ecf7cef71f144fc

UNITED STATES

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 June 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.

 

1,303,355,243 shares of $.01 par value Common Stock

Outstanding on July 25, 2014

 

 

 


 

THE CHARLES SCHWAB CORPORATION

 

Quarterly Report on Form 10-Q

For the Quarter Ended June 30, 2014

 

Index

 

 

 

 

 

 

 

 

 

 

 

 

Page

Part I - Financial Information 

 

 

 

 

 

 

 

 

Item 1.

Condensed Consolidated Financial Statements (Unaudited):

 

 

 

 

 

 

 

 

 

Statements of Income

 

1

 

 

Statements of Comprehensive Income

 

2

 

 

Balance Sheets

 

3

 

 

Statements of Cash Flows

 

4

 

 

Notes

 

522

 

 

 

 

 

 

Item 2.

Management’s Discussion and Analysis of Financial
Condition and Results of Operations

 

2345

 

 

 

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

 

4647

 

 

 

 

 

 

Item 4.

Controls and Procedures

 

47

 

 

 

 

 

Part II - Other Information 

 

 

 

 

 

 

 

 

Item 1.

Legal Proceedings

 

48

 

 

 

 

 

 

Item 1A.

Risk Factors

 

48

 

 

 

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

 

48

 

 

 

 

 

 

Item 3.

Defaults Upon Senior Securities

 

49

 

 

 

 

 

 

Item 4.

Mine Safety Disclosures

 

49

 

 

 

 

 

 

Item 5.

Other Information

 

49

 

 

 

 

 

 

Item 6.

Exhibits

 

49

 

 

 

 

 

Signature 

 

50

 

 

 

 

 

 

 


 

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

 

Six Months Ended

 

 

June 30,

 

June 30,

 

  

2014

 

2013

 

2014

 

2013

Net Revenues

  

 

 

 

 

 

 

 

 

 

 

 

Asset management and administration fees

  

$

632 

 

$

572 

  

$

1,243 

 

$

1,124 

Interest revenue

  

 

588 

 

 

499 

  

 

1,167 

 

 

996 

Interest expense

  

 

(26)

 

 

(26)

 

 

(52)

 

 

(54)

Net interest revenue

  

 

562 

 

 

473 

 

 

1,115 

 

 

942 

Trading revenue

  

 

212 

 

 

235 

 

 

459 

 

 

458 

Other

  

 

65 

 

 

59 

 

 

133 

 

 

115 

Provision for loan losses

  

 

 

 

 

 

 

 

(5)

Net impairment losses on securities (1)

  

 

 -

 

 

(3)

 

 

 -

 

 

(7)

Total net revenues

  

 

1,478 

 

 

1,337 

 

 

2,956 

 

 

2,627 

Expenses Excluding Interest

  

 

 

 

 

 

 

 

 

 

 

 

Compensation and benefits

  

 

520 

 

 

494 

  

 

1,048 

 

 

1,030 

Professional services

  

 

112 

 

 

106 

  

 

218 

 

 

205 

Occupancy and equipment

  

 

80 

 

 

77 

  

 

160 

 

 

154 

Advertising and market development

  

 

65 

 

 

67 

  

 

128 

 

 

141 

Communications

  

 

57 

 

 

56 

  

 

113 

 

 

110 

Depreciation and amortization

  

 

48 

 

 

51 

  

 

96 

 

 

102 

Other

  

 

75 

 

 

74 

  

 

150 

 

 

142 

Total expenses excluding interest

  

 

957 

 

 

925 

  

 

1,913 

 

 

1,884 

Income before taxes on income

  

 

521 

 

 

412 

  

 

1,043 

 

 

743 

Taxes on income

  

 

197 

 

 

156 

  

 

393 

 

 

281 

Net Income

  

 

324 

 

 

256 

  

 

650 

 

 

462 

Preferred stock dividends

  

 

22 

 

 

23 

  

 

30 

 

 

31 

Net Income Available to Common Stockholders

  

$

302 

 

$

233 

  

$

620 

 

$

431 

Weighted-Average Common Shares Outstanding — Diluted

  

 

1,313 

 

 

1,288 

  

 

1,312 

 

 

1,285 

Earnings Per Common Share — Basic

  

$

.23

 

$

.18

  

$

.47

 

$

.33

Earnings Per Common Share — Diluted

  

$

.23

 

$

.18

  

$

.47

 

$

.33

 

 

 

(1)

There were no net impairment losses on securities for the three or six months ended June 30, 2014. Net impairment losses on securities include total other-than-temporary impairment losses of $2 million recognized in other comprehensive income, net of $(1) million reclassified from other comprehensive income, for the three months ended June 30, 2013. Net impairment losses on securities include total other-than-temporary impairment losses of $2 million recognized in other comprehensive income, net of $(5) million reclassified from other comprehensive income, for the six months ended June 30, 2013.

 

See Notes to Condensed Consolidated Financial Statements.

 

 

-  1  - 


 

THE CHARLES SCHWAB CORPORATION

Condensed Consolidated Statements of Comprehensive Income

(In Millions)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Six Months Ended

 

  

June 30,

 

June 30,

 

  

2014

 

2013

 

2014

 

2013

Net Income

  

$

324 

 

$

256 

  

$

650 

 

$

462 

Other comprehensive income (loss), before tax:

  

 

 

 

 

 

 

 

 

 

 

 

Change in net unrealized gain on securities available for sale:

  

 

 

 

 

 

 

 

 

 

 

 

Net unrealized gain (loss)

  

 

126 

 

 

(477)

  

 

285 

 

 

(480)

Reclassification of impairment charges included in net

  

 

 

 

 

 

 

 

 

 

 

 

impairment losses on securities

 

 

 -

 

 

 

 

 -

 

 

Other reclassifications included in other revenue

 

 

(1)

 

 

(3)

 

 

(2)

 

 

(3)

Other

 

 

 -

 

 

 -

 

 

 -

 

 

Other comprehensive income (loss), before tax

  

 

125 

 

 

(477)

 

 

283 

 

 

(475)

Income tax effect

 

 

(47)

 

 

180 

 

 

(106)

 

 

180 

Other comprehensive income (loss), net of tax

  

 

78 

 

 

(297)

  

 

177 

 

 

(295)

Comprehensive Income (Loss)

  

$

402 

 

$

(41)

  

$

827 

 

$

167 

 

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)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30,

 

December 31,

 

  

2014

 

2013

Assets

  

 

 

 

 

 

Cash and cash equivalents

  

$

6,832 

 

$

7,728 

Cash and investments segregated and on deposit for regulatory purposes

  

 

 

 

 

 

(including resale agreements of $10,440 at June 30, 2014 and $14,016

 

 

 

 

 

 

at December 31, 2013)

 

 

19,093 

 

 

23,553 

Receivables from brokers, dealers, and clearing organizations

  

 

522 

 

 

509 

Receivables from brokerage clients — net

  

 

14,670 

 

 

13,951 

Other securities owned — at fair value

  

 

583 

 

 

517 

Securities available for sale

  

 

53,203 

 

 

51,618 

Securities held to maturity (fair value — $32,647 at June 30, 2014 and

  

 

 

 

 

 

$29,490 at December 31, 2013)

 

 

32,495 

 

 

30,318 

Loans to banking clients — net

  

 

12,869 

 

 

12,419 

Equipment, office facilities, and property — net

  

 

883 

 

 

790 

Goodwill

  

 

1,227 

 

 

1,227 

Intangible assets — net

  

 

244 

 

 

266 

Other assets

  

 

780 

 

 

746 

Total assets

  

$

143,401 

 

$

143,642 

Liabilities and Stockholders’ Equity

  

 

 

 

 

 

Deposits from banking clients

  

$

95,688 

 

$

92,972 

Payables to brokers, dealers, and clearing organizations

  

 

1,725 

 

 

1,467 

Payables to brokerage clients

  

 

31,484 

 

 

35,333 

Accrued expenses and other liabilities

  

 

1,433 

 

 

1,586 

Long-term debt

  

 

1,901 

 

 

1,903 

Total liabilities

  

 

132,231 

 

 

133,261 

Stockholders’ equity:

  

 

 

 

 

 

Preferred stock — $.01 par value per share; aggregate liquidation

  

 

 

 

 

 

preference of $885

 

 

871 

 

 

869 

Common stock — 3 billion shares authorized; $.01 par value per share;

  

 

 

 

 

 

1,487,543,446 shares issued

 

 

15 

 

 

15 

Additional paid-in capital

  

 

4,012 

 

 

3,951 

Retained earnings

  

 

9,715 

 

 

9,253 

Treasury stock, at cost — 185,261,252 shares at June 30, 2014 and

  

 

 

 

 

 

190,657,263 shares at December 31, 2013

 

 

(3,629)

 

 

(3,716)

Accumulated other comprehensive income

  

 

186 

 

 

Total stockholders’ equity

  

 

11,170 

 

 

10,381 

Total liabilities and stockholders’ equity

  

$

143,401 

 

$

143,642 

 

See Notes to Condensed Consolidated Financial Statements.

 

 

-  3  - 


 

THE CHARLES SCHWAB CORPORATION

Condensed Consolidated Statements of Cash Flows

(In Millions)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

Six Months Ended

 

 

June 30,

 

 

2014

 

2013

Cash Flows from Operating Activities

 

 

 

 

 

 

Net income

 

$

650 

 

$

462 

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

 

Provision for loan losses

 

 

(6)

 

 

Net impairment losses on securities

 

 

 -

 

 

Stock-based compensation

 

 

54 

 

 

59 

Depreciation and amortization

 

 

96 

 

 

102 

Premium amortization, net, on securities available for sale and securities held to maturity

 

 

58 

 

 

92 

Other

 

 

 

 

20 

Net change in:

 

 

 

 

 

 

Cash and investments segregated and on deposit for regulatory purposes

 

 

4,460 

 

 

1,458 

Receivables from brokers, dealers, and clearing organizations

 

 

(9)

 

 

(62)

Receivables from brokerage clients

 

 

(722)

 

 

631 

Other securities owned

 

 

(66)

 

 

148 

Other assets

 

 

(47)

 

 

16 

Payables to brokers, dealers, and clearing organizations

 

 

95 

 

 

662 

Payables to brokerage clients

 

 

(3,849)

 

 

(3,478)

Accrued expenses and other liabilities

 

 

(220)

 

 

42 

Net cash provided by operating activities

 

 

501 

 

 

164 

Cash Flows from Investing Activities

 

 

 

 

 

 

Purchases of securities available for sale

 

 

(6,493)

 

 

(12,587)

Proceeds from sales of securities available for sale

 

 

2,045 

 

 

3,004 

Principal payments on securities available for sale

 

 

3,194 

 

 

7,017 

Purchases of securities held to maturity

 

 

(3,255)

 

 

(9,914)

Principal payments on securities held to maturity

 

 

1,132 

 

 

2,413 

Net increase in loans to banking clients

 

 

(460)

 

 

(976)

Purchase of equipment, office facilities, and property

 

 

(165)

 

 

(111)

Other investing activities

 

 

(8)

 

 

Net cash used for investing activities

 

 

(4,010)

 

 

(11,152)

Cash Flows from Financing Activities

 

 

 

 

 

 

Net change in deposits from banking clients

 

 

2,716 

 

 

4,968 

Repayment of commercial paper

 

 

 -

 

 

(300)

Repayment of long-term debt

 

 

(4)

 

 

(3)

Dividends paid

 

 

(186)

 

 

(184)

Proceeds from stock options exercised and other

 

 

81 

 

 

81 

Other financing activities

 

 

 

 

(3)

Net cash provided by financing activities

 

 

2,613 

 

 

4,559 

Decrease in Cash and Cash Equivalents

 

 

(896)

 

 

(6,429)

Cash and Cash Equivalents at Beginning of Period

 

 

7,728 

 

 

12,663 

Cash and Cash Equivalents at End of Period

 

$

6,832 

 

$

6,234 

Supplemental Cash Flow Information

 

 

 

 

 

 

Cash paid during the period for:

 

 

 

 

 

 

Interest

 

$

51 

 

$

51 

Income taxes

 

$

403 

 

$

277 

Non-cash investing activity:

 

 

 

 

 

 

Securities purchased during the period but settled after period end

 

$

163 

 

$

420 

 

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 half 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

June 30, 2014

 

Cost

 

Gains

 

Losses

 

Value

Securities available for sale:

  

 

 

  

 

 

  

 

 

 

 

 

U.S. agency mortgage-backed securities

  

$

17,934 

  

$

225 

  

$

26 

  

$

18,133 

Asset-backed securities

  

 

17,524 

  

 

96 

  

 

  

 

17,617 

Corporate debt securities

  

 

9,203 

  

 

62 

  

 

  

 

9,262 

U.S. agency notes

  

 

4,240 

  

 

 -

  

 

56 

  

 

4,184 

Certificates of deposit

  

 

3,124 

  

 

  

 

 -

  

 

3,127 

Non-agency residential mortgage-backed securities

  

 

570 

  

 

15 

  

 

25 

  

 

560 

Non-agency commercial mortgage-backed securities

 

 

311 

 

 

 

 

 -

 

 

320 

Total securities available for sale

  

$

52,906 

  

$

410 

  

$

113 

  

$

53,203 

Securities held to maturity:

  

 

 

  

 

 

  

 

 

 

 

 

U.S. agency mortgage-backed securities

  

$

31,393 

 

$

454 

 

$

284 

 

$

31,563 

Non-agency commercial mortgage-backed securities

 

 

1,002 

 

 

 

 

25 

 

 

984 

Other securities

  

 

100 

 

 

 -

 

 

 -

 

 

100 

Total securities held to maturity

  

$

32,495 

 

$

461 

 

$

309 

 

$

32,647 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  

 

 

 

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 

  

 

 

 

104 

 

 

4,136 

Certificates of deposit

  

 

3,650 

  

 

 

 

 

 

3,652 

Non-agency residential mortgage-backed securities

  

 

616 

  

 

11 

 

 

34 

 

 

593 

Non-agency commercial mortgage-backed securities

 

 

271 

 

 

 

 

 -

 

 

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 $133 million at June 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

June 30, 2014

 

Value

 

Losses

 

Value

 

Losses

 

Value

 

Losses

Securities available for sale:

  

 

 

  

 

 

 

 

 

  

 

 

  

 

 

  

 

 

U.S agency mortgage-backed securities

  

$

4,266 

  

$

22 

  

$

577 

  

$

  

$

4,843 

  

$

26 

Asset-backed securities

 

 

457 

 

 

 

 

853 

 

 

 

 

1,310 

 

 

Corporate debt securities

  

 

 -

  

 

 -

  

 

618 

  

 

  

 

618 

  

 

U.S. agency notes

  

 

 -

  

 

 -

  

 

3,684 

  

 

56 

  

 

3,684 

  

 

56 

Non-agency residential mortgage-backed

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

securities

  

 

33 

  

 

  

 

331 

  

 

24 

  

 

364 

  

 

25 

Total

  

$

4,756 

  

$

24 

  

$

6,063 

  

$

89 

  

$

10,819 

  

$

113 

Securities held to maturity:

  

 

 

  

 

 

 

 

 

  

 

 

  

 

 

  

 

 

U.S. agency mortgage-backed securities

  

$

415 

  

$

  

$

12,125 

  

$

283 

  

$

12,540 

  

$

284 

Non-agency commercial mortgage-backed

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

securities

 

 

 -

 

 

 -

 

 

680 

 

 

25 

 

 

680 

 

 

25 

Total

  

$

415 

  

$

  

$

12,805 

  

$

308 

  

$

13,220 

  

$

309 

Total securities with unrealized losses (1)

  

$

5,171 

  

$

25 

  

$

18,868 

  

$

397 

  

$

24,039 

  

$

422 

 

(1)

The number of investment positions with unrealized losses totaled 218 for securities available for sale and 115 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 

 

$

 

$

5,137 

 

$

49 

Asset-backed securities

  

 

6,391 

  

 

33 

 

 

591 

 

 

  

 

6,982 

  

 

37 

Corporate debt securities

  

 

1,802 

  

 

14 

 

 

499 

 

 

  

 

2,301 

  

 

15 

U.S. agency notes

  

 

3,636 

  

 

104 

 

 

 -

 

 

 -

  

 

3,636 

  

 

104 

Certificates of deposit

  

 

 -

  

 

 -

 

 

299 

 

 

  

 

299 

  

 

Non-agency residential mortgage-backed

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

securities

  

 

89 

  

 

 

 

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 may recognize an impairment charge equal to the securities’ expected credit losses 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. There were no impairment charges recognized during the second quarter or first half of 2014. 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

  

Six Months Ended

 

June 30,

 

June 30,

 

2014

  

2013

  

2014

  

2013

Balance at beginning of period

$

169 

  

$

163 

  

$

169 

  

$

159 

Credit losses recognized into current period earnings on debt securities for

 

 

 

 

 

  

 

 

  

 

 

which an other-than-temporary impairment was not previously recognized

 

 -

  

 

 

 

 -

 

 

Credit losses recognized into current period earnings on debt securities for

 

 

 

 

 

 

 

 

 

 

 

which an other-than-temporary impairment was previously recognized

 

 -

  

 

  

 

 -

  

 

Balance at end of period

$

169 

  

$

166 

  

$

169 

  

$

166 

 

The maturities of securities available for sale and securities held to maturity at June 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:

 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

U.S. agency mortgage-backed securities (1)

 

$

 -

  

$

1,183 

  

$

3,964 

  

$

12,986 

  

$

18,133 

Asset-backed securities

 

 

 -

  

 

1,491 

  

 

4,732 

  

 

11,394 

  

 

17,617 

Corporate debt securities

 

 

1,163 

  

 

8,049 

  

 

50 

  

 

 -

  

 

9,262 

U.S. agency notes

 

 

 -

  

 

4,184 

  

 

 -

  

 

 -

  

 

4,184 

Certificates of deposit

 

 

1,527 

  

 

1,600 

  

 

 -

  

 

 -

  

 

3,127 

Non-agency residential mortgage-backed

 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

securities (1)

 

 

 -

 

 

 

 

 -

 

 

557 

 

 

560 

Non-agency commercial mortgage-backed

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

securities (1)

 

 

 -