Charles Schwab 2010 Annual Report Download - page 42

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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)
In 2010, the Company recognized class action litigation and regulatory reserves of $320 million relating to the Schwab YieldPlus
Fund. For further discussion of the Schwab YieldPlus Fund litigation and regulatory matters, see “Item 8 – Financial Statements and
Supplementary Data – Notes to Consolidated Financial Statements – 14. Commitments and Contingent Liabilities.”
In 2010, the Company decided to cover the net remaining losses recognized by Schwab money market mutual funds as a result of
their investments in a single structured investment vehicle that defaulted in 2008 and recorded a charge of $132 million.
Other expense increased in 2010 from 2009 primarily due to a charge of $30 million in 2010, as the Company ended its sponsorship
in its Invest First and WorldPoints Visa credit cards as a result of challenging credit card industry economics. Other expense also
increased in 2010 due to an increase in employee travel expenses. Other expense increased in 2009 from 2008 primarily due to a
$16 million FDIC special industry assessment and higher FDIC insurance premiums caused by higher deposits from banking clients,
partially offset by a decrease in employee travel expenses and insurance recovery of certain costs incurred in 2008.
Taxes on Income
The Company’s effective income tax rate on income from continuing operations before taxes was 41.7% in 2010, 38.3% in 2009, and
39.3% in 2008. The increase in 2010 from 2009 reflects the impact of non-deductible penalties relating to the Schwab YieldPlus Fund
regulatory settlements. The decrease in 2009 from 2008 was primarily due to lower effective state income tax rates.
Segment Information
The Company provides financial services to individuals and institutional clients through two segments
–
Investor Services and
Institutional Services. The Investor Services segment includes the Company’s retail client offering. The Institutional Services
segment provides custodial, trading, and support services to independent investment advisors, as well as retirement plan services, plan
administrator services, equity compensation plan services, and mutual fund clearing services. In addition, the Institutional Services
segment supports the availability of Schwab proprietary mutual funds and collective trust funds on third-party platforms. Banking
revenues and expenses are allocated to the Company’s two segments based on which segment services the client. The Company
evaluates the performance of its segments on a pre-tax basis, excluding items such as impairment charges on non-financial assets,
discontinued operations, extraordinary items, and significant restructuring and other charges. Segment assets and liabilities are not
disclosed because the balances are not used for evaluating segment performance and deciding how to allocate resources to segments.
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