consolidated subsidiaries will be reported in equity similar to treasury stock transactions. If a change in ownership of a consolidated subsidiary results in loss of control and deconsolidation, any retained ownership interests are remeasured with the gain or loss reported in net earnings.

 

Effective April 1, 2009, we adopted FASB FSP FAS 157-4, Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly. Adoption of the FSP had an insignificant effect on our financial statements.

 

Effective April 1, 2009, we adopted FASB FSP FAS 115-2 and FAS 124-2, Recognition and Presentation of Other-Than-Temporary Impairments. See Note 3. The FSP modifies the existing model for recognition and measurement of impairment for debt securities. The two principal changes to the impairment model for securities are as follows:

 

·

Recognition of an other-than-temporary impairment charge for debt securities is required if any of these conditions are met: (1) we do not expect to recover the entire amortized cost basis of the security, (2) we intend to sell the security or (3) it is more likely than not that we will be required to sell the security before we recover its amortized cost basis.

 

·

If the first condition above is met, but we do not intend to sell and it is not more likely than not that we will be required to sell the security before recovery of its amortized cost basis, we would be required to record the difference between the security’s amortized cost basis and its recoverable amount in earnings and the difference between the security’s recoverable amount and fair value in other comprehensive income. If either the second or third criteria are met, then we would be required to recognize the entire difference between the security’s amortized cost basis and its fair value in earnings.

 

Interim Period Presentation

 

The condensed, consolidated financial statements and notes thereto are unaudited. These statements include all adjustments (consisting of normal recurring accruals) that we considered necessary to present a fair statement of our results of operations, financial position and cash flows. We have evaluated subsequent events that have occurred through August 3, 2009, the date of financial statement issuance. The results reported in these condensed, consolidated financial statements should not be regarded as necessarily indicative of results that may be expected for the entire year. It is suggested that these condensed, consolidated financial statements be read in conjunction with the financial statements and notes thereto included in our 2008 Form 10-K. We label our quarterly information using a calendar convention, that is, first quarter is labeled as ending on March 31, second quarter as ending on June 30, and third quarter as ending on September 30. It is our longstanding practice to establish interim quarterly closing dates using a fiscal calendar, which requires our businesses to close their books on either a Saturday or Sunday, depending on the business. The effects of this practice are modest and only exist within a reporting year. The fiscal closing calendar from 1993 through 2013 is available on our website, www.ge.com/secreports.

 

2.  DISCONTINUED OPERATIONS

 

Discontinued operations comprised GE Money Japan (our Japanese personal loan business, Lake, and our Japanese mortgage and card businesses, excluding our investment in GE Nissen Credit Co., Ltd.), our U.S. mortgage business (WMC), GE Life and Genworth Financial, Inc. (Genworth). Associated results of operations, financial position and cash flows are separately reported as discontinued operations for all periods presented.

 

 

 

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GE Money Japan

 

During the third quarter of 2007, we committed to a plan to sell Lake upon determining that, despite restructuring, Japanese regulatory limits for interest charges on unsecured personal loans did not permit us to earn an acceptable return. During the third quarter of 2008, we completed the sale of GE Money Japan, which included Lake, along with our Japanese mortgage and card businesses, excluding our investment in GE Nissen Credit Co., Ltd. As a result, we recognized an after-tax loss of $908 million in 2007 and an incremental loss in 2008 of $361 million. In connection with the transaction, GE Money Japan reduced the proceeds on the sale for estimated interest refund claims in excess of the statutory interest rate. Proceeds from the sale may be increased or decreased based on the actual claims experienced in accordance with terms specified in the agreement, and will not be adjusted unless claims exceed approximately $2,800 million. During the second quarter of 2009, we accrued $132 million, which represents the amount by which we expect claims to exceed those levels and is based on our historical and recent claims experience and the estimated future requests, taking into consideration the ability and likelihood of customers to make claims and other industry risk factors. Uncertainties around the status of laws and regulations and lack of certain information related to the individual customers make it difficult to develop a meaningful estimate of the aggregate claims exposure. We will continue to review our estimated exposure quarterly, and make adjustments when required. GE Money Japan revenues from discontinued operations were an insignificant amount and $261 million in the second quarters of 2009 and 2008, respectively, and an insignificant amount and $551 million in the first six months of 2009 and 2008, respectively. In total, GE Money Japan losses from discontinued operations, net of taxes, were $136 million and $311 million in the second quarters of 2009 and 2008, respectively, and $132 million and $348 million in the first six months of 2009 and 2008, respectively.

 

WMC

 

During the fourth quarter of 2007, we completed the sale of our U.S. mortgage business. In connection with the transaction, WMC retained certain obligations related to loans sold prior to the disposal of the business, including WMC’s contractual obligations to repurchase previously sold loans as to which there was an early payment default or with respect to which certain contractual representations and warranties were not met. Reserves related to these obligations were $243 million at June 30, 2009, and $244 million at December 31, 2008. The amount of these reserves is based upon pending and estimated future loan repurchase requests, the estimated percentage of loans validly tendered for repurchase, and our estimated losses on loans repurchased. Based on our historical experience, we estimate that a small percentage of the total loans we originated and sold will be tendered for repurchase, and of those tendered, only a limited amount will qualify as “validly tendered,” meaning the loans sold did not satisfy specified contractual obligations. The amount of our current reserve represents our best estimate of losses with respect to our repurchase obligations. However, actual losses could exceed our reserve amount if actual claim rates, valid tenders or losses we incur on repurchased loans are higher than historically observed. WMC revenues from discontinued operations were $(2) million and $(62) million in the second quarters of 2009 and 2008, respectively, and $(9) million and $(57) million in the first six months of 2009 and 2008, respectively. In total, WMC’s losses from discontinued operations, net of taxes, were $5 million and $20 million in the second quarters of 2009 and 2008, respectively, and $11 million and $27 million in the first six months of 2009 and 2008, respectively.

 

 

 

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Summarized financial information for discontinued operations is shown below.

 

	Three months ended June 30						Six months ended June 30
(In millions)		2009			2008			2009			2008
Operations
Total revenues	$	(2	)	$	199		$	(8	)	$	494
Loss from discontinued operations before income taxes	$	(101	)	$	(204	)	$	(112	)	$	(282	)
Income tax benefit		38			101			42			133
Loss from discontinued operations, net of taxes	$	(63	)	$	(103	)	$	(70	)	$	(149	)
Disposal
Loss on disposal before income taxes	$	(130	)	$	(224	)	$	(123	)	$	(224	)
Income tax expense		(1	)		(9	)		(4	)		(9	)
Loss on disposal, net of taxes	$	(131	)	$	(233	)	$	(127	)	$	(233	)
Loss from discontinued operations, net of taxes	$	(194	)	$	(336	)	$	(197	)	$	(382	)

	At
(In millions)	June 30, 2009			December 31, 2008
Assets
Cash and equivalents	$	184		$	180
Other assets		13			19
Other		1,265			1,441
Assets of discontinued operations	$	1,462		$	1,640

 

	At
(In millions)	June 30, 2009			December 31, 2008
Liabilities
Liabilities of discontinued operations	$	913		$	799

 

Assets at June 30, 2009 and December 31, 2008, primarily comprised a deferred tax asset for a loss carryforward, which expires in 2015, related to the sale of our GE Money Japan business.

 

 

 

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3.  INVESTMENT SECURITIES

 

The vast majority of our investment securities are classified as available-for-sale and comprise mainly investment-grade debt securities supporting obligations to holders of guaranteed investment contracts.

 

	At
	June 30, 2009												December 31, 2008
				Gross			Gross									Gross			Gross
	Amortized			unrealized			unrealized			Estimated			Amortized			unrealized			unrealized			Estimated
(In millions)	cost			gains			losses			fair value			cost			gains			losses			fair value
Debt
U.S. corporate	$	3,927		$	53		$	(514	)	$	3,466		$	4,456		$	54		$	(637	)	$	3,873
State and municipal		1,204			4			(216	)		992			915			5			(70	)		850
Residential mortgage-backed(a)		3,526			20			(994	)		2,552			4,228			9			(976	)		3,261
Commercial mortgage-backed		1,649			−			(487	)		1,162			1,664			−			(509	)		1,155
Asset-backed		2,920			25			(345	)		2,600			2,922			2			(668	)		2,256
Corporate – non-U.S.		707			14			(48	)		673			608			6			(23	)		591
Government – non-U.S.		1,490			6			(20	)		1,476			936			2			(15	)		923
U.S. government and federal agency		71			2			−			73			26			3			−			29
Retained interests(b)(c)		6,154			167			(62	)		6,259			5,144			73			(136	)		5,081
Equity
Available-for-sale		867			78			(25	)		920			1,023			22			(134	)		911
Trading		644			−			−			644			388			−			−			388
Total	$	23,159		$	369		$	(2,711	)	$	20,817		$	22,310		$	176		$	(3,168	)	$	19,318

(a)	Substantially collateralized by U.S. mortgages.
(b)	Included $1,861 million and $1,752 million of retained interests at June 30, 2009 and December 31, 2008, respectively, accounted for in accordance with SFAS 155, Accounting for Certain Hybrid Financial Instruments. See Note12.
(c)	Amortized cost and estimated fair value included $5 million of trading securities at June 30, 2009.

 

 

 

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The following tables present the estimated fair values and gross unrealized losses of our available-for-sale investment securities.

 

	In loss position for
	Less than 12 months							12 months or more
(In millions)	Estimated fair value				Gross unrealized losses			Estimated fair value			Gross unrealized losses
June 30, 2009
Debt
U.S. corporate	$	478			$	(44	)	$	1,474		$	(470	)
State and municipal		318				(135	)		283			(81	)
Residential mortgage-backed		126				(39	)		1,713			(955	)
Commercial mortgage-backed		−				−			1,155			(487	)
Asset-backed		65				(7	)		1,369			(338	)
Corporate – non-U.S.		198				(27	)		260			(21	)
Government – non-U.S.		447				(3	)		280			(17	)
U.S. government and federal agency		−				−			−			−
Retained interests		204				(5	)		182			(57	)
Equity		91				(23	)		5			(2	)
Total	$	1,927			$	(283	)	$	6,721		$	(2,428	)
December 31, 2008
Debt
U.S. corporate	$	1,152			$	(397	)	$	1,253		$	(240	)
State and municipal		302				(21	)		278			(49	)
Residential mortgage-backed		1,216				(64	)		1,534			(912	)
Commercial mortgage-backed		285				(85	)		870			(424	)
Asset-backed		903				(406	)		1,031			(262	)
Corporate – non-U.S.		60				(7	)		265			(16	)
Government – non-U.S.		−				−			275			(15	)
U.S. government and federal agency		−				−			−			−
Retained interests		1,246				(61	)		238			(75	)
Equity		200				(132	)		6			(2	)
Total	$	5,364			$	(1,173	)	$	5,750		$	(1,995	)

 

We adopted FASB FSP FAS 115-2 and 124-2, Recognition and Presentation of Other-Than-Temporary Impairments, and recorded a cumulative effect adjustment to increase retained earnings as of April 1, 2009 of $25 million.

 

We regularly review investment securities for impairment using both qualitative and quantitative criteria. We presently do not intend to sell 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.

 

The vast majority of our U.S. corporate debt securities are rated investment grade by the major rating agencies. The unrealized loss on these securities at June 30, 2009 largely reflects changes in interest rates and higher spreads driven by the challenging conditions in the credit markets. We evaluate U.S. corporate debt securities based on a variety of factors such as the financial health of and specific prospects for the issuer, including whether the issuer is in compliance with the terms and covenants of the security. In the event a U.S. corporate debt security is deemed to be other-than-temporarily impaired, in accordance with the FSP, we isolate the credit portion of the impairment by comparing the present value of our expectation of cash flows to the amortized cost of the security. We discount the cash flows using the original effective interest rate of the security.

 

 

 

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The vast majority of our residential mortgage-backed securities (RMBS) have investment-grade credit ratings from the major rating agencies and are in a senior position in the capital structure of the deal. Of our total RMBS at June 30, 2009 and December 31, 2008, approximately $1,116 million and $1,284 million, respectively, relate to residential subprime credit, primarily supporting our guaranteed investment contracts. These are 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. In addition, of the total residential subprime credit exposure at June 30, 2009 and December 31, 2008, approximately $962 million and $1,089 million, respectively, was insured by monoline insurers.

 

Substantially all of our commercial mortgage-backed securities (CMBS) also have investment-grade credit ratings from the major rating agencies and are in a senior position in the capital structure of the deal. Our CMBS investments are 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 2006 and 2007.

 

For asset-backed securities, including RMBS, we estimate the portion of loss attributable to credit using a discounted cash flow model that considers estimates of cash flows generated from the underlying collateral. Estimates of cash flows consider internal credit risk, interest rate and prepayment assumptions that incorporate management’s best estimate of key assumptions, including default rates, loss severity and prepayment rates. For CMBS, we estimate the portion of loss attributable to credit by evaluating potential losses on each of the underlying loans in the security. Collateral cash flows are considered in the context of our position in the capital structure of the deal. Assumptions can vary widely depending upon the collateral type, geographic concentrations and vintage.

 

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 credit worthiness of the 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.

 

During the three months ended June 30, 2009, we recorded pre-tax, other-than-temporary impairments of $132 million, of which $57 million was recorded through earnings ($15 million relates to equity securities), and $75 million was recorded in Accumulated Other Comprehensive Income (AOCI). Had we not adopted FASB FSP FAS 115-2 and 124-2, other-than-temporary impairments recorded to earnings would have been $121 million in the second quarter of 2009.

 

Under the new standard, previously recognized other-than-temporary impairments related to credit on securities still held at April 1, 2009 were $101 million. During the quarter, first time credit and incremental impairments were both $21 million. There were no securities sold that had previously been impaired.

 

Supplemental information about gross realized gains and losses on available-for-sale investment securities follows.

 

	Three months ended June 30						Six months ended June 30
(In millions)		2009			2008			2009			2008
Gains	$	19		$	55		$	27		$	107
Losses, including impairments		(58	)		(62	)		(204	)		(100	)
Net	$	(39	)	$	(7	)	$	(177	)	$	7

 

In the ordinary course of managing our investment securities portfolio, we may sell securities prior to their maturities for a variety of reasons, including diversification, credit quality, yield and liquidity requirements and the funding of claims and obligations to policyholders.

 

Proceeds from investment securities sales and early redemptions by the issuer totaled $1,313 million and $1,031 million in the second quarters of 2009 and 2008, respectively, and $3,278 million and $1,290 million in the first six months of 2009 and 2008, respectively, principally from the sales and maturities of short-term securities in our bank subsidiaries.

 

We recognized pre-tax gains on trading securities of $204 million and $167 million in the second quarters of 2009 and 2008, respectively, and $244 million and $387 million in the first six months of 2009 and 2008, respectively. Investments in retained interests increased by $172 million and decreased by $93 million during the first six months of 2009 and 2008, respectively, reflecting changes in fair value accounted for in accordance with SFAS 155.

 

 

 

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4.  FINANCING RECEIVABLES AND ALLOWANCE FOR LOSSES ON FINANCING RECEIVABLES

 

Financing receivables – net, consisted of the following.

 

	At
(In millions)	June 30, 2009					December 31, 2008
Loans, net of deferred income		$	305,003				$	308,821
Investment in financing leases, net of deferred income			59,593					67,077
			364.596					375,898
Less allowance for losses			(6,590	)				(5,306	)
Financing receivables – net(a)		$	358,006				$	370,592

(a)

Included $4,967 million and $6,461 million related to consolidated, liquidating securitization entities at June 30, 2009 and December 31, 2008, respectively. In addition, financing receivables at June 30, 2009 and December 31, 2008 included $3,011 million and $2,736 million, respectively, relating to loans that had been acquired and accounted for in accordance with SOP 03-3, Accounting for Certain Loans or Debt Securities Acquired in a Transfer.

 

 

 

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We adopted SFAS 141(R) on January 1, 2009. As a result of this adoption, 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 loan losses is not carried over at acquisition. This may result in lower reserve coverage ratios prospectively. Details of financing receivables – net follow.

 

	At
(In millions)	June 30, 2009					December 31, 2008
CLL(a)
Americas		$	96,352				$	104,462
Europe			40,549					36,972
Asia			14,057					16,683
Other			751					786
			151,709					158,903
Consumer(a)
Non-U.S. residential mortgages(b)			62,587					60,753
Non-U.S. installment and revolving credit			25,485					24,441
U.S. installment and revolving credit			23,939					27,645
Non-U.S. auto			14,853					18,168
Other			13,218					11,541
			140,082					142,548
Real Estate			46,018					46,735
Energy Financial Services			8,471					8,355
GECAS(c)			14,992					15,326
Other(d)			3,324					4,031
			364,596					375,898
Less allowance for losses			(6,590	)				(5,306	)
Total		$	358,006				$	370,592

(a)	During the first quarter of 2009, we transferred Artesia from CLL to Consumer. Prior-period amounts were reclassified to conform to the current-period’s presentation.
(b)	At June 30, 2009, net of credit insurance, approximately 26% of this portfolio comprised loans with introductory, below market rates that are scheduled to adjust at future dates; with high loan-to-value ratios at inception; whose terms permitted interest-only payments; or whose terms resulted in negative amortization. At the origination date, loans with an adjustable rate were underwritten to the reset value.
(c)	Included loans and financing leases of $12,901 million and $13,078 million at June 30, 2009 and December 31, 2008, respectively, related to commercial aircraft at Aviation Financial Services.
(d)	Consisted of loans and financing leases related to certain consolidated, liquidating securitization entities.

 

 

 

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Individually impaired loans are defined by GAAP 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. An analysis of impaired loans and specific reserves follows.

 

	At
(In millions)	June 30, 2009					December 31, 2008
Loans requiring allowance for losses		$	5,657				$	2,712
Loans expected to be fully recoverable			2,425					871
Total impaired loans		$	8,082				$	3,583
Allowance for losses (specific reserves)		$	1,321				$	635
Average investment during the period			5,836					2,064
Interest income earned while impaired(a)			55					48

(a)	Recognized principally on cash basis.

 

Allowance for Losses on Financing Receivables

 

(In millions)	Balance January 1, 2009				Provision charged to operations				Other(a)				Gross write-offs				Recoveries				Balance June 30, 2009
CLL(b)
Americas		$	824			$	720			$	(35	)		$	(435	)		$	42			$	1,116
Europe			288				290				(1	)			(139	)			10				448
Asia			163				120				(6	)			(85	)			7				199
Other			2				3				2				(1	)			−				6
Consumer(b)
Non-U.S. residential
mortgages			383				561				59				(231	)			59				831
Non-U.S. installment
and revolving credit			1,051				900				65				(1,098	)			229				1,147
U.S. installment and
revolving credit			1,700				1,729				(497	)			(1,438	)			81				1,575
Non-U.S. auto			222				245				13				(302	)			91				269
Other			226				180				(2	)			(205	)			51				250
Real Estate			301				344				10				(85	)			−				570
Energy Financial
Services			58				32				1				−				−				91
GECAS			60				1				−				−				−				61
Other			28				12				1				(14	)			−				27
Total		$	5,306			$	5,137			$	(390	)		$	(4,033	)		$	570			$	6,590

(a)	Other primarily included the effects of securitization activity and currency exchange.
(b)	During the first quarter of 2009, we transferred Artesia from CLL to Consumer. Prior-period amounts were reclassified to conform to the current-period’s presentation.

 

 

 

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(In millions)	Balance January 1, 2008				Provision charged to operations				Other(a)				Gross write-offs				Recoveries				Balance June 30, 2008
CLL(b)
Americas		$	451			$	251			$	49			$	(239	)		$	32			$	544
Europe			230				94				(38	)			(82	)			17				221
Asia			226				49				(8	)			(162	)			3				108
Other			3				1				(2	)			−				−				2
Consumer(b)
Non-U.S. residential
mortgages			246				61				33				(62	)			41				319
Non-U.S. installment
and revolving credit			1,371				847				77				(1,265	)			436				1,466
U.S. installment and
revolving credit			985				1,144				(304	)			(952	)			132				1,005
Non-U.S. auto			324				154				(37	)			(299	)			144				286
Other			167				119				83				(149	)			33				253
Real Estate			168				34				14				(8	)			1				209
Energy Financial
Services			19				1				2				−				−				22
GECAS			8				38				−				(1	)			−				45
Other			18				10				−				(8	)			−				20
Total		$	4,216			$	2,803			$	(131	)		$	(3,227	)		$	839			$	4,500

(a)	Other primarily included the effects of securitization activity, currency exchange, dispositions and acquisitions.
(b)	During the first quarter of 2009, we transferred Artesia from CLL to Consumer. Prior-period amounts were reclassified to conform to the current-period’s presentation.

 

5.  GOODWILL AND OTHER INTANGIBLE ASSETS

 

Goodwill and other intangible assets – net, consisted of the following.

 

	At
(In millions)	June 30, 2009					December 31, 2008
Goodwill		$	27,160				$	25,204
Other intangible assets
Intangible assets subject to amortization		$	3,541				$	3,174

 

 

 

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Changes in goodwill balances follow.

 

(In millions)	Balance January 1, 2009			Acquisitions/ acquisition accounting adjustments			Dispositions, currency exchange and other			Balance June 30, 2009
CLL	$	12,321	(a)	$	839		$	(351	)	$	12,809
Consumer		9,407	(a)		1,352			138			10,897
Real Estate		1,159			(7	)		26			1,178
Energy Financial Services		2,162			(4	)		(39	)		2,119
GECAS		155			−			2			157
Total	$	25,204		$	2,180		$	(224	)	$	27,160

(a)	Reflected the transfer of Artesia during the first quarter of 2009, resulting in a related movement of beginning goodwill balance of $326 million.

 

Goodwill related to new acquisitions in the first six months of 2009 was $1,952 million and included acquisitions of BAC Credomatic (BAC) ($1,309 million) at GE Money and Interbanca S.p.A. (Interbanca) ($643 million) at CLL. During the first six months of 2009, the goodwill balance increased by $228 million related to acquisition accounting adjustments for prior-year acquisitions. The most significant of these adjustments was an increase of $177 million associated with the 2008 acquisition of CitiCapital at CLL. Also during the first six months of 2009, goodwill balances decreased $224 million, primarily as a result of the deconsolidation of Penske Truck Leasing Co., L.P. (PTL) ($634 million) at CLL, partially offset by an increase of $449 million as a result of the weaker U.S. dollar.

 

On June 25, 2009, we increased our ownership in BAC from 49.99% to 75% for a purchase price of $623 million, in accordance with terms of a previous agreement. We remeasured our previously held equity investment to fair value, resulting in a pre-tax gain of $343 million, which is reported in Revenues from services.

 

We test goodwill for impairment annually and more frequently if circumstances warrant. Given the significant decline in GE’s stock price in the first quarter of 2009 and market conditions in the financial services industry at that time, we conducted an additional impairment analysis of the reporting units during the first quarter of 2009 using data as of January 1, 2009.

 

We determined fair values for each of the reporting units using an income approach. When available and as appropriate, we used comparative market multiples to corroborate discounted cash flow results. For purposes of the income approach, fair value was determined based on the present value of estimated future cash flows, discounted at an appropriate risk-adjusted rate. We use our internal forecasts to estimate future cash flows and include an estimate of long-term future growth rates based on our most recent views of the long-term outlook for each business. Actual results may differ from those assumed in our forecasts. We derive our discount rates by applying the capital asset pricing model (i.e., to estimate the cost of equity financing) and analyzing published rates for industries relevant to our reporting units. We used discount rates that are commensurate with the risks and uncertainty inherent in the financial markets generally and in our internally developed forecasts. Discount rates used in these reporting unit valuations ranged from 11.5% to 13.0%. Valuations using the market approach reflect prices and other relevant observable information generated by market transactions involving financial services businesses.

 

 

 

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Compared to the market approach, the income approach more closely aligns the reporting unit valuation to a company’s or business’ specific business model, geographic markets and product offerings, as it is based on specific projections of the business. Required rates of return, along with uncertainty inherent in the forecasts of future cash flows are reflected in the selection of the discount rate. Equally important, under this approach, reasonably likely scenarios and associated sensitivities can be developed for alternative future states that may not be reflected in an observable market price. A market approach allows for comparison to actual market transactions and multiples. It can be somewhat more limited in its application because the population of potential comparables (or pure plays) is often limited to publicly-traded companies where the characteristics of the comparative business and ours can be significantly different, market data is usually not available for divisions within larger conglomerates or non-public subsidiaries that could otherwise qualify as comparable, and the specific circumstances surrounding a market transaction (e.g., synergies between the parties, terms and conditions of the transaction, etc.) may be different or irrelevant with respect to our business. It can also be difficult under the current market conditions to identify orderly transactions between market participants in similar financial services businesses. We assess the valuation methodology based upon the relevance and availability of data at the time of performing the valuation and weight the methodologies appropriately.

 

In performing the valuations, we updated cash flows to reflect management’s forecasts and adjusted discount rates to reflect the risks associated with the current market. Based on the results of our testing, the fair values of these reporting units exceeded their book values; therefore, the second step of the impairment test (in which fair value of each of the reporting units assets and liabilities are measured) was not required to be performed and no goodwill impairment was recognized. Estimating the fair value of reporting units involves the use of estimates and significant judgments that are based on a number of factors including actual operating results, future business plans, economic projections and market data. Actual results may differ from forecasted results. While no impairment was noted in our step one impairment tests, goodwill in our Real Estate reporting unit may be particularly sensitive to further deterioration in economic conditions. If current conditions persist longer or deteriorate further than expected, it is reasonably possible that the judgments and estimates described above could change in future periods.

 

Intangible Assets Subject to Amortization

 

	At
	June 30, 2009										December 31, 2008
(In millions)	Gross carrying amount			Accumulated amortization				Net			Gross carrying amount			Accumulated amortization				Net
Customer-related	$	1,774			$	(711	)	$	1,063		$	1,790			$	(616	)	$	1,174
Patents, licenses and trademarks		564				(417	)		147			564				(460	)		104
Capitalized software		2,262				(1,591	)		671			2,148				(1,463	)		685
Lease valuations		1,748				(702	)		1,046			1,761				(594	)		1,167
All other		878				(264	)		614			233				(189	)		44
Total	$	7,226			$	(3,685	)	$	3,541		$	6,496			$	(3,322	)	$	3,174

 

Amortization related to intangible assets subject to amortization was $236 million and $207 million for the quarters ended June 30, 2009 and 2008, respectively. Amortization related to intangible assets subject to amortization for the six months ended June 30, 2009 and 2008, was $410 million and $402 million, respectively.

 

 

 

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6.  BORROWINGS

 

Borrowings are summarized in the following table.

 

	At
(In millions)	June 30, 2009					December 31, 2008
Short-term borrowings
Commercial paper
U.S.
Unsecured(a)		$	35,162				$	57,665
Asset-backed(b)			3,032					3,652
Non-U.S.			9,356					9,033
Current portion of long-term debt(a)(c)(d)			82,417					69,680
Bank deposits(e)			26,959					29,634
Bank borrowings(f)			3,475					10,028
GE Interest Plus notes(g)			5,964					5,633
Other			1,664					3,276
Total			168,029					188,601
Long-term borrowings
Senior notes
Unsecured(a)(d)(h)			306,053					299,651
Asset-backed(i)			4,558					5,002
Subordinated notes(j)			2,475					2,567
Subordinated debentures(k)			7,534					7,315
Bank deposits(l)			9,447					7,220
Total			330,067					321,755
Total borrowings		$	498,096				$	510,356

(a)	GE Capital had issued and outstanding $69,132 million ($21,132 million commercial paper and $48,000 million long-term borrowings) and $35,243 million ($21,823 million commercial paper and $13,420 million long-term borrowings) of senior, unsecured debt that was guaranteed by the Federal Deposit Insurance Corporation (FDIC) under the Temporary Liquidity Guarantee Program at June 30, 2009 and December 31, 2008, respectively. GE Capital and GE are parties to an Eligible Entity Designation Agreement and GE Capital is subject to the terms of a Master Agreement, each entered into with the FDIC. The terms of these agreements include, among other things, a requirement that GE and GE Capital reimburse the FDIC for any amounts that the FDIC pays to holders of GE Capital debt that is guaranteed by the FDIC.
(b)	Consists entirely of obligations of consolidated, liquidating securitization entities. See Note 12.
(c)	Included $222 million and $326 million of asset-backed senior notes, issued by consolidated, liquidating securitization entities at June 30, 2009 and December 31, 2008, respectively.
(d)	Included $1,632 million ($113 million short-term and $1,519 million long-term) of borrowings under European government-sponsored programs at June 30, 2009.
(e)	Included $18,757 million and $11,793 million of deposits in non-U.S. banks at June 30, 2009 and December 31, 2008, respectively, and included certificates of deposits distributed by brokers of $8,202 million and $17,841 million at June 30, 2009 and December 31, 2008, respectively.