MORGAN STANLEY | 2013 | FY | 3


8. Financing Receivables and Allowance for Credit Losses.

 

Loans.

 

 

The Company's loans held for investment are recorded at amortized cost, and its loans held for sale are recorded at lower of cost or fair value in the consolidated statements of financial condition. A description of the Company's loan portfolio is described below.

 

       Corporate. Corporate loans primarily include commercial and industrial lending used for general corporate purposes, working capital and liquidity, “event-driven” loans and lending commitments and asset-backed lending products. “Event-driven” loans support client merger, acquisition or recapitalization activities. Corporate lending is structured as revolving lines of credit, letter of credit facilities, term loans and bridge loans. Risk factors considered in determining the allowance for corporate loans include the borrower's financial strength, seniority of the loan, collateral type, volatility of collateral value, debt cushion, covenants, counterparty type and, for lending commitments, the probability of drawdown.

 

       Consumer. Consumer loans include unsecured loans and securities-based lending that allows clients to borrow money against the value of qualifying securities for any suitable purpose other than purchasing, trading, or carrying securities or refinancing margin debt. The majority of consumer loans are structured as revolving lines of credit and letter of credit facilities and are primarily offered through the Company's Portfolio Loan Account program. The allowance methodology for unsecured loans considers the specific attributes of the loan as well as the borrower's source of repayment. The allowance methodology for securities-based lending considers the collateral type underlying the loan (e.g., diversified securities, concentrated securities or restricted stock).

 

       Residential Real Estate. Residential real estate loans mainly include non-conforming loans and home equity lines of credit. The allowance methodology for non-conforming residential mortgage loans considers several factors, including, but not limited to, loan-to-value ratio, FICO score, home price index, and delinquency status. The methodology for home equity lines of credit considers credit limits and utilization rates in addition to the factors considered for non-conforming residential mortgages.

 

       Wholesale Real Estate. Wholesale real estate loans include owner-occupied loans and income-producing loans. The principal risk factors for determining the allowance for wholesale real estate loans are the underlying collateral type, loan-to-value ratio and debt service ratio.

 

 

The Company's outstanding loans at December 31, 2013 and December 31, 2012 included the following:

 

 

               
   December 31, 2013  December 31, 2012
Loans by Product Type Loans Held For Investment Loans Held For Sale Total Loans  Loans Held For Investment Loans Held For Sale Total Loans
   (dollars in millions)
Corporate loans$ 13,263$ 6,168$ 19,431 $ 9,449$ 4,987$ 14,436
Consumer loans  11,577   11,577   7,618   7,618
Residential real estate loans  10,006  112  10,118   6,630  142  6,772
Wholesale real estate loans  1,855  49  1,904   326   326
Total loans, gross of allowance for loan losses  36,701  6,329  43,030   24,023  5,129  29,152
Allowance for loan losses  (156)   (156)   (106)   (106)
Total loans, net of allowance for loan losses(1)(2)$ 36,545$ 6,329$ 42,874 $ 23,917$ 5,129$ 29,046

______________

 

The above table does not include loans held at fair value of $12,612 million and $17,311 million at December 31, 2013 and December 31, 2012, respectively. At December 31, 2013, loans held at fair value consisted of $9,774 million of Corporate loans, $1,434 million of Residential real estate loans and $1,404 million of Wholesale real estate loans. At December 31, 2012, loans held at fair value consisted of $13,350 million of Corporate loans, $1,870 million of Residential real estate loans and $2,091 million of Wholesale real estate loans. Loans held at fair value are recorded as Trading Assets in the Company's consolidated statement of financial condition. See Note 4 for further information.

 

Credit Quality.

 

The Company's Credit Risk Management department evaluates new obligors before credit transactions are initially approved, and at least annually thereafter for corporate and wholesale real estate loans. For corporate loans, credit evaluations typically involve the evaluation of financial statements, assessment of leverage, liquidity, capital strength, asset composition and quality, market capitalization and access to capital markets, cash flow projections and debt service requirements, and the adequacy of collateral, if applicable. Credit Risk Management will also evaluate strategy, market position, industry dynamics, obligor's management and other factors that could affect the obligor's risk profile. For wholesale real estate loans, the credit evaluation is focused on property and transaction metrics including property type, loan-to-value ratio, occupancy levels, debt service ratio, prevailing capitalization rates, and market dynamics. For residential real estate and consumer loans, the initial credit evaluation typically includes, but is not limited to, review of the obligor's income, net worth, liquidity, collateral, loan-to-value ratio, and credit bureau information. Subsequent credit monitoring for residential real estate loans is performed at the portfolio level. Consumer loan collateral values are monitored on an ongoing basis.

 

The Company utilizes the following credit quality indicators which are consistent with banking regulators' definitions of criticized exposures, in its credit monitoring process for loans held for investment.

 

       Pass. A credit exposure rated pass has a continued expectation of timely repayment, all obligations of the borrower are current, and the obligor complies with material terms and conditions of the lending agreement.

 

       Special Mention. Extensions of credit that have potential weakness that deserve management's close attention, and if left uncorrected may, at some future date, result in the deterioration of the repayment prospects or collateral position.

 

       Substandard. Obligor has a well-defined weakness that jeopardizes the repayment of the debt and has a high probability of payment default with the distinct possibility that the Company will sustain some loss if noted deficiencies are not corrected.

 

       Doubtful. Inherent weakness in the exposure makes the collection or repayment in full, based on existing facts, conditions and circumstances, highly improbable, and the amount of loss is uncertain.

 

       Loss. Extensions of credit classified as loss are considered uncollectible and are charged off.

 

The following tables present credit quality indicators for the Company's loans held for investment, gross of allowance for loan losses, by product type, at December 31, 2013 and December 31, 2012.

 

            
   December 31, 2013
Loans by Credit Quality Indicators Corporate Consumer Residential Real Estate  Wholesale Real Estate Total
   (dollars in millions)
Pass$ 12,893$ 11,577$ 9,992$ 1,829$ 36,291
Special Mention  189    16  205
Substandard  174   14   188
Doubtful  7    10  17
Loss     
Total loans$ 13,263$ 11,577$ 10,006$ 1,855$ 36,701

            
   December 31, 2012
Loans by Credit Quality Indicators Corporate Consumer Residential Real Estate Wholesale Real Estate Total
   (dollars in millions)
Pass$ 9,410$ 7,618$ 6,629$ 302$ 23,959
Special Mention  6    24  30
Substandard  7   1   8
Doubtful  26     26
Loss     
Total loans$ 9,449$ 7,618$ 6,630$ 326$ 24,023

Allowance for Loan Losses and Impaired Loans.

The allowance for loan losses estimates probable losses related to loans specifically identified for impairment in addition to the probable losses inherent in the held for investment loan portfolio.

There are two components of the allowance for loan losses: the inherent allowance component and the specific allowance component.

The inherent allowance component of the allowance for loan losses is used to estimate the probable losses inherent in the loan portfolio and includes non-homogeneous loans that have not been identified as impaired and portfolios of smaller balance homogeneous loans. The Company maintains methodologies by loan product for calculating an allowance for loan losses that estimates the inherent losses in the loan portfolio. Qualitative and environmental factors such as economic and business conditions, nature and volume of the portfolio and lending terms, and volume and severity of past due loans may also be considered in the calculations. The allowance for loan losses is maintained at a level reasonable to ensure that it can adequately absorb the estimated probable losses inherent in the portfolio.

The specific allowance component of the allowance for loan losses is used to estimate probable losses for non-homogeneous exposures, including loans modified in a TDR, which have been specifically identified for impairment analysis by the Company and determined to be impaired. As of December 31, 2013 and 2012, the Company's TDRs were not significant. For further information on allowance for loan losses, see Note 2.

The tables below provide detail on impaired loans, past due loans and allowances for the Company's held for investment loans:

            
   December 31, 2013
Loans by Product Type Corporate Consumer Residential Real Estate Wholesale Real Estate Total
   (dollars in millions)
Impaired loans with allowance$ 63$$$ 10$ 73
Impaired loans without allowance(1)  6   11   17
Impaired loans unpaid principal balance  69   11  10  90
Past due 90 days loans and on nonaccrual  7   11  10  28

            
   December 31, 2012
Loans by Product Type Corporate Consumer Residential Real Estate Wholesale Real Estate Total
   (dollars in millions)
Impaired loans with allowance$ 19$$ 1$$ 20
Impaired loans without allowance(1)  14     14
Impaired loans unpaid principal balance  33   1   34
Past due 90 days loans and on nonaccrual  25   1   26

            
   December 31, 2013
Loans by Region Americas EMEA Asia Others Total
   (dollars in millions)
Impaired loans$ 90$$$$ 90
Past due 90 days loans and on nonaccrual  28     28
Allowance for loan losses  123  28  3  2  156

            
   December 31, 2012
Loans by Region Americas EMEA Asia Others Total
   (dollars in millions)
Impaired loans$ 34$$$$ 34
Past due 90 days loans and on nonaccrual  26     26
Allowance for loan losses  52  52  2   106

 

EMEA—Europe, Middle East and Africa.

(1)       At December 31, 2013 and 2012, no allowance was outstanding for these loans as the fair value of the collateral held exceeded or equaled the carrying value.

The table below summarizes information about the allowance for loan losses, loans by impairment methodology, the allowance for lending-related commitments and lending-related commitments by impairment methodology.

 

   Corporate Consumer Residential Real Estate Wholesale Real Estate  
       Total
   (dollars in millions)
Allowance for loan losses:          
 Balance at December 31, 2012$ 96$ 3$ 5$ 2$ 106
 Gross charge-offs  (13)   (2)   (15)
 Gross recoveries     
  Net charge-offs  (13)   (2)   (15)
 Provision for loan losses(1)  54  (2)  1  12  65
 Balance at December 31, 2013$ 137$ 1$ 4$ 14$ 156
            
Allowance for loan losses by impairment methodology:          
  Inherent$ 126$ 1$ 4$ 10$ 141
  Specific  11    4  15
  Total allowance for loan losses at December 31,           
  2013$ 137$ 1$ 4$ 14$ 156
            
Loans evaluated by impairment methodology(2):          
  Inherent$ 13,194$ 11,577$ 9,995$ 1,845$ 36,611
  Specific  69   11  10  90
  Total loans evaluated at December 31, 2013$ 13,263$ 11,577$ 10,006$ 1,855$ 36,701
            
Allowance for lending-related commitments:          
 Balance at December 31, 2012$ 91$$$ 1$ 92
 Provision for lending-related commitments(3)  44    1  45
 Other  (10)     (10)
 Balance at December 31, 2013$ 125$$$ 2$ 127
            
Allowance for lending-related commitments by           
 impairment methodology:          
  Inherent$ 125$$$ 2$ 127
  Specific     
  Total allowance for lending-related commitments           
  at December 31, 2013$ 125$$$ 2$ 127
            
Lending-related commitments evaluated by           
 impairment methodology:          
  Inherent$ 63,427$ 2,151$ 1,423$ 207$ 67,208
  Specific     
  Total lending-related commitments evaluated          
  at December 31, 2013$ 63,427$ 2,151$ 1,423$ 207$ 67,208

_______________

(1)       The Company recorded $65 million of provision for loan losses within Other revenues for the year ended December 31, 2013.

(2)       Balances are gross of the allowance and represent recorded investment in the loans.

(3)       The Company recorded $45 million of provision for lending-related commitments within Other non-interest expenses for the year ended December 31, 2013.

   Corporate Consumer Residential Real Estate Wholesale Real Estate  
       Total
   (dollars in millions)
Allowance for loan losses:          
 Balance at December 31, 2011$ 14$ 1$ 1$ 1$ 17
 Gross charge-offs  (11)     (11)
 Gross recoveries     13  13
  Net charge-offs  (11)    13  2
 Provision for loan losses(1)  93  2  4  (12)  87
 Balance at December 31, 2012$ 96$ 3$ 5$ 2$ 106
            
Allowance for loan losses by impairment methodology:          
  Inherent$ 94$ 3$ 5$ 2$ 104
  Specific  2     2
  Total allowance for loan losses at December 31, 2012$ 96$ 3$ 5$ 2$ 106
            
Loans evaluated by impairment methodology(2):          
  Inherent$ 9,416$ 7,618$ 6,629$ 326$ 23,989
  Specific  33   1   34
  Total loan evaluated at December 31, 2012$ 9,449$ 7,618$ 6,630$ 326$ 24,023
            
Allowance for lending-related commitments:          
 Balance at December 31, 2011$ 19$ 3$$ 2$ 24
 Provision for lending-related commitments(3)  72  (3)   (1)  68
 Balance at December 31, 2012$ 91$$$ 1$ 92
            
Allowance for lending-related commitments by           
 impairment methodology:          
  Inherent$ 87$$$ 1$ 88
  Specific  4     4
  Total allowance for lending-related commitments           
  at December 31, 2012$ 91$$$ 1$ 92
            
Lending-related commitments evaluated by           
 impairment methodology:          
  Inherent$ 44,079$ 1,406$ 712$ 101$ 46,298
  Specific  47     47
  Total lending-related commitments evaluated          
  at December 31, 2012$ 44,126$ 1,406$ 712$ 101$ 46,345

_______________

(1)       The Company recorded $87 million of provision for loan losses within Other revenues for the year ended December 31, 2012.

(2)       Balances are gross of the allowance and represent recorded investment in the loans.

(3)       The Company recorded $67 million of provision for lending-related commitments within Other non-interest expenses for the year ended December 31, 2012.

Employee Loans.

Employee loans are granted primarily in conjunction with a program established in the Wealth Management business segment to retain and recruit certain employees. These loans are recorded in Customer and other receivables in the consolidated statements of financial condition. These loans are full recourse, generally require periodic payments and have repayment terms ranging from one to 12 years. The Company establishes a reserve for loan amounts it does not consider recoverable, which is recorded in Compensation and benefits expense. At December 31, 2013, the Company had $5,487 million of employee loans, net of an allowance of approximately $109 million. At December 31, 2012, the Company had $5,998 million of employee loans, net of an allowance of approximately $131 million.

The Company has also granted loans to other employees primarily in conjunction with certain after-tax leveraged investment arrangementsAt December 31, 2013, the balance of these loans was $100 million, net of an allowance of approximately $51 million. At December 31, 2012, the balance of these loans was $172 million, net of an allowance of approximately $108 million. The Company establishes a reserve for non-recourse loan amounts not recoverable from employees, which is recorded in Other expense.

Collateralized Transactions.

In certain instances, the Company enters into reverse repurchase agreements and securities borrowed transactions to acquire securities to cover short positions, to settle other securities obligations and to accommodate clients' needs. The Company also engages in margin lending to broker-dealer clients that allows the client to borrow against the value of the qualifying securities and is included within Customer and other receivables in the consolidated statement of financial condition (see Note 6).

Servicing Advances.

As part of its servicing activities, the Company may make servicing advances to the extent that it believes that such advances will be reimbursed (see Note 7).

 


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