BANK LOANS, NET

Bank client receivables are comprised of loans originated or purchased by RJ Bank, and include commercial and industrial (“C&I”) loans, tax-exempt loans, securities based and other consumer loans (“SBL”), as well as commercial and residential real estate loans. These receivables are collateralized by first or second mortgages on residential or other real property, other assets of the borrower, a pledge of revenue, or are unsecured.

For a discussion of our accounting policies regarding bank loans and allowances for losses, including the policies regarding loans held for investment, loans held for sale, off-balance sheet loan commitments, nonperforming assets, troubled debt restructurings (“TDRs”), impaired loans, the allowance for loan losses and reserve for unfunded lending commitments, and loan charge-off policies, see Note 2 on pages 111 – 115 of our 2015 Form 10-K.

We segregate our loan portfolio into six loan portfolio segments: C&I, commercial real estate (“CRE”), CRE construction, tax-exempt, residential mortgage, and SBL. These portfolio segments also serve as the portfolio loan classes for purposes of credit analysis, except for residential mortgage loans which are further disaggregated into residential first mortgage and residential home equity classes.

The following table presents the balances for both the held for sale and held for investment loan portfolios, as well as the associated percentage of each portfolio segment in RJ Bank’s total loan portfolio:



	March 31, 2016					September 30, 2015
	Balance			%		Balance			%
	($ in thousands)
Loans held for sale, net⁽¹⁾	$	172,222		1	%	$	119,519		1	%
Loans held for investment:
Domestic:
C&I loans	6,236,413			43	%	5,893,631			44	%
CRE construction loans	143,437			1	%	126,402			1	%
CRE loans	2,035,699			14	%	1,679,332			13	%
Tax-exempt loans	610,274			4	%	484,537			4	%
Residential mortgage loans	2,215,264			15	%	1,959,786			15	%
SBL	1,702,766			12	%	1,479,562			11	%
Foreign:
C&I loans	1,046,801			7	%	1,034,387			8	%
CRE construction loans	2,468			—		35,954			—
CRE loans	412,569			3	%	374,822			3	%
Residential mortgage loans	2,320			—		2,828			—
SBL	1,909			—		1,942			—
Total loans held for investment	14,409,920					13,073,183
Net unearned income and deferred expenses	(39,441		)			(32,424		)
Total loans held for investment, net⁽¹⁾	14,370,479					13,040,759

Total loans held for sale and investment	14,542,701			100	%	13,160,278			100	%
Allowance for loan losses	(194,220		)			(172,257		)
Bank loans, net	$	14,348,481				$	12,988,021


(1)	Net of unearned income and deferred expenses, which includes purchase premiums, purchase discounts, and net deferred origination fees and costs.

At March 31, 2016, the Federal Home Loan Bank of Atlanta (“FHLB”) had a blanket lien on RJ Bank’s residential mortgage loan portfolio as security for the repayment of certain borrowings. See Note 12 for more information regarding borrowings from the FHLB.

Loans held for sale

RJ Bank originated or purchased $397.5 million and $1.0 billion of loans held for sale during the three and six months ended March 31, 2016, respectively, and $219.7 million and $617.6 million during the three and six months ended March 31, 2015. Proceeds from the sale of held for sale loans amounted to $84.7 million and $170.9 million during the three and six months ended March 31, 2016, and $60.2 million and $97.5 million during the three and six months ended March 31, 2015. Net gains resulting from such sales amounted to $300 thousand and $600 thousand during the three and six months ended March 31, 2016 and were insignificant during both the three and six months ended March 31, 2015. Unrealized losses recorded in the Condensed Consolidated Statements of Income and Comprehensive Income to reflect the loans held for sale at the lower of cost or market value were insignificant in each of the three and six months ended March 31, 2016 and 2015.

Purchases and sales of loans held for investment

As more fully described in Note 2 of our 2015 Form 10-K, corporate loan sales generally occur as part of a loan workout situation.

The following table presents purchases and sales of any loans held for investment by portfolio segment:



	C&I		CRE		Residential mortgage			Total
	(in thousands)
Three months ended March 31, 2016
Purchases	$	91,256	$	7,040	$	131,788	⁽²⁾	$	230,084
Sales ⁽¹⁾	$	36,569	$	—	$	—		$	36,569

Six months ended March 31, 2016
Purchases	$	149,107	$	7,040	210,823		⁽³⁾	$	366,970
Sales ⁽¹⁾	$	71,815	$	—	—			$	71,815

Three months ended March 31, 2015
Purchases	$	106,197	$	—	$	1,337		$	107,534
Sales ⁽¹⁾	$	25,500	$	—	$	—		$	25,500

Six months ended March 31, 2015
Purchases	$	260,281	$	—	$	213,309	⁽⁴⁾	$	473,590
Sales ⁽¹⁾	$	32,360	$	—	$	—		$	32,360


(1)	Represents the recorded investment of loans held for investment that were transferred to loans held for sale during the respective period and subsequently sold to a third party during the same period. Corporate loan sales generally occur as part of a loan workout situation.


(2)	Includes the purchase from another financial institution of residential mortgage loans totaling $107.1 million in principal loan balance.


(3)	Includes purchases from another financial institution of residential mortgage loans totaling $179.6 million in principal loan balance.


(4)	Includes the purchase from another financial institution of residential mortgage loans totaling $207.3 million in principal loan balance.

Aging analysis of loans held for investment

The following table presents an analysis of the payment status of loans held for investment:



	30-89 days and accruing		90 days or more and accruing		Total past due and accruing		Nonaccrual ⁽¹⁾		Current and accruing		Total loans held for investment ⁽²⁾
	(in thousands)
As of March 31, 2016:
C&I loans	$	152	$	—	$	152	$	11,391	$	7,271,671	$	7,283,214
CRE construction loans	—		—		—		—		145,905		145,905
CRE loans	—		—		—		4,497		2,443,771		2,448,268
Tax-exempt loans	—		—		—		—		610,274		610,274
Residential mortgage loans:
First mortgage loans	1,504		—		1,504		43,365		2,153,501		2,198,370
Home equity loans/lines	—		—		—		172		19,042		19,214
SBL	—		—		—		—		1,704,675		1,704,675
Total loans held for investment, net	$	1,656	$	—	$	1,656	$	59,425	$	14,348,839	$	14,409,920

As of September 30, 2015:
C&I loans	163		$	—	$	163	$	—	6,927,855		$	6,928,018
CRE construction loans	—		—		—		—		162,356		162,356
CRE loans	—		—		—		4,796		2,049,358		2,054,154
Tax-exempt	—		—		—		—		484,537		484,537
Residential mortgage loans:
First mortgage loans	2,906		—		2,906		47,504		1,891,384		1,941,794
Home equity loans/lines	30		—		30		319		20,471		20,820
SBL	—		—		—		—		1,481,504		1,481,504
Total loans held for investment, net	$	3,099	$	—	$	3,099	$	52,619	$	13,017,465	$	13,073,183


(1)	Includes $31.2 million and $22.4 million of nonaccrual loans at March 31, 2016 and September 30, 2015, respectively, which are performing pursuant to their contractual terms.


(2)	Excludes any net unearned income and deferred expenses.

Nonperforming loans represent those loans on nonaccrual status, troubled debt restructurings, and accruing loans which are 90 days or more past due and in the process of collection. The gross interest income related to the nonperforming loans reflected in the previous table, which would have been recorded had these loans been current in accordance with their original terms, totaled $500 thousand and $800 thousand for the three and six months ended March 31, 2016, respectively, and $500 thousand and $1.2 million for the three and six months ended March 31, 2015, respectively. The interest income recognized on nonperforming loans was $200 thousand and $500 thousand for the three and six months ended March 31, 2016, respectively and $400 thousand and $600 thousand for the three and six months ended March 31, 2015, respectively.

Other real estate owned, included in other assets on our Condensed Consolidated Statements of Financial Condition, was $4.5 million at March 31, 2016 and $4.6 million at September 30, 2015. The recorded investment of mortgage loans secured by one-to-four family residential properties for which formal foreclosure proceedings are in process was $21.6 million at March 31, 2016 and $24.6 million at September 30, 2015.

Impaired loans and troubled debt restructurings

The following table provides a summary of RJ Bank’s impaired loans:



	March 31, 2016						September 30, 2015
	Gross recorded investment		Unpaid principal balance		Allowance for losses		Gross recorded investment		Unpaid principal balance		Allowance for losses
	(in thousands)
Impaired loans with allowance for loan losses:⁽¹⁾
C&I loans	$	11,391	$	11,535	$	3,105	$	10,599	$	11,204	$	1,132
Residential - first mortgage loans	33,437		45,090		2,804		35,442		48,828		4,014
Total	44,828		56,625		5,909		46,041		60,032		5,146

Impaired loans without allowance for loan losses:⁽²⁾
CRE loans	4,497		11,611		—		4,796		11,611		—
Residential - first mortgage loans	18,532		27,189		—		20,221		29,598		—
Total	23,029		38,800		—		25,017		41,209		—
Total impaired loans	$	67,857	$	95,425	$	5,909	$	71,058	$	101,241	$	5,146


(1)	Impaired loan balances have had reserves established based upon management’s analysis.


(2)	When the discounted cash flow, collateral value or market value equals or exceeds the carrying value of the loan, then the loan does not require an allowance. These are generally loans in process of foreclosure that have already been adjusted to fair value.

The preceding table includes $4.5 million CRE, and $30.6 million residential first mortgage TDR’s at March 31, 2016, and $4.8 million CRE, $10.6 million C&I, and $32.8 million residential first mortgage TDR’s at September 30, 2015.

The average balance of the total impaired loans and the related interest income recognized in the Condensed Consolidated Statements of Income and Comprehensive Income are as follows:



	Three months ended March 31,				Six months ended March 31,
	2016		2015		2016		2015
	(in thousands)
Average impaired loan balance:
C&I loans	$	7,258	$	11,613	$	8,882	$	11,732
CRE loans	4,540		17,257		4,606		17,394
Residential mortgage loans:
First mortgage loans	52,713		59,875		53,223		61,493
Total	$	64,511	$	88,745	$	66,711	$	90,619

Interest income recognized:
Residential mortgage loans:
First mortgage loans	$	334	$	426	$	707	$	741
Total	$	334	$	426	$	707	$	741

During the three and six months ended March 31, 2016 and 2015, RJ Bank granted concessions to borrowers having financial difficulties, for which the resulting modification was deemed a TDR. These concessions granted for the respective first mortgage residential loans were interest rate reductions, maturity date extensions, capitalization of past due payments, or release of liability ordered under Chapter 7 bankruptcy not reaffirmed by the borrower.

The table below presents the TDRs that occurred during the respective periods presented:



	Number of contracts	Pre-modification outstanding recorded investment		Post-modification outstanding recorded investment
	($ in thousands)
Three months ended March 31, 2016
Residential – first mortgage loans	1	$	236	$	236

Six months ended March 31, 2016
Residential – first mortgage loans	1	$	236	$	236

Three months ended March 31, 2015
Residential – first mortgage loans	1	$	133	$	134

Six months ended March 31, 2015
Residential – first mortgage loans	3	$	290	$	293

There were no TDRs for which there was a payment default and for which the respective loan was modified as a TDR within the 12 months prior to the default during the three and six months ended March 31, 2016 and 2015. As of March 31, 2016, RJ Bank had no outstanding commitments on TDRs and had one outstanding commitment on a C&I TDR at September 30, 2015 in the amount of $600 thousand.

Credit quality indicators

The credit quality of RJ Bank’s loan portfolio is summarized monthly by management using the standard asset classification system utilized by bank regulators for the SBL and residential mortgage loan portfolios and internal risk ratings, which correspond to the same standard asset classifications for the corporate loan portfolios. These classifications are divided into three groups: Not Classified (Pass), Special Mention, and Classified or Adverse Rating (Substandard, Doubtful and Loss). These terms are defined as follows:

Pass – Loans which are well protected by the current net worth and paying capacity of the obligor (or guarantors, if any) or by the fair value, less costs to acquire and sell, of any underlying collateral in a timely manner.

Special Mention – Loans which have potential weaknesses that deserve management’s close attention. These loans are not adversely classified and do not expose RJ Bank to sufficient risk to warrant an adverse classification.

Substandard – Loans which are inadequately protected by the current sound worth and paying capacity of the obligor or by the collateral pledged, if any. Loans with this classification are characterized by the distinct possibility that RJ Bank will sustain some loss if the deficiencies are not corrected.

Doubtful – Loans which have all the weaknesses inherent in loans classified as substandard with the added characteristic that the weaknesses make collection or liquidation in full highly questionable and improbable on the basis of currently-known facts, conditions and values.

Loss – Loans which are considered by management to be uncollectible and of such little value that their continuance on RJ Bank’s books as an asset, without establishment of a specific valuation allowance or charge-off, is not warranted. RJ Bank does not have any loan balances within this classification because, in accordance with its accounting policy, loans, or a portion thereof considered to be uncollectible, are charged-off prior to the assignment of this classification.

The credit quality of RJ Bank’s held for investment loan portfolio is as follows:



	Pass		Special mention⁽¹⁾		Substandard⁽¹⁾		Doubtful⁽¹⁾		Total
	(in thousands)
March 31, 2016
C&I	$	7,046,244	$	95,379	$	141,591	$	—	$	7,283,214
CRE construction	145,905		—		—		—		145,905
CRE	2,443,599		—		4,669		—		2,448,268
Tax-exempt	610,274		—		—		—		610,274
Residential mortgage:
First mortgage	2,130,729		13,073		54,568		—		2,198,370
Home equity	18,827		215		172		—		19,214
SBL	1,704,675		—		—		—		1,704,675
Total	$	14,100,253	$	108,667	$	201,000	$	—	$	14,409,920

September 30, 2015
C&I	$	6,739,179	$	97,623	$	91,216	$	—	$	6,928,018
CRE construction	162,356		—		—		—		162,356
CRE	2,034,692		39		19,423		—		2,054,154
Tax-exempt	484,537		—		—		—		484,537
Residential mortgage:
First mortgage	1,868,044		14,890		58,860		—		1,941,794
Home equity	20,372		128		320		—		20,820
SBL	1,481,504		—		—		—		1,481,504
Total	$	12,790,684	$	112,680	$	169,819	$	—	$	13,073,183


(1)	Loans classified as special mention, substandard or doubtful are all considered to be “criticized” loans.

The credit quality of RJ Bank’s performing residential first mortgage loan portfolio is additionally assessed utilizing updated loan-to-value (“LTV”) ratios. RJ Bank segregates all of its performing residential first mortgage loan portfolio with higher reserve percentages allocated to the higher LTV loans. Current LTVs are updated using the most recently available information (generally on a one-quarter lag) and are estimated based on the initial appraisal obtained at the time of origination, adjusted using relevant market indices for housing price changes that have occurred since origination. The value of the homes could vary from actual market values due to changes in the condition of the underlying property, variations in housing price changes within current valuation indices, and other factors.

The table below presents the most recently available update of the performing residential first mortgage loan portfolio summarized by current LTV. The amounts in the table represent the entire loan balance:



	Balance⁽¹⁾
	(in thousands)
LTV range:
LTV less than 50%	$	658,860
LTV greater than 50% but less than 80%	1,085,978
LTV greater than 80% but less than 100%	88,862
LTV greater than 100%, but less than 120%	13,466
LTV greater than 120%	1,681
Total	$	1,848,847


(1)	Excludes loans that have full repurchase recourse for any delinquent loans.

Allowance for loan losses and reserve for unfunded lending commitments

Changes in the allowance for loan losses of RJ Bank by portfolio segment are as follows:



		Loans held for investment
		C&I			CRE construction			CRE			Tax-exempt			Residential mortgage			SBL			Total
	(in thousands)
Three months ended March 31, 2016
Balance at beginning of period		$	128,721		$	2,635		$	31,304		$	7,119		$	12,265		$	3,415		$	185,459
Provision (benefit) for loan losses		9,590			(100		)	1,149			(85		)	(902		)	(23		)	9,629
Net (charge-offs)/recoveries:
Charge-offs		(1,427		)	—			—			—			(369		)	—			(1,796		)
Recoveries		—			—			—			—			260			20			280
Net (charge-offs)/recoveries		(1,427		)	—			—			—			(109		)	20			(1,516		)
Foreign exchange translation adjustment		415			18			215			—			—			—			648
Balance at March 31, 2016		$	137,299		$	2,553		$	32,668		$	7,034		$	11,254		$	3,412		$	194,220

Six months ended March 31, 2016
Balance at beginning of period		$	117,623		$	2,707		$	30,486		$	5,949		$	12,526		$	2,966		$	172,257
Provision (benefit) for loan losses		21,175			(152		)	2,112			1,085			(1,106		)	425			23,539
Net (charge-offs)/recoveries:
Charge-offs		(1,694		)	—			—			—			(916		)	—			(2,610		)
Recoveries		—			—			—			—			750			21			771
Net (charge-offs)/recoveries		(1,694		)	—			—			—			(166		)	21			(1,839		)
Foreign exchange translation adjustment		195			(2		)	70			—			—			—			263
Balance at March 31, 2016		$	137,299		$	2,553		$	32,668		$	7,034		$	11,254		$	3,412		$	194,220

Three months ended March 31, 2015
Balance at beginning of period		$	109,582		$	1,709		$	25,095		$	2,738		$	15,319		$	2,324		$	156,767
Provision (benefit) for loan losses		1,530			(8		)	900			1,171			168			176			3,937
Net (charge-offs)/recoveries:
Charge-offs		—			—			—			—			(411		)	—			(411		)
Recoveries		536			—			—			—			—			6			542
Net (charge-offs)/recoveries		536			—			—			—			(411		)	6			131
Foreign exchange translation adjustment		(523		)	(26		)	(278		)	—			—			—			(827		)
Balance at March 31, 2015		$	111,125		$	1,675		$	25,717		$	3,909		$	15,076		$	2,506		$	160,008

Six months ended March 31, 2015
Balance at beginning of period		$	103,179		$	1,594		$	25,022		$	1,380		$	14,350		$	2,049		$	147,574
Provision for loan losses		8,364			117			1,062			2,529			787			443			13,302
Net (charge-offs)/recoveries:
Charge-offs		(238		)	—			—			—			(638		)	—			(876		)
Recoveries		536			—			—			—			577			14			1,127
Net recoveries/(charge-offs)		298			—			—			—			(61		)	14			251
Foreign exchange translation adjustment		(716		)	(36		)	(367		)	—			—			—			(1,119		)
Balance at March 31, 2015		$	111,125		$	1,675		$	25,717		$	3,909		$	15,076		$	2,506		$	160,008

The following table presents, by loan portfolio segment, RJ Bank’s recorded investment and related allowance for loan losses:



	Loans held for investment
	Allowance for loan losses						Recorded investment⁽¹⁾
	Individually evaluated for impairment		Collectively evaluated for impairment		Total		Individually evaluated for impairment		Collectively evaluated for impairment		Total
	(in thousands)
March 31, 2016
C&I	$	3,105	$	134,194	$	137,299	$	11,391	$	7,271,823	$	7,283,214
CRE construction	—		2,553		2,553		—		145,905		145,905
CRE	—		32,668		32,668		4,497		2,443,771		2,448,268
Tax-exempt	—		7,034		7,034		—		610,274		610,274
Residential mortgage	2,814		8,440		11,254		58,403		2,159,181		2,217,584
SBL	—		3,412		3,412		—		1,704,675		1,704,675
Total	$	5,919	$	188,301	$	194,220	$	74,291	$	14,335,629	$	14,409,920

September 30, 2015
C&I	$	1,132	116,491		$	117,623	$	10,599	$	6,917,419	$	6,928,018
CRE construction	—		2,707		2,707		—		162,356		162,356
CRE	—		30,486		30,486		4,796		2,049,358		2,054,154
Tax-exempt	—		5,949		5,949		—		484,537		484,537
Residential mortgage	4,046		8,480		12,526		62,706		1,899,908		1,962,614
SBL	—		2,966		2,966		—		1,481,504		1,481,504
Total	$	5,178	$	167,079	$	172,257	$	78,101	$	12,995,082	$	13,073,183


(1)	Excludes any net unearned income and deferred expenses.

The reserve for unfunded lending commitments, included in trade and other payables on our Condensed Consolidated Statements of Financial Condition, was $7.8 million and $9.7 million at March 31, 2016 and September 30, 2015, respectively.