Charles Schwab 2011 Annual Report Download - page 71

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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)
- 43 -
in a loss) are estimated from the Company’s historical loss experience adjusted for current trends and market information.
Loss severity estimates are based on the Company’s historical loss experience and market trends. Housing price trends are
derived from historical home price indices and econometric forecasts of future home values. Factors affecting the home price
index include: housing inventory, unemployment, interest rates, and inflation expectations. Interest rate projections are based
on the current term structure of interest rates and historical volatilities to project various possible future interest rate paths.
This quarterly analysis results in a loss factor that is applied to the outstanding balances to determine the allowance for loan
loss for each loan segment.
Legal Reserve: Reserves for legal and regulatory claims and proceedings reflect an estimate of probable losses for each
matter, after considering, among other factors, the progress of the case, prior experience and the experience of others in
similar cases, available defenses, insurance coverage and indemnification, and the opinions and views of legal counsel. In
many cases, including most class action lawsuits, it is not possible to determine whether a loss will be incurred, or to estimate
the range of that loss, until the matter is close to resolution, in which case no accrual is made until that time. Reserves are
adjusted as more information becomes available or when an event occurs requiring a change. Significant judgment is required
in making these estimates, and the actual cost of resolving a matter may ultimately differ materially from the amount
reserved.
The Company’s management has discussed the development and selection of these critical accounting estimates with the
Audit Committee. Additionally, management has reviewed with the Audit Committee the Company’s significant estimates
discussed in this Management’s Discussion and Analysis of Financial Condition and Results of Operations.
FORWARD-LOOKING STATEMENTS
In addition to historical information, this Annual Report on Form 10-K contains “forward-looking statements” within the
meaning of Section 27A of the Securities Act, and Section 21E of the Securities Exchange Act of 1934. Forward-looking
statements are identified by words such as “believe,” “anticipate,” “expect,” “intend,” “plan,” “will,” “may,” “estimate,”
“appear,” “aim,” “target,” “could,” and other similar expressions. In addition, any statements that refer to expectations,
projections, or other characterizations of future events or circumstances are forward-looking statements.
These forward-looking statements, which reflect management’s beliefs, objectives, and expectations as of the date hereof, are
necessarily estimates based on the best judgment of the Company’s senior management. These statements relate to, among
other things:
the Company’s ability to pursue its business strategy (see “Part I – Item 1. – Business – Business Strategy and
Competitive Environment”);
the impact of legal proceedings and regulatory matters (see “Part I – Item 3. – Legal Proceedings” and “Item 8 –
Financial Statements and Supplementary Data – Notes to Consolidated Financial Statements –15. Commitments and
Contingencies – Legal Contingencies”);
the impact of current market conditions on the Company’s results of operations (see “Current Market and
Regulatory Environment” and “Item 8 – Financial Statements and Supplementary Data – Notes to Consolidated
Financial Statements – 6. Securities Available for Sale and Securities Held to Maturity”);
sources of liquidity, capital, and level of dividends (see “Liquidity and Capital Resources” and “Contractual
Obligations”);
target capital ratios (see “Liquidity and Capital Resources” and “Item 8 – Financial Statements and Supplementary
Data – Notes to Consolidated Financial Statements – 24. Regulatory Requirements”);
capital expenditures (see “Liquidity and Capital Resources – Capital Resources”);
the impact of changes in management’s estimates on the Company’s results of operations (see “Critical Accounting
Estimates”);
the impact of changes in the likelihood of indemnification and guarantee payment obligations on the Company’s
results of operations (see “Item 8 – Financial Statements and Supplementary Data – Notes to Consolidated Financial
Statements – 15. Commitments and Contingencies”); and