Charles Schwab 2010 Annual Report Download - page 22

THE CHARLES SCHWAB CORPORATION
Developments in the business, economic, and geopolitical environment could negatively impact the Company’s business.
The Company’s business can be adversely affected by the general environment
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economic, corporate, securities market, regulatory,
and geopolitical developments all play a role in client asset valuations, trading activity, interest rates and overall investor engagement,
and are outside of the Company’s control. Deterioration in the housing and credit markets, reductions in short-term interest rates, and
decreases in securities valuations negatively impact the Company’s net interest revenue, asset management and administration fees,
and capital resources.
A significant decrease in the Company’s liquidity could negatively affect the Company’s business and financial management
as well as reduce client confidence in the Company.
Maintaining adequate liquidity is crucial to the business operations of the Company, including margin lending, mortgage lending, and
transaction settlement, among other liquidity needs. The Company meets its liquidity needs primarily through cash generated by
client activity and operating earnings, as well as cash provided by external financing. Fluctuations in client cash or deposit balances,
as well as changes in market conditions, may affect the Company’s ability to meet its liquidity needs. A reduction in the Company’s
liquidity position could reduce client confidence in the Company, which could result in the loss of client accounts. In addition, if the
Company’s broker-dealer or depository institution subsidiaries fail to meet regulatory capital guidelines, regulators could limit the
subsidiaries’ operations or their ability to upstream funds to CSC, which could reduce CSC’s liquidity and adversely affect its ability
to repay debt and pay cash dividends. In addition, CSC may need to provide additional funding to such subsidiaries.
Factors which may adversely affect the Company’s liquidity position include a reduction in cash held in banking or brokerage client
accounts, a dramatic increase in the Company’s client lending activities (including margin and personal lending), unanticipated
outflows of company cash, increased capital requirements, other regulatory changes or a loss of market or customer confidence in the
Company. Schwab may also experience temporary liquidity demands due to timing differences between clients’ transaction
settlements and the availability of segregated cash balances.
When cash generated by client activity and operating earnings is not sufficient for the Company’s liquidity needs, the Company must
seek external financing. During periods of disruptions in the credit and capital markets, potential sources of external financing could
be reduced, and borrowing costs could increase. Although CSC and Schwab maintain committed and uncommitted, unsecured bank
credit lines and CSC has a commercial paper issuance program, as well as a universal shelf registration statement filed with the SEC,
financing may not be available on acceptable terms or at all due to market conditions and disruptions in the credit markets. In
addition, a significant downgrade in the Company’s credit ratings could increase its borrowing costs and limit its access to the capital
markets.
The Company may suffer significant losses from its credit exposures.
The Company’s businesses are subject to the risk that a client, counterparty or issuer will fail to perform its contractual obligations, or
that the value of collateral held to secure obligations will prove to be inadequate. While the Company has policies and procedures
designed to manage this risk, the policies and procedures may not be fully effective. The Company’s exposure mainly results from
margin lending activities, securities lending activities, mortgage lending activities, its role as a counterparty in financial contracts and
investing activities, and indirectly from the investing activities of certain of the proprietary funds that the Company sponsors.
The Company has exposure to credit risk associated with its securities available for sale and securities held to maturity portfolios,
which includes U.S. agency and non-agency residential mortgage-backed securities, consumer loan asset-backed securities, corporate
debt securities, and certificates of deposit among other investments. These instruments are also subject to price fluctuations as a result
of changes in the financial market’s assessment of issuer credit quality, increases in the unemployment rate, delinquency and default
rates, housing price declines, changes in prevailing interest rates and other economic factors.
Loss of value of securities available for sale and securities held to maturity can result in charges if management determines that the
impairments are other than temporary. The evaluation of whether other-than-temporary impairment exists is a matter
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