Charles Schwab 2010 Annual Report Download - page 61

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THE CHARLES SCHWAB CORPORATION
estimate net interest revenue or precisely predict the impact of changes in interest rates on net interest revenue. Actual results may
differ from simulated results due to balance growth or decline and the timing, magnitude, and frequency of interest rate changes, as
well as changes in market conditions and management strategies, including changes in asset and liability mix.
As represented by the simulations presented below, the Company is positioned so that the consolidated balance sheet produces an
increase in net interest revenue when interest rates rise and, conversely, a decrease in net interest revenue when interest rates fall (i.e.,
interest-earning assets generally reprice more quickly than interest-bearing liabilities).
The simulations in the following table assume that the asset and liability structure of the consolidated balance sheet would not be
changed as a result of the simulated changes in interest rates. As the Company actively manages its consolidated balance sheet and
interest rate exposure, in all likelihood the Company would take steps to manage any additional interest rate exposure that could result
from changes in the interest rate environment. The following table shows the results of a gradual 100 basis point increase or decrease
in market interest rates relative to the Company’s current market rates forecast on simulated net interest revenue over the next 12
months beginning December 31, 2010 and 2009.
The sensitivities shown in the simulation reflect the fact that short-term interest rates in 2010 remained at historically low levels,
including the federal funds target rate, which was unchanged at a range of zero to 0.25%. The current low interest rate environment
limits the extent to which the Company can reduce interest expense paid on funding sources in a declining interest rate scenario. A
decline in interest rates could therefore negatively impact the yield on the Company’s investment portfolio to a greater degree than
any offsetting reduction in interest expense, further compressing net interest margin. Any increases in short-term interest rates result
in a greater impact as yields on interest-earning assets are expected to rise faster than the cost of funding sources.
-44 -
December 31, 2010 2009
Increase of 100 basis
p
oints
13.5%
16.8%
Decrease of 100 basis
p
oints
(4.8%)
(2.9%)