SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2014
Commission File Number: 1-9700
THE CHARLES SCHWAB CORPORATION
(Exact name of registrant as specified in its charter)
|
Delaware (State or other jurisdiction of incorporation or organization) |
94-3025021 (I.R.S. Employer Identification No.) |
211 Main Street, San Francisco, CA 94105
(Address of principal executive offices and zip code)
Registrant’s telephone number, including area code: (415) 667-7000
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes ⌧ No ☐
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes ⌧ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
|
Large accelerated filer ⌧ Non-accelerated filer ☐ (Do not check if a smaller reporting company) |
Accelerated filer ☐ Smaller reporting company ☐ |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes ☐ No ⌧
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
1,305,768,922 shares of $.01 par value Common Stock
Outstanding on October 24, 2014
THE CHARLES SCHWAB CORPORATION
Quarterly Report on Form 10-Q
For the Quarter Ended September 30, 2014
Index
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Item 1. |
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5 – 22 |
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Item 2. |
Management’s Discussion and Analysis of Financial |
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23 – 45 |
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Item 3. |
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46 – 47 |
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Item 1. |
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48 |
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Item 1A. |
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Item 2. |
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Item 3. |
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Item 6. |
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Part I – FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
THE CHARLES SCHWAB CORPORATION
Condensed Consolidated Statements of Income
(In Millions, Except Per Share Amounts)
(Unaudited)
|
Three Months Ended |
Nine Months Ended |
|||||||||||
|
September 30, |
September 30, |
|||||||||||
|
2014 |
2013 |
2014 |
2013 |
|||||||||
|
Net Revenues |
||||||||||||
|
Asset management and administration fees |
$ |
649 |
$ |
583 |
$ |
1,892 |
$ |
1,707 | ||||
|
Interest revenue |
600 | 531 | 1,767 | 1,527 | ||||||||
|
Interest expense |
(27) | (25) | (79) | (79) | ||||||||
|
Net interest revenue |
573 | 506 | 1,688 | 1,448 | ||||||||
|
Trading revenue |
209 | 224 | 668 | 682 | ||||||||
|
Other |
120 | 57 | 253 | 172 | ||||||||
|
Provision for loan losses |
1 | 4 | 7 | (1) | ||||||||
|
Net impairment losses on securities (1) |
(1) | (1) | (1) | (8) | ||||||||
|
Total net revenues |
1,551 | 1,373 | 4,507 | 4,000 | ||||||||
|
Expenses Excluding Interest |
||||||||||||
|
Compensation and benefits |
593 | 482 | 1,641 | 1,512 | ||||||||
|
Professional services |
117 | 103 | 335 | 308 | ||||||||
|
Occupancy and equipment |
82 | 77 | 242 | 231 | ||||||||
|
Advertising and market development |
59 | 57 | 187 | 198 | ||||||||
|
Communications |
55 | 55 | 168 | 165 | ||||||||
|
Depreciation and amortization |
49 | 51 | 145 | 153 | ||||||||
|
Other |
78 | 84 | 228 | 226 | ||||||||
|
Total expenses excluding interest |
1,033 | 909 | 2,946 | 2,793 | ||||||||
|
Income before taxes on income |
518 | 464 | 1,561 | 1,207 | ||||||||
|
Taxes on income |
197 | 174 | 590 | 455 | ||||||||
|
Net Income |
321 | 290 | 971 | 752 | ||||||||
|
Preferred stock dividends |
9 | 8 | 39 | 39 | ||||||||
|
Net Income Available to Common Stockholders |
$ |
312 |
$ |
282 |
$ |
932 |
$ |
713 | ||||
|
Weighted-Average Common Shares Outstanding — Diluted |
1,316 | 1,296 | 1,313 | 1,288 | ||||||||
|
Earnings Per Common Share — Basic |
$ |
.24 |
$ |
.22 |
$ |
.71 |
$ |
.55 |
||||
|
Earnings Per Common Share — Diluted |
$ |
.24 |
$ |
.22 |
$ |
.70 |
$ |
.55 |
||||
|
(1) |
Net impairment losses on securities include total other-than-temporary impairment losses of $1 million and $0 recognized in other comprehensive income, net of $0 and $(1) million reclassified from other comprehensive income, for the three months ended September 30, 2014 and 2013, respectively. Net impairment losses on securities include total other-than-temporary impairment losses of $1 million and $2 million recognized in other comprehensive income, net of $0 and $(6) million reclassified from other comprehensive income, for the nine months ended September 30, 2014 and 2013, respectively. |
See Notes to Condensed Consolidated Financial Statements.
- 1 -
THE CHARLES SCHWAB CORPORATION
Condensed Consolidated Statements of Comprehensive Income
(In Millions)
(Unaudited)
|
Three Months Ended |
Nine Months Ended |
|||||||||||
|
September 30, |
September 30, |
|||||||||||
|
2014 |
2013 |
2014 |
2013 |
|||||||||
|
Net Income |
$ |
321 |
$ |
290 |
$ |
971 |
$ |
752 | ||||
|
Other comprehensive (loss) income, before tax: |
||||||||||||
|
Change in net unrealized gain on securities available for sale: |
||||||||||||
|
Net unrealized (loss) gain |
(25) | 72 | 260 | (408) | ||||||||
|
Reclassification of impairment charges included in net |
||||||||||||
|
impairment losses on securities |
1 | 1 | 1 | 8 | ||||||||
|
Other reclassifications included in other revenue |
(12) | (2) | (14) | (5) | ||||||||
|
Other |
- |
- |
- |
1 | ||||||||
|
Other comprehensive (loss) income, before tax |
(36) | 71 | 247 | (404) | ||||||||
|
Income tax effect |
13 | (28) | (93) | 152 | ||||||||
|
Other comprehensive (loss) income, net of tax |
(23) | 43 | 154 | (252) | ||||||||
|
Comprehensive Income |
$ |
298 |
$ |
333 |
$ |
1,125 |
$ |
500 | ||||
See Notes to Condensed Consolidated Financial Statements.
- 2 -
THE CHARLES SCHWAB CORPORATION
Condensed Consolidated Balance Sheets
(In Millions, Except Per Share and Share Amounts)
(Unaudited)
|
September 30, |
December 31, |
|||||
|
2014 |
2013 |
|||||
|
Assets |
||||||
|
Cash and cash equivalents |
$ |
8,588 |
$ |
7,728 | ||
|
Cash and investments segregated and on deposit for regulatory purposes |
||||||
|
(including resale agreements of $11,729 at September 30, 2014 and $14,016 |
||||||
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at December 31, 2013) |
19,890 | 23,553 | ||||
|
Receivables from brokers, dealers, and clearing organizations |
458 | 509 | ||||
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Receivables from brokerage clients — net |
15,416 | 13,951 | ||||
|
Other securities owned — at fair value |
572 | 517 | ||||
|
Securities available for sale |
52,201 | 51,618 | ||||
|
Securities held to maturity (fair value — $33,939 at September 30, 2014 and |
||||||
|
$29,490 at December 31, 2013) |
34,007 | 30,318 | ||||
|
Loans to banking clients — net |
13,080 | 12,419 | ||||
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Equipment, office facilities, and property — net |
991 | 790 | ||||
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Goodwill |
1,227 | 1,227 | ||||
|
Intangible assets — net |
233 | 266 | ||||
|
Other assets |
781 | 746 | ||||
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Total assets |
$ |
147,444 |
$ |
143,642 | ||
|
Liabilities and Stockholders’ Equity |
||||||
|
Deposits from banking clients |
$ |
97,345 |
$ |
92,972 | ||
|
Payables to brokers, dealers, and clearing organizations |
2,099 | 1,467 | ||||
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Payables to brokerage clients |
33,131 | 35,333 | ||||
|
Accrued expenses and other liabilities |
1,496 | 1,586 | ||||
|
Long-term debt |
1,900 | 1,903 | ||||
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Total liabilities |
135,971 | 133,261 | ||||
|
Stockholders’ equity: |
||||||
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Preferred stock — $.01 par value per share; aggregate liquidation |
||||||
|
preference of $885 |
872 | 869 | ||||
|
Common stock — 3 billion shares authorized; $.01 par value per share; |
||||||
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1,487,543,446 shares issued |
15 | 15 | ||||
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Additional paid-in capital |
4,050 | 3,951 | ||||
|
Retained earnings |
9,949 | 9,253 | ||||
|
Treasury stock, at cost — 181,992,826 shares at September 30, 2014 and |
||||||
|
190,657,263 shares at December 31, 2013 |
(3,576) | (3,716) | ||||
|
Accumulated other comprehensive income |
163 | 9 | ||||
|
Total stockholders’ equity |
11,473 | 10,381 | ||||
|
Total liabilities and stockholders’ equity |
$ |
147,444 |
$ |
143,642 | ||
See Notes to Condensed Consolidated Financial Statements.
- 3 -
THE CHARLES SCHWAB CORPORATION
Condensed Consolidated Statements of Cash Flows
(In Millions)
(Unaudited)
|
Nine Months Ended |
||||||
|
September 30, |
||||||
|
2014 |
2013 |
|||||
|
Cash Flows from Operating Activities |
||||||
|
Net income |
$ |
971 |
$ |
752 | ||
|
Adjustments to reconcile net income to net cash provided by operating activities: |
||||||
|
Provision for loan losses |
(7) | 1 | ||||
|
Net impairment losses on securities |
1 | 8 | ||||
|
Stock-based compensation |
80 | 83 | ||||
|
Depreciation and amortization |
145 | 153 | ||||
|
Premium amortization, net, on securities available for sale and securities held to maturity |
91 | 129 | ||||
|
Other |
(5) | 23 | ||||
|
Net change in: |
||||||
|
Cash and investments segregated and on deposit for regulatory purposes |
3,663 | 4,949 | ||||
|
Receivables from brokers, dealers, and clearing organizations |
56 | (177) | ||||
|
Receivables from brokerage clients |
(1,469) | 332 | ||||
|
Other securities owned |
(55) | 154 | ||||
|
Other assets |
(49) | (48) | ||||
|
Payables to brokers, dealers, and clearing organizations |
389 | 101 | ||||
|
Payables to brokerage clients |
(2,202) | (5,798) | ||||
|
Accrued expenses and other liabilities |
(121) | 163 | ||||
|
Net cash provided by operating activities |
1,488 | 825 | ||||
|
Cash Flows from Investing Activities |
||||||
|
Purchases of securities available for sale |
(10,556) | (19,910) | ||||
|
Proceeds from sales of securities available for sale |
5,724 | 4,665 | ||||
|
Principal payments on securities available for sale |
4,630 | 9,087 | ||||
|
Purchases of securities held to maturity |
(5,612) | (13,442) | ||||
|
Principal payments on securities held to maturity |
1,948 | 3,332 | ||||
|
Net increase in loans to banking clients |
(672) | (1,315) | ||||
|
Purchase of equipment, office facilities, and property |
(310) | (176) | ||||
|
Other investing activities |
(8) | 2 | ||||
|
Net cash used for investing activities |
(4,856) | (17,757) | ||||
|
Cash Flows from Financing Activities |
||||||
|
Net change in deposits from banking clients |
4,373 | 11,810 | ||||
|
Repayment of commercial paper |
- |
(300) | ||||
|
Issuance of long-term debt |
- |
275 | ||||
|
Repayment of long-term debt |
(5) | (4) | ||||
|
Dividends paid |
(286) | (283) | ||||
|
Proceeds from stock options exercised and other |
138 | 140 | ||||
|
Other financing activities |
8 | (7) | ||||
|
Net cash provided by financing activities |
4,228 | 11,631 | ||||
|
Increase (Decrease) in Cash and Cash Equivalents |
860 | (5,301) | ||||
|
Cash and Cash Equivalents at Beginning of Period |
7,728 | 12,663 | ||||
|
Cash and Cash Equivalents at End of Period |
$ |
8,588 |
$ |
7,362 | ||
|
Supplemental Cash Flow Information |
||||||
|
Cash paid during the period for: |
||||||
|
Interest |
$ |
91 |
$ |
89 | ||
|
Income taxes |
$ |
588 |
$ |
448 | ||
|
Non-cash investing activity: |
||||||
|
Securities purchased during the period but settled after period end |
$ |
243 |
$ |
38 | ||
See Notes to Condensed Consolidated Financial Statements.
- 4 -
THE CHARLES SCHWAB CORPORATION
Notes to Condensed Consolidated Financial Statements
(Tabular Amounts in Millions, Except Per Share Data, Ratios, or as Noted)
(Unaudited)
1.Introduction and Basis of Presentation
The Charles Schwab Corporation (CSC) is a savings and loan holding company engaged, through its subsidiaries, in securities brokerage, banking, money management, and financial advisory services. Charles Schwab & Co., Inc. (Schwab) is a securities broker-dealer with over 300 domestic branch offices in 45 states, as well as a branch in each of the Commonwealth of Puerto Rico and London, England. In addition, Schwab serves clients in Hong Kong through one of CSC’s subsidiaries. Other subsidiaries include Charles Schwab Bank (Schwab Bank), a federal savings bank, and Charles Schwab Investment Management, Inc. (CSIM), the investment advisor for Schwab’s proprietary mutual funds, which are referred to as the Schwab Funds®, and for Schwab’s exchange-traded funds, which are referred to as the Schwab ETFs™.
The accompanying unaudited condensed consolidated financial statements include CSC and its majority-owned subsidiaries (collectively referred to as the Company). Intercompany balances and transactions have been eliminated. These condensed consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States (U.S.), which require management to make certain estimates and assumptions that affect the reported amounts in the accompanying financial statements. Certain estimates relate to other-than-temporary impairment of securities available for sale and securities held to maturity, valuation of goodwill, allowance for loan losses, and legal and regulatory reserves. Actual results may differ from those estimates. These condensed consolidated financial statements reflect all adjustments that are, in the opinion of management, necessary for a fair presentation of the results for the periods presented. These adjustments are of a normal recurring nature. The Company’s results for any interim period are not necessarily indicative of results for a full year or any other interim period. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2013.
The Company’s significant accounting policies are included in note “2 – Summary of Significant Accounting Policies” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2013. There have been no significant changes to these accounting policies during the first nine months of 2014.
2.New Accounting Standards
New Accounting Standards Not Yet Adopted
In January 2014, the Financial Accounting Standards Board (FASB) issued new guidance for creditors of consumer mortgage loans, which is effective January 1, 2015. The guidance clarifies when physical possession of a property underlying a consumer mortgage loan transfers to the creditor, and therefore when a loan receivable should be derecognized and the real estate property underlying the loan should be recognized. The adoption of this new guidance is not expected to have a material impact on the Company’s financial position, results of operations, earnings per common share (EPS), or cash flows.
In May 2014, the FASB issued new guidance on revenue recognition, which is effective January 1, 2017. The guidance clarifies that revenue from contracts with customers should be recognized in a manner that depicts both the likelihood of payment and the timing of the related transfer of goods or performance of services. The Company is currently evaluating the impact of this new guidance on its financial position, results of operations, EPS, and cash flows.
- 5 -
THE CHARLES SCHWAB CORPORATION
Notes to Condensed Consolidated Financial Statements
(Tabular Amounts in Millions, Except Per Share Data, Ratios, or as Noted)
(Unaudited)
3.Securities Available for Sale and Securities Held to Maturity
The amortized cost, gross unrealized gains and losses, and fair value of securities available for sale and securities held to maturity are as follows:
|
Gross |
Gross |
|||||||||||
|
Amortized |
Unrealized |
Unrealized |
Fair |
|||||||||
|
September 30, 2014 |
Cost |
Gains |
Losses |
Value |
||||||||
|
Securities available for sale: |
||||||||||||
|
Asset-backed securities |
$ |
19,419 |
$ |
90 |
$ |
6 |
$ |
19,503 | ||||
|
U.S. agency mortgage-backed securities |
18,001 | 215 | 15 | 18,201 | ||||||||
|
Corporate debt securities |
7,644 | 46 | 6 | 7,684 | ||||||||
|
U.S. agency notes |
3,990 |
- |
67 | 3,923 | ||||||||
|
Certificates of deposit |
1,533 | 1 |
- |
1,534 | ||||||||
|
Non-agency residential mortgage-backed securities |
543 | 19 | 24 | 538 | ||||||||
|
Treasury securities |
499 | 1 |
- |
500 | ||||||||
|
Non-agency commercial mortgage-backed securities |
311 | 7 |
- |
318 | ||||||||
|
Total securities available for sale |
$ |
51,940 |
$ |
379 |
$ |
118 |
$ |
52,201 | ||||
|
Securities held to maturity: |
||||||||||||
|
U.S. agency mortgage-backed securities |
$ |
33,005 |
$ |
316 |
$ |
357 |
$ |
32,964 | ||||
|
Non-agency commercial mortgage-backed securities |
1,002 | 4 | 31 | 975 | ||||||||
|
Total securities held to maturity |
$ |
34,007 |
$ |
320 |
$ |
388 |
$ |
33,939 | ||||
|
Gross |
Gross |
|||||||||||
|
Amortized |
Unrealized |
Unrealized |
Fair |
|||||||||
|
December 31, 2013 |
Cost |
Gains |
Losses |
Value |
||||||||
|
Securities available for sale: |
||||||||||||
|
U.S. agency mortgage-backed securities |
$ |
18,554 |
$ |
140 |
$ |
49 |
$ |
18,645 | ||||
|
Asset-backed securities |
15,201 | 42 | 37 | 15,206 | ||||||||
|
Corporate debt securities |
8,973 | 49 | 15 | 9,007 | ||||||||
|
U.S. agency notes |
4,239 | 1 | 104 | 4,136 | ||||||||
|
Certificates of deposit |
3,650 | 4 | 2 | 3,652 | ||||||||
|
Non-agency residential mortgage-backed securities |
616 | 11 | 34 | 593 | ||||||||
|
Non-agency commercial mortgage-backed securities |
271 | 8 |
- |
279 | ||||||||
|
Other securities |
100 |
- |
- |
100 | ||||||||
|
Total securities available for sale |
$ |
51,604 |
$ |
255 |
$ |
241 |
$ |
51,618 | ||||
|
Securities held to maturity: |
||||||||||||
|
U.S. agency mortgage-backed securities |
$ |
29,260 |
$ |
161 |
$ |
921 |
$ |
28,500 | ||||
|
Non-agency commercial mortgage-backed securities |
958 |
- |
68 | 890 | ||||||||
|
Other securities |
100 |
- |
- |
100 | ||||||||
|
Total securities held to maturity |
$ |
30,318 |
$ |
161 |
$ |
989 |
$ |
29,490 | ||||
Schwab Bank pledges securities issued by federal agencies to secure certain trust deposits. The fair value of these pledged securities was $132 million at September 30, 2014.
- 6 -
THE CHARLES SCHWAB CORPORATION
Notes to Condensed Consolidated Financial Statements
(Tabular Amounts in Millions, Except Per Share Data, Ratios, or as Noted)
(Unaudited)
A summary of securities with unrealized losses, aggregated by category and period of continuous unrealized loss, is as follows:
|
Less than |
12 months |
|||||||||||||||||
|
12 months |
or longer |
Total |
||||||||||||||||
|
Fair |
Unrealized |
Fair |
Unrealized |
Fair |
Unrealized |
|||||||||||||
|
September 30, 2014 |
Value |
Losses |
Value |
Losses |
Value |
Losses |
||||||||||||
|
Securities available for sale: |
||||||||||||||||||
|
Asset-backed securities |
$ |
1,928 |
$ |
4 |
$ |
841 |
$ |
2 |
$ |
2,769 |
$ |
6 | ||||||
|
U.S agency mortgage-backed securities |
2,414 | 6 | 1,629 | 9 | 4,043 | 15 | ||||||||||||
|
Corporate debt securities |
1,010 | 1 | 616 | 5 | 1,626 | 6 | ||||||||||||
|
U.S. agency notes |
249 | 1 | 3,674 | 66 | 3,923 | 67 | ||||||||||||
|
Non-agency residential mortgage-backed |
||||||||||||||||||
|
securities |
25 | 1 | 311 | 23 | 336 | 24 | ||||||||||||
|
Total |
$ |
5,626 |
$ |
13 |
$ |
7,071 |
$ |
105 |
$ |
12,697 |
$ |
118 | ||||||
|
Securities held to maturity: |
||||||||||||||||||
|
U.S. agency mortgage-backed securities |
$ |
4,421 |
$ |
17 |
$ |
11,565 |
$ |
340 |
$ |
15,986 |
$ |
357 | ||||||
|
Non-agency commercial mortgage-backed |
||||||||||||||||||
|
securities |
163 | 2 | 645 | 29 | 808 | 31 | ||||||||||||
|
Total |
$ |
4,584 |
$ |
19 |
$ |
12,210 |
$ |
369 |
$ |
16,794 |
$ |
388 | ||||||
|
Total securities with unrealized losses (1) |
$ |
10,210 |
$ |
32 |
$ |
19,281 |
$ |
474 |
$ |
29,491 |
$ |
506 | ||||||
|
(1) |
The number of investment positions with unrealized losses totaled 209 for securities available for sale and 144 for securities held to maturity. |
|
Less than |
12 months |
|||||||||||||||||
|
12 months |
or longer |
Total |
||||||||||||||||
|
Fair |
Unrealized |
Fair |
Unrealized |
Fair |
Unrealized |
|||||||||||||
|
December 31, 2013 |
Value |
Losses |
Value |
Losses |
Value |
Losses |
||||||||||||
|
Securities available for sale: |
||||||||||||||||||
|
U.S. agency mortgage-backed securities |
$ |
5,044 |
$ |
47 |
$ |
93 |
$ |
2 |
$ |
5,137 |
$ |
49 | ||||||
|
Asset-backed securities |
6,391 | 33 | 591 | 4 | 6,982 | 37 | ||||||||||||
|
Corporate debt securities |
1,802 | 14 | 499 | 1 | 2,301 | 15 | ||||||||||||
|
U.S. agency notes |
3,636 | 104 |
- |
- |
3,636 | 104 | ||||||||||||
|
Certificates of deposit |
- |
- |
299 | 2 | 299 | 2 | ||||||||||||
|
Non-agency residential mortgage-backed |
||||||||||||||||||
|
securities |
89 | 2 | 374 | 32 | 463 | 34 | ||||||||||||
|
Total |
$ |
16,962 |
$ |
200 |
$ |
1,856 |
$ |
41 |
$ |
18,818 |
$ |
241 | ||||||
|
Securities held to maturity: |
||||||||||||||||||
|
U.S. agency mortgage-backed securities |
$ |
19,175 |
$ |
698 |
$ |
2,345 |
$ |
223 |
$ |
21,520 |
$ |
921 | ||||||
|
Non-agency commercial mortgage-backed |
||||||||||||||||||
|
securities |
630 | 43 | 260 | 25 | 890 | 68 | ||||||||||||
|
Total |
$ |
19,805 |
$ |
741 |
$ |
2,605 |
$ |
248 |
$ |
22,410 |
$ |
989 | ||||||
|
Total securities with unrealized losses (1) |
$ |
36,767 |
$ |
941 |
$ |
4,461 |
$ |
289 |
$ |
41,228 |
$ |
1,230 | ||||||
|
(1) |
The number of investment positions with unrealized losses totaled 273 for securities available for sale and 193 for securities held to maturity. |
Non-agency residential mortgage-backed securities include securities collateralized by loans that are considered to be “Prime” (defined as loans to borrowers with a Fair Isaac Corporation (FICO) credit score of 620 or higher at origination), and “Alt-A” (defined as Prime loans with reduced documentation at origination). Management determined that it does not expect to recover all of the amortized cost of certain of its Alt-A and Prime residential mortgage-backed securities and therefore determined that these securities were other-than-temporarily impaired (OTTI); the Company does not intend to sell these securities and it is not “more likely than not” that the Company will be required to sell these securities before anticipated
- 7 -
THE CHARLES SCHWAB CORPORATION
Notes to Condensed Consolidated Financial Statements
(Tabular Amounts in Millions, Except Per Share Data, Ratios, or as Noted)
(Unaudited)
recovery of the unrealized losses on these securities. The Company recognized an impairment charge equal to the securities’ expected credit losses of $1 million during the third quarter and first nine months of 2014, based on the Company’s cash flow projections for these securities. The expected credit losses are measured as the difference between the present value of expected cash flows and the amortized cost of the securities. Further deterioration in the performance of the underlying loans in the Company’s non-agency residential mortgage-backed securities portfolio could result in the recognition of impairment losses.
The following table is a rollforward of the amount of credit losses recognized in earnings for OTTI securities held by the Company during the period for which a portion of the impairment was recognized in or reclassified from other comprehensive income:
|
Three Months Ended |
Nine Months Ended |
|||||||||||
|
September 30, |
September 30, |
|||||||||||
|
2014 |
2013 |
2014 |
2013 |
|||||||||
|
Balance at beginning of period |
$ |
169 |
$ |
166 |
$ |
169 |
$ |
159 | ||||
|
Credit losses recognized into current period earnings on debt securities for |
||||||||||||
|
which an other-than-temporary impairment was not previously recognized |
1 |
- |
1 | 1 | ||||||||
|
Credit losses recognized into current period earnings on debt securities for |
||||||||||||
|
which an other-than-temporary impairment was previously recognized |
- |
1 |
- |
7 | ||||||||
|
Balance at end of period |
$ |
170 |
$ |
167 |
$ |
170 |
$ |
167 | ||||
The maturities of securities available for sale and securities held to maturity at September 30, 2014 are as follows:
|
After 1 year |
After 5 years |
||||||||||||||
|
Within |
through |
through |
After |
||||||||||||
|
1 year |
5 years |
10 years |
10 years |
Total |
|||||||||||
|
Securities available for sale: |
|||||||||||||||
|
Asset-backed securities |
$ |
- |
$ |
2,666 |
$ |
5,148 |
$ |
11,689 |
$ |
19,503 | |||||
|
U.S. agency mortgage-backed securities (1) |
- |
1,312 | 4,425 | 12,464 | 18,201 | ||||||||||
|
Corporate debt securities |
741 | 6,893 | 50 |
- |
7,684 | ||||||||||
|
U.S. agency notes |
- |
3,923 |
- |
- |
3,923 | ||||||||||
|
Certificates of deposit |
384 | 1,150 |
- |
- |
1,534 | ||||||||||
|
Non-agency residential mortgage-backed |
|||||||||||||||
|
securities (1) |
- |
2 |
- |
536 | 538 | ||||||||||
|
Treasury securities |
- |
500 | |||||||||||||