Charles Schwab 2015 Annual Report Download - page 70

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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)
- 50 -
CRITICAL ACCOUNTING ESTIMATES
The consolidated financial statements of the Company have been prepared in accordance with accounting principles generally
accepted in the U.S. While the majority of the Company’s revenues, expenses, assets and liabilities are not based on
estimates, there are certain accounting principles that require management to make estimates regarding matters that are
uncertain and susceptible to change where such change may result in a material adverse impact on the Company’s financial
position and reported financial results. These critical accounting estimates are described below. Management regularly
reviews the estimates and assumptions used in the preparation of the Company’s financial statements for reasonableness and
adequacy.
Other-than-Temporary Impairment of Securities Available for Sale and Securities Held to Maturity
Management evaluates whether securities available for sale and securities held to maturity are other-than-temporarily
impaired 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 before 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, the
impairment recognized in earnings represents the estimated credit loss, and is measured by the difference between the present
value of expected cash flows and the amortized cost of the security. Management utilizes cash flow models to estimate the
expected future cash flow from the securities and to estimate the credit loss. 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 consideration of multiple factors including: the magnitude and duration of the unrealized loss; the
financial condition of the issuer; the payment structure of the security; external credit ratings; for asset-backed securities, the
amount of credit support provided by the structure of the security to absorb credit losses on the underlying collateral; recent
events specific to the issuer and the issuer’s industry; and whether the Company has received all scheduled principal and
interest payments.
Valuation of Goodwill
The Company tests goodwill for impairment at least annually, or whenever indications of impairment exist. Impairment
exists when the carrying amount of goodwill exceeds its implied fair value, resulting in an impairment charge for this excess.
Adverse changes in the Company’s planned business operations such as unanticipated competition, a loss of key personnel,
the sale of a reporting unit or a significant portion of a reporting unit, or other unforeseen developments could result in an
impairment of the Company’s recorded goodwill.
The Company’s annual goodwill impairment testing date is April 1st. In testing for a potential impairment of goodwill on
April 1, 2015, management performed an assessment of each of the Company’s reporting units (generally defined as the
Company’s businesses for which financial information is available and reviewed regularly by management) and concluded
that goodwill was not impaired.
Allowance for Loan Losses
The appropriateness of the allowance is reviewed quarterly by management, taking into consideration current economic
conditions, the existing loan portfolio composition, past loss experience, and risks inherent in the portfolios.
The methodology to establish an allowance for loan losses related to the First Mortgage and HELOC portfolios utilizes
statistical models that estimate prepayments, defaults, and probable losses for the loan segments based on predicted behavior
of individual loans within the segments. The methodology considers the effects of borrower behavior and a variety of factors
including, but not limited to, interest rates, housing price movements as measured by a housing price index, economic