Charles Schwab 2008 Annual Report Download - page 41

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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)
- 27 -
CSC has authorization from its Board of Directors to issue unsecured commercial paper notes (Commercial Paper Notes) not
to exceed $1.5 billion. Management has set a current limit for the commercial paper program of $800 million. The maturities
of the Commercial Paper Notes may vary, but are not to exceed 270 days from the date of issue. The commercial paper is not
redeemable prior to maturity and is not subject to voluntary prepayment. The proceeds of the commercial paper program are
to be used for general corporate purposes. CSC commenced issuing Commercial Paper Notes in April 2008. Average
borrowings for the year ended December 31, 2008 were $40 million. There were no Commercial Paper Notes outstanding at
December 31, 2008. CSC’s ratings for these short-term borrowings are P-1 by Moody’s, A-1 by S&P, and F1 by Fitch.
CSC maintains an $800 million committed, unsecured credit facility with a group of fourteen banks which is scheduled to
expire in June 2009. CSC plans to establish a similar facility to replace this one when it expires. This facility was unused in
2008. Any issuances under CSC’s commercial paper program will reduce the amount available under this facility. The funds
under this facility are available for general corporate purposes, including repayment of the Commercial Paper Notes discussed
above. The financial covenants under this facility require Schwab to maintain a minimum net capital ratio, as defined, Schwab
Bank to be well capitalized, as defined, and CSC to maintain a minimum level of stockholders’ equity. At December 31,
2008, the minimum level of stockholders’ equity required under this facility was $2.6 billion. Management believes that these
restrictions will not have a material effect on its ability to meet foreseeable dividend or funding requirements.
CSC also has direct access to $1.0 billion of the $1.1 billion uncommitted, unsecured bank credit lines discussed below, that
are primarily utilized by Schwab to manage short-term liquidity. The amount available to CSC under these lines is lower than
the amount available to Schwab because the credit line provided by one of these banks is only available to Schwab. These
lines were not used by CSC in 2008.
In addition, Schwab provides CSC with a $1.0 billion credit facility maturing in 2009. No funds were drawn under this
facility at December 31, 2008.
Schwab
Schwab is subject to regulatory requirements that are intended to ensure the general financial soundness and liquidity of
broker-dealers. These regulations prohibit Schwab from repaying subordinated borrowings to CSC, paying cash dividends, or
making unsecured advances or loans to its parent or employees if such payment would result in net capital of less than 5% of
aggregate debit balances or less than 120% of its minimum dollar requirement of $250,000. At December 31, 2008, Schwab’s
net capital was $1.2 billion (16% of aggregate debit balances), which was $1.1 billion in excess of its minimum required net
capital and $840 million in excess of 5% of aggregate debit balances.
Most of Schwab’s assets are readily convertible to cash, consisting primarily of short-term (i.e., less than 150 days)
investment-grade, interest-earning investments (the majority of which are segregated for the exclusive benefit of clients
pursuant to regulatory requirements), receivables from brokerage clients, and receivables from brokers, dealers, and clearing
organizations. Client margin loans are demand loan obligations secured by readily marketable securities. Receivables from
and payables to brokers, dealers, and clearing organizations primarily represent current open transactions, which usually
settle, or can be closed out, within a few business days.
Liquidity needs relating to client trading and margin borrowing activities are met primarily through cash balances in
brokerage client accounts, which were $19.2 billion, $19.5 billion, and $19.9 billion at December 31, 2008, 2007, and 2006,
respectively. Management believes that brokerage client cash balances and operating earnings will continue to be the primary
sources of liquidity for Schwab in the future.
The Company has a finance lease obligation related to an office building and land under a 20-year lease. The remaining
finance lease obligation of $116 million at December 31, 2008 is being reduced by a portion of the lease payments over the
remaining lease term of approximately 16 years.
To manage short-term liquidity, Schwab maintains uncommitted, unsecured bank credit lines with a group of six banks
totaling $1.1 billion at December 31, 2008. The need for short-term borrowings arises primarily from timing differences