Charles Schwab 2010 Annual Report Download - page 48

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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)
regulatory cash segregation requirements. Schwab used such borrowings for 25 days in 2010, with average daily amounts borrowed
of $28 million. There were no borrowings outstanding under these lines at December 31, 2010.
To partially satisfy the margin requirement of client option transactions with the Options Clearing Corporation (OCC), Schwab has
unsecured standby letter of credit agreements (LOCs) with seven banks in favor of the OCC aggregating $445 million at
December 31, 2010. In connection with its securities lending activities, Schwab is required to provide collateral to certain brokerage
clients. Schwab satisfies the collateral requirements by arranging LOCs, in favor of these brokerage clients, which are issued by
multiple banks. At December 31, 2010, the aggregate face amount of these LOCs totaled $37 million. There were no funds drawn
under any of these LOCs during 2010.
To manage Schwab’s regulatory capital requirement, CSC provides Schwab with a $1.4 billion subordinated revolving credit facility
which is scheduled to expire in March 2012. The amount outstanding under this facility at December 31, 2010, was $220 million.
Borrowings under this subordinated lending arrangement qualify as regulatory capital for Schwab.
In addition, CSC provides Schwab with a $1.5 billion credit facility, which is scheduled to expire in December 2011. Borrowings
under this facility do not qualify as regulatory capital for Schwab. At December 31, 2010, $45 million was outstanding under this
facility, which was subsequently repaid on January 3, 2011.
Schwab Bank
Schwab Bank is required to maintain minimum capital levels as specified in federal banking laws and regulations. Failure to meet the
minimum levels will result in certain mandatory, and possibly additional discretionary, actions by the regulators that, if undertaken,
could have a direct material effect on Schwab Bank. Based on its regulatory capital ratios at December 31, 2010, Schwab Bank is
considered well capitalized. Schwab Bank’s regulatory capital and ratios at December 31, 2010, are as follows:
N/A Not applicable.
Beginning in 2010, in light of the evolving regulatory environment and capitalization trends observed across the banking industry,
management established a target Tier 1 Core Capital Ratio for Schwab Bank of at least 7.5%. Schwab Bank’s current liquidity needs
are generally met through deposits from banking clients and equity capital.
The excess cash held in certain Schwab brokerage client accounts is swept into deposit accounts at Schwab Bank. At December 31,
2010, these balances totaled $31.0 billion.
Schwab Bank has access to traditional funding sources such as deposits, federal funds purchased, and repurchase agreements.
Additionally, Schwab Bank has access to short-term funding through the Federal Reserve Bank (FRB) discount window. Amounts
available under the FRB discount window are dependent on the fair value of certain of Schwab Bank’s securities available for sale
and securities held to maturity that are pledged as collateral. At December 31, 2010, $1.1 billion was available under this
arrangement. There were no funds drawn under this arrangement during 2010.
Schwab Bank maintains a credit facility with the Federal Home Loan Bank System. Amounts available under this facility are
dependent on the amount of Schwab Bank’s residential real estate mortgages and HELOCs that are pledged as collateral. At
December 31, 2010, $4.1 billion was available under this facility. There were no funds drawn under this facility during 2010.
-31 -
Actual
Minimum Capital
Requirement
Minimum to be
Well Capitalized
Amount Ratio Amount Ratio Amount Ratio
Tier 1 Ris
k
-Based Ca
p
ital
$ 4,157
23.7%
$702
4.0%
$1,053
6.0%
Total Ris
k
-Based Ca
p
ital
$ 4,209
24.0%
$ 1,404
8.0%
$ 1,755
10.0%
Tier 1 Core Ca
p
ital
$4,157
7.6%
$2,195
4.0%
$2,744
5.0%
Tan
g
ible E
q
uit
y
$ 4,157
7.6%
$ 1,098
2.0%
N/A