Note 4.

Loans and Leases

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


(In millions)	2011			2010
Institutional:
Investment funds:
U.S.	$	5,592		$	5,316
Non-U.S.		796			1,478
Commercial and financial:
U.S.		563			540
Non-U.S.		453			190
Purchased receivables:
U.S.		563			728
Non-U.S.		372			1,471
Lease financing:
U.S.		397			417
Non-U.S.		857			1,053

Total institutional		9,593			11,193
Commercial real estate:
U.S.		460			764
Total loans and leases		10,053			11,957
Allowance for loan losses		(22	)		(100	)
Loans and leases, net of allowance for loan losses	$	10,031		$	11,857

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)	2011			2010
Net rental income receivable	$	1,671		$	2,187
Estimated residual values		110			118
Unearned income		(527	)		(835	)

Investment in leveraged lease financing		1,254			1,470
Less related deferred income tax liabilities		(397	)		(463	)

Net investment in leveraged lease financing	$	857		$	1,007

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 fund 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. Lease financing includes our investment in leveraged lease financing.

Aggregate short-duration advances to our clients included in the institutional segment were $2.17 billion and $2.63 billion at December 31, 2011 and 2010, respectively.

The CRE segment represents the commercial real estate 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 CRE segment is composed of the following classes: property development; other—acquired credit-impaired; and other.

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, 2011 (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


	Institutional										Commercial Real Estate
December 31, 2010 (In millions)	Investment Funds		Commercial and Financial		Purchased Receivables		Lease Financing		Property Development		Property Development Acquired- Credit Impaired		Other Acquired Credit- Impaired		Other		Total Loans and Leases
Investment grade	$	6,674	$	579	$	2,199	$	1,279	$	3			$	3	$	49	$	10,786
Speculative		120		101		—		191		362				47		108		929
Substandard		—		50		—		—		—				—		—		50
Doubtful		—		—		—		—		86	$	42		49		15		192

Total	$	6,794	$	730	$	2,199	$	1,470	$	451	$	42	$	99	$	172	$	11,957

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, 2011. We use an internal risk-rating system to assess the 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 and the related allowance for loan losses, disaggregated based on our impairment methodology, as of December 31:


	Institutional				Commercial Real Estate				Total Loans and Leases
(In millions)	2011		2010		2011		2010		2011		2010
Loans and leases:
Individually evaluated for impairment	$	56	$	112	$	421	$	623	$	477	$	735
Collectively evaluated for impairment		9,537		11,081		—		—		9,537		11,081
Loans acquired with deteriorated credit quality		—		—		39		141		39		141

Total loans and leases	$	9,593	$	11,193	$	460	$	764	$	10,053	$	11,957

Allowance for loan losses:
Individually evaluated for impairment							$	24			$	24
Collectively evaluated for impairment	$	22	$	31				—	$	22		31
Loans acquired with deteriorated credit quality		—		—				45		—		45
Total allowance for loan losses	$	22	$	31		—	$	69	$	22	$	100

The following table presents our recorded investment in impaired loans and leases as of the dates or for the periods indicated:


	December 31, 2011						Year Ended December 31, 2011				December 31, 2010
(In millions)	Recorded Investment		Unpaid Principal Balance		Related Allowance⁽¹⁾		Average Recorded Investment		Interest Revenue Recognized		Recorded Investment		Unpaid Principal Balance		Related Allowance⁽¹⁾
With no related allowance recorded:
CRE - property development	$	199	$	227			$	200	$	15	$	209	$	240
CRE - property development – acquired credit-impaired		—		34				—		—				34
CRE - other - acquired credit-impaired		8		69				12		—		16		47
CRE - other		—		—				—		—		27		29
With an allowance recorded:
CRE - property development		—		—				—		—		79		113	$	24
CRE - property development – acquired credit-impaired		—		—				—		—		42		47		19
CRE - other - acquired credit-impaired		31		37		—		31		1		83		100		26
CRE - other		—		—		—		—		—		7		9		—

Total CRE	$	238	$	367		—	$	243	$	16	$	463	$	619	$	69

⁽¹⁾	As of December 31, 2011 and December 31, 2010, we maintained allowances for loan losses of $22 million and $31 million, respectively, associated with loans and leases that were not impaired.

As of December 31, 2011, we held an aggregate of approximately $199 million of CRE loans which were modified in troubled debt restructurings compared to $307 million as of December 31, 2010. 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. No loans were modified in troubled debt restructurings in 2011.

No institutional loans or leases were 90 days or more contractually past due as of December 31, 2011 or 2010. Although a portion of the CRE loans was 90 days or more contractually past-due as of December 31, 2011 and 2010, 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.

The following table presents the components of our recorded investment in loans and leases on non-accrual status as of December 31:


(In millions)	2011		2010
Commercial Real Estate:
Property development			$	79
Property development - acquired credit-impaired				42
Other - acquired credit-impaired	$	5		22
Other		—		15
Total	$	5	$	158

The loans presented in the table above were placed on non-accrual status by management because the yield associated with those loans was deemed to be non-accretable, based on the expected future collection of principal and interest from the loans. The property development loan of $79 million presented in the table was transferred to other real estate owned in 2011 subsequent to our execution of a deed-in-lieu-of-foreclosure agreement, net of a partial charge-off. The acquired credit-impaired property development loan of $42 million presented in the table was foreclosed upon and transferred to other real estate owned in 2011, net of a partial charge-off. Neither transfer had an impact on our 2011 consolidated statement of income.

The following table presents activity in the allowance for loan losses for the years ended December 31:


(In millions)	2011									2010			2009
	Institutional			Commercial Real Estate			Total Loans and Leases			Total Loans and Leases			Total Loans and Leases
Allowance for loan losses:
Beginning balance	$	31		$	69		$	100		$	79		$	18
Charge-offs		—			(78	)		(78	)		(4	)		(91	)
Provisions		(9	)		9			—			25			149
Recoveries		—			—			—			—			3

Ending balance	$	22		$	—		$	22		$	100		$	79

The charge-offs recorded in 2011 were mainly related to the previously described 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 probable credit losses inherent 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.