Charles Schwab 2010 Annual Report Download - page 37

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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)
some ability to manage its net interest spread. However, the spread is influenced by external factors such as the interest rate
environment and competition. For discussion of the impact of current market conditions on net interest revenue, see “Current Market
and Regulatory Environment.”
In clearing its clients’ trades, Schwab holds cash balances payable to clients. In most cases, Schwab pays its clients interest on cash
balances awaiting investment, and may invest these funds and earn interest revenue. Receivables from brokerage clients consist
primarily of margin loans to brokerage clients. Margin loans are loans made by Schwab to clients on a secured basis to purchase
securities. Pursuant to SEC regulations, client cash balances that are not used for margin lending are generally segregated into
investment accounts that are maintained for the exclusive benefit of clients, which are recorded in cash and investments segregated on
the Company’s consolidated balance sheet.
When investing segregated client cash balances, Schwab must adhere to SEC regulations that restrict investments to securities
guaranteed by the full faith and credit of the U.S. government, participation certificates, mortgage-backed securities guaranteed by the
Government National Mortgage Association, certificates of deposit issued by U.S. banks and thrifts, and resale agreements
collateralized by qualified securities. Additionally, Schwab has established policies for the minimum credit quality and maximum
maturity of these investments. Schwab Bank also maintains investment portfolios for liquidity as well as to invest funding from
deposits raised in excess of loans to banking clients. Schwab Bank’s securities available for sale include residential mortgage-backed
securities, U.S. agency notes, asset-backed securities, corporate debt securities, and certificates of deposit. Schwab Bank’s securities
held to maturity include residential mortgage-backed securities, asset-backed securities, and corporate debt securities. Schwab Bank
lends funds to banking clients primarily in the form of mortgage loans and HELOCs. These loans are largely funded by interest-
bearing deposits from banking clients.
The Company’s interest-earning assets are financed primarily by brokerage client cash balances and deposits from banking clients.
Noninterest-bearing funding sources include noninterest-bearing brokerage client cash balances and proceeds from stock-lending
activities, as well as stockholders’ equity.
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