Bank Loans and Related Allowance for Credit Losses

3 Months Ended

Mar. 31, 2020

Receivables [Abstract]

Bank Loans and Related Allowance for Credit Losses

Bank Loans and Related Allowance for Credit Losses

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

March 31, 2020	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 credit losses		Total bank loans – net
First Mortgages (1,2)	$	12,751	$	32	$	3	$	12	$	47	$	12,798	$	21	$	12,777
HELOCs (1,2)	1,055		2		1		9		12		1,067		4		1,063
Pledged asset lines	5,458		6		3		—		9		5,467		—		5,467
Other	216		—		—		2		2		218		4		214
Total bank loans	$	19,480	$	40	$	7	$	23	$	70	$	19,550	$	29	$	19,521
December 31, 2019
First Mortgages (1,2)	$	11,665	$	24	$	4	$	11	$	39	$	11,704	$	11	$	11,693
HELOCs (1,2)	1,105		2		1		9		12		1,117		4		1,113
Pledged asset lines	5,202		4		—		—		4		5,206		—		5,206
Other	201		—		—		2		2		203		3		200
Total bank loans	$	18,173	$	30	$	5	$	22	$	57	$	18,230	$	18	$	18,212

⁽¹⁾ First Mortgages and HELOCs include unamortized premiums and discounts and direct origination costs of $77 million and $74 million at March 31, 2020 and December 31, 2019, respectively.

⁽²⁾ At March 31, 2020 and December 31, 2019, 45% 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 March 31, 2020 or December 31, 2019.

At March 31, 2020, CSB had pledged $11.9 billion of First Mortgages and HELOCs as collateral to secure borrowing capacity on a secured credit facility with the FHLB (see Note 8).

Changes in the allowance for credit losses on bank loans were as follows:

	March 31, 2020								March 31, 2019
Three Months Ended	First Mortgages		HELOCs		Other		Total (1)		First Mortgages		HELOCs			Other		Total (1)
Balance at beginning of period	$	11	$	4	$	3	$	18	$	14	$	5		$	2	$	21
Adoption of ASU 2016-13	1		—		—		1		—		—			—		—
Charge-offs	—		—		—		—		—		—			—		—
Recoveries	—		—		—		—		—		1			—		1
Provision for credit losses	9		—		1		10		—		(1		)	—		(1		)
Balance at end of period	$	21	$	4	$	4	$	29	$	14	$	5		$	2	$	21

Note:    Substantially all of the bank loans were collectively evaluated for impairment at December 31, 2019.

⁽¹⁾ All PALs were fully collateralized by securities with fair values in excess of borrowings as of each period presented.

While credit quality metrics and overall performance of the bank loans portfolio remain strong, a higher estimate of expected losses on First Mortgages in the first quarter of 2020 reflects management’s recognition of rapidly deteriorating economic conditions related to the impact of the COVID-19 pandemic and measures introduced by the federal, state, and local authorities to combat it. Management’s reasonable and supportable forecast period is 2020-2021 and includes a sharp increase in the unemployment rate in the second quarter of 2020 and a moderate decline in home prices through the remainder of 2020, with reversion to long-term trends after 2021.

A summary of bank loan-related nonperforming assets and troubled debt restructurings is as follows:

	March 31, 2020		December 31, 2019
Nonaccrual loans (1)	$	23	$	22
Other real estate owned (2)	1		1
Total nonperforming assets	24		23
Troubled debt restructurings	2		2
Total nonperforming assets and troubled debt restructurings	$	26	$	25

⁽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 updated quarterly. 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 updated on a monthly basis by reference to a home price appreciation index.

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

	First Mortgages Amortized Cost Basis by Origination Year
March 31, 2020	2020			2019			2018			2017			2016			pre-2016			Total First Mortgages			Revolving HELOCs amortized cost basis			HELOCs converted to term loans			Total HELOCs
Origination FICO
<620	$	—		$	—		$	—		$	—		$	—		$	3		$	3		$	—		$	—		$	—
620 – 679	11			14			6			14			19			20			84			2			4			6
680 – 739	222			480			193			278			271			369			1,813			108			100			208
≥740	1,719			3,498			886			1,447			1,689			1,659			10,898			482			371			853
Total	$	1,952		$	3,992		$	1,085		$	1,739		$	1,979		$	2,051		$	12,798		$	592		$	475		$	1,067
Origination LTV
≤70%	$	1,578		$	3,120		$	771		$	1,290		$	1,669		$	1,453		$	9,881		$	432		$	331		$	763
>70% – ≤90%	374			872			314			449			310			594			2,913			160			139			299
>90% – ≤100%	—			—			—			—			—			4			4			—			5			5
Total	$	1,952		$	3,992		$	1,085		$	1,739		$	1,979		$	2,051		$	12,798		$	592		$	475		$	1,067
Weighted Average Updated FICO
<620	$	4		$	5		$	3		$	5		$	4		$	24		$	45		$	5		$	14		$	19
620 – 679	14			49			23			23			21			54			184			14			21			35
680 – 739	192			385			135			184			177			264			1,337			84			75			159
≥740	1,742			3,553			924			1,527			1,777			1,709			11,232			489			365			854
Total	$	1,952		$	3,992		$	1,085		$	1,739		$	1,979		$	2,051		$	12,798		$	592		$	475		$	1,067
Estimated Current LTV (1)
≤70%	$	1,578		$	3,168		$	884		$	1,646		$	1,956		$	2,026		$	11,258		$	558		$	450		$	1,008
>70% – ≤90%	374			824			199			93			23			22			1,535			34			20			54
>90% – ≤100%	—			—			2			—			—			2			4			—			3			3
>100%	—			—			—			—			—			1			1			—			2			2
Total	$	1,952		$	3,992		$	1,085		$	1,739		$	1,979		$	2,051		$	12,798		$	592		$	475		$	1,067
Percent of Loans on Nonaccrual Status	0.03		%	0.03		%	0.03		%	0.05		%	0.08		%	0.34		%	0.09		%	0.14		%	1.69		%	0.84		%

⁽¹⁾ Represents the LTV for the full line of credit (drawn and undrawn) for revolving HELOCs.

March 31, 2020	Balance		Weighted Average Updated FICO	Percent of Loans on Nonaccrual Status
Pledged Asset Lines
Weighted-Average LTV (1)
=70%	$	5,467	769	—

⁽¹⁾ Represents the LTV for the full line of credit (drawn and undrawn).

	First Mortgages Amortized Cost Basis by Origination Year
December 31, 2019	2019			2018			2017			2016			pre-2016			Total First Mortgages			Revolving HELOCs amortized cost basis			HELOCs converted to term loans			Total HELOCs
Origination FICO
<620	$	—		$	—		$	—		$	—		$	3		$	3		$	—		$	—		$	—
620 – 679	12			6			14			20			25			77			1			4			5
680 – 739	478			220			304			290			421			1,713			114			105			219
≥740	3,512			1,058			1,593			1,839			1,909			9,911			496			397			893
Total	$	4,002		$	1,284		$	1,911		$	2,149		$	2,358		$	11,704		$	611		$	506		$	1,117
Origination LTV
≤70%	$	3,104		$	906		$	1,427		$	1,812		$	1,679		$	8,928		$	444		$	354		$	798
>70% – ≤90%	898			378			484			337			676			2,773			167			147			314
>90% – ≤100%	—			—			—			—			3			3			—			5			5
Total	$	4,002		$	1,284		$	1,911		$	2,149		$	2,358		$	11,704		$	611		$	506		$	1,117
Weighted Average Updated FICO
<620	$	5		$	4		$	5		$	3		$	25		$	42		$	6		$	15		$	21
620 – 679	45			36			32			26			68			207			18			22			40
680 – 739	474			153			213			199			307			1,346			92			80			172
≥740	3,478			1,091			1,661			1,921			1,958			10,109			495			389			884
Total	$	4,002		$	1,284		$	1,911		$	2,149		$	2,358		$	11,704		$	611		$	506		$	1,117
Estimated Current LTV (1)
≤70%	$	3,125		$	1,018		$	1,790		$	2,119		$	2,330		$	10,382		$	578		$	478		$	1,056
>70% – ≤90%	877			265			121			30			27			1,320			33			23			56
>90% – ≤100%	—			1			—			—			1			2			—			3			3
>100%	—			—			—			—			—			—			—			2			2
Total	$	4,002		$	1,284		$	1,911		$	2,149		$	2,358		$	11,704		$	611		$	506		$	1,117
Percent of Loans on Nonaccrual Status	0.04		%	0.04		%	0.04		%	0.08		%	0.25		%	0.09		%	0.19		%	1.57		%	0.83		%

⁽¹⁾ Represents the LTV for the full line of credit (drawn and undrawn) for revolving HELOCs.

December 31, 2019	Balance		Weighted Average Updated FICO	Percent of Loans on Nonaccrual Status
Pledged Asset Lines
Weighted-Average LTV (1)
=70%	$	5,206	766	—

⁽¹⁾ Represents the LTV for the full line of credit (drawn and undrawn).

At March 31, 2020, First Mortgage loans of $11.4 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 25% of the balance of these mortgages consisted of loans with interest-only payment terms. The interest rates on approximately 72% 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.

At March 31, 2020 and December 31, 2019, Schwab had $46 million of accrued interest on bank loans, which is excluded from the amortized cost basis of bank loans and included in other assets on the condensed consolidated balance sheets.

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.

The following table presents HELOCs converted to amortizing loans during each period presented:

Three Months Ended	March 31, 2020		March 31, 2019
HELOCs converted to amortizing loans	$	11	$	25

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

March 31, 2020	Balance
Converted to an amortizing loan by period end	$	475
Within 1 year	43
> 1 year – 3 years	83
> 3 years – 5 years	138
> 5 years	328
Total	$	1,067

At March 31, 2020, $867 million 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 March 31, 2020, the borrowers on approximately 53% of HELOC loan balances outstanding only paid the minimum amount due.