BANK LOANS, NET

9 Months Ended

Jun. 30, 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.


	June 30, 2020						September 30, 2019
$ in millions	Balance		%		Balance		%
Loans held for investment:
C&I loans	$	7,731	36	%	$	8,098	38	%
CRE construction loans	219		1	%	185		1	%
CRE loans	3,695		17	%	3,652		17	%
Tax-exempt loans	1,290		6	%	1,241		6	%
Residential mortgage loans	4,917		23	%	4,454		21	%
SBL and other	3,631		17	%	3,349		16	%
Total loans held for investment	21,483				20,979
Net unearned income and deferred expenses	(12)				(12)
Total loans held for investment, net	21,471				20,967
Loans held for sale, net	86		—		142		1	%
Total loans held for sale and investment	21,557		100	%	21,109		100	%
Allowance for loan losses	(334)				(218)
Bank loans, net	$	21,223			$	20,891

At June 30, 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 $185 million and $1.33 billion of loans held for sale during the three and nine months ended June 30, 2020, respectively, and $522 million and $1.79 billion during the three and nine months ended June 30, 2019, respectively. Proceeds from the sale of these held for sale loans amounted to $130 million and $564 million during the three and nine months ended June 30, 2020, respectively, and $159 million and $516 million during the three and nine months ended June 30, 2019, respectively. Net gains resulting from such sales were insignificant in all periods during the three and nine months ended June 30, 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 June 30, 2020
Purchases	$	—	$	—	$	113	$	113
Sales	$	265	$	27	$	—	$	292
Nine months ended June 30, 2020
Purchases	$	363	$	5	$	371	$	739
Sales	$	285	$	27	$	—	$	312
Three months ended June 30, 2019
Purchases	$	247	$	10	$	132	$	389
Sales	$	7	$	—	$	—	$	7
Nine months ended June 30, 2019
Purchases	$	937	$	35	$	254	$	1,226
Sales	$	100	$	—	$	—	$	100

Sales in the preceding table represent the recorded investment (i.e., net of charge-offs and discounts or premiums) 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
June 30, 2020
C&I loans	$	—	$	—	$	—	$	1	$	7,730	$	7,731
CRE construction loans	—		—		—		—		219		219
CRE loans	—		—		—		6		3,689		3,695
Tax-exempt loans	—		—		—		—		1,290		1,290
Residential mortgage loans:
First mortgage loans	4		—		4		14		4,875		4,893
Home equity loans/lines	—		—		—		—		24		24
SBL and other	—		—		—		—		3,631		3,631
Total loans held for investment	$	4	$	—	$	4	$	21	$	21,458	$	21,483

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 $6 million and $32 million at June 30, 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 $2 million and $3 million at June 30, 2020 and September 30, 2019, respectively. The recorded investment in mortgage loans secured by one-to-four family residential properties for which formal foreclosure proceedings were in process was $6 million and $7 million at June 30, 2020 and September 30, 2019, respectively.

Impaired loans and troubled debt restructurings

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


	June 30, 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	$	1	$	1	$	1	$	19	$	20	$	6


Residential - first mortgage loans	8		10		1		11		13		1

Total	9		11		2		30		33		7
Impaired loans without allowance for loan losses:

CRE loans	7		12		—		8		13		—

Residential - first mortgage loans	11		16		—		11		17		—
Total	18		28		—		19		30		—
Total impaired loans	$	27	$	39	$	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 $6 million and $16 million, respectively, at June 30, 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 June 30,						Nine months ended June 30,
$ in millions	2020		2019		2020		2019
C&I loans	$	2	$	26	$	10	$	19
CRE loans	6		10		7		4

Residential - first mortgage loans	19		24		20		25

Total average impaired loan balance	$	27	$	60	$	37	$	48

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
June 30, 2020
C&I loans	$	7,384	$	281	$	66	$	—	$	7,731
CRE construction loans	219		—		—		—		219
CRE loans	3,341		262		92		—		3,695
Tax-exempt loans	1,290		—		—		—		1,290
Residential mortgage loans:
First mortgage loans	4,861		9		23		—		4,893
Home equity loans/lines	24		—		—		—		24
SBL and other	3,631		—		—		—		3,631
Total loans held for investment	$	20,750	$	552	$	181	$	—	$	21,483

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 June 30, 2020
Balance at beginning of period	$	197	$	3	$	88	$	11	$	18	$	7	$	324
Provision/(benefit) for loan losses	59		1		20		2		1		(2)		81
Net (charge-offs)/recoveries:
Charge-offs ⁽¹⁾	(71)		—		(2)		—		—		—		(73)
Recoveries	—		—		—		—		1		—		1
Net (charge-offs)/recoveries	(71)		—		(2)		—		1		—		(72)
Foreign exchange translation adjustment	1		—		—		—		—		—		1
Balance at end of period	$	186	$	4	$	106	$	13	$	20	$	5	$	334

Nine months ended June 30, 2020
Balance at beginning of period	$	139	$	3	$	46	$	9	$	16	$	5	$	218
Provision for loan losses	118		1		62		4		3		—		188
Net (charge-offs)/recoveries:
Charge-offs ⁽¹⁾	(71)		—		(2)		—		—		—		(73)
Recoveries	—		—		—		—		1		—		1
Net (charge-offs)/recoveries	(71)		—		(2)		—		1		—		(72)
Foreign exchange translation adjustment	—		—		—		—		—		—		—
Balance at end of period	$	186	$	4	$	106	$	13	$	20	$	5	$	334

Three months ended June 30, 2019
Balance at beginning of period	$	140	$	3	$	45	$	8	$	17	$	5	$	218
Provision/(benefit) for loan losses	(8)		1		1		1		(1)		1		(5)
Net (charge-offs)/recoveries:
Charge-offs ⁽¹⁾	—		—		—		—		—		—		—
Recoveries	1		—		—		—		—		—		1
Net recoveries	1		—		—		—		—		—		1
Foreign exchange translation adjustment	1		—		—		—		—		—		1
Balance at end of period	$	134	$	4	$	46	$	9	$	16	$	6	$	215

Nine months ended June 30, 2019
Balance at beginning of period	$	123	$	3	$	47	$	9	$	17	$	4	$	203
Provision/(benefit) for loan losses	13		1		2		—		(2)		2		16
Net (charge-offs)/recoveries:
Charge-offs ⁽¹⁾	(3)		—		(3)		—		—		—		(6)
Recoveries	1		—		—		—		1		—		2
Net (charge-offs)/recoveries	(2)		—		(3)		—		1		—		(4)
Foreign exchange translation adjustment	—		—		—		—		—		—		—
Balance at end of period	$	134	$	4	$	46	$	9	$	16	$	6	$	215

(1) Charge-offs related to loan sales amounted $61 million for both the three and nine months ended June 30, 2020 and $2 million for the nine months ended June 30, 2019.

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
June 30, 2020
C&I loans	$	1	$	185	$	186	$	1	$	7,730	$	7,731
CRE construction loans	—		4		4		—		219		219
CRE loans	—		106		106		6		3,689		3,695
Tax-exempt loans	—		13		13		—		1,290		1,290
Residential mortgage loans	1		19		20		25		4,892		4,917
SBL and other	—		5		5		—		3,631		3,631
Total	$	2	$	332	$	334	$	32	$	21,451	$	21,483

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 $11 million and $9 million at June 30, 2020 and September 30, 2019, respectively.