Loans to Banking Clients and Related Allowance for Loan Losses

The composition of loans to banking clients by loan segment is as follows:


	June 30, 2012			December 31, 2011
Residential real estate mortgages	$	5,674		$	5,596
Home equity lines of credit		3,408			3,509
Personal loans secured by securities		787			742
Other		19			19

Total loans to banking clients ⁽¹⁾		9,888			9,866
Allowance for loan losses		(51	)		(54	)

Total loans to banking clients – net	$	9,837		$	9,812

⁽¹⁾	All loans are evaluated for impairment by loan segment.

Changes in the allowance for loan losses were as follows:


Three Months Ended	June 30, 2012									June 30, 2011
Three Months Ended	Residential real estate mortgages			Home equity lines of credit			Total			Residential real estate mortgages			Home equity lines of credit			Total
Balance at beginning of period	$	37		$	13		$	50		$	37		$	16		$	53
Charge-offs		(1	)		(2	)		(3	)		(3	)		(2	)		(5	)
Recoveries		—			—			—			—			1			1
Provision for loan losses		(2	)		6			4			—			1			1

Balance at end of period	$	34		$	17		$	51		$	34		$	16		$	50


Six Months Ended	June 30, 2012									June 30, 2011
Six Months Ended	Residential real estate mortgages			Home equity lines of credit			Total			Residential real estate mortgages			Home equity lines of credit			Total
Balance at beginning of period	$	40		$	14		$	54		$	38		$	15		$	53
Charge-offs		(4	)		(4	)		(8	)		(6	)		(3	)		(9	)
Recoveries		1			—			1			—			1			1
Provision for loan losses		(3	)		7			4			2			3			5

Balance at end of period	$	34		$	17		$	51		$	34		$	16		$	50

Included in the loan portfolio are nonaccrual loans totaling $47 million and $52 million at June 30, 2012 and December 31, 2011, respectively. There were no loans accruing interest that were contractually 90 days or more past due at June 30, 2012 or December 31, 2011. The amount of interest revenue that would have been earned on nonaccrual loans, versus actual interest revenue recognized on these loans, was not material to the Company’s results of operations in the first halves of 2012 or 2011. Nonperforming assets, which include nonaccrual loans and other real estate owned, totaled $52 million and $56 million at June 30, 2012 and December 31, 2011, respectively. The Company considers loan modifications in which it makes an economic concession to a borrower experiencing financial difficulty to be a troubled debt restructuring. Troubled debt restructurings were not material at June 30, 2012 or December 31, 2011.

In the first quarter of 2012, Schwab Bank launched a co-branded loan origination program for Schwab Bank clients (the Program) with Quicken Loans, Inc. (Quicken^® Loans^®). Pursuant to the Program, Quicken Loans originates and services loans for Schwab Bank clients and Schwab Bank sets the underwriting standards and pricing for those loans it intends to purchase for its portfolio. The first mortgage portion of the Program launched in March 2012 and these loans are included in the originated and purchased first mortgages loan class as of June 30, 2012, in the tables below. The home equity line of credit (HELOC) portion of the Program was launched in May 2012. Under the Program, Schwab Bank purchases all HELOC loans to Schwab Bank clients that are originated by Quicken Loans.

The delinquency aging analysis by loan class is as follows:


June 30, 2012	Current		30-59 days past due		60-89 days past due		Greater than 90 days		Total past due		Total loans
Residential real estate mortgages:
Originated and purchased first mortgages	$	5,458	$	19	$	3	$	34	$	56	$	5,514
Other purchased first mortgages		153		2		1		4		7		160
Home equity lines of credit		3,392		5		2		9		16		3,408
Personal loans secured by securities		787		—		—		—		—		787
Other		19		—		—		—		—		19

Total loans to banking clients	$	9,809	$	26	$	6	$	47	$	79	$	9,888


December 31, 2011
Residential real estate mortgages:
Originated first mortgages	$	5,380	$	16	$	2	$	39	$	57	$	5,437
Purchased first mortgages		152		2		—		5		7		159
Home equity lines of credit		3,494		5		2		8		15		3,509
Personal loans secured by securities		741		1		—		—		1		742
Other		19		—		—		—		—		19

Total loans to banking clients	$	9,786	$	24	$	4	$	52	$	80	$	9,866

In addition to monitoring the delinquency characteristics as presented in the aging analysis in the previous table, the Company monitors the credit quality of residential real estate mortgages and HELOCs by stratifying the portfolios by the year of origination, borrower Fair Issac & Company (FICO) scores at origination, updated FICO scores, and loan-to-value ratios at origination (Origination LTV), as presented in the following tables. Borrowers’ FICO scores are provided by an independent third party credit reporting service and were last updated in June 2012.


	Residential real estate mortgages
June 30, 2012	Originated and purchased first mortgages		Other purchased first mortgages		Total		Home equity lines of credit
Year of origination
Pre-2008	$	513	$	58	$	571	$	1,243
2008		464		7		471		1,212
2009		415		8		423		384
2010		1,374		15		1,389		289
2011		1,824		68		1,892		223
2012		924		4		928		57

Total	$	5,514	$	160	$	5,674	$	3,408

Origination FICO
< 620	$	10	$	2	$	12	$	1
620 - 679		96		18		114		24
680 - 739		1,029		42		1,071		652
³ 740		4,379		98		4,477		2,731

Total	$	5,514	$	160	$	5,674	$	3,408

Updated FICO
< 620	$	55	$	6	$	61	$	45
620 - 679		154		11		165		105
680 - 739		857		37		894		516
³ 740		4,448		106		4,554		2,742

Total	$	5,514	$	160	$	5,674	$	3,408

Origination LTV ⁽¹⁾
£ 70%	$	3,586	$	96	$	3,682	$	2,307
71% - 89%		1,903		55		1,958		1,063
³ 90%		25		9		34		38

Total	$	5,514	$	160	$	5,674	$	3,408

⁽¹⁾	The computation of the Origination LTV ratio for a HELOC includes any first lien mortgage outstanding on the same property at the time of origination. At June 30, 2012, $746 million of $3.4 billion in HELOCs were in a first lien position.


	Residential real estate mortgages
December 31, 2011	Originated first mortgages		Purchased first mortgages		Total		Home equity lines of credit
Year of origination
Pre-2008	$	569	$	60	$	629	$	1,306
2008		538		8		546		1,262
2009		553		10		563		412
2010		1,757		17		1,774		311
2011		2,020		64		2,084		218

Total	$	5,437	$	159	$	5,596	$	3,509

Origination FICO
< 620	$	9	$	2	$	11	$	—
620 - 679		108		19		127		24
680 - 739		1,030		43		1,073		667
³ 740		4,290		95		4,385		2,818

Total	$	5,437	$	159	$	5,596	$	3,509

Updated FICO
< 620	$	55	$	7	$	62	$	49
620 - 679		162		11		173		112
680 - 739		831		44		875		520
³ 740		4,389		97		4,486		2,828

Total	$	5,437	$	159	$	5,596	$	3,509

Origination LTV ⁽¹⁾
£ 70%	$	3,507	$	91	$	3,598	$	2,378
71% - 89%		1,904		60		1,964		1,091
³ 90%		26		8		34		40

Total	$	5,437	$	159	$	5,596	$	3,509

⁽¹⁾	The computation of the Origination LTV ratio for a HELOC includes any first lien mortgage outstanding on the same property at the time of origination. At December 31, 2011, $755 million of $3.5 billion in HELOCs were in a first lien position.

The Company monitors the credit quality of personal loans secured by securities by reviewing the fair value of collateral to ensure adequate collateralization of at least 100% of the principal amount of the loans. All of these personal loans were fully collateralized by securities with fair values in excess of borrowing amounts at June 30, 2012 and December 31, 2011.