Charles Schwab 2010 Annual Report Download - page 70

THE CHARLES SCHWAB CORPORATION
Notes to Consolidated Financial Statements
(Tabular Amounts in Millions, Except Per Share Data, Option Price Amounts, Ratios, or as Noted)
money market funds, deposits with banks, certificates of deposit, federal funds sold, commercial paper, and treasury securities. Cash
and cash equivalents also include balances that Schwab Bank maintains at the Federal Reserve Bank.
Cash and investments segregated and on deposit for regulatory purposes include securities purchased under agreements to resell
(resale agreements), which are collateralized by United States (U.S.) Government and agency securities. Resale agreements are
accounted for as collateralized investing transactions that are recorded at their contractual amounts plus accrued interest. The
Company obtains control of collateral with a market value equal to or in excess of the principal amount loaned and accrued interest
under resale agreements. Collateral is valued daily by the Company, with additional collateral obtained to ensure full collateralization.
Cash and investments segregated also include certificates of deposit and U.S. Government securities, as well as corporate debt
securities and commercial paper guaranteed by the Federal Deposit Insurance Corporation (FDIC) under the Temporary Liquidity
Guarantee Program. Certificates of deposit, U.S. Government securities, corporate debt securities, and commercial paper are recorded
at fair value.
R
eceivables from brokerage clients include margin loans to clients and are recorded net of an allowance for doubtful accounts.
Receivables from brokerage clients that remain unsecured or partially secured for more than 30 days are fully reserved.
Other securities owned include Schwab Funds money market funds, commercial paper, certificates of deposit, equity and bond
mutual funds, state and municipal debt obligations, equity securities, U.S. Government and corporate debt, and other securities
recorded at fair value based on quoted market prices. Unrealized gains and losses are included in trading revenue.
Securities available for sale and securities held to maturity: Securities available for sale include U.S. agency and non-agency
residential mortgage-backed securities, U.S. agency notes, corporate debt securities, certificates of deposit, asset-backed securities,
and commercial paper. Securities available for sale are recorded at fair value and unrealized gains and losses are reported, net of
taxes, in accumulated other comprehensive income (loss) included in stockholders’ equity. Securities held to maturity include U.S.
agency residential mortgage-backed securities, asset-backed securities, and corporate debt securities. Securities held to maturity are
recorded at amortized cost based on the Company’s positive intent and ability to hold these securities to maturity. Realized gains and
losses from sales of securities available for sale are determined on a specific identification basis and are included in other revenue.
Management evaluates whether securities available for sale and securities held to maturity are other-than-temporarily impaired
(OTTI) on a quarterly basis. Debt securities with unrealized losses are considered OTTI if the Company intends to sell the security or
if it is more likely than not that the Company will be required to sell such security prior to any anticipated recovery. If management
determines that a security is OTTI under these circumstances, the impairment recognized in earnings is measured as the entire
difference between the amortized cost and the then-current fair value.
A security is also OTTI if management does not expect to recover the amortized cost of the security. In this circumstance,
management utilizes cash flow models to estimate the expected future cash flow from the securities and to estimate the credit loss.
The impairment recognized in earnings is measured by the difference between the present value of expected cash flows and the
amortized cost of the security. Expected cash flows are discounted using the security’s effective interest rate.
The evaluation of whether the Company expects to recover the amortized cost of a security is inherently judgmental. The evaluation
includes the assessment of several bond performance indicators including: the portion of the underlying loans that are delinquent
(30 days, 60 days, 90+ days), in bankruptcy, in foreclosure or converted to real estate owned; the actual amount of loss incurred on
the underlying loans in which the property has been foreclosed and sold; the amount of credit support provided by the structure of the
security available to absorb credit losses on the underlying loans; the current credit ratings issued by either Standard & Poor’s, Fitch
Ratings, or Moody’s; the current price and magnitude of the unrealized loss; and whether the Company has received all scheduled
principal and interest payments. Management uses cash flow models to further assess the likelihood of other-than-temporary
impairment for the Company’s non-agency residential mortgage-backed securities. To develop the cash flow models, the Company
uses forecasted loss severity, prepayment speeds (i.e. the rate at which the principal on underlying loans are paid down), and default
rates over the securities’ expected remaining maturities.
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