Charles Schwab 2014 Annual Report Download - page 95

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THE CHARLES SCHWAB CORPORATION
Notes to Consolidated Financial Statements
(Tabular Amounts in Millions, Except Per Share Data, Option Price Amounts, Ratios, or as Noted)
- 77 -
value of client securities pledged to fulfill the Company’s proprietary short sales, which resulted from facilitating clients’
dividend reinvestment elections, was $216 million and $130 million at December 31, 2014 and 2013, respectively. The
Company may also pledge client securities to fulfill client margin requirements for open option contracts established with the
OCC. The fair value of these pledged securities to the OCC was $1.3 billion and $1.3 billion at December 31, 2014 and 2013,
respectively.
Commitments to extend credit: Schwab Bank enters into commitments to extend credit to banking clients. Schwab Bank also
has commitments to purchase certain First Mortgage loans and HELOCs under the Program with Quicken Loans, which
began in 2012. The credit risk associated with these commitments varies depending on the creditworthiness of the client and
the value of any collateral expected to be held. Collateral requirements vary by type of loan. At December 31, 2014 and 2013,
the Company had commitments to purchase First Mortgage loans of $226 million and $208 million, respectively. Schwab
Bank also has commitments to extend credit related to its clients’ unused HELOCs, personal loans secured by securities, and
other lines of credit, which totaled $6.7 billion and $5.7 billion at December 31, 2014 and 2013, respectively. See also note
“6 – Loans to Banking Clients and Related Allowance for Loan Losses.”
Financial Guarantees: See note “14 – Commitments and Contingencies.”
Concentration Risk
The Company has exposure to concentration risk when holding large positions of financial instruments collateralized by
assets with similar economic characteristics or in securities of a single issuer or 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). The
fair value of the Company’s investments in mortgage-backed securities totaled $48.9 billion at December 31, 2013. Of these,
$47.1 billion were issued by U.S. agencies and $1.8 billion were 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 corporate debt securities and commercial paper totaled $8.1 billion and
$9.2 billion at December 31, 2014 and 2013, respectively, 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.
The fair value of the Company’s investments in asset-backed securities totaled $19.4 billion and $15.2 billion at
December 31, 2014 and 2013, respectively, with the majority serviced by a single servicer.
The Company’s loans to banking clients include $7.4 billion and $7.3 billion of adjustable rate First Mortgages at
December 31, 2014 and 2013, respectively. At December 31, 2014, approximately 40% of these mortgages consisted of loans
with interest-only payment terms. At December 31, 2014, the interest rates on approximately 65% of these interest-only loans
are not scheduled to reset for three or more years. For additional detail on concentrations in loans to banking clients, see note
“6 – Loans to Banking Clients and Related Allowance for Loan Losses.”
The Company also has exposure to concentration risk from its margin and securities lending activities collateralized by
securities of a single issuer or industry. This concentration risk is mitigated by collateral arrangements that require the fair
value of such collateral exceeds the amounts loaned, as described above.
16. Fair Values of Assets and Liabilities
For a description of the fair value hierarchy and the Company’s fair value methodologies, including the use of independent
third-party pricing services, see note “2 – Summary of Significant Accounting Policies.” The Company did not transfer any
assets or liabilities between Level 1, Level 2, or Level 3 during 2014 or 2013. In addition, the Company did not adjust prices
received from the primary independent third-party pricing service at December 31, 2014 or 2013.