Charles Schwab 2013 Annual Report Download - page 57

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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)
- 46 -
derived from historical home price indices and econometric forecasts of future home values. Factors affecting the home price
index include: housing inventory, unemployment, interest rates, and inflation expectations. Interest rate projections are based
on the current term structure of interest rates and historical volatilities to project various possible future interest rate paths. As
a result, the current state of house prices and the current state of delinquencies unique to the Company’s First Mortgage and
HELOC portfolios are considered in the allowance for loan loss methodology. This methodology results in loss factors that
are applied to the outstanding balances to determine the allowance for loan loss for each loan segment.
The allowance for personal loans secured by securities is established on a loan by loan basis. The market value of collateral
pledged by borrowers is regularly reviewed to ensure the Company’s commitment to extend credit is over-collateralized. If
collateral is in danger of falling below specified levels, the Company may reduce a borrower’s committed line or may
liquidate collateral. At December 31, 2013 and 2012, the allowance for loan losses related to personal loans secured by
securities was immaterial.
Legal and Regulatory Reserves
Reserves for legal and regulatory claims and proceedings reflect an estimate of probable losses for each matter, after
considering, among other factors, the progress of the case, prior experience and the experience of others in similar cases,
available defenses, insurance coverage and indemnification, and the opinions and views of legal counsel. In many cases,
including most class action lawsuits, it is not possible to determine whether a loss will be incurred, or to estimate the range of
that loss, until the matter is close to resolution, in which case no accrual is made until that time. Reserves are adjusted as
more information becomes available or when an event occurs requiring a change. Significant judgment is required in making
these estimates, and the actual cost of resolving a matter may ultimately differ materially from the amount reserved.
The Company’s management has discussed the development and selection of these critical accounting estimates with the
Audit Committee. Additionally, management has reviewed with the Audit Committee the Company’s significant estimates
discussed in this Management’s Discussion and Analysis of Financial Condition and Results of Operations.
FORWARD-LOOKING STATEMENTS
In addition to historical information, this Annual Report on Form 10-K contains “forward-looking statements” within the
meaning of Section 27A of the Securities Act, and Section 21E of the Securities Exchange Act of 1934. Forward-looking
statements are identified by words such as “believe,” “anticipate,” “expect,” “intend,” “plan,” “will,” “may,” “estimate,”
“appear,” “aim,” “target,” “could,” and other similar expressions. In addition, any statements that refer to expectations,
projections, or other characterizations of future events or circumstances are forward-looking statements.
These forward-looking statements, which reflect management’s beliefs, objectives, and expectations as of the date hereof, are
necessarily estimates based on the best judgment of the Company’s senior management. These statements relate to, among
other things:
the Company’s ability to pursue its business strategy and maintain its market leadership position (see “Part I – Item
1. – Business – Business Strategy and Competitive Environment”);
the expected impact of the final regulatory capital rules, which implemented Basel III and relevant provisions of the
Dodd-Frank Act, the Federal Reserve notice of proposed rulemaking regarding quantitative liquidity requirements,
and the NSCC rule issuance (see “Part I – Item 1A. – Risk Factors” and “Current Market and Regulatory
Environment and Other Developments”);
the impact of legal proceedings and regulatory matters (see “Part I – Item 3. – Legal Proceedings” and “Item 8 –
Financial Statements and Supplementary Data – Notes to Consolidated Financial Statements –14. Commitments and
Contingencies – Legal contingencies”);
the impact of current market conditions on the Company’s results of operations (see “Current Market and
Regulatory Environment and Other Developments,” “Results of Operations – Net Interest Revenue,” and “Item 8 –
Financial Statements and Supplementary Data – Notes to Consolidated Financial Statements – 5. Securities
Available for Sale and Securities Held to Maturity”);