Bank Loans and Related Allowance for Credit Losses

9 Months Ended

Sep. 30, 2021

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:

September 30, 2021	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)	$	19,226	$	25	$	3	$	36	$	64	$	19,290	$	8	$	19,282
HELOCs (1,2)	677		—		—		11		11		688		2		686
Total residential real estate	19,903		25		3		47		75		19,978		10		19,968
Pledged asset lines	11,393		10		9		—		19		11,412		—		11,412
Other	193		—		—		—		—		193		3		190
Total bank loans	$	31,489	$	35	$	12	$	47	$	94	$	31,583	$	13	$	31,570
December 31, 2020
Residential real estate:
First Mortgages (1,2)	$	14,804	$	27	$	1	$	72	$	100	$	14,904	$	22	$	14,882
HELOCs (1,2)	823		1		1		17		19		842		5		837
Total residential real estate	15,627		28		2		89		119		15,746		27		15,719
Pledged asset lines	7,901		10		5		—		15		7,916		—		7,916
Other	181		—		—		—		—		181		3		178
Total bank loans	$	23,709	$	38	$	7	$	89	$	134	$	23,843	$	30	$	23,813

(1) First Mortgages and HELOCs include unamortized premiums and discounts and direct origination costs of $85 million and $72 million at September 30, 2021 and December 31, 2020, respectively.

(2) At September 30, 2021 and December 31, 2020, 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 September 30, 2021 or December 31, 2020.

At September 30, 2021, CSB had pledged the full balance of First Mortgages and HELOCs pursuant to a blanket lien status collateral arrangement 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:

	September 30, 2021										September 30, 2020
Three Months Ended	First Mortgages		HELOCs		Total residential real estate		Other		Total		First Mortgages		HELOCs		Total residential real estate		Other		Total
Balance at beginning of   period	$	8	$	2	$	10	$	3	$	13	$	22	$	4	$	26	$	4	$	30
Charge-offs	—		—		—		(1)		(1)		—		—		—		—		—
Recoveries	—		1		1		—		1		—		—		—		—		—
Provision for credit   losses	—		(1)		(1)		1		—		(1)		2		1		(1)		—
Balance at end of period	$	8	$	2	$	10	$	3	$	13	$	21	$	6	$	27	$	3	$	30

	September 30, 2021										September 30, 2020
Nine Months Ended	First Mortgages		HELOCs		Total residential real estate		Other		Total		First Mortgages		HELOCs		Total residential real estate		Other		Total
Balance at beginning of   period	$	22	$	5	$	27	$	3	$	30	$	11	$	4	$	15	$	3	$	18
Adoption of ASU   2016-13	—		—		—		—		—		1		—		1		—		1
Charge-offs	—		—		—		(1)		(1)		—		—		—		—		—
Recoveries	—		1		1		—		1		1		—		1		—		1
Provision for credit   losses	(14)		(4)		(18)		1		(17)		8		2		10		—		10
Balance at end of period	$	8	$	2	$	10	$	3	$	13	$	21	$	6	$	27	$	3	$	30

As discussed in Item 8 – Note 2 in our 2020 Form 10-K, PALs are subject to the collateral maintenance practical expedient under ASC 326. All PALs were fully collateralized by securities with fair values in excess of borrowings as of September 30, 2021 and December 31, 2020. Therefore, no allowance for credit losses for PALs as of those dates was required.

The economy continued to strengthen throughout 2021, with sectors most adversely affected by the pandemic improving in recent months. However, COVID-19 has continued to affect the pace of the recovery. Management’s macroeconomic outlook reflects continued moderate growth in home prices and lower unemployment anticipated over the near term. This macroeconomic outlook, along with the continued strong credit quality metrics in the bank loans portfolio, result in a lower modeled projection of loss rates compared to December 31, 2020.

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

	September 30, 2021		December 31, 2020
Nonaccrual loans (1)	$	47	$	89
Other real estate owned (2)	—		1
Total nonperforming assets	47		90
Troubled debt restructurings	—		1
Total nonperforming assets and troubled debt restructurings	$	47	$	91

(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 generally 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
September 30, 2021	2021			2020			2019			2018			2017			pre-2017			Total First Mortgages			Revolving HELOCs amortized cost basis			HELOCs converted to term loans			Total HELOCs
Origination FICO
<620	$	—		$	1		$	—		$	—		$	—		$	1		$	2		$	—		$	—		$	—
620 – 679	21			28			5			1			7			21			83			—			3			3
680 – 739	934			611			179			51			112			256			2,143			65			63			128
≥740	8,820			5,163			1,281			218			430			1,150			17,062			323			234			557
Total	$	9,775		$	5,803		$	1,465		$	270		$	549		$	1,428		$	19,290		$	388		$	300		$	688
Origination LTV
≤70%	$	8,464		$	4,838		$	1,161		$	202		$	417		$	1,065		$	16,147		$	315		$	214		$	529
>70% – ≤90%	1,311			965			304			68			132			360			3,140			73			84			157
>90% – ≤100%	—			—			—			—			—			3			3			—			2			2
Total	$	9,775		$	5,803		$	1,465		$	270		$	549		$	1,428		$	19,290		$	388		$	300		$	688
Weighted Average   Updated FICO
<620	$	4		$	4		$	2		$	—		$	3		$	13		$	26		$	2		$	7		$	9
620 – 679	76			76			20			7			9			35			223			8			14			22
680 – 739	882			486			145			33			63			171			1,780			53			42			95
≥740	8,813			5,237			1,298			230			474			1,209			17,261			325			237			562
Total	$	9,775		$	5,803		$	1,465		$	270		$	549		$	1,428		$	19,290		$	388		$	300		$	688
Estimated Current LTV (1)
≤70%	$	8,857		$	5,727		$	1,451		$	268		$	547		$	1,426		$	18,276		$	387		$	296		$	683
>70% – ≤90%	918			76			14			2			2			2			1,014			1			3			4
>90% – ≤100%	—			—			—			—			—			—			—			—			1			1
>100%	—			—			—			—			—			—			—			—			—			—
Total	$	9,775		$	5,803		$	1,465		$	270		$	549		$	1,428		$	19,290		$	388		$	300		$	688
Percent of Loans on   Nonaccrual Status	0.05		%	0.12		%	0.14		%	0.33		%	0.36		%	1.31		%	0.19		%	0.86		%	2.48		%	1.60		%

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

September 30, 2021	Balance		Weighted Average Updated FICO	Percent of Loans on Nonaccrual Status
Pledged Asset Lines
Weighted-Average LTV (1)
=70%	$	11,412	768	—

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

	First Mortgages Amortized Cost Basis by Origination Year
December 31, 2020	2020			2019			2018			2017			pre-2017			Total First Mortgages			Revolving HELOCs amortized cost basis			HELOCs converted to term loans			Total HELOCs
Origination FICO
<620	$	1		$	—		$	—		$	—		$	2		$	3		$	—		$	—		$	—
620 – 679	29			13			3			8			31			84			1			3			4
680 – 739	794			355			105			181			419			1,854			82			80			162
≥740	7,150			2,452			449			858			2,054			12,963			380			296			676
Total	$	7,974		$	2,820		$	557		$	1,047		$	2,506		$	14,904		$	463		$	379		$	842
Origination LTV
≤70%	$	6,653		$	2,211		$	396		$	793		$	1,935		$	11,988		$	351		$	269		$	620
>70% – ≤90%	1,321			609			161			254			568			2,913			112			107			219
>90% – ≤100%	—			—			—			—			3			3			—			3			3
Total	$	7,974		$	2,820		$	557		$	1,047		$	2,506		$	14,904		$	463		$	379		$	842
Weighted Average   Updated FICO
<620	$	5		$	2		$	1		$	4		$	19		$	31		$	3		$	9		$	12
620 – 679	67			34			16			21			60			198			12			20			32
680 – 739	784			252			66			121			281			1,504			58			55			113
≥740	7,118			2,532			474			901			2,146			13,171			390			295			685
Total	$	7,974		$	2,820		$	557		$	1,047		$	2,506		$	14,904		$	463		$	379		$	842
Estimated Current LTV (1)
≤70%	$	6,999		$	2,582		$	533		$	1,034		$	2,490		$	13,638		$	452		$	368		$	820
>70% – ≤90%	975			238			24			13			16			1,266			11			9			20
>90% – ≤100%	—			—			—			—			—			—			—			1			1
>100%	—			—			—			—			—			—			—			1			1
Total	$	7,974		$	2,820		$	557		$	1,047		$	2,506		$	14,904		$	463		$	379		$	842
Percent of Loans on   Nonaccrual Status	0.09		%	0.38		%	1.02		%	0.87		%	1.57		%	0.48		%	1.37		%	2.80		%	2.02		%

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

December 31, 2020	Balance		Weighted Average Updated FICO	Percent of Loans on Nonaccrual Status
Pledged Asset Lines
Weighted-Average LTV (1)
=70%	$	7,916	770	—

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

At September 30, 2021, First Mortgage loans of $15.8 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 27% of the balance of these mortgages consisted of loans with interest-only payment terms. The interest rates on approximately 87% 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 September 30, 2021 and December 31, 2020, Schwab had $54 million and $43 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 September 30,				Nine Months Ended September 30,
	2021		2020		2021		2020
HELOCs converted to amortizing loans	$	5	$	9	$	17	$	25

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

September 30, 2021	Balance
Converted to an amortizing loan by period end	$	300
Within 1 year	15
> 1 year – 3 years	81
> 3 years – 5 years	68
> 5 years	224
Total	$	688

At September 30, 2021, $530 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 September 30, 2021, the borrowers on approximately 55% of HELOC loan balances outstanding only paid the minimum amount due.