Bank Loans and Related Allowance for Loan Losses

The composition of bank loans and delinquency analysis by loan type is as follows:



September 30, 2017	Current		30-59 days past due		60-89 days past due		>90 days past due and other nonaccrual loans		Total past due and other nonaccrual loans		Total loans		Allowance for loan losses		Total bank loans - net
Residential real estate mortgages	$	9,773	$	11	$	2	$	16	$	29	$	9,802	$	16	$	9,786
Home equity loans and lines of credit	2,027		4		1		10		15		2,042		8		2,034
Pledged asset lines	4,278		1		—		—		1		4,279		—		4,279
Other	135		—		—		—		—		135		2		133
Total bank loans	$	16,213	$	16	$	3	$	26	$	45	$	16,258	$	26	$	16,232

December 31, 2016
Residential real estate mortgages	$	9,100	$	15	$	3	$	16	$	34	$	9,134	$	17	$	9,117
Home equity loans and lines of credit	2,336		2		2		10		14		2,350		8		2,342
Pledged asset lines	3,846		4		1		—		5		3,851		—		3,851
Other	94		—		—		—		—		94		1		93
Total bank loans	$	15,376	$	21	$	6	$	26	$	53	$	15,429	$	26	$	15,403

Residential real estate mortgages (First Mortgages) and home equity loans and lines of credit (HELOCs) include unamortized premiums and discounts and direct origination costs of $77 million and $78 million at September 30, 2017 and December 31, 2016, respectively. The Company had commitments to extend credit related to unused HELOCs, pledged asset lines (PALs), and other lines of credit, which totaled $9.6 billion and $8.4 billion at September 30, 2017 and December 31, 2016, respectively. The Company had commitments to purchase First Mortgage loans of $459 million and $466 million at September 30, 2017 and December 31, 2016, respectively. All PALs were fully collateralized by securities with fair values in excess of borrowings at September 30, 2017 and December 31, 2016.

Schwab Bank provides a co-branded loan origination program for Schwab Bank clients (the Program) with Quicken Loans, Inc. (Quicken Loans^®). Pursuant to the Program, Quicken Loans originates and services First Mortgages and HELOCs for Schwab Bank clients. Under the Program, Schwab Bank purchases certain First Mortgages and HELOCs that are originated by Quicken Loans. Schwab Bank purchased First Mortgages of $696 million and $858 million during the third quarters of 2017 and 2016, respectively, and $2.0 billion and $2.1 billion during the first nine months of 2017 and 2016, respectively. Schwab Bank purchased HELOCs with commitments of $115 million and $93 million during the third quarters of 2017 and 2016, respectively, and $344 million and $315 million during the first nine months of 2017 and 2016, respectively.

Credit Quality

Changes in the allowance for loan losses were as follows:



Three Months Ended	September 30, 2017										September 30, 2016
	Residential real estate mortgages			Home equity loans and lines of credit		Other		Total			Residential real estate mortgages			Home equity loans and lines of credit		Other		Total
Balance at beginning of period	$	17		$	8	$	1	$	26		$	20		$	10	$	1	$	31
Charge-offs	(1		)	—		—		(1		)	—			—		—		—
Recoveries	—			—		1		1			—			—		—		—
Provision for loan losses	—			—		—		—			(5		)	—		—		(5		)
Balance at end of period	$	16		$	8	$	2	$	26		$	15		$	10	$	1	$	26



Nine Months Ended	September 30, 2017											September 30, 2016
	Residential real estate mortgages			Home equity loans and lines of credit			Other		Total			Residential real estate mortgages			Home equity loans and lines of credit			Other		Total
Balance at beginning of period	$	17		$	8		$	1	$	26		$	20		$	11		$	—	$	31
Charge-offs	(2		)	(1		)	—		(3		)	(1		)	—			—		(1		)
Recoveries	1			1			1		3			1			—			—		1
Provision for loan losses	—			—			—		—			(5		)	(1		)	1		(5		)
Balance at end of period	$	16		$	8		$	2	$	26		$	15		$	10		$	1	$	26

Substantially all of the bank loans were collectively evaluated for impairment at September 30, 2017 and December 31, 2016. There were no loans accruing interest that were contractually 90 days or more past due at September 30, 2017 or December 31, 2016. Nonperforming assets, which include nonaccrual loans and other real estate owned, totaled $29 million and $31 million at September 30, 2017 and December 31, 2016, respectively. Impaired assets, which include nonaccrual loans, other real estate owned and troubled debt restructurings, totaled $38 million and $45 million at September 30, 2017 and December 31, 2016, respectively. Troubled debt restructurings were not material at September 30, 2017 or December 31, 2016.

In addition to monitoring delinquency, the Company monitors the credit quality of First Mortgages and HELOCs by stratifying the portfolios by the following:


•	Year of origination;


•	Borrower FICO scores at origination (Origination FICO);


•	Updated borrower FICO scores (Updated FICO);


•	Loan-to-value ratios at origination (Origination LTV); and


•	Estimated current LTV ratios (Estimated Current LTV).

Borrowers’ FICO scores are provided by an independent third-party credit reporting service and were last updated in September 2017. The Origination LTV and Estimated Current LTV for a HELOC include any first lien mortgage outstanding on the same property at the time of the HELOC’s origination. The Estimated Current LTV for each loan is estimated by reference to a home price appreciation index.

As of September 30, 2017 and December 31, 2016, 47% and 48% of the Company’s HELOC and First Mortgage portfolio was concentrated in California. These loans have performed in a manner consistent with the portfolio as a whole.

The credit quality indicators of the Company’s bank loan portfolio are detailed below:



September 30, 2017	Balance		Weighted Average Updated FICO	Utilization Rate ⁽¹⁾		Percent of Loans on Nonaccrual Status
Residential real estate mortgages:
Estimated Current LTV
<70%	$	8,896	776	N/A		0.05	%
>70% – <90%	893		768	N/A		0.47	%
>90% – <100%	8		720	N/A		4.60	%
>100%	5		724	N/A		—
Total	$	9,802	776	N/A		0.09	%
Home equity loans and lines of credit:
Estimated Current LTV ⁽²⁾
<70%	$	1,855	772	33	%	0.16	%
>70% – <90%	160		757	49	%	0.46	%
>90% – <100%	17		747	74	%	2.08	%
>100%	10		718	74	%	2.12	%
Total	$	2,042	770	34	%	0.21	%
Pledged asset lines:
Weighted-Average LTV ⁽²⁾
=70%	$	4,279	767	42	%	—

⁽¹⁾The Utilization Rate is calculated using the outstanding balance divided by the associated total line of credit.

⁽²⁾Represents the LTV for the full line of credit (drawn and undrawn).

N/A Not applicable.



September 30, 2017	Residential real estate mortgages		Home equity loans and lines of credit
Year of origination
Pre-2013	$	1,639	$	1,448
2013	1,437		158
2014	569		126
2015	1,280		134
2016	2,967		107
2017	1,910		69
Total	$	9,802	$	2,042
Origination FICO
<620	$	7	$	1
620 – 679	85		10
680 – 739	1,533		377
>740	8,177		1,654
Total	$	9,802	$	2,042
Origination LTV
<70%	$	7,395	$	1,423
>70% – <90%	2,400		608
>90% – <100%	7		11
Total	$	9,802	$	2,042



December 31, 2016	Balance		Weighted Average Updated FICO	Utilization Rate ⁽¹⁾		Percent of Loans on Nonaccrual Status
Residential real estate mortgages:
Estimated Current LTV
<70%	$	8,350	774	N/A		0.04	%
>70% – <90%	743		768	N/A		0.35	%
>90% – <100%	21		747	N/A		2.08	%
>100%	20		709	N/A		14.50	%
Total	$	9,134	773	N/A		0.10	%
Home equity loans and lines of credit:
Estimated Current LTV ⁽²⁾
<70%	$	2,070	771	35	%	0.12	%
>70% – <90%	234		757	50	%	0.40	%
>90% – <100%	29		747	66	%	1.74	%
>100%	17		728	70	%	3.73	%
Total	$	2,350	769	36	%	0.20	%
Pledged asset lines:
Weighted-Average LTV ⁽²⁾
=70%	$	3,851	763	46	%	—

⁽¹⁾The Utilization Rate is calculated using the outstanding balance divided by the associated total line of credit.

⁽²⁾Represents the LTV for the full line of credit (drawn and undrawn).

N/A Not applicable.



December 31, 2016	Residential real estate mortgages		Home equity loans and lines of credit
Year of origination
Pre-2013	$	2,136	$	1,765
2013	1,746		193
2014	685		152
2015	1,458		146
2016	3,109		94
Total	$	9,134	$	2,350
Origination FICO
<620	$	8	$	—
620 – 679	92		13
680 – 739	1,427		432
>740	7,607		1,905
Total	$	9,134	$	2,350
Origination LTV
<70%	$	6,865	$	1,628
>70% – <90%	2,260		709
>90% – <100%	9		13
Total	$	9,134	$	2,350

The Company’s bank loans include $8.8 billion of adjustable rate First Mortgage loans at September 30, 2017. The Company’s adjustable rate mortgages have initial fixed interest rates for three to ten years and interest rates that adjust annually thereafter. Approximately 34% of these mortgages consisted of loans with interest-only payment terms. The interest rates on approximately 56% of these interest-only loans are not scheduled to reset for three or more years. The Company’s mortgage loans do not include interest terms described as temporary introductory rates below current market rates.

The Company’s HELOC product has a 30-year loan term with an initial draw period of ten years from the date of origination. After the initial draw period, the balance outstanding at such time is converted to a 20-year amortizing loan. The interest rate during the initial draw period and the 20-year amortizing period is a floating rate based on the prime rate plus a margin. HELOCs that convert to an amortizing loan may experience higher delinquencies and higher loss rates than those in the initial draw period. The Company’s allowance for loan loss methodology takes this increased inherent risk into consideration.

The following table presents when current outstanding HELOCs will convert to amortizing loans:



September 30, 2017	Balance
Converted to an amortizing loan by period end	$	447
Within 1 year	475
> 1 year – 3 years	346
> 3 years – 5 years	148
> 5 years	626
Total	$	2,042

At September 30, 2017, $1.6 billion of the HELOC portfolio was secured by second liens on the associated properties. Second lien mortgage loans typically possess a higher degree of credit risk given the subordination to the first lien holder in the event of default. In addition to the credit monitoring activities described previously, the Company also monitors credit risk by reviewing the delinquency status of the first lien loan on the associated property. At September 30, 2017, approximately 39% of the HELOC borrowers that had a balance only paid the minimum amount of interest due.