Morgan Stanley 2010 Annual Report Download - page 188

MORGAN STANLEY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
8. Financing Receivables.
Loans held for investment.
The Company’s loans held for investment are recorded at amortized cost and classified as Loans in the
consolidated statements of financial condition. A description of the Company’s loan portfolio is described below.
• Commercial and Industrial. Commercial and industrial loans include commercial lending, corporate
lending and commercial asset-backed lending products. Risk factors considered in determining the
allowance for commercial and industrial loans include the borrower’s financial strength, seniority of the
loan, collateral type, volatility of collateral value, debt cushion, covenants and (for unsecured loans)
counterparty type.
• Consumer. Consumer loans include unsecured loans and non-purpose 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 marketable securities or refinancing margin debt. The allowance
methodology for unsecured loans considers the specific attributes of the loan as well as borrower’s source
of repayment. The allowance methodology for non-purpose securities-based lending considers the
collateral type underlying the loan (e.g., diversified securities, concentrated securities, or restricted stock).
• Real Estate—Residential. Residential real estate loans include home equity lines of credit and
non-conforming loans. The allowance methodology for nonconforming residential mortgage loans
considers several factors, including but not limited to loan-to-value ratio, a FICO score, home price index,
and delinquency status. The methodology for home equity loans considers credit limits and utilization
rates in addition to the factors considered for nonconforming residential mortgages.
• Real Estate—Wholesale. Wholesale real estate loans include owner-occupied loans and income-
producing loans. The principal risk factor for determining the allowance for wholesale real estate loans is
the underlying collateral type, which is affected by the time period to liquidate the collateral and the
volatility in collateral values.
The Company’s loans held for investment at December 31, 2010 included the following (dollars in millions):
Commercial and industrial ............................................ $ 4,054
Consumer loans .................................................... 3,974
Residential real estate loans ........................................... 1,915
Wholesale real estate loans ........................................... 468
Total loans held for investment, net of allowance of $82 million .......... $10,411
The above table does not include loans held for sale of $165 million at December 31, 2010.
The Company’s Credit Risk Management Department evaluates new obligors before credit transactions are
initially approved, and at least annually thereafter for consumer and industrial loans. For corporate and
commercial 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. The
Company’s Credit Risk Management Department will also evaluate strategy, market position, industry dynamics,
obligor’s management and other factors that could affect the obligor’s risk profile. For residential real estate and
consumer loans, the initial credit evaluation 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 and for consumer loans collateral, values are
monitored on an ongoing basis.
182