Charles Schwab 2011 Annual Report Download - page 102

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THE CHARLES SCHWAB CORPORATION
Notes to Consolidated Financial Statements
(Tabular Amounts in Millions, Except Per Share Data, Option Price Amounts, Ratios, or as Noted)
- 74 -
deposit for regulatory purposes, cash and cash equivalents, and other securities owned. At December 31, 2011 and 2010, the
Company held $867 million and $1.9 billion, respectively, of corporate debt securities issued by financial institutions and
guaranteed under the FDIC Temporary Liquidity Guarantee Program.
The Company’s loans to banking clients include $5.6 billion and $4.7 billion of adjustable rate first lien residential real estate
mortgage loans at December 31, 2011 and 2010, respectively. The Company’s adjustable rate mortgages have initial fixed
interest rates for three to ten years and interest rates that adjust annually thereafter. At December 31, 2011, approximately
60% of these mortgages consisted of loans with interest-only payment terms. At December 31, 2011, the interest rates on
approximately 65% of these interest-only loans are not scheduled to reset for three or more years. The Company’s mortgage
loans do not include interest terms described as temporary introductory rates below current market rates. At December 31,
2011, 44% of the residential real estate mortgages and 50% of the HELOC balances were secured by properties which are
located in California. At December 31, 2010, 42% of the residential real estate mortgages and 49% of the HELOC balances
were secured by properties which are located in California.
The Company also has exposure to concentration risk from its margin and securities lending activities collateralized by
securities of a single issuer or industry.
The Company has indirect exposure to U.S. Government and agency securities held as collateral to secure its resale
agreements. The Company’s primary credit exposure on these resale transactions is with its counterparty. The Company
would have exposure to the U.S. Government and agency securities only in the event of the counterparty’s default on the
resale agreements. The fair value of U.S. Government and agency securities held as collateral for resale agreements totaled
$18.3 billion and $13.0 billion at December 31, 2011 and 2010, respectively.
Commitments to extend credit: Schwab Bank enters into commitments to extend credit to banking clients primarily relating to
mortgage lending. The credit risk associated with these commitments varies depending on the creditworthiness of the client
and the value of any collateral expected to be held. Collateral requirements vary by type of loan. These commitments are
legally binding agreements to lend to a client that generally have fixed expiration dates or other termination clauses, may
require payment of a fee and are not secured by collateral until funds are advanced. Schwab Bank also has commitments to
extend credit related to its clients’ unused HELOC. Total amounts outstanding for these commitments to extend credit were
$5.8 billion and $6.1 billion at December 31, 2011 and 2010, respectively.
Forward sale and interest rate lock commitments: Schwab Bank’s loans held for sale portfolio consists of fixed-rate and
adjustable-rate residential mortgage loans, which are subject to a loss in value when market interest rates rise. Schwab Bank
uses forward sale commitments to manage this risk. These forward sale commitments have been designated as cash flow
hedging instruments, and are recorded on the Company’s consolidated balance sheet at fair value with gains or losses
recorded in other comprehensive income (loss). Amounts included in other comprehensive income (loss) are reclassified into
earnings when the related loan is sold. At December 31, 2011 and 2010, the derivative asset and liability for these forward
sale commitments were not material.
Additionally, Schwab Bank uses forward sale commitments to hedge interest rate lock commitments issued on mortgage loans
that will be held for sale. Schwab Bank considers the fair value of these commitments to be zero at the commitment date, with
subsequent changes in fair value determined solely based on changes in market interest rates. Any changes in fair value of the
interest rate lock commitments are completely offset by changes in fair value of the related forward sale commitments.
Schwab Bank had interest rate lock commitments on mortgage loans to be held for sale with principal balances totaling
approximately $347 million and $628 million at December 31, 2011 and 2010, respectively. At December 31, 2011 and 2010,
the derivative asset and liability for these interest rate lock commitments and the related forward sale commitments were not
material.