Charles Schwab 2015 Annual Report Download - page 82

THE CHARLES SCHWAB CORPORATION
Notes to Consolidated Financial Statements
(Tabular Amounts in Millions, Except Per Share Data, Option Price Amounts, Ratios, or as Noted)
- 62 -
Securities available for sale and securities held to maturity
Securities available for sale are recorded at fair value and unrealized gains and losses are reported, net of taxes, in
accumulated other comprehensive income (loss) included in stockholders’ equity. Securities held to maturity are recorded at
amortized cost based on the Company’s positive intent and ability to hold these securities to maturity. Realized gains and
losses from sales of securities available for sale are determined on a specific identification basis and are included in other
revenue.
Management evaluates whether securities available for sale and securities held to maturity are OTTI on a quarterly basis.
Debt securities with unrealized losses are considered OTTI if the Company intends to sell the security or if it is more likely
than not that the Company will be required to sell such security before any anticipated recovery. If management determines
that a security is OTTI under these circumstances, the impairment recognized in earnings is measured as the entire difference
between amortized cost and fair value.
A security is also OTTI if management does not expect to recover all of the amortized cost of the security. In this
circumstance, the impairment recognized in earnings represents the estimated credit loss, and is measured by the difference
between the present value of expected cash flows and the amortized cost of the security. Where appropriate, management
utilizes cash flow models to estimate the expected future cash flow from the securities to estimate the credit loss. Expected
cash flows are discounted using the security’s effective interest rate.
The evaluation of whether the Company expects to recover the amortized cost of a security is inherently judgmental. The
evaluation includes the consideration of multiple factors including: the magnitude and duration of the unrealized loss; the
financial condition of the issuer; the payment structure of the security; external credit ratings; for asset-backed securities, the
amount of credit support provided by the structure of the security to absorb credit losses on the underlying collateral; recent
events specific to the issuer and the issuer’s industry; and whether the Company has received all scheduled principal and
interest payments.
Securities borrowed and securities loaned
Securities borrowed require the Company to deliver cash to the lender in exchange for securities and are included in
receivables from brokers, dealers, and clearing organizations. For securities loaned, the Company receives collateral in the
form of cash in an amount equal to or greater than the market value of securities loaned. Securities loaned are included in
payables to brokers, dealers, and clearing organizations. The Company monitors the market value of securities borrowed and
loaned, with additional collateral obtained or refunded to ensure full collateralization. Fees received or paid are recorded in
interest revenue or interest expense.
Bank loans and related allowance for loan losses
Bank loans are recorded at their contractual principal amounts and include unamortized direct origination costs or net
purchase discounts or premiums. Direct origination costs and premiums and discounts are recognized in interest revenue
using the effective interest method over the contractual life of the loan and are adjusted for actual prepayments. Additionally,
loans are recorded net of an allowance for loan losses. The Company’s loan portfolio includes four loan segments: First
Mortgages, HELOCs, PALs and other loans. First Mortgages include two loan classes: first mortgages and purchased first
mortgages. Loan segments are defined as the level to which the Company disaggregates its loan portfolio when developing
and documenting a methodology for determining the allowance for loan losses. A loan class is defined as a group of loans
within a loan segment that has homogeneous risk characteristics.
PALs are collateralized by marketable securities with liquid markets. Credit lines are over-collateralized dependent on the
type of security pledged. Collateral market value is monitored on a daily basis and a borrower’s committed line may be
reduced or collateral may be liquidated if the collateral is in danger of falling below specified levels. As such, the loss
inherent within this portfolio is limited.
The Company records an allowance for loan losses through a charge to earnings based on management’s estimate of probable
losses in the existing portfolio. Management reviews the allowance for loan losses quarterly, taking into consideration current