Charles Schwab 2015 Annual Report Download - page 65

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)
- 45 -
As of January 1, 2016, the Company is required to comply with the modified LCR rule. This rule was adopted to help
regulators ensure that large financial institutions have sufficient liquidity to withstand a short-term stress scenario, and is
measured by comparing available high quality liquid assets against prescriptive cash outflows over a 30 day horizon. The
Company is currently in compliance with the fully phased-in modified LCR rule.
Primary Funding Sources
The Company’s primary source of funds is cash generated by client activity: bank deposits and cash balances in brokerage
client accounts. In 2015 bank deposits swept from brokerage accounts increased $26.0 billion. These funds were used to
invest in interest earning assets, thereby funding a significant portion of the 19% growth in the Company’s balance sheet.
Other sources of funds may include cash flows from operations, maturities and sales of investment securities, repayments on
loans, securities lending, and cash provided by external financing or equity offerings.
To meet daily funding needs, the Company maintains liquidity in the form of overnight cash deposits and short-term
investments. For unanticipated liquidity needs, the Company maintains high-quality liquid assets, currently comprised of
U.S. Treasury notes.
Additional Funding Sources
In addition to internal sources of liquidity, the Company has sources of external funding. CSC maintains a $750 million
committed, unsecured credit facility with a group of banks that is scheduled to expire in June 2016. Other than an overnight
borrowing to test the availability of this facility, it was unused during 2015. The funds under this facility are available for
general corporate purposes. The financial covenants require Schwab to maintain a minimum net capital ratio, Schwab Bank
to be well capitalized, and CSC to maintain a minimum level of stockholders’ equity, adjusted to exclude AOCI. At
December 31, 2015, the minimum level of stockholders’ equity required under this facility was $8.9 billion (CSC’s
stockholders’ equity, excluding accumulated other comprehensive income, at December 31, 2015 was $13.5 billion).
Management believes that these restrictions will not have a material effect on CSC’s ability to meet foreseeable dividend or
funding requirements.
CSC and Schwab also have access to uncommitted, unsecured bank credit lines with several banks. The need for short-term
borrowings arises primarily from timing differences between cash flow requirements, scheduled liquidation of interest-
earning investments, and movements of cash to meet regulatory brokerage client cash segregation requirements. Schwab used
such borrowings for six days in 2015, with average daily amounts borrowed of $137 million. These lines were not used by
CSC during 2015. There were no borrowings outstanding under these lines at December 31, 2015.
To partially satisfy the margin requirement of client option transactions with the Options Clearing Corporation, the broker-
dealer subsidiaries have unsecured standby letter of credit agreements (LOCs) with several banks in favor of the Options
Clearing Corporation aggregating $295 million at December 31, 2015. There were no funds drawn under any of these LOCs
during 2015 or 2014. In connection with its securities lending activities, the Company is required to provide collateral to
certain brokerage clients. The collateral requirements were satisfied by providing cash as collateral.
Schwab Bank has access to short-term secured funding through the Federal Reserve’s discount window. Amounts available
under the Federal Reserve discount window are dependent on the fair value of certain of Schwab Bank’s securities available
for sale and/or securities held to maturity that are pledged as collateral. Schwab Bank maintains policies and procedures
necessary to access this funding and tests discount window borrowing procedures on a periodic basis. At December 31, 2015,
$2.0 billion was available under this arrangement. There were no funds drawn under this arrangement during 2015, except for
testing purposes.
Schwab Bank also maintains a secured credit facility with the Federal Home Loan Bank of San Francisco. Amounts available
under this facility are dependent on the amount of Schwab Bank’s residential real estate mortgages and HELOCs that are
pledged as collateral. Schwab Bank maintains policies and procedures necessary to access this funding and tests borrowing