Bank Loans and Related Allowance for Credit Losses

6 Months Ended

Jun. 30, 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 portfolio segment and class of financing receivable is as follows:

June 30, 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
Residential real estate:
First Mortgages (1,2)	$	13,952	$	25	$	3	$	13	$	41	$	13,993	$	22	$	13,971
HELOCs (1,2)	972		1		1		7		9		981		4		977
Total residential real estate	14,924		26		4		20		50		14,974		26		14,948
Pledged asset lines	5,727		3		4		—		7		5,734		—		5,734
Other	190		—		—		3		3		193		4		189
Total bank loans	$	20,841	$	29	$	8	$	23	$	60	$	20,901	$	30	$	20,871
December 31, 2019
Residential real estate:
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
Total residential real estate	12,770		26		5		20		51		12,821		15		12,806
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 $78 million and $74 million at June 30, 2020 and December 31, 2019, respectively.

⁽²⁾ At June 30, 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 June 30, 2020 or December 31, 2019.

At June 30, 2020, CSB had pledged $12.4 billion of First Mortgages and HELOCs as collateral to secure borrowing capacity on a secured credit facility with the FHLB (see Note 9).

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

	June 30, 2020										June 30, 2019
Three Months Ended	First Mortgages		HELOCs		Total residential real estate		Other		Total (1)		First Mortgages			HELOCs		Total residential real estate			Other		Total (1)
Balance at beginning of period	$	21	$	4	$	25	$	4	$	29	$	14		$	5	$	19		$	2	$	21
Charge-offs	—		—		—		—		—		—			—		—			—		—
Recoveries	1		—		1		—		1		1			—		1			—		1
Provision for credit losses	—		—		—		—		—		(3		)	—		(3		)	—		(3		)
Balance at end of period	$	22	$	4	$	26	$	4	$	30	$	12		$	5	$	17		$	2	$	19

	June 30, 2020										June 30, 2019
Six Months Ended	First Mortgages		HELOCs		Total residential real estate		Other		Total (1)		First Mortgages			HELOCs			Total residential real estate			Other		Total (1)
Balance at beginning of period	$	11	$	4	$	15	$	3	$	18	$	14		$	5		$	19		$	2	$	21
Adoption of ASU 2016-13	1		—		1		—		1		—			—			—			—		—
Charge-offs	—		—		—		—		—		—			—			—			—		—
Recoveries	1		—		1		—		1		1			1			2			—		2
Provision for credit losses	9		—		9		1		10		(3		)	(1		)	(4		)	—		(4		)
Balance at end of period	$	22	$	4	$	26	$	4	$	30	$	12		$	5		$	17		$	2	$	19

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.

Although continued economic uncertainty remains due to the ongoing COVID-19 pandemic, credit quality metrics and overall performance of the bank loans portfolios remain strong. Management’s reasonable and supportable forecast period extends through 2021, with unemployment peaking in the second quarter of 2020 accompanied by lackluster growth in home prices that do not revert to long-term trends until after 2021. Continued strong credit quality metrics and a modestly improving macroeconomic outlook produced a relatively stable projection of credit losses compared to the prior quarter.

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

	June 30, 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
June 30, 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	$	—		$	—	$	—		$	—		$	—		$	2		$	2		$	—		$	—		$	—
620 – 679	12			14		4			11			17			18			76			1			4			5
680 – 739	491			436		153			247			235			324			1,886			100			94			194
≥740	4,116			3,130		712			1,218			1,434			1,419			12,029			434			348			782
Total	$	4,619		$	3,580	$	869		$	1,476		$	1,686		$	1,763		$	13,993		$	535		$	446		$	981
Origination LTV
≤70%	$	3,866		$	2,797	$	612		$	1,106		$	1,429		$	1,240		$	11,050		$	393		$	314		$	707
>70% – ≤90%	753			783		257			370			257			520			2,940			142			128			270
>90% – ≤100%	—			—		—			—			—			3			3			—			4			4
Total	$	4,619		$	3,580	$	869		$	1,476		$	1,686		$	1,763		$	13,993		$	535		$	446		$	981
Weighted Average Updated FICO
<620	$	4		$	4	$	2		$	2		$	4		$	22		$	38		$	5		$	13		$	18
620 – 679	31			54		17			33			19			54			208			14			20			34
680 – 739	430			322		104			162			142			215			1,375			71			66			137
≥740	4,154			3,200		746			1,279			1,521			1,472			12,372			445			347			792
Total	$	4,619		$	3,580	$	869		$	1,476		$	1,686		$	1,763		$	13,993		$	535		$	446		$	981
Estimated Current LTV (1)
≤70%	$	3,912		$	2,975	$	744		$	1,430		$	1,671		$	1,744		$	12,476		$	510		$	427		$	937
>70% – ≤90%	707			605		125			46			15			17			1,515			25			16			41
>90% – ≤100%	—			—		—			—			—			1			1			—			2			2
>100%	—			—		—			—			—			1			1			—			1			1
Total	$	4,619		$	3,580	$	869		$	1,476		$	1,686		$	1,763		$	13,993		$	535		$	446		$	981
Percent of Loans on Nonaccrual Status	0.07		%	—		0.03		%	0.03		%	0.08		%	0.45		%	0.09		%	0.21		%	1.58		%	0.71		%

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

June 30, 2020	Balance		Weighted Average Updated FICO	Percent of Loans on Nonaccrual Status
Pledged Asset Lines
Weighted-Average LTV (1)
=70%	$	5,734	770	—

⁽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 June 30, 2020, First Mortgage loans of $12.4 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 75% 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 June 30, 2020 and December 31, 2019, Schwab had $43 million and $46 million, respectively, 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 June 30,				Six Months Ended June 30,
	2020		2019		2020		2019
HELOCs converted to amortizing loans	$	8	$	11	$	18	$	33

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

June 30, 2020	Balance
Converted to an amortizing loan by period end	$	446
Within 1 year	41
> 1 year – 3 years	86
> 3 years – 5 years	124
> 5 years	284
Total	$	981

At June 30, 2020, $789 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 June 30, 2020, the borrowers on approximately 52% of HELOC loan balances outstanding only paid the minimum amount due.