Loans and Leases

The following table presents our recorded investment in loans and leases, by segment and class, as of the dates indicated:



(In millions)	March 31, 2014			December 31, 2013
Institutional:
Investment funds:
U.S.	$	10,000		$	8,695
Non-U.S.	2,310			1,718
Commercial and financial:
U.S.	1,895			1,372
Non-U.S.	363			154
Purchased receivables:
U.S.	202			217
Non-U.S.	20			26
Lease financing:
U.S.	337			339
Non-U.S.	753			756
Total institutional	15,880			13,277
Commercial real estate:
U.S.	234			209
Total loans and leases	16,114			13,486
Allowance for loan losses	(30		)	(28		)
Loans and leases, net of allowance for loan losses	$	16,084		$	13,458

Aggregate short-duration advances to our clients included in the institutional segment were $4.83 billion and $2.45 billion as of March 31, 2014 and December 31, 2013, respectively.

The commercial-and-financial class in the institutional segment presented in the table above included approximately $1.15 billion and $724 million of senior secured bank loans as of March 31, 2014 and December 31, 2013, respectively. These commercial-and-financial loans are included in the “speculative” category in the credit-quality-indicator tables presented below. As of March 31, 2014, our allowance for loan losses included approximately $8 million related to these loans.

The commercial real estate, or 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
March 31, 2014	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⁾	$	12,073	$	961	$	222	$	1,037	$	—	$	29	$	14,322
Speculative⁽²⁾	237		1,281		—		53		205		—		1,776
Special mention⁽³⁾	—		16		—		—		—		—		16
Total	$	12,310	$	2,258	$	222	$	1,090	$	205	$	29	$	16,114



	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

⁽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 preceding table that align with our internal risk-rating framework. Management considers the ratings to be current as of March 31, 2014. 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 the dates indicated:



	March 31, 2014						December 31, 2013
(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	$	—	$	130	$	130	$	26	$	180	$	206
Collectively evaluated for impairment⁽¹⁾	15,880		104		15,984		13,251		29		13,280
Total	$	15,880	$	234	$	16,114	$	13,277	$	209	$	13,486

⁽¹⁾As of March 31, 2014 and December 31, 2013, all of the allowance for loan losses of $30 million and $28 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 the dates, or for the periods, indicated:



	March 31, 2014						December 31, 2013
(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	$	—	$	130	$	143	$	—
CRE—property development—acquired credit-impaired	—		34		—		—		34		—
CRE—other—acquired credit-impaired	—		21		—		—		21		—
Total CRE	$	130	$	198	$	—	$	130	$	198	$	—

⁽¹⁾As of March 31, 2014 and December 31, 2013, all of the allowance for loan losses of $30 million and $28 million, respectively, related to loans that were not impaired.



	Three Months Ended March 31,
	Average Recorded Investment				Interest Revenue Recognized
	2014		2013		2014		2013
(In millions)
With no related allowance recorded:
CRE—property development	$	130	$	195	$	2	$	4
Total CRE	$	130	$	195	$	2	$	4

As of both March 31, 2014 and December 31, 2013, we held an aggregate of approximately $130 million of CRE loans, presented in the preceding impaired loans and leases table, which were modified in troubled debt restructurings. No impairment loss was recognized 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. No loans were modified in troubled debt restructurings in the three months ended March 31, 2014 or the year ended December 31, 2013.

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



	Three Months Ended March 31,
	2014						2013
(In millions)	Institutional		Commercial Real Estate		Total Loans and Leases		Institutional		Commercial Real Estate		Total Loans and Leases
Allowance for loan losses:
Beginning balance	$	28	$	—	$	28	$	22	$	—	$	22
Provisions	2		—		2		—		—		—
Ending balance	$	30	$	—	$	30	$	22	$	—	$	22

The provision recorded in the three months ended March 31, 2014 was associated with our exposure to senior secured bank loans. These loans are held in connection with our participation in loan syndications in the non-investment-grade lending market.

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.