Charles Schwab 2015 Annual Report Download - page 68

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)
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Committee and provides guidelines for sustained capital events. It does not specifically address every contingency, but is
designed to provide a framework for responding to any capital stress. The Capital Contingency Plan is reviewed annually and
updated as appropriate. See “Part I – Item 1. – Business – Regulation” for additional information.
Regulatory Capital Requirements
Beginning on January 1, 2015, CSC became subject to capital requirements set by the Federal Reserve. In addition, CSC is
required to serve as a source of strength for Schwab Bank and to provide financial assistance if Schwab Bank experiences
financial distress. To manage capital adequacy, the Company currently utilizes a target Tier 1 Leverage Ratio for CSC of at
least 6%. Due to the relatively low risk of the Company’s balance sheet assets and risk-based capital ratios at CSC and
Schwab Bank that are well in excess of regulatory requirements, the Tier 1 Leverage Ratio is the most restrictive capital
constraint on CSC’s asset growth.
Schwab Bank is also required to maintain capital levels specified by the OCC. These capital requirements are substantially
similar to those imposed on CSC by the Federal Reserve. Schwab Bank’s failure to remain well capitalized could result in
certain mandatory and possibly additional discretionary actions by the regulators that, if undertaken, could have a direct
material effect on the bank. The Company currently utilizes a target Tier 1 Leverage Ratio for Schwab Bank of at least
6.25%. As of January 1, 2015, Schwab Bank became subject to the new Final Regulatory Capital Rules set by the OCC.
Based on its regulatory capital ratios at December 31, 2015, Schwab Bank is considered well capitalized.
The following table details CSC’s and Schwab Bank’s capital ratios under the new Final Regulatory Capital Rules:
December 31, 2015 CSC Schwab Bank
Total stockholders’ equity $ 13,402 $ 9,191
Less:
Preferred Stock 1,459 -
Common Equity Tier 1 Capital before regulatory adjustments $ 11,943 $ 9,191
Less:
Goodwill, net of associated deferred tax liabilities $ 1,185 $ 11
Other intangible assets, net of associated deferred tax liabilities 41 -
AOCI adjustment (1) (134) (134)
Common Equity Tier 1 Capital $ 10,851 $ 9,314
Tier 1 Ca
p
ital $12,310 $ 9,314
Total Capital 12,342 9,345
Risk-Weighted Assets 59,578 51,516
Common Equity Tier 1 Capital/Risk-Weighted Assets 18.2 % 18.1 %
Tier 1 Capital/Risk-Weighted Assets 20.7 % 18.1 %
Total Capital/Risk-Weighted Assets 20.7 % 18.1 %
Tier 1 Leverage Ratio 7.1 % 7.1 %
(1) CSC and Schwab Bank have elected to opt-out of the requirement to include most components of AOCI in CET1
Capital.
The Company’s broker-dealer subsidiaries (Schwab and optionsXpress, Inc.) are subject to regulatory requirements of the
Uniform Net Capital Rule. The rule is intended to ensure the general financial soundness and liquidity of broker-dealers.
These regulations prohibit the broker-dealer subsidiaries from paying cash dividends, making unsecured advances and loans
to their parent company and employees, and Schwab from repaying subordinated borrowings from CSC if such payment
would result in a net capital amount of less than 5% of aggregate debit balances or less than 120% of its minimum dollar
requirement of $250,000. As such, the broker-dealer subsidiaries are required to maintain, at all times, at least the minimum
level of net capital required under Rule 15c3-1. At December 31, 2015, Schwab and optionsXpress met and exceeded their
net capital requirements.