Charles Schwab 2015 Annual Report Download - page 62

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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)
- 42 -
At December 31, 2015, the weighted-average originated LTV ratio was 58% and 59% for the First Mortgage and HELOC
portfolios, respectively. The computation of the LTV ratios at origination (origination LTV) for a HELOC includes any first
lien mortgage outstanding on the same property at the time of origination. At December 31, 2015, 21% of HELOCs
($583 million of the HELOC portfolio) were in a first lien position. The weighted-average originated FICO score was 771
and 769 for the First Mortgage and HELOC portfolios, respectively.
The Company monitors the estimated current LTV ratios (estimated current LTV) of its First Mortgage and HELOC
portfolios on an ongoing basis. At December 31, 2015, the weighted-average estimated current LTV ratios were 48% and
51% 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, 2015, the weighted-average updated FICO scores were 773 and 770 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, 2015, $2.2 billion, or 79%, 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. At December 31, 2015, approximately 28% of the HELOC
borrowers that had a balance only paid the minimum amount of interest due or less.
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. Bank Loans and Related Allowance for Loan Losses.”
The following table presents certain of the Company’s bank loan quality metrics as a percentage of total outstanding loans:
December 31, 2015 2014
Loan delinquencies (1) 0.25 % 0.27 %
N
onaccrual loans 0.19 % 0.26 %
Allowance for loan losses 0.22 % 0.31 %
(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 available for sale and held to maturity securities which include
U.S. agency and non-agency mortgage-backed securities, asset-backed securities, corporate debt securities, U.S. agency
notes, U.S. Treasury securities, certificates of deposit, and U.S. state and municipal securities.
At December 31, 2015, substantially 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). 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.
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 or geographical
area.