BANK LOANS, NET

6 Months Ended

Mar. 31, 2020

Bank client receivables are comprised of loans originated or purchased by RJ Bank and include commercial and industrial (“C&I”) loans, tax-exempt loans, commercial and residential real estate loans, securities-based loans (“SBL”) and other loans. These receivables are collateralized by first and, to a lesser extent, second mortgages on residential or other real property, other assets of the borrower, a pledge of revenue or are unsecured. See Note 2 of our 2019 Form 10-K for a discussion of accounting policies related to bank loans and allowances for losses.

We segregate our loan portfolio into six loan portfolio segments: C&I, commercial real estate (“CRE”), CRE construction, tax-exempt, residential mortgage, and SBL and other. 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. “Loans held for sale, net” and “Total loans held for investment, net” in the following table are presented net of unearned income and deferred expenses, which include purchase premiums, purchase discounts and net deferred origination fees and costs.



	March 31, 2020					September 30, 2019
$ in millions	Balance			%		Balance			%
Loans held for investment:
C&I loans	$	8,316		38	%	$	8,098		38	%
CRE construction loans	180			1	%	185			1	%
CRE loans	3,830			17	%	3,652			17	%
Tax-exempt loans	1,266			5	%	1,241			6	%
Residential mortgage loans	4,864			22	%	4,454			21	%
SBL and other	3,546			16	%	3,349			16	%
Total loans held for investment	22,002					20,979
Net unearned income and deferred expenses	(13		)			(12		)
Total loans held for investment, net	21,989					20,967
Loans held for sale, net	123			1	%	142			1	%
Total loans held for sale and investment	22,112			100	%	21,109			100	%
Allowance for loan losses	(324		)			(218		)
Bank loans, net	$	21,788				$	20,891

At March 31, 2020, the 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 $443 million and $1.15 billion of loans held for sale during the three and six months ended March 31, 2020, respectively, and $475 million and $1.27 billion during the three and six months ended March 31, 2019, respectively. Proceeds from the sale of these held for sale loans amounted to $220 million and $434 million during the three and six months ended March 31, 2020, respectively, and $100 million and $357 million during the three and six months ended March 31, 2019, respectively. Net gains resulting from such sales were insignificant in all periods during the three and six months ended March 31, 2020 and 2019.

Purchases and sales of loans held for investment

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



$ in millions	C&I loans		CRE loans		Residential mortgage loans		Total
Three months ended March 31, 2020
Purchases	$	296	$	5	$	100	$	401
Sales	$	—	$	—	$	—	$	—
Six months ended March 31, 2020
Purchases	$	363	$	5	$	258	$	626
Sales	$	20	$	—	$	—	$	20
Three months ended March 31, 2019
Purchases	$	428	$	25	$	46	$	499
Sales	$	24	$	—	$	—	$	24
Six months ended March 31, 2019
Purchases	$	690	$	25	$	122	$	837
Sales	$	93	$	—	$	—	$	93

Sales in the preceding table represent the recorded investment of loans held for investment that were transferred to loans held for sale and subsequently sold to a third party during the respective period. As more fully described in Note 2 of our 2019 Form 10-K, corporate loan (C&I, CRE and CRE construction) sales generally occur as part of our credit management activities.

Aging analysis of loans held for investment

The following table presents an analysis of the payment status of loans held for investment. Amounts in the table exclude any net unearned income and deferred expenses.



$ in millions	30-89 days and accruing		90 days or more and accruing		Total past due and accruing		Nonaccrual		Current and accruing		Total loans held for investment
March 31, 2020
C&I loans	$	—	$	—	$	—	$	4	$	8,312	$	8,316
CRE construction loans	—		—		—		—		180		180
CRE loans	—		—		—		6		3,824		3,830
Tax-exempt loans	—		—		—		—		1,266		1,266
Residential mortgage loans:
First mortgage loans	1		—		1		14		4,824		4,839
Home equity loans/lines	—		—		—		—		25		25
SBL and other	—		—		—		—		3,546		3,546
Total loans held for investment	$	1	$	—	$	1	$	24	$	21,977	$	22,002

September 30, 2019
C&I loans	$	—	$	—	$	—	$	19	$	8,079	$	8,098
CRE construction loans	—		—		—		—		185		185
CRE loans	—		—		—		8		3,644		3,652
Tax-exempt loans	—		—		—		—		1,241		1,241
Residential mortgage loans:
First mortgage loans	2		—		2		16		4,409		4,427
Home equity loans/lines	—		—		—		—		27		27
SBL and other	—		—		—		—		3,349		3,349
Total loans held for investment	$	2	$	—	$	2	$	43	$	20,934	$	20,979

The preceding table includes $9 million and $32 million at March 31, 2020 and September 30, 2019, respectively, of nonaccrual loans which were current pursuant to their contractual terms.

Other real estate owned, included in “Other assets” on our Condensed Consolidated Statements of Financial Condition, was $3 million at both March 31, 2020 and September 30, 2019. The recorded investment in mortgage loans secured by one-to-four family residential properties for which formal foreclosure proceedings were in process was $7 million at both March 31, 2020 and September 30, 2019.

Impaired loans and troubled debt restructurings

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



	March 31, 2020						September 30, 2019
$ in millions	Gross recorded investment		Unpaid principal balance		Allowance for losses		Gross recorded investment		Unpaid principal balance		Allowance for losses
Impaired loans with allowance for loan losses:
C&I loans	$	4	$	4	$	1	$	19	$	20	$	6
Residential - first mortgage loans	8		10		1		11		13		1
Total	12		14		2		30		33		7
Impaired loans without allowance for loan losses:
CRE loans	7		12		—		8		13		—
Residential - first mortgage loans	11		17		—		11		17		—
Total	18		29		—		19		30		—
Total impaired loans	$	30	$	43	$	2	$	49	$	63	$	7

Impaired loan balances with allowances for loan losses have had reserves established based upon management’s analysis. There is no allowance required when the discounted cash flow, collateral value or market value of a loan equals or exceeds the carrying value. These are generally loans in process of foreclosure that have already been adjusted to fair value.

The preceding table includes CRE and residential first mortgage loans troubled debt restructurings (“TDRs”) of $7 million and $17 million, respectively, at March 31, 2020 and C&I, CRE and residential first mortgage loans TDRs of $19 million, $8 million and $18 million, respectively, at September 30, 2019.

The average balance of the total impaired loans was as follows.



	Three months ended March 31,				Six months ended March 31,
$ in millions	2020		2019		2020		2019
C&I loans	$	9	$	27	$	13	$	16
CRE loans	7		3		7		2
Residential - first mortgage loans	20		25		21		26
Total average impaired loan balance	$	36	$	55	$	41	$	44

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 our books as an asset, without establishment of a specific valuation allowance or charge-off, is not warranted. We do not have any bank loan balances within this classification because, in accordance with our accounting policy, loans, or a portion thereof considered to be uncollectible, are charged-off prior to the assignment of this classification.

The following table presents the credit quality of RJ Bank’s held for investment loan portfolio.



$ in millions	Pass		Special mention		Substandard		Doubtful		Total
March 31, 2020
C&I loans	$	8,045	$	142	$	129	$	—	$	8,316
CRE construction loans	180		—		—		—		180
CRE loans	3,745		36		49		—		3,830
Tax-exempt loans	1,266		—		—		—		1,266
Residential mortgage loans:
First mortgage loans	4,808		8		23		—		4,839
Home equity loans/lines	25		—		—		—		25
SBL and other	3,546		—		—		—		3,546
Total loans held for investment	$	21,615	$	186	$	201	$	—	$	22,002

September 30, 2019
C&I loans	$	7,870	$	152	$	76	$	—	$	8,098
CRE construction loans	185		—		—		—		185
CRE loans	3,630		—		22		—		3,652
Tax-exempt loans	1,241		—		—		—		1,241
Residential mortgage loans:
First mortgage loans	4,392		10		25		—		4,427
Home equity loans/lines	27		—		—		—		27
SBL and other	3,349		—		—		—		3,349
Total loans held for investment	$	20,694	$	162	$	123	$	—	$	20,979

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

Allowance for loan losses and reserve for unfunded lending commitments

The following table presents changes in the allowance for loan losses of RJ Bank by portfolio segment.



	Loans held for investment
$ in millions	C&I loans			CRE construction loans		CRE loans			Tax-exempt loans			Residential mortgage loans			SBL and other		Total
Three months ended March 31, 2020
Balance at beginning of period	$	139		$	2	$	46		$	8		$	17		$	4	$	216
Provision for loan losses	59			1		42			3			1			3		109
Net (charge-offs)/recoveries:
Charge-offs	—			—		—			—			—			—		—
Recoveries	—			—		—			—			—			—		—
Net (charge-offs)/recoveries	—			—		—			—			—			—		—
Foreign exchange translation adjustment	(1		)	—		—			—			—			—		(1		)
Balance at end of period	$	197		$	3	$	88		$	11		$	18		$	7	$	324

Six months ended March 31, 2020
Balance at beginning of period	$	139		$	3	$	46		$	9		$	16		$	5	$	218
Provision for loan losses	59			—		42			2			2			2		107
Net (charge-offs)/recoveries:
Charge-offs	—			—		—			—			—			—		—
Recoveries	—			—		—			—			—			—		—
Net (charge-offs)/recoveries	—			—		—			—			—			—		—
Foreign exchange translation adjustment	(1		)	—		—			—			—			—		(1		)
Balance at end of period	$	197		$	3	$	88		$	11		$	18		$	7	$	324

Three months ended March 31, 2019
Balance at beginning of period	$	137		$	3	$	46		$	9		$	19		$	5	$	219
Provision/(benefit) for loan losses	6			—		2			(1		)	(2		)	—		5
Net (charge-offs)/recoveries:
Charge-offs	(3		)	—		(3		)	—			—			—		(6		)
Recoveries	—			—		—			—			—			—		—
Net (charge-offs)/recoveries	(3		)	—		(3		)	—			—			—		(6		)
Foreign exchange translation adjustment	—			—		—			—			—			—		—
Balance at end of period	$	140		$	3	$	45		$	8		$	17		$	5	$	218

Six months ended March 31, 2019
Balance at beginning of period	$	123		$	3	$	47		$	9		$	17		$	4	$	203
Provision/(benefit) for loan losses	21			—		1			(1		)	(1		)	1		21
Net (charge-offs)/recoveries:
Charge-offs	(3		)	—		(3		)	—			—			—		(6		)
Recoveries	—			—		—			—			1			—		1
Net (charge-offs)/recoveries	(3		)	—		(3		)	—			1			—		(5		)
Foreign exchange translation adjustment	(1		)	—		—			—			—			—		(1		)
Balance at end of period	$	140		$	3	$	45		$	8		$	17		$	5	$	218

The following table presents, by loan portfolio segment, RJ Bank’s recorded investment (excluding any net unearned income and deferred expenses) and the related allowance for loan losses.



	Loans held for investment
	Allowance for loan losses						Recorded investment
$ in millions	Individually evaluated for impairment		Collectively evaluated for impairment		Total		Individually evaluated for impairment		Collectively evaluated for impairment		Total
March 31, 2020
C&I loans	$	1	$	196	$	197	$	4	$	8,312	$	8,316
CRE construction loans	—		3		3		—		180		180
CRE loans	—		88		88		6		3,824		3,830
Tax-exempt loans	—		11		11		—		1,266		1,266
Residential mortgage loans	1		17		18		25		4,839		4,864
SBL and other	—		7		7		—		3,546		3,546
Total	$	2	$	322	$	324	$	35	$	21,967	$	22,002

September 30, 2019
C&I loans	$	6	$	133	$	139	$	19	$	8,079	$	8,098
CRE construction loans	—		3		3		—		185		185
CRE loans	—		46		46		8		3,644		3,652
Tax-exempt loans	—		9		9		—		1,241		1,241
Residential mortgage loans	1		15		16		28		4,426		4,454
SBL and other	—		5		5		—		3,349		3,349
Total	$	7	$	211	$	218	$	55	$	20,924	$	20,979

The reserve for unfunded lending commitments, which is included in “Other payables” on our Condensed Consolidated Statements of Financial Condition, was $9 million at both March 31, 2020 and September 30, 2019.