Charles Schwab 2008 Annual Report Download - page 62

THE CHARLES SCHWAB CORPORATION
Notes to Consolidated Financial Statements
(Tabular Amounts in Millions, Except Per Share Data, Option Price Amounts, Ratios, or as Noted)
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control of collateral with a market value equal to or in excess of the principal amount loaned and accrued interest under resale
agreements. Collateral is valued daily by the Company, with additional collateral obtained when necessary. Cash and
investments segregated also include certificates of deposit and U.S. Treasury securities, as well as corporate debt securities
and commercial paper guaranteed by the Federal Deposit Insurance Corporation (FDIC) under the Temporary Liquidity
Guarantee Program. Certificates of deposit, U.S. Treasury securities, corporate debt securities, and commercial paper are
recorded at fair value.
Receivables from brokerage clients include margin loans to clients and are stated net of allowance for doubtful accounts. Cash
receivables from brokerage clients that remain unsecured or partially secured for more than 30 days are fully reserved.
Other securities owned include Schwab Funds money market funds, fixed income securities, equity and other securities, and
equity and bond mutual funds recorded at fair value based on quoted market prices. Unrealized gains and losses are included
in trading revenue.
Securities available for sale are recorded at fair value based on quoted prices for similar securities in active markets and other
observable market data. Securities available for sale include U.S. agency and non-agency mortgage-backed securities,
corporate debt securities, asset-backed securities, certificates of deposit, and U.S. agency notes. The Company evaluates these
securities for other-than-temporary impairment on a quarterly basis. If the Company determines other-than-temporary
impairment exists, the cost basis of the security is adjusted to the then-current fair value, with a corresponding loss recognized
in current earnings. Unrealized gains and losses are reported, net of taxes, in accumulated other comprehensive income (loss)
included in stockholders’ equity. Realized gains and losses from sales of securities available for sale are determined on a
specific identification basis and are included in other revenue.
Securities held to maturity are recorded at amortized cost based on the Company’s positive intent and ability to hold these
securities to maturity. The Company evaluates these securities for other-than-temporary impairment on a quarterly basis. If
the Company determines other-than-temporary impairment exists, the cost basis of the security is adjusted to the then-current
fair value, with a corresponding loss recognized in current earnings.
Securities borrowed and securities loaned: Securities borrowed require the Company to deliver cash to the lender in exchange
for securities and are included in receivables from brokers, dealers, and clearing organizations. For securities loaned, the
Company receives collateral in the form of cash in an amount equal to the market value of securities loaned. Securities loaned
are included in payables to brokers, dealers, and clearing organizations. The Company monitors the market value of securities
borrowed and loaned, with additional collateral obtained or refunded when necessary. Fees received or paid are recorded in
interest revenue or interest expense.
Loans to banking clients are stated net of allowance for credit losses. The allowance is established through charges to income
based on management’s evaluation of the existing portfolio. The adequacy of the allowance is reviewed regularly by
management, taking into consideration current economic conditions, the existing loan portfolio composition, past loss
experience, and risks inherent in the portfolio, as more fully described below.
The Company performs a quarterly analysis to estimate the allowance for credit losses. This process utilizes loan-level
statistical models that estimate prepayments, defaults, and lifetime contractual losses for our loan portfolios based on
predicted behavior of individual loans within the portfolios. The models consider effects of borrower behavior and a variety
of factors including, but not limited to, interest rate fluctuations, housing price movements, current economic conditions,
estimated defaults and foreclosures, delinquencies, the loan portfolio composition (including concentrations of credit risk),
past loss experience, estimates of loss severity, and credit scores. The more significant variables within the models are interest
rates and housing prices. Predicted housing price scenarios are primarily based on 20 years of historical prices at the
metropolitan statistical area level. Interest rate projections are based on the current term structure of interest rates and
historical volatilities to project various possible future interest rate paths. Other variables in the model, such as probability of
default, are derived from historical data. This quarterly analysis results in a loss factor that is applied to the outstanding
balances to determine the allowance for credit loss for each loan category.