Charles Schwab 2014 Annual Report Download - page 60

Download and view the complete annual report

Please find page 60 of the 2014 Charles Schwab annual report below. You can navigate through the pages in the report by either clicking on the pages listed below, or by using the keyword search tool below to find specific information within the annual report.

Page out of 140

  • 1
  • 2
  • 3
  • 4
  • 5
  • 6
  • 7
  • 8
  • 9
  • 10
  • 11
  • 12
  • 13
  • 14
  • 15
  • 16
  • 17
  • 18
  • 19
  • 20
  • 21
  • 22
  • 23
  • 24
  • 25
  • 26
  • 27
  • 28
  • 29
  • 30
  • 31
  • 32
  • 33
  • 34
  • 35
  • 36
  • 37
  • 38
  • 39
  • 40
  • 41
  • 42
  • 43
  • 44
  • 45
  • 46
  • 47
  • 48
  • 49
  • 50
  • 51
  • 52
  • 53
  • 54
  • 55
  • 56
  • 57
  • 58
  • 59
  • 60
  • 61
  • 62
  • 63
  • 64
  • 65
  • 66
  • 67
  • 68
  • 69
  • 70
  • 71
  • 72
  • 73
  • 74
  • 75
  • 76
  • 77
  • 78
  • 79
  • 80
  • 81
  • 82
  • 83
  • 84
  • 85
  • 86
  • 87
  • 88
  • 89
  • 90
  • 91
  • 92
  • 93
  • 94
  • 95
  • 96
  • 97
  • 98
  • 99
  • 100
  • 101
  • 102
  • 103
  • 104
  • 105
  • 106
  • 107
  • 108
  • 109
  • 110
  • 111
  • 112
  • 113
  • 114
  • 115
  • 116
  • 117
  • 118
  • 119
  • 120
  • 121
  • 122
  • 123
  • 124
  • 125
  • 126
  • 127
  • 128
  • 129
  • 130
  • 131
  • 132
  • 133
  • 134
  • 135
  • 136
  • 137
  • 138
  • 139
  • 140

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)
- 42 -
Schwab performs clearing services for all securities transactions in its client accounts. Schwab has exposure to credit risk due
to its obligation to settle transactions with clearing corporations, mutual funds, and other financial institutions even if
Schwab’s client or a counterparty fails to meet its obligations to Schwab.
Concentration Risk
The Company has exposure to concentration risk when holding large positions in financial instruments collateralized by
assets with similar economic characteristics or in securities of a single issuer or within a particular industry.
The fair value of the Company’s investments in mortgage-backed securities totaled $53.8 billion at December 31, 2014. Of
these, $52.5 billion were issued by U.S. agencies and $1.3 billion were issued by private entities (non-agency securities).
These U.S. agency and non-agency securities are included in securities available for sale and securities held to maturity.
The fair value of the Company’s investments in asset-backed securities totaled $19.4 billion at December 31, 2014. Of these,
$11.7 billion were securities backed by student loans, the majority of which are guaranteed by the U.S. federal government.
These asset-backed securities are included in securities available for sale.
The fair value of the Company’s investments in corporate debt securities and commercial paper totaled $8.1 billion at
December 31, 2014, with the majority issued by institutions in the financial services industry. These securities are included in
securities available for sale, cash and cash equivalents, and other securities owned in the Company’s consolidated balance
sheets. Issuer, geographic, and sector concentrations are controlled by established credit policy limits to each concentration
type.
The Company’s loans to banking clients include $7.4 billion of adjustable rate First Mortgage loans at December 31, 2014.
The Company’s adjustable rate mortgages have initial fixed interest rates for three to ten years and interest rates that adjust
annually thereafter. Approximately 40% of these mortgages consisted of loans with interest-only payment terms. 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.
The Company’s HELOC product has a 30-year loan term with an initial draw period of ten years from the date of origination.
After the initial draw period, the balance outstanding at such time is converted to a 20-year amortizing loan. The interest rate
during the initial draw period and the 20-year amortizing period is a floating rate based on the prime rate plus a margin.
HELOCs that convert to an amortizing loan may experience higher delinquencies and higher loss rates than those in the
initial draw period. The Company’s allowance for loan loss methodology takes this increased inherent risk into consideration.
The following table presents when current outstanding HELOCs will convert to amortizing loans:
December 31, 2014 Balance
Converted to amortizing loan by period end $ 307
Within 1 year 274
> 1 year – 3 years 356
> 3 years – 5 years 1,139
> 5 years 879
Total $ 2,955
The Company also has exposure to concentration risk from its margin and securities lending and client option and futures
activities collateralized by or referencing securities of a single issuer, an index, or within a single industry. This concentration
risk is mitigated by collateral arrangements that require the fair value of such collateral exceeds the amounts loaned.
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
$10.4 billion at December 31, 2014.