Charles Schwab 2008 Annual Report Download - page 40

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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$18 million in the second quarter of 2008. U.S. Trust is presented as a discontinued operation for all periods prior to the
completion of the sale.
Business Acquisition
On March 31, 2007, the Company completed its acquisition of The 401(k) Company, which offers retirement plan services,
for $115 million in cash. As a result of a purchase price allocation, the Company recorded goodwill of $106 million and
intangible assets of $8 million. The intangible assets are being amortized over 16 years.
LIQUIDITY AND CAPITAL RESOURCES
CSC conducts substantially all of its business through its wholly-owned subsidiaries. The capital structure among CSC and its
subsidiaries is designed to provide each entity with capital and liquidity to meet its operational needs and regulatory
requirements.
CSC is a savings and loan holding company and Schwab Bank, CSC’s depository institution, is a federal savings bank. CSC
and Schwab Bank are both subject to supervision and regulation by the Office of Thrift Supervision.
Liquidity
CSC
As a savings and loan holding company, CSC is not subject to specific statutory capital requirements. However, CSC is
required to maintain capital that is sufficient to support the holding company and its subsidiaries’ business activities, and the
risks inherent in those activities. To manage capital adequacy, CSC currently utilizes a target Tier 1 Leverage Ratio, as
defined by the Board of Governors of the Federal Reserve Board, of at least 6%. At December 31, 2008, CSC’s Tier 1
Leverage Ratio was 8.6%.
CSC’s liquidity needs are generally met through cash generated by its subsidiaries, as well as cash provided by external
financing. CSC maintains excess liquidity in the form of overnight cash deposits to cover daily funding needs and to support
growth in the Company’s business. Generally, CSC does not hold liquidity at its subsidiaries in excess of amounts deemed
sufficient to support the subsidiaries’ operations, including any regulatory capital requirements. Schwab and Schwab Bank are
subject to regulatory requirements that may restrict them from certain transactions with CSC. Management believes that funds
generated by the operations of CSC’s subsidiaries will continue to be the primary funding source in meeting CSC’s liquidity
needs, providing adequate liquidity to meet Schwab Bank’s capital guidelines, and maintaining Schwab’s net capital.
CSC has liquidity needs that arise from its Senior Medium-Term Notes, Series A (Medium-Term Notes), and junior
subordinated notes, as well as from the funding of cash dividends, acquisitions, and other investments. The Medium-Term
Notes, of which $458 million was outstanding at December 31, 2008, have maturities ranging from 2009 to 2017 and fixed
interest rates ranging from 6.375% to 8.05% with interest payable semiannually. The Medium-Term Notes are rated A2 by
Moody’s Investors Service (Moody’s), A by Standard & Poor’s Ratings Group (S&P), and A by Fitch IBCA, Inc. (Fitch). At
December 31, 2008, $300 million of junior subordinated notes were outstanding and have a fixed interest rate of 7.50% until
2017 and a floating rate thereafter. The junior subordinated notes are not rated, however the trust preferred securities related
to these notes are rated A3 by Moody’s, BBB+ by S&P, and A- by Fitch. For further discussion of the issuance of the junior
subordinated notes, see “Item 8 – Financial Statements and Supplementary Data – Notes to Consolidated Financial Statements
– 12. Borrowings.”
CSC has a universal automatic shelf registration statement on file with the SEC which enables CSC to issue debt, equity and
other securities. This registration statement was filed in December 2008. CSC’s prior shelf registration statement/prospectus
supplement for issuing Medium-Term Notes and universal shelf registration statement both expired in November 2008.