4d4680191421434

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 September 30, 2013

 

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 T  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 T   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 T

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 T

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

 

1,289,217,199 shares of $.01 par value Common Stock

Outstanding on October 23, 2013

 

 

 


 

THE CHARLES SCHWAB CORPORATION

 

Quarterly Report on Form 10-Q

For the Quarter Ended September 30, 2013

 

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

 

23  46

 

 

 

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

 

47  48

 

 

 

 

 

 

Item 4.

Controls and Procedures

 

48

 

 

 

 

 

Part II - Other Information 

 

 

 

 

 

 

 

 

Item 1.

Legal Proceedings

 

49

 

 

 

 

 

 

Item 1A.

Risk Factors

 

49

 

 

 

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

 

49

 

 

 

 

 

 

Item 3.

Defaults Upon Senior Securities

 

50

 

 

 

 

 

 

Item 4.

Mine Safety Disclosures

 

50

 

 

 

 

 

 

Item 5.

Other Information

 

50

 

 

 

 

 

 

Item 6.

Exhibits

 

51

 

 

 

 

 

Signature 

 

52

 

 

 

 

 

 

 


 

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,

 

  

2013

 

2012

 

2013

 

2012

Net Revenues

  

 

 

 

 

 

 

 

 

 

 

 

Asset management and administration fees

  

$

583 

 

$

524 

  

$

1,707 

 

$

1,504 

Interest revenue

  

 

531 

 

 

478 

  

 

1,527 

 

 

1,447 

Interest expense

  

 

(25)

 

 

(39)

 

 

(79)

 

 

(116)

Net interest revenue

  

 

506 

 

 

439 

 

 

1,448 

 

 

1,331 

Trading revenue

  

 

224 

 

 

204 

 

 

682 

 

 

666 

Other

  

 

57 

 

 

42 

 

 

172 

 

 

209 

Provision for loan losses

  

 

 

 

(10)

 

 

(1)

 

 

(14)

Net impairment losses on securities (1)

  

 

(1)

 

 

(3)

 

 

(8)

 

 

(28)

Total net revenues

  

 

1,373 

 

 

1,196 

 

 

4,000 

 

 

3,668 

Expenses Excluding Interest

  

 

 

 

 

 

 

 

 

 

 

 

Compensation and benefits

  

 

482 

 

 

442 

  

 

1,512 

 

 

1,353 

Professional services

  

 

103 

 

 

98 

  

 

308 

 

 

287 

Occupancy and equipment

  

 

77 

 

 

77 

  

 

231 

 

 

233 

Advertising and market development

  

 

57 

 

 

49 

  

 

198 

 

 

173 

Communications

  

 

55 

 

 

53 

  

 

165 

 

 

166 

Depreciation and amortization

  

 

51 

 

 

50 

  

 

153 

 

 

146 

Other

  

 

84 

 

 

66 

  

 

226 

 

 

204 

Total expenses excluding interest

  

 

909 

 

 

835 

  

 

2,793 

 

 

2,562 

Income before taxes on income

  

 

464 

 

 

361 

  

 

1,207 

 

 

1,106 

Taxes on income

  

 

174 

 

 

114 

  

 

455 

 

 

389 

Net Income

  

 

290 

 

 

247 

  

 

752 

 

 

717 

Preferred stock dividends

  

 

 

 

  

 

39 

 

 

23 

Net Income Available to Common Stockholders

  

$

282 

 

$

238 

  

$

713 

 

$

694 

Weighted-Average Common Shares Outstanding — Diluted

  

 

1,296 

 

 

1,275 

  

 

1,288 

 

 

1,274 

Earnings Per Common Share — Basic

  

$

.22

 

$

.19

  

$

.55

 

$

.54

Earnings Per Common Share — Diluted

  

$

.22

 

$

.19

  

$

.55

 

$

.54

 

(1)

Net impairment losses on securities include total other-than-temporary impairment losses of $0 million and $1 million recognized in other comprehensive income, net of $(1) million and $(2) million reclassified from other comprehensive income, for the three months ended September 30, 2013 and 2012, respectively. Net impairment losses on securities include total other-than-temporary impairment losses of $2 million and $15 million recognized in other comprehensive income, net of $(6) million and $(13) million reclassified from other comprehensive income, for the nine months ended September 30, 2013 and 2012, 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,

 

  

2013

 

2012

 

2013

 

2012

Net Income

  

$

290 

 

$

247 

  

$

752 

 

$

717 

Other comprehensive income (loss), before tax:

  

 

 

 

 

 

 

 

 

 

 

 

Change in net unrealized gain on securities available for sale:

  

 

 

 

 

 

 

 

 

 

 

 

Net unrealized gain (loss)

  

 

72 

 

 

250 

  

 

(408)

 

 

458 

Reclassification of impairment charges included in net

  

 

 

 

 

 

 

 

 

 

 

 

impairment losses on securities

 

 

 

 

 

 

 

 

28 

Other reclassifications included in other revenue

 

 

(2)

 

 

 -

 

 

(5)

 

 

(1)

Other

 

 

 -

 

 

 -

 

 

 

 

 -

Other comprehensive income (loss), before tax

  

 

71 

 

 

253 

 

 

(404)

 

 

485 

Income tax effect

 

 

(28)

 

 

(95)

 

 

152 

 

 

(181)

Other comprehensive income (loss), net of tax

  

 

43 

 

 

158 

  

 

(252)

 

 

304 

Comprehensive Income

  

$

333 

 

$

405 

  

$

500 

 

$

1,021 

 

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,

 

  

2013

 

2012

Assets

  

 

 

 

 

 

Cash and cash equivalents

  

$

7,362 

 

$

12,663 

Cash and investments segregated and on deposit for regulatory purposes

  

 

 

 

 

 

(including resale agreements of $13,461 at September 30, 2013 and $19,325

 

 

 

 

 

 

at December 31, 2012)

 

 

23,520 

 

 

28,469 

Receivables from brokers, dealers, and clearing organizations

  

 

511 

 

 

333 

Receivables from brokerage clients — net

  

 

13,124 

 

 

13,458 

Other securities owned — at fair value

  

 

482 

 

 

636 

Securities available for sale

  

 

51,865 

 

 

46,123 

Securities held to maturity (fair value — $27,717 at September 30, 2013 and

  

 

 

 

 

 

$18,732 at December 31, 2012)

 

 

28,219 

 

 

18,194 

Loans to banking clients — net

  

 

12,115 

 

 

10,726 

Equipment, office facilities, and property — net

  

 

738 

 

 

675 

Goodwill

  

 

1,227 

 

 

1,228 

Intangible assets — net

  

 

278 

 

 

319 

Other assets

  

 

770 

 

 

813 

Total assets

  

$

140,211 

 

$

133,637 

Liabilities and Stockholders’ Equity

  

 

 

 

 

 

Deposits from banking clients

  

$

91,187 

 

$

79,377 

Payables to brokers, dealers, and clearing organizations

  

 

1,207 

 

 

1,068 

Payables to brokerage clients

  

 

34,532 

 

 

40,330 

Accrued expenses and other liabilities

  

 

1,328 

 

 

1,641 

Long-term debt

  

 

1,904 

 

 

1,632 

Total liabilities

  

 

130,158 

 

 

124,048 

Stockholders’ equity:

  

 

 

 

 

 

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

  

 

 

 

 

 

preference of $885 at both September 30, 2013 and December 31, 2012

 

 

868 

 

 

865 

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

  

 

 

 

 

 

1,487,543,446 shares issued

 

 

15 

 

 

15 

Additional paid-in capital

  

 

3,964 

 

 

3,881 

Retained earnings

  

 

9,034 

 

 

8,554 

Treasury stock, at cost — 199,823,743 shares at September 30, 2013 and

  

 

 

 

 

 

210,014,305 shares at December 31, 2012

 

 

(3,874)

 

 

(4,024)

Accumulated other comprehensive income

  

 

46 

 

 

298 

Total stockholders’ equity

  

 

10,053 

 

 

9,589 

Total liabilities and stockholders’ equity

  

$

140,211 

 

$

133,637 

 

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,

 

 

2013

 

2012

Cash Flows from Operating Activities

 

 

 

 

 

 

Net income

 

$

752 

 

$

717 

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

 

 

 

 

 

 

Provision for loan losses

 

 

 

 

14 

Net impairment losses on securities

 

 

 

 

28 

Stock-based compensation

 

 

83 

 

 

79 

Depreciation and amortization

 

 

153 

 

 

146 

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

 

 

129 

 

 

163 

Other

 

 

23 

 

 

Originations of loans held for sale

 

 

 -

 

 

(441)

Proceeds from sales of loans held for sale

 

 

 -

 

 

513 

Net change in:

 

 

 

 

 

 

Cash and investments segregated and on deposit for regulatory purposes

 

 

4,949 

 

 

880 

Receivables from brokers, dealers, and clearing organizations

 

 

(177)

 

 

(376)

Receivables from brokerage clients

 

 

332 

 

 

(844)

Other securities owned

 

 

154 

 

 

80 

Other assets

 

 

(48)

 

 

19 

Payables to brokers, dealers, and clearing organizations

 

 

101 

 

 

84 

Payables to brokerage clients

 

 

(5,798)

 

 

(619)

Accrued expenses and other liabilities

 

 

163 

 

 

(74)

Net cash provided by operating activities

 

 

825 

 

 

373 

Cash Flows from Investing Activities

 

 

 

 

 

 

Purchases of securities available for sale

 

 

(19,910)

 

 

(19,889)

Proceeds from sales of securities available for sale

 

 

4,665 

 

 

1,524 

Principal payments on securities available for sale

 

 

9,087 

 

 

10,546 

Purchases of securities held to maturity

 

 

(13,442)

 

 

(4,620)

Principal payments on securities held to maturity

 

 

3,332 

 

 

4,012 

Net increase in loans to banking clients

 

 

(1,315)

 

 

(318)

Purchase of equipment, office facilities, and property

 

 

(176)

 

 

(107)

Other investing activities

 

 

 

 

10 

Net cash used for investing activities

 

 

(17,757)

 

 

(8,842)

Cash Flows from Financing Activities

 

 

 

 

 

 

Net change in deposits from banking clients

 

 

11,810 

 

 

7,902 

Repayment of commercial paper

 

 

(300)

 

 

 -

Issuance of long-term debt

 

 

275 

 

 

 -

Repayment of long-term debt

 

 

(4)

 

 

(207)

Premium paid on debt exchange

 

 

 -

 

 

(19)

Net proceeds from preferred stock offerings

 

 

 -

 

 

863 

Dividends paid

 

 

(283)

 

 

(252)

Proceeds from stock options exercised and other

 

 

140 

 

 

26 

Other financing activities

 

 

(7)

 

 

 -

Net cash provided by financing activities

 

 

11,631 

 

 

8,313 

Decrease in Cash and Cash Equivalents

 

 

(5,301)

 

 

(156)

Cash and Cash Equivalents at Beginning of Period

 

 

12,663 

 

 

8,679 

Cash and Cash Equivalents at End of Period

 

$

7,362 

 

$

8,523 

Supplemental Cash Flow Information

 

 

 

 

 

 

Cash paid during the period for:

 

 

 

 

 

 

Interest

 

$

89 

 

$

118 

Income taxes

 

$

448 

 

$

379 

Non-cash investing activity:

 

 

 

 

 

 

Securities purchased during the period but settled after period end

 

$

38 

 

$

263 

Non-cash financing activity:

 

 

 

 

 

 

Exchange of Senior Notes

 

$

 -

 

$

256 

 

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, U.K. 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. Certain prior period amounts have been reclassified to conform to the 2013 presentation. 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, 2012, as updated by the Company’s Current Report on Form 8-K filed on June 24, 2013, relating to the realignment of the Company’s reportable segments.

 

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, 2012, as updated by its Current Report on Form 8-K filed on June 24, 2013. There have been no significant changes to these accounting policies during the first nine months of 2013.

 

 

2.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, 2013

 

Cost

 

Gains

 

Losses

 

Value

Securities available for sale:

  

 

 

  

 

 

  

 

 

 

 

 

U.S. agency mortgage-backed securities

  

$

18,498 

  

$

175 

  

$

25 

  

$

18,648 

Asset-backed securities

  

 

14,519 

  

 

37 

  

 

42 

  

 

14,514 

Corporate debt securities

  

 

9,335 

  

 

52 

  

 

15 

  

 

9,372 

Certificates of deposit

  

 

4,275 

  

 

  

 

  

 

4,280 

U.S. agency notes

  

 

4,240 

  

 

  

 

89 

  

 

4,152 

Non-agency residential mortgage-backed securities

  

 

653 

  

 

  

 

44 

  

 

618 

Other securities

  

 

272 

  

 

  

 

 -

  

 

281 

Total securities available for sale

  

$

51,792 

  

$

289 

  

$

216 

  

$

51,865 

Securities held to maturity:

  

 

 

  

 

 

  

 

 

 

 

 

U.S. agency mortgage-backed securities

  

$

27,288 

 

$

249 

 

$

691 

 

$

26,846 

Other securities

  

 

931 

 

 

 -

 

 

60 

 

 

871 

Total securities held to maturity

  

$

28,219 

 

$

249 

 

$

751 

 

$

27,717 

 

5 


 

THE CHARLES SCHWAB CORPORATION

Notes to Condensed Consolidated Financial Statements

(Tabular Amounts in Millions, Except Per Share Data, Ratios, or as Noted)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  

 

 

 

Gross

 

Gross

 

 

 

 

 

Amortized

 

Unrealized

 

Unrealized

 

Fair

December 31, 2012

 

Cost

 

Gains

 

Losses

 

Value

Securities available for sale:

  

 

 

 

  

 

 

 

  

 

 

 

U.S. agency mortgage-backed securities

  

$

20,080 

  

$

396 

 

$

 -

 

$

20,476 

Asset-backed securities

  

 

8,104 

  

 

62 

 

 

 

 

8,164 

Corporate debt securities

  

 

6,197 

  

 

61 

 

 

 

 

6,256 

Certificates of deposit

  

 

6,150 

  

 

12 

 

 

 

 

6,161 

U.S. agency notes

  

 

3,465 

  

 

 

 

 

 

3,464 

Non-agency residential mortgage-backed securities

  

 

796 

  

 

 

 

65 

 

 

733 

Commercial paper

 

 

574 

 

 

 -

 

 

 -

 

 

574 

Other securities

  

 

278 

  

 

17 

 

 

 -

 

 

295 

Total securities available for sale

  

$

45,644 

  

$

552 

 

$

73 

 

$

46,123 

Securities held to maturity:

  

 

 

 

 

 

 

 

 

 

 

 

U.S. agency mortgage-backed securities

  

$

17,750 

  

$

558 

 

$

19 

 

$

18,289 

Other securities

  

 

444 

  

 

 -

 

 

 

 

443 

Total securities held to maturity

  

$

18,194 

  

$

558 

 

$

20 

 

$

18,732 

 

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, 2013

 

Value

 

Losses

 

Value

 

Losses

 

Value

 

Losses

Securities available for sale:

  

 

 

  

 

 

 

 

 

  

 

 

  

 

 

  

 

 

U.S agency mortgage-backed securities

  

$

5,105 

  

$

25 

  

$

 -

  

$

 -

  

$

5,105 

  

$

25 

Asset-backed securities

 

 

7,328 

 

 

40 

 

 

469 

 

 

 

 

7,797 

 

 

42 

Corporate debt securities

  

 

1,685 

  

 

14 

  

 

400 

  

 

  

 

2,085 

  

 

15 

Certificates of deposit

  

 

 -

  

 

 -

  

 

299 

  

 

  

 

299 

  

 

U.S. agency notes

  

 

3,651 

  

 

89 

  

 

 -

  

 

 -

  

 

3,651 

  

 

89 

Non-agency residential mortgage-backed

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

securities

  

 

112 

  

 

  

 

393 

  

 

41 

  

 

505 

  

 

44 

Total

  

$

17,881 

  

$

171 

  

$

1,561 

  

$

45 

  

$

19,442 

  

$

216 

Securities held to maturity:

  

 

 

  

 

 

 

 

 

  

 

 

  

 

 

  

 

 

U.S. agency mortgage-backed securities

  

$

16,051 

  

$

690 

  

$

85 

  

$

  

$

16,136 

  

$

691 

Other securities

 

 

771 

 

 

60 

 

 

 -

 

 

 -

 

 

771 

 

 

60 

Total

  

$

16,822 

  

$

750 

  

$

85 

  

$

  

$

16,907 

  

$

751 

Total securities with unrealized losses (1)

  

$

34,703 

  

$

921 

  

$

1,646 

  

$

46 

  

$

36,349 

  

$

967 

 

(1)

The number of investment positions with unrealized losses totaled 260 for securities available for sale and 135 for securities held to maturity.

 

6 


 

THE CHARLES SCHWAB CORPORATION

Notes to Condensed Consolidated Financial Statements

(Tabular Amounts in Millions, Except Per Share Data, Ratios, or as Noted)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  

Less than

 

12 months

 

 

 

 

  

 

 

 

12 months

 

or longer

 

Total

 

  

Fair

 

Unrealized

 

Fair

 

Unrealized

 

Fair

 

Unrealized

December 31, 2012

 

Value

 

Losses

 

Value

 

Losses

 

Value

 

Losses

Securities available for sale:

  

 

 

 

  

 

 

 

  

 

 

 

  

 

 

 

  

 

Asset-backed securities

  

$

 -

  

$

 -

 

$

801 

 

$

  

$

801 

  

$

Corporate debt securities

  

 

878 

  

 

 

 

 -

 

 

 -

  

 

878 

  

 

Certificates of deposit

  

 

599 

  

 

 

 

 -

 

 

 -

  

 

599 

  

 

U.S. agency notes

  

 

2,102 

  

 

 

 

 -

 

 

 -

  

 

2,102 

  

 

Non-agency residential mortgage-backed

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

securities

  

 

46 

  

 

 

 

549 

 

 

64 

  

 

595 

  

 

65 

Total

  

$

3,625 

  

$

 

$

1,350 

 

$

66 

  

$

4,975 

  

$

73 

Securities held to maturity:

  

 

 

 

 

 

 

 

 

 

 

 

  

 

 

 

 

 

U.S. agency mortgage-backed

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

securities

 

$

2,680 

 

$

19 

 

$

 -

 

$

 -

 

$

2,680 

 

$

19 

Other securities

  

 

240 

  

 

 

 

 -

 

 

 -

  

 

240 

  

 

Total

  

$

2,920 

  

$

20 

 

$

 -

 

$

 -

  

$

2,920 

  

$

20 

Total securities with unrealized losses (1)

  

$

6,545 

  

$

27 

 

$

1,350 

 

$

66 

  

$

7,895 

  

$

93 

 

(1)

The number of investment positions with unrealized losses totaled 139 for securities available for sale and 24 for securities held to maturity.

 

The Company’s non-agency residential mortgage-backed securities portfolio includes 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). 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. 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 recognized an impairment charge equal to the securities’ expected credit losses of $1 million and $8 million during the third quarter and first nine months of 2013, respectively, based on the Company’s cash flow projections for these securities. The expected credit losses were 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 additional 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 (loss):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

  

Nine Months Ended

 

 

September 30,

 

September 30,

 

 

2013

  

2012

  

2013

  

2012

Balance at beginning of period

 

$

166 

  

$

152 

  

$

159 

  

$

127 

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

 

 

  

 

  

 

  

 

22 

Balance at end of period

 

$

167 

  

$

155 

  

$

167 

  

$

155 

 

7 


 

THE CHARLES SCHWAB CORPORATION

Notes to Condensed Consolidated Financial Statements

(Tabular Amounts in Millions, Except Per Share Data, Ratios, or as Noted)

(Unaudited)

 

The maturities of securities available for sale and securities held to maturity at September 30, 2013 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)

 

$

 -

  

$

325 

  

$

4,271 

  

$

14,052 

  

$

18,648 

Asset-backed securities

 

 

 -

  

 

1,255 

  

 

2,598 

  

 

10,661 

  

 

14,514 

Corporate debt securities

 

 

1,902 

  

 

7,364 

  

 

106 

  

 

 -

  

 

9,372 

Certificates of deposit

 

 

2,378 

  

 

1,902 

  

 

 -

  

 

 -

  

 

4,280 

U.S. agency notes

 

 

 -

  

 

2,291 

  

 

1,861 

  

 

 -

  

 

4,152 

Non-agency residential mortgage-backed

 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

securities (1)

 

 

 -

 

 

 

 

 

 

613 

 

 

618 

Other securities

 

 

 -

  

 

 -

  

 

 -

  

 

281 

  

 

281 

Total fair value

 

$

4,280 

  

$

13,140 

  

$

8,838 

  

$

25,607 

  

$

51,865 

Total amortized cost

 

$

4,272 

  

$

13,136 

  

$

8,835 

  

$

25,549 

  

$

51,792 

Securities held to maturity:

 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

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

 

$

 -

  

$

371 

  

$

11,555 

  

$

14,920 

  

$

26,846 

Other securities

 

 

100 

  

 

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