Charles Schwab 2014 Annual Report Download - page 77

THE CHARLES SCHWAB CORPORATION
Notes to Consolidated Financial Statements
(Tabular Amounts in Millions, Except Per Share Data, Option Price Amounts, Ratios, or as Noted)
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loan-level simulation discussed above are calibrated to match a moving average of the delinquency roll rates actually
experienced in the respective first lien residential real estate mortgage loan (First Mortgage) and HELOC portfolios. Loss
severity estimates are based on the Company’s historical loss experience and market trends. The estimated loss severity (i.e.
loss given default) used in the allowance for loan loss methodology for HELOC loans is higher than that used in the
methodology for First Mortgages. Housing price trends are derived from historical home price indices and econometric
forecasts of future home values. Factors affecting the home price index include: housing inventory, unemployment, interest
rates, and inflation expectations. Interest rate projections are based on the current term structure of interest rates and historical
volatilities to project various possible future interest rate paths. As a result, the current state of house prices, including the
decrease in general house prices experienced over the last several years, as well as the current state of delinquencies unique to
the Company’s First Mortgage and HELOC portfolios, are considered in the allowance for loan loss methodology.
This methodology results in loss factors that are applied to the outstanding balances to determine the allowance for loan loss
for each loan segment.
The Company considers loan modifications in which it makes an economic concession to a borrower experiencing financial
difficulty to be a troubled debt restructuring.
Nonaccrual loans
Residential real estate mortgages, HELOC, personal, and other loans are placed on nonaccrual status upon becoming 90 days
past due as to interest or principal (unless the loans are well-secured and in the process of collection), or when the full timely
collection of interest or principal becomes uncertain, including loans to borrowers who have filed for bankruptcy. For the
portion of the HELOC portfolio for which the Company is able to track the delinquency status on the associated first lien
loan, the Company places a HELOC on non-accrual status if the associated first mortgage is 90 days or more delinquent,
regardless of the payment status of the HELOC. When a loan is placed on nonaccrual status, the accrued and unpaid interest
receivable is reversed and the loan is accounted for on the cash or cost recovery method thereafter, until qualifying for return
to accrual status. Generally, a nonaccrual loan may be returned to accrual status when all delinquent interest and principal is
repaid and the borrower demonstrates a sustained period of performance, or when the loan is both well-secured and in the
process of collection and collectability is no longer doubtful.
Loan Charge-Offs
The Company charges off a loan in the period that it is deemed uncollectible and records a reduction in the allowance for
loan losses and the loan balance. The Company’s charge-off policy for residential real estate first mortgages and HELOC
loans is to assess the value of the property when the loan has been delinquent for 180 days or has been discharged in
bankruptcy proceedings, regardless of whether or not the property is in foreclosure, and charge-off the amount of the loan
balance in excess of the estimated current value of the underlying property less estimated costs to sell.
Equipment, office facilities, and property
Equipment, office facilities, and property are recorded at cost net of accumulated depreciation and amortization, except for
land, which is recorded at cost. Equipment and office facilities are depreciated on a straight-line basis over an estimated
useful life of five to ten years. Buildings are depreciated on a straight-line basis over 20 to 40 years. Leasehold improvements
are amortized on a straight-line basis over the shorter of the estimated useful life of the asset or the term of the lease.
Software and certain costs incurred for purchasing or developing software for internal use are amortized on a straight-line
basis over an estimated useful life of three or five years. Equipment, office facilities, and property are reviewed for
impairment whenever events or changes in circumstances indicate that the carrying amount of such assets may not be
recoverable.
Goodwill
Goodwill represents the fair value of acquired businesses in excess of the fair value of the individually identified net assets
acquired. Goodwill is not amortized but is tested for impairment annually or whenever indications of impairment exist. The
Company’s annual impairment testing date is April 1st. The Company can elect to qualitatively assess goodwill for