Charles Schwab 2008 Annual Report Download - page 48

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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)
- 34 -
The following table presents certain of the Company’s loan quality metrics as a percentage of total outstanding loans:
December 31, 2008 2007
Loan delinquencies (1) 0.54% 0.80%
Nonaccrual loans 0.13% 0.12%
Allowance for credit losses 0.33% 0.20%
(1) Loan delinquencies are defined as loans that are 30 days or more past due.
The Company has exposure to credit risk associated with its securities available for sale portfolio, which totaled $14.4 billion
at December 31, 2008. This portfolio includes U.S. agency and non-agency mortgage-backed securities, corporate debt
securities, long term certificates of deposit, asset-backed securities and U.S. agency notes. U.S. agency 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 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 mortgage-backed securities, including prime and
Alt-A mortgage-backed securities by year of origination. In some instances securities have divergent ratings from Moody’s,
Fitch Ratings or Standard and Poor’s. In these instances the Company has used the lowest rating as of December 31, 2008 for
purposes of presenting the table below. Mortgage-backed securities, particularly Alt-A securities, experienced deteriorating
credit characteristics, including increased delinquencies, and valuation pressure in 2008. For a discussion of the impact of
current market conditions on mortgage-backed securities available for sale, see “Current Market Environment”.
AAA
AA to A BBB BB or Lower Total
Net Net Net Net Net
Amortized Unrealized Amortized Unrealized Amortized Unrealized Amortized Unrealized Amortized Unrealized
Cost Gain (Loss) Cost Gain (Loss) Cost Gain (Loss) Cost Gain (Loss) Cost Gain (Loss)
U.S. agency mortgage-backed
securities:
2005 $ 813 $ (11) $ - $ - $ - $ - $ - $ - $ 813 $ (11)
2006 509 (13) - - - - - - 509 (13)
2007 1,053 20 - - - - - - 1,053 20
2008 5,828 30 - - - - - - 5,828 30
Total 8,203 26 - - - - - - 8,203 26
Non-agency mortgage-backed
securities:
2003 130 (16) - - - - - - 130 (16)
2004 337 (68) - - - - - - 337 (68)
2005 987 (226) 62 (29) - - 15 (7) 1,064 (262)
2006 260 (90) 202 (63) 126 (35) 309 (181) 897 (369)
2007 347 (54) 121 (32) 42 (10) 147 (51) 657 (147)
Total 2,061 (454) 385 (124) 168 (45) 471 (239) 3,085 (862)
Total mortgage-backed securities $ 10,264 $ (428) $ 385 $ (124) $ 168 $ (45) $ 471 $ (239) $ 11,288 $ (836)
% of Total mortgage-backed
securities 91% 3% 2% 4% 100%
At December 31, 2008, the corporate debt securities and non-mortgage asset-backed securities were rated investment grade
(defined as a rating equivalent to a Moody’s rating of “Baa” or higher, or a Standard and Poor’s rating of “BBB-” or higher).