7. LENDING ACTIVITIES
Mortgage and other loans receivable include commercial mortgages, life insurance policy loans, commercial loans, and other loans and notes receivable. Commercial mortgages, commercial loans, and other loans and notes receivable are carried at unpaid principal balances less credit allowances and plus or minus adjustments for the accretion or amortization of discount or premium. Interest income on such loans is accrued as earned.
Direct costs of originating commercial mortgages, commercial loans, and other loans and notes receivable, net of nonrefundable points and fees, are deferred and included in the carrying amount of the related receivables. The amount deferred is amortized to income as an adjustment to earnings using the interest method.
Life insurance policy loans are carried at unpaid principal amount. There is no allowance for policy loans because these loans serve to reduce the death benefit paid when the death claim is made and the balances are effectively collateralized by the cash surrender value of the policy.
The following table presents the composition of Mortgages and other loans receivable:
| |
|
|
|||||
|---|---|---|---|---|---|---|---|
| (in millions) |
December 31, 2013 |
December 31, 2012 |
|||||
|
Commercial mortgages* |
$ |
16,195 |
|
$ | 13,788 | ||
|
Life insurance policy loans |
|
2,830 |
|
2,952 | |||
|
Commercial loans, other loans and notes receivable |
|
2,052 |
|
3,147 | |||
|
Total mortgage and other loans receivable |
|
21,077 |
|
19,887 | |||
|
Allowance for losses |
|
(312 |
) |
(405 | ) | ||
|
Mortgage and other loans receivable, net |
$ |
20,765 |
|
$ | 19,482 | ||
* Commercial mortgages primarily represent loans for office, retail and industrial properties, with exposures in California and New York representing the largest geographic concentrations (18 percent and 17 percent, respectively, at December 31, 2013 and 22 percent and 15 percent, respectively, at December 31, 2012).
The following table presents the credit quality indicators for commercial mortgage loans:
| |
Number of Loans |
Class | |
|
||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| December 31, 2013 (dollars in millions) |
|
Percent of Total $ |
||||||||||||||||||||||||||
| Apartments |
Offices |
Retail |
Industrial |
Hotel |
Others |
Total(c) |
||||||||||||||||||||||
|
Credit Quality Indicator: |
||||||||||||||||||||||||||||
|
In good standing |
978 | $ | 2,786 | $ | 4,636 | $ | 3,364 | $ | 1,607 | $ | 1,431 | $ | 1,970 | $ | 15,794 | 98 | % | |||||||||||
|
Restructured(a) |
9 | 53 | 210 | 6 | – | – | 85 | 354 | 2 | |||||||||||||||||||
|
90 days or less delinquent |
2 | – | – | 5 | – | – | – | 5 | – | |||||||||||||||||||
|
>90 days delinquent or in process of foreclosure |
6 | – | 42 | – | – | – | – | 42 | – | |||||||||||||||||||
|
Total(b) |
995 | $ | 2,839 | $ | 4,888 | $ | 3,375 | $ | 1,607 | $ | 1,431 | $ | 2,055 | $ | 16,195 | 100 | % | |||||||||||
|
Allowance for losses |
$ | 10 | $ | 109 | $ | 9 | $ | 19 | $ | 3 | $ | 51 | $ | 201 | 1 | % | ||||||||||||
|
December 31, 2012 |
||||||||||||||||||||||||||||
|
(dollars in millions) |
||||||||||||||||||||||||||||
|
Credit Quality Indicator: |
||||||||||||||||||||||||||||
|
In good standing |
998 | $ | 1,549 | $ | 4,698 | $ | 2,640 | $ | 1,654 | $ | 1,153 | $ | 1,671 | $ | 13,365 | 97 | % | |||||||||||
|
Restructured(a) |
8 | 50 | 207 | 7 | 2 | – | 22 | 288 | 2 | |||||||||||||||||||
|
90 days or less delinquent |
4 | – | 17 | – | – | – | – | 17 | – | |||||||||||||||||||
|
>90 days delinquent or in process of foreclosure |
6 | – | 13 | 26 | – | – | 79 | 118 | 1 | |||||||||||||||||||
|
Total(b) |
1,016 | $ | 1,599 | $ | 4,935 | $ | 2,673 | $ | 1,656 | $ | 1,153 | $ | 1,772 | $ | 13,788 | 100 | % | |||||||||||
|
Allowance for losses |
$ | 5 | $ | 74 | $ | 19 | $ | 19 | $ | 1 | $ | 41 | $ | 159 | 1 | % | ||||||||||||
(a) Loans that have been modified in troubled debt restructurings and are performing according to their restructured terms. See discussion of troubled debt restructurings below.
(b) Does not reflect allowance for losses.
(c) Approximately 99 percent of the commercial mortgages held at such respective dates were current as to payments of principal and interest.
Methodology Used to Estimate the Allowance for Losses
Mortgage and other loans receivable are considered impaired when collection of all amounts due under contractual terms is not probable. For commercial mortgage loans in particular, the impairment is measured based on the fair value of underlying collateral, which is determined based on the present value of expected net future cash flows of the collateral, less estimated costs to sell. For other loans, the impairment may be measured based on the present value of expected future cash flows discounted at the loan's effective interest rate or based on the loan's observable market price, where available. An allowance is typically established for the difference between the impaired value of the loan and its current carrying amount. Additional allowance amounts are established for incurred but not specifically identified impairments, based on the analysis of internal risk ratings and current loan values. Internal risk ratings are assigned based on the consideration of risk factors including past due status, debt service coverage, loan-to-value ratio or the ratio of the loan balance to the estimated value of the property, property occupancy, profile of the borrower and of the major property tenants, economic trends in the market where the property is located, and condition of the property. These factors and the resulting risk ratings also provide a basis for determining the level of monitoring performed at both the individual loan and the portfolio level. When all or a portion of a commercial mortgage loan is deemed uncollectible, the uncollectible portion of the carrying value of the loan is charged off against the allowance. Interest income on impaired loans is recognized as cash is received.
A significant majority of commercial mortgage loans in the portfolio are non-recourse loans and, accordingly, the only guarantees are for specific items that are exceptions to the non-recourse provisions. It is therefore extremely rare for us to have cause to enforce the provisions of a guarantee on a commercial real estate or mortgage loan.
The following table presents a rollforward of the changes in the allowance for losses on Mortgage and other loans receivable:
| |
|
|
|
|
|
|
|
|||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| |
2013 | 2012 | 2011 | |||||||||||||||||||||||||
| Years Ended December 31, (in millions) |
Commercial |
Other |
Total |
Commercial Mortgages |
Other Loans |
Total |
Commercial Mortgages |
Other Loans |
Total |
|||||||||||||||||||
|
Allowance, beginning of year |
$ |
159 |
|
$ |
246 |
|
$ |
405 |
|
$ | 305 | $ | 435 | $ | 740 | $ | 470 | $ | 408 | $ | 878 | |||||||
|
Loans charged off |
|
(12 |
) |
|
(104 |
) |
|
(116 |
) |
(23 | ) | (21 | ) | (44 | ) | (78 | ) | (47 | ) | (125 | ) | |||||||
|
Recoveries of loans previously charged off |
|
3 |
|
|
6 |
|
|
9 |
|
13 | 4 | 17 | 37 | 1 | 38 | |||||||||||||
|
Net charge-offs |
|
(9 |
) |
|
(98 |
) |
|
(107 |
) |
(10 | ) | (17 | ) | (27 | ) | (41 | ) | (46 | ) | (87 | ) | |||||||
|
Provision for loan losses |
|
52 |
|
|
(32 |
) |
|
20 |
|
(136 | ) | 33 | (103 | ) | (69 | ) | 51 | (18 | ) | |||||||||
|
Other |
|
(1 |
) |
|
(5 |
) |
|
(6 |
) |
– | – | – | (55 | ) | – | (55 | ) | |||||||||||
|
Activity of discontinued operations |
|
– |
|
|
– |
|
|
– |
|
– | (205 | ) | (205 | ) | – | 22 | 22 | |||||||||||
|
Allowance, end of year |
$ |
201* |
|
$ |
111 |
|
$ |
312 |
|
$ | 159* | $ | 246 | $ | 405 | $ | 305* | $ | 435 | $ | 740 | |||||||
* Of the total allowance at the end of the year, $93 million and $47 million relates to individually assessed credit losses on $264 million and $286 million of commercial mortgage loans as of December 31, 2013 and 2012, respectively.
Troubled Debt Restructurings
We modify loans to optimize their returns and improve their collectability, among other things. When we undertake such a modification with a borrower that is experiencing financial difficulty and the modification involves us granting a concession to the troubled debtor, the modification is a troubled debt restructuring (TDR). We assess whether a borrower is experiencing financial difficulty based on a variety of factors, including the borrower's current default on any of its outstanding debt, the probability of a default on any of its debt in the foreseeable future without the modification, the insufficiency of the borrower's forecasted cash flows to service any of its outstanding debt (including both principal and interest), and the borrower's inability to access alternative third-party financing at an interest rate that would be reflective of current market conditions for a non-troubled debtor. Concessions granted may include extended maturity dates, interest rate changes, principal forgiveness, payment deferrals and easing of loan covenants.
As of December 31, 2013 and 2012, we held no significant loans that had been modified in a TDR during those respective years.