Bank Loans and Related Allowance for Loan Losses

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



December 31, 2017	Current		30-59 days past due		60-89 days past due		>90 days past due and other nonaccrual loans ⁽³⁾		Total past due and other nonaccrual loans		Total loans		Allowance for loan losses		Total bank loans - net
First Mortgages ^(1,2)	$	9,983	$	14	$	2	$	17	$	33	$	10,016	$	16	$	10,000
HELOCs ^(1,2)	1,928		—		3		12		15		1,943		8		1,935
Pledged asset lines	4,361		4		4		—		8		4,369		—		4,369
Other	176		—		—		—		—		176		2		174
Total bank loans	$	16,448	$	18	$	9	$	29	$	56	$	16,504	$	26	$	16,478

December 31, 2016
First Mortgages ^(1,2)	$	9,100	$	15	$	3	$	16	$	34	$	9,134	$	17	$	9,117
HELOCs ^(1,2)	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

⁽¹⁾ First Mortgages and HELOCs include unamortized premiums and discounts and direct origination costs of $77 million and $78 million at December 31, 2017 and 2016, respectively.

⁽²⁾ At December 31, 2017 and 2016, 48% of the First Mortgage and HELOC portfolios were concentrated in California. These loans have performed in a manner consistent with the portfolio as a whole.

⁽³⁾ There were no loans accruing interest that were contractually 90 days or more past due at December 31, 2017 or 2016.

Schwab Bank maintains a secured credit facility with the FHLB and loan collateral, including First Mortgages and HELOCs, is pledged at the FHLB in order to secure borrowing capacity. The amount of loan collateral pledged was $11.1 billion at December 31, 2017.

Substantially all of the bank loans were collectively evaluated for impairment at both December 31, 2017 and 2016.

Changes in the allowance for loan losses were as follows:



	December 31, 2017											December 31, 2016											December 31, 2015
	First Mortgages			HELOCs			Other		Total ⁽¹⁾			First Mortgages			HELOCs			Other		Total ⁽¹⁾			First Mortgages			HELOCs			Total ⁽¹⁾
Balance at beginning of year	$	17		$	8		$	1	$	26		$	20		$	11		$	—	$	31		$	29		$	13		$	42
Charge-offs	(2		)	(1		)	—		(3		)	(1		)	(1		)	—		(2		)	(1		)	(2		)	(3		)
Recoveries	1			1			1		3			1			1			—		2			1			2			3
Provision for loan losses	—			—			—		—			(3		)	(3		)	1		(5		)	(9		)	(2		)	(11		)
Balance at end of year	$	16		$	8		$	2	$	26		$	17		$	8		$	1	$	26		$	20		$	11		$	31

⁽¹⁾ All PALs were fully collateralized by securities with fair values in excess of borrowings at December 31, 2017, 2016, and 2015.

A summary of impaired bank loan related assets is as follows:



December 31,	2017		2016
Nonaccrual loans⁽¹⁾	$	28	$	26
Other real estate owned⁽²⁾	3		5
Total nonperforming assets	31		31
Troubled debt restructurings	11		14
Total impaired assets	$	42	$	45

⁽¹⁾ Nonaccrual loans include nonaccrual troubled debt restructurings.

⁽²⁾ Included in Other assets on the consolidated balance sheets.

Credit Quality

In addition to monitoring delinquency, Schwab 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.

Borrowers’ FICO scores are provided by an independent third-party credit reporting service and were last updated in December 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.

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



December 31, 2017	Balance		Weighted Average Updated FICO	Utilization Rate ⁽¹⁾		Percent of Loans that are on Nonaccrual Status
First Mortgages:
Estimated Current LTV
<70%	$	9,046	775	N/A		0.09	%
>70% – <90%	961		769	N/A		0.46	%
>90% – <100%	5		714	N/A		10.49	%
>100%	4		713	N/A		6.23	%
Total	$	10,016	775	N/A		0.14	%
HELOCs:
Estimated Current LTV ⁽²⁾
<70%	$	1,773	772	32	%	0.18	%
>70% – <90%	148		755	47	%	0.84	%
>90% – <100%	14		742	64	%	2.85	%
>100%	8		718	72	%	4.91	%
Total	$	1,943	770	33	%	0.27	%
Pledged asset lines:
Weighted Average LTV ⁽²⁾
= 70%	$	4,369	765	41	%	—
December 31, 2016	Balance		Weighted Average Updated FICO	Utilization Rate ⁽¹⁾		Percent of Loans that are on Nonaccrual Status
First 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	%
HELOCs:
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, 2017	First Mortgages		HELOCs
Year of origination
Pre-2013	$	1,478	$	1,349
2013	1,326		147
2014	530		116
2015	1,218		128
2016	2,886		111
2017	2,578		92
Total	$	10,016	$	1,943
Origination FICO
<620	$	6	$	1
620 – 679	89		10
680 – 739	1,569		365
>740	8,352		1,567
Total	$	10,016	$	1,943
Origination LTV
<70%	$	7,569	$	1,360
>70% – <90%	2,441		574
>90% – <100%	6		9
Total	$	10,016	$	1,943
December 31, 2016	First Mortgages		HELOCs
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

At December 31, 2017, First Mortgage loans of $9.0 billion had adjustable interest rates. Substantially all of these mortgages have initial fixed interest rates for three to ten years and interest rates that adjust annually thereafter. Approximately 33% of the balance of these mortgages consisted of loans with interest-only payment terms. The interest rates on approximately 58% of the balance of these interest-only loans are not scheduled to reset for three or more years. Schwab’s mortgage loans do not include interest terms described as temporary introductory rates below current market rates.

The 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 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:



December 31, 2017	Balance
Converted to amortizing loan by period end	$	437
Within 1 year	559
> 1 year – 3 years	204
> 3 years – 5 years	149
> 5 years	594
Total	$	1,943

At December 31, 2017, $1.5 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, Schwab also monitors credit risk by reviewing the delinquency status of the first lien loan on the associated property. At December 31, 2017, the borrowers on approximately 38% of HELOC loan balances outstanding only paid the minimum amount of interest due.