Bank Loans and Related Allowance for Loan Losses

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



June 30, 2018	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)	$	10,126	$	15	$	2	$	15	$	32	$	10,158	$	17	$	10,141
HELOCs ^(1,2)	1,686		2		1		9		12		1,698		7		1,691
Pledged asset lines	4,558		11		1		—		12		4,570		—		4,570
Other	169		—		—		—		—		169		2		167
Total bank loans	$	16,539	$	28	$	4	$	24	$	56	$	16,595	$	26	$	16,569

December 31, 2017
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

⁽¹⁾First Mortgages and HELOCs include unamortized premiums and discounts and direct origination costs of $74 million and $77 million at June 30, 2018 and December 31, 2017, respectively.

⁽²⁾At June 30, 2018 and December 31, 2017, 47% and 48%, respectively, 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 June 30, 2018 or December 31, 2017.

At June 30, 2018, CSB had pledged $11.1 billion of First Mortgages and HELOCs as collateral to secure borrowing capacity on a secured credit facility with the FHLB (see Note 8).

Substantially all of the bank loans were collectively evaluated for impairment at June 30, 2018 and December 31, 2017.

Changes in the allowance for loan losses were as follows:



Three Months Ended	June 30, 2018											June 30, 2017
	First Mortgages		HELOCs			Other			Total ⁽¹⁾			First Mortgages			HELOCs			Other		Total ⁽¹⁾
Balance at beginning of period	$	17	$	7		$	3		$	27		$	17		$	8		$	1	$	26
Charge-offs	—		—			(1		)	(1		)	(1		)	(1		)	—		(2		)
Recoveries	—		1			—			1			1			1			—		2
Provision for loan losses	—		(1		)	—			(1		)	—			—			—		—
Balance at end of period	$	17	$	7		$	2		$	26		$	17		$	8		$	1	$	26



Six Months Ended	June 30, 2018											June 30, 2017
	First Mortgages		HELOCs			Other			Total ⁽¹⁾			First Mortgages			HELOCs			Other		Total ⁽¹⁾
Balance at beginning of period	$	16	$	8		$	2		$	26		$	17		$	8		$	1	$	26
Charge-offs	—		—			(1		)	(1		)	(1		)	(1		)	—		(2		)
Recoveries	—		1			—			1			1			1			—		2
Provision for loan losses	1		(2		)	1			—			—			—			—		—
Balance at end of period	$	17	$	7		$	2		$	26		$	17		$	8		$	1	$	26

⁽¹⁾All pledged asset lines (PALs) were fully collateralized by securities with fair values in excess of borrowings at June 30, 2018 and December 31, 2017.

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



	June 30, 2018		December 31, 2017
Nonaccrual loans⁽¹⁾	$	24	$	28
Other real estate owned⁽²⁾	2		3
Total nonperforming assets	26		31
Troubled debt restructurings	6		11
Total impaired assets	$	32	$	42

⁽¹⁾ Nonaccrual loans include nonaccrual troubled debt restructurings.

⁽²⁾ Included in other assets on the condensed 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 (LTV) 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 June 2018. 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 Company’s bank loan portfolio are detailed below:



June 30, 2018	Balance		Weighted Average Updated FICO	Utilization Rate ⁽¹⁾		Percent of Loans that are on Nonaccrual Status
First Mortgages:
Estimated Current LTV
<70%	$	9,287	776	N/A		0.06	%
>70% – <90%	865		770	N/A		0.42	%
>90% – <100%	4		696	N/A		8.72	%
>100%	2		729	N/A		10.14	%
Total	$	10,158	776	N/A		0.10	%
HELOCs:
Estimated Current LTV ⁽²⁾
<70%	$	1,580	772	31	%	0.11	%
>70% – <90%	105		754	48	%	1.04	%
>90% – <100%	8		741	72	%	2.39	%
>100%	5		714	76	%	2.03	%
Total	$	1,698	771	31	%	0.19	%
Pledged asset lines:
Weighted-Average LTV ⁽²⁾
=70%	$	4,570	766	38	%	—



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	%	—

⁽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.



June 30, 2018	First Mortgages		HELOCs
Year of origination
Pre-2014	$	2,313	$	1,252
2014	461		99
2015	1,121		113
2016	2,734		101
2017	2,484		101
2018	1,045		32
Total	$	10,158	$	1,698
Origination FICO
<620	$	5	$	—
620 – 679	84		9
680 – 739	1,574		321
>740	8,495		1,368
Total	$	10,158	$	1,698
Origination LTV
<70%	$	7,677	$	1,194
>70% – <90%	2,476		496
>90% – <100%	5		8
Total	$	10,158	$	1,698



December 31, 2017	First Mortgages		HELOCs
Year of origination
Pre-2014	$	2,804	$	1,496
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

At June 30, 2018, First Mortgage loans of $9.2 billion had adjustable interest rates. These mortgages have initial fixed interest rates for three to ten years and interest rates that adjust annually thereafter. Approximately 32% of the balance of these mortgages consisted of loans with interest-only payment terms. The interest rates on approximately 63% 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:



June 30, 2018	Balance
Converted to an amortizing loan by period end	$	537
Within 1 year	342
> 1 year – 3 years	152
> 3 years – 5 years	155
> 5 years	512
Total	$	1,698

At June 30, 2018, $1.4 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 June 30, 2018, the borrowers on approximately 49% of HELOC loan balances outstanding only paid the minimum amount due.