Charles Schwab 2010 Annual Report Download - page 54

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THE CHARLES SCHWAB CORPORATION
Management’s Discussion and Analysis of Financial Condition and Results of Operations
(Tabular Amounts in Millions, Except Ratios, or as Noted)
borrower has compensating credit factors. At December 31, 2010, approximately 2% of both the First Mortgage and HELOC portfolios
consisted of loans to borrowers with FICO credit scores of less than 620.
The following table presents certain of the Company’s loan quality metrics as a percentage of total outstanding loans:
The Company has exposure to credit risk associated with its securities available for sale and securities held to maturity portfolios, whose fair
values totaled $24.0 billion and $17.8 billion at December 31, 2010, respectively. These portfolios include U.S. agency and non-agency
residential mortgage-backed securities, U.S. agency notes, corporate debt securities, asset-backed securities, and certificates of deposit. U.S.
agency residential mortgage-backed securities do not have explicit credit ratings, however management considers these to be of the highest
credit quality and rating given the guarantee of principal and interest by the U.S. agencies. Included in non-agency residential mortgage-
backed securities are securities collateralized by loans that are considered to be “Prime” (defined by the Company as loans to borrowers with
a FICO credit score of 620 or higher at origination), and “Alt-A” (defined by the Company as Prime loans with reduced documentation at
origination).
The table below presents the credit ratings for U.S. agency and non-agency residential mortgage-backed securities available for sale and
securities held to maturity, including Prime and Alt-A residential mortgage-backed securities, by year of origination. In some instances
securities have divergent ratings from Moody’s, Fitch, or Standard & Poor’s. In these instances, the Company has used the lowest rating as
of December 31, 2010, for purposes of presenting the table below. Residential mortgage-backed securities, particularly Alt-A securities,
experienced continued deteriorating credit characteristics, including increased payment delinquencies, in 2010. For a discussion of the
impact of current market conditions on residential mortgage-backed securities, see “Current Market and Regulatory Environment.”
-37 -
December 31, 201
0
200
9
Loan delinquencies
0.96% 0.87%
Nonaccrual loans
0.58% 0.46%
Allowance for loan losses
0.60% 0.61%
Loan delinquencies are defined as loans that are 30 days or more past due.
AAA AA to A BBB BB or Lowe
r
Total
Amortized
Cost
Net
Unrealized
Gain (Loss)
Amortized
Cost
Net
Unrealized
Loss
Amortized
Cost
Net
Unrealized
Loss
Amortized
Cost
Net
Unrealized
Loss
Amortized
Cost
Net
Unrealized
Gain (Loss)
U.S. agency residential
mortgage-backed
securities:
2005
$410 $6
$
—
$
—
$
—
$
—
$
—
$
—
$410 $6
2006
396
2
—
—
—
—
—
—
396 2
2007
372 8
—
—
—
—
—
—
372 8
2008
2,723
86
—
—
—
—
—
—
2,723
86
2009
6,914 18
2
—
—
—
—
—
—
6,914 182
2010
18,786 7
—
—
—
—
—
—
18,786 7
Total
29,601 291
—
—
—
—
—
—
29,601 291
Non-agency residential
mortgage-backed
securities:
2003
52 (3)
6
—
—
—
—
—
58 (3)
2004
76 (3)
65
(7) 12
(5)
—
—
153 (15)
2005
12
—
68
(1) 29
(1) 55
0
(88)
659 (90)
2006
7
—
—
—
—
—
514
(97)
521 (97)
2007
49 1
—
—
—
—
261
(27)
310 (26)
Total
196 (5)
139
(8) 41
(6) 1,325
(21
2
)
1,701 (231)
Total residential mortgage-
backed securities
$ 29,797 $ 286
$139
$(8) $41
$(6) $ 1,325
$(21
2
)
$ 31,302 $60
% of Total residential
mortgage-backed
securities
95%
—
—
5%
100%
(1)
(1)