Note 9.

Loans Receivable

Loans receivable is comprised of loans held for investment that are accounted for at amortized cost net of allowance for loan losses. Interest on loans receivable is recognized over the life of the loan and is recorded on an accrual basis.

The table below presents details about loans receivable.


	As of
$ in millions		March 2017		December 2016
Corporate loans		$25,151		$24,837

Loans to private wealth management clients		13,156		13,828

Loans backed by commercial real estate		5,011		4,761

Loans backed by residential real estate		3,867		3,865

Other loans		3,742		2,890
Total loans receivable, gross		50,927		50,181

Allowance for loan losses		(542	)	(509	)
Total loans receivable		$50,385		$49,672

As of March 2017 and December 2016, the fair value of loans receivable was $50.65 billion and $49.80 billion, respectively. As of March 2017, had these loans been carried at fair value and included in the fair value hierarchy, $28.42 billion and $22.23 billion would have been classified in level 2 and level 3, respectively. As of December 2016, had these loans been carried at fair value and included in the fair value hierarchy, $28.40 billion and $21.40 billion would have been classified in level 2 and level 3, respectively.

The firm also extends lending commitments that are held for investment and accounted for on an accrual basis. As of March 2017 and December 2016, such lending commitments were $100.79 billion and $98.05 billion, respectively. Substantially all of these commitments were extended to corporate borrowers and were primarily related to the firm’s relationship lending activities. The carrying value and the estimated fair value of such lending commitments were liabilities of $363 million and $2.34 billion, respectively, as of March 2017, and $327 million and $2.55 billion, respectively, as of December 2016. As of March 2017, had these lending commitments been carried at fair value and included in the fair value hierarchy, $871 million and $1.47 billion would have been classified in level 2 and level 3, respectively. As of December 2016, had these lending commitments been carried at fair value and included in the fair value hierarchy, $1.10 billion and $1.45 billion would have been classified in level 2 and level 3, respectively.

The following is a description of the captions in the table above:

•

Corporate Loans. Corporate loans include term loans, revolving lines of credit, letter of credit facilities and bridge loans, and are principally used for operating liquidity and general corporate purposes, or in connection with acquisitions. Corporate loans may be secured or unsecured, depending on the loan purpose, the risk profile of the borrower and other factors. Loans receivable related to the firm’s relationship lending activities are reported within corporate loans.

•

Loans to Private Wealth Management Clients. Loans to the firm’s private wealth management clients include loans used by clients to finance private asset purchases, employ leverage for strategic investments in real or financial assets, bridge cash flow timing gaps or provide liquidity for other needs. Such loans are primarily secured by securities or other assets.

•

Loans Backed by Commercial Real Estate. Loans backed by commercial real estate include loans extended by the firm that are directly or indirectly secured by hotels, retail stores, multifamily housing complexes and commercial and industrial properties. Loans backed by commercial real estate also include loans purchased by the firm.

•

Loans Backed by Residential Real Estate. Loans backed by residential real estate include loans extended by the firm to clients who warehouse assets that are directly or indirectly secured by residential real estate. Loans backed by residential real estate also include loans purchased by the firm.

•

Other Loans. Other loans primarily include loans extended to clients who warehouse assets that are directly or indirectly secured by consumer loans, including auto loans, and private student loans and other assets. Other loans also includes unsecured loans to individuals made through the firm’s online platform.

Loans receivable includes Purchased Credit Impaired (PCI) loans. PCI loans represent acquired loans or pools of loans with evidence of credit deterioration subsequent to their origination and where it is probable, at acquisition, that the firm will not be able to collect all contractually required payments. Loans acquired within the same reporting period, which have at least two common risk characteristics, one of which relates to their credit risk, are eligible to be pooled together and considered a single unit of account. PCI loans are initially recorded at acquisition price and the difference between the acquisition price and the expected cash flows (accretable yield) is recognized as interest income over the life of such loans or pools of loans on an effective yield method. Expected cash flows on PCI loans are determined using various inputs and assumptions, including default rates, loss severities, recoveries, amount and timing of prepayments and other macroeconomic indicators.

As of March 2017, the gross carrying value of PCI loans was $4.03 billion (including $1.40 billion, $2.61 billion and $16 million related to loans backed by commercial real estate, loans backed by residential real estate and other consumer loans, respectively). The outstanding principal balance and accretable yield related to such loans was $8.57 billion and $552 million, respectively, as of March 2017. At the time of acquisition, the fair value, related expected cash flows, and the contractually required cash flows of PCI loans acquired during the three months ended March 2017 were $262 million, $296 million and $632 million, respectively. As of December 2016, the gross carrying value of PCI loans was $3.97 billion (including $1.44 billion, $2.51 billion and $18 million related to loans backed by commercial real estate, loans backed by residential real estate and other consumer loans, respectively). The outstanding principal balance and accretable yield related to such loans was $8.52 billion and $526 million, respectively, as of December 2016. At the time of acquisition, the fair value, related expected cash flows, and the contractually required cash flows of PCI loans acquired during the three months ended March 2016 were $214 million, $253 million and $526 million, respectively.

Credit Quality

The firm’s risk assessment process includes evaluating the credit quality of its loans receivable. For loans receivable (excluding PCI loans), the firm performs credit reviews which include initial and ongoing analyses of its borrowers. A credit review is an independent analysis of the capacity and willingness of a borrower to meet its financial obligations, resulting in an internal credit rating. The determination of internal credit ratings also incorporates assumptions with respect to the nature of and outlook for the borrower’s industry, and the economic environment. The firm also assigns a regulatory risk rating to such loans based on the definitions provided by the U.S. federal bank regulatory agencies.

The table below presents gross loans receivable (excluding PCI loans of $4.03 billion and $3.97 billion as of March 2017 and December 2016, respectively, which are not assigned a credit rating equivalent) and related lending commitments by the firm’s internally determined public rating agency equivalent and by regulatory risk rating.

$ in millions

Loans

Lending

Commitments

Total

Credit Rating Equivalent

As of March 2017

Investment-grade

$18,667

$ 72,777

$ 91,444

Non-investment-grade

28,236

28,017

56,253

Total

$46,903

$100,794

$147,697

As of December 2016

Investment-grade

$18,434

$ 72,323

$ 90,757

Non-investment-grade

27,777

25,722

53,499

Total

$46,211

$ 98,045

$144,256

Regulatory Risk Rating

As of March 2017

Non-criticized/pass

$43,600

$ 97,205

$140,805

Criticized

3,303

3,589

6,892

Total

$46,903

$100,794

$147,697

As of December 2016

Non-criticized/pass

$43,146

$ 94,966

$138,112

Criticized

3,065

3,079

6,144

Total

$46,211

$ 98,045

$144,256

In the table above, non-criticized/pass loans and lending commitments represent loans and lending commitments that are performing and/or do not demonstrate adverse characteristics that are likely to result in a credit loss.

The firm enters into economic hedges to mitigate credit risk on certain loans receivable and commercial lending commitments (both of which are held for investment) related to the firm’s relationship lending activities. Such hedges are accounted for at fair value. See Note 18 for further information about commercial lending commitments and associated hedges.

Loans receivable (excluding PCI loans) are determined to be impaired when it is probable that the firm will not be able to collect all principal and interest due under the contractual terms of the loan. At that time, loans are generally placed on non-accrual status and all accrued but uncollected interest is reversed against interest income, and interest subsequently collected is recognized on a cash basis to the extent the loan balance is deemed collectible. Otherwise, all cash received is used to reduce the outstanding loan balance. In certain circumstances, the firm may also modify the original terms of a loan agreement by granting a concession to a borrower experiencing financial difficulty. Such modifications are considered troubled debt restructurings and typically include interest rate reductions, payment extensions, and modification of loan covenants. Loans modified in a troubled debt restructuring are considered impaired and are subject to specific loan-level reserves.

As of March 2017 and December 2016, the gross carrying value of impaired loans receivable (excluding PCI loans) on non-accrual status was $630 million and $404 million, respectively. As of March 2017 and December 2016, such loans included $176 million and $142 million, respectively, of corporate loans that were modified in a troubled debt restructuring. The firm’s lending commitments related to these loans were $156 million and $144 million, as of March 2017 and December 2016, respectively.

For PCI loans, the firm’s risk assessment process includes reviewing certain key metrics, such as delinquency status, collateral values, credit scores and other risk factors. When it is determined that the firm cannot reasonably estimate expected cash flows on the PCI loans or pools of loans, such loans are placed on non-accrual status.


Allowance for Losses on Loans and Lending Commitments

The firm’s allowance for loan losses is comprised of specific loan-level reserves, portfolio level reserves, and reserves on PCI loans as described below:

•

Specific loan-level reserves are determined on loans (excluding PCI loans) that exhibit credit quality weakness and are therefore individually evaluated for impairment.

•

Portfolio level reserves are determined on loans (excluding PCI loans) not deemed impaired by aggregating groups of loans with similar risk characteristics and estimating the probable loss inherent in the portfolio.

•

Reserves on PCI loans are recorded when it is determined that the expected cash flows, which are reassessed on a quarterly basis, will be lower than those used to establish the current effective yield for such loans or pools of loans. If the expected cash flows are determined to be significantly higher than those used to establish the current effective yield, such increases are initially recognized as a reduction to any previously recorded allowances for loan losses and any remaining increases are recognized as interest income prospectively over the life of the loan or pools of loans as an increase to the effective yield.

The allowance for loan losses is determined using various inputs, including industry default and loss data, current macroeconomic indicators, borrower’s capacity to meet its financial obligations, borrower’s country of risk, loan seniority and collateral type. Management’s estimate of loan losses entails judgment about loan collectability at the reporting dates, and there are uncertainties inherent in those judgments. While management uses the best information available to determine this estimate, future adjustments to the allowance may be necessary based on, among other things, changes in the economic environment or variances between actual results and the original assumptions used. Loans are charged off against the allowance for loan losses when deemed to be uncollectible. As of March 2017 and December 2016, substantially all of the firm’s loans receivable were evaluated for impairment at the portfolio level.

The firm also records an allowance for losses on lending commitments that are held for investment and accounted for on an accrual basis. Such allowance is determined using the same methodology as the allowance for loan losses, while also taking into consideration the probability of drawdowns or funding, and is included in “Other liabilities and accrued expenses.” As of March 2017 and December 2016, substantially all of such lending commitments were evaluated for impairment at the portfolio level.

The table below presents changes in the allowance for loan losses and the allowance for losses on lending commitments.


$ in millions	Three Months Ended March 2017		Year Ended December 2016
Allowance for loan losses
Beginning balance	$509		$414

Charge-offs	(11	)	(8	)

Provision	52		138

Other	(8	)	(35	)
Ending balance	$542		$509
Allowance for losses on lending commitments
Beginning balance	$212		$188

Provision	36		44

Other	—		(20	)
Ending balance	$248		$212

In the table above:

•

The provision for losses on loans and lending commitments is included in “Other principal transactions,” and was primarily related to corporate loans and corporate lending commitments.

•

Other represents the reduction to the allowance related to loans and lending commitments transferred to held for sale.

•

As of March 2017 and December 2016, substantially all of the allowance for loan losses and allowance for losses on lending commitments were related to corporate loans and corporate lending commitments and were primarily determined at the portfolio level.

•

The firm’s allowance for losses on PCI loans as of March 2017 and December 2016 was not material.