Charles Schwab 2013 Annual Report Download - page 51

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)
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Company revised its First Mortgage underwriting criteria in conformance with the CFPB’s new guidance on Qualified
Mortgage lending and a borrower’s ability to repay. Revisions were made to requirements affecting Debt to Income Ratio,
Loan to Value Ratio, and liquid asset holdings. The Company does not purchase loans that allow for negative amortization
and does not purchase subprime loans (generally defined as extensions of credit to borrowers with a FICO score of less than
620 at origination), unless the borrower has compensating credit factors. At December 31, 2013, approximately 1% of both
the First Mortgage and HELOC portfolios consisted of loans to borrowers with updated FICO scores of less than 620.
At December 31, 2013, the weighted-average originated LTV ratio was 59% for both the First Mortgage and HELOC
portfolios. 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, 2013, 22% of HELOCs ($680 million of the HELOC portfolio)
were in a first lien position. The weighted-average originated FICO credit score was 769 and 768 for the First Mortgage and
HELOC portfolios, respectively.
The Company monitors the estimated current LTV ratios of its First Mortgage and HELOC portfolios on an ongoing basis.
At December 31, 2013, the weighted-average estimated current LTV ratios were 53% and 59% for the First Mortgage and
HELOC portfolios, respectively. The computation of the estimated current LTV ratio for a HELOC includes any first lien
mortgage outstanding on the same property at the time of the HELOC’s origination. The Company estimates the current LTV
ratio for each loan by reference to a home price appreciation index. The Company also monitors updated borrower FICO
scores, delinquency trends, and verified liquid assets held by individual borrowers. At December 31, 2013, the weighted-
average updated FICO scores were 772 and 769 for the First Mortgage and HELOC portfolios, respectively.
A portion of the Company’s HELOC portfolio is secured by second liens on the associated properties. Second lien mortgage
loans possess a higher degree of credit risk given the subordination to the first lien holder in the event of default. At
December 31, 2013, $2.4 billion, or 78%, of the HELOC portfolio was in a second lien position. In addition to the credit
monitoring activities described above, the Company also monitors credit risk on second lien HELOC loans by reviewing the
delinquency status of the first lien loan on the associated property. Additionally, at December 31, 2013, approximately 30%
of the HELOC borrowers that had a balance only paid the minimum amount due.
For more information on the Company’s credit quality indicators relating to its First Mortgage and HELOC portfolios,
including delinquency characteristics, borrower FICO scores at origination, updated borrower FICO scores, LTV ratios at
origination, and estimated current LTV ratios, see “Item 8 – Financial Statements and Supplementary Data – Notes to
Consolidated Financial Statements – 6. Loans to Banking Clients and Related Allowance for Loan Losses.”
The following table presents certain of the Company’s loan quality metrics as a percentage of total outstanding loans:
December 31, 2013 2012 
Loan delinquencies (1) 0.48 % 0.77 % 
N
onaccrual loans 0.39 % 0.45 %
Allowance for loan losses 0.39 % 0.52 %
(1) Loan delinquencies include loans that are 30 days or more past due and other nonaccrual 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 $51.6 billion and $29.5 billion at December 31, 2013, respectively. These portfolios
include U.S. agency and non-agency mortgage-backed securities, asset-backed securities, corporate debt securities, U.S.
agency notes, certificates of deposit, and other securities. 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. government-sponsored enterprises.
At December 31, 2013, with the exception of one corporate bond (with an amortized cost of $100 million) and certain non-
agency residential mortgage-backed securities, all securities in the available for sale and held to maturity portfolios were
rated investment grade (defined as a rating equivalent to a Moody’s rating of “Baa” or higher, or a Standard & Poor’s rating
of “BBB-” or higher). The one non-investment grade corporate bond, which matures in April 2014, was not considered other
than temporarily impaired at December 31, 2013. Although the Company has recognized net impairment losses on certain