Loans and Leases

The following table presents our recorded investment in loans and leases, by segment and class, as of December 31:



(In millions)	2012			2011
Institutional:
Investment funds:
U.S.	$	8,376		$	5,592
Non-U.S.	829			796
Commercial and financial:
U.S.	613			563
Non-U.S.	520			453
Purchased receivables:
U.S.	276			563
Non-U.S.	118			372
Lease financing:
U.S.	380			397
Non-U.S.	784			857
Total institutional	11,896			9,593
Commercial real estate:
U.S.	411			460
Total loans and leases	12,307			10,053
Allowance for loan losses	(22		)	(22		)
Loans and leases, net of allowance for loan losses	$	12,285		$	10,031

The components of our net investment in leveraged lease financing, included in the institutional segment in the preceding table, were as follows as of December 31:



(In millions)	2012			2011
Net rental income receivable	$	1,519		$	1,671
Estimated residual values	110			110
Unearned income	(465		)	(527		)
Investment in leveraged lease financing	1,164			1,254
Less related deferred income tax liabilities	(370		)	(397		)
Net investment in leveraged lease financing	$	794		$	857

We segregate our loans and leases into two segments: institutional and commercial real estate, or CRE. Within these two segments, we further segregate the receivables into classes based on their risk characteristics, their initial measurement attributes and the methods we use to monitor and assess credit risk.

The institutional segment is composed of the following classes: investment funds, commercial and financial, purchased receivables and lease financing. Investment funds includes lending to mutual and other collective investment funds and short-duration advances to these clients in order to provide liquidity in support of their transaction flows associated with securities settlement activities. Commercial and financial includes lending to corporate borrowers, including broker/dealers. Purchased receivables represents undivided interests in securitized pools of underlying third-party receivables added in connection with the 2009 conduit consolidation. Lease financing includes our investment in leveraged lease financing.

Aggregate short-duration advances to our clients included in the institutional segment were $3.30 billion and $2.17 billion as of December 31, 2012 and December 31, 2011, respectively.

The CRE segment is composed of the loans acquired in 2008 pursuant to indemnified repurchase agreements with an affiliate of Lehman as a result of the Lehman Brothers bankruptcy. These loans, which are primarily collateralized by direct and indirect interests in commercial real estate, were recorded at their then-current fair value, based on management’s expectations with respect to future cash flows from the loans using appropriate market discount rates as of the date of acquisition. These cash flow estimates are updated quarterly to reflect changes in management’s expectations, which consider market conditions and other factors.

The following tables present our recorded investment in each class of loans and leases by credit quality indicator as of the dates indicated:



	Institutional								Commercial Real Estate
December 31, 2012	Investment Funds		Commercial and Financial		Purchased Receivables		Lease Financing		Property Development		Other		Total Loans and Leases
(In millions)	Investment Funds		Commercial and Financial		Purchased Receivables		Lease Financing		Property Development		Other		Total Loans and Leases
Investment grade	$	8,937	$	1,041	$	394	$	1,137	$	—	$	29	$	11,538
Speculative	268		92		—		27		377		5		769
Total	$	9,205	$	1,133	$	394	$	1,164	$	377	$	34	$	12,307



	Institutional								Commercial Real Estate
December 31, 2011	Investment Funds		Commercial and Financial		Purchased Receivables		Lease Financing		Property Development		Other Acquired Credit- Impaired		Other		Total Loans and Leases
(In millions)	Investment Funds		Commercial and Financial		Purchased Receivables		Lease Financing		Property Development		Other Acquired Credit- Impaired		Other		Total Loans and Leases
Investment grade	$	6,341	$	592	$	935	$	1,194	$	1	$	3	$	36	$	9,102
Speculative	47		424		—		60		379		31		5		946
Doubtful	—		—		—		—		—		5		—		5
Total	$	6,388	$	1,016	$	935	$	1,254	$	380	$	39	$	41	$	10,053

Loans and leases are grouped in the tables presented above into the rating categories that align with our internal risk-rating framework. Management considers the ratings to be current as of December 31, 2012. We use an internal risk-rating system to assess our risk of credit loss for each loan or lease. This risk-rating process incorporates the use of risk-rating tools in conjunction with management judgment. Qualitative and quantitative inputs are captured in a systematic manner, and following a formal review and approval process, an internal credit rating based on our credit scale is assigned.

In assessing the risk rating assigned to each individual loan or lease, among the factors considered are the borrower's debt capacity, collateral coverage, payment history and delinquency experience, financial flexibility and earnings strength, the expected amounts and sources of repayment, the level and nature of contingencies, if any, and the industry and geography in which the borrower operates. These factors are based on an evaluation of historical and current information, and involve subjective assessment and interpretation. Credit counterparties are evaluated and risk-rated on an individual basis at least annually.

The following table presents our recorded investment in loans and leases, disaggregated based on our impairment methodology, as of December 31:



	Institutional				Commercial Real Estate				Total Loans and Leases
(In millions)	2012		2011		2012		2011		2012		2011
Loans and leases:
Individually evaluated for impairment	$	11	$	56	$	411	$	421	$	422	$	477
Collectively evaluated for impairment⁽¹⁾	11,885		9,537		—		—		11,885		9,537
Loans acquired with deteriorated credit quality	—		—		—		39		—		39
Total	$	11,896	$	9,593	$	411	$	460	$	12,307	$	10,053

⁽¹⁾As of both December 31, 2012 and 2011, the entire $22 million allowance for loan losses was related to institutional loans collectively evaluated for impairment.

The following tables present information related to our recorded investment in impaired loans and leases as of and for the years ended December 31:



December 31,	2012						2011
(In millions)	Recorded Investment		Unpaid Principal Balance		Related Allowance⁽¹⁾		Recorded Investment		Unpaid Principal Balance		Related Allowance⁽¹⁾
With no related allowance recorded:
CRE—property development	$	197	$	224	$	—	$	199	$	227	$	—
CRE—property development—acquired credit-impaired	—		34		—		—		34		—
CRE—other—acquired credit-impaired	—		64		—		8		69		—
With an allowance recorded:
CRE—other—acquired credit-impaired	—		—		—		31		37		—
Total CRE	$	197	$	322	$	—	$	238	$	367	$	—

⁽¹⁾As of both December 31, 2012 and December 31, 2011, we maintained an allowance for loan losses of $22 million associated with loans and leases that were not impaired.



	Average Recorded Investment				Interest Revenue Recognized
Years ended December 31,	2012		2011		2012		2011
(In millions)
With no related allowance recorded:
CRE—property development	$	198	$	200	$	16	$	15
CRE—other—acquired credit-impaired	13		12		—		—
With an allowance recorded:
CRE—other—acquired credit-impaired	—		31		—		1
Total CRE	$	211	$	243	$	16	$	16

As of December 31, 2012 and December 31, 2011, we held an aggregate of approximately $197 million and $199 million, respectively, of CRE loans which were modified in troubled debt restructurings. No impairment loss was recognized upon restructuring of the loans, as the discounted cash flows of the modified loans exceeded the carrying amount of the original loans as of the modification date. As of December 31, 2012 and 2011, no loans were modified in troubled debt restructurings.

No institutional loans or leases were 90 days or more contractually past due as of December 31, 2012 or 2011. As of December 31, 2012, no CRE loans were 90 days or more contractually past due. As of December 31, 2011, a portion of the CRE loans was 90 days or more contractually due; however, we do not report them as past-due loans, pursuant to GAAP that governs the accounting for acquired credit-impaired loans.

We generally place loans on non-accrual status once principal or interest payments are 60 days contractually past due, or earlier if management determines that full collection is not probable. Loans 60 days past due, but considered both well-secured and in the process of collection, may be excluded from non-accrual status. For loans placed on non-accrual status, revenue recognition is suspended.

As of December 31, 2012, none of the aforementioned CRE loans was on non-accrual status. As of December 31, 2011, approximately $5 million of CRE loans was on non-accrual status, as the yield associated with these loans, determined when the loans were acquired, was deemed to be non-accretable. This determination was based on management's expectations of the future collection of principal and interest from the loans.

The following table presents activity in the allowance for loan losses for the periods indicated:



	Years Ended December 31,
	2012								2011			2010
(In millions)	Institutional		Commercial Real Estate			Total Loans and Leases			Total Loans and Leases			Total Loans and Leases
Allowance for loan losses:
Beginning balance	$	22	$	—		$	22		$	100		$	79
Charge-offs	—		—			—			(78		)	(4		)
Provisions	—		(3		)	(3		)	—			25
Recoveries	—		3			3			—			—
Ending balance	$	22	$	—		$	22		$	22		$	100

The charge-offs recorded in 2011 were mainly related to a deed-in-lieu-of-foreclosure agreement and acquired credit-impaired CRE loan foreclosure, as well as an acquired credit-impaired CRE loan whose underlying collateral had deteriorated in value.

Loans and leases are reviewed on a regular basis, and any provisions for loan losses that are recorded reflect management's estimate of the amount necessary to maintain the allowance for loan losses at a level considered appropriate to absorb estimated incurred losses in the loan and lease portfolio. With respect to CRE loans, management also considers its expectations with respect to future cash flows from those loans and the value of available collateral. These expectations are based, among other things, on an assessment of economic conditions, including conditions in the commercial real estate market and other factors.