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The Charles SchwabIts New Day SCHWAB 2009 ANNUAL REPORT Jr fc 00 c 4 1iIIIIIIi NtIsIt 11111 uuiiit II iiIk sri k4M1i tp 4j%I (cid:231)r ti r__ 44IiiI wap R$ $uIIIIIIIIIIIi 7i 1\ ht 1c gr A1I_ JIuw iiP 14 (cid:231)Y /2 tj Perhaps nowhere is this truer than in financial services In postcrisis world Schwab is more relevant and more recommended than ever Thats because through it all we stayed true to our purpose to help everyone be financially fit .1 1i$1 In complex and busy world few people have time to find their way alone FInding the route that works best is what matters lead to Schwab is built take the actions that to help everyone financial fitness Some clients we serve directly others through advisors still others through the retirement plans independent and 401ks that their employers provide But in every case we help people get where they want to go little help sometImes whether its figuring financial plan Schwab offers Everyone needs out the latest technology or help and guidance based on objective analysis And we make it easily accessible Equity Rating posted on the Web to oneonone talks with our financial consultants No matter how our clients turn to us for help we try to make financial guidance easy to reach easy to understand and worthy of trust research and disciplined from Schwab xr 1IiI2 41 4t fr 444p IiIIIIIIIII1 not just our clients Americans really want to understand all their financial options but too many lack basic knowledge Thats why Schwab wants to help everyone how to reach financial with everyone from the tools and information we post on SchwabMoneyWisa Girls Clubs of America We want to make good choices about their money fitness We try to share our knowledge corn to our work with teens through Boys better understand to make sure people know how Todays world is world of choices But finding the right thing is much easier in the grocery store than it is In financial services Schwab offers wide range of financial products our own and many from other firms them Only by providing the widest with trusted help and guidance can we help our clients meet so people can choose whaVs best for range of choices coupled their individual financial needs I1I Li 4i JWt fI %L rj1r rj(cid:231) p1 ci /PdPt pp PV kJ P\ ku pp ac IIN R11L c$k iqP Ip Cp pp 1ii pr /1 voice and these days its very easy for people Everyone has to make sure their voices are heard Schwab is proud that more people than ever say they would recommend us Like few competitors in the financial services industry were adding new households new accounts and new assets As the market went down our clients opinion of us kept climbing That says lot 1v II JL 1i St Schwab to fill the tin ua investors putting our clients need as ged even in imes cri les Founder and Chairman From Wt Bettnger President and Chief Executive Officer To My Fellow Stockholders Last year Schwab added almost million new client accounts while maintaining healthy balance sheet and delivering significant improvements to our client services and products solid performance in the best of times and an outstanding reality of 2009 one given the economic Through CIients Eyes As we stuck to our strategy of focusing on our clients on seeing our business and the services we provide from their perspective it became clear that everything weve done in our 35-year history led us to be the firm people needed Schwab remained during this very tumultuous time Through it all reliable source of financial services trusted provider of help and advice and all when it was needed stable firm committed to delivering great value the most Let me put little context around that Tough Environment for Investors and Savers Despite the market advances since March 2009 investors and savers continue to suffer An estimated $12.6 trillion in household wealth has simply disappeared between mid-2007 and the third quarter of last year Millions of Americans have lost their jobs lost their homes and lost faith in business and the economy In addition to challenging investing environment the prevailing ultra-low interest rate policies have made it difficult to earn an attractive return on savings hitting particularly hard those who depend on their savings for income After spending lifetime making responsible decisions about spending and debt accumulation many of these savers have suffered as their yields on cash investments declined to negligible levels Understandably some individuals began to focus less on investing and saving and more on shoring up the foundation down debt paying for example of their financial picture While these factors impacted our revenues in 2009 Schwab came through it all as strong and solid company 16 LETTER FROM THE CHIEF EXECUTIVE OFFICER Financial Results purpose with our day-to-day behavior that is central In 2009 clients continued to entrust their hard-earned to our firms success In looking back on the major money to Schwab bringing in net new assets of $87.3 accomplishments of 2009 its clear that our actions billion far ahead of the pace reported by any competitor delivered very specific benefits for our clients and for Total client assets reached $1.42 trillion at year-end our business compared to $1.14 trillion at year-end 2008 Our asset-gathering strength led to solid financial performance 31 2009 for the 12 months ending December Net revenues of $4.2 billion Net income of $787 million Diluted earnings per share of $0.68 compared to $1.05 the prior year and pre-tax profit margin of 30.4 percent down from record 39.4 percent year ago Both reflected the impact of the same Building Client Loyalty by Being Service Oriented In 2009 Schwab helped more people than ever serving nearly 10 million accounts Institutional Services across and Investor Services our two operating segments On the institutional or business-to-business side we of employers and third-parry 401k served thousands recordkeepers representing 1.5 million retirement plan participants We also helped more than 6000 independent clients needs These investment advisors take care of their independent professionals located low interest rate environment that affected our around the country typically serve as fiduciary to nations savers their clients role that requires their clients needs to come first This client-first philosophy with Schwabs commitment to the individual and we are proud of the leading role we play in that investor aligns perfectly by percent growing part of the industry To generate these results in such environment we knew we had to be company Overall we reduced expenses by focusing on things we could factors such as market valuations control when so many and interest rates challenging very disciplined were clearly not page 20 in our control See Letter from the CFO Pursuing Our Purpose One of the most important things we could control was to stay the course with our purpose and our client- focused strategy When so much was changing all around us what is unchanging about Schwab kept us strong and moving forward Last year as more commissioned brokers decided to leave their brokerage firm and join the growing number investment advisors Schwab helped of independent record 172 new advisory teams as they either started or joined an independent firm We also introduced to help independent an initiative business Our Make the Move program saved clients of independent advisors millions of dollars in fees and advisors grow their in the process reduced the operating expenses of advisors we serve It all starts with our purpose to help everyone be Among individual investors we served 7.7 million client financially fit That is the lens through which we view our business decisions and our actions To fulfill our purpose we pursue clear and transparent strategy Each quarter when report about the state and 722000 banking accounts brokerage accounts which rose 62 percent Bank High Yield Investor Checking and the introduction of Schwab Bank High Yield Investor Savings with the success of our Schwab of our business talk about our progress against four At our local Schwab branches we conducted more than strategic pillars client loyalty innovation operating discipline and One Schwab These four pillars not only half-million we recorded client meetings In our automated more than 250 million client log-ons to channels stake out what we intend to do but they also signal the schwab.com and routed 15.4 million calls through our very specific each pillar of our strategy behaviors that tell how we will carry out automated systems In addition Schwab employees also answered 13.7 million phone calls with an average speed-to-answer of 22 seconds Building client loyalty by being service oriented Innovating in ways that benefit consumers During the most challenging days of early 2009 when Operating our company in disciplined manner and people needed someone to talk to for clients to call us We introduced we didnt wait an outbound calling Leveraging capabilities across our company program and proactively contacted clients to offer Helping everyone be financially fit compels us to think our best suggestions shaped by our clients interests We also increased the number of branch workshops and act in different ways and its that alignment of our online webinars and other forms of client outreach In many branches to work with people who drop we assigned dedicated professional Also in early 2009 we waived advisory fees for new in without an appointment client enrollments in managed portfolio programs making sure both clients and prospects get the help thereby giving clients the help they needed with they need investment advisory services stock market decline We also introduced even at the depth of the new versions As result of our efforts we continued to post of our Web sites for individual investors independent extraordinary client loyalty results As profiled in in\estment advisors and retirement plan participants number of publications the Schwab story of client loyalty all to very positive reviews is clients true business success story In 2009 more retail said they would recommend Schwab than ever before as our internal Client Promoter Score for investors reached record levels Schwab also ranked individual Highest in Investor Satisfaction with Self-Directed Last November we broke new ground in the fast-growing world of exchange-traded funds ETF5 Eight new Schwab ETFs have some of the lowest operating expense ratios on the market and can be bought and sold without Services by J.D Power and Associates and remarkably commissions in Schwab accounts if purchased online given our history as discount brokerage firm we ranked regardless of the number of shares traded These third in the U.S Full-Service Investor Satisfaction Study ETFs can be purchased in blocks as small as one for traditional brokerage firms share per trade When we innovate at Schwab our focus is on delivering client benefits And in 2010 we will continue our legacy of innovating on behalf of consumers while challenging traditional approaches to financial services where we believe that clients interests are not optimally served In fact we began this year by cutting our online equity commission to $8.95 for all clients regardless of the size of their trade or the size of their portfolio We also added to our suite of Schwab Managed Portfolios with new portfolios of ETFs making it easier and more affordable for individual investors to obtain broad diversification in single professionally managed account with the low costs of ETFs Operating Our Company in In order to deliver effective products Disciplined Manner and services at Innovating in Ways That Benefit Consumers From day one Schwab has been an advocate for the individual investor from pioneering discount brokerage to launching OneSource to leading the way in Web-based no-load no-transaction-fee Mutual Fund investment great value for all clients especially when the environment put such tremendous pressure on revenues we had to be disciplined and efficient in our internal operations Early last year we faced very difficult worked to address this challenge We made the painful decision to cut some jobs but we made those decisions carefully and thoughtfully make cuts that would negatively impact client and we simply refused to as we service choices As and banking services Throughout 2009 we took series of bold innovative steps to help investors and savers make the most of their money In the spring we introduced high yield savings result of our operating discipline we were in position to deliver even greater value to clients while generating healthy financial performance for our stockholders In March we lowered Hedged Equity FundTM the expense ratio of the Schwab month later we enhanced our Schwab Target Funds by reducing expenses charged to account that in the Schwab tradition offered great investors adjusting the asset allocation glide path to rate on every clients first dollar no catches or fine- print gotchas be more conservative expanding the underlying funds that we invest two weeks passed before we cut fund as investors near fees again retirement in Only and this time for all Schwab equity index funds to some of 18 LETTER FROM THE CHIEF EXECUTIVE OFFICER the lowest levels in the mutual fund industry We also Our faith in the individual investor has been rewarded simplified share Classes so that all Schwab equity index funds offer the same low fund expenses to investors regardless of how much they invest starting with $100 minimum with their Since 1993 Schwab has posted positive net new assets and new brokerage trust in Schwab low accounts for each and every quarter Thats track record were proud of and one we intend to keep going This is our purpose put Schwab One brokerage account into action Now anyone can and invest open just $100 in Fund which has fund like Schwab SP 500 Index Mutual net expense ratio after waivers of As we look toward 2010 and beyond we will to focus on what about Schwab is unchanging continue our purpose our strategy and our day-to-day behaviors .09 percent In that case investors can have access to We will continue to focus on the needs of both all that Schwab has to offer for just cents year less individual and institutional clients delivering superior than single dime service and We will be innovative great value on behalf ofconsumers Leveraging Capabilities Across Our Company introducing targeted new products and services and Our senior management team recognizes the power finding new ways to be game-changer in financial of teamwork and collaboration in driving long-term sustainable growth In 2009 we diligently worked across business lines and departments to align on certain core capabilities including our people our processes and our technology While each member of our Operating Council is responsible for running an individual business unit our leaders understand that our mindset and our decisions must be made in the best Schwab organization interest of the entire For example in 2009 we continued to reinforce services industry where many competitors would prefer the status quo We will be disciplined in the way we operate and manage our capital so that we have resources to reinvest in an ever-improving client experience and the continued growth of our business We will manage the company from holistic perspective putting our investments and scale to work on behalf of the widest range of clients even as we work together to build financial others who may not be our clients As literacy for result we will sustainable company-wide management bench strength continue to share our expertise through our Schwab Over the past several years executives have been MoneyWise program as well as our work with nonprofit thoughtfully rotated throughout different parts of the organizations like SingleStop and Boys Girls Clubs of business building knowledge will need to lead Schwab for decades to come awareness and skills they America At Schwab our advocacy for investors and savers isnt But the true power of One Schwab philosophy is the ability to learn something once and apply it multiple times across technology internal organizational standpoint we leveraged lines From what we learned from the redesign of schwab.com Web sites across to benefit other client the firm We applied our Web expertise to our new site for 401k participants became the top-rated participant which quickly site in the industry Leading Into the Future As continue in my second year as President and Chief Executive Officer of Charles Schwab have been thinking quite bit about leadership about whats expected of my leadership Schwabs leadership within our industry of this firm and whats expected of it just words on paper day You can be assured that we will talk because when we lead the way to financial we want ever more people to follow After all our success is the way we do business every to walk the continue fitness is built one client at time as we see the world through clients eyes Walt Bettinger March 10 2010 It is my deeply held belief that leadership is not position you declare but to follow At Schwab right that you earn as others choose our entire leadership team is driven by the desire to serve and benefit others As result we are both pleased whove chosen our firm to serve and humbled at the number of people their financial needs SP 500 is trademark of the McGraw-Hill Companies Inc and has been licensed for use by the Schwab 5P 500 Index Fund Y\ 44 es Is .e 1L Q7 fl1udos increases 398 000 reat to th quisition rsoyiaI Chooe Retirement AoeCut par olpants of The 4Ok Company and OOOOr Schwab 4y 20 LETTER FROM THE CHIEF FINANCIAL OFFICER rom Joe Martnetto Chief Financial Officer Keeping Our Commitments Tough Environment in Theres no question that the big driver of our story for 2009 was the macro economic environment and its Since our money funds by law must invest in relatively short-term assets yields on number of them dropped so low in 2009 that we were forced to waive more than $220 million of our management even return to clients These fees in order nominal to pay basis point pervasive effects on our business Lets acknowledge waivers outweighed the growth in fee-generating assets in many than 2008 yet it ended last years apparent paradox right up front ways 2009 felt better being much tougher on our financial comments to you this year Id like to start by describing the forces that caused such can review our 2009 results in proper context and then Ill move on to discuss our financial situation so that performance picture as we up In my enter 2010 With the economy showing signs of improvement the equity markets rebounding from their March 2009 and lows our clients saw the market value of their assets at Schwab rise by more than $260 billion in the last nine months of the year In addition as Walt mentioned the strength of engagement measures such as phone calls branch and Web site visits and trading activity provided clear signs that investors continued to seek Schwabs help in finding the right way forward in the midst of environment Tough shifting net new assets were down from 2008 levels but as Walt as that environment was our also mentioned at $87.3 billion they were still far ahead of the pace reported by any other firm Coupling strong engagement with ongoing success in building our client base and attracting new assets helped drive substantial expansion of the companys earnings power in several ways For example client assets held at Schwab in fee-generating mutual including proprietary Mutual Fund OneSource the dollar value of funds and Clearing balances rose by $61.2 billion or 15 percent during 2009 even after $38.5 billion decline in money fund positions In addition balances in ongoing advised 2009 relationships 49 percent rose to $62 billion by year-end increase over 2008 And the companys average balance of interest-earning which are primarily funded by client $14.8 billion or 34 percent between 2008 and 2009 cash inflows assets rose by reaching $58.6 billion last year and resulted in 20 percent year-over-year drop in asset management and administration fees Furthermore we keep large portion of our interest- earning assets in shorter were always As the yield on those assets continued 2009 and we literally ran out of room to lower the rate to accommodate client term securities to help ensure to decline during cash needs ready paid on client cash the resulting drop in our net interest margin overwhelmed the effect of balance sheet growth and our net interest revenue declined by 28 percent Finally while client in 2009 trading revenue declined by trading activity remained healthy percent as the market volatility eventually eased and record-setting volumes of late 2008 All in all revenues declined 19 percent in 2009 Thats basically what we expected in flat Fed Funds environment although we got there in different way than wed projected at the start of the year with higher- than-expected balance sheet growth offsetting our and it is lower-than-expected net interest margin Knowing our During revenues were likely to remain under pressure we came That all certainly sounds like good news Schwabs growth is the envy of the industry 2009 however the revenue generated by client assets was severely constrained by continued declines in short-term interest rates How one might reasonably ask could rates keep falling even after the Fed Funds target was set at essentially zero at the end of 2008 In short the Federal Reserve has been so successful at pumping liquidity into our financial system to support the into the year with plan to reduce expenses by at least percent and we delivered on that commitment major part of that effort was complex realignment of staffing and office space utilization across the country which culminated in 29 percent high-cost San Francisco and the more efficient of our square footage reduction reduction percent in headcount in relatively allocation economic recovery that borrowing rates have dropped to of staff across other operating hubs in Phoenix Denver negligible levels even for terms of six months to year and Austin That expense discipline in turn enabled us to deliver 17 percent pre-tax profit margin of 30.4 percent and return on equity for 2009 not records for us certainly but solid results and right in line with our expectations given the environment In 2010 we see an opportunity to push harder on projects spend that will benefit clients as well as the need little more to accommodate the strong growth to weve continued to achieve even as the financial and economic crisis of the last few years has played out We therefore expect expenses to rise by at between 2009 and 2010 We also expect however least percent that any upside to that increase will be linked to the higher begin level of revenue growth projected when interest rates to rise If that happens wed expect to increase bonuses as appropriate while keeping employee other expenses at their planned levels By staying we believe we can continue disciplined to successfully balance investment for long-term growth with near-term profitability profit margins of at least 25 percent in 2010 which wed translate into pre-tax and 35 percent Fed Funds in our flat-rate and percent respectively rate scenarios We continue to focus on growth knowing that the full earnings power associated with that growth will become clear as interest rates inevitably move toward more sustainable levels We also continue to focus on the Id hke to say the hard work is done and all we have to do in 2010 is sit back and watch the client assets roll in and the revenue dollars pile up Actually we do believe that our revenue story is finally poised improvement for now that the economy seems to be solidly on recovery track colleagues conservative financial management and employees expect from Schwab stockholders come to work every day knowing its my job to ensure the company is ready to support the growth that my are so busily generating and to do so as that our clients the stable enduring institution We appreciate your ongoing support as we aim for sustained profitable growth in 2010 and beyond Joe Marthietto March 10 2010 and interest rates cant do much more harm Even if Fed Funds target we currently believe that is not raised from year-end the sequential improvement 2009 levels in net interest revenue we achieved in the fourth quarter of 2009 will spread to our other major sources of revenue during the first half of this year and that the company will achieve revenue growth of at least percent year-over-year in 2010 To the extent the Fed Funds target is adjusted upward starting in the middle of the year and ends 2010 at percent wed expect revenue growth to reach approximately 15 percent With revenues likely on the mend the hard part is expense discipline Ive said this before and it bears repeating Schwab is growth company managed by folks who come to work every day thinking about how to do job for clients how to offer them better better products better service and better value We love our competitive strength the world-class seemingly inexorable asset gathering but were always coming up with more ideas about how to enhance than we can effectively pursue with the managerial bandwidth that momentum at hand So our ability to apply and resources judgment to prioritize our reinvestment and work on the things that matter most in the company to our clients remains critical Amounts are presented on continuing operations basis to exclude the impact of the sale of US Trust Corporaton which was completed on July 2007 22 FINANCIAL HIGHLIGHTS In Millions Except Per Share Amounts and as Noted 2008-09 2009 HRATE 1-YEAR Net revenues Expenses excluding interest Net income Income from continuing operations per share basic Income from continuing operations per share diluted Basic earnings per share Diluted earnings per share Dividends declared per common share Special dividend declared per common share Weighted-average common shares outstanding diluted Closing market price per share at year end Book value per common share at year end growth revenue decline Net Pre-tax profit margin from continuing Return on stockholders equity operations Full-time equivalent employees at year end in thousands Net revenues per average 19% 7% 35% 36% 36% 36% 35% 9% 16% 25% 4193 2917 787 2008 5150 3122 1212 .68 1.07 .68 .68 .68 .24 1160 18.82 4.37 19% 30.4% 17% 1.06 1.06 1.05 .22 1157 16.17 3.51 3% 39.4% 31% 2007 4994 3141 2407 .93 .92 1.98 1.96 .20 1.00 1222 25.55 3.22 16% 37.1% 55% 7% 12.4 13.4 13.3 full-time equivalent employee in thousands 12% 338 383 387 GROWTH IN CLIENT ASSETS AND ACCOUNTS GROWTH RATES COMPOUNDED ANNUAL 4-YEAR 1-YEAR In Billions at Year End Except as Noted 2005-09 2008-09 2009 2008 2007 2006 2005 Assets in client accounts Schwab One other cash equivalents and deposits from banking clients 20% 47% 65.1 44.4 35.9 31.0 31.3 Proprietary funds Schwab Funds and Laudus Funds Money market funds Equity and bond funds Total proprietary funds Mutual Fund Marketplace Mutual Fund OneSource2 Mutual fund clearing services 12% 18% 1% 23% 9% 13% 6% 8% 58% 51% Other third-party mutual funds2 14% 44% Total Mutual Fund Marketplace 10% 50% Total mutual fund assets Equity and other securities 10% 24% 4% 36% Fixed income securities Margin loans outstanding Total client assets Client assets by business Investor Services Advisor Services Corporate Retirement Services Total client assets by business Net growth in assets in client accounts 171.2 209.7 183.1 135.0 110.6 41.6 33.9 58.7 56.2 39.2 212.8 243.6 241.8 191.2 149.8 175.0 110.6 180.9 163.2 81.8 54.2 81.8 62.1 243.8 500.6 713.4 485.0 167.0 7.9 169.1 333.9 577.5 357.2 164.1 225.7 488.4 730.2 545.2 145.8 173.1 398.4 589.6 487.0 142.0 17.8 60.2 142.7 340.7 490.5 422.4 119.7 25% $1422.6 6.2 11.6 10.4 10.4 $1137.0 $1445.5 $1239.2 $1053.5 9% 2% 7% 27% 8% 4% 21% 10% 24% 16% 41% 583.2 590.4 249.0 482.6 477.2 177.2 625.3 583.5 236.7 567.5 502.5 169.2 507.8 407.0 138.7 8% 25% $1422.6 $1137.0 $1445.5 $1239.2 $1053.5 for the year ended Net new assets Investor Services Advisor Services Corporate Retirement Services Total net new assets 34 Net market gains losses Net growth decline New brokerage accounts 2% 56% 31% 10% 70% 2% 23% 15.3 41.3 30.7 87.3 198.3 285.6 35.1 60.2 18.1 113.4 421.9 308.5 38.6 65.6 56.0 160.2 46.1 206.3 26.7 51.4 5.2 83.3 102.4 185.7 16.3 42.1 21.2 79.6 31.9 111.5 in thousands for the year ended 8% 11% 787 889 809 655 568 Clients in thousands5 Active brokerage accounts Banking accounts Corporate retirement plan participants6 2% 4% N/A 62% 7701 722 7401 447 7049 262 6737 147 7049 N/A N/A 4% 1465 1407 1205 542 N/A Note All amounts are presented ona continuing operations basis to exclude the impact of the sale of U.S Trust Corporation which was completed on July 12007 Excludes all proprietary money market equity and bond funds Certain client assets at December 31 2009 have been reclassified from Mutual Includes inflows of $17.8 billion in 2007 related to the acquisition respectively related to mutual fund clearing services client Includes of The 401k outflow an Fund OneSourceeto other third-party mutual funds Company Includes inflows of $3.3 billion and $3.6 billion in 2007 and 2006 of $19.5 billion in 2006 related to mutual fund clearing services client who completed the transfer of these assets to an internal platform Effective 2007 amount includes $5.2 billion at May 31 2007 related to the March 2007 acquisition of The 401k Company balances covered by 401k record keeping-only services which totaled Effective 2007 amounts include the Companys mutual fund clearing services business daily net settlements with corresponding change in net market gains losses All prior period amounts have been recast to reflect this change Periodically the Company reviews its active account base The Company identified over 400000 brokerage accounts that met its current definition of active but had little or no balances and no likelihood of further activity Effective March 31 2006 the Company removed these accounts from its Amounts for periods prior to 2006 were not adjusted While the Company adjusted its definition of an active balance accounts the basic definition remains accounts with balances or activity within the preceding brokerage months account to exclude certain zero and minimal active brokerage account total related to the acquisition of The 401k Company and 100000 related to Schwab Personal Choice Retirement Accounta 2007 includes increases of 398000 participants at Schwab 24 SCHWAB EXECUTIVE MANAGEMENT Charles Schwab Chmrman of the Board Walter Bettinger II Carrie Dwyer James McCooI Executive Vice President General Executive Vice President Counsel and Corporate Secretary Institutional Services President and Chief Executive Officer Jan Hier-King Jay Allen Executive Vice President Human Executive Vice President Shared Support Services Randall Merk Executive Vice President Investment Management Services Resources and Employee Services Lisa Kidd Hunt Rebecca Saeger Benjamin Brigeman Executive Vice President Investor Services John Clendening Executive Vice President Shared Strategic Services Executive Vice President Executive Vice President and Investor Development Chief Marketing Officer Joseph Martinetto Paul Woolway Executive Vice President and Executive Vice President and Chief Financial Officer President Charles Schwab Bank SECURITIES AND EXCHANGE COMMISSION UNITED STATES Received SEC Washington D.C 20549 FORM 10-K MAR 312010 ANNUAL REPORT PURSUANT TO SECTION 13 OR OF THE SECURITIES EXCHANGE ACT OF 1934 4Tashingtofl DC 20549 For the fiscal year ended December 31 2009 Commission file number 1-9700 THE CHARLES SCHWAB CORPORATION Exact name of registrant as specified in its charter Delaware State or other jurisdiction of incorporation or organization 94-3025021 I.R.S Employer Identification Number 211 Main Street San Francisco CA 94105 Address of principal executive offices and zip code Registrants telephone number including area code 415 636-7000 Securities registered pursuant to Section 12b of the Act Title of each class Common Stock $.01 par value per share Name of each exchange on which registered The Nasdaq Stock Market Securities registered pursuant to Section 12g of the Act Common Stock None Indicate by check mark if the registrant is well-known seasoned issuer as defmed in Rule 405 of the Securities Act Yes No Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15d of the Exchange Act Yes No Indicate by check mark whether the registrant has filed all reports required to be filed by Section 13 or 15d of the Securities Exchange Act of 1934 during the preceding 12 months or for such shorter period that the registrant was required to file such reports and has been subject to such filing requirements for thepast 90 days YesN NoD Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website if any every Interactive Data File required be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months or for such shorter period that the registrant was required to to submit and post such files Yes No Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein and will not be contained to the best of registrants knowledge in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K Indicate by check mark whether the registrant is large accelerated filer an accelerated filer non-accelerated filer or smaller reporting company See the definitions of large accelerated filer accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act Large accelerated filer Non-accelerated filer Do not check if smaller reporting company Accelerated filer Smaller reporting company Indicate by check mark whether the registrant is shell company as defmed in Rule 12b-2 of the Exchange Act Yes No As of June 30 2009 the aggregate market value of the voting stock held by non-affiliates of the registrant was $16.9 billion For purposes of this information the outstanding shares of Common Stock owned by directors and executive officers of the registrant and certain investment companies managed by Charles Schwab Investment Management Inc were deemed to be shares of the voting stock held by affiliates The number of shares of Common Stock outstanding as of January 292010 was 1192216294 DOCUMENTS INCORPORATED BY REFERENCE Part III of this Form 10-K incorporates certain information contained in the registrants definitive proxy statement for its annual meeting of stockholders to be held May 13 2010 by reference to that document THE CHARLES SCHWAB CORPORATION Annual Report On Form 10-K For Fiscal Year Ended December 31 2009 TABLE OF CONTENTS Part Item Business General Corporate Overview Acquisition and Divestiture Business Strategy and Competitive Environment Products and Services Regulation Sources of Net Revenues Available Information Item 1A Risk Factors Item lB Unresolved Securities and Exchange Commission Staff Comments Properties Legal Proceedings Submission of Matters to Vote of Security Holders Item Item Item Part II Item Market for Registrants Common Equity Related Stockholder Matters and Issuer Purchases Item Item Item 7A Item Item Item 9A Item 9B Part III Item 10 Item 11 Item 12 of Equity Securities Selected Financial Data Managements Discussion and Analysis of Financial Condition and Results of Operations Overview Current Market Environment Results of Operations Liquidity and Capital Resources Risk Management Fair Value of Financial Instruments Critical Accounting Estimates Forward-Looking Statements Quantitative and Qualitative Disclosures About Market Risk Financial Statements and Supplementary Data Changes in and Disagreements with Accountants on Accounting and Financial Disclosure Controls and Procedures Other Information Directors Executive Officers and Corporate Governance Executive Compensation Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Item 13 Certain Relationships and Related Transactions and Director Independence Item 14 Principal Accountant Fees and Services Part IV Item 15 Exhibits and Financial Statement Schedule Exhibit Index Signatures Index to Financial Statement Schedule 11 11 12 12 12 14 15 15 17 18 25 30 36 36 38 39 41 85 85 85 85 87 87 87 87 88 88 93 F-l THE CHARLES SCHWAB CORPORATION PART Item Business General Corporate Overview The Charles Schwab Corporation CSC headquartered in San Francisco California was incorporated in 1986 and engages through its subsidiaries collectively referred to as the Company and primarily located in San Francisco except as indicated in securities brokerage banking and related financial services At December 31 2009 the Company had $1.42 trillion in client assets 7.7 million active brokerage accountsa 1.5 million corporate retirement plan participants and 722000 banking accounts Significant subsidiaries of CSC include Charles Schwab Co Inc Schwab which was incorporated in 1971 is securities broker-dealer with 304 domestic branch offices in 45 states as well as branch in each of the Commonwealth of Puerto Rico and London clients U.K and serves Charles Schwab Bank Schwab Bank which commenced operations in 2003 is Reno Nevada one of CSCs subsidiaries in Hong Kong through and Investment Management Inc CSIM is the investment Charles Schwab federal savings bank located in advisor for Schwabs proprietary mutual funds which are referred to as the Schwab Funds The Company provides financial services to individuals and institutional clients through two segments Investor Services and Institutional Services The Investor Services Institutional Services segment provides custodial segment includes the Companys retail brokerage trading and support services to independent and banking operations The advisors lAs as investment well as retirement plan equity compensation plan and other financial services to corporations and their employees For financial information by segment for the three years ended December 31 2009 see Item Financial Statements and Supplementary Data Notes to Consolidated Financial Statements 21 Segment Information As of December 31 2009 the Company had full-time part-time and temporary employees and persons employed on contract basis that represented the equivalent of about 12400 full-time employees Acquisition and Divestiture In July 2007 the Company sold all of the outstanding stock of U.S Trust Corporation USTC and with its subsidiaries collectively referred to as U.S Trust U.S Trust was subsidiary that provided wealth management services In March 2007 the Company acquired The 401k Company which offers retirement plan services The acquisition enhanced the Companys ability to meet the needs of retirement plans of all sizes The acquisition also provided the opportunity to capture rollover accounts from individuals participating in retirement plans served by The 401k Company and to cross-sell the Companys other investment and banking services to plan participants Business Strategy and Competitive Environment The Companys purpose is to help everyone be financially fit The Companys strategy is to meet the financial services needs of individual investors both directly and indirectly through its two segments To pursue its strategy the Company focuses on building client loyalty innovating in ways that benefit clients operating in disciplined manner and leveraging its strengths through shared core processes and technology platforms The Company provides clients with compelling combination of personalized relationships superior service and great value delivered through blend of people and technology People provide the client focus and personal touch that are essential in serving investors while technology helps create services that are scalable and consistent This combination helps the Company address wide range of client needs from tools and information for self-directed or active investors to advice services to retirement and equity-based incentive Accounts with balances or activity within the preceding eight months THE CHARLES SCHWAB CORPORATION plans to support services for independent according to their unique circumstances lAs while enabling each client to easily utilize some or all of these capabilities The Companys competition in serving individual investors includes wide range of brokerage wealth management and asset management percentage of the investable wealth firms as well as banks and trust companies In serving these investors and competing for growing in the U.S the Company offers multi-channel service delivery model which includes branch telephonic and online capabilities Under this model the Company can offer personalized service at competitive prices while giving clients regional telephone the choice of where when and how they do business with the Company Schwabs financial consultants FCs focused service centers are staffed with trained and experienced branches and on building and sustaining client relationships The Company offers the ability to meet client investing needs through single ongoing point of contact even as those needs change over time In particular management believes that the Companys ability to provide those clients seeking help guidance or advice with an integrated individually tailored solution ranging from occasional consultations to an ongoing relationship with Schwab FC or an IA is competitive strength compared to the more fragmented offerings of other firms The Companys online and telephonic tools trade execution research channels provide quick and efficient access to an extensive array of information and administrative services which clients can access according to their needs For example as clients trade more actively they can use these channels to access highly competitive pricing expert tools and extensive service capabilities including experienced knowledgeable teams of trading specialists and integrated product offerings Individuals investing for retirement through 401k plans can take advantage of the Companys bundled offering of multiple investment choices education and third-party advice Management also believes the Company is able to compete with the wide variety of financial services firms striving with the extensive array of investment banking to attract individual client relationships by complementing these capabilities and lending products and services described in the following section In the IA arena the Company competes with institutional custodians traditional and discount brokers banks and trust companies Management believes that its Institutional Services segment can maintain its market leadership position primarily the efforts of its expanded sales through in serving their clients In addition to focusing on superior service Institutional and support teams which are dedicated to helping lAs grow compete and succeed Services competes by utilizing technology to provide lAs with highly-developed scalable platform for administering their clients assets easily and efficiently Institutional Services sponsors variety of national regional and local events designedto help lAs identify and implement better ways to grow and manage their practices efficiently Another important aspect of the Companys ability costs give the Company greater flexibility to compete is its ongoing focus on efficiency in its approach to pricing and investing for growth Management and productivity as lower believes that this flexibility remains important in light of the current competitive environment in which number of competitors offer reduced online trading commission rates and lower expense ratios on certain classes of mutual funds Additionally the Companys nationwide marketing effort is an important competitive tool because it reinforces the attributes of the Schwab brand Products and Services The Company offers broad range of products to address individuals varying investment and financial needs Examples of these product offerings include Brokerage an array of asset management accounts including some with check-writing features debit card and billpay individual retirement accounts retirement plans for small to large businesses 529 college savings accounts separately managed well as access to fixed income securities equity and debt offerings and exchange traded funds home equity lines of credit pledged-asset accounts designated loans certificates brokerage first mortgages Banking of deposit demand deposit accounts equity incentive plan accounts and margin loans as accounts checking accounts linked to brokerage Trust trust custody services personal trust accounts savings reporting services and administrative accounts and credit cards trustee services and Mutual third-party mutual funds funds the Mutual Fund OneSource service proprietary mutual funds from two fund families through Mutual Fund Marketplace through and Laudus Funds other third-party mutual funds and mutual fund trading and clearing services to broker-dealers including no-load mutual funds Schwab Funds -2- THE CHARLES SCHWAB CORPORATION These products and the Companys full array of investing services are made available through Services and Institutional Services its two segments Investor Investor Services Through the Investor Services segment the Company provides retail brokerage and banking services to individual investors The Company offers research analytic tools performance reports market analysis and educational material to all clients Clients looking for more guidance Schwabs portfolio consultants who can help develop have access to online portfolio planning tools as well as professional advice from an investment strategy and carry out investment and portfolio management decisions Schwab strives to demystif investing by educating and assisting clients in the development of investment plans Educational tools include workshops interactive courses and online information about investing Additionally Schwab provides various internet-based research and analysis tools that are designed to help clients achieve better investment outcomes As an example of such tools Schwab Equity Ratings is quantitative model-based stock rating system that provides all clients with ratings on approximately 3000 stocks assigning each equity single grade or Stocks are rated based on specific factors relating to fundamentals valuation momentum and risk and ranked so that the number of buy consideration ratings As and Bs equals the number of sell consideration ratings Ds and Fs Clients may need specific investment recommendations either from time to time or on an ongoing basis The Company provides clients seeking advice with customized solutions The Companys approach to advice is based on long-term investment strategies and guidance on portfolio diversification and asset allocation This approach is designed to be offered consistently across all of Schwabs delivery channels Schwab Private Client features personal advice relationship with designated FC supported by team of investment professionals who provide individualized and ongoing guidance and execution service customized investment strategy developed in collaboration with the client For clients seeking relationship in which investment decisions are fully delegated to financial professional the Company offers several alternatives The Company provides investors access to professional investment management in diversified account that is invested exclusively program The Company also refers in either mutual funds or exchange traded funds through investors who want to utilize specific third-party money manager to direct portion of the Schwab Managed PortfolioTM their investment assets to the Schwab Managed Account program In addition clients who want the assistance of an independent professional in managing their financial affairs may be referred to lAs in the Schwab Advisor Network These lAs provide personalized portfolio management financial planning and wealth management solutions The Company strives to deliver information education technology service and pricing that meet the specific needs of clients who trade actively Schwab offers integrated Web- and software-based trading platforms which incorporate intelligent order routing technology real-time market data options trading premium stock research and multi-channel access as well as sophisticated account and trade management features risk management tools decision support tools and dedicated personal support The Company serves both foreign investors and non-English-speaking U.S clients who wish to trade or invest in U.S dollar- based securities The Company has physical presence in the United Kingdom and Hong Kong In the U.S the Company serves Chinese- Korean- Spanish- and Vietnamese-speaking clients through combination of its branch offices and Web based and telephonic services Institutional Services Through the Institutional and other support services to lAs To attract Services segment Schwab provides custodial trading technology practice management trust asset and serve lAs Institutional Services has dedicated sales force and service teams assigned to meet their needs -3- THE CHARLES SCHWAB CORPORATION lAs who custody client accounts at Schwab may use proprietary software that provides them with up-to-date client account information as well as trading capabilities The Institutional Services website is the core platform for lAs to conduct daily business activities online with Schwab including submitting client account information and retrieving news and market information This platform provides lAs with comprehensive suite of electronic and paper-based reporting capabilities Institutional Services offers online cashiering services as well as internet-based eDocuments sites for both lAs and their clients that provide multi-year archiving of online statements trade confirms and tax reports along with document search capabilities To help lAs grow and manage their practices Institutional Services offers variety of services including marketing and business development business strategy and planning and transition suppOrt Regulatory compliance consulting and support services are available as well as website design and development capabilities Institutional Services maintains website that provides interactive tools educational content and research reports to assist advisors thinking about establishing their own independent practices Institutional Services offers an array of services to help advisors establish their own independent practices through the Business Start-up Solutions package This includes access to dedicated service teams and outsourcing of back-office as well as third-party firms who provide assistance with real estate errors and omissions insurance and company operations benefits The Company offers and trends as well as sharpen their variety of educational materials and events to lAs seeking to expand their knowledge of industry issues individual expertise and practice management skills Institutional Services updates and shares market research on an ongoing basis and it holds series of events and conferences every year to discuss topics of interest to lAs including business strategies which provides national forum for the Company insights and best practices The Company sponsors lAs and other industry participants the annual IMPACT conference to gather and share information and lAs and their clients have access to broad range of the Companys products and services including managed accounts and cash products The Institutional Services segment also provides retirement plan services plan administrator services stock plan services and mutual fund clearing services and supports the availability of Schwab proprietary mutual funds on third-party platforms The Company serves plans and other investment range of employer sponsored plans equity compensation plans defined contribution plans defined benefit related benefits plans The Companys bundled 40 1k retirement plan product services and participant-level recordkeeping Plan design offers plan sponsors wide array of investment options trustee features which increase plan efficiency and achieve employer goals are also offered increases Services such as automatic such as Roth 40 1k and designated enrollment automatic fund mapping at conversion and automatic contribution brokerage accounts are also offered The Company provides robust suite of tools to plan sponsors to manage their plans including plan-specific reports studies and research access to legislative updates and benchmarking reports that provide perspective of their plans features compared with overall in bundled 40 1k plans receive targeted education materials have access to electronic industry and segment-specific plans Participants tools and resources may attend onsite and virtual seminars and can receive customized advice provided by third party Participants in 401k plans administered by Institutional Services have access to personalized advice online by phone or in person including recommendations specific to the core investment fund choices in their retirement plan and specific recommended savings asset allocations rates Advice services include the automatic rebalancing of participant accounts to maintain proper The Companys equity compensation plan product offers plan sponsors full-service recordkeeping for stock plans stock options restricted stock performance shares and stock appreciation rights Specialized services for executive transactions and reporting grant acceptance tracking and other services are offered to employers to meet the needs of administering the reporting and compliance aspects of an equity compensation plan -4- THE CHARLES SCHWAB CORPORATION Through the Plan Administrator Services unit the Companyand third-party administrators work together to serve plan sponsors combining the consulting and administrative expertise of the administrator with the Companys investment technology participant education and trustee services Schwab also offers its proprietary mutual funds and collective trust funds on third-party retirement platforms allowing plan sponsors outside of the Companys bundled platform access to the Schwab Managed Retirement Trust Fund family These target-date retirement collective trusts have independent sub-managers and leverage both active and passive management which offer institutional structure and pricing Regulation savings and loan holding company CSC is bank CSC and Schwab Bank are both subject and loan holding company CSC is not subject maintain capital to support is sufficient that and Schwab Bank CSCs depository institution subsidiary is federal savings to supervision and regulation by the Office of Thrift Supervision As savings to specific statutory capital requirements However CSC is required to the holding company and its subsidiaries business activities and the risks inherent in those activities Schwab Bank is subject to regulation and supervision and to various requirements and restrictions under federal and state laws including regulatory capital guidelines Among other things these requirements govern transactions with CSC and its non-depository institution subsidiaries including loans and other extensions of credit investments or asset purchases dividends and investments The federal banking agencies have broad powers to enforce these regulations including the power to terminate deposit insurance impose substantial fines and other civil and criminal penalties and appoint conservator or receiver Schwab Bank is required to maintain capital level that at least equals minimum capital levels specified in federal banking laws and regulations Failure to meet the minimum levels will have actions by the regulators that if undertaken could possibly additional discretionary Bank result in certain mandatory and direct material effect on Schwab The securities registered as laws Schwab industry in the United broker-dealer with the Securities and Exchange Commission SEC the fifty states and the District of to extensive regulation under both federal and state is subject States is Columbia and Puerto Rico Schwab regulated by the Commodities Futures Trading Commission CFTC with respect and CSIM are registered as investment advisors with the SEC Additionally Schwab is to the futures and commodities trading activities it conducts as an introducing broker Much of the regulation of broker-dealers has been delegated to self-regulatory organizations SROs namely the Financial Industry Regulatory Authority Inc FINRA and the Municipal Securities Rulemaking Board MSRB Schwab is member of the Nasdaq Stock Market and the Chicago Board Options Exchange and is consequently subject to their rules and The primary regulators of Schwab the National Futures Association NFA as Schwabs primary The Companys business is also subject to oversight by regulatory are the FINRA and for municipal regulator securities the MSRB The CFTC has for futures and commodities trading bodies in other countries in which the Company regulations designated activities operates The principal purpose markets The regulations to which broker-dealers of regulating broker-dealers and investment advisors is the protection of clients and the securities and investment advisors are subject cover all aspects of the securities business including among other things sales and trading practices publication of research margin lending uses and safekeeping of clients funds and securities capital adequacy recordkeeping and reporting fee arrangements disclosure to clients fiduciary duties owed to advisory clients and the conduct of directors officers and employees registered broker-dealer As Capital Rule and related SRO requirements Capital Rule specifies minimum capital Schwab is subject to Rule 5c3- under the Securities Exchange Act of 1934 the Uniform Net The CFTC and NFA also impose net capital requirements The Uniform Net requirements that are intended to ensure the general financial soundness and liquidity of broker-dealers Because CSC itself is not registered broker-dealer it is not subject to the Uniform Net Capital Rule However if Schwab failed to maintain specified levels of net capital such failure would constitute default by CSC under certain debt covenants -5- THE CHARLES SCHWAB CORPORATION The Uniform Net Capital Rule limits broker-dealers Compliance with the Uniform Net Capital Rule could CSC which in turn could limit CSCs ability to repay debt pay cash dividends and purchase shares of its outstanding stock ability to transfer capital to parent companies and other affiliates limit Schwabs operations and its ability to repay subordinated debt to Sources of Net Revenues The Companys major sources of net revenues revenue The Company generates asset management are asset management and administration fees net interest revenue and trading and administration fees through its proprietary and third-party mutual fund offerings as well as fee-based investment management and advisory services Net interest revenue is the difference between interest earned on interest-earning assets such as cash short- and long-term investments and mortgage and margin loans and interest and long-term debt The Company generates and principal paid on funding sources transaction revenues including deposits in banking and brokerage accounts short-term borrowings trading revenues through commissions earned for executing trades for clients from trading activity in fixed income securities For revenue information by source for the three years ended December 31 2009 see Item Managements Discussion and Analysis of Financial Condition and Results of Operations Results of Operations Net Revenues Available Information The Company files annual quarterly and current reports proxy statements Companys SEC filings are available to the public over read and document that the Internet on the SECs website at http//www.sec.gov the Company files with the SEC at the SECs Public Reference Room at 100 You may Street NE on the operation of the Public Reference Room by calling the SEC at copy any and other information with the SEC The Washington DC 20549 You may obtain information -800-SEC-0330 On the Companys Internet website http//www.aboutschwab.com the Company posts the following recent filings as soon as reasonably Form 10-K the Companys quarterly reports on Form 10-Q the Companys current practicable after they are electronically filed with or furnished to the SEC the Companys annual reports on reports on Form 8-K and any amendments to those reports filed or furnished pursuant to Section 13a or 15d of the Securities Exchange Act of 1934 All such filings are available free of charge either on the Companys website or by request via email telephone 415-667-1959 or mail Charles Schwab Investor Relations at 211 Main Street investor.relationsschwab.com San Francisco CA 94105 Item lA Risk Factors The Company faces variety of risks that may affect its operations or financial results and many of those risks are driven by factors that the Company cannot control or predict The following discussion addresses those risks that management believes are the most significant although there may be other risks that could arise or may prove to be more significant than expected that may affect the Companys operations or financial results For discussion of the Companys risk management including technology and operating risk credit risk concentration risk market risk fiduciary risk and legal and regulatory risk see Item Managements Discussion and Analysis of Financial Condition and Results of Operations Risk Management Developments business in the business economic and geopolitical environment could negatively impact the Companys The Companys business can be adversely affected by the general environment economic corporate securities market regulatory and geopolitical developments all play role in client asset valuations trading activity interest rates and overall investor engagement and are outside of the Companys control Deterioration in the housing and credit markets reductions in short-term interest rates and decreases in securities valuations are negatively impacting the Companys net interest revenue asset management and administration fees and capital resources -6- THE CHARLES SCHWAB CORPORATION significant decrease in the Companys liquidity could negatively affect the Companys 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 Companys ability to meet its liquidity needs reduction in the Companys liquidity position could reduce client confidence in the Company which could result in the loss of client accounts In addition if the Companys 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 CSCs liquidity and adversely affect its ability to repay debt and pay cash dividends Factors which may adversely affect the Companys liquidity position include reduction in cash held in banking or brokerage client accounts and/or dramatic increase in the Companys client lending activities including margin and personal lending The Company also experiences liquidity demands as result of brokerage client asset flows In the ordinary course of business clients asset flows between cash balances and investment products and timing differences between when amounts are segregated for regulatory purposes and when amounts are required to fund settlement of client transactions can create significant daily changes in the Companys cash position The unpredictability of such timing differences and liquidity demands has increased with recent market conditions as client asset flows have become more volatile When cash generated by client activity and operating earnings is not sufficient for the Companys liquidity needs the Company must seek external financing Due to significant disruptions in the credit and capital markets potential sources of external financing have been reduced for many finns and borrowing costs have increased Although CSC and Schwab maintain uncommitted unsecured bank credit lines and CSC has commercial paper issuance program as well as universal shelf registration statement conditions and disruptions filed with the SEC financing may not be available on acceptable in the credit markets In addition significant terms or at all due to market downgrade in the Companys 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 Companys businesses are subject to the risk that client counterpart or issuer will fail to perform its contractual obligations or that the value of collateral policies and procedures designed to manage held to secure obligations will prove this risk the policies and procedures may not be fully effective to be inadequate While the Company has The Companys exposure mainly results from margin lending activities securities lending activities mortgage lending activities its role as 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 portfolios which includes U.S agency securities corporate debt securities and certificates exposure to credit and risk associated with its securities available for sale and securities held to maturity non-agency residential mortgage-backed securities consumer loan asset-backed of deposit among other investments These instruments are also subject to price fluctuations as result of changes in the financial markets 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 matter ofjudgment which includes the assessment of several factors See Item Managements Discussion and Analysis of Financial Condition and Results of Operations Critical Accounting Estimates If management determines that security is other-than-temporarily impaired the cost basis of the security may be adjusted and corresponding loss may be recognized in current earnings Certain securities available for sale experienced deteriorating credit characteristics in 2009 which resulted in impairment charges Deterioration in the performance of securities available for sale and securities held to maturity could result in the recognition of future impairment charges -7- THE CHARLES SCHWAB CORPORATION The Companys loans to banking clients primarily consist of first-lien mortgage loans and home equity lines of credit Increases in delinquency and default rates housing price declines increases in the unemployment rate and other economic factors can result in charges for loan loss reserves and write downs on such loans Heightened credit exposures to specific counterparties or instruments concentration risk can increase the Companys risk of loss Examples of the Companys credit concentration risk include large positions in financial instruments collateralized by assets with similar economic characteristics or in securities of single issuer or industry mortgage loans and home equity lines of credit to banking clients which are secured by properties in the same geographic region and margin and securities lending activities collateralized by securities of single issuer or industry The Company may also be subject to concentration risk when lending to particular counterparty borrower or issuer The Company sponsors Company has no obligation to do so the Company may decide number of proprietary money market mutual funds and other proprietary funds Although the for competitive reasons to provide credit liquidity or other support to its funds in the event of significant declines in valuation of fund holdings or significant redemption activity that exceeds available liquidity Such support could cause the Company to take significant charges and could reduce the Companys liquidity If the Company chose not to provide credit liquidity or other support in such situation the Company could suffer reputational damage and its business could be adversely affected Significant interest rate changes could affect the Companys profitability and financial condition The Company is exposed to interest rate risk primarily from changes in the interest rates on its interest-earning assets such as cash short- and long-term investments and mortgage and margin loans relative to changes in the costs of its funding sources including deposits in banking and brokerage accounts short-term borrowings and long-term debt Changes in interest rates generally affect the interest earned on interest-earning assets differently bearing liabilities In addition certain funding sources do not bear interest than the interest the Company pays on its interest- and their cost therefore does not vary Overall the Company is positioned to benefit from rising interest rate environment the Company could be adversely affected by decline in interest rates if the rates that the Company earns on interest-earning assets decline more than the rates that the Company pays on its funding sources the Company holds With the low interest or if prepayment rates increase on the mortgages and mortgage-backed securities that rate environment the Companys revenue from interest-earning assets has been declining more than the rates that the Company pays on its funding sources The Company may also be limited in the amount it can reduce interest rates on deposit accounts and still offer competitive return To the extent certain Schwab-sponsored money market mutual funds replace maturing securities with lower yielding securities and the overall yield on such funds falls to may waive portion of its fee in order to continue providing the Company has been waiving and may continue environment sponsored money market mutual funds Such fee waivers administration fees level at or below the management some return to clients As fees on those funds the Company result of the low interest rate to waive portion of its management fees for certain Schwab- negatively impact the Companys asset management and The Company is subject to litigation and regulatory investigations and proceedings and may not always be successful in defending itself against such claims or proceedings The financial services industry faces substantial litigation and regulatory risks The Company is subject to arbitration claims and lawsuits in the ordinary course of its business as well as class actions and other significant litigation The Company is also the subject of inquiries investigations and proceedings by regulatory and other governmental agencies Actions brought in settlements awards injunctions fines penalties or other results adverse to the Company against the Company may result including reputational harm Even may result in the Company incurring significant if the Company is successful against expenses Predicting the outcome of matters is inherently difficult in defending these actions the defense of such matters particularly damages where claims are brought on behalf of various classes of claimants claimants seek substantial or unspecified or when investigations or legal proceedings are at an early stage substantial judgment settlement fine or penalty could be material to the Companys operating results or cash flows for particular future period depending on the -8- THE CHARLES SCHWAB CORPORATION Companys results for that period In market downturns the volume of legal claims and amount of damages sought in litigation and regulatory proceedings against financial services companies have historically increased See Item Legal Proceedings From time to time the Company is subject to litigation claims from third parties alleging infringement of their intellectual property rights e.g patents Such litigation can require the expenditure of significant Company resources If the Company was found to have infringed third-party patent or other intellectual property rights it could incur substantial liability and in some circumstances could be enjoined from using certain technology or providing certain products or services Extensive regulation of the Companys businesses limits the Companys activities and may subject it to significant penalties As participant in the securities banking and financial services industries the Company is subject to extensive regulation under both federal and state laws by governmental agencies supervisory authorities and SROs Such regulation is expected to become more extensive and complex in response to the recent market disruptions The requirements imposed by the Companys regulators are designed to ensure the integrity of the financial markets the safety and soundness of financial institutions and the protection of clients These regulations often serve to limit the Companys activities by way of capital customer protection and market conduct requirements and restrictions on the businesses activities that the Company may conduct Despite to comply with applicable regulations areas where applicable regulations may be unclear or where regulators revise their previous guidance Any enforcement the Companys efforts number of risks particularly there are in actions or other proceedings brought by the Companys regulators against the Company or its affiliates officers or employees could result in fines penalties cease and desist orders enforcement actions suspension or expulsion or other disciplinary sanctions including adversely affect limitations on the Companys business the Companys results of operations and financial condition activities any of which could harm the Companys reputation and Legislation or changes in rules and regulations could negatively impact the Companys business and financial results New legislation rule changes or changes in the interpretation or enforcement of existing federal state and SRO rules and regulations may directly of the Company could also be affected by rules affect the operation and profitability of the Company or its specific business lines The profitability and regulations which impact the business and financial communities generally including changes to the laws governing taxation electronic commerce client privacy and security of client data In addition the rules and regulations could result in limitations on the lines of business the Company conducts modifications to the Companys business practices increased capital requirements or additional costs The Companys industry is characterized by aggressive price competition The Company continually monitors its pricing in relation to competitors and periodically adjusts trade commission rates interest rates on deposits and loans fees for advisory services and other fee structures to enhance its competitive position Increased price competition from other financial services firms such as reduced commissions to attract trading volume or higher deposit rates to attract client cash balances could impact the Companys results of operations and financial condition The industry in which the Company competes has undergone period of consolidation The Company faces intense competition for the clients that it serves and the products and services it offers There has been significant consolidation as financial institutions with which the Company competes have been acquired by or merged into or acquired other firms This consolidation may continue Competition is based and services offered pricing customer service brand recognition reputation on many factors and perceived including the range of products financial strength Consolidations may enable other firms to offer broader range of products and services than the Company does or offer such products at more competitive prices -9- THE CHARLES SCHWAB CORPORATION The Company faces competition in hiring and retaining qualified employees especially for employees who are key to the Companys ability to build and enhance client relationships The market for quality professionals and other personnel in the Companys business is highly competitive Competition is particularly strong for financial consultants who build and sustain the Companys client The Companys ability upon its ability to attract new employees and retain existing employees while relationships to continue to compete effectively will depend managing compensation costs Technology and operational failures could subject the Company to losses litigation and regulatory actions The Company faces technology and operating risk which is the potential for loss due to deficiencies in control processes or technology systems of the Company its vendors or its outsourced service providers that constrain the Companys ability to gather process This risk also includes the risk of human error employee misconduct and communicate information and process client transactions efficiently and securely without interruptions external fraud computer viruses terrorist attacks and natural disaster The Companys business and operations could be negatively impacted by any significant technology and operational failures Moreover instances of fraud or other misconduct including improper use or disclosure of confidential client employee or company information might also negatively impact the Companys reputation and client confidence in the Company areas of risk oversee operational in addition to any direct losses that might result from such instances Despite the Companys efforts to identify areas involving risk and implement policies and procedures designed to manage risk there can be no assurance that the Company will not suffer unexpected losses reputational damage or regulatory action due to technology or other operational failures including those of its vendors The Company also faces risk related to its security guarantee which covers client losses from unauthorized account activity such as those caused by external fraud involving the compromise of clients login and password information Losses reimbursed under the guarantee could have negative impact on the Companys results of operations The Company relies on outsourced service providers to perform key functions The Company relies on external service providers to perform certain key technology processing servicing and support functions These service providers also face technology and operating risk and any significant failures by them including the improper use or disclosure of the Companys confidential client employee or company information could cause the Company to incur losses and could harm the Companys reputation An interruption in or the cessation of service by any external service provider as result of systems failures capacity constraints financial difficulties or for any other reason and the Companys inability to make alternative arrangements in timely manner could disrupt the Companys operations Switching to an alternative service provider may require transition period and result in less efficient operations Potential strategic transactions could have negative impact on the Companys financial position The Company evaluates potential strategic transactions including business combinations acquisitions and dispositions Any such transaction could have material impact on the Companys financial position results of operations or cash flows The process business businesses of evaluating negotiating and effecting any such strategic transaction may divert managements attention from other concerns and might cause and systems may result the loss of key clients employees and business partners Moreover integrating in unforeseen expenditures as well as numerous risks and uncertainties including the need to integrate operational financial and management information systems and management controls integrate relationships with clients and business partners and manage facilities and employees in different geographic areas In addition an acquisition may cause the Company to assume liabilities or become subject to litigation Further the Company may not realize the anticipated benefits from an acquisition and any future acquisition could be dilutive to the Companys current stockholders percentage ownership or to earnings per share EPS The Companys acquisitions and dispositions are typically subject to closing conditions including regulatory approvals the absence of material adverse changes in the business operations or financial condition of the entity being acquired and or sold To the extent the Company enters into an agreement close when expected or at all If material to buy or sell an entity there can be no guarantee transaction does not close the Companys stock price could decline that the transaction will 10- THE CHARLES SCHWAB CORPORATION The Companys stock price has fluctuated historically and may continue to fluctuate The Companys stock price can be volatile Among the factors that may affect the volatility of the Companys stock price are the following speculation in the investment community or the press about or actual changes in the Companys competitive position organizational structure executive team operations financial condition financial reporting and results effectiveness of cost reduction initiatives or strategic transactions the announcement of new products services acquisitions or dispositions by the Company or its competitors increases or decreases in revenue or earnings changes in earnings estimates by the investment community and variations between estimated financial results and actual financial results Changes in the stock market generally or as it concerns the Companys industry as well as geopolitical economic and business factors unrelated to the Company may also affect the Companys stock price Future sales of CSCs equity securities may adversely affect the market price of CSCs common stock and result in dilution CSC certificate of incorporation authorizes CSC Board of Directors to among other things issue additional shares of common or preferred stock or securities CSC may issue additional equity or convertible additional equity or convertible securities convertible or exchangeable into equity securities without stockholder approval securities to raise additional capital or for other purposes The issuance of any could be substantially dilutive to holders of CS Cs common stock and may adversely affect the market price of CSCs common stock Item lB Unresolved Securities and Exchange Commission Staff Comments None Item Properties summary of the Companys significant locations at December 31 2009 is presented in the following table Locations are leased or owned as noted below The square footage amounts are presented net of space that has been subleased to third parties amounts in thousands Location Corporate office San Francisco space CA Service centers Phoenix AZ Denver CO Austin TX Orlando FL Richfield OH Indianapolis IN Includes the Companys headquarters Includes two data centers Square Footage Leased Owned 901 146 383 167 140 709 17 113 data centers Substantially all of the Companys branch offices and service centers generally support all of the Companys segments offices are located in leased premises The corporate headquarters -11- THE CHARLES SCHWAB CORPORATION Item Legal Proceedings For discussion of legal proceedings see Item Financial Statements and Supplementary Data Notes to Consolidated Financial Statements 13 Commitments and Contingent Liabilities Item Submission of Matters to Vote of Security Holders None PART II Item Market for Registrants Common Equity Related Stockholder Matters and Issuer Purchases of Equity Securities CSCs common stock stockholders of record as of January 29 2010 was 8722 The closing market price per share on that date was $18.29 On to the New York Stock Exchange is listed on The Nasdaq Stock Market under the ticker it is transferring the listing of its common stock 22 2010 CSC announced symbol SCHW The number of common February that NYSE CSC expects its common stock to begin trading on the NYSE on March 2010 using its current symbol The quarterly high and low sales prices for CSCs common stock and the other to this item are included in Item Statements 25 Quarterly Financial Retirement Plans Financial Statements Information Unaudited and 17 Employee Incentive Deferred and Supplementary Data Notes to Consolidated Financial Compensation and information required to be furnished pursuant The following graph shows five-year comparison of cumulative total returns for CSCs common stock the Dow Jones U.S Investment Services Index and the Standard Poors 500 Index each of which assumes an initial investment of $100 and reinvestment of dividends $250 -i $200 $150 $100 $50 $0 12/31/04 The Charles Schwab Corporation A- Dow Jones U.S Investment Services Index -- Standard Poors 500 Index \-4--- --- .-.----.- 12/31/05 12/31/06 12/31/07 12/31/08 12/31/09 December 31 2004 2005 2006 2007 2008 2009 The Charles Schwab Corporation Dow Jones U.S Investment Services Index StandardPoors 500 Index 100 100 100 124 122 105 164 165 121 230 149 128 147 49 81 174 78 102 12 THE CHARLES SCHWAB CORPORATION Issuer Purchases of Equity Securities The following table summarizes purchases made by or on behalf of CSC of its common stock for each calendar month in the fourth quarter of 2009 Total Number of Shares Purchased jjpIiousands Average Price Paid per Share Total Number Approximate of Shares Purchased Dollar Value of as Part of Publicly Announced Program in thousands Shares that May Yet be Purchased under the Program in millions 196 211 Month October Share Repurchase Program Employee transactions November Share Repurchase Program Employeetransactions2 December Share Repurchase Program Employee transactions Total Share Repurchase Program Employee transactions N/A Not applicable There were no share repurchases program are under authorizations common stock publicly announced 17.62 N/A 17.30 18.16 N/A N/A N/A 596 N/A 596 N/A 596 N/A 596 N/A under this 410 17.46 the Share Repurchase Program during the fourth quarter Repurchases under by CSCs Board of Directors covering up to $500 million and $500 million of by the Company on April 25 2007 and March 13 2008 respectively The remaining authorizations do not have an expiration date Includes restricted shares withheld under the terms of grants under employee stock incentive plans to offset tax withholding obligations that occur upon vesting and release of restricted The Company may receive shares to obligations by employees who exercise stock options granted shares pay the exercise price and/or under employee stock to satisfy tax withholding incentive plans which are commonly referred to as stock swap exercises 13 THE CHARLES SCHWAB CORPORATION Item Selected Financial Data Selected Financial and Operating Data In Milhiant Except Per Share Amauntn Eatian or as Noted Growth Rates Compounded 4-Year Annual t-Year 2005-2009 2008-2009 2009 2008 2007 2006 2005 Results of Operations Net revenues Expenses excluding interest Income from continuing operations NetincomeW Income from continuing operations per share basic Income from continuing operations per share diluted Basic eamings share per Diluted earnings per share2 Dividends declared per common shsre Special dividend declared per common share Weighted-aversgc common shares nutstanding diluted Asset management and administration fees as percentage of net revenues Net interest revenue ss percentage of net revenues Trading revenue as percentage of net revenues Effective income tax rate on income from continuing operations Capital expenditures purchases of equipment office facilities and property net Capital expenditures net as percentage of net revenues 4% 3% 6% 2% 9% 9% 5% 5% 28% N/M 3% 19% 7% 36% 35% 36% 36% 36% 35% 9% 4193 2917 787 787 .68 .68 .68 .68 .240 5150 3122 1230 1212 1.07 1.06 1.06 1.05 .220 4994 3141 t120 2407 .93 .92 1.98 t.96 .200 1.00 4309 2833 891 1227 .70 .69 .96 .95 36t9 2592 634 725 .49 .48 .56 .55 .135 .089 t160 1157 1222 1286 1308 45% 29% 24% 46% 32% 21% 47% 33% 17% 45% 33% 18% 46% 28% 21% 38.3% 39.3% 39.6% 39.6% 38.3% 16% 28% 139 3% 194 4% 168 3% 59 1% 78 2% Performance Measures Net revenue decline growth Pre-tax profit margin from continuing operations Retum on stockholders equity Financial Condition at year end Total assets Long-term debt Stockholders equity Assets to stockholders equity ratio Long-term debt to total financial capital long-term debt plus stockholders equity Employee Information 19% 30.4% 17% 3% 39.4% 31% 16% 37.1% 55% 19% 34.3% 26% 6% 28.4% 16% 12% 35% 3% 46% 71% 25% 75431 51675 42286 48992 47351 1512 5073 15 883 4061 13 899 3732 11 388 5008 10 462 4450 11 23% 18% 19% 7% 9% Full-time equivalent empluyees15 at year end in thousands Net revenues per average frill-time equivalent employee in thousands 2% 1% 7% 12% 12.4 338 13.4 383 13.3 387 12.4 362 11.6 319 Note All information contained in this Annual Report on Form 10-K is presented on continuing basis unless otherwise noted Net income in 2007 includes gain of$l.2 billion after tax on the sale of U.S Trust Both basic and diluted eamings per share include discontinued operations Trading revenue includes commission and principal transaction revenues Capital expenditures in 2006 are presented net of proceeds of $63 million primarily from the sale of data center and in 2005 are presented net of proceeds of $20 million from the sale of equipment Full-time equivalent N/M Not meaningful employees in 2007 includes 365 employees related to the acquisition of The 401k Company in March 2007 14 THE CHARLES SCHWAB CORPORATION Managements Discussion and Analysis of Financial Condition and Results of Operations Tabular Amounts in Millions Except Ratios or as Noted Item Managements Discussion and Analysis of Financial Condition and Results of Operations OVERVIEW Management of the Company focuses financial position and operating performance All on several key financial and non-financial metrics in evaluating the Companys information contained in this Annual Report on Form 10-K is presented on continuing operations basis unless otherwise noted Summarized results for the years ended December 31 2009 2008 and 2007 are shown in the following table Year Ended December 31 Client Activity Metrics Net new client assets in billions1 Client assets in billions at year end Clients daily average trades in thousands Company Financial Metrics Net revenues Expenses excluding interest Income from continuing operations before taxes on income Taxes on income Income from continuing Loss income from discontinued operations operations net of tax Net income Earnings per share from continuing operations diluted Earnings per share diluted Net revenue decline growth from prior year Pre-tax profit margin from continuing operations Return on stockholders equity Net revenue per average full-time equivalent employee in thousands Growth Rate 1-Year 2008-2009 2009 2008 2007 23% 25% 4% 19% 7% 37% 39% 36% N/M 35% 36% 35% 87.3 113.4 160.2 1422.6 333.6 1137.0 346.6 1445.5 284.9 4193 2917 1276 489 787 787 .68 .68 19% 30.4% 17% 5150 3122 2028 798 1230 18 1.2 12 1.06 1.05 3% 39.4% 31% 4994 3141 1853 733 1120 1287 2.407 .92 1.96 16% 37.1% 55% 12% 338 383 387 Net new client assets in 2007 includes $23.0 billion related to the acquisition of The 401k Company and $3.3 billion related to mutual fund clearing services client N/M Not meaningful Net new client assets is defined as the total inflows of client cash and securities to the firm less client outflows Management believes that this metric depicts how well the Companys products and services appeal to new and existing clients Client assets is the market value of all client assets housed at the Company Management considers client assets to be indicative of the Companys appeal in the marketplace Additionally fluctuations in certain components of client assets e.g Mutual Fund OneSource funds directly impacts asset management and administration fee revenues Clients daily average trades is an indicator of client engagement with securities markets and the most prominent driver of trading revenues Management believes that earnings per share net revenue growth pre-tax profit margin from continuing operations and return on stockholders equity provide broad indicators of the Companys overall financial health operating efficiency and ability to generate acceptable returns within the context of given operating environment Net revenue per average full-time equivalent employee is considered by management to be the Companys broadest measure of productivity 15 and tight LIBOR decreased THE CHARLES SCHWAB CORPORATION Managements Discussion and Analysis of Financial Condition and Results of Operations Tabular Amounts in Millions Except Ratios or as Noted The Companys major sources of net revenues are asset management and administration fees net interest revenue and trading revenue The Company generates asset management and administration fees through its proprietary and third-party mutual fund offerings as well as fee-based investment management and advisory services Net interest revenue is the difference between interest earned on interest-earning assets and interest paid on funding sources Asset management and administration fees and net interest revenue are impacted by securities valuations interest and client activity levels The Company generates trading revenues through rates the Companys ability to attract new clients commissions trades for earned for executing clients and principal transaction revenues from trading activity in fixed income securities Trading revenues are impacted by trading volumes the volatility of prices in the equity and fixed income markets and commission rates 2009 Compared to 2008 Economic and market conditions remained challenging throughout 2009 marked by unprecedented market dynamics including further declines in short-term interest rates and home valuations increases in home foreclosures and delinquencies credit markets While the federal funds target rate remained unchanged at range of zero to 0.25% the three-month by 158 basis points to 0.25% At the same time although the equity markets showed sustained improvement from their March 2009 lows the Nasdaq Composite Index the Standard Poors 500 Index and the Dow Jones Industrial Average increased during the year by 44% 24% and 19% respectively average equity market valuations declined in 2009 from 2008 In this shifting market environment clients continued to actively utilize the Companys products and services The Company attracted $87.3 billion in net new client assets during the year Total client assets were $1.42 trillion at December 31 2009 up 25% from the prior year reflecting slowed modestly during the year as clients daily average the Companys success in continuing to attract and retain clients Client trading activity trades decreased 4% to 333600 in 2009 from 2008 Net revenues decreased by 19% in 2009 from 2008 primarily due to the decreases fees and net interest revenue Asset management and administration fees decreased in asset management in 2009 primarily due to money market and administration mutual fund fee waivers and lower average equity market valuations Given the low interest rate environment the overall yields on certain Schwab-sponsored money market mutual funds those funds As result the Company waived have fallen to levels at or below the management fees on portion of its fees which totaled $224 million in order to provide positive return to clients There were no money market mutual fund fee waivers result of the low interest rate environment partially offset by higher average in 2008 or 2007 Net interest revenue decreased as balances of interest-earning assets These decreases were offset by the increase in other revenue Other revenue in 2009 included $31 million gain on the repurchase of portion of the Companys long-term debt In addition other revenue in 2008 included loss of $29 million on the sale of corporate debt security held in the Companys available for sale portfolio Net revenues were also negatively impacted by net impairment charges of $60 million in 2009 relating to certain residential mortgage-backed securities in the Companys available for sale portfolio Net impairment losses on securities in 2008 included an other-than-temporary impairment charge of $44 million related to corporate debt security held in the Companys available for sale portfolio Expenses excluding interest decreased benefits professional services and advertising and market development expenses by 7% in 2009 from 2008 primarily due to the decreases The decrease in compensation and in expenses was partially offset by severance and facilities charges of $101 million relating to the Companys cost reduction measures and $16 million Federal Deposit Insurance Corporation FDIC special industry assessment As result of the Companys cost reduction measures and ongoing expense discipline the Company achieved pre-tax profit margin from continuing operations of 30.4% and return on stockholders equity of 17% in 2009 Net revenue per average full- time equivalent employee was $338000 in 2009 down 12% from 2008 due to lower net revenues partially offset by the decrease in average full-time equivalent employees 2008 Compared to 2007 2008 was also marked by extraordinary market conditions including downward pressure on home prices tight credit markets liquidity concerns significant volatility and sharp declines in the equity markets and slow general economic activity The 16 THE CHARLES SCHWAB CORPORATION Managements Discussion and Analysis of Financial Condition and Results of Operations Tabular Amounts in Millions Except Ratios or as Noted Nasdaq Composite Index Standard 38% and 34% respectively with Poors 500 Index and the Dow Jones Industrial Average decreased in 2008 by 41% significant portion of these decreases occurring in the fourth quarter In addition the federal funds target rate decreased during 2008 by 4.25% to range of zero to 0.25% at December 31 2008 Net new client assets totaled $113.4 billion for 2008 down 29% from 2007 reflecting deterioration in the equity markets and lower asset valuations Total client assets were $1.14 trillion at December 31 2008 down 21% from December 31 2007 Additionally clients daily average trades increased 22% to 346600 in 2008 from 2007 Net revenues grew by 3% in 2008 from 2007 primarily due to an increase in trading revenue partially offset by decrease in other revenue as well as net impairment losses on securities incurred in 2008 Trading revenue increased in 2008 primarily due to higher trading volume as result of significant volatility in the equity markets during the year The decrease in other revenue related to loss of $29 million on the sale of corporate debt security and net impairment losses on securities included an other-than-temporary impairment charge of $44 million related to another corporate debt security which were held in the Companys available for sale portfolio Asset management and administration fees remained relatively flat in 2008 reflecting the Companys ability to attract and retain clients Net interest revenue increased slightly in 2008 due to higher levels of interest-earning assets offset by the impact of decrease in the average net yield earned on these assets Although expenses excluding interest remained relatively flat in 2008 compensation and benefits expense decreased reflecting lower incentive compensation while other expense and occupancy and equipment expense increased The loss from discontinued operations of $18 million in 2008 relates to the adjustment to finalize the income tax gain related to the sale of U.S Trust The Companys pre-tax profit margin from continuing operations was 39.4% and return on stockholders equity was 31% in 2008 which reflected the Companys sustained expense discipline during the year Return on stockholders equity in 2007 included $1.2 billion after-tax gain on the sale of U.S Trust as well as incremental interest revenue generated from temporarily investing the proceeds from the sale Net revenue per average full-time equivalent employee was $383000 in 2008 down 1% from 2007 as net revenue growth was lower than the increase in average full-time equivalent employees Certain prior period amounts have been reclassified to conform to the current period presentation All references to EPS information in this Managements Discussion and Analysis of Financial Condition and Results of Operations reflect diluted EPS unless otherwise noted Subsequent Event On January 26 2010 the Company completed the sale of 29670300 shares of its common stock offering price of $19.00 per share Net proceeds from the offering were $543 million and will be used received $.Ol par value at public to support the Companys balance from money market funds into Schwab Bank sheet growth including expansion of its deposit base and potential migration of certain client balances CURRENT MARKET ENVIRONMENT The difficult market conditions in 2009 continue to adversely affect the Companys net revenues While the Company generally earns asset management assets these fees are currently being affected by the low interest and administration fees based upon daily balances of certain client rate environment as well The overall yields on certain Schwab-sponsored money market mutual funds have fallen to levels at or below the management fees on those funds The Company continues to waive funds may continue providing portion of its management positive return to clients These and other money market mutual funds may continue fees which it began to do in the first quarter of 2009 so that the to find it necessary to replace maturing securities with lower yielding securities as result of the current interest rate environment and the overall yield on such funds may fall below or further below the management fees on those funds To the extent this occurs the amount of fees waived may increase from fourth quarter 2009 levels which would adversely affect asset management and administration fees 17- THE CHARLES SCHWAB CORPORATION Managements Discussion and Analysis of Financial Condition and Results of Operations Tabular Amounts in Millions Except Ratios or as Noted Given the low interest rate environment the Companys revenue from interest-earning assets such as securities held and loans to clients was declining more than the interest that the Company pays on funding sources such as client deposits The Companys ability to reduce sources which are largely tied to shorter-term interest the interest expense paid on funding sources has been limited as the rates paid on funding rates approached zero Concurrently interest-earning asset yields which are often tied to longer-term interest rates continued to decline By the end of 2009 however the pace of further declines in interest-earning asset yields had slowed significantly The Company recorded net impairment charges of $60 million related to certain non-agency residential mortgage-backed securities in 2009 due to credit deterioration of the securities underlying collateral Further deterioration in the performance of the underlying loans in the Companys residential mortgage-backed securities portfolio could result in the recognition of additional future impairment charges RESULTS OF OPERATIONS The following 2008 and 2007 discussion presents an analysis of the Companys results of operations for the years ended December 31 2009 Net Revenues The Companys major sources of net revenues are asset management and administration fees net interest revenue and trading revenue Asset management to 2008 Asset management and administration fees net interest revenue and trading revenue decreased in 2009 as compared and administration fees were relatively flat while net interest revenue and trading revenue increased in 2008 as compared to 2007 Year Ended December31 Asset management and administration fees Mutual fund service fees Proprietaiy funds Schwab Funds and Laudus Funds MutualFundOneSource Clearing and other Investment management and trust fees Other Asset management and administration fees Net interest revenue Interest revenue Interest expense Net interest revenue Trading revenue Commissions Principal transactions Trading revenue Other Net impairment losses on securities Total net revenues Asset Management and Administration Fees Growth Rate 2009 2008 2007 %of Total Net %of Total Net %of Total Net 2008-2009 Amount Revenues Amount Revenues Amount Revenues 25% 15% 14% 20% 1% 20% 25% 9% 28% 3% 32% 8% 86% 36% 19% 949 461 93 273 99 1.875 1428 221 1.207 884 112 996 175 60 23% 11% 2% 7% 2% 45% 34% 5% 29% 21% 3% 24% 3% 1% 1265 544 108 340 98 2.355 1908 243 1.665 915 165 1.080 94 44 24% 11% 2% 7% 2% 46% 37% 5% 32% 18% 3% 21% 2% 1% 1167 621 104 378 88 2.358 2270 623 1647 755 105 860 129 23% 13% 2% 8% 1% 47% 46% 13% 33% 15% 2% 17% 3% 4193 100% 5.150 100% 4994 100% Asset management and administration fees include mutual fund service fees and fees for other asset-based financial services provided to individual and institutional clients The Company earns mutual fund service fees for shareholder services administration investment management and transfer agent services through July 2009 provided to its proprietary funds and recordkeeping and shareholder services provided to third-party funds These fees are based upon the daily balances of client 18 THE CHARLES SCHWAB CORPORATION Managements Discussion and Analysis of Financial Condition and Results of Operations Tabular Amounts in Millions Except Ratios or as Noted assets invested in the Companys proprietary funds advisory and managed account services which are based and third-party funds The Company also earns asset management to the specific on the daily balances of client subject assets fees for fee for service The fair values of client assets included in proprietary and third-party mutual funds are based on quoted market prices and other observable market data Asset management and administration fees may vary with changes in the balances of client assets due to market fluctuations and client activity For discussion of the impact of current market conditions on asset management and administration fees see Current Market Environment As shown in the following table asset management and administration fees decreased 2008 This decrease was due to decreases in mutual fund service fees and investment by $480 million or 20% in 2009 from and trust fees management Year Ended December 31 Asset management and administration fees before money market mutual fund fee waivers Money market mutual fund fee waivers Asset management N/M Not meaningful and administration fees Growth Rate 2008-2009 11% N/M 20% 2009 2008 2007 2099 224 2355 2358 1.875 2.355 2.358 Mutual fund service fees decreased fee waivers Given the low interest mutual funds have fallen to levels by $414 million or 22% in 2009 from 2008 primarily due to money market mutual fund rate environment in 2009 the overall yields on certain Schwab-sponsored money market at or below the management fees on those funds As result the Company waived portion of its fees which totaled $224 million in 2009 in order to provide positive return to clients There were no money market mutual fund fee waivers in 2008 or 2007 In addition mutual fund service fees decreased during the year due to lower and mutual fund clearing services average balances of client assets invested in the Companys Mutual Fund OneSource funds as result of lower average equity market valuations Investment management and trust fees decreased by $67 million or 20% in 2009 from 2008 due to temporary fee rebates offered to qualifying clients for choosing to participate in advisory or managed account services programs Asset management and administration fees remained relatively flat in 2008 from 2007 primarily due to lower third-party mutual fund and advisory service fees partially offset by higher proprietary fund fees Mutual Fund OneSource service fees decreased by $77 million or 12% in 2008 from 2007 primarily due to lower average balances of client assets invested in the Companys Mutual Fund OneSource 8% in 2008 from 2007 primarily due to higher average balances of client funds The Companys proprietary mutual fund service fees increased $98 million or assets invested in the Companys money market mutual funds Investment management and trust fees decreased by $38 million or 10% in 2008 from 2007 due to lower average balances of client assets participating in advisory and managed account services programs Net Interest Revenue Net interest revenue is the difference between interest earned on interest-earning assets and interest paid on funding sources Net interest revenue is affected by changes in the volume and mix of these assets and liabilities as well as by fluctuations in interest rates and portfolio management strategies The Company is positioned so that the consolidated balance sheet produces an increase in net interest revenue when interest rates rise and conversely decrease in net interest revenue when interest rates fall i.e interest-earning assets generally reprice more quickly than interest-bearing liabilities When interest rates fall the Company attempts to mitigate some of this negative impact by extending the maturities of assets in investment portfolios to lock-in asset yields as well as by lowering rates paid to clients on interest-bearing liabilities Since the Company establishes the rates paid on certain brokerage client cash balances and deposits from banking clients as well as the rates charged on receivables from brokerage clients and also controls the composition of its investment securities it has some ability to manage its net interest spread However the spread is influenced by external factors such as the interest rate environment and competition For discussion of the impact of current market conditions on net interest revenue see Current Market Environment -19- THE CHARLES SCHWAB CORPORATION Managements Discussion and Analysis of Financial Condition and Results of Operations Tabular Amounts in Millions Except Ratios or as Noted In clearing its clients trades Schwab holds cash balances payable to clients In most cases Schwab pays its clients interest on cash balances awaiting investment and may invest consist primarily of margin loans to brokerage these funds and earn interest clients Margin loans are loans made by Schwab revenue Receivables from brokerage clients to clients on secured basis to purchase securities Pursuant to SEC regulations client cash balances that are not used for margin lending are generally segregated into investment accounts that are maintained for the exclusive benefit of clients which are recorded in cash and investments segregated on the Companys consolidated balance sheet When investing segregated client cash balances Schwab must adhere to SEC regulations that restrict investments to securities guaranteed by the full faith and credit of the U.S government participation certificates mortgage-backed securities guaranteed by the Government National Mortgage Association certificates resale agreements collateralized by qualified securities Additionally Schwab of deposit issued by U.S banks and thrifts has established policies for the minimum credit and quality and maximum maturity of these investments Schwab Bank also maintains investment portfolios for liquidity as well as to invest funding from deposits raised in excess of loans to banking clients Schwab Banks securities securities U.S agency notes corporate debt securities certificates available for sale of deposit and asset- include residential mortgage-backed backed securities Schwab Banks securities held to maturity include residential mortgage-backed securities asset-backed securities and corporate These loans are largely funded by interest-bearing debt securities Schwab Bank deposits from banking clients lends funds to banking clients primarily in the form of mortgage loans The Companys interest-earning assets are financed primarily by brokerage client cash balances and deposits from banking clients Non-interest bearing funding sources include noninterest-bearing brokerage client cash balances and proceeds from stock-lending activities as well as stockholders equity The following table presents net interest revenue information corresponding to interest-earning assets and funding sources on the consolidated balance sheet Year Ended December 31 Interest-earning assets Cash and cash equivalents Cash and investments segregated Broker-related receivables Receivables from brokerage clients Other securities owned Securities available for sale Securities held to maturity Loans to banking clients Loans held for sale Total interest-earning assets Other interest revenue Total interest-earning assets Funding sources Depositsfrombankingclients Payables to brokerage clients Short-term borrowings Long-term debt Total interest-bearing liabilities Non-interest bearing funding sources Provision for credit losses Other interest expense Total funding sources Net interest revenue Average Balance 7848 16291 363 6749 126 18558 1915 6671 110 58631 2009 Interest Revenue Average Yield 2008 Interest Average Revenue Average Yield 2007 Interest Average Average Revenue Yield Expense Rate Balance Expense Rate Balance Expense Rate 0.42% 0.49% 0.28% 5.20% 0.79% 2.81% 3.86% 3.61% 4.55% 2.23% 33 80 351 521 74 241 1.307 121 5217 11223 428 10278 11772 22 4831 66 129 280 612 517 227 2.47% 2.49% 1.87% 5.95% 4.39% 5.86% 4.70% 6.06% 4290 9991 595 10736 7335 2786 37 43.837 1778 4.06% 35770 223 511 27 859 5.20% 5.11% 4.54% 8.00% 399 5.44% 169 2.190 80 6.07% 5.41% 6.12% 4.35% 35.770 2.270 6.3_5IL 58.631 1.428 2.44% 43837 31249 18002 1.231 50482 8149 58.63 0.34% 0.02% 5.77% 0.36% 107 71 181 38 221 1.207 0.38% 2.06% 19203 15220 40 890 35.353 8484 43.837 130 1908 104 55 59 219 17 0.54% 0.36% 2.54% 6.63% 0.62% 243 1.665 0.55% 3.80% 12046 14768 531 27.345 8425 35.770 238 329 38 605 15 623 1.98% 2.23% 7.16% 2.21% 1.74% 1.647 4.6114 Includes receivables from brokers dealers and clearing organizations Amounts have been calculated based on amortized cost Net interest revenue decreased in 2009 from 2008 due to the low interest rate environment that persisted throughout the year As result the Company experienced declines in the yields and rates of all interest-eaming assets and interest-bearing 20 THE CHARLES SCHWAB CORPORATION Managements Discussion and Analysis of Financial Condition and Results of Operations Tabular Amounts in Millions Except Ratios or as Noted liabilities compared to 2008 with yields on interest-earning assets declining more than the cost of funding sources as short- term interest rates approached zero The mix of interest-earning assets also negatively affected net interest revenue most notably the decrease in average margin loans resulted in higher average balances of cash and investments segregated lower yielding asset category The effect of the low interest rate environment and asset mix was partially offset by the growth in average balances The Company experienced increases in the average balances of securities significant growth in deposits from banking clients which in turn funded available for sale loans to banking clients and cash and cash equivalents Net interest revenue slightly increased in 2008 from 2007 primarily due to higher average balances of interest-eaming assets including increases in securities available for sale and loans to banking clients offset by lower yields on interest-earning assets Net from the sale of U.S Trust Consistent with declines in general market interest in 2007 included incremental revenue revenue interest interest generated from temporarily investing the proceeds rates prevalent in 2008 the Company experienced declines in the yields of all interest-earning assets during 2008 as compared to 2007 Accordingly the average interest rates on deposits from banking clients and payables to brokerage clients also decreased during 2008 The decline in the average interest rate on long-term debt was due to the additional debt issued at lower interest rates as part of the Companys capital restructuring in 2007 Trading Revenue Trading revenue includes commission and principal transaction revenues Commission revenues are affected by the number of revenue trades executed and the average revenue earned per revenue trade Principal transaction revenues are primarily comprised of revenues from client fixed income securities trading activity Factors that influence principal transaction revenues include the volume of client trades market price volatility and competitive pressures Trading revenue decreased by $84 million or 8% in 2009 from 2008 due to lower daily average revenue trades and lower average revenue earned per revenue trade as trading volume and market volatility by $220 million or 26% in 2008 from 2007 due to higher daily average eased from 2008 levels Trading revenue revenue trades and higher average revenue increased earned per revenue trade As shown in the following table daily average revenue trades decreased 2% in 2009 The decrease was primarily due to lower volumes of principal transaction and mutual fund trades Average revenue earned per revenue trade decreased 5% in 2009 from 2008 primarily due to lower average revenue earned per revenue trade for principal transactions and mutual funds partially offset by higher average revenue earned per revenue trade for option securities Daily average revenue trades increased 19% in 2008 from 2007 due to higher volumes of equity mutual fund option and principal transaction trades Average revenue earned per revenue trade increased 4% in 2008 from 2007 primarily due to higher average revenue earned per revenue securities trade for principal transactions partially offset by lower average revenue earned per revenue trade for option Year Ended December 31 Daily average Number of trading days revenue trades in thousands Average revenue earned perrevenue trade Growth Rate 2008-2009 2% 5% 2009 285.8 251.0 13.86 2008 292.6 251.5 14.53 2007 245.3 249.5 13.99 Includes all client trades that generate trading revenue i.e commission revenue or revenue from fixed income securities trading Other Revenue Other revenue includes gains on the repurchases of long-term debt realized gains and losses on sales of securities available for sale gains and losses on sales of loans held for sale service fees and software maintenance fees Other revenue increased by $81 million or 86% in 2009 from 2008 primarily due to the recognition Companys long-term debt The Company repurchased $98 million of trust preferred securities related to its Junior of gain on the repurchase of portion of the Subordinated Notes for cash payment of $67 million in 2009 The repurchase of the trust preferred securities is considered -21 THE CHARLES SCHWAB CORPORATION Managements Discussion and Analysis of Financial Condition and Results of Operations Tabular Amounts in Millions Except Ratios or as Noted an extinguishment of portion of the Junior Subordinated decreased by $35 million or 27% in 2008 from 2007 primarily due to debt security issued by Washington Mutual Bank as result of its seizure by the FDIC in September 2008 This security was realized loss of $29 million on the sale of corporate Notes and resulted in gain of $31 million Other revenue held in the Companys available for sale portfolio Net Impairment Losses on Securities The Company recorded net impairment charges of $60 million related to certain non-agency residential mortgage-backed securities in the Companys available for sale portfolio in 2009 due to credit deterioration of the securities underlying collateral In 2008 the Company recognized an other-than-temporary impairment charge of $44 million on corporate debt security issued by Lehman Brothers Holdings Inc Lehman as September 2008 The Company sold this security in October 2008 This security was held in the Companys available for sale portfolio For further discussion result of Lehmans Chapter and Supplementary Data Notes to Consolidated Financial Statements see Item 11 bankruptcy filing in petition Financial Statements Securities Available for Sale and Securities Held to Maturity Expenses Excluding Interest As shown in the table below expenses excluding interest decreased in 2009 from 2008 primarily due to decreases in compensation and benefits expense professional Expenses excluding interest were relatively services expense and advertising and market development expense flat in 2008 compared to 2007 primarily due to decrease in compensation and benefits expense partially offset by increases in other expense and occupancy and equipment expense Year Ended December 31 Compensation and benefits Professional services Occupancy and equipment Advertising and market development Communications Depreciation and amortization Other Total expenses excluding interest Expenses as percentage of total net revenues Total expenses excluding interest Advertising and market development Compensation and Benefits Growth Rate 2008-2009 7% 18% 6% 21% 2% 5% 4% 7% 2009 1544 275 318 191 206 159 224 2008 1667 334 299 243 211 152 216 2007 1781 324 282 230 200 156 168 2.917 3.122 3141 70% 5% 61% 5% 63% 5% Compensation and benefits expense includes salaries and wages incentive compensation and related employee benefits and taxes Incentive compensation is based on the achievement of specified performance objectives including revenue growth and pre-tax profit margin and therefore will fluctuate with these measures 22 THE CHARLES SCHWAB CORPORATION Managements Discussion and Analysis of Financial Condition and Results of Operations Tabular Amounts in Millions Except Ratios or as Noted Compensation and benefits expense decreased by $123 million or 7% in 2009 from 2008 primarily due to decreases in salaries and wages expense and incentive compensation Compensation and benefits expense decreased by $114 million or 6% in 2008 from 2007 due to decreases increase in salaries and wages expense The following table shows in incentive compensation and employee benefits and other expense offset by an comparison of certain compensation and benefits components and employee data Year Ended December 31 Salaries and wages Incentive compensation Employee benefits and other Total comnensation and benefits exnense Compensation and benefits expense as percentage of total net revenues Salaries and wages Incentive compensation Employee benefits and other Total compensation and benefits expense Full-time equivalent employees in thousands Atyearend Average Growth Rate 2008-2009 2009 9% 12% 6% 7% 7% 8% 930 355 259 1.544 22% 8% 7% 37% 12.4 12.4 2008 1020 402 245 1667 20% 8% 4% 32% 13.4 13.5 2007 955 552 274 1.78 19% 11% 6% 36% 13.3 12.9 Includes variable compensation discretionary bonus costs stock-based compensation and employee stock purchase plan expense Includes full-time part-time and temporary employees and persons employed on contract basis and excludes employees of outsourced service providers Salaries and wages decreased in 2009 from 2008 primarily due to lower expense as result of decreases in full-time employees and persons employed on contract basis offset by severance cost reduction measures Incentive compensation based on actual performance in 2009 In addition compensation The last performance period under decreased to the Companys in 2009 from 2008 primarily due to lower variable compensation of $58 million relating expense incentive compensation in 2008 included long-term incentive plan the Companys long-term incentive program ended on December 31 2008 Salaries and wages increased in 2008 from 2007 due to higher severance expense Incentive compensation decreased in 2008 from 2007 primarily due to lower long-term incentive plan compensation discretionary bonus costs and variable compensation Discretionary bonus costs and variable compensation decreased in 2008 from 2007 based on actual performance in 2008 Long-term incentive plan compensation decreased in 2008 from 2007 primarily due to the maturity of certain plan units that matured in 2007 Employee benefits and other expense decreased in 2008 from 2007 primarily due to decrease in defened compensation Expenses Excluding Compensation and Benefits Professional services expense decreased in 2009 from 2008 primarily due to decrease in fees paid to outsourced service providers and consultants Occupancy and equipment expense increased in 2009 from 2008 primarily due to facilities charges of $43 million relating to the Companys cost reduction measures partially offset by lower purchases of equipment Occupancy and equipment expense increased in 2008 from 2007 primarily due to increases in data processing equipment and maintenance expense of $12 million and occupancy expense of $5 million Advertising and market development expense decreased in 2009 from 2008 primarily due to lower media spending relating to the Companys Talk to ChuckTM national advertising campaign Media spending and marketing expense decreased by $39 million and $13 million respectively Advertising and market development expense increased in 2008 from 2007 due to higher media spending related to the Talk to ChuckTM national advertising campaign 23 THE CHARLES SCHWAB CORPORATION Managements Discussion and Analysis of Financial Condition and Results of Operations Tabular Amounts in Millions Except Ratios or as Noted Other expense increased in 2009 from 2008 primarily due to $16 million FDIC special industry assessment and higher FDIC insurance premiums caused expenses and insurance recovery by higher deposits from banking clients partially of certain costs incurred in 2008 Other offset by decrease in employee travel expense increased in 2008 from 2007 primarily due to charges of $29 million for individual client complaints and arbitration claims relating to Schwab YieldPlus Fund investments Taxes on Income The Companys effective income tax rate on income from continuing 2008 and 39.6% in 2007 The decrease in the Companys effective operations before taxes was 38.3% in 2009 39.3% in income tax rate on income from continuing operations 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 Institutional Services segment provides custodial trading includes the Companys retail brokerage and support services to independent and banking operations The 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 The Company evaluates the performance of its segments on pre-tax basis excluding items such as impairment charges on non-financial assets discontinued operations extraordinary items and other significant restructuring segment performance and deciding how to allocate charges Segment assets resources to segments and liabilities are not disclosed because the balances are not used for evaluating Financial information for the Companys reportable segments is presented in the following table Year Ended December 31 Investor Services Net revenues Expenses excluding interest Contribution margin Institutional Services Net revenues Expenses excluding interest Contribution margin Unallocated Net revenues Expenses excluding interest Contribution margin Total Net revenues Expenses excluding interest Contribution margin N/M Not meaningful Investor Services Growth Rate 2008-2009 2009 2008 2007 20% 10% 37% 15% 7% 26% N/M N/M N/M 19% 7% 37% 2710 1.906 804 1483 929 554 82 82 4193 2917 1276 3385 2107 1.278 1754 1001 753 11 14 5150 3122 2.028 3352 2115 1.237 1627 1006 621 15 20 4994 3141 1853 Net revenues decreased by $675 million or 20% in 2009 from 2008 due to decreases in asset management and administration fees and net interest revenue partially offset by an increase in other revenue Asset management and administration fees decreased primarily due to lower average asset valuations and money market mutual fund fee waivers Net interest revenue decreased as result of the low interest rate environment partially offset by higher average balances of interest-earning 24 THE CHARLES SCHWAB CORPORATION Managements Discussion and Analysis of Financial Condition and Results of Operations Tabular Amounts in Millions Except Ratios or as Noted assets The increase in other revenue was primarily due to the recognition of gain on the repurchase of portion of the Companys long-term debt In addition the Companys available for sale portfolio Net other revenue in 2008 included loss on the sale of corporate debt security held in revenues were also negatively impacted by net impairment charges relating to certain residential mortgage-backed securities in the Companys available for sale portfolio Expenses excluding interest decreased by $201 million or 10% in 2009 from 2008 primarily due to lower compensation and benefits professional services and advertising and market development expenses Net revenues increased by $33 million or 1% in 2008 from 2007 primarily due to increases in trading revenue and net interest revenue partially offset by decrease in other revenue Trading revenue increased due to higher daily average revenue trades Net interest revenue increased due to higher levels of interest-earning assets partially offset by the impact of decrease in the average net yield earned on these assets The decrease in other revenue was primarily due to loss on the sale of corporate debt security The increase in net revenues was also offset by an other-than-temporary impairment charge related to another corporate debt security These securities were held in the Companys available for sale portfolio Expenses excluding interest were relatively flat in 2008 as compared to 2007 as result of lower incentive compensation expense offset by charge for individual client complaints and arbitration claims related to Schwab YieldPlus Fund investments in 2008 Institutional Services Net revenues decreased by $271 million or 15% in 2009 from 2008 due to decreases in asset management and administration fees net interest revenue and trading revenue partially offset by an increase in other revenue Asset management and administration fees decreased primarily due to lower average asset valuations and money market mutual fund fee waivers Net interest revenue decreased as result of the low interest rate environment partially offset by higher average balances of interest-earning assets Trading revenue decreased due to lower daily average revenue trades and lower average revenue earned per revenue trade Net impairment losses on securities increased due to credit deterioration of certain mortgage-backed securities underlying collateral The increase in other revenue was primarily due to the recognition of repurchase of portion of the Companys long-term debt Expenses excluding interest decreased gain on the by $72 million or 7% in offset by an services expenses partially 2009 from 2008 primarily due to lower compensation and benefits and professional increase in other expense Net revenues increased and administration fees offset by by $127 million or 8% in 2008 from 2007 due to increases in trading revenue revenue in net interest increased decrease revenue Trading and asset management due to higher daily average revenue trades Asset management and administration fees increased as result of higher average balances of client assets invested in the Companys proprietary funds Net interest revenue decreased due to the impact of decrease in the average net yield earned on interest-earning assets Expenses excluding interest were relatively flat in 2008 as compared to 2007 as result of lower incentive compensation expense offset by increased costs to service additional corporate retirement plan participants resulting from the acquisition of the 401k Company in 2007 Unallocated Expenses excluding interest in 2009 include facilities and severance charges relating to the Companys cost reduction measures Discontinued Operations In July 2007 the Company sold all of the outstanding common stock of U.S Trust gain on the sale of $1.9 billion or $1.2 billion the sale of U.S Trust the Company recorded tax In connection tax expense additional after with the determination of the final income tax gain on of $18 million in the second quarter of 2008 for $3.3 billion in cash and recognized LIOUIDITY AND CAPITAL RESOURCES CSC conducts substantially all of its business through its wholly-owned subsidiaries The capital structure among CSC and its subsidiaries is designed to provide each entity with capital and liquidity to meet its operational needs and regulatory requirements 25 THE CHARLES SCHWAB CORPORATION Managements Discussion and Analysis of Financial Condition and Results of Operations Tabular Amounts in Millions Except Ratios or as Noted CSC is savings and loan holding company and Schwab Bank CSCs depository institution is federal savings bank CSC and Schwab Bank are both subject to supervision and regulation by the Office of Thrift Supervision Liquidity csc As savings and loan holding company CSC is not subject to specific statutory capital requirements However CSC is required to maintain capital that is sufficient risks inherent in those activities To manage the holding company to support capital adequacy CSC currently utilizes and its subsidiaries business activities and the target Tier Leverage Ratio as defined by the Board of Governors of the Federal Reserve System of at Leverage Ratio was 7.1% least 6% At December 31 2009 CSCs Tier CSCs liquidity financing CSC maintains excess needs are generally met through cash generated by its subsidiaries as well as cash provided by external liquidity in the form of overnight cash deposits and short-term investments to cover daily funding needs and to support growth in the Companys business Generally CSC does not hold liquidity at its subsidiaries in excess of amounts deemed sufficient to support the subsidiaries operations including any regulatory capital requirements Schwab and Schwab Bank are subject to regulatory requirements that may restrict them from certain transactions with CSC Management believes that funds generated by the operations of CSCs subsidiaries will continue to be the primary funding source in meeting CSCs liquidity needs providing adequate liquidity to meet Schwab Banks capital guidelines and maintaining Schwabs net capital CSC has liquidity needs Notes and Senior Notes that arise from its Senior Medium-Term Notes Series Medium-Term Notes Junior Subordinated as well as from the funding of cash dividends and other investments The Medium- acquisitions Term Notes of which $450 million were outstanding at December 31 2009 have maturities ranging from 2010 to 2017 and ranging from 6.375% to 8.05% with interest payable semiannually The Medium-Term Notes are rated A2 rates fixed interest by Moodys Investors Service Moodys Ratings Ltd Fitch At December by Standard Poors Ratings Group Standard Poors and by Fitch 31 2009 $202 million of Junior Subordinated Notes were outstanding and have fixed interest rate of 7.50% until 2017 and floating rate thereafter The Junior Subordinated Notes are not rated however the trust preferred securities In 2009 CSC repurchased related to these notes are rated Baal by Moodys BBB by Standard $98 million of trust preferred securities related to its Junior Subordinated Poors and BBB by Fitch Notes for cash payment of $67 million The repurchase of the trust preferred securities is considered an extinguishment of portion of the Junior Subordinated Notes and resulted in gain of $31 million CSC has universal automatic shelf registration statement on file with the SEC which enables CSC to issue debt equity and other securities In June 2009 the Company issued $750 million of Senior Notes that mature in 2014 under this registration statement The Senior Notes have fixed interest rate of 4.950% with interest payable semiannually The Senior Notes are rated A2 by Moodys of 29670300 shares of its common stock under Subsequent Event by Standard Poors and by Fitch In January 2010 the Company completed an equity offering this registration statement For further discussion of the equity offering see CSC has authorization from its Board of Directors to issue unsecured commercial paper notes Commercial Paper Notes not to exceed $1.5 billion Management of the Commercial Paper Notes may vary but are not to exceed 270 days from the date of issue The commercial paper redeemable prior to maturity for the commercial paper program and cannot has set current limit of $800 million The maturities be voluntarily prepaid The proceeds of the commercial paper program are to be used 31 2009 CSCs ratings for for general corporate purposes There were no Commercial Paper Notes outstanding at December are P-i by Moodys A-i by Standard Poors and Fl by Fitch these short-term borrowings is not CSC maintains an $800 million committed unsecured June 2010 This facility replaced similar facility credit facility with group of 12 banks which is scheduled to expire in that expired in June 2009 These facilities were unused in 2009 The funds under this facility are available for general corporate purposes including repayment of the Commercial Paper Notes discussed above The amount of this facility that CSC can use for other general corporate purposes is reduced by the amount of any 26 THE CHARLES SCHWAB CORPORATION Managements Discussion and Analysis of Financial Condition and Results of Operations Tabular Amounts in Millions Except Ratios or as Noted Commercial Paper Notes outstanding The financial covenants capital ratio as defined Schwab Bank to be well capitalized this under require Schwab as defined and CSC to maintain minimum level of facility to maintain minimum net stockholders equity At December 31 2009 the minimum level of stockholders equity required under this facility was $3.3 billion Management believes that these restrictions will not have material effect on CSCs ability to meet foreseeable dividend or funding requirements CSC also has direct access to $744 million of the $824 million uncommitted unsecured short-term liquidity These lines were not used by CSC in 2009 bank credit lines discussed below that are primarily utilized by Schwab to manage In addition Schwab provides CSC with $1.0 billion credit facility maturing in December 2011 No funds were drawn under this facility at December 31 2009 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 from CSC paying cash dividends advances or making unsecured than 5% of aggregate 2009 Schwabs net capital was $1.1 billion 11% of aggregate minimum required net capital or loans to its parent company debit balances or less than 120% of its minimum dollar requirement of $250000 At December 31 or employees if such payment would result in net capital of less debit balances which was $868 million in excess of its and $580 million in excess of 5% of aggregate debit balances Most of Schwabs assets are readily convertible investment-grade interest-earning investments to cash consisting primarily of short-term i.e less than 150 days the majority of which are segregated for the exclusive benefit of clients to regulatory pursuant organizations Client margin loans are demand and payables requirements receivables from brokerage loan obligations clients and receivables from brokers dealers and clearing from securities Receivables secured by readily marketable to brokers dealers and clearing organizations primarily represent current open transactions which usually settle or can be closed out within 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 $25.3 billion and $19.2 billion at December 31 2009 and 2008 respectively Management believes that brokerage liquidity for Schwab in the future client cash balances and operating earnings will continue to be the primary sources of has Schwab lease obligation of $111 million at December remaining lease term of approximately 15 years finance lease obligation related to an office building and land under 20-year lease The remaining finance 31 2009 is being reduced by portion of the lease payments over the To manage short-term liquidity Schwab maintains uncommitted unsecured bank credit lines with group of seven banks totaling $824 million at December 31 2009 The need for short-term borrowings arises primarily from timing differences between cash flow requirements scheduled liquidation of interest-bearing investments and movements of cash to meet segregation requirements Schwab used such borrowings $18 million There were no borrowings outstanding under for ten days in 2009 with daily amounts borrowed averaging 31 2009 these lines at December To satisfy the margin requirement of client option transactions with the Options Clearing Corporation 0CC Schwab has unsecured standby letter of credit December 31 2009 In connection agreements LOCs with seven with its securities clients Schwab satisfies the collateral brokerage are issued by multiple banks At December were no funds drawn under any of these LOCs during 2009 31 2009 the aggregate banks in favor of the 0CC aggregating $445 million at lending activities is required to provide collateral requirements by arranging LOCs in favor of these brokerage Schwab to certain clients which face amount of these LOCs totaled $37 million There 27 THE CHARLES SCHWAB CORPORATION Managements Discussion and Analysis of Financial Condition and Results of Operations Tabular Amounts in Millions Except Ratios or as Noted To manage Schwabs facility which is scheduled regulatory capital requirement CSC provides Schwab with $1.4 billion subordinated revolving credit to expire in March 2010 The amount outstanding under this facility at December 31 2009 was $220 million Borrowings under this subordinated lending arrangement qualify as regulatory capital for Schwab In addition CSC provides Schwab with $1.5 billion credit facility which is scheduled to expire in 2011 Borrowings under this facility December do not qualify as 31 2009 Schwab Bank regulatory capital for Schwab There were no funds drawn under this facility at Bank Schwab laws and regulations Failure to meet the minimum levels will is required to maintain that at capital level least equals minimum capital levels specified in federal banking result in certain mandatory and possibly additional discretionary actions by the regulators that if undertaken could have direct material effect on Schwab Bank Based on its regulatory capital ratios at December 31 2009 Schwab Bank is considered well capitalized Schwab Banks regulatory capital and ratios at December 31 2009 are as follows Tier Capital Total Capital Tier Leverage Tangible Equity N/A Not applicable Actual Requirement Minimum Capital Minimum to be Well Capitalized Amount 2724 2770 2724 2724 Ratio 18.3% 18.6% 6.3% 6.3% Amount 595 1191 1737 868 Ratio 4.0% 8.0% 4.0% 2.0% Amount 893 1488 2171 N/A Ratio 6.0% 10.0% 5.0% In light of the evolving regulatory environment and capitalization trends observed across the banking industry management has established target Tier Leverage Ratio for Schwab Bank of at least 7.5% beginning Schwab Banks current liquidity needs are generally met through deposits from banking clients in the first quarter of 2010 and equity capital The excess cash held in certain Schwab brokerage client accounts is swept into deposit accounts at Schwab Bank At December 31 2009 these balances totaled $23.0 billion Schwab Bank has access to traditional funding sources such as deposits federal funds purchased and repurchase agreements Additionally Schwab Bank Amounts available under has access to short-term funding through Bank FRB discount window the FRB discount window are dependent on the fair value of certain of Schwab Banks securities the Federal Reserve available for sale available under this arrangement There were no funds drawn under held to maturity that are pledged and securities this arrangement during 2009 as collateral At December 31 2009 $974 million was Schwab Bank maintains credit facility are dependent facility with the Federal Home Loan Bank System FHLB Amounts available under real estate mortgages and home equity lines of credit on the amount of Schwab Banks residential this that are pledged as collateral At December 31 2009 $2.9 billion was available under this facility There were no funds drawn under this facility during 2009 CSC provides Schwab Bank with Borrowings under this facility facility during 2009 $100 million short-term credit do not qualify as regulatory capital facility which is scheduled for Schwab Bank There were no funds drawn under to expire in December 2011 this Capital Resources The Company monitors both the relative composition and absolute level of its capital structure Management is focused on limiting the Companys use of capital and currently targets long-term debt to total financial capital ratio not to exceed 30% 28 THE CHARLES SCHWAB CORPORATION Managements Discussion and Analysis of Financial Condition and Results of Operations Tabular Amounts in Millions Except Ratios or as Noted The Companys total $1.6 billion or 33% from December financial capital long-term debt plus stockholders 31 2008 equity at December 31 2009 was $6.6 billion up At December 31 2009 the Company had long-term debt of $1.5 billion or 23% of total financial capital that bears interest at weighted-average rate of 5.97% At December 31 2008 the Company had long-term debt of $883 million or 18% of total financial interest capital In June 2009 the Company issued $750 million of Senior Notes that mature rate of 4.950% The Company repaid $13 million and $20 million of long-term debt in 2014 and have fixed in 2009 and 2008 respectively In addition the Company repurchased cash payment of $67 million in 2009 resulting in gain of $31 million $98 million of trust preferred securities related to its Junior Subordinated Notes for The Companys cash position reported as cash and cash equivalents on its consolidated balance sheet and cash flows are affected by changes in brokerage client cash balances and the associated amounts required to be segregated under regulatory guidelines Timing differences between cash and investments actually segregated on given date and the amount required to be segregated for that date may arise in the ordinary course of business and are addressed by the Company in accordance with applicable regulations Other factors which affect the Companys cash position and cash flows include investment activity in securities levels of capital expenditures acquisition and divestiture activity banking client deposit activity brokerage and banking client loan activity financing activity in long-term debt payments of dividends and repurchases of CSCs common stock The combination of these factors can cause significant fluctuations in the levels of cash and cash equivalents during specific time periods Capital Expenditures The Companys capital expenditures were $139 million in 2009 and $196 million in 2008 Capital expenditures as percentage of net revenues were 3% and 4% in 2009 and 2008 respectively Capital expenditures in 2009 were primarily for leasehold improvements software and equipment relating to the Companys information technology systems and building improvements Capital expenditures in 2008 were primarily for software and equipment relating to the Companys information developing Management technology internal-use software of $16 million in 2009 and $46 million in 2008 systems buildings and leasehold improvements Capital expenditures include capitalized costs for currently anticipates that 2010 capital expenditures will be approximately 5% lower than 2009 spending primarily due to decreased spending on leasehold improvements partially offset by increased costs for developing internal- use software As has been the case in recent years the Company may adjust its capital expenditures from period to period as business conditions change Management believes that funds generated by its operations will continue to be the primary funding source of its capital expenditures Dividends CSC paid common stock cash dividends of $279 million and $253 million in 2009 and 2008 respectively dividend in 1989 CSC has paid 83 consecutive quarterly dividends and has increased the quarterly dividend Since the initial 19 times 20% increase in the third quarter of 2008 Since including growth rate excluding the special cash dividend of $1.00 per common share in 2007 CSC paid common stock dividends of $.24 $.22 and $1.20 per share in 2009 2008 and 2007 respectively While the payment and amount of dividends are at the 27% compounded 1989 dividends have increased annual by discretion of the Board subject to certain regulatory and other restrictions the Company currently targets its cash dividend at approximately 20% to 30% of net income Share Repurchases There were no repurchases $350 million in 2008 As of December of CSC common stock in 2009 CSC repurchased 17 million shares of its common stock for 31 2009 CSC had remaining authority from the Board of Directors to repurchase up to $596 million of its common stock 29 THE CHARLES SCHWAB CORPORATION Managements Discussion and Analysis of Financial Condition and Results of Operations Tabular Amounts in Millions Except Ratios or as Noted Off-Balance-Sheet Arrangements The Company enters into various off-balance-sheet needs of its clients These arrangements and other similar arrangements guarantees of these arrangements see Item arrangements in the ordinary course of business primarily to meet the include firm commitments to extend credit Additionally the Company enters into as part of transactions in the ordinary course of business For information on each Financial Statements and Supplementary Data Notes to Consolidated Financial Statements 13 Commitments and Contingent Liabilities Contractual Obligations summary of the Companys principal contractual obligations as of December 31 2009 is shown in the following table Excluded from this table are liabilities recorded on the consolidated balance sheet that are generally short-term in nature e.g payables to brokers dealers and clearing organizations or without contractual payment terms e.g deposits from banking clients payables to brokerage clients and deferred compensation Management believes that funds generated by its continuing operations as well as cash provided by extemal financing will continue to be the primary funding sources in meeting these obligations Credit-related financial instruments Long-term debt Leases Purchase obligations Total Less than 1-3 Year Years 3-5 Years More than Years Total 832 276 126 130 1.364 80 137 168 61 446 918 867 99 3544 546 218 1885 4.308 5374 1826 611 192 8003 Represents Schwab Banks firm commitments to extend credit to banking clients Includes estimated future interest payments through 2017 The Junior Subordinated Notes have fixed interest rate of 7.50% until 2017 and floating rate from 2018 to 2067 Based on the current interest rate of 7.50% and no repayments of principal the estimated future interest payments on the Junior Subordinated Notes in 2018 to 2067 would be $15 million per year Amounts exclude maturities under finance lease obligation unamortized discounts and the effect of interest rate swaps Represents minimum rental commitments net of sublease commitments and includes facilities under the Companys past restructuring initiatives and rental commitments under finance lease obligation Consists of purchase obligations for services such as advertising and marketing telecommunications professional services and hardware- and software-related agreements Includes purchase obligations which can be canceled by the Company without penalty RISK MANAGEMENT Overview The Companys business legal and reputational activities expose it to variety of risks including technology operations credit market liquidity risk Identification and management of these risks are essential to the success and financial soundness of the Company Senior management takes an active role in the Companys risk management process and has developed policies and procedures under which specific business and control units are responsible for identifying measuring and controlling various risks Oversight of risk management has been delegated to the Global Risk Committee which is comprised of senior managers of major business and control functions The Global Risk Committee is responsible for reviewing and monitoring the Companys risk exposures and leading the continued development of the Companys risk management policies and practices -30- THE CHARLES SCHWAB CORPORATION Managements Discussion and Analysis of Financial Condition and Results of Operations Tabular Amounts in Millions Except Ratios or as Noted Functional risk sub-committees focusing on specific areas of risk report into the Global Risk Committee These sub committees include the Corporate Asset-Liability Management and Pricing Committee which focuses on the Companys liquidity capital resources interest rate risk and investments Credit and Market Risk Oversight Committee which focuses on the credit exposures resulting from client activity e.g margin lending activities and loans to banking clients the investing activities of certain of the Companys proprietary funds corporate credit activities e.g counterparty and corporate investing activities and market risk resulting from the Company taking positions in certain securities to facilitate client Information Security and Privacy Steering Committee which oversees information trading activity security and privacy programs and policies Investment Management and ERISA Risk Committee which oversees activities in which the Company and its principals operate in an investment advisory capacity or as an ERISA fiduciary and Investment Products Review Board which provides senior level oversight of investment products and services made available to clients The Global Risk Committee reports regularly to the Audit Committee of the Board of Directors Audit Committee which reviews major risk exposures and the steps management has taken to monitor and control such exposures The Companys Disclosure Committee is responsible for monitoring and evaluating the effectiveness of the Companys disclosure controls and procedures Disclosure Committee reports on this evaluation to the CEO and CFO prior to their certification 906 of the Sarbanes Oxley Act of 2002 control internal and over financial reporting as of the end of each fiscal quarter The required by Sections 302 and The Companys compliance finance internal audit legal and risk and credit management departments assist management and the various risk committees in evaluating testing and monitoring the Companys risk management Risk is inherent in the Companys business Consequently despite the Companys efforts to identifr areas of risk and implement risk management policies and procedures there can be no assurance that the Company will not suffer unexpected losses due to operating or other risks The following discussion highlights the Companys policies and procedures for identification assessment and management of the principal areas of risk in its operations Technology and Operating Risk Technology and operating risk is the potential for loss due to deficiencies in control processes or technology systems that to gather process and communicate information and process client transactions efficiently constrain the Companys ability and securely without systems technology interruptions The Companys operations are highly dependent on the integrity of its technology and the Companys success depends in part on its ability to make timely enhancements and additions to its downtime which could in anticipation of evolving client needs To the extent from variety of causes including result the Company experiences system interruptions errors or changes in client use patterns technological failure changes to its systems linkages with third-party systems and power failures the Companys business and operations could be significantly negatively impacted Additionally rapid increases in client its technology and expand its operating capacity To minimize business demand may strain interruptions Schwab the Companys ability to enhance has two data centers intended in part to further improve the recovery of business processing in the event of an emergency The Company is committed to an ongoing process of upgrading enhancing and testing its technology systems This effort is focused on meeting client needs meeting market and regulatory changes and deploying standardized technology platforms Technology and operating risk also includes the risk of human error employee misconduct external fraud computer viruses terrorist attack and natural disaster Employee misconduct could include fraud and misappropriation of client or Company assets improper use or disclosure of confidential client or Company information and unauthorized activities such as transactions exceeding acceptable risks or authorized limits External fraud includes misappropriation of client or Company assets by third parties including through unauthorized access to Company systems and data and client accounts The frequency and sophistication of such fraud attempts continue to increase -31 THE CHARLES SCHWAB CORPORATION Managements Discussion and Analysis of Financial Condition and Results of Operations Tabular Amounts in Millions Except Ratios or as Noted The Company has specific policies and procedures to identify and manage operational risk and uses periodic risk self- assessments and internal audit reviews to evaluate the effectiveness of these internal controls The Company maintains backup and recovery functions including facilities for backup and communications and conducts periodic testing of disaster recovery plans The Company also maintains policies and procedures and technology to protect against fraud and unauthorized access to systems and data Despite the Companys risk management efforts it is not always possible to deter or prevent technological or operational failure or fraud or other misconduct Company may be subject additional resources to litigation to remediate vulnerabilities or other exposures and the precautions taken by the Company may not be effective losses and regulatory actions in such cases and may be required to expend significant in all cases The The Company also faces technology and operating risk when it employs the services of various external vendors including domestic and international outsourcing of certain technology processing and support functions The Company manages its exposure to external vendor risk through contractual provisions control standards and ongoing monitoring of vendor performance The Company maintains policies and procedures regarding the standard of care expected with Company data whether the data is internal company information employee information or non-public client information The Company clearly defines for employees contractors and vendors the Companys expected standards of care for confidential data Regular training is provided by the Company in regard to data security The Company is actively engaged in the research and development of new technologies services and products The Company endeavors trade secrets and contracts to protect Credit Risk its research and development efforts and its brands through the use of copyrights patents Credit risk is the potential for loss due to borrower counterparty or issuer failing to perform its contractual obligations The Companys direct exposure to credit risk mainly results from margin lending activities securities lending activities mortgage lending activities its role as counterparty in financial contracts and investing activities and indirectly from the investing activities of certain of the proprietary funds that the Company sponsors To manage the risks of such losses the Company has established policies and procedures which include establishing and reviewing credit limits monitoring of credit limits and quality of counterparties and adjusting margin requirements for certain securities Most of the Companys credit extensions are supported by collateral arrangements Collateral arrangements relating to margin loans securities lending agreements and resale agreements are subject to requirements that provide additional collateral in the event that market fluctuations result in declines in the value of collateral received The Companys credit risk exposure related to loansto banking clients is actively managed through individual and portfolio reviews performed by management Management regularly reviews asset quality including concentrations delinquencies non-performing loans losses and recoveries All are factors in the determination of an appropriate allowance for credit losses which is reviewed quarterly by senior management The Companys mortgage loan portfolios primarily include first lien 3- 5- and 7-year adjustable rate residential mortgage loans First Mortgage portfolio of $3.7 billion and home equity lines of credit HELOC portfolio of $3.3 billion at December 31 2009 The Companys First Mortgage portfolio underwriting requirements are generally consistent with the underwriting in the secondary market for loan portfolios The Companys guidelines include maximum loan-to-value LTV requirements ratios cash out limits and minimum Fair Issac Company FICO credit scores The specific guidelines are dependent on the individual characteristics of loan for example whether the property is loan is for investment property whether the loan is for an initial purchase of whether the loan is conforming or jumbo These credit underwriting standards primary or secondary home or refinance of an existing home and have limited the exposure residence to the types of loans whether the that experienced high foreclosures and loss rates elsewhere in the industry during 2009 and 2008 There have been no 32 THE CHARLES SCHWAB CORPORATION Managements Discussion and Analysis of Financial Condition and Results of Operations Tabular Amounts in Millions Except Ratios or as Noted significant changes to the LTV ratio or FICO credit score guidelines related to the Companys First Mortgage or HELOC portfolios during 2009 At December Mortgage and HELOC portfolios respectively the First Mortgage and HELOC portfolios respectively 31 2009 the weighted-average and the weighted-average originated LTV ratios were 62% and 59% for the First originated FICO credit scores were 760 and 767 for The Company does not offer loans that allow for negative amortization and does not originate or purchase subprime loans generally defined as extensions of credit to borrowers with FICO credit score of less than 620 at origination unless the borrower has compensating credit factors At December 31 2009 approximately 2% of both the First Mortgage and HELOC portfolios consisted of loans to borrowers with FICO credit scores of less than 620 The following table presents certain of the Companys loan quality metrics as percentage of total outstanding loans December 31 Loan delinquencies Nonaccrual loans Allowance for credit losses 2009 0.87% 0.46% 0.6 1% 2008 0.54% 0.13% 0.33% Loan delinquencies are defined as loans that are 30 days or more past due The Company has exposure to credit risk associated with its securities available for sale and securities held to maturity portfolios whose fair values totaled $22.1 billion and $6.9 billion at December 31 2009 respectively These portfolios include U.S agency and non-agency residential mortgage-backed securities U.S agency notes corporate debt securities certificates of deposit and asset-backed securities U.S agency residential mortgage-backed securities do not have explicit credit ratings however management considers these to be of the highest credit quality and rating given the guarantee of principal and interest by the U.S agencies collateralized by loans that are considered Included to be Prime defined by the Company as in non-agency residential mortgage-backed securities are securities loans to borrowers with FICO credit score of 620 or higher at origination and Alt-A defined by the Company as Prime loans with reduced documentation at origination The table below presents the credit ratings for U.S agency and non-agency residential mortgage-backed securities available for sale and securities held to maturity including Prime and Alt-A residential mortgage-backed securities by year of origination In some instances securities have divergent ratings from Moodys Fitch or Standard Poors In these instances the Company has used the lowest rating as of December 31 2009 for purposes of presenting the table below Residential mortgage-backed securities particularly Alt-A securities experienced deteriorating credit characteristics including increased delinquencies and valuation pressure in 2009 For discussion of the impact of current market conditions on residential mortgage-backed securities see Current Market Environment 33 THE CHARLES SCHWAB CORPORATION Managements Discussion and Analysis of Financial Condition and Results of Operations Tabular Amounts in Millions Except Ratios or as Noted U.S agency residential mortgage-backed securities 2005 2006 2007 2008 2009 Total Non-agency residential mortgage-backed securities 2003 2004 2005 2006 2007 Total Total residential AAA Net AA to BBB BB or Lower Net Net Net Total Net Amortized Unrealized Amortized Unrealized Amortized Unrealized Amortized Unrealized Amortized Unrealized Cost Gain Loss Cost Loss Cost Loss Cost Loss Cost Gain Loss 584$ 6$ -$ -$ -$ -$ -$ 584$ 390 709 4360 10.663 16706 80 134 64 13 93 384 25 129 26 187 26 84 303 37 432 390 709 4360 10663 16706 88 227 969 694 482 2.460 25 129 26 187 27 184 206 94 519 91 201 85 377 377 19.166 332 100% 13 37 56 56 236 34 279 279 2% 50 60 60 366 644 355 1.365 1.365 7% morteage-backed securities 17.090 161 432 of Total residential mortgage-backed securities 89% 2% At December 31 2009 all of the corporate grade defined as rating equivalent higher debt securities and non-mortgage asset-backed to Moodys rating of Baa or higher or Standard securities were rated investment rating of BBB- or Poors performs clearing services for all securities Schwab to its obligation to settle transactions with clearing corporations mutual funds and other transactions in its (cid:244)lient accounts Schwab has exposure to credit risk due financial institutions even if Schwabs client or counterparty fails to meet its obligations to Schwab Concentration Risk The Company has exposure with similar economic characteristics or in securities of single issuer or industry to concentration risk when holding large positions in financial instruments collateralized by assets The fair value of the Companys investments 2009 Of these $16.9 billion were U.S agency securities in residential mortgage-backed securities totaled $18.8 billion at December 31 and $1.9 billion were non-agency securities The U.S agency securities are included in securities available for sale and securities held to maturity and the non-agency securities are included in securities available for sale Included collateralized by Alt-A loans At December in non-agency residential mortgage-backed 31 2009 the amortized cost and fair value of Alt-A mortgage-backed securities are securities securities were $628 million and $387 million respectively The Companys investments in corporate debt securities and commercial paper totaled $5.6 billion at December 31 2009 with the majority issued by institutions in the financial services industry These securities are included in securities available for sale securities held to maturity cash and investments segregated and on deposit for regulatory purposes cash and cash equivalents and other securities owned in the Companys consolidated balance sheets Included in corporate debt securities and commercial paper under the FDIC Temporary Liquidity Guarantee at December Program 31 2009 were $3.2 billion of securities issued by financial institutions and guaranteed The Companys loans to banking clients include $3.7 billion of first lien residential real estate mortgage loans at December 31 2009 Approximately 75% of these mortgages consisted of loans with interest-only payment terms The interest -34- THE CHARLES SCHWAB CORPORATION Managements Discussion and Analysis of Financial Condition and Results of Operations Tabular Amounts in Millions Except Ratios or as Noted rates on approximately 75% of these interest-only loans are not scheduled to reset interest-only loans do not include interest terms described as temporary introductory for three or more years The Companys rates below current market rates At December 31 2009 39% of the residential real estate mortgages and 48% of the home equity lines of credit balances were secured by properties which are located in California The Company also has exposure to concentration risk from its margin and securities lending activities collateralized by securities of single issuer or industry The Company has indirect exposure to U.S Government and agency securities held as collateral to secure its resale agreements The Companys primary credit exposure on these resale transactions is with its counterparty The Company would have exposure resale agreements U.S Government December 31 2009 to the U.S Government and agency securities only in the event of the counterpartys default on the and agency securities held as collateral for resale agreements totaled $8.5 billion at Market Risk Market risk is the potential for changes in revenue or the value of financial instruments held by the Company as result of fluctuations in interest rates equity prices or market conditions For discussion of the Companys market risk see Item 7A Quantitative and Qualitative Disclosures About Market Risk Fiduciary Risk Fiduciary risk is the potential for financial or reputational loss through breach of fiduciary duties to client Fiduciary activities include but are not limited to individual and institutional trust investment management custody and cash and securities processing The Company attempts to manage this risk by establishing procedures to ensure that obligations to clients are discharged faithfully and in compliance with applicable legal and regulatory requirements Business units have the primary responsibility for adherence to the procedures applicable to their business Guidance and control are provided through the creation approval and ongoing review of applicable policies by business units and various risk committees Legal and Regulatory Risk The Company faces significant legal and compliance risk in its business and the volume of litigation and regulatory proceedings against financial services firms and the amount of damages claimed have been increasing Among other things these risks relate to the suitability of client investments conflicts of interest disclosure obligations and performance expectations for Company products and services supervision of employees and the adequacy of the Companys controls Claims against the Company may increase due to variety of factors such as if clients suffer losses during period of deteriorating equity market conditions as the Company increases the level of advice it provides to clients and as the Company enhances the services it provides to lAs In addition the Company and its affiliates are subject to extensive regulation by federal state and foreign regulatory authorities and SROs and such regulation is becoming increasingly extensive and complex The Company attempts to manage litigation claims and prevent legal and compliance risk through policies and procedures reasonably designed to avoid or detect violations of applicable legal and regulatory requirements These procedures address issues such as business conduct and ethics sales and trading practices marketing and communications extension of credit client funds and securities books and records anti-money laundering client privacy employment policies and contracts management Despite the Companys efforts to maintain an effective compliance program and internal controls legal breaches and rule violations could result in reputational harm significant losses and disciplinary sanctions including limitations on the Companys business activities 35 THE CHARLES SCHWAB CORPORATION Managements Discussion and Analysis of Financial Condition and Results of Operations Tabular Amounts in Millions Except Ratios or as Noted FAIR VALUE OF FINANCIAL INSTRUMENTS The Company uses fair value measurements to record certain financial assets value disclosures At December 31 2009 $30.1 billion or 40% of total assets were recorded and liabilities at fair value and to determine fair at fair value At December 31 2008 $21.9 billion or 42% of total assets were recorded at fair value All of these assets were measured at fair value using quoted prices or market-based information and accordingly were classified as Level or Level measurements in accordance with the fair value hierarchy described in fair value measurement accounting guidance Liabilities recorded at fair value were not material at December 31 2009 or 2008 See note Item Financial Statements and Supplementary Data Notes to Consolidated Financial Statements 15 Fair Value of Assets and Liabilities for more information on the Companys assets and liabilities accounted for at fair value The Company uses prices obtained from an independent third-party pricing service to measure the fair value of certain investment securities The Company validates prices received from the pricing service using various methods including comparison to prices received from additional pricing services comparison to available quoted market prices internal valuation models and review of other relevant market data The Company does not adjust the prices received from the independent third-party pricing service unless such prices are inconsistent with the definition of fair value and result in material difference in the recorded amounts At December 31 2009 and 2008 the Company did not adjust prices received from the independent third-party pricing service For certificates of deposits and treasury securities included in investments segregated and on deposit for regulatory purposes the Company uses discounted cash-flow models to measure the fair value that utilize market-based inputs including observable market interest rates that correspond to the remaining maturities or next interest reset dates CRITICAL ACCOUNTING ESTIMATES The consolidated financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the U.S While the majority of the Companys revenues expenses assets and liabilities are not based on estimates there are certain accounting principles that require management to make estimates regarding matters that are uncertain and susceptible to change where such change may result in material adverse impact on the Companys financial position and reported financial results These critical accounting estimates are described below Management regularly reviews the estimates and assumptions used in the preparation of the Companys financial statements for reasonableness and adequacy Other-than-Temporary Impairment of Securities Available for Sale and Securities Held to Maturity Management evaluates whether securities available for sale and securities held to maturity are other-than-temporarily impaired OTTI on quarterly basis Debt securities with unrealized losses are considered OTTI if the Company intends to sell the security or if the Company will be required to sell such OTTI under these circumstances security prior to any anticipated recovery If management determines that security is the impairment recognized in earnings is measured as the entire difference between the amortized cost and then-current fair value security is also OTTI if management does not expect to recover the amortized cost of the security In this circumstance management utilizes cash flow models to estimate the expected future cash flow from the securities and to estimate the credit loss The impairment recognized in earnings is measured by the difference between the present value of expected cash flows and the amortized cost of the security Expected cash flows are discounted using the securitys effective interest rate The evaluation of whether the Company expects to recover the amortized cost of security is inherently judgmental The evaluation includes the assessment of several bond performance are delinquent 30 days 60 days 90 days in bankruptcy in foreclosure amount of loss incurred on the underlying indicators including the portion of the underlying loans that or converted to real estate owned the actual loans in which the property has been foreclosed and sold the amount of credit support provided by the structure of the security available to absorb credit losses on the underlying loans the current credit ratings issued by either Standard Poors Fitch Ratings or Moodys the current price and magnitude of the unrealized loss and whether the Company has received all scheduled principal and interest payments Management uses cash flow models to further assess the likelihood of other-than-temporary impairment for the Companys non-agency residential mortgage-backed 36 THE CHARLES SCHWAB CORPORATION Managements Discussion and Analysis of Financial Condition and Results of Operations Tabular Amounts in Millions Except Ratios or as Noted securities To develop the cash flow models the Company uses forecasted loss severity prepayment speeds i.e the rate at which the principal on underlying home price fluctuations loans are paid down and default rates over the securities remaining maturities Forecasted are an important variable in forecasting the expected loss severity and default rates Based on these cash flow projections management determines if the Company expects to recover all of the amortized cost of the securities and therefore if the securities are OTTI Valuation of Goodwill The Company tests goodwill for impairment at least annually or whenever indications of impairment exist An impairment exists when the carrying amount of goodwill exceeds its implied fair value resulting in an impairment charge for this excess The Company has elected April 1st as its annual goodwill impairment testing date In testing for potential impairment of goodwill on April 2009 management estimated the fair value of each of the Companys reporting units generally defined as the Companys businesses compared this value to the carrying value of the reporting unit The estimated fair value of each information for which financial is available and reviewed regularly by management and reporting unit substantially exceeded its carrying value and therefore management fair value of the reporting units was established using concluded that no amount of goodwill was impaired The estimated discounted cash flow model that includes significant assumptions about the future operating results and cash flows of each reporting unit Adverse changes in the Companys planned business operations such as unanticipated competition loss of key personnel the sale of reporting unit or significant portion of reporting unit or other unforeseen developments could result in an impairment of the Companys recorded goodwill Allowance for Credit Losses The adequacy of the allowance for credit losses is reviewed regularly by management taking into consideration current economic conditions inherent in the portfolio as more fully described the existing loan portfolio composition past loss experience below and risks The Company performs statistical models that estimate prepayments quarterly analysis to estimate the allowance for credit losses This process utilizes loan-level defaults and expected life of loan losses for our loan portfolios based on predicted behavior of individual loans within the portfolios The models consider effects of borrower behavior and 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 include measure of delinqubncy roll rates the amount of loss in the event of default housing prices and interest rates Delinquency roll rates i.e the rates at which loans transition through delinquency stages and ultimately result in loss are estimated from the Companys historical loss experience adjusted for current trends and market information Loss in the event of default is based on the Companys historical loss experience and market trends Housing price trends are derived from historical Factors affecting the home price index include housing values home price indices and statistical forecasts of future home 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 This quarterly analysis results in loss factor that is applied to the outstanding balances to determine the allowance for credit loss for each loan category Legal Reserve 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 many cases including most class action lawsuits the range of that the matter loss until coverage and indemnification and the opinions and views of legal counsel In it is not possible to determine whether loss will be incurred or to estimate 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 in making these estimates and the actual cost of resolving occurs change matter may ultimately differ materially from the amount judgment Significant requiring is required reserved The Companys management Audit Committee Additionally management has discussed the development and selection of these critical accounting estimates with the has reviewed with the Audit Committee the Companys significant estimates discussed in this Managements Discussion and Analysis of Financial Condition and Results of Operations 37 THE CHARLES SCHWAB CORPORATION Managements Discussion and Analysis of Financial Condition and Results of Operations Tabular Amounts in Millions Except Ratios or as Noted FORWARD-LOOKING STATEMENTS In addition to historical information meaning of Section 27A of the Securities Act and Section this Annual Report statements are identified by words such of the Securities Exchange Act of 1934 Forward-looking as believe anticipate expect intend plan will may estimate 21 on Form 10-K contains forward-looking statements within the aim target could and other similar expressions of future events or circumstances other characterizations In addition any statements that refer to expectations projections or are forward-looking statements These forward-looking statements which reflect managements beliefs objectives and expectations as of the date hereof are necessarily estimates based on the best judgment of the Companys senior management These statements relate to among other things the Companys ability to pursue its business strategy see Item Business Business Strategy and Competitive Environment the impact of legal proceedings Statements and Supplementary Data Notes to Consolidated Contingent Liabilities Legal Contingencies and regulatory matters see Item and Item Financial Statements 13 Commitments Legal Proceedings Financial and the impact and Item of current market conditions on the Companys results of operations see Current Market Environment Financial Statements and Supplementary Data Notes to Consolidated Financial Statements Securities Available for Sale and Securities Held to Maturity sources of liquidity capital and level of dividends see Liquidity and Capital Resources and Contractual Obligations target capital ratios see Liquidity and Capital Resources capital expenditures see Liquidity and Capital Resources Capital Resources the impact of changes in managements estimates on the Companys results of operations see Critical Accounting Estimates the impact of changes results of operations see Item in the likelihood of indemnification and guarantee payment obligations on the Companys Financial Statements and Supplementary Data Notes to Consolidated Financial Statements 13 Commitments and Contingent Liabilities the impact Statements on the Companys results of operations of recording stock option expense and Supplementary Data Notes to Consolidated Financial Statements see Item 17 Employee Incentive Financial Deferred Compensation and Retirement Plans and Achievement of the expressed beliefs objectives and expectations described in these statements is subject to certain risks and uncertainties that could cause actual results to differ materially from the expressed beliefs objectives and expectations Readers are cautioned not to place undue reliance on these forward-looking statements which speak only as of the date of this Annual Report on Form 10-K or in the case of documents incorporated by reference as of the date of those documents Important factors changes that may cause in general economic and financial market conditions actual results to differ include but are not limited to changes in revenues and profit margin due to changes in interest rates unanticipated adverse developments in litigation or regulatory matters fluctuations in client asset values due to changes in equity valuations the performance of securities available for sale the level of interest the amount of loans to the Companys brokerage rates including yields available on money market mutual fund eligible investments and banking clients the level of brokerage client cash balances and deposits from banking clients the availability and terms of external financing the level of the Companys stock repurchase the timing and impact of changes activity in the Companys level of investments in leasehold improvements and technology potential breaches of contractual terms for which the Company has indemnification obligations and Certain of these factors as well as general risk factors affecting the Company are discussed in greater detail in this Annual Report on Form 10-K including Item Risk Factors 38 THE CHARLES SCHWAB CORPORATION Item 7A Quantitative and Qualitative Disclosures About Market Risk Market risk is the potential for changes in revenue or the value of financial instruments held by the Company as result of fluctuations in interest rates equity prices or market conditions For the Companys market risk related to interest model is shown below The Company is exposed to interest rates sensitivity analysis referred to as net interest revenue simulation rate risk primarily from changes in the interest rates on its interest-earning assets relative to changes in the costs of its funding sources that finance these assets Net interest revenue is affected by various factors such as the distribution and composition of interest-earning assets and interest bearing liabilities the spread between yields earned on interest-earning assets and rates paid on interest-bearing liabilities which may re-price at different times or by different amounts and the spread between short and long-term interest rates Interest-earning assets include residential real estate loans and residential mortgage-backed securities These assets are sensitive to changes in interest rates and to changes to prepayment levels which tend to increase in declining rate environment To mitigate the risk of loss the Company has established policies and procedures amount of net interest at risk and monitoring revenue the net interest margin and average maturity of its interest-earning which include setting guidelines on the assets and funding sources To remain within these guidelines the Company manages the maturity repricing and cash flow characteristics of the investment portfolios Because the Company establishes the rates paid on certain brokerage client cash balances and deposits from banking clients the rates charged on margin loans and controls the composition of its investment securities it has some ability to manage its net interest spread depending on competitive factors and market conditions The Company is also subject to market risk as result of fluctuations in equity prices The Companys direct holdings of equity securities and its associated exposure to equity prices are not material The Company is indirectly exposed to equity market fluctuations in connection with securities collateralizing margin loans to brokerage customers and customer securities loaned out as part of the Companys securities lending activities Equity market valuations may also affect the level of brokerage client trading activity margin borrowing and overall client engagement with the Company Additionally the Company earns mutual fund service fees and asset management fees based upon daily balances of certain client assets Fluctuations in these client asset balances caused by changes in equity valuations directly impact the amount of fee revenue earned by the Company Financial instruments held by the Company are also subject to liquidity risk that is the risk that valuations will be negatively affected by changes in demand and the underlying market for financial instrument Recent conditions in the credit markets have significantly reduced market liquidity in wide range of financial instruments including the types of instruments held by the Company actual performance of the instruments underlying cash flows and fair value can differ significantly from the value implied by the credit quality and Financial instruments held by the Company are also subject to valuation risk as result of changes in valuations of the underlying collateral such as housing prices in the case of residential real estate loans and mortgage-backed securities For discussion of the impact of current market conditions on asset management and administration fees net interest revenue and securities available for sale see Item Managements Discussion and Analysis of Financial Condition and Results of Operations Current Market Environment The Companys market risk related to financial instruments held for trading interest rate swaps related to portion of its fixed interest rate Medium-Term Notes and forward sale and interest rate lock commitments related to its loans held for sale portfolio is not material Net Interest Revenue Simulation The Company uses net interest revenue simulation modeling techniques to evaluate and manage the effect of changing interest rates The simulation model the model includes all interest-sensitive assets and liabilities as well as interest rate swap agreements utilized by the Company to hedge its interest rate risk Key variables in the model include the repricing of 39 THE CHARLES SCHWAB CORPORATION financial instruments prepayment and reinvestment assumptions and product constant balances and market rates in the model assumptions in order pricing assumptions The Company uses to minimize the number of variables and to better isolate risks The simulations involve assumptions that are inherently uncertain and as result cannot precisely estimate net interest revenue or precisely predict the impact of changes in interest rates on net interest revenue Actual results may differ from simulated results due to balance growth or decline and the timing magnitude and frequency of interest rate changes as well as changes in market conditions and management strategies including changes in asset and liability mix As represented by the simulations presented below the Company is positioned so that the consolidated balance sheet produces an increase in net interest revenue when interest rates rise and conversely decrease in net interest revenue when interest rates fall i.e interest-earning assets generally reprice more quickly than interest-bearing liabilities The simulations in the following table assume that the asset and liability structure of the consolidated balance sheet would not be changed as result of the simulated changes in interest rates As the Company actively manages its consolidated balance sheet and interest rate exposure in all likelihood the Company would take steps to manage any additional interest rate exposure that could result from changes in the interest rate environment The following table shows the results of gradual 100 basis point increase or decrease in market interest rates relative simulated net interest revenue over the next 12 months at December to the Companys current market rates 31 2009 and 2008 While the Company typically uses forecast on gradual 200 basis point change it revised the methodology at March 31 2008 due to the current low levels of interest rates The Company will use gradual 100 basis point change until such time as the level of interest rates justifies return to the previous methodology December 31 Increase of 100 basis points Decrease of 100 basis points 2009 16.8% 2.9% 2008 6.4% 6.8% The sensitivities shown in the simulation reflect the fact that short-term interest rates in 2009 continued to decline even though the Fed Funds target rate remained at range of zero to 0.25% During 2009 the Companys yield on interest-earning assets fell faster than its already low cost of funding sources Since current short-term interest rates are so low further declines have lesser impact on net interest revenue while increases in short-term interest rates result in greater impact as yields on interest-earning assets rise faster than the cost of funding sources 40 THE CHARLES SCHWAB CORPORATION Item Financial Statements and Supplementary Data TABLE OF CONTENTS Consolidated Statements of Income Consolidated Balance Sheets Consolidated Statements of Cash Flows Consolidated Statements of Stockholders Equity Notes to Consolidated Financial Statements Note Note Note Note Note Note Note Note Note Introduction and Basis of Presentation Summary of Significant Accounting Policies Receivables from Brokerage Clients Other Securities Owned Securities Available for Sale and Securities Held to Maturity Loans to Banking Clients and Related Allowance Equipment Office Facilities and Property for Credit Losses Other Assets Deposits from Banking Clients Note 10 Payables to Brokers Dealers and Clearing Organizations Note 11 Payables to Brokerage Clients Note 12 Borrowings Note 13 Note 14 Note 15 Note 16 Note 17 Note 18 Note 19 Note 20 Note 21 Note 22 Note 23 Note 24 Note 25 Commitments and Contingent Liabilities Financial Instruments Subject to Off-Balance Sheet Risk Credit Risk or Market Risk Fair Values of Assets and Liabilities Accumulated Other Comprehensive Loss Employee Incentive Deferred Compensation and Retirement Plans Taxes on Income Eamings Per Share Regulatory Requirements Segment Information Discontinued Operations Subsequent Event The Charles Schwab Corporation Parent Company Only Financial Statements Quarterly Financial Information Unaudited Report of Independent Registered Public Accounting Firm Managements Report on Intemal Control Over Financial Reporting 42 43 44 45 46 46 46 51 51 52 55 56 56 57 57 57 57 59 62 64 68 69 72 74 74 75 78 79 79 82 83 84 -41- THE CHARLES SCHWAB CORPORATION Consolidated Statements of Income In Millions Except Per Share Amounts Year Ended December 31 Net Revenues Asset management and administration fees Interest revenue Interest expense Net interest revenue Trading revenue Other Total other-than-temporary impairment losses Noncredit portion of loss recognized in other comprehensive income Net impairment losses on securities Total net revenues Expenses Excluding Interest Compensation and benefits Professional services Occupancy and equipment Advertising and market development Communications Depreciation and amortization Other Total expenses excluding interest Income from continuing operations before taxes on income Taxes on income Income from continuing operations Loss income from discontinued operations net of tax Net Income Weighted-Average Common Shares Outstanding Diluted Earnings Per Share Basic Income from continuing operations Loss income from discontinued operations net of tax Net income Earnings Per Share Diluted Income from continuing operations Loss income from discontinued operations net of tax Net income Dividends Declared Per Common Share See Notes to Consolidated Financial Statements 2009 2008 2007 1875 1428 221 1207 996 175 278 218 60 2355 1908 243 1665 1080 94 44 44 2358 2270 623 1647 860 129 4193 5150 4994 1544 1667 1781 275 318 191 206 159 224 2917 1276 489 787 787 1160 .68 .68 .68 .68 .24 334 299 243 211 152 216 3122 2028 798 1230 18 1212 1157 1.07 .01 1.06 1.06 .01 1.05 .22 324 282 230 200 156 168 3141 1853 733 1120 1287 2407 1222 .93 1.05 1.98 .92 1.04 1.96 1.20 42 2009 2008 8241 18373 560 8627 916 22120 6839 7348 104 641 528 1134 75.431 38820 2373 26246 1407 1512 70358 14 2298 7243 4291 191 5073 75431 5442 14685 759 7129 626 14446 243 6044 41 661 528 1071 1.675 23841 1100 20256 1534 883 47614 14 2214 6735 4349 553 4061 51675 THE CHARLES SCHWAB CORPORATION Consolidated Balance Sheets In Millions Except Share and Per Share Amounts December 31 Assets Cash and cash equivalents Cash and investments segregated and on deposit for regulatory purposes including resale agreements of $8346 in 2009 and $6701 in 2008 Receivables from brokers dealers and clearing organizations Receivables from brokerage clients Other securities owned at fair value net Securities available for sale Securities held to maturity fair value $6880 in 2009 and $244 in 2008 Loans to banking clients net Loans held for sale Equipment office facilities and propertynet Goodwill Other assets Total assets Liabilities and Stockholders Equity Deposits from banking clients Payables to brokers dealers and clearing organizations Payables to brokerage clients Accrued expenses and other liabilities Long-term debt Total liabilities Stockholders equity Preferred stock Common stock 9940000 shares authorized $.01 par value per share none issued billion shares authorized $.Ol par value per share 1392091544 shares issued Additional paid-in capital Retained earnings Treasury stock at cost 229983936 shares in 2009 and 234991565 shares in 2008 Accumulated other comprehensive loss Total stockholders equity Total liabilities and stockholders equity See Notes to Consolidated Financial Statements 43 THE CHARLES SCHWAB CORPORATION Consolidated Statements of Cash Flows In Millions Year Ended December31 Cash Flows from Operating Activities Net income Adjustments to reconcile net income to net cash provided by operating activities Loss income from discontinued operations net of tax Depreciation Stock-based and amortization expense compensation expense Excess tax benefits from stock-based compensation Provision for deferred income taxes Net impairment losses on securities Other Originations of loans held for sale Proceeds from sales of loans held for sale Net change in Cash and investments segregated and on deposit for regulatory purposes Other securities owned Receivables from brokers dealers and clearing organizations Receivables from brokerage clients Other assets Payables to brokers dealers and clearing organizations Payables to brokerage clients Accrued expenses and other liabilities Net cash provided by discontinued operations Net cash orovided by onerating activities Cash Flows from Investing Activities Purchases of securities available for sale Proceeds from sales of securities available for sale Principal payments on securities available for sale Purchases of securities held to maturity Principal payments on securities held to maturity Net increase in loans to banking clients Purchase Proceeds of equipment office from sale of U.S Trust net of transaction facilities and property costs 2009 2008 2007 787 1212 2407 159 75 16 60 2746 2695 3688 290 202 1503 253 56 5990 111 1.437 14342 107 7063 5470 139 1411 140 18 152 69 50 97 44 70 1526 1522 5882 48 32 5171 51 822 34 106 9839 14 2003 245 2642 188 1287 156 58 108 175 16 863 849 2059 277 75 1394 33 424 331 419 389 1.746 3554 2034 1129 168 3237 119 67 367 Cash payments for business combinations net of cash acquired Other investing activities Net cash provided by discontinued operations Net cash used for provided by investing activities 14057 10901 Cash Flows from Financing Net change Activities in deposits from banking clients 14979 10019 2802 Issuance of long-term debt Repayment of long-term debt Excess tax benefits from stock-based compensation Dividends paid Purchase of treasury stock Proceeds from stock options exercised and other Other financing activities Net cash provided by discontinued operations Net cash provided by financing activities Increase decrease in Cash and Cash Equivalents CashandCash ofYear Cash and Cash Equivalents at End of Year Supplemental Cash Flow Information Cash paid during the year for Interest Income taxes 2008 and 2007 amounts include discontinued operations Non-cash investing activity Securities purchased during the year but settled after year end See Notes to Consolidated Financial Statements 44 20 50 253 350 131 9577 1322 6764 5442 232 767 549 43 108 1500 2742 414 563 144 2257 4507 6764 616 1071 747 80 279 53 15419 2799 5442 8241 173 446 1267 THE CHARLES SCHWAB CORPORATION Consolidated Statements of Stockholders Equity In Millions Balance at December31 2006 Comprehensive Net income income Other comprehensive income net of tax Net unrealized loss on cash flow hedging instruments Net unrealized gain on securities available for sale Minimum pension liability adjustment Total comprehensive income Dividends declared on common stock Purchase of treasury stock Stock option exercises and other Stock-based compensation expense Excess tax benefits from stock-based compensation Effect of change in accounting for sabbatical leave Effect of change in accounting for income taxes Restricted shares withheld for tax Balance at December 31 2007 Comprehensive income Netincome Other comprehensive income net of tax Net unrealized loss on securities available for sale Foreign currency translation adjustment Total comprehensive income Dividends declared on common stock Purchase of treasury stock Stock option exercises and other Stock-based compensation expense Excess tax benefits from stock-based compensation Restricted shares withheld for tax Employee stock purchase plan purchases Balance at December 31 2008 Comprehensive income Net income Other comprehensive income net of tax Net unrealized gain on securities available for sale Non-OTTI securities Net unrealized gain on securities available for sale OTTI securities Total comprehensive income Dividends declared on common stock Stock option Stock-based exercises and other compensation expense Excess tax benefits from stock-based compensation Restricted shares withheld for tax Employee stock purchase plan purchases BalanceatDecember3l2009 See Notes to Consolidated Financial Statements Additional Accumulated Other Common Stock Paid-In Retained Treasury Stock Comprehensive Shares Amount Capital Earnings at cost Loss Total 1392 14 1868 4901 1739 2407 2407 17 17 53 78 108 1498 17 17 1392 14 2107 5.776 1212 253 20 65 50 12 2214 1392 14 17 535 2426 1498 2742 415 78 108 17 17 29 3732 1212 535 676 253 350 129 65 50 11 23 2742 362 29 4148 350 149 11 11 6735 4349 553 4061 787 787 327 327 35 279 52 72 1392 14 2298 7243 13 4291 191 35 1149 279 52 72 17 5073 45 THE CHARLES SCHWAB CORPORATION Notes to Consolidated Financial Statements Tabular Amounts in Millions Except Per Share Data Option Price Amounts Ratios or as Noted Introduction and Basis of Presentation The Charles Schwab Corporation CSC is brokerage banking and related financial services Charles Schwab savings and loan holding company engaged through its subsidiaries in securities Co Inc Schwab is securities broker-dealer with 304 domestic branch offices in 45 states as well as branch in each of the Commonwealth of Puerto Rico and London U.K In addition Schwab serves clients in Hong Kong through Schwab Bank Schwab Bank federal savings bank and Charles Schwab one of CSCs subsidiaries Other subsidiaries include Charles Inc CSIM the Investment Management investment advisor for Schwabs proprietary mutual funds which are referred to as the Schwab Funds The accompanying consolidated financial statements include CSC and its majority-owned subsidiaries collectively referred to as the Company All material intercompany balances and transactions have been eliminated statements have been prepared in conformity with accounting principles generally accepted which require management to make certain estimates and assumptions that affect These consolidated financial States GAAP the reported amounts in the accompanying in the United financial statements Certain estimates include other-than-temporary impairment of securities available for sale and securities held to maturity the valuation of goodwill the allowance for credit losses and legal reserves Actual results could differ from those estimates Certain prior-period amounts have been reclassified to conform to the current period presentation Management has evaluated subsequent events through the date the consolidated financial statements were issued which was February 24 2010 Summary of Significant Accounting Policies Asset management fees and fees for other asset-based and administration fees Asset management and administration fees which include mutual fund service financial services provided to individual and institutional clients are recognized as revenue over the period that the related service is provided based upon average net asset balances The Company eams mutual fund service fees for shareholder services administration provided to its proprietary funds and recordkeeping investment management and transfer agent services through July 2009 and shareholder services provided to third-party funds Mutual fund service fees are based upon the daily balances of client assets invested in third-party funds funds The Company also earns asset management fees for advisory and managed account and the Companys proprietary services which are based on the daily balances of client assets subject to the specific fee for service The fair values of client assets included in proprietary and third-party mutual funds are based on quoted market prices and other observable market data In 2009 the Company waived mutual funds in order to provide portion of its asset management fees eamed from certain Schwab-sponsored money market positive return to clients Under agreements with these funds the Company may recover such fee waivers depending on the future performance of the funds Recoveries of previously-waived asset management fees are recognized and approval by the boards of the respective funds as revenue when substantially all uncertainties about timing and amount of realization are resolved The Company did not recognize any revenue for recoveries of previously- waived asset management fees in 2009 Interest revenue Interest revenue represents interest earned on certain assets which include cash and cash equivalents cash and investments segregated broker-related receivables receivables from brokerage clients other securities owned securities available for sale securities held to maturity loans to banking clients and loans held for sale Interest revenue is recognized in the period earned based upon average asset balances and respective interest rates Securities transactions Trading revenue includes commission and principal transaction revenues Clients securities transactions are recorded on the date that they settle while the related commission revenues and expenses are recorded on the date that the trade occurs Principal transaction revenues are primarily comprised of revenues from client fixed income securities trading activity which are recorded on trade date basis Cash and cash equivalents less that are not segregated The Company considers all highly and on deposit for regulatory purposes liquid investments with original maturities of three months or to be cash equivalents Cash and cash equivalents include 46 THE CHARLES SCHWAB CORPORATION Notes to Consolidated Financial Statements Tabular Amounts in Millions Except Per Share Data Option Price Amounts Ratios or as Noted money market funds deposits with banks certificates securities Cash and cash equivalents also include balances of deposit federal funds sold commercial paper that Schwab Bank maintains at the Federal Reserve and treasury Bank Cash and investments segregated and on deposit for regulatory purposes include securities purchased under agreements to resell resale agreements which are collateralized by United States U.S Government and agency securities Resale agreements are accounted for as collateralized investing transactions that are recorded at their contractual amounts plus accrued interest The Company obtains control of collateral with 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 Government securities as well FDIC under the Temporary Liquidity Guarantee debt securities and commercial paper are recorded as corporate debt securities and commercial paper guaranteed by the Federal Deposit Insurance Corporation Program Certificates at fair value of deposit U.S Government securities corporate 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 commercial paper certificates of deposit equity and bond mutual funds state and municipal debt obligations equity U.S Government and corporate debt and other securities recorded at fair value based on quoted market prices Unrealized gains and losses are included in trading revenue Securities available for sale and securities held to maturity Securities available for sale are recorded at fair value based on quoted prices for similar securities U.S agency of deposit and non-agency and asset-backed in active markets and other observable market data Securities available for sale include residential mortgage-backed securities U.S agency notes corporate debt securities certificates securities 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 specific identification basis and are included in other revenue Securities held to maturity are recorded at amortized cost based on the Companys positive intent and ability to hold these securities to maturity Securities held to maturity include U.S agency residential mortgage-backed securities asset-based securities and corporate debt securities evaluates whether Management impaired OTTI on sell the security or if the Company will be required to sell such securities quarterly basis Debt securities with unrealized losses are considered OTTI if the Company intends to available for sale and securities held to maturity are other-than-temporarily security prior to any anticipated recovery If management determines that security is OTTI under these circumstances the impairment recognized in earnings is measured as the entire difference between the amortized cost and the then-current fair value security is also OTTI if management does not expect to recover the amortized cost of the security In this circumstance management utilizes cash flow models to estimate the expected future cash flow from the securities and to estimate the credit loss The impairment recognized in earnings is measured by the difference between the present value of expected cash flows and the amortized cost of the security Expected cash flows are discounted using the securitys effective interest rate The evaluation of whether the Company expects to recover the amortized cost of security is inherently judgmental The evaluation includes the assessment of several bond performance are delinquent 30 days 60 days 90 days in bankruptcy in foreclosure or converted amount of loss incurred on the underlying indicators including loans in which the property has been foreclosed and sold the amount of credit the portion of the underlying loans that to real estate owned the actual support provided by the structure of the security available to absorb credit losses on the underlying loans the current credit ratings issued by either Standard and whether the Company has received Poors Fitch Ratings or Moodys the current price and magnitude of the unrealized loss flow models to all scheduled uses cash principal and interest payments Management further assess the likelihood of other-than-temporary impairment for the Companys non-agency residential mortgage-backed flow models the Company uses forecasted loss severity prepayment speeds i.e the rate at securities To develop which the principal on underlying the cash loans are paid down and default rates over the securities remaining maturities 47 THE CHARLES SCHWAB CORPORATION Notes to Consolidated Financial Statements Tabular Amounts in Millions Except Per Share Data Option Price Amounts Ratios or as Noted 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 or greater than 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 earnings based on managements 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 statistical models that estimate prepayments quarterly analysis to estimate the allowance for credit losses This process utilizes loan-level defaults and expected life of loan losses for our loan portfolios based on predicted behavior of individual loans within the portfolios The models consider effects of borrower behavior and 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 include measure of delinquency roll rates the amount of loss in the event of default housing prices and interest rates Delinquency roll rates i.e the rates at which loans transition through delinquency stages and ultimately result in loss are estimated from the Companys historical loss experience adjusted for current trends and market information Loss in the event of default is based on the Companys historical loss experience and market trends Housing price trends are derived from historical Factors affecting the home price index include values housing home price indices and statistical forecasts of future home 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 This quarterly analysis results in loss factor that is applied to the outstanding balances to determine the allowance for credit loss for each loan category Nonaccrual loans Loans are placed on nonaccrual status upon becoming 90 days past due as to interest or principal unless the loans are well-secured and in the process of collection or when the full timely collection of interest or principal becomes uncertain When loan is placed on nonaccrual status the accrued and unpaid interest receivable is reversed and the loan is accounted for on the cash or cost recovery method thereafter until qualifying for return to accrual status Generally loan may be returned to accrual and principal with the terms of the loan agreement or when the loan is both well-secured status when all delinquent interest is repaid and the loan is performing in accordance and in the process of collection and collectability is no longer doubtful Loans held for sale include fixed-rate residential first-mortgage loans intended for sale Loans held for sale are recorded at the lower of cost or fair value The fair value of loans held for sale is estimated using quoted market prices for securities backed by similar types of loans Equimenl office facilities depreciation and amortization and properly Equipment office facilities and property are stated at cost net of accumulated except for land which is stated at cost Equipment and office facilities are depreciated on straight-line basis over an estimated useful life of three to ten years Buildings are depreciated on straight-line basis over 40 years Leasehold improvements are amortized on straight-line basis over the lesser of the estimated useful life of the asset or the term of the lease Software and certain costs incurred for purchasing on straight-line basis over an estimated useful reviewed for impairment whenever events or changes in circumstances or developing life of three or five years Equipment indicate that software for internal use are amortized office facilities and property are the carrying amount of such assets may not be recoverable Goodwill represents the cost of acquired businesses in excess of the fair value of the related net assets acquired Goodwill is not amortized but is tested for impairment annually or whenever indications of impairment exist In testing for potential 48 THE CHARLES SCHWAB CORPORATION Notes to Consolidated Financial Statements Tabular Amounts in Millions Except Per Share Data Option Price Amounts Ratios or as Noted impairment of goodwill management estimates the fair value of each of the Companys reporting units defined as the Companys businesses for which financial information is available and reviewed regularly by management and compares it to their carrying value If the estimated fair value of reporting unit is less than its carrying value management is required to estimate the fair value of all assets and liabilities of the reporting unit including goodwill If the carrying value of the reporting units goodwill Company has elected April is greater than the estimated fair value an impairment charge is recognized date The Company did not recognize impairment testing its annual 1St as for the excess The any goodwill impairment in 2009 2008 or 2007 Derivative financial instruments are recorded on the balance sheet in other assets and other liabilities at fair value As part of its consolidated asset and liability management process the Company utilizes interest rate swap agreements Swaps to effectively convert the interest rate characteristics of portion of its Medium-Term Notes from fixed to variable These Swaps have been designated value of the hedged Medium-Term Notes as fair value hedges and therefore changes in fair value of the Swaps are offset by changes in the fair Schwab Banks loans held for sale portfolio includes fixed-rate residential when market interest rise Schwab Bank uses forward sale commitments rates first-mortgage which are subject to loss in value to manage this risk These forward sale commitments have been designated as cash flow hedging instruments with respect to the loans held for sale Accordingly the fair values of these forward sale commitments are recorded on the Companys consolidated balance sheet with gains or losses recorded in other comprehensive income until the associated loan is sold Additionally Schwab Bank uses forward sale commitments to hedge interest rate lock commitments issued on mortgage loans that will be held for sale Schwab Bank considers the fair value of these commitments to be zero at the commitment date with subsequent changes in fair value determined solely based on changes in market interest rates Any changes in fair value of the interest rate lock commitments are completely offset by changes in fair value of the related forward sale commitments Guarantees and indemn/ications The Company recognizes at the inception of guarantee liability equal to the estimated fair value of the obligation undertaken in issuing the guarantee agreements LOCsare estimated based on fees charged credit The fair values of the obligations relating to standby letter of to enter into similar agreements considering the creditworthiness of the counterparties The fair values of the obligations relating to other guarantees are estimated based on transactions for similar guarantees or expected present value measures Income taxes The Company provides for income taxes on all transactions that have been recognized in the consolidated financial statements Accordingly deferred tax assets are adjusted to reflect the tax rates at which future taxable amounts will likely be settled or realized The effects of tax rate changes on future deferred tax assets and deferred tax liabilities as well as other changes in income tax laws are recorded in earnings in the period during which such changes are enacted The Companys unrecognized between positions taken on tax return filings and estimated potential tax settlement outcomes tax benefits which are included in accrued expenses and other liabilities represent the difference Stock-based compensation Stock-based compensation includes employee and board of director stock options restricted stock awards and restricted stock units The Company measures compensation expense for these share-based payment arrangements based on their estimated fair values as of the awards grant date The fair value of the share-based award is recognized over the vesting period as stock-based compensation Stock-based compensation expense is based on awards expected to vest and therefore is reduced for estimated forfeitures Forfeitures are estimated at the time of grant based on the Companys historical forfeiture experience and revised in subsequent periods if actual forfeitures differ from those estimates Adoption of New Accounting Standards FASB Accounting Standards CodfIcation The FASB Accounting Standards Codification the Codification was effective for interim and annual reporting periods ending after September 15 2009 This standard establishes the Codification as the source of authoritative accounting principles in the preparation of financial statements in conformity with GAAP Rules and 49 THE CHARLES SCHWAB CORPORATION Notes to Consolidated Financial Statements Tabular Amounts in Millions Except Per Share Data Option Price Amounts Ratios or as Noted interpretive releases of the Securities and Exchange sources of authoritative GAAP for SEC registrants The adoption GAAP standards but did not have an impact Commission SEC under authority of federal securities laws are also of the Codification changed the Companys references to on the Companys financial position results of operations EPS or cash flows Throughout this Annual Report on Form 10-K all references to prior FASB AICPA and EITF accounting pronouncements have been removed Business Combinations On January 2009 the Company adopted new guidance that requires an acquirer to recognize the assets acquired the liabilities assumed contingent purchase consideration and any noncontrolling interest in the acquiree at fair value on the date of acquisition This new guidance also requires an acquirer to expense most transaction and restructuring costs as incurred and not include such items in the cost of the acquired entity This new standard applies to any business acquisition with an acquisition date on or after January 2009 Noncontrolling Interests On January 2009 the Company adopted new guidance that amends financial statement presentation and disclosure requirements for reporting noncontrolling ownership interests This new guidance also establishes consistent accounting methods for changes in ownership interest and for the valuation of retained noncontrolling investments upon deconsolidation results of operations EPS or cash The adoption of this new guidance did not have material impact on the Companys financial position flows Subsequent Events In the second quarter of 2009 the Company adopted new guidance that establishes the accounting for and disclosure of subsequent events The adoption of this new guidance did not have material impact on the Companys financial position results of operations EPS or cash flows See note Introduction and Basis of Presentation for disclosures pursuant to this guidance Instruments Granted in Share-Based Payment Transactions On January 2009 the Company adopted new guidance that requires the inclusion of unvested share-based payment awards with non-forfeitable rights to dividends or dividend equivalents as participating securities in the computation of EPS under the two-class method This new guidance requires retrospective adjustment to all prior-period EPS data presented The Company has participating securities in the form of unvested restricted common shares related to the Companys stock incentive plans However these participating securities do not have material impact on the Companys EPS data presented Other-Than-Temporary Impairments In the first quarter of 2009 the Company adopted new guidance that modifies the requirements for recognizing impairment charges on OTTI debt securities and expands the disclosures related to OTTI debt and equity securities See note Securities Available for Sale and Securities Held to Maturity for additional information and disclosures pursuant to this new guidance Fair Value Measurements In the first quarter of 2009 the Company adopted new guidance for estimating fair value when the volume and level of activity for an asset or liability have significantly decreased including guidance on identifying circumstances that indicate transaction is not orderly This new guidance also requires additional disclosures related to fair value The adoption of this new guidance did not have material impact operations EPS or cash flows See note 15 Fair Values of Assets guidance on the Companys financial position and Liabilities for disclosures pursuant results of to this new Fair Value Measurements and Disclosures of Financial Instruments In the first quarter of 2009 the Company adopted new guidance that expands the fair value disclosures required for financial instruments to interim periods and requires entities to disclose the methods and significant assumptions used to estimate the fair value of financial instruments in financial statements Assets and Liabilities for disclosures pursuant on an interim and annual basis and to highlight any changes to this new guidance from prior periods See note 15 Fair Values of New Accounting Standards Not Yet Adopted Transfers of Financial Assets In June 2009 the FASB issued new guidance which is effective for financial asset transfers occurring after January on accounting for transfers of financial assets 2010 This new guidance removes the concept of qualifing special-purpose entity and amends the requirements for transfer of portion of financial asset to be accounted 50 THE CHARLES SCHWAB CORPORATION Notes to Consolidated Financial Statements Tabular Amounts in Millions Except Per Share Data Option Price Amounts Ratios or as Noted for as sale and related disclosures The adoption of this new guidance is not expected to have material impact on the Companys financial position results of operations EPS or cash flows Consolidation of Variable Interest Entities In June 2009 the FASB issued new guidance entities VIEs which is effective 2010 This new guidance amends January on consolidation of variable interest the consolidation guidance applicable to VIEs including changing the approach to determining VIEs primary beneficiary the reporting entity that must consolidate the VIE and the frequency of reassessment In January 2010 the FASB voted to defer the effective date of this new guidance for reporting enterprises interest in certain investment companies and for certain money market funds The adoption of this new guidance except the deferred portion which the Company is currently evaluating is not expected to have material impact on the Companys financial position results of operations EPS or cash flows Receivables from Brokerage Clients Receivables from brokerage clients are stated net of allowance for doubtful accounts of $2 million and $4 million at December 31 2009 and 2008 respectively Receivables from brokerage clients consist primarily of margin loans to brokerage clients of $7.9 billion and $6.2 billion at December 31 2009 and 2008 respectively Securities owned by brokerage clients are held as collateral for margin loans Such collateral is not reflected in the consolidated financial statements Charge-offs related to margin loans were not material 5.95% in 2009 and 2008 respectively in 2009 2008 and 2007 The average yield earned on margin loans was 5.20% and Other Securities Owned summary of other securities owned is as follows December 31 Schwab Funds money market funds Commercial paper Certificates of deposit Equity and bond mutual funds State and municipal Equity U.S Government debt obligations and corporate debt and other securities Total other securities owned 2009 321 220 200 103 49 23 916 2008 440 135 37 14 626 Amounts include securities pledged of $3 million and $7 million at December 31 2009 and 2008 respectively The Companys positions in Schwab Funds money market funds arise from certain overnight funding of clients redemption check-writing and debit card activities Equity and bond mutual funds include investments made by the Company relating to its deferred compensation plan mutual fund investments held at CSC and inventory maintained to facilitate certain Schwab Funds and third-party mutual fund clients transactions State and municipal debt obligations equity U.S Government and corporate debt and other securities include securities held to meet clients trading activities Securities sold but not yet purchased were not material at December 31 2009 and 2008 -51 THE CHARLES SCHWAB CORPORATION Notes to Consolidated Financial Statements Tabular Amounts in Millions Except Per Share Data Option Price Amounts Ratios or as Noted Securities Available for Sale and Securities Held to Maturity The amortized cost gross unrealized gains and losses and fair value of securities available for sale and securities held to maturity are as follows December 31 2009 Securities available for sale U.S agency residential mortgage-backed securities Non-agency U.S agency notes residential mortgage-backed securities Corporate debt securities Certificates of deposit Asset-backed securities Total securities available for sale Securities held to maturity U.S agency residential mortgage-backed securities Asset-backed securities Corporate debt securities Total securities held to maturity December 31 2008 Securities available for sale U.S agency residential mortgage-backed securities Non-agency U.S agencynotes residential mortgage-backed securities Corporate debt securities Certificates of deposit Asset-backed securities Gross Gross Amortized Unrealized Unrealized Cost Gains Losses Fair Value 11601 2460 2975 2368 1950 1077 22.43 5105 1389 345 6839 199 13 12 231 36 25 68 21 519 542 27 27 11779 1941 2978 2380 1953 1089 22i2 5114 1414 352 6.880 Gross Gross Amortized Unrealized Unrealized Cost Gains Losses Fair Value 108 8203 3085 515 1762 925 866 82 862 31 44 8229 2223 517 1733 922 822 14446 244 244 Total securities available for sale 15.356 112 1.022 Securities held to maturity Asset-backed securities Total securities held to maturity 243 243 52 THE CHARLES SCHWAB CORPORATION Notes to Consolidated Financial Statements Tabular Amounts in Millions Except Per Share Data Option Price Amounts Ratios or as Noted summary of securities with unrealized losses aggregated by category and period of continuous unrealized loss is as follows December 31 2009 Securities available for sale Less than 12 months 12 months or longer Total Fair Unrealized Fair Unrealized Fair Unrealized Value Losses Value Losses Value Losses U.S agency residential mortgage-backed securities 3801 Non-agency residential mortgage-backed U.S agencynotes securities Corporate debt securities Total Securities held to maturity U.S agency residential mortgage-backed securities Total Total securities with unrealized losses 171 864 374 5.210 1.885 1.885 7.095 11 10 1994 1770 10 509 5795 1941 864 374 23 3.764 519 8974 27 27 50 1.885 1885 3764 519 10859 21 519 542 27 27 569 The number of investment positions with unrealized losses totaled 333 for securities available for sale and 30 for securities held to maturity December 31 2008 Securities available for sale U.S agency residential mortgage-backed securities Non-agency residential mortgage-backed securities Corporate debt securities Certificates of deposit Asset-backed securities Total securities with unrealized losses Less than 12 months 12 months or longer Total Fair Unrealized Fair Unrealized Fair Unrealized Value Losses Value Losses Value Losses 2231 1704 477 647 822 5.881 63 512 11 44 633 381 513 436 19 350 20 2612 2217 913 647 822 1.330 389 7.211 82 862 31 44 1022 The number of investment positions with unrealized losses totaled 334 Unrealized losses in securities available for sale were $542 million as of December 31 2009 and were concentrated in non- agency residential mortgage-backed ratings however management by the U.S agencies Included securities U.S agency residential mortgage-backed securities do not have explicit credit considers these to be of the highest credit quality given the guarantee of principal and interest in non-agency residential mortgage-backed securities are securities collateralized by loans that are considered origination to be Prime defined as loans to borrowers and Alt-A defined as Prime loans with reduced with Fair Isaac Company credit score of 620 or higher at documentation at origination At December 31 2009 the amortized cost and fair value of Alt-A mortgage-backed securities were $628 million and $387 million respectively Corporate debt securities at December guaranteed under the Federal Deposit 31 2009 included $981 million of securities Insurance Corporation FDIC Temporary Liquidity Guarantee issued by financial institutions and Program Assessment of Other-Than-Temporary Impairment Management securities with unrealized losses are considered OTTI evaluates whether securities available for sale and securities held to maturity are OTTI on if the Company intends to sell the security or if the Company will be quarterly basis Debt required to sell such security prior to any anticipated recovery If management determines that security is OTTI under these circumstances the impairment recognized in earnings is measured as the entire difference between the amortized cost and then-current fair value 53 THE CHARLES SCHWAB CORPORATION Notes to Consolidated Financial Statements Tabular Amounts in Millions Except Per Share Data Option Price Amounts Ratios or as Noted security is also OTTI if management does not expect to recover the amortized cost of the security In this circumstance management utilizes cash flow models to estimate the expected future cash flow from the securities and to estimate the credit loss The impairment recognized in eamings is measured by the difference between the present value of expected cash flows and the amortized cost of the security Expected cash flows are discounted using the securitys effective interest rate The evaluation of whether the Company expects to recover the amortized cost of security is inherently judgmental The evaluation includes the assessment of several bond performance indicators including the portion of the underlying loans that are delinquent 30 days 60 days 90 days in bankruptcy in foreclosure or converted amount of loss incurred on the underlying loans in which the property has been foreclosed and sold the amount of credit to real estate owned the actual support provided by the structure of the security available to absorb credit losses on the underlying loans the current credit ratings issued by either Standard and whether the Company has received further assess the likelihood of other-than-temporary Poors Fitch Ratings or Moodys the current price and magnitude of the unrealized loss flow models to all scheduled principal and interest payments Management uses cash impairment for the Companys non-agency residential mortgage-backed securities To develop the cash flow models the Company uses forecasted loss severity prepayment speeds i.e the rate at which the principal on underlying loans are paid down and default rates over the securities remaining maturities Certain Alt-A and Prime residential mortgage-backed securities experienced deteriorating credit characteristics in 2009 including increased payment delinquencies and decreased prepayments due to the slowing of general economic activity and increased unemployment Losses on foreclosures of underlying mortgages increased as result of housing price declines Forecasted home price fluctuations are an important variable in forecasting the expected loss severity and default rates Based on the Companys cash flow projections management determined that it does not expect to recover all of the amortized cost of these securities and therefore determined that these securities were 0Th The Company does not intend to sell the securities available for sale and it will not be required to sell these securities employs buy and hold strategy relative to its mortgage-related securities Further before anticipated recovery The Company the Company has an adequate liquidity position at December 31 2009 with cash and cash equivalents totaling $8.2 billion loan-to-deposit ratio of 19% adequate access to short-term borrowing facilities and regulatory capital ratios in excess of well capitalized levels Because the Company does not intend to sell these securities and will not be required to sell these securities the Company recognized an impairment charge equal to the securities expected credit losses of $60 million in 2009 The expected credit losses were measured as the difference between the present value of expected cash flows and the amortized cost of the securities In 2008 the Company recognized an other-than-temporary issued by Lehman Brothers Holdings Inc Lehman as September 2008 The Company sold this security in October 2008 Impairment charges result of Lehmans Chapter 11 bankruptcy petition filing in recognized in earnings are included in impairment charge of $44 million on corporate debt security net impairment losses on securities As of December 31 2009 the Company has not realized an actual credit loss on any of its residential mortgage-backed securities Further deterioration in the performance of the underlying loans in the Companys residential mortgage-backed securities portfolio could result in the recognition of additional future impairment charges The following table is rollforward of the amount of credit losses recognized in earnings for OTTI securities held by the Company during the period for which portion of the impairment was recognized in other comprehensive income Balance at beginning of year Credit losses recognized into current year eamings on debt securities for which an other-than-temporary impairment was not previously recognized Balance at end of year 2009 60 60 54 THE CHARLES SCHWAB CORPORATION Notes to Consolidated Financial Statements Tabular Amounts in Millions Except Per Share Data Option Price Amounts Ratios or as Noted The maturities of securities available for sale and securities held to maturity at December 31 2009 are as follows Securities available for sale U.S agency residential mortgage-backed securities Non-agency U.S agency notes residential mortgage-backed securities Corporate debt securities Certificates of deposit Asset-backed securities Totalfairvalue Total amortized cost Securities held to maturity U.S agency residential mortgage-backed securities Asset-backed securities Corporate debt securities Total fair value Total amortized cost After year After years Within through through After year years 10 years 10 years Total 325 1366 1853 3544 3534 33 33 32 2653 1014 100 940 4707 4692 1259 319 1578 1.548 173 32 149 354 345 155 155 154 11606 11779 1909 1941 2978 2380 1953 1089 13515 13860 $22120 22431 5114 5114 5105 5114 1414 352 6880 6.839 Residential mortgage-backed securities have been allocated over maturity groupings based on final contractual maturities Actual maturities will differ from final contractual maturities because certain portion of loans underlying these securities require scheduled principal payments and borrowers have the right to prepay obligations The proceeds and gross realized gains losses from sales of securities available for sale are as follows December 31 Proceeds Gross realized gains Gross realized losses 2007 2009 107 2008 14 31 Realized gains and losses from sales of securities available for sale are included in other revenue In 2008 the Company recorded Bank as result of its seizure by the FDIC in September 2008 loss of $29 million on the sale of corporate debt security issued by Washington Mutual Loans to Banking Clients and Related Allowance for Credit Losses The composition of the loan portfolio is as follows December 31 Residential real estate mortgages Home equity lines of credit Secured personal loans Other Total loans to banking clients Allowance for credit losses Total loans to banking clients net 55 2009 3710 3304 366 13 7393 45 7348 2008 3195 2662 187 20 6064 20 6.044 THE CHARLES SCHWAB CORPORATION Notes to Consolidated Financial Statements Tabular Amounts in Millions Except Per Share Data Option Price Amounts Ratios or as Noted Included in the loan portfolio are nonaccrual loans totaling $34 million and $8 million at December 31 2009 and 2008 respectively Nonperforming assets which include nonaccrual loans and other real estate owned totaled $37 million and $9 million at December 31 2009 and 2008 respectively There were no loans accruing interest that were contractually 90 days or more past due at December 31 2009 and 2008 The amount of interest revenue that would have been earned on nonaccrual loans versus interest revenue recognized on these loans was not material to the Companys results of operations for 2009 and 2008 Changes in the allowance for credit losses were as follows December 31 Balance at beginning of year Charge-offs Recoveries Provision for credit losses Balance at end of yeax___ Equipment Office Facilities and Property Equipment office facilities and property are detailed below December 31 Software Buildings Information technology equipment Leasehold improvements Furniture and equipment Telecommunications equipment Land Construction in progress Total equipment office facilities and property Accumulated depreciation and amortization Total equipment office facilities and property net Other Assets The components of other assets are as follows December 31 Accounts receivable Deferred tax asset net Prepaid expenses Interest and dividends receivable Other investments Intangible assets net Other Total other assets 2009 2008 2007 20 13 38 45 17 20 2009 2008 854 428 392 296 128 100 57 846 414 392 251 123 97 57 14 2259 1618 641 2194 1533 661 2009 327 249 224 141 59 23 111 1.134 2008 216 502 66 92 45 24 126 1.071 Accounts receivable includes accrued service fee income and receivable from loan servicer 56 THE CHARLES SCHWAB CORPORATION Notes to Consolidated Financial Statements Tabular Amounts in Millions Except Per Share Data Option Price Amounts Ratios or as Noted Deposits from Banking Clients Deposits from banking clients consist of interest-bearing deposits as follows December 31 Deposits swept from brokerage accounts Savings Checking Total deposits from banking clients 2009 2008 22955 8257 7608 38a20_ 18439 5.402 23.84 Demand deposit overdrafts included as other loans within loans to banking clients were not material at December and 2008 31 2009 10 Payables to Brokers Dealers and Clearing Organizations Payables December to brokers dealers and clearing organizations include securities loaned of $996 million and $883 million at 31 2009 and 2008 respectively The cash collateral received from counterparties under securities lending transactions was equal to or greater than the market value of the securities loaned Payables to brokers dealers and clearing organizations at December 31 2009 also included unsettled purchases of securities held to maturity of $1.3 billion 11 Payables to Brokerage Clients The principal source of funding for Schwabs margin lending is cash balances in brokerage client accounts which are included in payables to brokerage clients Cash balances in interest-bearing brokerage client accounts were $20.8 billion and $15.8 billion at December 31 2009 and 2008 respectively The average rate paid on cash balances in interest-bearing brokerage client accounts was 0.02% and 0.36% in 2009 and 2008 respectively 12 Borrowings Long-term debt net of unamortized debt discounts where applicable consists of the following December 31 Senior Notes Senior Medium-Term Notes Series Junior Subordinated Notes Finance lease obligation Fair value adjustment Total long-term debt 2009 2008 747 450 202 111 1512 458 300 116 883 CSC has universal automatic shelf registration statement on file with the SEC which enables CSC to issue debt equity and other securities In June 2009 the Company issued $750 million of Senior Notes that mature in 2014 under this registration statement The Senior Notes have fixed interest rate of 4.950% with interest payable semiannually The aggregate principal amount of Senior Medium-Term Notes Series Medium-Term Notes outstanding at December 2009 had maturities ranging from 2010 to 2017 At December 31 2009 and 2008 the aggregate principal amount of 31 Medium-Term Notes outstanding had fixed interest rates ranging from 6.375% to 8.05% with interest payable semiannually At December 31 2009 and 2008 the Medium-Term Notes carried weighted-average interest rate of 7.12% and 7.13% 57 THE CHARLES SCHWAB CORPORATION Notes to Consolidated Financial Statements Tabular Amounts in Millions Except Per Share Data Option Price Amounts Ratios or as Noted respectively portion of the Medium-Term Notes is subject to fair value hedging instruments as described in note 14 Financial Instruments Subject to Off-Balance Sheet Risk Credit Risk or Market Risk In October 2007 CSC and Schwab Capital Trust statutory trust formed under the laws of the State of Delaware Trust closed public offering of $300 million of the Trusts fixed to floating rate trust preferred securities The proceeds from the sale of the trust preferred securities were invested by the Trust CSC The Junior Subordinated Notes have fixed interest in fixed to floating rate Junior Subordinated Notes issued by rate of 7.50% until November 15 2017 and floating rate thereafter The Junior Subordinated Notes may be redeemed at redemption price of principal plus accrued but unpaid interest on November 15 2017 on or after November 15 2037 or following price at any other time CSC has contractually holders of the Companys long-term indebtedness whole redemption benefit of certain the occurrence of certain events and at make- agreed pursuant to replacement capital covenant for the ranking senior to the Junior Subordinated Notes or the trust preferred securities prior to November 15 2047 unless Notes not to redeem repay or purchase the Junior Subordinated it has received proceeds of the issuance of certain replacement capital securities among other conditions At December 31 2009 the Companys 6.375% Senior Medium-Term Notes due 2017 is the series of long-term indebtedness whose holders are entitled to the benefits of the replacement capital covenant In 2009 the Company repurchased $98 million of trust preferred securities related to its Junior Subordinated Notes for cash payment of $67 million The repurchase of the trust preferred securities is considered an extinguishment of portion of the Junior Subordinated Notes and resulted in gain of $31 million In 2004 the Company sold an office building for proceeds of $136 million and leased the property back for 20-year term This transaction was accounted for as financing lease The remaining finance lease obligation of $111 million at December 31 2009 is being reduced by portion of the lease payments over the remaining lease term of approximately 15 years Annual maturities on long-term debt outstanding at December 31 2009 are as follows 2010 2011 2012 2013 2014 Thereafter Total maturities Fair value adjustment Unamortized discount Total long-term debt 205 756 535 1514 1512 CSC has authorization from its Board of Directors to issue unsecured commercial paper notes Commercial Paper Notes not to exceed $1.5 billion Management of the Commercial Paper Notes may vary but are not to exceed 270 days from the date of issue The commercial redeemable for the commercial paper program of $800 million The maturities be voluntarily prepaid The proceeds paper is not and cannot current has set limit prior to maturity of the commercial paper program are to be used 31 2009 for general corporate purposes There were no Commercial Paper Notes outstanding at December CSC maintains an $800 million commiued unsecured expire in June 2010 This facility replaced credit facility with group of twelve banks which is scheduled to similar facility that expired in June 2009 The funds under this facility are available for general corporate purposes including repayment of Commercial Paper Notes discussed above The amount of this facility outstanding that CSC can use for other general corporate purposes The financial in this covenants Schwab Bank to be well capitalized to maintain minimum net capital as defined and CSC to maintain minimum level of stockholders require Schwab facility ratio as defined equity At is reduced by the amount of any Commercial Paper Notes December 31 2009 the minimum level of stockholders equity required under this facility was $3.3 billion These facilities were unused at December 31 2009 and 2008 58 THE CHARLES SCHWAB CORPORATION Notes to Consolidated Financial Statements Tabular Amounts in Millions Except Per Share Data Option Price Amounts Ratios or as Noted To manage short-term liquidity Schwab maintains uncommitted unsecured bank credit lines with group of seven banks totaling $824 million at December 31 2009 CSC has access to $744 million of these credit lines There were no borrowings outstanding under these lines at December 31 2009 and 2008 To satisfy unsecured the margin requirement of client option transactions with the Options Clearing Corporation 0CC Schwab 31 2009 In standby LOCs with seven banks in favor of the 0CC aggregating $445 million at December has connection with its securities lending activities Schwab is required to provide collateral to certain brokerage clients Schwab satisfies the collateral requirements by arranging LOCs in favor of these brokerage clients which are issued by multiple banks At December 31 2009 the aggregate face amount of these LOCs totaled $37 million There were no funds drawn under any of these LOCs during 2009 and 2008 13 Commitments and Contingent Liabilities Operating Future minimum rental leases and other commitments The Company has non-cancelable operating leases for office space and equipment commitments under these leases net of contractual subleases at December 31 2009 are as follows 2010 2011 2012 2013 2014 Thereafter Total Operating Leases 157 128 84 67 58 179 673 Subleases Net 41 35 30 25 22 64 217 116 93 54 42 36 115 456 Certain leases contain provisions for renewal options purchase options and rent escalations based on increases in certain costs incurred by the lessor Rent expense was $213 million $186 million and $180 million in 2009 2008 and 2007 respectively Rent expense in 2009 included charges of $37 million relating to the Companys cost reduction measures Purchase obligations The Company has purchase obligations for services such as advertising and marketing telecommunications professional services and hardware- and software-related agreements At December 31 2009 the Company has purchase obligations as follows 2010 2011 2012 2013 2014 Thereafter Total 130 50 11 192 Guarantees and indemnJIcations In the normal course of business the Company provides certain indemnifications i.e protection against damage or loss to counterparties in connection with the disposition of certain of its assets Such indenmifications are generally standard contractual terms with various expiration dates and typically relate to title to the assets transferred ownership of intellectual property rights e.g patents accuracy of financial statements compliance with laws and regulations failure to pay satisfy or discharge any liability or to defend claims as well as errors omissions and misrepresentations The maximum potential future liability under these indemnifications cannot be estimated The Company has not recorded liability for these indemnifications and believes that the occurrence of events that would trigger payments under these agreements is remote 59 THE CHARLES SCHWAB CORPORATION Notes to Consolidated Financial Statements Tabular Amounts in Millions Except Per Share Data Option Price Amounts Ratios or as Noted Separately the Company has guaranteed agreements related to the adoption certain payments in the event of of certain mutual fund sub-advisor of AXA Rosenberg LLC U.S family of mutual funds known as the Laudus Funds termination Additionally the Company has provided indenmifications related to facility leases to counterparty in connection with the disposition of certain of its assets At December 31 2009 the Companys maximum potential future liability under these agreements was approximately $120 million At December 31 2009 the Company has recorded liability of approximately $15 million reflecting the estimated fair value of these guarantees and indemnifications The fair value of these guarantees and indemnifications is not necessarily indicative of amounts that would be paid in the event payment was required The Company has clients that sell i.e write listed option contracts that are cleared by various clearing houses The clearing houses establish margin requirements on these transactions standby LOCs in favor of the clearing houses which are issued by multiple banks At December amount of these LOCs totaled $445 million In connection with its securities lending activities The Company satisfies 31 2009 the aggregate face Schwab is required to provide the margin requirements by arranging collateral to certain brokerage clients Schwab satisfies the collateral clients which are issued by multiple banks At December brokerage totaled $37 million There were no funds drawn under any of these LOCs at December 31 2009 requirements by arranging LOCs in favor of these face amount of these LOCs 31 2009 the aggregate The Company also provides guarantees agreement which requires members becomes unable to satisfi its obligations to securities clearing houses and exchanges under their standard membership to guarantee the performance of other members Under the agreement if another member to the clearing houses and exchanges other members would be required to meet shortfalls The Companys liability under these arrangements is not quantifiable and may exceed the cash and securities it has posted as collateral However the potential requirement for the Company to make payments under these arrangements is remote Accordingly no liability has been recognized for these guarantees Legal contingencies The Company is subject to claims and lawsuits in the ordinary course of business including arbitrations class actions and other litigation some of which include claims for substantial or unspecified damages The Company is also the subject of inquiries investigations and proceedings by regulatory and other governmental agencies In addition the Company is responding to certain litigation claims brought against former subsidiaries pursuant to indemnities it has provided to purchasers of those entities Certain of these matters are described below The Company believes it has strong defenses in all significant matters currently pending and is contesting liability and the damages claimed Nevertheless some of these matters may result in adverse judgments or awards including penalties injunctions or other relief and the Company may also determine to settle matter because of the uncertainty and risks of litigation Based on current information and consultation with counsel management believes that the resolution of matters currently pending will not have material impact on the financial condition or cash flows of the Company but could be material to the Companys operating results for particular future period depending on results for that period However predicting the outcome of matter is inherently difficult particularly where claims are brought on behalf of various classes of claimants claimants seek substantial or unspecified damages or when investigations or legal proceedings are at an early stage and in many cases including incurred or to estimate the range of that loss until the matter is closer to resolution those matters described below it is not possible to determine whether loss will be Auction Rate Securities Regulatory Inquiries Schwab to industry wide inquiries from federal and state has been responding to clients who were unable to sell their holdings when the normal auction regulators regarding sales of auction rate securities process Schwab for those securities in New York state court by the Attorney General and omissions by Schwab froze unexpectedly misrepresentations in February 2008 On August 17 2009 civil complaint was filed against of the State of New York NYAG alleging material regarding the risks of auction rate securities and seeking restitution held in client accounts As reflected in statement disgorgement penalties and other relief including repurchase of securities issued August 17 2009 Schwab has responded that the allegations are without merit and that Schwab charges On September 2009 Schwab removed the case to the U.S District Court on January 19 2010 the case was remanded to New York state court intends to contest any for the Southern District of New York Separately FINRA regarding regarding sales of auction rate securities preliminary on November 19 2009 the Company received Wells notice from the Financial Industry Regulatory Authority determination to recommend disciplinary action against Schwab for possible rule violations through the Company Wells notice provides recipients an opportunity to respond 60 THE CHARLES SCHWAB CORPORATION Notes to Consolidated Financial Statements Tabular Amounts in Millions Except Per Share Data Option Price Amounts Ratios or as Noted to issues raised in an investigation prior to any decision on an enforcement proceeding and is neither formal allegation nor finding of wrongdoing The Company has responded to the notice to explain why it believes enforcement charges are unwarranted YieldPlus Fund Litigation and Regulatory Inquiries The Company is the subject of nine class action lawsuits filed between March and May 2008 on behalf of investors in the Schwab YieldPlus Fund alleging violations of state law and federal securities law in connection with the funds investment policy disclosures and fund marketing Allegations include changes to the investment policy of the fund regarding limits on positions in mortgage-backed securities without obtaining disclosure of the risks associated with fund investments in mortgage-backed securities and fund shareholder vote inadequate risk management inaccurate reporting of the funds weighted-average positions in YieldPlus by other Schwab Company Schwab CSIM the fund itself Schwab Schwab Randall Merk current Investments investment funds Defendants duration and failure to disclose redemptions of named in one or more of the lawsuits include the registrant and issuer of the funds shares Charles president of the fund and current and former trustees and officers of the fund and/or Schwab Claimants seek unspecified compensatory and rescission damages unspecified equitable and injunctive relief and costs and attorneys fees On July 2008 the U.S District Court for the Northern District of California consolidated all nine lawsuits into single action for purposes of pre-trial proceedings and appointed group of fund investors as lead plaintiff On February claim and lifted 2009 the court denied defendants motion to dismiss plaintiffs federal stay on discovery On August 21 2009 the court certified law claims dismissed all but one state law two classes of plaintiffs for purposes of the federal law claims and single class of plaintiffs for purposes of the remaining state law claim Plaintiffs and defendants filed motions for summary judgment on February 11 2010 and the court has set trial date for May 10 2010 the Company has been responding Separately October 14 2009 the Company received Wells notice from the staff of the SEC that filing of action against Schwab civil enforcement to investigations by federal and state regulators regarding these matters On the staff intends to recommend the Investments CSIM Schwab and the president of the fund for possible Wells notice from to the fund On October 27 2009 the Company received violations of the securities laws with respect FINRA regarding preliminary determination to recommend disciplinary action against Schwab for possible violation of securities laws and F1NRA rules with respect to the fund The Company has responded to the notices to explain why it believes enforcement charges are unwarranted At this time the Company is unable litigation and regulatory matters if to estimate whether it will incur liability or the range of any such liability in these liability were incurred in view of claims to date under the Companys insurance policies it is increasingly likely that such liability would exceed the limits of applicable policies Total Bond Market Fund Litigation On August 28 2008 class action lawsuit was filed in the U.S District Court for the Northern District of California on behalf of investors in the Schwab Total Bond Market FundTM The lawsuit which alleges violations of state law and federal securities law in connection with the funds investment policy names the fund Schwab Investments registrant and issuer of the funds shares Schwab and CSIM as defendants Allegations include that the fund deviated from its stated improperly investing more than 25% of fund assets investment Claimants seek unspecified compensatory attorneys fees On February objectives by investing in collateralized mortgage obligations CMOs and in CMOs and mortgage-backed securities without obtaining shareholder vote and rescission damages unspecified equitable and injunctive relief and costs and 19 2009 the court denied defendants motion to dismiss plaintiffs federal securities law claim and dismissed certain state law claims with leave to amend On April 27 2009 the court issued stay of proceedings while defendants appeal the courts February 19 2009 decision refusing to dismiss plaintiffs federal securities law claim currently under review by the U.S Court of Appeals for the Ninth Circuit The SEC Wells notice received by the Company on October 14 2009 concerning the YieldPlus Fund also provided notice of the SEC staffs intention to recommend additional charges against Schwab Investments and CSIM for possible violations of the securities laws with respect to the Total Bond Market Fund The Company has responded to the notice to explain why it believes these additional enforcement charges are also unwarranted 61 THE CHARLES SCHWAB CORPORATION Notes to Consolidated Financial Statements Tabular Amounts in Millions Except Per Share Data Option Price Amounts Ratios or as Noted 14 Financial Instruments Subject to Off-Balance Sheet Risk Credit Risk or Market Risk Securities lending Through Schwab the Company loans client securities temporarily to other brokers in connection with its securities lending activities The Company receives cash as collateral for the securities loaned Increases in security prices may cause the fair value of the securities loaned to exceed the amount of cash received as collateral In the event the counterparty to these transactions does not return the loaned securities or provide additional cash collateral the Company may be exposed to the risk of acquiring the securities at prevailing market prices in order to satisi its client obligations The Company mitigates this risk by requiring credit for counterparties by monitoring the fair value of securities loaned and by requiring additional cash as collateral The fair value of Schwabs client securities pledged in approvals when necessary securities lending transactions to other broker-dealers was $871 million and $760 million at December 31 2009 and 2008 respectively Additionally Schwab borrows securities from other broker-dealers to fulfill short sales of its clients The fair value of these borrowed securities was $274 million and $259 million at December 31 2009 and 2008 respectively Client trade settlement The Company is obligated to settle transactions with brokers and other financial institutions even if its clients fail to meet their obligations to the Company Clients are required to complete their transactions on settlement date generally three business days after trade date If clients do not fulfill their contractual obligations the Company may incur losses The Company has established procedures to reduce this risk by requiring deposits from clients prescribed by regulatory requirements for certain types of trades and therefore the potential for Schwab in excess of amounts to make payments under these client transactions is remote Accordingly no liability has been recognized for these transactions Schwab provides margin loans to its clients which are collateralized Margin lending accounts Schwab may be liable for the margin requirement of its client margin securities the Company may incur options or sell securities losses if the clients short by securities in their brokerage transactions As clients write do not fulfill their obligations and the collateral in client accounts is not sufficient to fully cover losses which clients may incur from these strategies To mitigate this risk the Company monitors required margin levels and clients are required to deposit additional collateral or reduce positions to meet minimum collateral requirements Clients with margin loans have agreed to allow Schwab to pledge collateralized securities in their brokerage accounts in accordance with federal regulations Schwab was allowed under such regulations to pledge securities with fair value of $11.4 billion and $9.2 billion at December 31 2009 and 2008 respectively The fair value of Schwabs client securities pledged to fulfill the short sales of its clients was $1.2 billion and $591 million at December31 2009 and 2008 respectively The fair value of Schwabs client securities pledged to fulfill Schwabs proprietary short sales which resulted from facilitating clients dividend reinvestment elections was $33 million and $42 million at December 31 2009 and 2008 respectively Schwab has also pledged portion of its securities owned in order to fulfill the short sales of clients and in connection with securities lending transactions to other broker-dealers The fair value of these pledged securities was $3 million and $7 million at December 31 2009 and 2008 respectively The Company may also pledge client securities to fulfill client margin requirements for open option contracts established with the 0CC The fair value of these pledged securities to the 0CC was $647 million and $774 million at December 31 2009 and 2008 respectively Financial instruments held for trading purposes The Company maintains inventories in securities on long and short basis relating to its fixed income operations The Company could incur losses or gains as result of changes in the fair value of these securities To mitigate the risk of losses long and short positions are marked to fair value and are monitored by management to assure compliance with limits established by the Company Resale and repurchase agreements Schwab enters into collateralized resale agreements principally with other broker-dealers which could result in losses in the event the counterparty fails to purchase the securities held as collateral for the cash advanced and the fair value of the securities declines To mitigate this risk Schwab requires that the counterparty deliver securities to custodian to be held as collateral with fair value in excess of the resale price Schwab also sets standards for the credit quality of the counterparty monitors the fair value of the underlying securities as compared to the related receivable including accrued interest and requires additional collateral where deemed appropriate At December 31 2009 and 2008 the fair value of collateral received in connection with resale agreements that are available to be repledged or sold was $8.5 billion and $6.8 billion respectively For Schwab to repledge or sell this collateral it would be required to deposit into its segregated reserve hank accounts cash and/or securities of an equal amount in order to meet its segregated cash and investment requirement 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 Concentration collateralized risk The Company is subject by assets with similar economic characteristics to concentration risk when holding large positions of financial instruments or in securities of single issuer or industry For discussion on the Companys exposure to concentration risk relating to residential mortgage-backed securities see note Securities Available for Sale and Securities Held to Maturity The Companys investments December in corporate debt securities and commercial paper totaled $5.6 billion and $3.5 billion at 31 2009 and 2008 respectively with the majority issued by institutions in the financial services industry These securities are included in securities available for sale securities held to maturity and cash and investments segregated and on for regulatory purposes deposit and commercial paper at December under the FDIC Temporary Liquidity Guarantee Program cash and cash equivalents and other securities owned Included in corporate debt securities 31 2009 were $3.2 billion of securities issued by financial institutions and guaranteed The Companys loans to banking clients include $3.7 billion and $3.2 billion of first lien residential real estate mortgage loans at December 31 2009 and 2008 respectively At December 31 2009 approximately 75% of the residential real estate mortgages consisted of loans with interest-only payment 75% of these interest-only loans are not scheduled to reset include interest terms described as temporary introductory terms At December 31 2009 the interest rates on approximately for three or more years The Companys interest-only loans do not rates below current market rates At December 31 2009 39% of residential real estate mortgages and 48% of the home equity lines of credit HELOC balances were secured by properties which are located in California At December 31 2008 33% of residential real estate mortgages and 46% of the HELOC balances were secured by properties which are located in California The Company also has exposure securities of single issuer or industry to concentration risk from its margin and securities lending activities collateralized by The Company has indirect agreements The Companys primary would have exposure exposure to the U.S Government to U.S Government and agency securities held as collateral to secure its resale credit exposure on these resale transactions is with its counterparty The Company and agency securities only in the event of the counterpartys default on the resale agreements U.S Government and held as collateral for resale agreements totaled $8.5 billion and $6.8 billion at December agency securities 31 2009 and 2008 respectively Commitments to extend credit In the normal course of business Schwab Bank enters into commitments to extend credit to banking clients primarily relating to mortgage lending The credit risk associated with these commitments varies depending on the creditworthiness of the client and the value of any collateral held Collateral requirements vary by type of loan These commitments are legally binding agreements to lend to client that generally have fixed expiration dates or other termination clauses may require payment of $5.4 billion and $5.0 billion at December 31 2009 and 2008 respectively fee and are not secured by collateral until funds are advanced Firm commitments totaled Interest rate Swaps CSC uses Swaps to effectively convert Notes from fixed to variable These Swaps are structured for CSC to receive the interest rate characteristics of portion of its Medium-Term fixed rate of interest and pay variable rate of interest based on the three-month LIBOR rate The variable interest rates reset every three months Information on these Swaps is summarized in the following table December 31 Notional principal amount Weighted-average variable interest rate Weighted-average fixed interest rate Weighted-average maturity in years 2009 200 2.99% 8.05% 0.2 2008 200 4.94% 8.05% 1.2 These Swaps have been designated as fair value hedges and are recorded on the Companys consolidated balance sheet at fair value Changes in fair value of the Swaps are completely offset by changes in fair value of the hedged Medium-Term Notes 63 THE CHARLES SCHWAB CORPORATION Notes to Consolidated Financial Statements Tabular Amounts in Millions Except Per Share Data Option Price Amounts Ratios or as Noted resulting in no effect on net income At December 31 2009 and 2008 CSC recorded derivative asset of $2 million and $9 million respectively for these Swaps Concurrently the carrying value of the Medium-Term Notes was increased by $2 million and $9 million at December 31 2009 and 2008 respectively Forward sale and interest rate lock commitments Schwab Banks loans held for sale portfolio consists of fixed-rate and adjustable-rate mortgages which are subject to loss in value when market interest rates rise Schwab Bank uses forward sale commitments to manage this risk These forward sale commitments have been designated as cash flow hedging instruments and are recorded on the Companys consolidated balance sheet at fair value with gains or losses recorded in other comprehensive income loss Amounts related loan is sold At both December included in other comprehensive income loss are reclassified into earnings when the 31 2009 and 2008 the derivative asset and liability recorded by Schwab Bank for these forward sale commitments were not material Additionally Schwab Bank uses forward sale commitments to hedge interest rate lock commitments issued on mortgage loans that will be held for sale Schwab Bank considers the fair value of these commitments to be zero at the commitment date with subsequent changes in fair value determined solely based on changes in market interest rates Any changes in fair value of the interest rate lock commitments are completely offset by changes in fair value of the related forward sale commitments Schwab Bank had interest rate lock commitments approximately $440 million and $452 million at December on mortgage loans to be held for sale with principal balances 31 2009 and 2008 respectively At both December totaling 31 2009 and 2008 the derivative asset and liability recorded by Schwab Bank for these interest rate lock commitments and the related forward sale commitments were not material 15 Fair Values of Assets and Liabilities Fair value is defined as the price that would be received to sell an asset or the price paid to transfer liability in an orderly transaction between market participants at the measurement date Fair value measurement accounting guidance describes the fair value hierarchy for disclosing assets and liabilities measured at fair value based on the inputs used to value them The fair value hierarchy maximizes the use of observable inputs and minimizes the use of unobservable inputs Observable inputs are based on market pricing data obtained from sources independent of the Company quoted price in an active market provides the most reliable evidence of fair value and is generally used to measure fair value whenever available Unobservable inputs reflect managements judgment about the assumptions market participants would use in pricing the asset or liability Where inputs used to measure fair value of an asset or liability are from different levels of the hierarchy the asset or liability is categorized based on the lowest level input that is significant to the fair value measurement in its entirety Assessing the significance of particular input requires judgment The fair value hierarchy includes three levels based on the objectivity of the inputs as follows Level inputs are quoted prices in active markets as of the measurement date for identical assets or liabilities that the Company has the ability to access This category includes active exchange-traded money market funds mutual funds and equity securities Level inputs are inputs other than quoted prices included in Level that are observable for the asset or liability either directly or indirectly Level inputs include quoted prices for similar assets and liabilities in active markets and inputs other than quoted prices that are observable for the asset or liability such as interest rates benchmark yields issuer spreads new issue data and collateral performance This category backed securities asset-backed securities corporate debt securities certificates includes residential mortgage of deposit commercial paper U.S agency and municipal debt securities U.S Treasury securities and derivative contracts Level inputs are unobservable inputs for the asset or liability and include situations where there is little if any market activity for the asset or liability The Company did not have any financial assets or liabilities utilizing Level inputs as of December 31 2009 or 2008 64 THE CHARLES SCHWAB CORPORATION Notes to Consolidated Financial Statements Tabular Amounts in Millions Except Per Share Data Option Price Amounts Ratios or as Noted Assets and Liabilities Recorded at Fair Value The Companys assets recorded at fair value include certain investments segregated and on deposit for regulatory purposes other securities owned and securities available for sale The Company uses prices obtained from an independent third-party pricing service to measure the fair value of certain investment pricing service using various methods including comparison to prices received securities The Company validates prices received from additional pricing services from the comparison to quoted market prices where available comparison to internal valuation models and review of other relevant market data The Company does not adjust the prices received from the independent third-party pricing service unless such prices are inconsistent with the definition of fair value and result in material difference in the recorded amounts At December 31 2009 and 2008 the Company did not adjust prices received from the independent third-party pricing service Liabilities recorded at fair value are not material The following tables present the fair value hierarchy for assets and liabilities measured at fair value Quoted Prices in Active Markets Significant Significant for Identical Other Observable Unobservable Assets Level Inputs Level Inputs Level Balance at Fair Value December31 2009 Assets Investments segregated and on deposit for regulatory purposes U.S Government securities Corporate debt securities Certificates of deposit Commercial paper Total investments segregated and on deposit for regulatory purposes Other securities owned Schwab Funds money market Commercial paper funds Certificates of deposit Equity and bond mutual funds State and municipal debt obligations Equity U.S Government and corporate debt and other securities Total other securities owned Securities available for sale U.S agency residential mortgage-backed securities Non-agency residential mortgage-backed securities 321 103 426 U.S agency notes Corporate debt securities Certificates of deposit Asset-backed securities Total securities available for sale Other assets Total assets at fair value Liabilities Accrued exuenses and other liabilities 2681 2135 2091 100 7007 220 200 49 21 490 11779 1941 2978 2380 1953 1089 22120 426 29626 Other assets recorded at fair value include derivative contracts Accrued expenses and other liabilities include securities sold not yet purchased and derivative contracts 65 2681 2135 2091 100 7007 321 220 200 103 49 23 916 11779 1941 2978 2380 1953 1089 22120 30.052 THE CHARLES SCHWAB CORPORATION Notes to Consolidated Financial Statements Tabular Amounts in Millions Except Per Share Data Option Price Amounts Ratios or as Noted December 31 2008 Assets Investments segregated and on deposit for regulatory purposes Certificates of deposit Corporate debt securities U.S Government securities Commercial paper Total investments segregated and on deposit for regulatory purposes Other securities owned Schwab Funds money market funds Equity and bond mutual funds State and municipal debt obligations Equity U.S Government and corporate debt and other securities Total other securities owned Securities available for sale U.S agency residential mortgage-backed securities Non-agency residential mortgage-backed securities U.S agencynotes Corporate debt securities Certificates of deposit Asset-backed securities Total securities available for sale Other assets Total assets at fair value Liabilities Accrued exuenses and other liabilities Quoted Prices in Active Markets Significant Significant for Identical Other Observable Unobservable Assets Level Inputs Level Inputs Level Balance at Fair Value 3888 1501 1190 250 6829 37 11 48 8229 2223 517 1733 922 822 14446 11 1.334 440 135 578 578 3888 1501 1190 250 6829 440 135 37 14 626 8229 2223 517 1733 922 822 14446 11 21.912 Other assets recorded at fair value include derivative contracts Accrued expenses and other liabilities include securities sold not yet purchased and derivative contracts Fair Value of Assets and Liabilities Not Recorded at Fair Value Descriptions of the valuation methodologies and assumptions used to estimate the fair value of assets and liabilities not recorded at fair value are described below There were no significant changes in these methodologies or assumptions during 2009 Cash and cash equivalents receivables payables and accrued expenses and other liabilities include cash and highly liquid investments receivables and payables from to brokers dealers and clearing organizations receivables and payables from to brokerage clients and drafts accounts taxes interest and compensation payable Assets and liabilities in these categories are short-term in nature and accordingly are recorded at amounts that approximate fair value Cash and investments segregated and on deposit for regulatory purposes include securities purchased under resale agreements Securities purchased under resale agreements are recorded at par value plus accrued interest Securities purchased under resale agreements are short-term in nature and are backed by collateral that both exceeds the carrying value of the resale agreement and is highly liquid in nature Accordingly the carrying value approximates fair value Securities held to maturity include U.S agency residential mortgage-backed by credit card student auto loans and corporate debt securities Securities held to maturity are recorded securities asset-backed securities collateralized at amortized cost The fair value of these securities is obtained using an independent third-party pricing service as discussed above 66 THE CHARLES SCHWAB CORPORATION Notes to Consolidated Financial Statements Tabular Amounts in Millions Except Per Share Data Option Price Amounts Ratios or as Noted Loans to banking clients primarily include adjustable-rate residential first-mortgage and HELOC loans Loans to banking clients are recorded at carrying value net of an allowance for credit losses The fair value of the Companys loans to banking clients is estimated based on market prices for mortgage-backed securities collateralized by similar types of loans Loans heldfor sale include fixed rate residential first-mortgage loans intended for sale Loans held for sale are recorded at the lower of cost or fair value The fair value of the Companys loans held for sale is estimated using quoted market prices for securities backed by similar types of loans Other assets include cost method investments including the Companys investment in Federal Home Loan Bank FHLB stock The cost method investments carrying values approximate their fair values Deposits from banking clients The Company considers the fair value of deposits with no stated maturity such as deposits from banking clients to be equal to the amount payable on demand as of the balance sheet date Long-term debt The fair value of the Companys long-term debt includes Senior Notes Medium-Term Notes and Junior Subordinated Notes and finance lease obligation is estimated using indicative non-binding quotes from independent brokers Firm commitments to extend credit The Company extends Company considers the fair value of unused HELOC commitments HELOC outstanding balances is based credit to banking clients through HELOC commitments The to be not material because the interest rate earned on on the Prime rate and resets monthly Future utilization of HELOC commitments will earn then-current market interest rate The Company does not charge fee to maintain HELOC The table below presents the Companys fair value estimates as of December 31 2009 and 2008 for financial instruments excluding short-term financial assets and liabilities for which carrying amounts approximate fair value and excluding financial instruments recorded at fair value December 31 Financial Assets Securities held to maturity Loans to banking clients net Loans held for sale Financial Liabilities Long-term debt 2009 2008 Carrying Amount Fair Value Carrying Amount Fair Value 6839 7348 104 6880 6888 107 243 6044 41 244 5389 42 1512 1.580 883 705 67 THE CHARLES SCHWAB CORPORATION Notes to Consolidated Financial Statements Tabular Amounts in Millions Except Per Share Data Option Price Amounts Ratios or as Noted 16 Accumulated Other Comprehensive Loss Accumulated other comprehensive loss represents cumulative gains and losses that are not reflected in earnings The components of other comprehensive income loss are as follows Year Ended December 31 Securities available for sale Net unrealized gain loss arising 2009 2008 2007 Before Tax Net of Before Tax Net of Before Tax Net of tax effect tax tax effect tax tax effect tax duringtheyearforNonOTTIsecurities 539 214 325 955 374 581 29 12 17 Net unrealized loss arising during the year for OTTI securities OTTI charges recognized in earnings Reclassification of realized losses to earnings Net unrealized gain loss on securities 60 24 36 44 31 17 12 27 19 available for sale 599 237 362 880 345 535 59 30 25 13 34 17 Net unrealized loss on cash flow hedging instruments Minimum pension liability adjustment Foreign currency translation adjustment Other comprehensive income loss 599 237 362 881 345 536 33 14 19 Net unrealized loss Net on securities available for sale unrealized Portion of Portion of gain Foreign Minimum Total accumulated unrealized loss unrealized loss on cash flow currency pension other on Non-OTTI on OTTI hedging translation liability comprehensive securities securities instruments adjustment adjustment loss 36 19 17 536 553 362 191 Balance at December 31 2006 Net change Balance at December 31 2007 Net change Balance at December 31 2008 Reclassification of OTTI securities Other net change Balance at December 31 2009 35 17 18 535 553 149 327 77 149 35 114 68 THE CHARLES SCHWAB CORPORATION Notes to Consolidated Financial Statements Tabular Amounts in Millions Except Per Share Data Option Price Amounts Ratios or as Noted 17 Employee Incentive Deferred Compensation and Retirement Plans summary of the Companys stock-based compensation expense and related income tax benefit is as follows Year Ended December 31 Stock option expense Restricted stock award expense Restricted stock unit expense Employee stock purchase plan expense Total stock-based compensation expense Income_tax_benefit_on_stock-based_compensation_expense 2009 2008 44 27 75 $__29 28 38 69 2007 18 38 58 23 Total stock-based compensation expense including discontinued operations was $80 million in 2007 The Company issues shares for stock options and restricted Company was authorized to grant up to 25 million common shares under stock awards from treasury stock At December 31 2009 the its existing stock incentive plans As of December 31 2009 there was $172 million of total unrecognized compensation cost net of forfeitures related to outstanding stock options restricted stock awards and restricted stock units which is expected to be recognized through 2013 with remaining weighted-average period of 2.8 years Stock Option Plans The Companys stock incentive plans provide for granting options to employees officers and directors Options are granted for the purchase of shares of common stock at an exercise price not less than market value on the date of grant and expire within seven or ten years from the date of grant Options generally vest annually over three- to four-year period from the date of grant Certain options are granted at an exercise price above the market value of common stock on the date of grant i.e premium-priced options The Companys stock option activity including options held by employees of discontinued operations is summarized below Weighted- Average Weighted- Number Exercise Price Contractual Intrinsic Average Remaining Aggregate of Options per Share Life in years Value Outstanding at December 31 2008 Granted Exercised Forfeited Expired Outstandinc at December 31 2009 Vested and expected to vest at December 31 2009 Vested and exercisable at December 31 2009 56 14 57 53 34 18.48 14.98 11.62 18.79 26.09 17.30 17.30 17.11 5.01 4.74 2.71 171 161 120 The aggregate intrinsic value in the table above represents the difference between CSCs closing stock price and the exercise price of each in-the-money option on the last trading day of the period presented 69 THE CHARLES SCHWAB CORPORATION Notes to Consolidated Financial Statements Tabular Amounts in Millions Except Per Share Data Option Price Amounts Ratios or as Noted Information on stock options granted and exercised is presented below Year Ended December 31 Weighted-average fair value of options granted per share Cash received from options exercised Tax benefit realized on options exercised Aggregate intrinsic value of options exercised 2009 6.42 53 25 2008 7.94 131 48 127 2007 7.06 414 97 244 Management uses binomial option pricing model to estimate the fair value of options granted The binomial model takes into account the contractual term of the stock option expected volatility dividend yield and risk-free interest rate Expected volatility is based on the implied volatility of publicly-traded options on CSCs stock Dividend yield is based historical CSC dividend yield The risk-free interest rate is based on the yield of U.S Treasury zero-coupon on the average issue with remaining term equal to the contractual term of the option Management uses historical option exercise data which includes employee termination data to estimate the probability of future option exercises Management uses the Black-Scholes model to solve for the expected life of options valued with the binomial model presented below The assumptions used to value the Companys options granted during the years presented and their expected lives were as follows Year Ended December 31 Weighted-average expected dividend yield Weighted-average expected volatility Weighted-average risk-free interest rate Expectedlifeinyears Restricted Stock Plans 2009 .58% 52% 3.0% 2008 .51% 44% 3.9% 2007 .46% 35% 4.2% 1.45.3 2.75.0 2.87.2 The Companys stock officers and directors Restricted stock units are awards that entitle the holder incentive plans provide for granting restricted stock awards and restricted stock units to employees to receive shares of CSCs common stock following vesting period Restricted stock awards and units are restricted from transfer or sale and generally vest annually over three- to four-year period but some vest based upon the Company achieving certain financial or other measures The fair value of restricted stock awards and units is based on the market price of the Companys stock on the date of grant and is amortized to compensation expense on straight-line basis over the requisite service period The total fair value of the restricted stock awards including awards held by employees of discontinued operations in 2007 that vested during each of the years 2009 2008 and 2007 was $28 million $41 million and $96 million respectively The Companys restricted stock awards and units activity is summarized below Outstanding at December 31 2008 Granted Vested Forfeited Outstandinu at December 31 2009 Restricted Stock Awards Restricted Stock Units Weighted- Average Grant Date Fair Value per Share Weighted- Average Grant Date Fair Value per Unit Number of Units Number of Shares 19.64 18.97 19.95 17.28 17.28 70 THE CHARLES SCHWAB CORPORATION Notes to Consolidated Financial Statements Tabular Amounts in Millions Except Per Share Data Option Price Amounts Ratios or as Noted Employee Stock Purchase Plan Under the Companys Employee Stock Purchase stock using amounts withheld through payroll deductions month offering periods that start each year on February is 85% of the fair market value of the shares on the last Plan ESPP eligible employees can purchase shares of CSCs common subject to limitations Payroll deductions are accumulated during six 1st and August 1st The purchase price for each share of common stock trading day of the offering period At December 31 2009 the Company had 48 million shares reserved for future issuance under the ESPP Other Deferred Compensation Plans The Company sponsors deferred compensation plans for eligible officers and non-employee directors The Companys deferred compensation plan for officers permits participants to defer the receipt of certain cash compensation The deferred compensation liability was $142 million and $121 million at December 31 2009 and 2008 respectively The Companys deferred compensation plan for non-employee directors permits participants to defer receipt of all or portion of their directors fees and to receive either grant of stock options or upon ceasing to serve as director the number of shares of CSCs common stock that would have resulted from investing the deferred fee amount into CSCs common stock Retirement Plan three months of consecutive Upon completing retirement plan the SchwabPlan Retirement contributions or make additional contributions to this plan at its discretion service employees of the Company may participate in the Companys qualified Savings and Investment Plan The Company may match certain The Companys total contribution employee expense was $49 million $53 million and $52 million in 2009 2008 and 2007 respectively Long-term Incentive Plan Eligible officers received LTIP units under the Companys long-term incentive program These awards were restricted from transfer or sale and vested annually over three- made following the end of the performance period based to four-year performance period The cash payout of the LTIP units was upon the Companys achievement of certain cumulative 31 2008 EPS levels The last performance period under this incentive program ended on December LTIP unit information including units held by employees of discontinued operations is as follows LTIP units outstanding at year end LTIP unit compensation expense LTIP liability at year end 2008 2007 33 19 90 72 88 190 71 THE CHARLES SCHWAB CORPORATION Notes to Consolidated Financial Statements Tabular Amounts in Millions Except Per Share Data Option Price Amounts Ratios or as Noted 18 Taxes on Income Income tax expense on income from continuing operations is as follows Year Ended December 31 2009 2008 2007 Current Federal State Total current Deferred Federal State Total deferred Taxes on income 400 73 473 12 16 489 584 117 701 79 18 97 798 441 117 558 144 31 175 733 The excess tax benefits from the exercise of stock options and the vesting of restricted stock awards which for accounting purposes are recorded in additional paid-in capital were $8 million $50 million and $108 million in 2009 2008 and 2007 respectively from discontinued Income tax expense income tax gain on the sale of U.S Trust The net income tax expense 2007 which included $763 million of income tax expense sale of U.S Trust offset by $72 million income tax benefit from discontinued operations was $691 million in related to income from discontinued operations and the gain on related to the excess of the tax basis of U.S Trust stock over operations was $18 million in 2008 and related to the determination of the final book basis The temporary differences that created deferred tax assets and liabilities are detailed below December 31 Deferred tax assets Employee compensation severance and benefits Facilities lease commitments State and local taxes Reserves and allowances Unrealized loss on securities available for sale net Other Total deferred tax assets Deferred tax liabilities Capitalized internal-use software development costs Depreciation and amortization Deferred cancellation of debt income Deferred loan costs Other Total deferred tax liabilities Deferred tax asset net 2009 2008 91 69 15 36 144 359 42 33 11 20 10 249 97 70 30 36 357 596 52 21 21 94 502 The Company determined that no valuation allowance against deferred tax assets at December 31 2009 and 2008 was necessary 72 THE CHARLES SCHWAB CORPORATION Notes to Consolidated Financial Statements Tabular Amounts in Millions Except Per Share Data Option Price Amounts Ratios or as Noted The effective income tax rate on income from continuing operations before taxes differs from the amount computed by applying the federal statutory income tax rate as follows Year Ended December 31 Federal statutory income tax rate State income taxes net of federal tax benefit Other Effective income tax rate 2009 35.0% 3.7 0.4 38.3% 2008 35.0% 4.4 0.1 39.3% 2007 35.0% 5.3 0.7 39.6% The effective income tax rate including discontinued operations was 40.2% in 2008 and 37.2% in 2007 The difference between the effective income tax rate on income from continuing operations and the effective income tax rate including discontinued operations was primarily due to the $18 million income tax expense in 2008 and the $72 million income tax benefit in 2007 discussed above The Companys unrecognized difference between positions taken tax benefits which are included in accrued expenses and other liabilities represent the on tax return filings and estimated potential tax settlement outcomes Resolving these uncertain tax matters in the Companys favor would reduce income tax expense from continuing operations by $7 million net of federal tax benefit reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows Balance at beginning of year Additions for tax positions of prior years Reductions for tax positions of prior years Reductions due to lapse of statue of limitations Settlements Balance at end of year 2009 12 2008 10 12 The Company recognizes the years ended December interest and penalties related to unrecognized tax benefits in taxes on income Interest charges for 31 2009 2008 and 2007 were not material At December 31 2009 and 2008 the Company had liability for estimated interest on the unrecognized tax benefits of $2 million and $3 million respectively CSC and its subsidiaries file income tax returns in the federal jurisdiction as well as most state and applicable local jurisdictions and are subject to routine examinations by the respective taxing authorities Federal return audits have been completed through 2005 73 THE CHARLES SCHWAB CORPORATION Notes to Consolidated Financial Statements Tabular Amounts in Millions Except Per Share Data Option Price Amounts Ratios or as Noted 19 Earnings Per Share Basic EPS is computed by dividing net income available to common shareholders by the weighted-average number of common shares outstanding during the period The computation of diluted EPS is similar to the computation of basic EPS except that the denominator is increased to include the number of additional common shares that would have been outstanding if dilutive potential common shares had been issued Dilutive potential common shares are determined using the treasury stock method and include outstanding stock options and unvested restricted stock awards and units EPS under the basic and diluted computations are as follows Year Ended December 31 Net income available to common shareholders Weighted-average Common stock equivalent common shares outstanding basic shares related to stock incentive plans Weiuhted-averaue common shares outstandinu diluted Basic EPS Income from continuing operations Loss income from discontinued operations net of tax Net income Diluted EPS Income from continuing operations Loss income from discontinued operations net of tax Net income 2009 787 1156 1.160 .68 .68 .68 .68 2008 1.212 1148 1.157 1.07 .01 1.06 1.06 .0 1.05 2007 2407 1208 14 1.222 .93 1.05 1.98 .92 1.04 1.96 Net income available to participating securities unvested restricted shares was not material for the years ended December 31 2009 2008 and 2007 Total antidilutive stock options and restricted stock awards excluded from the calculation of diluted EPS were 53 million 33 million and 39 million shares for the years ended December 31 2009 2008 and 2007 respectively 20 Regulatory Requirements savings and loan holding company CSC is bank CSC and Schwab Bank are both subject and loan holding company CSC is not subject maintain capital to support is sufficient that and Schwab Bank CSCs depository institution subsidiary is federal savings to supervision and regulation by the Office of Thrift Supervision As savings to specific statutory capital the holding company and its subsidiaries requirements However CSC is required to and the risks business activities inherent in those activities Schwab Bank is subject to regulation and supervision and to various requirements and restrictions under federal and state laws including regulatory capital guidelines Among other things these requirements govern transactions with CSC and its non-depository institution subsidiaries including loans and other extensions of credit investments or asset purchases dividends and investments The federal banking agencies have broad powers to enforce these regulations including the power to terminate deposit insurance impose substantial fines and other civil and criminal penalties and appoint conservator or receiver Under the Federal Deposit Insurance Act Schwab Bank could be subject to restrictive actions if it were to fall within one of the lowest three of five capital categories Schwab Bank is required to maintain capital level that at least equals minimum capital levels specified in federal banking laws and regulations Failure to meet the minimum levels will result in certain mandatory and possibly additional discretionary material effect on Schwab Bank At December actions by the regulators that 31 2009 CSC and Schwab Bank met the capital if undertaken level requirements could have direct 74 THE CHARLES SCHWAB CORPORATION Notes to Consolidated Financial Statements Tabular Amounts in Millions Except Per Share Data Option Price Amounts Ratios or as Noted The regulatory capital and ratios for Schwab Bank are as follows December 31 2009 Tier Capital Total Capital Tier Leverage Tangible Equity December 31 2008 Tier Capital Total Capital Tier Leverage Tangible Equity N/A Not applicable Actual Requirement Minimum Capital Minimum to be Well Caiitalized Amount Ratio Amount Ratio Amount Ratio 2724 2770 2724 2724 1650 1671 1650 1.650 18.3% 18.6% 6.3% 6.3% 15.3% 15.5% 6.4% 6.4% 595 1191 1737 868 432 863 1037 518 4.0% 8.0% 4.0% 2.0% 4.0% 8.0% 4.0% 2.0% 893 1488 2171 N/A 647 1079 1296 N/A 6.0% 10.0% 5.0% 6.0% 10.0% 5.0% Based on its regulatory capital ratios at December 31 2009 and 2008 Schwab Bank is considered well capitalized the highest category pursuant to banking regulatory guidelines believes have changed Schwab Banks capital management There are no conditions or events since December 31 2009 that category The Board of Governors of the Federal Reserve System requires Schwab Bank to maintain reserve balances at the Federal Reserve Bank based on certain deposit levels Schwab Banks average reserve requirement was $628 million in 2009 and $284 million in 2008 Schwab is subject to Rule 5c3- under the Securities Exchange Act of 1934 the Uniform Net Capital Rule Schwab computes net capital under the alternative method permitted by the Uniform Net Capital Rule This method requires the maintenance of minimum net capital as defined of the greater of 2% of aggregate debit balances arising from client transactions or minimum dollar requirement which is based on the type of business December 31 2009 2% of aggregate debits was $192 million which exceeded the minimum dollar requirement conducted by the broker-dealer At for Schwab 31 2009 Schwabs net capital was $1.1 billion 11% of aggregate debit balances which was of $250000 At December $868 million in excess of its minimum required net capital Under the alternative method broker-dealer may not repay and $580 million in excess of 5% of aggregate debit balances subordinated bonowings pay cash dividends or make any of less than 5% unsecured advances or loans to its parent company or employees if such payment would result in net capital of aggregate debit balances or less than 120% of its minimum dollar requirement Schwab is also subject to Rule 5c3-3 under the Securities Exchange Act of 1934 which requires Schwab to maintain cash or qualified securities in segregated reserve account for the exclusive benefit of clients In accordance with Rule 5c3-3 Schwab had portions of its cash and investments segregated for the exclusive benefit of clients at December 31 2009 Amounts included in cash and investments segregated and on deposit for regulatory purposes represent actual balances on deposit whereas cash and investments required to be segregated and on deposit for regulatory purposes at December 31 2009 and 2008 were $18.9 billion and $14.5 billion respectively On January 2010 and January 2009 the Company deposited net amount of $1.0 billion and $216 million respectively into its segregated reserve bank accounts 21 Segment Information Operating segments are defined as components of the chief operating decision maker or decision-making company in which separate financial group in deciding how to allocate information is evaluated regularly by resources and in assessing performance The Company structures its operating segments according to its various types of clients and the services provided to those clients The Companys two reportable segments are Investor Services and Institutional Services 75 THE CHARLES SCHWAB CORPORATION Notes to Consolidated Financial Statements Tabular Amounts in Millions Except Per Share Data Option Price Amounts Ratios or as Noted The Investor Services segment includes the Companys retail brokerage and banking operations 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 The accounting policies of the segments are the same as those described in note Summary of Significant Accounting Policies Financial information for the Companys reportable segments is presented in the following table For the computation of its segment information the Company utilizes an activity-based costing model to allocate traditional income statement line item business activities expenses e.g compensation driving segment expenses e.g client and benefits depreciation and amortization and professional services to the service opening new accounts or business development and funds transfer pricing methodology to allocate certain revenues The Company evaluates the performance of its segments on pre-tax basis excluding items such as impairment charges on non-financial assets discontinued operations extraordinary items and other significant restructuring 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 However capital expenditures are used in resource allocation and are therefore disclosed There are no revenues from transactions with other segments within the Company Capital expenditures are reported gross and are not net of proceeds from the sale of fixed assets 76 THE CHARLES SCHWAB CORPORATION Notes to Consolidated Financial Statements Tabular Amounts in Millions Except Per Share Data Option Price Amounts Ratios or as Noted Selected financial information for the Companys reportable segments is presented in the following table Year Ended December 31 2009 2008 2007 Net revenues Investor Services Institutional Services Unallocated Total net revenues Net interest revenue Investor Services Institutional Services Unallocated 2710 1483 4.193 1024 183 3385 1754 11 5.150 1383 281 3352 1627 15 4.994 1337 315 Total net interest revenue 1.207 1.665 1.647 Income from continuing operations before taxes on income Investor Services Institutional Services Unallocated Income from continuing operations before taxes on income Taxes on income Loss income from discontinued operations net of tax Net Income Capital expenditures Investor Services Institutional Services Unallocated Total canital expenditures Depreciation and amortization Investor Services Institutional Services Unallocated Total depreciation and amortization 804 554 82 1276 489 787 95 44 139 100 59 159 1278 753 2028 798 18 1.2 12 125 70 196 100 52 152 1237 621 1853 733 1287 2.407 111 54 168 98 40 18 156 Fees received from Schwabs proprietary mutual funds represented approximately 23% 24% and 23% of the Companys net revenues in 2009 2008 and 2007 respectively Except for Schwabs proprietary mutual funds which are considered single client for purposes of this computation no single client accounted for more than 10% of the Companys net revenues in 2009 2008 or 2007 Substantially all of the Companys revenues and assets are generated 24% at December or located in the U.S The percentage 31 2009 2008 and 2007 of Schwabs total client accounts located in California was approximately 77 THE CHARLES SCHWAB CORPORATION Notes to Consolidated Financial Statements Tabular Amounts in Millions Except Per Share Data Option Price Amounts Ratios or as Noted Net revenues categorized by similar products and services are shown in the following table Year Ended December 31 Mutual fund service fees Investment management and trust fees Other asset management and administration fees Interest revenue Interest expense Commissions Principal transactions Net impairment losses on securities Other Total net revenues 2009 1503 273 99 1428 221 884 112 60 175 2008 1917 340 98 1908 243 915 165 44 94 4.193 5.150 2007 1892 378 88 2270 623 755 105 129 4.994 The carrying amount of goodwill as allocated to the Companys reportable segments for purposes of testing goodwill for impairment is presented in the following table December 31 Investor Services Institutional Services Total noodwill 22 Discontinued Operations 2009 2008 416 112 528 416 112 528 In July 2007 the Company sold all of the outstanding common stock of U.S Trust of loss income from discontinued operations related to U.S Trust are as follows for $3.3 billion in cash The components Year Ended December 31 Net revenues Income from discontinued operations before taxes Gain on sale of U.S Trust before taxes Taxes on income Loss income from discontinued operations net of tax 2008 18 18 2007 446 116 1862 691 1.287 When calculating the Companys gain on the sale of U.S Trust for income tax purposes the acquisition date tax basis is the basis of U.S Trusts prior stockholders in their shares as of the date U.S Trust was acquired by the Company since the transaction qualified as tax-free exchange In 2006 the Company recorded $205 million income tax benefit related to the estimated difference between the tax and book bases of the Companys U.S Trust stock This amount was included in income from discontinued statements of income This initial estimate of the tax net of tax on the Companys consolidated operations benefit was based the acquisition date and the market price of U.S Trust stock during relevant periods on publicly available information information including on the composition of U.S Trusts stockholders at and was subject to adjustment following survey of former U.S Trust stockholders The Company completed the survey in the third quarter of 2007 Based upon the results of this survey the Company recorded of the acquisition examination date tax basis under an additional $72 million income tax benefit in 2007 The IRS completed their pre-filing agreement in the second quarter of 2008 In connection with the determination of the final income tax gain on the sale of U.S Trust the Company recorded additional tax expense of $18 million in the second quarter of 2008 This amount was recorded in loss from discontinued operations 78 THE CHARLES SCHWAB CORPORATION Notes to Consolidated Financial Statements Tabular Amounts in Millions Except Per Share Data Option Price Amounts Ratios or as Noted 23 Subsequent Event On January 26 2010 the Company completed the sale of 29670300 shares of its common stock $.0 par value at public offering price of $19.00 per share Net proceeds received from the offering were $543 million and will be used to support the Companys balance sheet growth including expansion of its deposit base and potential migration of certain client balances from money market funds into Schwab Bank 24 The Charles Schwab Corporation Parent Company Only Financial Statements Condensed Statements of Income Year Ended December 31 2009 2008 2007 Interest revenue Interest expense Net interest revenue Other revenues Other expenses Loss income before income tax benefit expense and equity in earnings of subsidiaries Income tax benefit expense Loss income from continuing operations before equity in earnings of subsidiaries Equity in earnings of subsidiaries Equity in undistributed earnings of subsidiaries Dividends from Schwab Bank Dividends from non-banking subsidiaries Income from continuing operations Equity in undistributed earnings of subsidiaries discontinued operations Dividends from discontinued operations Tax expense from discontinued operations Income from discontinued operations Net Income 66 58 33 15 40 16 24 228 583 787 27 54 27 11 251 988 1230 18 787 1.212 68 34 34 13 20 27 18 548 65 489 1120 32 40 657 1.872 2.407 79 THE CHARLES SCHWAB CORPORATION Notes to Consolidated Financial Statements Tabular Amounts in Millions Except Per Share Data Option Price Amounts Ratios or as Noted Condensed Balance Sheets December 31 Assets Cash and cash equivalents Receivables from brokers dealers and clearing organizations Receivables from subsidiaries Other securities owned at fair value Loans to non-banking subsidiaries Investment in non-banking subsidiaries Investment in Schwab Bank Equipment office facilities and property net Other assets Total Liabilities and Stockholders Equity Accrued expenses and other liabilities Payables to subsidiaries Long-term debt Total liabilities Stockholders equity Total 2009 2008 875 11 74 513 220 2319 2549 130 6.696 177 45 1.401 1.623 5.073 6.696 755 34 81 109 373 2437 1096 133 5.024 178 19 766 963 4.061 5.024 80 THE CHARLES SCHWAB CORPORATION Notes to Consolidated Financial Statements Tabular Amounts in Millions Except Per Share Data Option Price Amounts Ratios or as Noted Condensed Statements of Cash Flows Year Ended December 31 Cash Flows from Operating Activities Net income Adjustments to reconcile net income to net cash provided by operating activities Loss gain from discontinued operations net of tax Equity in undistributed eamings of subsidiaries Equity in undistributed earnings of subsidiaries discontinued operations Excess tax benefits from stock-based compensation Provision for deferred income taxes Other Net change in Receivables from brokers dealers and clearing organizations Other securities owned Other assets Accrued expenses and other liabilities Net cash provided by operating activities Cash Flows from Investing Activities Due from to subsidiaries net Purchase of equipment office facilities and property increase decrease in investments in subsidiaries Cash payments for business combinations and investments net of cash received Proceeds from sale of subsidiary Net cash used for provided by investing activities Cash Flows from Financing Activities Issuance of long-term debt Repayment of long-term debt Excess tax benefits from stock-based compensation Dividends paid Purchase of treasury stock Proceeds from stock options exercised and other Other financing activities Net cash provided by used for financing activities Increase decrease in Cash and Cash Equivalents Cash and Cash Ecuivalents at Beginning of Year Cash and Cash Equivalents at End of Year 2009 2008 2007 787 1212 2407 253 20 27 23 404 16 121 279 725 446 747 76 279 53 445 120 755 875 19 251 50 48 34 17 52 85 792 94 330 426 15 50 253 350 131 438 72 827 755 1215 548 32 108 192 52 647 95 122 14 116 3.237 3252 549 38 108 1500 2742 414 3.216 131 696 827 81 THE CHARLES SCHWAB CORPORATION Notes to Consolidated Financial Statements Tabular Amounts in Millions Except Per Share Data Option Price Amounts Ratios or as Noted 25 Quarterly Financial Information Unaudited Year Ended December 31 2009 Net Revenues Expenses Excluding Interest Net Income Weighted Average Common Shares Diluted Basic Earnings Per Share Diluted Earnings Per Share Dividends Declared Per Common Share Range of Common Stock Price Per Share High Low Range of Price/Earnings Ratio High Low Year Ended December 31 2008 Net Revenues Expenses Excluding Interesi Netlncome Weighted Average Common Shares Diluted Basic Earnings Per Share Diluted Earnings Per Share Dividends Declared Per Common Share Range of Common Stock Price Per Share High Low Range of Price/Earnings Ratio High Low Fourth Quarter Third Quarter Second First Quarter Quarter 986 720 164 1163 .14 .14 .06 19.49 16.94 29 25 1284 777 308 1158 .27 .27 .06 24.37 14.59 23 14 1011 691 200 1163 .17 .17 .06 19.45 16.47 24 20 1251 752 304 1158 .26 .26 .06 26.00 18.78 25 18 1085 750 205 1160 .18 .18 .06 18.92 15.31 21 17 1308 794 295 1154 .26 .26 .05 22.78 18.31 1111 756 218 1156 .19 .19 .06 16.63 11.34 17 12 1307 799 305 1159 .27 .26 .05 24.78 18.04 11 12 Price/earnings ratio is computed by dividing the high and low market prices by diluted earnings per share for the 12-month period ending preceding In the second quarter of 2008 both basic and diluted earnings per on the last day of the quarter presented share include loss from discontinued operations 82 Report of Independent Registered Public Accounting Firm To the Board of Directors and Stockholders of The Charles Schwab Corporation We have audited the accompanying consolidated balance sheets of The Charles Schwab Corporation and subsidiaries the Company as of December 31 2009 and 2008 and the related consolidated in the period ended December 31 2009 Our audits years statements also included the financial of income stockholders equity and cash flows for each of the three on page F-2 We schedule of the Company statement also have audited the Companys internal control over financial reporting as of December 31 2009 based on criteria established in Internal Control Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission The Companys management is responsible for these financial statements and financial statement schedule for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in Managements Report on Internal Control over Financial Reporting Our responsibility is to express an opinion on these financial statements and financial statement schedule and an opinion on the Companys internal control over financial reporting based on our audits We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board United States Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects Our audits of the financial statements included examining on test basis evidence supporting the amounts and disclosures in the financial statements assessing the accounting principles used and significant estimates made by management and evaluating the overall financial statement presentation Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting assessing the risk that material weakness exists testing and evaluating the design and operating effectiveness of internal control based on the assessed risk Our audits also included performing such other procedures as we considered necessary in the circumstances We believe that our audits provide reasonable basis for our opinions companys internal control over financial reporting is process designed by or under the supervision of the companys principal executive and principal financial officers or persons performing similar functions and effected by the companys board of directors management and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles companys internal control over financial reporting includes those policies and procedures that pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the company provide reasonable assurance that transactions are recorded as necessary to permit preparation in accordance with generally of the company are being made only in accordance with authorizations of financial statements accepted accounting principles and that of management and directors of the receipts and expenditures company and the companys provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition use or disposition of assets that could have material effect on the financial statements Because of the inherent limitations of internal control over financial reporting including the possibility of collusion or improper management override of controls material misstatements due to error or fraud may not be prevented or detected on timely basis Also projections the controls may become inadequate because of changes of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that in conditions or that the degree of compliance with the policies or procedures may deteriorate In our opinion the consolidated financial statements referred to above present fairly in all material respects the financial position of the Company as of December 31 2009 and 2008 and the results of their operations and their cash flows for each of the three years in the period ended December 31 2009 in conformity with accounting principles generally accepted in the United States of America Also in our opinion such financial statement schedule when considered in relation to the basic consolidated financial statements taken as whole presents fairly in all material respects the information set forth therein Also in our opinion the Company maintained in all material respects effective internal control over financial reporting as of December 31 2009 based on the criteria established in Internal Control Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission is Deloitte Touche LLP San Francisco California February 24 2010 83 THE CHARLES SCHWAB CORPORATION Managements Report on Internal Control Over Financial Reporting Management and maintaining of The Charles Schwab Corporation together with its subsidiaries the Company is responsible for establishing financial reporting is The Companys internal financial reporting control over control over internal adequate process designed under the supervision of and effected by the Companys chief executive officer and chief financial officer to provide reasonable assurance regarding the reliability of financial reporting and the preparation of published financial statements in accordance with accounting principles generally accepted in the United States of America As of December 31 2009 management conducted an assessment of the effectiveness of the Companys internal control over financial reporting based on the framework established in Internal Control Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission Based on this assessment management has determined that the Companys internal control over financial reporting was effective as of December 31 2009 The Companys internal control over financial reporting includes policies and procedures that pertain to the maintenance of records that in reasonable detail accurately and fairly reflect transactions and dispositions of assets provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with accounting principles generally accepted in the United States of America and that receipts and expenditures are being made only in accordance with authorizations of management and the directors of the Company and provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition use or disposition of the Companys assets that could have material effect on the Companys financial statements The Companys internal LLP an independent registered public accounting control over financial reporting as of December 31 2009 has been audited by Deloitte Touche firm as stated in their report appearing on the previous page 84 THE CHARLES SCHWAB CORPORATION Changes in and Disagreements with Accountants Disclosure on Accounting and Financial Item None Item 9A Controls and Procedures Evaluation of disclosure controls and procedures The management of the Company with the participation of the Companys Chief Executive Officer and Chief Financial Officer has evaluated the effectiveness of the Companys disclosure controls and procedures this evaluation as defined in Rule the Companys Chief Executive Officer and Chief Financial Officer have concluded the Securities Exchange Act of 1934 as of December 3a- 15e under that the Companys 31 2009 Based on disclosure controls and procedures were effective as of December 31 2009 Changes in internal control over financial reporting No change in the Companys internal control over financial reporting as defined in Rule 3a- 5f under the Securities Exchange Act of 1934 was identified during the quarter ended December 31 2009 that has materially affected or is reasonably likely to materially affect the Companys internal control over financial reporting Managements Report Accounting Firm are included in Item on Internal Control Over Financial Reporting and the Report of Independent Registered Public Financial Statements and Supplementary Data that it is transferring the listing of its common stock to the New York Stock Exchange Item 9B Other Information On February NYSE CSC expects 22 2010 CSC announced its common stock to begin trading on the NYSE on March 2010 using its current symbol PART III Item 10 Directors Executive Officers and Corporate Governance The information relating to directors of CSC required to be furnished pursuant to this item is incorporated by reference from portions of the Companys definitive proxy statement for its annual meeting of stockholders to be filed with the SEC pursuant 4A by April 30 2010 the Proxy Statement under The Board of Directors Members of the Board of to Regulation Directors The Board of Directors Corporate Governance Information The Board of Directors Director Nominations and Section 16a Beneficial Ownership Reporting Compliance The Companys Code of Conduct and Business Ethics applicable to directors and all employees including senior financial officers is available on the Companys website at http//www.aboutschwab.com/governance If the Company makes any amendments to or grants any waivers from its Code of Conduct and Business Ethics which are required to be disclosed pursuant the Company will make such disclosures on this website to the Securities Exchange Act of 1934 85 THE CHARLES SCHWAB CORPORATION Executive Officers of the Registrant The following table provides certain information about each of the Companys current executive officers Executive Officers of the Registrant Name Charles Schwab Walter Bettinger II Jay Allen Benjamin Brigeman Carrie Dwyer Joseph Martinetto James McCool Rebecca Saeger Title Chairman of the Board President and Chief Executive Officer Executive Vice President Human Resources and Employee Services Executive Vice President Investor Services Executive Vice President General Counsel and Corporate Secretary Executive Vice President and Chief Financial Officer Executive Vice President Institutional Services Executive Vice President and Chief Marketing Officer 72 49 53 47 59 47 51 54 director of CSC since its incorporation in 1986 He also served as Chief Mr Schwab has been Chairman of the Board and Executive Officer of CSC from 1986 to 1997 Chief Executive Officer in 2004 and served Co Inc and Charles Schwab Bank Capital Trust Schwab Annuity Portfolios Laudus Trust and Laudus Institutional in that and as Co-Chief Executive Officer from 1998 until 2003 He was re-appointed role until October 2008 Mr Schwab is Chairman of Charles Schwab and trustee of The Charles Schwab Family of Funds Schwab Investments Schwab Trust all registered investment companies since 2008 He also serves on the Board Mr Bettinger of Directors of CSC Charles Schwab of Funds Schwab has been President and Chief Executive Officer of CSC and Schwab Co Inc and Charles Schwab Bank and as trustee of The Charles Schwab Family Investments Schwab Capital Trust Schwab Annuity Portfolios Laudus Trust Laudus Institutional Trust and Schwab Strategic Trust all registered investment President and Chief Operating Officer of CSC from 2007 until 2008 and as Executive Investor Services of CSC and Schwab from 2005 to 2007 He served as Executive companies Prior to assuming his current role Mr Bettinger served as Vice President and President Schwab Vice President and Chief Operating Officer Individual Investor Enterprise of CSC and Schwab from 2004 until 2005 and Executive Vice President Corporate Services of Schwab from 2002 until 2004 Mr Bettinger joined Schwab in 1995 Mr Allen has been Executive Vice President He served as Senior Vice President Human Resources and Employee Services of CSC and Schwab since 2007 Human Resources of Schwab Investor Services from 2004 to 2007 Mr Allen joined Schwab in 2003 as Vice President Human Resources of Schwab Investor Services Before joining Schwab Mr Allen was Vice President Human Resources and Administration for GE Consumer Finance Japan based in Tokyo Mr Brigeman Senior Vice President has been Executive Vice President Investor Services of CSC and Schwab since 2007 Mr Brigeman was Schwab Investor Services of Schwab from 2005 to 2007 and Senior Vice President Schwab Retirement Plan Services of Schwab from 2000 to 2005 Mr Brigeman joined Schwab in 1996 Ms Dwyer has been Executive Vice President General Counsel and Corporate Secretary of CSC and Executive Vice President Corporate Oversight of Schwab since 1996 Ms Dwyer joined Schwab in 1996 86 THE CHARLES SCHWAB CORPORATION Mr Martinetto has been Executive Vice President and Chief Financial Officer of CSC and Schwab since 2007 Mr Martinetto served as Senior Vice President and Treasurer of CSC and Schwab from 2003 to 2007 and Senior Vice President Individual Investor Finance of Schwab from 2002 to 2003 Mr Martinetto joined Schwab in 1997 Institutional Mr McCool has been Executive Vice President as Executive Vice President Schwab Corporate 2006 until 2008 Mr McCool served as Senior Vice President McCool also served until 2007 Mr McCool served as Senior Vice President Operating Officer of CSTC from 2003 until 2004 and Vice President from 2002 until 2003 Mr McCool joined Schwab and Retirement in 1995 from 2004 until 2006 Mr as President and Chief Executive Officer of The Charles Schwab Trust Company CSTC from 2005 Services of Schwab Corporate Plan Administrative Services of CSTC from 2004 until 2005 Chief Development and Business Technology of CSTC Services of CSC and Schwab since 2008 Mr McCool served Services of CSC from 2007 until 2008 and of Schwab from Ms Saeger has been Executive Vice President and Chief Marketing Officer of CSC and Schwab since 2006 She served as Executive Vice President Ms Saeger joined Schwab Brand Management in 2004 and Marketing Communications of CSC and Schwab from 2004 until 2006 Item 11 Executive Compensation The information required to be furnished pursuant to this item is incorporated by reference from portions of the Proxy Statement under Compensation Information Compensation Discussion and Analysis Compensation Information Executive Compensation Tables 2009 Summary Compensation Table Compensation Information Executive Compensation Tables 2009 Grants of Plan-Based Awards Table Compensation Information Executive Compensation Tables Narrative to Summary Compensation and Grants of Plan-Based Awards Tables Compensation Information Executive Compensation Tables 2009 Termination and Change in Control Benefits Table Compensation Information Executive Compensation Tables Executive Compensation Tables Outstanding 2009 Option Exercises and Stock Vested Table Compensation Equity Awards as of December 31 2009 Compensation Information Information Executive Compensation Tables Compensation and The Board of Directors 2009 Nonqualified Deferred Compensation Table Compensation Information Director Compensation Committee Interlocks and Insider Participation In addition the information from portion of the Proxy Statement under Compensation Information Compensation Committee is incorporated by reference from the Proxy Statement and furnished on this Form 10-K and shall not be deemed 18 of the Securities Exchange Act of 1934 nor shall it be deemed incorporated by reference in Report filed for purposes of Section any filing under the Securities Act of 1933 Item 12 Security Ownership of Certain Beneficial Owners and Management Stockholder Matters and Related The information required to be furnished pursuant to this item is incorporated by reference from portions of the Proxy Statement under Security Ownership of Certain Beneficial Owners and Management and Compensation Information Securities Authorized for Issuance Under Equity Compensation Plans Item 13 Certain Relationships and Related Transactions and Director Independence The information required to be furnished pursuant to this item is incorporated by reference from portions of the Proxy Statement under Transactions with Related Persons and The Board of Directors Director Independence Item 14 Principal Accountant Fees and Services The information required to be furnished pursuant to this item is incorporated by reference from portion of the Proxy Statement under The Board of Directors Auditor Fees 87 THE CHARLES SCHWAB CORPORATION PART IV Item 15 Exhibits and Financial Statement Schedule Documents filed as part of this Report Financial Statements The financial statements and independent auditors report are included in Item Financial Statements and Supplementary Data and are listed below Consolidated Statements of Income Consolidated Balance Sheets Consolidated Statements of Cash Flows Consolidated Statements of Stockholders Equity Notes to Consolidated Financial Statements Report of Independent Registered Public Accounting Firm Financial Statement Schedule The financial statement schedule required to be furnished pursuant to this item is listed in the accompanying index appearing on page F-I Exhibits The exhibits listed below are filed as part of this annual report on Form 10-K Exhibit Number Exhibit 3.11 Fifth Restated Certificate of Incorporation effective May 2001 of the Registrant filed as Exhibit 3.11 to the Registrants Form l0-Q for the quarter ended September 30 2006 and incorporated herein by reference 3.13 Fourth Restated Bylaws as amended on December 12 2007 of the Registrant filed as Exhibit 3.13 to the Registrants Form 10-K for the year ended December 31 2007 and incorporated herein by reference 3.14 Fourth Restated Bylaws as amended filed as Exhibit 3.1 to the Registrants Form 8-K dated January on January 27 2010 supersedes Exhibit 3.13 of the Registrant 27 2010 and incorporated herein by reference 4.2 Neither the Registrant nor its subsidiaries are parties to any instrument with respect to long-term debt for which securities authorized thereunder exceed 10% of the total assets of the Registrant and its subsidiaries on consolidated basis Copies of instruments with respect to long-term debt of lesser amounts will be provided to the SEC upon request 10.4 Form of Release Agreement Inc Charles Schwab dated as of March 31 1987 among BAC Registrant Co Inc and former shareholders of Schwab Holdings Inc Schwab Holdings 88 THE CHARLES SCHWAB CORPORATION Exhibit Registration Rights and Stock Restriction Agreement Registrant and the holders of the Common Stock filed as Exhibit 4.23 to Registrants Registration Statement No 33-16192 on Form S-i and incorporated dated as of March 31 1987 between the herein by reference Exhibit Number 10.57 10.72 Restatement of Assignment and License as amended January 25 1988 among Charles Schwab Co Inc Charles Schwab and the Registrant 10.271 The Charles Schwab Corporation Directors December 2004 Deferred Compensation Plan as amended through 10.272 The Charles Schwab Corporation Deferred Compensation Plan as amended through December 2004 10.288 Stock Purchase Agreement by and between the Registrant and Bank of America Corporation dated as of November 19 2006 and incorporated herein by reference 10.289 Form of Notice and Restricted Stock Agreement for Walter Bettinger under The Charles Schwab Corporation 2004 Stock Incentive Plan dated February 20 2007 filed as Exhibit 10.289 to the Registrants Form l0-Q for the quarter ended March 31 2007 and incorporated herein by reference 10.290 Summary of Non-Employee Director Compensation filed as Exhibit 10.290 to the Registrants Form 10-Q for the quarter ended March 31 2007 and incorporated herein by reference 10.294 Form of Notice and Restricted Stock Agreement Corporation Form 10-Q for the quarter ended June 30 2007 and incorporated herein by reference for Joseph Incentive Plan dated May 18 2007 filed as Exhibit 10.294 2004 Stock Martinetto under The Charles Schwab to the Registrants 10.295 Form of Notice and Nonqualified Stock Option Agreement for Joseph Martinetto under The Charles Schwab Corporation Registrants Form 10-Q for the quarter ended June 30 2007 and incorporated 2004 Stock incentive Plan dated May 18 2007 filed as Exhibit 10.295 to the herein by reference 10.296 Stock Purchase Agreement The Charles Helen Schwab dated JuJy Schwab Living Trust HOS Family Partners LLC 188 Partners LP and the 2007 by and among Charles Schwab Helen 10.298 10.300 Charles Helen Schwab Foundation and The Charles Schwab Corporation filed as Exhibit 10.296 to the Registrants Form lO-Q for the quarter ended June 30 2007 and incorporated herein by reference Directed Employee Benefit Trust Agreement under Plan dated August 17 2007 filed as Exhibit 10.298 to the Registrants Form 10-Q for the quarter ended September 30 2007 and incorporated the SchwabPlan and Investment herein by reference Retirement Savings The Charles Schwab Corporation Employee Stock December 12 2007 filed as Exhibit 10.300 to the Registrants 31 2007 and incorporated herein by reference December Incentive Plan as amended and restated as of Form 10-K for the year ended 10.30 The Charles Schwab Corporation 1992 Stock Incentive Plan as amended and restated as of December December 12 2007 filed as Exhibit 10.301 31 2007 and incorporated herein by reference to the Registrants Form 10-K for the year ended 10.302 The Charles Schwab Corporation 2001 Stock incentive Plan as amended and restated as of December December 12 2007 filed as Exhibit 10.302 to the Registrants 31 2007 and incorporated herein by reference Form 10-K for the year ended 89 THE CHARLES SCHWAB CORPORATION Exhibit Number 10.306 Form of Notice and Nonqualified Exhibit 2004 Stock Incentive Plan filed as Exhibit 10.306 Stock Option Agreement under The Charles Schwab Corporation to the Registrants Form 10-K forthe year ended December 31 2007 and incorporated herein by reference 10.307 and Restricted Stock Agreement Form of Notice Incentive Plan filed as Exhibit 10.307 to the Registrants Form 10-K for the year ended December 2007 and incorporated herein by reference under The Charles Schwab Corporation 2004 Stock 31 10.309 Form of Notice and Premium-Priced Stock Option Agreement under The Charles Schwab Corporation 2004 Stock Incentive Plan filed as Exhibit 10.309 to the Registrants Form 10-K for the year ended December 31 2007 and incorporated herein by reference 10.3 10 The Charles Schwab Corporation 2004 Stock Incentive Plan as amended and restated as of December December 12 2007 filed as Exhibit 10.3 10 to the Registrants Form 10-K for the year ended 31 2007 and incorporated herein by reference 10.311 Form of Notice and Restricted Stock Agreement for Non-Employee Directors under The Charles Schwab Corporation 2004 Stock Incentive Plan filed as Exhibit 10.3 11 to the Registrants Form 10-K for the year ended December 31 2007 and incorporated herein by reference 10.312 Form of Notice and Option Agreement for Non-Employee Directors under The Charles Schwab Corporation 2004 Stock Incentive Plan filed as Exhibit 10.312 to the Registrants Form 10-K for the year ended December 31 2007 and incorporated herein by reference 10.314 Employment Agreement filed as Exhibit 10.314 to the Registrants Form 10-Q for the quarter ended March 31 2008 and dated as of March 13 2008 between the Registrant and Charles Schwab incorporated herein by reference 10.315 Credit Agreement 364-Day Commitment dated as of June 13 2008 between the Registrant and the financial institutions listed therein filed as Exhibit 10.315 to the Registrants Form l0-Q for the quarter ended June 30 2008 and incorporated herein by reference 10.316 Form of Notice and Restricted Stock Agreement for Walter Bettinger under the Charles Schwab 2004 Stock Incentive Plan dated October Corporation Registrants Form 10-Q for the quarter ended September 30 2008 and incorpoiated 2008 filed as Exhibit 10.316 to the herein by reference 10.317 Form of Notice and Nonqualified Stock Option Agreement for Walter Bettinger under The Charles Schwab Corporation 2004 Stock Incentive Plan dated October 2008 filed as Exhibit 10.317 to the Registrants Form 10-Q for the quarter ended September 30 2008 and incorporated herein by reference 10.318 Form of Notice and Performance-Based Restricted Stock Agreement under the Charles Schwab Corporation 2004 Stock Incentive Plan filed as Exhibit 10.318 to the Registrants Form 10-K for the year ended December 31 2008 and incorporated herein by reference 10.319 Form of Notice and Restricted Stock Unit Agreement for Non-Employee Directors under the Charles 2004 Stock Incentive Plan filed as Exhibit 10.319 to the Registrants Form 10-K Schwab Corporation for the year ended December 31 2008 and incorporated herein by reference 10.320 The Charles Schwab Corporation Corporate October 23 2008 filed as Exhibit 10.320 to the Registrants Form 10-K for the year December 31 2008 and incorporated herein by reference Executive Bonus Plan as amended and restated as of ended 90 THE CHARLES SCHWAB CORPORATION Exhibit Number Exhibit 10.321 The Charles Schwab Corporation Long Term Incentive Plan as amended and restated as of October 23 2008 filed as Exhibit 10.321 to the Registrants Form 10-K for the year ended December incorporated herein by reference 31 2008 and 10.322 10.323 The Charles Schwab Corporation Deferred Compensation October 23 2008 filed as Exhibit 10.322 to the Registrants Form 10-K for the year ended December Plan II as amended 31 2008 and incorporated herein by reference and restated as of The Charles Schwab Corporation Directors as of October 23 2008 filed as Exhibit 10.323 to the Registrants Form 10-K for the year ended December herein by reference Compensation Plan II as amended 31 2008 and incorporated Deferred and restated 10.324 The Charles Schwab Severance Pay Plan as amended and restated effective January 2009 filed as Exhibit 10.324 to the Registrants Form 10-K for the year ended December 31 2008 and incorporated herein by reference 10.325 The Charles Schwab Severance Pay Plan as amended and restated effective April 2009 supersedes Exhibit 10.324 filed as Exhibit 10.325 to the Registrants Form 10-K for the year ended December 2008 and incorporated herein by reference 31 10.326 Credit Agreement 364-Day Commitment dated as of June 12 2009 between the Registrant and the financial institutions listed therein supersedes Exhibit 10.315 files as Exhibit 10.326 to the Registrants Form 10-Q for the quarter ended June 30 2009 and incorporated herein by reference 10.327 The Charles Schwab Corporation 2004 Stock Incentive Plan as amended and restated as of December 10 2009 supersedes Exhibit 10.310 10.328 Form of Notice and Retainer Restricted Stock Unit Agreement for Non-Employee Directors under The Charles Schwab Corporation 2004 Stock Incentive Plan 10.329 Form of Notice and Performance-Based Restricted Stock Unit Agreement under The Charles Schwab Corporation 2004 Stock Incentive Plan 10.330 Form of Notice and Restricted Stock Unit Agreement under the Charles Schwab Corporation 2004 Stock Incentive Plan 12.1 Computation of Ratio of Earnings to Fixed Charges 21.1 Subsidiaries of the Registrant 23.1 Independent Registered Public Accounting Firms Consent 31.1 Certification Pursuant to Rule 3a- 14a/i 5d- 14a As Adopted Pursuant to Section 302 of The Sarbanes-Oxley Act of 2002 31.2 Certification Pursuant to Rule 3a- 14a/i Sd- 14a As Adopted Pursuant to Section 302 of The Sarbanes-Oxley Act of 2002 32.1 Certification Pursuant to 18 U.S.C Section 1350 As Adopted Pursuant to Section 906 of The Sarbanes Oxley Act of 2002 32.2 Certification Pursuant to 18 U.S.C Section 1350 As Adopted Pursuant to Section 906 of The Sarbanes Oxley Act of 2002 -91 THE CHARLES SCHWAB CORPORATION Exhibit Number Exhibit 101.1NS XBRL Instance Document 101.SCH XBRL Taxonomy Extension Schema 101 .CAL XBRL Taxonomy Extension Calculation 101 .DEF XBRL Extension Definition 101 .LAB XBRL Taxonomy Extension Label 101 .PRE XBRL Taxonomy Extension Presentation Incorporated No 33-16192 on Form 5-1 as amended by reference to the identically-numbered and declared exhibit to Registrants Registration Statement effective on September 22 1987 Furnished as an exhibit to this annual report on Form 10-K Confidential treatment has been granted for portions of this exhibit Management contract or compensatory plan Attached as Exhibit 101 2009 are the following materials formatted in XBRL Extensible to this Annual Report on Form 10-K for the annual period ended December Business Reporting Language 31 the Consolidated Statements of Income ii the Consolidated Balance Sheets iii the Consolidated Statements of Cash Flows iv the Consolidated Statements of Stockholders Equity and Notes to Consolidated Financial Statements tagged as blocks of text 92 THE CHARLES SCHWAB CORPORATION SIGNATURES Pursuant to the requirements of Section on its behalf by the undersigned thereunto duly authorized 13 or 15d of the Securities Exchange Act of 1934 on February report to be signed the registrant 24 2010 has duly caused this THE CHARLES SCHWAB CORPORATION Registrant BY /s/ Walter Bettinger II Walter Bettinger II President and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934 this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated on February 24 2010 Signature Title Signature Title Is Walter Bettinger II Walter Bettinger II President and Chief Executive Officer /s/ Joseph Martinetto Joseph Martinetto Executive Vice President and Chief Financial Officer principal financial and accounting officer /5/ Charles Schwab Charles Schwab Chairman of the Board Is William Aldinger III William Aldinger III Director /s/ Nancy Bechtle Nancy Bechtle Director /s/ Frank Herringer Frank Herringer Director /s/ Arun Sarin Arun Sarin Director Is Roger Walther Roger Walther Director Is Preston Butcher Preston Butcher Director Is Stephen McLin Stephen McLin Director Is Paula Sneed Paula Sneed Director Is Robert Wilson Robert Wilson Director 93 THE CHARLES SCHWAB CORPORATION Index to Financial Statement Schedule Schedule II Valuation and Qualifying Accounts Supplemental Financial Data for Charles Schwab Bank Unaudited F-2 F-3 F-8 Schedules not listed are omitted because of the absence of the conditions under which they are required or because the information is included in the Companys consolidated financial statements and notes in Item 8Financial Statements and Supplementary Data F-i THE CHARLES SCHWAB CORPORATION SCHEDULE II Valuation and Qualifying Accounts In millions Description of Year to Expense Other Written off of Year Balance at Additions Beginning Charged Balance at End For the year ended December 31 2009 Allowance for doubtful accounts of brokerage clients For the year ended December 31 2008 Allowance for doubtful accounts of brokerage clients 13 11 For the year ended December 31 2007 Allowance for doubtful accounts of brokerage clients Represents collections of previously written-off accounts Excludes banking-related valuation and qualifying accounts See Item Financial Statements and Supplementasy Data Notes to Consolidated Financial Statements Loans to Banking Clients and Related Allowance for Credit Losses F-2 THE CHARLES SCHWAB CORPORATION Supplemental Financial Data for Charles Schwab Bank Unaudited Dollars in Millions The following supplemental financial data is consistent with the Securities Exchange Act of 1934 Industry Guide Statistical Disclosure by Bank Holding Companies The accompanying unaudited financial information represents Charles Schwab Bank Schwab Bank which is holding company and Schwab Bank is subsidiary of The Charles Schwab Corporation CSC CSC is federal savings bank savings and loan Three-year Net Interest Revenue and Average Balances For the Year Ended December 31 Average Balance 2009 Interest Average Rate Average Balance Assets Cash and cash uiva1ents Securities available for sale Securitiesheldtnrnaturity Loanstobankingcients3 Loans held for sale Other interest-earning assets Total interest-earning assets Net unrealized loss on securities available for sale Non-interest-earning assets Total Assets Liabilities and Stockholders Equity Interest-bearingbankingdeposits Total sources on which interest is puid Non-interest-bearing liabilities Stockholdeis equity Total Liabilities and Stockholdef Equity Net interest revenue Provision for credit loss 26 521 74 241 6352 18558 1915 6668 110 30 33633 867 0.40% 2.81% 3.86% 3.61% 4.55% 0.49% 2.58% 3947 11772 22 4829 66 29 20665 846 2008 Interest 95 517 227 Average Rate Average Balance 2007 Interest Average Rate 2.44% 4.39% 5.86% 4.7O% 6.06% 5.54% 4.1Y4 2523 7335 133 399 2786 169 37 41 12722 706 5.28% 5.44% 6.07% 5.41% 5.98% 5.55% 614 331 33350 31249 31249 513 1588 33350 107 107 0.34% 0.34% 323 211 20553 19203 19203 456 894 20553 104 104 0.54% 0.54% 23 132 12831 12046 12046 111 674 12831 238 238 1.98% 1.98% 760 38 722 742 17 725 468 465 Net yield on interest-earning assets 2.26% 3.59% 3.68% Includes deposits with banks short-terrn investments and federal funds sold Amounts have been calculated based on amortized cost Includes average principal balances of non-accrual loans F-3 THE CHARLES SCHWAB CORPORATION Supplemental Financial Data for Charles Schwab Bank Unaudited Dollars in Millions Analysis of Change in Net Interest Revenue An analysis of the year-to-year volume and rate is as follows changes in the categories of interest revenue and interest expense resulting from changes in Interest-earning assets Cash and cash equivalents Securities available for sale Securities held to maturity Loans to banking clients Loans held for sale Other interest-earning assets Total interest-eaming assets Interest-bearing sources of funds Interest-bearing banking deposits Total sources on which interest is geid Change in net interest revenue Provision for credit loss 2009 Compared to 2008 Increase Decrease Due to Change in Average 2008 Compared to 2007 Increase Decrease Due to Change in Average Average Rate Total Volume Rate Total Average Volume 59 298 11 86 128 294 38 72 557 536 65 65 492 62 62 474 69 73 14 21 18 21 77 241 124 115 123 66 38 118 58 443 303 140 141 141 302 275 275 28 134 134 274 14 260 Changes that are not due solely to volume or rate have been allocated to rate Includes deposits with banks short-term investments and federal funds sold Amounts have been calculated based on amortized cost Includes average principal balances of non-accrual loans F-4 THE CHARLES SCHWAB CORPORATION Supplemental Financial Data for Charles Schwab Bank Unaudited Dollars in Millions Securities Available for Sale and Securities Held to Maturity The amortized cost gross unrealized gains and losses and fair value of securities available for sale and securities held to maturity are as follows Gross Gross Amortized Unrealized Unrealized Cost Gains Losses December 31 2009 Securities available for sale U.S agency residential mortgage-backed securities Non-agency residential mortgage-backed U.S agency notes securities Corporate debt securities Certificates of deposit Asset-backed securities Total securities availabLe for sale Securities held to maturity U.S agency residential mortgage-backed securities Asset-backed securities Corporate debt securities Total securities heldtrnaturitv 11601 2460 2975 2368 1950 1077 22431 5105 1389 345 6.839 199 13 12 231 36 25 68 December 31 2008 Securities available for sale U.S agency residential mortgage-backed securities Non-agency U.S agencynotes residential mortgage-backed securities Corporate debt securities Certificates of deposit Asset-backed securities Gross Gross Amortized Unrealized Unrealized Cost Gains Losses 8203 3085 515 1762 925 866 108 82 862 31 44 Total securities available for sale 15.356 112 1022 14446 Securities held to maturity Asset-backed securities Total securities held to maturity 243 243 December 31 2007 Securities available for sale U.S agency residential mortgage-backed securities Non-agency residential mortgage-backed U.S agencynotes securities Corporate debt securities Certificates of deposit Total securities available for sale Gross Gross Amortized Unrealized Unrealized Cost Gains Losses 2889 3503 15 804 345 7.556 25 30 33 21 60 There were no securities classified as held to maturity at December 31 2007 244 244 Fair Value 2908 3474 15 784 345 7526 F-S 21 519 27 27 542 22120 Fair Value 11779 1941 2978 2380 1953 1089 5114 1414 352 6.880 Fair Value 8229 2223 517 1733 922 822 THE CHARLES SCHWAB CORPORATION Supplemental Financial Data for Charles Schwab Bank Unaudited Dollars in Millions The maturities and related weighted-average December 31 2009 are as follows yields of securities available for sale and securities held to maturity at Securities available for sale U.S agency residential mortgage-backed securities Non-agency U.S agency notes residential mortgage-backed securities Corporate debt securities Certificates of deposit Asset-backed securities Total fair value Total amortized cost Weighted-average yield Securities held to maturity U.S agency residential mortgage-backed securities Asset-backed securities Corporate debt securities Total fair value Total amortized cost Weighted-average yield Within year 325 1366 1853 3544 3534 0.89% 33 33 32 After year After years through through After years 10 years 10 years Total 173 32 11606 1909 2653 1014 100 940 4707 4692 1.14% 1259 319 1578 1548 149 354 345 3.24% 155 155 154 11779 1941 2978 2380 1953 1089 22120 22431 2.24% 5114 1414 352 6880 6.839 2.14% 13515 13.860 2.93% 5114 5114 5105 1.82% 4.19% 3.14% 2.09% Residential mortgage-backed securities maturities Actual maturities will differ have been allocated over maturity from final contractual maturities because groupings based on final contractual certain portion of loans underlying these securities The weighted-average require scheduled principal payments and borrowers yield is computed using the amortized cost at December have the right 31 2009 to prepay obligations Loans to Banking Clients and Related Allowance for Credit Losses The composition of the loan portfolio is as follows December 31 Residential Home equity lines of credit real estate mortgages Secured personal loans Other 2009 3710 3304 366 11 2008 3195 2662 187 18 Total loans to banking clients 7.39 6.062 2007 2101 1234 102 13 3.450 2006 1127 1192 10 233 2005 1193 746 10 1.949 An analysis of nonperforming assets is as follows December 31 Non-accrual loans Average non-accrual loans 2009 2008 2007 2006 2005 34 17 F-6 THE CHARLES SCHWAB CORPORATION Supplemental Financial Data for Charles Schwab Bank Unaudited Dollars in Millions Changes in the allowance for credit losses were as follows December31 Balance at beginning of year Charge-offs Recoveries Provision for credit losses Balance at end of year 2009 2008 2007 2006 2005 20 13 38 45 17 20 The maturities of the loan portfolio at December 31 2009 are as follows Residential real estate mortgages Home equity lines of credit Secured personal loans Other Total After year Within through year years 498 366 865 After years 3710 2806 Total 3710 3304 366 11 6.521 7391 Maturities are based upon the contractual terms of the loans The interest sensitivity of loans with contractual maturities in excess of one year at December 31 2009 is as follows Loans with predetermined interest rates Loans with floating or adjustable interest rates Total ________________________________________________________ Summary of Credit Loss on Banking Loans Experience After year 976 6410 7386 December 31 Average loans Allowance to year end loans Allowance to nonperforming loans Nonperforming assets to average loans and real estate owned N/M Not meaningful Deposits from Banking Clients 2009 6668 .61% 132% 2008 4831 .33% 235% 2007 2786 .20% 173% 2006 2162 .17% N/M 2005 1163 .17% NIM .51% .18% .14% .03% .04% Analysis of average daily deposits Certificates of deposit of $100000 or more Money market and other savings deposits Ilots 2009 2008 2007 Amount Rate Amount Rate Amount Rate 31250 0.34% 19203 0.54% 31.250 19.203 1.98% 12047 12.047 There wereno certificates of deposit of $100000 or more at December 31 2009 F-7 THE CHARLES SCHWAB CORPORATION Supplemental Financial Data for Charles Schwab Bank Unaudited Dollars in Millions Ratios December 31 Return on average stockholders equity Return on average total assets Average stockholders equity as percentage of average total assets 2009 2008 2007 21.95% 1.05% 40.36% 1.76% 34.3 1% 1.83% 4.76% 4.35% 5.33% F-8 THE CHARLES SCHWAB CORPORATION EXHIBIT 12.1 Computation of Ratio of Earnings to Fixed Charges Dollar amounts in millions Unaudited Year Ended December 31 2009 2008 2007 2006 2005 Earnings from continuing operations before taxes on earnings 1276 2028 1853 1476 1027 Fixed charges Interest expense excluding provision for credit lossesW Deposits from banking clients Payables to brokerage clients Short-term borrowings Long-term debt Other Total Interest portion of rental expense Total fixed charges 107 71 183 71 254 104 55 59 24 243 62 305 238 329 38 18 623 60 683 200 426 29 24 679 55 734 74 378 30 19 501 55 556 Earnings from continuing operations before taxes on earnings and fixed charges 1530 2333 2536 2210 1583 Ratio of earnings to fixed charges 6.0 7.6 3.7 3.0 2.8 Ratio of earnings to fixed charges excluding deposits from banking clients and payables to brokerage clients interest expense 9.9 14.9 17.0 14.7 10.9 Begimsing in 2009 the provision for credit losses has been excluded from fixed charges The ratio of earnings to fixed charges of earnings from continuing operations is calculated in accordance with SEC requirements For such purposes earnings consist before taxes on earnings and fixed charges Fixed charges consist of interest expense as listed above and one-third of rental expense which is estimated to be representative of the interest factor Because interest expense incurred in connection with both deposits from banking clients and payables to brokerage clients is completely offset by interest revenue on related investments and loans the Company considers such interest to be an operating expense Accordingly the ratio of earnings to fixed charges excluding deposits from banking clients and payables to brokerage clients interest expense reflects the elimination of such interest expense as fixed charge THE CHARLES SCHWAB CORPORATION Subsidiaries of the Registrant EXHIBIT 21.1 Pursuant to Item 601 21 ii of Regulation S-K certain subsidiaries of the Registrant have been omitted which considered in the aggregate as single subsidiary would not constitute significant subsidiary as defined in Rule 1-02w of Regulation S-X as of December 31 2009 The following is listing of the significant subsidiaries of the Registrant Schwab Holdings Inc holding company for Charles Schwab Co Inc Delaware corporation Charles Schwab Co Inc California corporation Charles Schwab Investment Management Inc Delaware corporation Charles Schwab Bank Federal Savings Association CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM We consent to the incorporation by reference in the following Registration Statements of our report dated February 24 2010 relating to the consolidated financial statements and financial statement schedule of The Charles Schwab Corporation and the effectiveness of The Charles EXHIBIT 23.1 Schwab Corporations internal Corporation for the year ended December 31 2009 control over financial reporting appearing in this Annual Report on Form 10-K of The Charles Schwab Filed on Form S-3 Registration Statement No 333-156152 Debt Securities Preferred Stock Depositary Shares Common Stock Purchase Contracts Warrants and Units Consisting of Two or More Securities Filed on Form S-4 Registration Statement No 333-48764 Registration of common stock Filed on Form S-8 Registration Statement No 333-144303 The Charles Schwab Corporation Employee Stock Purchase Plan Registration Statement No 333-131502 The Charles Schwab Corporation Deferred Compensation Plan II Registration Statement No 333-101992 The Charles Schwab Corporation 2004 Stock Incentive Plan Registration Statement No 333-93125 The Charles Schwab Corporation Employee Stock Incentive Plan Registration Statement No 333-81840 The Charles Schwab Corporation Employee Stock Incentive Plan Registration Statement No 333-7 1322 The SchwabPlan Retirement Savings and Investment Plan Registration Statement No 333-63452 The Charles Schwab Corporation Employee Stock Incentive Plan Registration Statement No 333-63448 The Charles Schwab Corporation 2004 Stock Incentive Plan Registration Statement No 333-59280 The Charles Schwab Corporation Employee Stock Incentive Plan Registration Statement No 333-48335 The Charles Schwab Corporation Employee Stock Incentive Plan Registration Statement No 333-47107 The Charles Schwab Corporation 2004 Stock Incentive Plan Registration Statement No 333-44793 Charles Schwab Profit Sharing and Employee Stock Ownership Plan Registration Statement No 333-32058 CyBerCorp Holdings Inc 1996 Incentive Plan is Deloitte Touche LLP San Francisco California February 24 2010 THE CHARLES SCHWAB CORPORATION CERTIFICATION PURSUANT TO RULE 13a-14a/15d-14a AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 Exhibit 31.1 Walter Bettinger II certify that have reviewed this Annual Report on Form 10-K of The Charles Schwab Corporation Based on my knowledge this report does not contain any untrue statement of material fact or omit to state material fact necessary to make the statements made in light of the circumstances under which such statements were made not misleading with respect to the period covered by this report Based on my knowledge the financial statements and other financial information included in this report fairly present in all material respects the financial condition results of operations and cash flows of the registrant as of and for the periods presented in this report The registrants other certifying officer and are responsible for establishing and maintaining disclosure controls and procedures as defined in Exchange Act Rules defined in Exchange Act Rules 3a- 15e and 3a- 5f and Sd-i 5f for Sd- 15e and internal and have the registrant control over financial reporting as Designed such disclosure controls and procedures or caused such disclosure controls and procedures to be designed under our supervision to ensure that material information relating to the registrant including its consolidated subsidiaries is made known to us by others within those entities particularly during the period in which this report is being prepared Designedsuch internal control over financial reporting or caused such internal control over financial reporting to be designed under our supervision to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles Evaluated the effectiveness of the registrants disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures as of the end of the period covered by this report based on such evaluation and Disclosed in this report any change during the registrants most recent in the registrants internal control over financial reporting that occurred fiscal quarter the registrants fourth fiscal quarter in the case of an annual report that has materially affected or is reasonably likely to materially affect the registrants internal control over financial reporting and The registrants other certifying officer and have disclosed based on our most recent evaluation of internal control over financial reporting to the registrants auditors and the audit committee of registrants board of directors or persons performing the equivalent functions All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrants ability to record process summarize and report financial information and Any fraud whether or not material that involves management or other employees who have significant role in the registrants internal control over financial reporting Date February 24 2010 Is Walter Bettinger II Walter Bettinger II President and Chief Executive Officer THE CHARLES SCHWAB CORPORATION CERTIFICATION PURSUANT TO RULE 13a-14a/15d-14a AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 Exhibit 31.2 Joseph Martinetto certify that have reviewed this Annual Report on Form 10-K of The Charles Schwab Corporation Based on my knowledge this report does not contain any untrue statement fact necessary to make the statements made in light of the circumstances of material fact or omit to state material under which such statements were made not misleading with respect to the period covered by this report Based on my knowledge all material respects the financial condition the financial statements and other financial information included in this report fairly present in results of operations and cash flows of the registrant as of and for the periods presented in this report The registrants other certifying officer and are responsible for establishing and maintaining disclosure controls and procedures as defined in Exchange Act Rules 3a- 15e and defined in Exchange Act Rules 3a- 15f and Sd-i 5f for the registrant 5d- 15e and internal and have control over financial reporting as Designed such disclosure controls and procedures or caused such disclosure controls and procedures to be designed under our supervision to ensure that material information relating to the registrant including its consolidated subsidiaries is made known to us by others within those entities particularly during the period in which this report is being prepared Designed such internal control over financial reporting or caused such internal control over financial reporting to be designed under our supervision to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles Evaluated the effectiveness of the registrants disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures as of the end of the period covered by this report based on such evaluation and Disclosed in this report any change in the registrants internal control over financial reporting that occurred during the registrants most recent fiscal quarter the registrants fourth fiscal quarter in the case of an annual report that has materially affected or is reasonably likely to materially affect the registrants internal control over financial reporting and The registrants other certifying officer and have disclosed based on our most recent evaluation of internal control over financial reporting to the registrants auditors and the audit committee of registrants board of directors or persons performing the equivalent functions All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrants ability to record process summarize and report financial information and Any fraud whether or not material that involves management the registrants internal control over financial reporting or other employees who have significant role in Date February 24 2010 Is Joseph Martinetto Martinetto Joseph Executive Vice President and Chief Financial Officer THE CHARLES SCHWAB CORPORATION Exhibit 32.1 CERTIFICATION PURSUANT TO 18 U.S.C SECTION 1350 AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Annual Report of The Charles Schwab Corporation the Company on Form 10-K for the year ended December 31 2009 the Report Walter Bettinger II President and Chief Executive Officer of the Company hereby certify pursuant to 18 U.S.C section 1350 as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002 that to the best of my knowledge The Report 1934 and fully complies with the requirements of section 13a or 15d of the Securities Exchange Act of The information contained in the Report fairly presents in all material respects the financial condition and results of operations of the Company for the periods presented therein Is Walter Bettinger II Walter Bettinger II President and Chief Executive Officer Date February 24 2010 signed original of this written statement required by Section 906 has been provided to The Charles Schwab Corporation and will be retained by The Charles Schwab Corporation and furnished to the Securities and Exchange Commission or its staff upon request THE CHARLES SCHWAB CORPORATION Exhibit 32.2 CERTIFICATION PURSUANT TO 18 U.S.C SECTION 1350 AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Annual Report of The Charles Schwab Corporation the Company on Form 10-K for the year ended December 31 2009 the Report Company hereby certifi pursuant Joseph to 18 U.S.C section 1350 Martinetto Executive Vice President and Chief Financial Officer of the as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002 that to the best of ray knowledge The Report 1934 and fully complies with the requirements of section 13a or 15d of the Securities Exchange Act of The information contained in the Report fairly presents in all material respects the financial condition and results of operations of the Company for the periods presented therein /s Joseph Martinetto Joseph Martinetto Executive Vice President and Chief Financial Officer Date February 24 2010 signed original of this written statement required by Section 906 has been provided to The Charles Schwab Corporation and will be retained by The Charles Schwab Corporation and furnished to the Securities and Exchange Commission or its staff upon request Frank Herringer Chairman of the Board of Transamerica Corporation financial services company Age 67 Director since 1996 term expires in 2011 Chairman of the Nominating and Corporate Governance Committee member of the Compensation Committee Paula Sneed Chairman and Chief Executive Officer Phelps Prescott Group LLC strategy and management consulting firm Age 62 Director since 2002 term expires this year Member of the Compensation Committee Nominating and Corporate Governance Committee Stephen McLin Roger Walther Chairman and Chief Executive Chairman and Chief Executive Officer STM Holdings LLC which Officer Tusker Corporation advice real estate and business offers merger and acquisition Age 63 Director since 1988 term expires in 2011 Chairman of the Audit Committee member of the Nominating and Corporate Governance Committee Arun Sarin Former Chief Executive Officer Vodafone Group Plc mobile telecommunications company Age 55 Director since 2009 term expires this year Member of the Audit Committee Nominating and Corporate Governance Committee company management Age 74 Director since 1989 term expires in 2011 Chairman of the Compensation Committee member of the Nominating and Corporate Governance Committee Robert Wilson Chairman Still River Systems medical device company Age 69 Director since 2003 term expires in 2011 Member of the Compensation Committee Nominating Corporate Governance Committee and BOARD OF DIRECTORS Charles Schwab Chairman of the Board The Charles Schwab Corporation Age 72 Director since 1986 term expires in 2011 William Aldinger lii Former Chairman President and Chief Executive Officer Capmark Financial Group Inc financial services company Age 62 Director since 2005 term expires this year Member of the Audit Committee Nominating and Corporate Governance Committee Nancy Bechtle Former President and Chief Executive Officer San Francisco Symphony Age 72 Director since 1992 term expires in 2012 Member of the Compensation Committee Nominating and Corporate Governance Committee Walter Bettinger II President and Chief Executive Officer The Charles Schwab Corporation Age 49 Director since 2008 term expires in 2012 Preston Butcher Chairman and Chief Executive Officer Legacy Partners real estate and management development Age 71 Director since 1988 term expires in 2012 Member of the Audit Committee firm Nominating and Corporate Governance Committee In Memoriam for Don Fisher The Charles Schwab Corporation last September Don Fisher played counsel optimism and entrepreneurial our employees and clients lost longtime supporter trusted advisor and great friend key role in the transformative growth of our company where his insights strategic spirit were invaluable during his 21 years of service to Schwab Don had an community to others that was exemplified here in the San Francisco extraordinarily generous spirit and commitment through his philanthropy community service and support for the arts and education We will all miss him deeply Charles Schwab Chairman of the Board Walter Bettinger II President and Chief Executive Officer ii CORPORATE CONTACTS AND INFORMATION The Charles Schwab Corporation 211 Main Street CA 94105 San Francisco 415 667-7000 www.aboutschwab.com The Charles Schwab Corporation is leading provider of financial Stockholder In formation Schwab Contacts Annual Meeting The annual meeting of stockholders p.m Pacific Time be held at will on Thursday May 13 2010 at 211 Main Street San Francisco CA and via the Internet To register visit Customer Service Investor Services 800 435-4000 www.schwab.com Advisor Services 877 456-0777 www.schwabadvisorcenter.com/public Corporate and Retirement Services 877 456-0777 www.scrs.schwab.com services with more than 300 offices www.schwabevents.com/corporation and 7.7 million brokerage accounts 1.5 million corporate retirement Stock Ownership Services plan participants 722000 banking All stockholders of record are welcome The Charles Schwab Corporation accounts and $1.42 trillion in client assets Through its operating to participate Corporation Dividend Reinvestment in The Charles Schwab Office of the Corporate Secretary 415 667-9807 subsidiaries the company provides and Stock Purchase Plan managed by full range of securities brokerage Wells Fargo Bank N.A For information Charles Schwab Foundation banking money management and on the Dividend Reinvestment and financial advisory services to individual Stock Purchase Plan or for assistance investors and institutions Our ticker symbol is SCHW and our common on stock ownership questions contact Transfer Agent Registrar Carrie Schwab-Pomerantz Charles Schwab 877 408-5438 Foundation President stock is listed on the New York Stock Wells Fargo Bank N.A Investor Relations Exchange effective March 2010 CEO and CFO Certifications The Charles Schwab Corporation has included as exhibits to its Annual Report ended December on Form 10-K for the year 31 2009 filed with the Securities and Exchange Shareowner Services P.O Box 64854 St Paul MN 55164 800 468-9716 www.wellsfargo.com/ shareownerservices Richard Fowler Senior Vice Investor Relations President 415 667-1841 E-mail investor.relations@schwab.com Legislative and Regulatory Affairs Independent Auditors Jeffrey Brown Senior Vice President Commission certificates of its Chief Deloitte Touche LLP Executive Officer and Chief Financial 50 Fremont Street Officer certifying the quality of the companys public disclosure Publications CA 94105 San Francisco 415 783-4000 www.deloitte.com To obtain the companys annual report Outside Counsel 10-K 10-Q quarterly earnings report Howard Rice Nemerovski or other publications without charge Canady Falk Rabkin contact Embarcadero Center 7th Floor Legislative and Regulatory Affairs 555 12th Street NW Suite 740 Washington 202 662-4902 DC 20004 Public Relations Greg Gable Senior Vice President Public Relations Corporate Media Hotline 888 767-5432 E-mail public.relations@schwab.com CA 94111-4024 San Francisco 415 434-1600 www.howardrice.com Charles Schwab Investor Relations 211 Main Street CA 94105 San Francisco 415 667-1959 These documents may also be in the Investor Relations viewed section of the companys Web site at www.aboutschwab.com Trademarks or Registered Trademarks Charles Schwab Schwab and other trademarks appearing herein which and TM are may be indicated by registered trademarks or trademarks Co Inc in the of Charles Schwab U.S and/or trademarks and registered trademarks other countries These are proprietary to Charles Schwab Co Inc in the U.S and/or other countries 1y \\ f l MKT10448-22 3/10
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