Charles Schwab 2011 Annual Report Download - page 55

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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)
- 27 -
Communications expense increased in 2011 from 2010 primarily due to higher telephone service expense and third-party
news and information expense.
Depreciation and amortization expense increased in 2011 from 2010 primarily due to higher amortization of intangible assets
resulting from the acquisitions of optionsXpress and Windhaven. Depreciation and amortization expense decreased in 2010
from 2009 primarily due to certain assets becoming fully depreciated.
In 2011 and 2010, the Company recorded class action litigation and regulatory reserves relating to the Schwab YieldPlus
Fund. For further discussion of the Schwab YieldPlus Fund litigation and regulatory matters, see “Item 8 – Financial
Statements and Supplementary Data – Notes to Consolidated Financial Statements – 15. Commitments and Contingencies.”
In 2010, the Company decided to cover the net remaining losses of $132 million recognized by Schwab money market
mutual funds as a result of their investments in a single structured investment vehicle that defaulted in 2008.
Other expense was lower in 2011 compared to 2010 primarily due to a charge of $30 million in 2010, relating to the
Company’s Invest First and WorldPoints Visa credit cards, as the Company ended its sponsorship due to challenging credit
card industry economics. Other expense was higher in 2010 as compared to 2009 primarily due to this charge and an increase
in employee travel expenses.
Taxes on Income
The Company’s effective income tax rate on income before taxes was 37.9% in 2011, 41.7% in 2010, and 38.3% in 2009.
The decrease in 2011 from 2010 was due to a lower effective state income tax rate in 2011 and the impact of non-deductible
penalties relating to the Schwab YieldPlus Fund regulatory settlements recorded in 2010. The increase in 2010 from 2009
was primarily due to the impact of non-deductible penalties in 2010.
Segment Information
The Company provides financial services to individuals and institutional clients through two segments – Investor Services
and Institutional Services. The Investor Services segment provides retail brokerage and banking services to individual
investors. The Institutional Services segment provides custodial, trading, and support services to independent investment
advisors. The Institutional Services segment also provides retirement plan services, specialty brokerage services, and mutual
fund clearing services, and supports the availability of Schwab proprietary mutual funds and collective trust funds on third-
party platforms. Banking revenues and expenses are allocated to the Company’s two segments based on which segment
services the client. The Company evaluates the performance of its segments on a pre-tax basis, excluding items such as
impairment charges on non-financial assets, discontinued operations, extraordinary items, and significant restructuring and
other charges. Segment assets and liabilities are not disclosed because the balances are not used for evaluating segment
performance and deciding how to allocate resources to segments.