Charles Schwab 2011 Annual Report Download - page 81

THE CHARLES SCHWAB CORPORATION
Notes to Consolidated Financial Statements
(Tabular Amounts in Millions, Except Per Share Data, Option Price Amounts, Ratios, or as Noted)
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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 guaranteed by the Federal Deposit Insurance Corporation
(FDIC) under the Temporary Liquidity Guarantee Program. Certificates of deposit, U.S. Government securities, and corporate
debt securities are recorded at fair value.
Receivables 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, 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, certificates of deposit, corporate debt securities, U.S. agency notes, and asset-backed
and other securities. 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 and other 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 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.