Loans and Leases

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



(In millions)	2013			2012
Institutional:
Investment funds:
U.S.	$	8,695		$	8,376
Non-U.S.	1,718			829
Commercial and financial:
U.S.	1,372			613
Non-U.S.	154			520
Purchased receivables:
U.S.	217			276
Non-U.S.	26			118
Lease financing:
U.S.	339			380
Non-U.S.	756			784
Total institutional	13,277			11,896
Commercial real estate:
U.S.	209			411
Total loans and leases	13,486			12,307
Allowance for loan losses	(28		)	(22		)
Loans and leases, net of allowance for loan losses	$	13,458		$	12,285

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)	2013			2012
Net rental income receivable	$	1,404		$	1,519
Estimated residual values	110			110
Unearned income	(419		)	(465		)
Investment in leveraged lease financing	1,095			1,164
Less related deferred income tax liabilities	(359		)	(370		)
Net investment in leveraged lease financing	$	736		$	794

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. The investment funds class 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. The commercial-and-financial class includes lending to corporate borrowers, including broker/dealers, as well as purchased loans composed of senior secured bank loans. These senior secured bank loans, which are more fully described below, resulted from our participation in loan syndications in the non-investment-grade lending market beginning in 2013. The purchased receivables class represents undivided interests in securitized pools of underlying third-party receivables added in connection with the commercial paper conduit consolidation in 2009. The lease financing class includes our investment in leveraged lease financing.

Aggregate short-duration advances to our clients included in the institutional segment were $2.45 billion and $3.30 billion as of December 31, 2013 and December 31, 2012, respectively.

The commercial-and-financial class in the institutional segment presented in the table above included approximately $724 million of senior secured bank loans as of December 31, 2013. We had no investment in senior secured bank loans as of December 31, 2012. These commercial-and-financial loans are included in the “speculative” category as of December 31, 2013 in the credit-quality-indicator table presented below.

Senior secured bank loans present more significant exposure to potential credit losses. However, we seek to mitigate such exposure, in part through the limitation of our investment to larger, more liquid credits underwritten by major global financial institutions, the application of our internal credit analysis process to each potential investment, and diversification by counterparty and industry segment. As of December 31, 2013, our allowance for loan losses included approximately $6 million related to these commercial-and-financial loans.

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, 2013	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⁽¹⁾	$	10,282	$	740	$	243	$	1,068	$	—	$	29	$	12,362
Speculative⁽²⁾	131		770		—		27		180		—		1,108
Special mention⁽³⁾	—		16		—		—		—		—		16
Total	$	10,413	$	1,526	$	243	$	1,095	$	180	$	29	$	13,486



	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⁽¹⁾	$	8,937	$	1,041	$	394	$	1,137	$	—	$	29	$	11,538
Speculative⁽²⁾	268		92		—		27		377		5		769
Total	$	9,205	$	1,133	$	394	$	1,164	$	377	$	34	$	12,307

⁽¹⁾Investment-grade loans and leases consist of counterparties with strong credit quality and low expected credit risk and probability of default. Ratings apply to counterparties with a strong capacity to support the timely repayment of any financial commitment.

⁽²⁾Speculative loans and leases consist of counterparties that face ongoing uncertainties or exposure to business, financial, or economic downturns. However, these counterparties may have financial flexibility or access to financial alternatives, which allow for financial commitments to be met.

⁽³⁾Special mention loans and leases consist of counterparties with potential weaknesses that, if uncorrected, may result in deterioration of repayment prospects.

Loans and leases are categorized in the rating categories presented in the table above that align with our internal risk-rating framework. Management considers the ratings to be current as of December 31, 2013. 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:



	2013						2012
(In millions)	Institutional		Commercial Real Estate		Total Loans and Leases		Institutional		Commercial Real Estate		Total Loans and Leases
Loans and leases:
Individually evaluated for impairment	$	26	$	180	$	206	$	11	$	411	$	422
Collectively evaluated for impairment⁽¹⁾	13,251		29		13,280		11,885		—		11,885
Total	$	13,277	$	209	$	13,486	$	11,896	$	411	$	12,307

⁽¹⁾As of December 31, 2013 and 2012, all of the allowance for loan losses of $28 million and $22 million, respectively, 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:



	2013						2012
(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	$	130	$	143	$	—	$	197	$	224	$	—
CRE—property development—acquired credit-impaired	—		34		—		—		34		—
CRE—other—acquired credit-impaired	—		21		—		—		64		—
Total CRE	$	130	$	198	$	—	$	197	$	322	$	—

⁽¹⁾As of December 31, 2013 and 2012, all of the allowance for loan losses of $28 million and $22 million, respectively, related to loans that were not impaired.



	Average Recorded Investment				Interest Revenue Recognized
Years Ended December 31,	2013		2012		2013		2012
(In millions)
With no related allowance recorded:
CRE—property development	$	148	$	198	$	19	$	16
CRE—other—acquired credit-impaired	—		13		—		—
Total CRE	$	148	$	211	$	19	$	16

As of December 31, 2013 and December 31, 2012, we held an aggregate of approximately $130 million and $197 million, respectively, of CRE loans, presented in the foregoing impaired loans and leases table, which were modified in troubled debt restructurings. We recognized no impairment loss as a result of restructuring the loans, as the discounted cash flows of the modified loans exceeded the carrying amount of the original loans as of the modification date. In the years ended December 31, 2013 and 2012, no loans were modified in troubled debt restructurings.

As of December 31, 2013 and 2012, no institutional loans or leases and no CRE loans were 90 days or more contractually past due.

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 discontinued. As of December 31, 2013 and 2012, none of the aforementioned CRE loans was on non-accrual status.

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



	Years Ended December 31,
	2013						2012			2011
(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	$	22		$	100
Charge-offs	—		—		—		—			(78		)
Provisions	6		—		6		(3		)	—
Recoveries	—		—		—		3			—
Ending balance	$	28	$	—	$	28	$	22		$	22

The provision recorded in 2013, which was related to the institutional loans segment, resulted from our exposure to non-investment-grade borrowers composed of senior secured bank loans, more fully described above, which were purchased in connection with our participation in loan syndications in the non-investment-grade lending market beginning in 2013.

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.