1
WHAT I’VE HEARD.
THE CHARLES SCHWAB CORPORATION
2011 Annual Report
The Charles Schwab Corporation (NYSE: SCHW) is
a leading provider of brokerage, banking, home
loans, and other financial services to millions of
individual investors. The firm also serves independent
investment advisors and helps companies manage
retirement and stock plans.
TABLE OF CONTENTS
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i
ii
Letter From the CEO
Operating Priorities
Letter From the CFO
Financial Highlights and Reconciliation
Growth in Client Assets and Accounts
Executive Management
Form 10-K
Board of Directors
Corporate Information
In addition to historical information, this Annual Report to Stockholders contains
“forward-looking statements,” which are identified by words such as “believe,”
“anticipate,” “expect,” “intend,” “plan,” “will,” “may,” “estimate,” “aim,” “target,”
“should,” “growth,” “commit,” “build,” “deliver,” “continue,” “remain” and other
similar expressions. In addition, any statements that refer to expectations,
projections, or other characterizations of future events or circumstances are
forward-looking statements. These forward-looking statements, which reflect
management’s beliefs, objectives, and expectations as of the date hereof, are
necessarily estimates based on the best judgment of the company’s senior
management. These statements relate to, among other things, the company’s
growth in revenues, earnings and profits (See “Letter from the Chief Executive
Officer” and “Letter from the Chief Financial Officer”), earnings power (See “Letter
from the Chief Executive Officer”), and investment spending, expenses and
capital position (See “Letter from the Chief Financial Officer”). 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 to Stockholders. See
“Forward-Looking Statements” in Management’s Discussion and Analysis of
Financial Condition and Results of Operations on page 43 in the Form 10-K for a
discussion of important factors that may cause such differences.
1
Chuck Schwab,
Chairman
of the Board
For many years, our company has invited
clients to Talk to Chuck™, to tell us what
they need and want from a financial services
firm. They responded. And what we’ve heard
from them is that a superior experience
means listening to what people need and
basing our innovations on what we learn.
It means providing resources and knowledge
that help our clients shape their futures.
It means creating a culture of service,
and it means providing direct access
to the markets.
But don’t take it from me.
Read their stories for yourself.
2
“ With our Schwab rep, it really was a
personal connection. He was trying
to plan for his own family just like we
were trying to plan for our family.”
– Jamie Wulf, Investor
“No one can prepare you for it until you are actually
going through it” is one of the first things Jamie Wulf
says when she talks about becoming a mother. Young,
adventurous, and somewhat carefree, Jamie and
Nathan Wulf knew their lives would change forever
when they learned they were pregnant. “You’re no
longer number one,” Nathan says. Their daughter
Ashlyn was born on May 20, 2011, and suddenly
trips or house improvements became less important
than “the diaper fund.” Fortunately, their families
live nearby and are quick to help out, but Nathan
and Jamie also rely on their Schwab financial
consultant. “It was really important to me to make
sure that we were investing in the right way, we were
saving in the right accounts, and where our Schwab
representative came in is really being a check-and-
balance system,” Jamie says. Nathan is quick to
add: “He sets the roadmap for us, but ultimately
leaves the decisions up to Jamie and I.” Nathan
and Jamie continue to enjoy working with Schwab
because, as Nathan says, they’re “vested in us
from a personal standpoint.”
3
Hear Nathan and Jamie Wulf share their story in their own words at www.aboutschwab.com
4
“ In my piloting, I don’t like excitement.
In my retirement plan, as a trustee of
the plan, I don’t want excitement either.”
– Capt. Peter McIsaac, San Francisco Bar Pilots
Hear Capt. Peter McIsaac share
his story in his own words at
www.aboutschwab.com
5
Boarding ships by rope ladder 12 miles off the California
coast is a dangerous job, but the San Francisco Bar Pilots’
experience and knowledge of local waters make most days
event-free. That is exactly what Capt. Peter McIsaac and
his 59 fellow pilots looked for in a retirement plan provider.
“In my piloting, I don’t like excitement. In my retirement plan,
as a trustee of the plan, I don’t want excitement either.”
With approximately $1 billion in commerce passing under
the Golden Gate Bridge every day, the Bar Pilots know their
job is critical to the nation’s economy.
Every vessel transit through San Francisco Bay is
important. The pilots feel good knowing the people
at Schwab Retirement Plan Services take the same
approach in providing services for their retirement
plan: “Everyone we’ve dealt with at Schwab has been
good and competent,” McIsaac says. “If we have ques-
tions, they get back to us with the answer, or they get
back to us and tell us they’re going to need another
day or two to find the answer. That, to me, is service.”
6
“ During the economic crisis, I thought
to myself, ‘Gee, if we could change a
generation around financial literacy,
it would impact the country.’”
– Roxanne Spillett, President Emeritus of Boys & Girls Clubs of America
Hear Roxanne Spillett share her story in her own words at www.aboutschwab.com
7
Not long ago, Roxanne Spillett walked into a Boys & Girls
Club to find a group of kids poring over a copy of The Wall
Street Journal. They were following their stock picks and
catching up on the business news of the day. Five years
ago, this would have surprised Spillett. Today, it doesn’t.
“During the economic crisis, I thought to myself, ‘Gee, if
we could change a generation around financial literacy,
it would impact the country.’” And with the help of
Charles Schwab Foundation, the clubs are doing exactly
that with Money Matters: Make It CountSM, a program that
helps kids become financially literate. Club members
learn everything from how to open a checking or savings
account to more advanced lessons such as paying
for college or even starting a business. Developing the
curriculum with Schwab, Spillett quickly realized financial
literacy was a real passion for the company. “They’re
not hands-off. They’re engaged in the development of
the program, making sure we have the right expertise,
the right kinds of activities that resonate with kids.
And at a local level, their employees are serving as
volunteers.” The experience has reaffirmed Spillett’s
belief in the power of corporate relationships, that
companies can “carry out their mission and their
business at the same time.”
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Hear Carol Benz share her story in her own words at www.aboutschwab.com
“ It’s almost as if Schwab is part
of our firm. It’s as if they have
an office down the hall.”
– Carol Benz, Principal, Bingham, Osborn & Scarborough, LLC, Wealth Management
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Over the past few years, the number of Registered
Independent Advisors has exploded. It’s happening,
says Carol Benz, because independent advisors can
“choose from a wide variety of investment vehicles to meet
the needs of their clients,” instead of pushing proprietary
products. But running an independent advisory isn’t as
simple as providing transparent, conflict-free advice.
It’s a business that requires human resources, strategic
planning, technology, operations, and all the other respon-
sibilities that fall on Carol’s shoulders to keep her firm,
Bingham, Osborn & Scarborough, running. That’s where
Schwab Advisor Services comes in: “We’ve worked with
the same Schwab representatives for over 10 years.
There’s a deep intelligence of the firm and how we
operate.” In addition to Schwab’s practice management
services, in-house consultants, and “immense library of
tools and resources that help drive growth,” Carol says
that what defines the Schwab experience is the people:
“Working with Schwab is an authentic experience. It’s
real, it’s human, and it’s incredibly reliable. Each person
we work with tends to look at things with a long-term,
futuristic perspective. It’s a very entrepreneurial approach.”
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Hear Gus and Betty Franke share their story in their own words at www.aboutschwab.com
After the constant relocations of a military career,
Gus and Betty Franke settled in Georgia and started
a business together, producing flags and banners.
Gus handles design and sales, while Betty keeps the
books. It is a true partnership in work and in life.
But for Betty, there was a problem: She wanted to be
more involved in the family’s finances. “I realized how
it was really important that I understand where our
money was, what it meant for my future, not just our
future,” she says. “I wanted the empowerment of
knowing what was going on.” Schwab made her
learning curve easy, she says. “Every time we meet with
Schwab they review what our needs are: Where do we
stand, what are our thoughts, where do we want to be.
They listen to me.” Today, Gus and Betty continue to seek
that help and guidance by driving 120 miles round-trip
to see their trusted Schwab financial consultant, Steve
Marcu. Gus says the drive is worth it. “With Schwab, Betty
and I walk out, and we’re not looking at each other going,
‘What did he just tell us?’ We’re going, ‘That was really
interesting. I got a lot out of that.’”
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“ The biggest change for me was when
I saw this was going to be something
that Gus and I can do together.”
– Betty Franke, Investor
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“ If I think of my running career as
a marathon, then it’s the same as
investing: They’re both focused on
being able to do this into my 60s
and hopefully 70s.”
– Kirk Larson, Investor
During the financial crisis of 2008, Kirk Larson saw
that some of the big brokerages were tied in with
companies that did not seem financially sound to him.
“Yet with Schwab,” he says, “I had complete confidence.”
That’s because as a self-directed, independent investor
who has successfully managed his own investments
for years, Kirk takes a conservative but intuitive
approach, studying companies that show long-term
value and avoiding the impulse to buy and sell every
day. Over the years, this approach gave Kirk a broad
range of investments from a broad range of financial
services firms, including Schwab. Then around 2008,
Kirk saw the benefit of bringing his assets under one
roof, choosing a firm he felt shared his values: “To me,
Schwab seemed like the complete class of the field.
They’d been there a long time.” Kirk knows he found the
right firm. Schwab made his consolidation easy four
years ago, and today, the company gives him the kind
of service he expects: “I’ve never called Schwab and
not had somebody who really understood what I was
asking, what I needed, and wasn’t able to resolve, or if
they couldn’t resolve it, put me in touch with someone
who could. That doesn’t happen that often.”
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Hear Kirk Larson share his story
in his own words at www.aboutschwab.com
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14 LETTER FROM THE CHIEF EXECUTIVE OFFICER
Walt Bettinger,
President and
Chief Executive Officer
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We delivered outstanding revenue and earnings
growth during the six quarters from early 2010 through
mid 2011, when interest rates were relatively stable.
And when the Federal Reserve allows market forces to
determine interest rates, we believe our efforts
will yield significant revenue and earnings growth.
2011 can be summarized in three statements:
1. We are not immune to the economic challenges
of the day, but we are focused on delivering
results in the areas we can control.
2. In difficult times, we remain committed to our
strategy and operating priorities — because
they are working.
3. We are building significant earnings power
that will be delivered to our stockholders
as the environment improves.
Focusing on What We Can Control to Generate Growth
We evaluate our financial performance in two ways.
First, we look at our client metrics. Are we building a
strong franchise for the long term? Next, we look at our
current year results. Did we grow revenue and earnings?
On both measures, we delivered quality results in 2011
despite difficult economic times.
Clients continued to entrust their assets to Schwab,
bringing $82.3 billion in net new assets in 2011 (exclud-
ing one-time flows). Perhaps our most important measure
of success is the enduring strength of our business and
the trust our clients place in us. Since the financial crisis
To My Fellow Stockholders:
A close friend once suggested that my
annual letter to fellow stockholders
should be crafted as if I were speaking
with a business partner who had been
away from the business for the entire year.
My friend suggested that the letter offer
clear and concise conversation, without
spin or corporate-speak. Given the chal-
lenges of the past year, I’ve made an extra
effort to follow his guidance in preparing
this letter to you, my fellow stockholders.
Our overall results in 2011 tell the story of a company
on a solid growth path, the full potential of which is
currently masked by environmental factors that should
eventually abate.
Last year was an extraordinarily difficult year across the
financial services industry — and Schwab was not immune.
The downgrade of U.S. debt, the ongoing sovereign debt
issues affecting the Eurozone, extreme equity market
volatility, and the political stalemate in Washington, were
just a few of the contributing factors in a challenging
year. Of course, the unprecedented actions taken by the
Federal Reserve to manage short- and long-term interest
rates to record-low levels pressured Schwab’s earnings
in 2011, and as a result our stock performance suffered.
But in the middle of this challenging environment, your
management team continued to focus on the things we
could control — principally, building a world-class invest-
ing services firm with strong long-term earnings power.
16 LETTER FROM THE CHIEF EXECUTIVE OFFICER
TOTAL CLIENT ASSETS BY BUSINESS
(in billions at year end)
$1,445.5
$1,422.6
$1,137.0
$1,677.7
$1,574.5
2007
2008
2009
2010
2011
Investor Services
Advisor Services
Other Institutional Services
began in the summer of 2008, clients have invested more
than $300 billion in net new assets (NNA) with Schwab—
more than the comparable NNA numbers reported by our
publicly traded competitors combined. Total client assets
reached $1.68 trillion at the end of 2011.
We produced revenue and earnings growth in a tough
environment. Our net revenues were $4.7 billion in 2011,
up 10 percent over 2010. Net income was $864 million
in 2011, up 90 percent year-over-year. Prior to the inclu-
sion of charges relating to YieldPlus and other previously
disclosed matters, net income totaled $775 million in 2010.
Our pre-tax profit margin was 29.7 percent in 2011, and
diluted earnings per share reached $0.70.
As a further indication of the strength of our underlying fun-
damentals, for the six quarters from January 2010 through
June 2011, a period where interest rates remained relatively
stable, we grew revenue 22 percent and pre-tax operating
income by about 80 percent.
Basing Our Strategy on the Golden Rule
Our strategy is as simple as it is successful: We build our
business “through clients’ eyes.”
Too often in today’s business world, people overcomplicate
things. At Schwab, we keep things simple and build our
strategy around the Golden Rule. We have a fundamental
belief that if you treat clients as you would like to be treated,
clients will bring in more business and will refer their friends
and family members.
We focus our efforts on long-term growth instead of short-
term profit-taking. In difficult times, some companies feel
compelled to make trade-offs on the backs of their clients.
Not at Schwab. We will not make decisions simply to pro-
duce gains that are both short-term and shortsighted.
At Schwab, we structure our two primary business
segments to meet client needs.
Investor Services, our retail segment, provides broker-
age, banking, financial advice, and related services di-
rectly to millions of individual investors. As of December
31, 2011, Investor Services accounted for total client
assets of $697.9 billion.
Institutional Services, our business-to-business
segment, serves independent investment advisors
and company benefit plan sponsors. As of December
31, 2011, Advisor Services accounted for $679.0 billion
in total client assets, with $300.8 billion contributed
by Other Institutional Services.
We believe that the best long-term growth strategy is
one that puts clients first.
Following Our Operating Priorities
Our five operating priorities help us translate our client-
focused strategy into action.
1. Diversified client acquisition
2. Win-win monetization
3. Long-term client retention
4. Expense discipline
5. Effective capital management
In 2011, we took decisive action in each of these areas,
including: the acquisition of optionsXpress® to help diver-
sify and expand our client base; significant expansion of
our money management and retail investment advice, both
of which deepen our relationships with clients and help us
monetize those relationships to benefit both clients and
our firm; and the addition of new capabilities to enhance
the client experience and promote long-term retention.
(See “Operating Priorities” on page 18.)
As a result of our client-focused activities, our Client Pro-
moter Score (CPS) for individual investors reached record
levels last year, suggesting our strategy and operating
priorities are having the impact we strive for. About half of
our new clients join because of a referral or recommenda-
tion. CPS is a simple measure of how well we’re doing at
earning that level of loyalty and advocacy from our clients.
When CPS is strong, we know our clients are recommending
Schwab to their friends, family, and acquaintances — and
that is the most direct measure of whether our client-
focused strategy is working successfully. The pronounced
turnaround in that score since 2004, when we began to
measure it, reaffirms the steady positive impact of our
clients-first strategy.
CLIENT PROMOTER TRENDS FOR INVESTOR SERVICES*
17
25%
24%
30%
34%
36%
70%
60%
50%
40%
30%
20%
10%
0%
-10%
-20%
-30%
14%
-4%
-17%
Q4
Q4
Q4
Q4
Q4
Q4
Q4
Q4
2004
2005
2006
2007
2008
2009
2010
2011
* Client Promoter Score (CPS) is a program in which we survey clients and ask them to rate us, from 0 to 10, on their willingness to recommend
Schwab. CPS is calculated by taking the percentage of “promoters” minus the percentage of “detractors” to arrive at a net indicator of loyalty.
Building Earnings Power for Stockholders
Whether our activities are focused on acquisition, monetiza-
tion, or retention, they have one thing in common: They
are designed to deliver outstanding long-term growth of
earnings per share.
The current record-low interest rate environment makes it
difficult to measure the progress we are making at building
earnings power. However, a careful review illustrates the
progress we have made during the financial crisis.
EPS POWER*
$0.39
* Does not address
performance
beyond Q2 2011.
$0.27
$0.20
Q2 2008
Q2 2011
Actual EPS
Hypothetical based on Q2 2011 and Q2 2008
environment (2% Fed Funds, 1,350 S&P 500 avg.).
Our firm’s record quarter for earnings was the second quarter
of 2008, when we earned $0.27 per share from continuing
operations. If we apply the same economic environment
from Q2 2008 to the second quarter of 2011 — including
a 2 percent Fed Funds rate and the S&P 500 averaging
1,350 — and assuming no other change, we would have
earned $0.39 per share. Put another way, it took us almost
35 years to grow quarterly earnings to $0.27 per share from
continuing operations. A mere three years later, we would
have grown our EPS power another 44 percent, to $0.39, if
conditions had remained constant.
Creating and Delivering Long-Term Stockholder Value
Our 2011 performance confirms that Schwab is on the right
track. As we look toward 2012 and beyond, we will stay the
course with our “through clients’ eyes” strategy, and we will
continue to focus on our successful operating priorities.
Our goal is not just to build earnings power, but also to
deliver it to our stockholders as the environment improves.
As I write this letter, it is difficult to see the economic envi-
ronment improving to a significant extent in the near term.
As we move into 2012, we are facing what is likely to be a
turbulent, bruising, and important presidential election. In
addition, we continue to witness sovereign debt problems
in Europe, the ongoing deleveraging of the consumer, and
the extraordinary commitments by the Federal Reserve to
keep interest rates anchored at record-low levels.
Nevertheless, your management team remains focused on
continuing to build the Schwab brand and franchise, serving
millions more clients and gathering billions of dollars in new
assets. Each and every day, we apply our efforts to building
earnings power that will benefit our long-term shareholders.
For as we all know, the challenges of today won’t last forever.
Thank you for your confidence.
Warmly,
WALT BETTINGER
March 10, 2012
18 OPERATING PRIORITIES
During 2011, Schwab continued
to make progress against our
operating priorities.
DIVERSIFIED CLIENT ACQUISITION
Schwab generated incremental growth last year with the
strategic acquisitions of optionsXpress and Compliance11™
and positioned itself for future growth with the launch of
Independent Branch Services.
The first independent branch opened last fall in Nashua,
N.H. Over the next five years, the company expects to award
many more branch franchises to qualified financial profes-
sionals. By locating these independent branches in markets
where Schwab is currently underrepresented, the firm can
strengthen its retail presence in a cost-effective way, and
independent branch leaders can leverage the well-known
Schwab brand as they build their client base.
In 2011, Schwab also grew organically by attracting
new clients to Schwab’s two primary business segments,
Investor Services and Institutional Services.
Investor Services added 163,221 new-to-firm households,
helping to boost the number of active brokerage accounts to
8.6 million and the number of banking accounts to 780,000.
Among the many initiatives designed to acquire new clients
were the relaunch of the marketing website at Schwab.com
and a refreshed advertising campaign building on the popu-
lar Talk to Chuck campaign.
In Institutional Services, Schwab gained new clients in two
important segments — Registered Investment Advisors (RIAs)
and company plan sponsors.
costs, Schwab Index Advantage provides index mutual funds
with low operating expenses. The program also comes with
a low-cost professional, independent advisor service that
develops a savings and investment program with the goal
of helping participants increase retirement savings.
Getting retirement savings right is crucial, and we expect
Schwab Index Advantage to be an industry-leading alterna-
tive that could benefit millions of Americans who use 401(k)
plans to save for retirement.
WIN-WIN MONETIZATION
In 2011, Schwab’s diversified revenue streams helped
generate profitable growth.
Asset management and administration fees—our largest
single source of revenue — grew 6 percent year-over-year,
from $1.8 billion to $1.9 billion in 2011. A number of
strategies fueled this growth:
We expanded client investment solutions, including new
index exchange-traded funds (ETFs), fixed income, and
global investing capabilities. Our fast-growing family of
ETFs reached $5.0 billion in assets just two years after
the initial ETF launch.
Our clients enrolled in fee-based advisory solutions in
increasing numbers. On average, approximately 4,000
clients per month choose to move from do-it-yourself to
Schwab advisory solutions.
In our retirement plan business, 2012 opened with the
launch of Schwab Index Advantage™ — a one-of-a-kind
401(k) plan offer designed to lower costs, simplify investing,
and help workers better prepare for retirement. To help lower
We integrated Windhaven Investment Management™ into
Schwab’s suite of managed solutions. Since November
2010, the number of Windhaven™ accounts has more than
tripled, and client assets have increased by 96 percent.
2%
19
41%
2011 NET REVENUES
(in millions)
$1,928
Asset management and
administration fees
$1,725
Net interest revenue
$927
Trading revenue
$111
Other
20%
37%
Net interest revenue continues to be important, even
though much of the revenue benefit is currently masked as
a result of the ultra-low interest rate environment. In 2011,
client cash assets invested on Schwab’s balance sheet grew
by 19 percent, from $81.1 billion at the beginning of 2011
to $96.4 billion by year end. We also continued to make
prudent home loans from Schwab Bank, thus building our
loan book from $8.7 billion in 2010 to $9.8 billion at year
end 2011.
Trading remains a relatively modest part of Schwab’s
revenue mix, contributing only 20 percent of revenue, but
it is important to any brokerage firm. At the height of stock
market volatility last August, Schwab experienced four of
the top trading days in the firm’s history and processed
more than 1 million trades on a single day. Maintaining that
capacity — and reliability — ensures that the company will
be there when clients need us most.
Following the completion of the optionsXpress acquisition
last year, we made the strategic decision to reduce its
trading price, consistent with Schwab’s flat $8.95 trading
fee. Although the decision had a very minor impact on total
trading revenue, it was the right thing to do for clients.
Also last year, we introduced a new state-of-the-art trading
platform for active traders, called StreetSmart Edge®.
LONG-TERM CLIENT RETENTION
Schwab continued to strengthen client relationships by
listening, innovating, and providing personalized service.
Through the Schwab branch network, more than 600,000
face-to-face meetings were held with retail clients last year.
In addition, Schwab phone-based reps personally answered
more than 13.8 million calls, with another 12.7 million
handled efficiently through automated systems.
Schwab.com handled approximately 280 million client
log-ins and became the first brokerage website to allow
clients to publicly rate and review Schwab accounts. Plus,
we pursued innovative new ways to connect with clients
and prospects through third-party social media networks,
including Facebook, LinkedIn, Twitter, and YouTube.
We also expanded access through Schwab Mobile apps
available on smart phones and tablets, giving clients
one-touch access to their brokerage, banking, and 401(k)
accounts. By year end, mobile client log-ins reached
nearly 17 million, with about 50 percent of all check
deposits at Schwab Bank coming through mobile devices —
a remarkable illustration of how quickly Schwab clients
adopted this technology.
In Advisor Services, we completed the first phase of
Schwab Intelligent Integration™, a ground-breaking
platform that will enhance the productivity of thousands
of independent advisor firms.
EXPENSE DISCIPLINE AND
EFFECTIVE CAPITAL MANAGEMENT
Chief Financial Officer Joe Martinetto addresses progress
on our two remaining operating priorities — expense
discipline and effective capital management — in his
letter on page 20.
20 LETTER FROM THE CHIEF FINANCIAL OFFICER
Joe Martinetto,
Chief Financial Officer
Driving Forward
Are there positives for Schwab stockholders
to take away from a year like 2011, with
interest rates declining further and the
markets suffering from global uncertainty
and heightened volatility? Absolutely.
Why? Because we once again took
everything the environment threw at us
and still delivered on our financial and
operating commitments, and we stand
on a very firm footing to drive forward
into the future.
Let’s review how events unfolded. We started 2011 with
a sense of building optimism. We’d seen some stability in
the rate and equity markets, which along with the continued
growth we’ve experienced in our client base, had begun to
turn into consistent growth in revenues and earnings.
With that as a backdrop, we’d begun ramping investment
spending in late 2010 and were prepared to continue
on that track in 2011. We saw opportunities in front of
us that we believed were going to be important drivers of
growth in the future, and while our profitability had not
yet returned fully to pre-financial crisis levels, we strove
to find the right balance between near-term profitability
and long-term growth.
As the year progressed, the economic environment clearly
veered away from a consistent recovery, equity markets
turned volatile, and the Fed took yet another round of action
to drive down rates, this time pushing down the longer end
of the yield curve. Given how we make money, this environ-
ment created challenges that we didn’t anticipate in our
baseline planning scenario. To place these challenges in
perspective, our two largest sources of revenue — asset
management and administration fees and net interest rev-
enue — declined by a combined $129 million, or 7 percent,
between the first and second halves of 2011, even as we
added over 1 million brokerage accounts and more than
$145 billion in net new assets to our client base during the
year, including optionsXpress accounts and assets. I think
it’s fair to say we hit a bump in the road.
Still, we met both our financial commitments and planned
investment in our clients for 2011. We originally thought we
could deliver 10 percent revenue growth against 8 percent
expense growth (including our accelerated investment
spending) if rates remained flat and the equity markets
produced mid-single-digit returns. In the face of the
significantly tougher reality that unfolded, our comparable
revenue and expense growth rates were 9 percent and
NET REVENUES*
(in millions for year ended December 31,)
$4,994
$5,150
$4,193
$4,248
$4,691
2007
2008
2009
2010
2011
* Amounts are presented on a continuing operations basis to exclude the impact of the
sale of U.S. Trust Corporation, which was completed on July 1, 2007.
7 percent, respectively, after adjusting for optionsXpress
and certain charges taken in 2010. Revenue pressure was
partially offset by continued growth in non-interest sensitive
sources like advice fees, as well as a period of very active
trading in the summer. And our expense discipline remained
intact, even as we dedicated substantial resources to
driving important growth initiatives toward completion as
planned. We determined that seeing these projects through
would be far more cost-effective in the long run than trying
to cut them back and then restart them later.
“ We operate the company to be resilient in
any economic scenario — our commitment to
solid capital, strong liquidity, and managing
risk is unyielding.”
21
PRE-TAX PROFIT MARGIN*
39.4%
37.1%
30.4%
29.7%
18.3%
2007
2008
2009
2010
2011
* Amounts are presented on a continuing operations basis to exclude the impact
of the sale of U.S. Trust Corporation, which was completed on July 1, 2007.
What are we looking for in 2012? Possibly a slow start, with
a rebound into the latter part of the year. But we can take
that in stride; as we’ve shown in the last couple of years, our
basic model works well, turning client growth into earnings
growth once economic drivers stabilize. After allocating a
record $180-plus million to projects in 2011, we’re planning
to trim investment spending by over 20 percent, but not
nearly back to the lows of recent years, and we’ll continue
to make headway against a number of important initia-
tives. This far into the crisis, and running as lean as we are
now, operating expense trade-offs get harder to make in
the near-term. And they have implications for service and,
potentially, growth, so we’re approaching this cautiously.
Overall, assuming a flat interest rate environment and mod-
est equity market gains in 2012, we believe we can keep
core expenses close to 2011 levels before layering on a
full year of optionsXpress, with revenues probably making
a bit more progress as we grow our client base. That might
not sound very dramatic, but it would actually represent a
strong rebound in performance as 2012 progresses.
This is the fifth year I’ve written a letter to you as fellow
stockholders. Reflecting back, I’ve attempted to “call
’em like I see ’em.” Sometimes my crystal ball has been
a little cloudy, but there are some things that have been
consistent throughout:
We operate the company to be resilient in any economic
scenario — our commitment to solid capital, strong
liquidity, and managing risk is unyielding.
We make necessary trade-offs to remain solidly profitable
in the short run, while also continuing to invest in growth
for the future.
We understand that stockholders have entrusted us with
their capital, and we look to deploy it efficiently and earn
an appropriate return on it.
I should spend a minute on capital management before
I close. As I’ve said to you before, as environmental
headwinds ease and our profitability strengthens, we’d
expect that the company’s ongoing growth will be primarily
supported by capital generated by earnings, which was
the case even in an earnings-constrained year like 2011.
Looking ahead into 2012, we see another year of strong
balance sheet growth as our client initiatives yield stronger
business momentum and we continue our work to optimize
net interest revenue. To help ensure that the company can
continue to operate as it chooses in the face of headwinds
that have yet to improve, we raised $400 million in capital
early this year via our first-ever preferred stock offering. We
viewed this as a cost-effective, non-dilutive way to support
our ongoing growth. You can rest assured that we remain
committed to maintaining only the capital level appropriate
to run our businesses, and that we’ll look to return anything
beyond that level to owners.
We’re ready to continue driving forward without waiting
for help from the environment. We remain positioned for
profitable growth, with a healthy balance sheet and the
resources necessary to meet the needs of our clients.
This most recent round of volatility may not turn out to be
the last bump in the road on the way to a healthier economy,
but we remain prepared to serve clients, deliver on our
commitments, and build a thriving franchise for the long run.
JOE MARTINETTO
March 10, 2012
22 FINANCIAL HIGHLIGHTS AND RECONCILIATION
FINANCIAL HIGHLIGHTS
(In Millions, Except Per Share Amounts and as Noted)
Net revenues
Expenses excluding interest
Net income
Basic earnings per share
Diluted earnings per share
Dividends 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)
Net revenue growth (decline)
Pre-tax profit margin
Return on stockholders’ equity
Full-time equivalent employees
(at year-end, in thousands)
Net revenues per average
GROWTH RATE
1-YEAR
2010-11
10%
(5%)
90%
84%
84%
–
3%
(34%)
17%
2011
$ 4,691
$ 3,299
$
$
$
$
864
.70
.70
.24
1,229
$ 11.26
$ 6.07
10%
29.7%
12%
2010
$ 4,248
$ 3,469
$ 454
$
$
$
.38
.38
.24
1,194
$ 17.11
$ 5.18
1%
18.3%
8%
2009
$ 4,193
$ 2,917
$ 787
$
$
$
.68
.68
.24
1,160
$ 18.82
$
4.37
(19%)
30.4%
17%
10%
14.1
12.8
12.4
full-time equivalent employee (in thousands)
4%
$ 350
$ 337
$ 338
RECONCILIATION OF NET REVENUES, EXPENSES EXCLUDING INTEREST, AND NET INCOME
EXCLUDING CERTAIN ITEMS TO REPORTED AMOUNTS
TWELVE MONTHS ENDED
DECEMBER 31,
THREE MONTHS ENDED
JUNE 30, MARCH 31,
(In Millions, Unaudited)
2011
2010
%Change
2011
2010
%Change
Net Revenues Excluding Certain Items
optionsXpress net revenues (1)
Reported Net Revenues
$ 4,623
$ 4,248
68
–
$ 4,691
$ 4,248
Expenses Excluding Interest and Certain Items
$ 3,208
$ 2,987
optionsXpress expenses (2)
Class action litigation and regulatory reserve
Money market mutual fund charges
Other expense
Total expenses excluded
84
7
–
–
–
320
132
30
91
482
9%
N/M
10%
7%
N/M
N/M
N/M
N/M
N/M
$ 1,190
$ 978
–
–
$ 1,190
$ 978
$ 797
$ 760
–
7
–
–
7
–
196
–
9
205
Reported Expenses Excluding Interest
$ 3,299
$ 3,469
(5%)
$ 804
$ 965
Income Excluding Certain Items
Before Taxes on Income
$ 1,415
$ 1,261
Net Income Excluding Certain Items
$ 880
$ 775
Add: Revenues excluded above
Less: Expenses excluded above
Tax benefit
Reported Net Income
68
91
(7)
–
482
(161)
$ 864
$ 454
12%
14%
N/M
N/M
N/M
90%
$ 393
$ 218
$ 242
$ 132
–
7
(3)
–
205
(79)
$ 238
$
6
22%
–
22%
5%
–
N/M
–
N/M
N/M
(17%)
80%
83%
–
N/M
N/M
N/M
(1) Includes net revenues of optionsXpress Holdings, Inc. (optionsXpress) from the date of acquisition of September 1, 2011.
(2) Includes non-recurring costs relating to the acquisition and integration of optionsXpress, which totaled $20 million in 2011, as well as operating expenses from September 1, 2011.
N/M — Not Meaningful
-
GROWTH IN CLIENT ASSETS AND ACCOUNTS 23
GROWTH RATES
COMPOUNDED
4-YEAR
ANNUAL
1-YEAR
(In Billions, at Year End, Except as Noted)
2007-11 2010-11
2011
2010
2009
2008
2007
Assets in client accounts
Schwab One®, other cash equivalents
and deposits from banking clients
28%
19% $
96.4
$
81.1
$
65.1 $
44.4
$
35.9
Proprietary funds (Schwab Funds®
and Laudus Funds®):
Money market funds
(3%)
3%
159.8
154.5
171.2
209.7
183.1
Equity and bond funds
(10%)
(17%)
38.2
46.0
41.6
33.9
58.7
Total proprietary funds
Mutual Fund Marketplace®(1):
Mutual Fund OneSource®(2)
Mutual fund clearing services
Other third-party mutual funds
(2)
Total Mutual Fund Marketplace
Total mutual fund assets
Equity and other securities (1)
Fixed income securities
Margin loans outstanding
Total client assets
Client assets by business
Investor Services
Advisor Services
Other Institutional Services
Total client assets
by business
Net growth in assets in client accounts
(for the year ended)
Net new assets
Investor Services
Advisor Services
Other Institutional Services
(3)
Total net new assets
Net market gains (losses)
Net growth (decline)
New brokerage accounts (4)
(in thousands, for the year ended)
Clients (in thousands)
Active brokerage accounts
Banking accounts (5)
Corporate retirement
(6)
plan participants
(5%)
(1%)
198.0
200.5
212.8
243.6
241.8
2%
6%
8%
6%
3%
3%
5%
(3%)
4%
3%
4%
6%
(5%)
198.6
208.6
175.0
110.6
180.9
148%
104.2
42.1
81.8
54.2
81.8
5%
305.9
291.8
243.8
169.1
225.7
12%
608.7
542.5
500.6
333.9
488.4
9%
3%
3%
806.7
743.0
713.4
577.5
730.2
607.9
589.4
485.0
357.2
545.2
176.9
171.3
167.0
164.1
145.8
(1%)
(10.2)
(10.3)
(7.9)
(6.2)
(11.6)
7% $ 1,677.7
$ 1,574.5
$ 1,422.6
$ 1,137.0
$ 1,445.5
2% $ 697.9
$ 686.5
$ 583.2
$ 482.6
$ 625.3
4%
679.0
654.9
590.4
477.2
583.5
29%
300.8
233.1
249.0
177.2
236.7
4%
7% $ 1,677.7
$ 1,574.5
$ 1,422.6
$ 1,137.0
$ 1,445.5
(11%)
89% $
(9%)
(10%)
N/M
8%
(2%)
24.6
44.6
76.7
$
$
13.0
49.3
(35.7)
15.3
41.3
30.7
87.3
$
35.1 $
60.2
18.1
38.6
65.6
56.0
$ 113.4
$ 160.2
N/M $ 145.9
$
26.6
$
(16%)
(32%) $ 103.2
$ 151.9
$ 285.6
$ (308.5) $ 206.3
42.7
125.3
198.3
(421.9)
46.1
9%
37%
1,138
829
787
889
809
5%
41%
7%
8,552
7,998
7,701
7,401
7,049
13%
780
690
567
377
196
5%
1%
1,492
1,477
1,465
1,407
1,205
(1) Excludes all proprietary money market, equity, and bond funds.
(2) Certain client assets at December 31, 2009, have been reclassified from Mutual Fund OneSource® to other third-party mutual funds.
(3) Includes inflows of $56.1 billion from a mutual fund clearing services client and $7.5 billion from the acquisition of optionsXpress Holdings, Inc. in 2011. Includes
inflows of $2.0 billion from the acquisition of Windhaven Investment Management, Inc. and $1.2 billion from a mutual fund clearing services client, and outflows of
$51.5 billion related to the planned deconversion of a mutual fund clearing services client in 2010. Includes inflows of $17.8 billion in 2007 related to the acquisition
of The 401(k) Company. Includes inflows of $3.3 billion in 2007 related to a mutual fund clearing services client. Effective 2007, amount includes balances covered
by 401(k) record keeping-only services, which totaled $5.2 billion at May 31, 2007, related to the March 2007 acquisition of The 401(k) Company.
(4) Includes 315,000 new brokerage accounts from the acquisition of optionsXpress Holdings, Inc. in 2011.
(5) Effective 2010, the number of banking accounts excludes credit cards. Prior period amounts have been recast to reflect this change.
(6) 2007 includes 398,000 participants related to the acquisition of The 401(k) Company and 100,000 related to Schwab Personal Choice Retirement Account®
participants at Schwab.
N/M — Not Meaningful
-
24 EXECUTIVE MANAGEMENT
CHARLES R. SCHWAB
Chairman of the Board
WALTER W. BETTINGER II
President and Chief Executive Officer
JAY L. ALLEN
Executive Vice President,
Human Resources and
Employee Services
RON CARTER
Executive Vice President,
Operational Services
MARIE A. CHANDOHA
President, Chief Executive Officer, and
Chief Investment Officer, Charles
Schwab Investment Management, Inc.
BERNARD J. CLARK
Executive Vice President,
Advisor Services
JOHN S. CLENDENING
Executive Vice President,
Investor Services
LISA KIDD HUNT
Executive Vice President,
Branch Network
JOSEPH R. MARTINETTO
Executive Vice President and
Chief Financial Officer
CARRIE E. DWYER
Executive Vice President, General
Counsel and Corporate Secretary
JAMES D. McCOOL
Executive Vice President,
Institutional Services
LAURINE M. GARRITY
Executive Vice President and
Chief Marketing Officer
G. ANDREW GILL
Executive Vice President,
Investor Services
BRADLEY J. PETERSON
Executive Vice President and
Chief Information Officer
PAUL V. WOOLWAY
Executive Vice President and
President, Charles Schwab Bank
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2011
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)
Registrant’s telephone number, including area code: (415) 667-7000
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Common Stock - $.01 par value per share
Name of each exchange on which registered
New York Stock Exchange
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes
No
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act. Yes
No
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) 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 (2) has been subject to such filing requirements for
the past 90 days. Yes
No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to
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
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 registrant’s 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 a large accelerated filer, an accelerated filer, a non-accelerated filer, or a 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
Accelerated filer
Non-accelerated filer
(Do not check if a smaller reporting company)
Smaller reporting company
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes
No
As of June 30, 2011, the aggregate market value of the voting stock held by non-affiliates of the registrant was $16.8 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 31, 2012, was 1,271,342,259.
DOCUMENTS INCORPORATED BY REFERENCE
Part III of this Form 10-K incorporates certain information contained in the registrant’s definitive proxy statement for its annual meeting of stockholders, to be
held May 17, 2012, by reference to that document.
THE CHARLES SCHWAB CORPORATION
Annual Report On Form 10-K
For Fiscal Year Ended December 31, 2011
TABLE OF CONTENTS
Part I
Item 1.
Business -------------------------------------------------------------------------------------------------------------------------------
General Corporate Overview -----------------------------------------------------------------------------------------------
Acquisitions and Divestiture ------------------------------------------------------------------------------------------------
Business Strategy and Competitive Environment -----------------------------------------------------------------------
Products and Services -------------------------------------------------------------------------------------------------------
Regulation ---------------------------------------------------------------------------------------------------------------------
Sources of Net Revenues ----------------------------------------------------------------------------------------------------
Available Information -------------------------------------------------------------------------------------------------------
Item 1A. Risk Factors --------------------------------------------------------------------------------------------------------------------------
Item 1B. Unresolved Securities and Exchange Commission Staff Comments ---------------------------------------------------------
Properties -----------------------------------------------------------------------------------------------------------------------------
Item 2.
Legal Proceedings -------------------------------------------------------------------------------------------------------------------
Item 3.
Part II
Item 4.
Item 5.
Mine Safety Disclosures --------------------------------------------------------------------------------------------------------------
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases
Item 6.
Item 7.
of Equity Securities ----------------------------------------------------------------------------------------------------------
Selected Financial Data -------------------------------------------------------------------------------------------------------------
Management’s Discussion and Analysis of Financial Condition and Results of Operations ------------------------------
Overview ----------------------------------------------------------------------------------------------------------------------
Current Market and Regulatory Environment ----------------------------------------------------------------------------
Results of Operations --------------------------------------------------------------------------------------------------------
Liquidity and Capital Resources -------------------------------------------------------------------------------------------
Risk Management ------------------------------------------------------------------------------------------------------------
Fair Value of Financial Instruments ---------------------------------------------------------------------------------------
Critical Accounting Estimates ----------------------------------------------------------------------------------------------
Forward-Looking Statements -----------------------------------------------------------------------------------------------
Item 7A. Quantitative and Qualitative Disclosures About Market Risk -----------------------------------------------------------------
Financial Statements and Supplementary Data ----------------------------------------------------------------------------------
Item 8.
Item 9.
Changes in and Disagreements With Accountants on Accounting and Financial Disclosure -----------------------------
Item 9A. Controls and Procedures ------------------------------------------------------------------------------------------------------------
Item 9B. Other Information --------------------------------------------------------------------------------------------------------------------
Part III
Item 10. Directors, Executive Officers, and Corporate Governance --------------------------------------------------------------------
Executive Compensation -----------------------------------------------------------------------------------------------------------
Item 11.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters ----------------
Item 12.
Certain Relationships and Related Transactions, and Director Independence -----------------------------------------------
Item 13.
Principal Accountant Fees and Services ------------------------------------------------------------------------------------------
Item 14.
1
1
1
2
3
5
6
6
7
12
13
13
13
13
16
17
17
20
21
29
35
41
41
43
45
47
93
93
93
93
95
95
95
96
Part IV
Item 15.
Exhibits and Financial Statement Schedule --------------------------------------------------------------------------------------
Exhibit Index ------------------------------------------------------------------------------------------------------------------
Signatures ---------------------------------------------------------------------------------------------------------------------
Index to Financial Statement Schedule ------------------------------------------------------------------------------------
96
96
102
F-1
THE CHARLES SCHWAB CORPORATION
PART I
Item 1. Business
General Corporate Overview
The Charles Schwab Corporation (CSC), headquartered in San Francisco, California, was incorporated in 1986 and engages,
through its subsidiaries (together 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, 2011, the Company had $1.68 trillion in client
assets, 8.6 million active brokerage accounts(a), 1.5 million corporate retirement plan participants, and 780,000 banking
accounts.
Significant business subsidiaries of CSC include:
Charles Schwab & Co., Inc. (Schwab), which was incorporated in 1971, is a securities broker-dealer with over 300
domestic branch offices in 45 states, as well as a branch in each of the Commonwealth of Puerto Rico and London,
U.K., and serves clients in Hong Kong through one of CSC’s subsidiaries;
Charles Schwab Bank (Schwab Bank), which commenced operations in 2003, is a federal savings bank located in
Reno, Nevada; and
Charles Schwab Investment Management, Inc. (CSIM), which is the investment advisor for Schwab’s proprietary
mutual funds, referred to as the Schwab Funds, and Schwab’s exchange-traded funds, referred to as the Schwab
ETFs™.
The Company provides financial services to individuals and institutional clients through two segments – Investor Services
and Institutional Services. The Investor Services segment provides retail brokerage and banking services to individual
investors. The Institutional Services segment provides custodial, trading, and support services to independent investment
advisors (IAs). The Institutional Services segment also provides retirement plan services, specialty brokerage services, and
mutual fund clearing services. For financial information by segment for the three years ended December 31, 2011, see “Item
8 – Financial Statements and Supplementary Data – Notes to Consolidated Financial Statements – 25. Segment Information.”
As of December 31, 2011, the Company had full-time, part-time and temporary employees, and persons employed on a
contract basis that represented the equivalent of about 14,100 full-time employees.
Acquisitions and Divestiture
On September 1, 2011, the Company completed its acquisition of all of the outstanding common shares of optionsXpress
Holdings, Inc. (optionsXpress), an online brokerage firm primarily focused on equity option securities and futures. The
optionsXpress brokerage platform provides active investors and traders trading tools, analytics and education to execute a
variety of investment strategies. The combination of optionsXpress and Schwab offers active investors an additional level of
service and platform capabilities. optionsXpress, Inc., a wholly-owned subsidiary of optionsXpress, is a securities broker-
dealer.
On November 9, 2010, the Company acquired substantially all of the assets of Windward Investment Management, Inc.
(Windward), which was an investment advisory firm that managed diversified investment portfolios comprised primarily of
exchange-traded fund securities. As a result of the acquisition, Windhaven Investment Management, Inc. (Windhaven) was
formed as a wholly-owned subsidiary of Schwab Holdings, Inc.
In July 2007, the Company sold all of the outstanding stock of U.S. Trust Corporation, which was a subsidiary that provided
wealth management services.
In March 2007, the Company acquired The 401(k) Company, which offers retirement plan services. The acquisition enhanced
the Company’s ability to meet the needs of retirement plans of all sizes. The acquisition also provided the opportunity to
(a) Accounts with balances or activity within the preceding eight months.
- 1 -
THE CHARLES SCHWAB CORPORATION
capture rollover accounts from individuals participating in retirement plans served by The 401(k) Company and to cross-sell
the Company’s other investment and banking services to plan participants.
Business Strategy and Competitive Environment
The Company’s strategy is to meet the financial services needs of investors, advisors, and employers through its two
segments. To pursue its strategy, the Company focuses on: building client loyalty; innovating in ways that benefit clients;
operating in a disciplined manner; and leveraging its strengths through shared core processes and technology platforms. The
Company provides clients with a compelling combination of personalized relationships, superior service, and great value,
delivered through a 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 a wide range of client needs – from tools and information for self-directed or active investors, to advice
solutions, to retirement and equity-based incentive plans, to support services for independent IAs – while enabling each client
to easily utilize some or all of these capabilities according to their unique circumstances.
The Company’s competition in serving individual investors includes a wide range of brokerage, wealth management, and
asset management firms, as well as banks and trust companies. In serving these investors and competing for a growing
percentage of the investable wealth in the U.S., the Company offers a multi-channel service delivery model, which includes
branch, telephonic, mobile, and online capabilities. Under this model, the Company can offer personalized service at
competitive prices while giving clients the choice of where, when, and how they do business with the Company. Schwab’s
branches and regional telephone service centers are staffed with trained and experienced financial consultants (FCs) focused
on building and sustaining client relationships. The Company offers the ability to meet client investing needs through a single
ongoing point of contact, even as those needs change over time. In particular, management believes that the Company’s 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 a Schwab FC or an IA – is a competitive strength compared to the
more fragmented offerings of other firms.
The Company’s online, telephonic, and mobile channels provide quick and efficient access to an extensive array of
information, research, tools, trade execution, 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 401(k) plans can take advantage of the Company’s 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 to attract individual client relationships by complementing these
capabilities with the extensive array of investment, banking, 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
through the efforts of its expanded sales and support teams, which are dedicated to helping IAs grow, compete, and succeed in
serving their clients. In addition to focusing on superior service, Institutional Services competes by utilizing technology to
provide IAs with a highly-developed, scalable platform for administering their clients’ assets easily and efficiently.
Institutional Services sponsors a variety of national, regional, and local events designed to help IAs identify and implement
better ways to grow and manage their practices efficiently.
Another important aspect of the Company’s ability to compete is its ongoing focus on efficiency and productivity, as lower
costs give the Company greater flexibility in its approach to pricing and investing for growth. Management believes that this
flexibility remains important in light of the competitive environment, in which a number of competitors offer reduced online
trading commission rates and lower expense ratios on certain classes of mutual funds and exchange-traded funds.
Additionally, the Company’s nationwide marketing effort is an important competitive tool because it reinforces the attributes
of the Schwab brand.
- 2 -
THE CHARLES SCHWAB CORPORATION
Products and Services
The Company offers a broad range of products to address individuals’ varying investment and financial needs. Examples of
these product offerings include:
Brokerage – an array of brokerage 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;
designated brokerage accounts; equity incentive plan accounts; and margin loans, as well as access to fixed income
securities, equity and debt offerings, options, and futures;
Banking – checking accounts linked to brokerage accounts, savings accounts, certificates of deposit, demand deposit
accounts, first mortgages, home equity lines of credit (HELOCs), and personal loans collateralized by securities;
Trust – trust custody services, personal trust reporting services, and administrative trustee services;
Advice solutions– separately managed accounts, customized personal advice for tailored portfolios, and specialized
planning and full-time portfolio management;
Mutual funds – third-party mutual funds through Mutual Fund Marketplace, including no-load mutual funds through
the Mutual Fund OneSource service, proprietary mutual funds from two fund families – Schwab Funds and Laudus
Funds, other third-party mutual funds, and mutual fund trading and clearing services to broker-dealers; and
Exchange-traded funds (ETFs) – third-party and proprietary ETFs, as well as separately managed portfolios of ETFs.
These products, and the Company’s full array of investing services, are made available through its two segments – Investor
Services and Institutional Services.
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 have access to online portfolio planning tools, professional advice from Schwab’s portfolio
consultants who can help develop an investment strategy and carry out investment and portfolio management decisions, as
well as a range of fully delegated managed solutions that provide ongoing portfolio management.
Schwab strives to demystify 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 a quantitative model-based stock rating system that provides all clients with ratings
on approximately 3,000 stocks, assigning each equity a single grade: A, B, C, D, or F. 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. In 2011, the Company launched Schwab Equity
Ratings InternationalTM, an international ranking methodology covering approximately 4,000 stocks in 28 foreign equity
markets.
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 Company’s 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 Schwab’s delivery channels.
Schwab Private ClientTM features a personal advice relationship with a designated portfolio consultant, supported by a team of
investment professionals who provide individualized service, a customized investment strategy developed in collaboration
with the client, and ongoing guidance and execution.
For clients seeking a relationship in which investment decisions are fully delegated to a financial professional, the Company
offers several alternatives. The Company provides investors access to professional investment management in a diversified
account that is invested exclusively in either mutual funds or ETFs through the Schwab Managed PortfolioTM and
WindhavenTM programs. The Company also refers investors who want to utilize a specific third-party money manager to
direct a portion of their investment assets to the Schwab Managed Account program. In addition, clients who want the
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THE CHARLES SCHWAB CORPORATION
assistance of an independent professional in managing their financial affairs may be referred to IAs in the Schwab Advisor
Network. These IAs 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. In the U.S., the Company serves Chinese-, Spanish-, and Vietnamese-speaking clients through a combination
of its branch offices and Web-based and telephonic services.
Institutional Services
Through the Institutional Services segment, Schwab provides custodial, trading, technology, practice management, trust asset,
and other support services to IAs. To attract and serve IAs, Institutional Services has a dedicated sales force and service teams
assigned to meet their needs.
IAs 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 IAs to conduct daily
business activities online with Schwab, including submitting client account information and retrieving news and market
information. This platform provides IAs with a comprehensive suite of electronic and paper-based reporting capabilities.
Institutional Services offers online cashiering services, as well as internet-based eDocuments sites for both IAs and their
clients that provide multi-year archiving of online statements, trade confirms and tax reports, along with document search
capabilities.
To help IAs grow and manage their practices, Institutional Services offers a 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 a 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
operations, as well as third-party firms who provide assistance with real estate, errors and omissions insurance, and company
benefits.
The Company offers a variety of educational materials and events to IAs seeking to expand their knowledge of industry issues
and trends, as well as sharpen their individual expertise and practice management skills. Institutional Services updates and
shares market research on an ongoing basis, and it holds a series of events and conferences every year to discuss topics of
interest to IAs, including business strategies and best practices. The Company sponsors the annual IMPACT® conference,
which provides a national forum for the Company, IAs, and other industry participants to gather and share information and
insights.
IAs and their clients have access to a broad range of the Company’s products and services, including managed accounts and
cash products.
The Institutional Services segment also provides retirement plan recordkeeping and related services, retirement plan trust and
custody services, specialty brokerage services, and mutual fund clearing services, and supports the availability of Schwab
proprietary investment funds on third-party platforms. The Company serves a range of employer sponsored plans: equity
compensation plans, defined contribution plans, defined benefit plans, nonqualified deferred compensation plans and other
employee benefit plans.
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THE CHARLES SCHWAB CORPORATION
The Company’s bundled 401(k) retirement plan product offers plan sponsors a wide array of investment options, trustee or
custodial services, and participant-level recordkeeping. Plan design features, which increase plan efficiency and achieve
employer goals, are also offered, such as automatic enrollment, automatic fund mapping at conversion, and automatic
contribution increases. Services also include support for Roth 401(k) accounts and profit sharing and defined benefit plans.
The Company provides a 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 on their plan’s features
compared with overall industry and segment-specific plans. Participants in bundled plans serviced by the Company receive
targeted education materials, have access to electronic tools and resources, may attend onsite and virtual seminars, and can
receive third-party advice delivered by Schwab. This third-party advice service is delivered online, by phone, or in person,
including recommendations based on the core investment fund choices in their retirement plan and specific recommended
savings rates.
Through the Retirement Business Services unit, the Company and independent retirement plan providers work together to
serve plan sponsors, combining the consulting and administrative expertise of the administrator with the Company’s
investment, technology, trust, and custodial services. Retirement Business Services also offers the Schwab Personal Choice
Retirement Account, a self-directed brokerage offering for retirement plans.
The Company’s Corporate Brokerage Services unit provides specialty brokerage-related services to corporate clients through
its Stock Plan Services and Designated Brokerage Services businesses. Stock Plan Services offers equity compensation 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.
Designated Brokerage Services provides solutions for compliance departments of regulated companies and firms with special
requirements to monitor employee personal trading, including trade surveillance technology. The Corporate Brokerage
Services unit also provides mutual fund clearing services to banks, brokerage firms and trust companies and offers Schwab-
generated Investment Solutions outside the Company to institutional channels.
Regulation
CSC is a savings and loan holding company and Schwab Bank, CSC’s depository institution subsidiary, is a federal savings
bank. Prior to July 21, 2011, CSC and Schwab Bank were both subject to supervision and regulation by the Office of Thrift
Supervision (OTS). The “Dodd-Frank Wall Street Reform and Consumer Protection Act” legislation (Dodd-Frank Act)
eliminated the OTS effective July 21, 2011. As a result, the Board of Governors of the Federal Reserve System (Federal
Reserve) became CSC’s primary regulator and the Office of the Comptroller of the Currency became the primary regulator of
Schwab Bank. Effective July 21, 2011, CSC is required by the Dodd-Frank Act to serve as a source of strength for Schwab
Bank. While under the OTS, CSC was required to have a “prudential level of capital” to support CSC’s risk profile. The OTS
did not historically subject savings and loan holding companies, such as CSC, to consolidated regulatory capital requirements.
However, under the Dodd-Frank Act, CSC will be subject to new minimum leverage and minimum risk-based capital ratio
requirements that will be set by the Federal Reserve that are at least as stringent as the requirements generally applicable to
insured depository institutions as of July 21, 2011.
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 also govern transactions with CSC and
its non-depository institution subsidiaries, including loans and other extensions of credit, investments and 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 a
conservator or receiver. Schwab Bank is required to maintain minimum capital levels as specified in federal banking laws and
regulations. Failure to meet the minimum levels could result in certain mandatory, and possibly additional discretionary
actions by the regulators that, if undertaken, could have a direct material effect on Schwab Bank.
The securities industry in the United States is subject to extensive regulation under both federal and state laws. CSC’s
principal U.S. broker-dealers are Schwab and optionsXpress, Inc. Schwab is registered as a broker-dealer with the United
States Securities and Exchange Commission (SEC), the fifty states, and the District of Columbia and Puerto Rico.
optionsXpress, Inc. is registered as a broker-dealer with the SEC, the fifty states, the District of Columbia, Puerto Rico, and
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THE CHARLES SCHWAB CORPORATION
the Virgin Islands. Schwab and CSIM are registered as investment advisors with the SEC. Additionally, Schwab and
optionsXpress, Inc. are regulated by the Commodities Futures Trading Commission (CFTC) with respect to the commodity
futures and commodities trading activities they conduct as an introducing broker and futures commission merchant,
respectively.
Much of the regulation of broker-dealers has been delegated to self-regulatory organizations (SROs). Schwab and
optionsXpress, Inc. are members of the Financial Industry Regulatory Authority, Inc. (FINRA), the Municipal Securities
Rulemaking Board (MSRB), NYSE Arca, and the Chicago Board Options Exchange (CBOE). optionsXpress, Inc. is also a
member of other exchanges. The primary regulators of Schwab are FINRA and, for municipal securities, the MSRB. The
primary regulators of optionsXpress, Inc. are FINRA, CBOE, and for municipal securities, the MSRB. The National Futures
Association (NFA) is Schwab and optionsXpress, Inc.’s primary regulator for futures and commodities trading activities. The
Company’s business is also subject to oversight by regulatory bodies in other countries in which the Company operates.
The principal purpose of regulating broker-dealers and investment advisors is the protection of clients and the securities
markets. The regulations to which broker-dealers 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.
Schwab and optionsXpress, Inc. are both subject to Rule 15c3-1 under the Securities Exchange Act of 1934 (the Uniform Net
Capital Rule) and related SRO requirements. The CFTC and NFA also impose net capital requirements. The Uniform Net
Capital Rule specifies minimum capital requirements that are intended to ensure the general financial soundness and liquidity
of broker-dealers. Because CSC itself is not a registered broker-dealer, it is not subject to the Uniform Net Capital Rule.
However, if Schwab or optionsXpress, Inc. fail to maintain specified levels of net capital, such failure would constitute a
default by CSC under debt covenants under certain of CSC’s debt agreements.
The Uniform Net Capital Rule limits broker-dealers’ ability to transfer capital to parent companies and other affiliates.
Compliance with the Uniform Net Capital Rule could limit Schwab’s operations and its ability to repay subordinated debt to
CSC, which in turn could limit CSC’s ability to repay debt, pay cash dividends, and purchase shares of its outstanding stock.
Sources of Net Revenues
The Company’s 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 advisory solutions. 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 paid on
funding sources (including banking deposits and client cash in brokerage accounts, short-term borrowings, and long-term
debt). The Company generates trading revenue through commissions earned for executing trades for clients and principal
transaction revenue from trading activity in fixed income securities.
For revenue information by source for the three years ended December 31, 2011, see “Item 7 – Management’s 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, and other information with the SEC. The
Company’s SEC filings are available to the public over the Internet on the SEC’s website at http://www.sec.gov. You may
read and copy any document that the Company files with the SEC at the SEC’s Public Reference Room at 100 F Street, NE,
Washington, DC 20549. You may obtain information on the operation of the Public Reference Room by calling the SEC at
1-800-SEC-0330.
On the Company’s Internet website, http://www.aboutschwab.com, the Company posts the following recent filings as soon as
reasonably practicable after they are electronically filed with or furnished to the SEC: the Company’s annual reports on
Form 10-K, the Company’s quarterly reports on Form 10-Q, the Company’s current reports on Form 8-K, and any
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THE CHARLES SCHWAB CORPORATION
amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934. All
such filings are available free of charge either on the Company’s website or by request via email
(investor.relations@schwab.com), telephone (415-667-1959), or mail (Charles Schwab Investor Relations at 211 Main Street,
San Francisco, CA 94105).
Item 1A.
Risk Factors
The Company faces a 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 Company’s operations or financial results.
For a discussion of the Company’s risk management, including technology and operating risk, credit risk, concentration risk,
market risk, fiduciary risk, and legal and regulatory risk, see “Item 7 – Management’s Discussion and Analysis of Financial
Condition and Results of Operations – Risk Management.”
Developments in the business, economic, and geopolitical environment could negatively impact the Company’s
business.
The Company’s business can be adversely affected by the general environment – economic, corporate, securities market,
regulatory, and geopolitical developments all play a role in client asset valuations, trading activity, interest rates and overall
investor engagement, and are outside of the Company’s control. Deterioration in the housing and credit markets, reductions in
short-term interest rates, and decreases in securities valuations negatively impact the Company’s net interest revenue, asset
management and administration fees, and capital resources.
A significant decrease in the Company’s liquidity could negatively affect the Company’s business and financial
management as well as reduce client confidence in the Company.
Maintaining adequate liquidity is crucial to the business operations of the Company, including margin lending, mortgage
lending, and transaction settlement, among other liquidity needs. The Company meets its liquidity needs primarily through
cash generated by client activity and operating earnings, as well as cash provided by external financing. Fluctuations in client
cash or deposit balances, as well as changes in market conditions, may affect the Company’s ability to meet its liquidity needs.
A reduction in the Company’s liquidity position could reduce client confidence in the Company, which could result in the loss
of client accounts. In addition, if the Company’s broker-dealer or depository institution subsidiaries fail to meet regulatory
capital guidelines, regulators could limit the subsidiaries’ operations or their ability to upstream funds to CSC, which could
reduce CSC’s liquidity and adversely affect its ability to repay debt and pay cash dividends. In addition, CSC may need to
provide additional funding to such subsidiaries.
Factors which may adversely affect the Company’s liquidity position include a reduction in cash held in banking or brokerage
client accounts, a dramatic increase in the Company’s client lending activities (including margin and personal lending),
unanticipated outflows of company cash, increased capital requirements, other regulatory changes or a loss of market or
customer confidence in the Company. Schwab may also experience temporary liquidity demands due to timing differences
between clients’ transaction settlements and the availability of segregated cash balances.
When cash generated by client activity and operating earnings is not sufficient for the Company’s liquidity needs, the
Company must seek external financing. During periods of disruptions in the credit and capital markets, potential sources of
external financing could be reduced, and borrowing costs could increase. Although CSC and Schwab maintain committed and
uncommitted, unsecured bank credit lines and CSC has a commercial paper issuance program, as well as a universal shelf
registration statement filed with the SEC, financing may not be available on acceptable terms or at all due to market
conditions and disruptions in the credit markets. In addition, a significant downgrade in the Company’s credit ratings could
increase its borrowing costs and limit its access to the capital markets.
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THE CHARLES SCHWAB CORPORATION
The Company may suffer significant losses from its credit exposures.
The Company’s businesses are subject to the risk that a client, counterparty or issuer will fail to perform its contractual
obligations, or that the value of collateral held to secure obligations will prove to be inadequate. While the Company has
policies and procedures designed to manage this risk, the policies and procedures may not be fully effective. The Company’s
exposure mainly results from margin lending activities, securities lending activities, mortgage lending activities, its role as a
counterparty in financial contracts and investing activities, and indirectly from the investing activities of certain of the
proprietary funds that the Company sponsors.
The Company has exposure to credit risk associated with its securities available for sale and securities held to maturity
portfolios, which include U.S. agency and non-agency residential mortgage-backed securities, consumer loan asset-backed
securities, corporate debt securities, U.S. agency notes, and certificates of deposit among other investments. These instruments
are also subject to price fluctuations as a result of changes in the financial market’s assessment of issuer credit quality,
increases in the unemployment rate, delinquency and default rates, housing price declines, changes in prevailing interest rates
and other economic factors.
Loss of value of securities available for sale and securities held to maturity can result in charges if management determines
that the impairments are other than temporary. The evaluation of whether other-than-temporary impairment exists is a matter
of judgment, which includes the assessment of several factors. See “Item 7 – Management’s Discussion and Analysis of
Financial Condition and Results of Operations – Critical Accounting Estimates.” If management determines that a security is
other-than-temporarily impaired, the cost basis of the security may be adjusted and a corresponding loss may be recognized in
current earnings. Certain securities available for sale experienced continued credit deterioration in 2011, 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.
The Company’s loans to banking clients primarily consist of first-lien residential real estate mortgage loans and HELOCs.
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 Company’s risk of
loss. Examples of the Company’s credit concentration risk include:
large positions in financial instruments collateralized by assets with similar economic characteristics or in securities
of a single issuer or industry;
mortgage loans and HELOCs to banking clients which are secured by properties in the same geographic region; and
margin and securities lending activities collateralized by securities of a single issuer or industry.
The Company may also be subject to concentration risk when lending to a particular counterparty, borrower or issuer.
The Company sponsors a number of proprietary money market mutual funds and other proprietary funds. Although the
Company has no obligation to do so, the Company may decide 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
Company’s liquidity. If the Company chose not to provide credit, liquidity or other support in such a situation, the Company
could suffer reputational damage and its business could be adversely affected.
Significant interest rate changes could affect the Company’s 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 equivalents, 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 than the interest the Company pays on
its interest-bearing liabilities. In addition, certain funding sources do not bear interest and their cost therefore does not vary.
Overall, the Company is positioned to benefit from a rising interest rate environment; the Company could be adversely
affected by a decline in interest rates if the rates that the Company earns on interest-earning assets decline more than the rates
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THE CHARLES SCHWAB CORPORATION
that the Company pays on its funding sources, or if prepayment rates increase on the mortgages and mortgage-backed
securities that the Company holds. With the low interest rate environment, the Company’s 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 a competitive return.
To the extent the overall yield on certain Schwab-sponsored money market mutual funds falls to a level at or below the
management fees on those funds, the Company may waive a portion of its fee in order to continue providing some return to
clients. As a result of the low interest rate environment, the Company has been waiving and may continue to waive a portion
of its management fees for certain Schwab-sponsored money market mutual funds. Such fee waivers negatively impact the
Company’s asset management and administration fees.
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 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. Actions brought against the Company may result in settlements, awards,
injunctions, fines, penalties or other results adverse to the Company including reputational harm. Even if the Company is
successful in defending against these actions, the defense of such matters may result in the Company incurring significant
expenses. Predicting the outcome of matters 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. A substantial judgment, settlement, fine, or penalty could be material to the Company’s operating results or cash
flows for a particular future period, depending on the Company’s 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 8 – Financial Statements and Supplementary Data – Notes to Consolidated Financial
Statements – 15. Commitments and Contingencies.”
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 a 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 Company’s businesses limits the Company’s activities and may subject it to significant
penalties.
As a 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 has become
more extensive and complex in response to the recent market disruptions. The requirements imposed by the Company’s
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 Company’s activities by way of capital, customer protection
and market conduct requirements, and restrictions on the businesses activities that the Company may conduct. Despite the
Company’s efforts to comply with applicable regulations, there are a number of risks, particularly in areas where applicable
regulations may be unclear or where regulators revise their previous guidance. Any enforcement actions or other proceedings
brought by the Company’s 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
limitations on the Company’s business activities, any of which could harm the Company’s reputation and adversely affect the
Company’s results of operations and financial condition.
Legislation or changes in rules and regulations could negatively impact the Company’s 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 affect the operation and profitability of the Company or its specific business lines. The profitability of
the Company could also be affected by rules and regulations which impact the business and financial communities generally,
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THE CHARLES SCHWAB CORPORATION
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
Company’s business practices, increased capital requirements, or additional costs.
Financial reforms and related regulations may affect the Company’s business activities, financial position and
profitability.
The “Dodd-Frank Wall Street Reform and Consumer Protection Act” was signed into law in July 2010. This legislation makes
extensive changes to the laws regulating financial services firms and requires significant rule-making. In addition, the
legislation mandates multiple studies, which could result in additional legislative or regulatory action. Among other things, the
legislation authorizes various assessments and fees and requires the establishment of minimum leverage and risk-based capital
requirements for insured depository institutions, and requires the SEC to complete studies and develop rules regarding various
investor protection issues. The legislation also eliminated the Office of Thrift Supervision effective July 21, 2011 and, as a
result, the Federal Reserve became CSC’s primary regulator and the Office of the Comptroller of the Currency became the
primary regulator of Schwab Bank. CSC is continuing to review the impact the legislation, studies and related rule-making
will have on the Company’s business, financial condition, and results of operations.
The legislation charges the Federal Reserve with drafting enhanced regulatory requirements for “systemically important” bank
holding companies and certain other non-bank financial institutions designated as “systemically important” by the Financial
Stability Oversight Council, which may include CSC. The enhanced requirements include more stringent capital, leverage and
liquidity standards. The legislation permits the Federal Reserve to tailor its enhanced requirements to the perceived risk profile
of an individual financial institution. Among other things, the legislation authorizes various assessments and fees, requires the
establishment of minimum leverage and risk-based capital requirements for insured depository institutions, bans proprietary
trading by insured depository institutions and affiliates, and requires the SEC to complete studies and develop rules regarding
various investor protection issues.
The legislation also established a new independent Consumer Financial Protection Bureau, which has broad rulemaking,
supervisory and enforcement authority over consumer products, including mortgages, home-equity loans and credit cards.
States will be permitted to adopt stricter consumer protection laws and state attorney generals can enforce consumer protection
rules issued by the Bureau.
The legislation gives the SEC discretion to adopt rules regarding standards of conduct for broker-dealers providing investment
advice to retail customers. The various studies required by the legislation could result in additional rulemaking or legislative
action, which could impact the Company’s business and financial results.
The changes resulting from the legislation may impact the profitability of the Company’s business activities, require changes
to certain of its business practices, impose upon the Company more stringent capital, liquidity and leverage ratio requirements
or otherwise adversely affect the Company’s business. These changes may also require the Company to invest significant
management attention and resources to evaluate and make necessary changes.
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 Company’s ability to
gather, process, and communicate information and process client transactions efficiently and securely, without interruptions.
This risk also includes the risk of human error, employee misconduct, external fraud, computer viruses, distributed denial of
service attacks, terrorist attacks, and natural disaster. It could take several hours or more to restore full functionality in the
event of an unforeseen event which could affect the Company’s ability to process and settle client transactions. Extraordinary
trading volumes could cause the Company’s computer systems to operate at an unacceptably slow speed or even fail. The
Company’s 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 Company’s reputation and client confidence in the Company, in
addition to any direct losses that might result from such instances. Despite the Company’s efforts to identify areas of risk,
oversee operational areas involving risk, and implement policies and procedures designed to manage risk, there can be no
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THE CHARLES SCHWAB CORPORATION
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 a negative impact on the Company’s 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 face technology, operating, business, and economic risks, and any significant failures by
them, including the improper use or disclosure of the Company’s confidential client, employee, or company information,
could cause the Company to incur losses and could harm the Company’s reputation. An interruption in or the cessation of
service by any external service provider as a result of systems failures, capacity constraints, financial difficulties or for any
other reason, and the Company’s inability to make alternative arrangements in a timely manner could disrupt the Company’s
operations, impact the Company’s ability to offer certain products and services, and result in financial losses to the Company.
Switching to an alternative service provider may require a transition period and result in less efficient operations.
Potential strategic transactions could have a negative impact on the Company’s financial position.
The Company evaluates potential strategic transactions, including business combinations, acquisitions, and dispositions. Any
such transaction could have a material impact on the Company’s financial position, results of operations, or cash flows. The
process of evaluating, negotiating, and effecting any such strategic transaction may divert management’s attention from other
business concerns, and might cause the loss of key clients, employees, and business partners. Moreover, integrating businesses
and systems may result 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 Company’s current stockholders’ percentage ownership
or to earnings per share (EPS).
The Company’s acquisitions and dispositions are typically subject to closing conditions, including regulatory approvals and
the absence of material adverse changes in the business, operations or financial condition of the entity being acquired or sold.
To the extent the Company enters into an agreement to buy or sell an entity, there can be no guarantee that the transaction will
close when expected, or at all. If a material transaction does not close, the Company’s stock price could decline.
The Company’s 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 Company’s results of operations and financial condition.
The industry in which the Company competes has undergone a 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 on many factors, including the range of products
and services offered, pricing, customer service, brand recognition, reputation, and perceived financial strength. Consolidations
may enable other firms to offer a broader range of products and services than the Company does, or offer such products at
more competitive prices.
- 11 -
THE CHARLES SCHWAB CORPORATION
The Company faces competition in hiring and retaining qualified employees, especially for employees who are key to
the Company’s ability to build and enhance client relationships.
The market for quality professionals and other personnel in the Company’s business is highly competitive. Competition is
particularly strong for financial consultants who build and sustain the Company’s client relationships. The Company’s ability
to continue to compete effectively will depend upon its ability to attract new employees and retain existing employees while
managing compensation costs.
The Company’s stock price has fluctuated historically, and may continue to fluctuate.
The Company’s stock price can be volatile. Among the factors that may affect the volatility of the Company’s stock price are
the following:
speculation in the investment community or the press about, or actual changes in, the Company’s 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 Company’s industry, as well as geopolitical, economic, and
business factors unrelated to the Company, may also affect the Company’s stock price.
Future sales of CSC’s equity securities may adversely affect the market price of CSC’s common stock and result in
dilution.
CSC’s certificate of incorporation authorizes CSC’s Board of Directors to, among other things, issue additional shares of
common or preferred stock or securities convertible or exchangeable into equity securities, without stockholder approval. CSC
may issue additional equity or convertible securities to raise additional capital or for other purposes. The issuance of any
additional equity or convertible securities could be substantially dilutive to holders of CSC’s common stock and may
adversely affect the market price of CSC’s common stock.
Item 1B. Unresolved Securities and Exchange Commission Staff Comments
None.
- 12 -
THE CHARLES SCHWAB CORPORATION
Item 2.
Properties
A summary of the Company’s significant locations at December 31, 2011, 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 space:
San Francisco, CA (1)
Service centers:
Phoenix, AZ (2)
Denver, CO
Indianapolis, IN
Austin, TX
Orlando, FL
Richfield, OH
(1)
(2)
Includes the Company’s headquarters.
Includes two data centers.
Square Footage
Leased
Owned
776
47
383
-
220
148
-
-
709
-
274
-
-
117
Substantially all of the Company’s branch offices are located in leased premises. The corporate headquarters, data centers,
offices, and service centers support both of the Company’s segments.
Item 3. Legal Proceedings
For a discussion of legal proceedings, see “Item 8 – Financial Statements and Supplementary Data – Notes to Consolidated
Financial Statements – 15. Commitments and Contingencies.”
PART II
Item 4. Mine Safety Disclosures
Not applicable.
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities
CSC’s common stock is listed on The New York Stock Exchange under the ticker symbol SCHW. The number of common
stockholders of record as of January 31, 2012, was 7,983. The closing market price per share on that date was $11.65.
The quarterly high and low sales prices for CSC’s common stock and the other information required to be furnished pursuant
to this item are included in “Item 8 – Financial Statements and Supplementary Data – Notes to Consolidated Financial
Statements – 28. Quarterly Financial Information (Unaudited) and 20. Employee Incentive, Deferred Compensation, and
Retirement Plans.”
- 13 -
THE CHARLES SCHWAB CORPORATION
The following graph shows a five-year comparison of cumulative total returns for CSC’s common stock, the Dow Jones U.S.
Investment Services Index, and the Standard & Poor’s 500 Index, each of which assumes an initial investment of $100 and
reinvestment of dividends.
$150
$100
$50
$0
The Charles Schwab Corporation
Dow Jones U.S. Investment Services Index
Standard & Poor's 500 Index
12/31/06
12/31/07
12/31/08
12/31/09
12/31/10
12/31/11
December 31,
The Charles Schwab Corporation
Dow Jones U.S. Investment Services Index
Standard & Poor’s 500 Index
2006
$ 100
$ 100
$ 100
2007
$ 140
$ 90
$ 105
2008
$ 90
$ 30
$ 66
2009
$ 106
$ 47
$ 84
2010
$ 98
$ 49
$ 97
2011
$ 65
$ 32
$ 99
- 14 -
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 2011:
Total Number
of Shares
Purchased
(in thousands)
Average
Price Paid
per Share
Total Number
of Shares Purchased
as Part of Publicly
Announced
Program (1)
(in thousands)
Approximate
Dollar Value of
Shares that May
Yet be Purchased
under the Program
(in millions)
-
17
-
505
-
N/A
$
-
$ 12.04
$
-
$ 11.36
$
596
N/A
Month
October:
Share Repurchase Program (1)
Employee transactions (2)
November:
Share Repurchase Program (1)
Employee transactions (2)
December:
Share Repurchase Program (1)
Employee transactions (2)
Total:
Share Repurchase Program (1)
Employee transactions (2)
N/A Not applicable.
(1) There were no share repurchases under the Share Repurchase Program during the fourth quarter. Repurchases under this
program would occur under two authorizations by CSC’s Board of Directors, each covering up to $500 million of
common stock that were publicly announced by the Company on April 25, 2007, and March 13, 2008. 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 shares. The Company may receive shares to pay
the exercise price and/or to satisfy tax withholding obligations by employees who exercise stock options (granted under
employee stock incentive plans), which are commonly referred to as stock swap exercises.
$
596
N/A
596
$
N/A
$
596
N/A
$
-
$ 11.80
-
$
$ 12.01
-
N/A
-
N/A
-
N/A
-
528
-
6
(2)
- 15 -
THE CHARLES SCHWAB CORPORATION
Item 6. Selected Financial Data
Selected Financial and Operating Data
(In Millions, Except Per Share Amounts, Ratios, or as Noted)
Results of Operations
Net revenues
Expenses excluding interest
Income from continuing operations
Net income (2)
Income from continuing operations per share — basic
Income from continuing operations per share — diluted
Basic earnings per share (2, 3)
Diluted earnings per share (2, 3)
Dividends declared per common share
Special dividend declared per common share
Weighted-average common shares outstanding — diluted
Asset management and administration fees as a
percentage of net revenues
Net interest revenue as a percentage of net revenues
Trading revenue as a percentage of net revenues (4)
Effective income tax rate
Capital expenditures — purchases of equipment,
office facilities, and property, net
Capital expenditures, net, as a percentage of net revenues
Performance Measures
Net revenue growth (decline)
Pre-tax profit margin
Return 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
Full-time equivalent employees (at year end,
in thousands)
Net revenues per average full-time equivalent
employee (in thousands)
Growth Rates
Compounded
4-Year (1)
2007-2011
Annual
1-Year
2010-2011
2011
2010
2009
2008
2007
(2%)
1%
(6%)
(23%)
(7%)
(7%)
(23%)
(23%)
5%
N/M
-
10%
(5%)
90%
90%
84%
84%
84%
84%
-
-
3%
$
4,691
$
3,299
$
864
$
864
$
.70
$
.70
$
.70
$
.70
.24
$
-
$
1,229
$
4,248
$
3,469
$
454
$
454
$
.38
$
.38
$
.38
$
.38
$
.24
-
$
1,194
$
4,193
$
2,917
$
787
$
787
$
.68
$
.68
$
.68
$
.68
$
.24
$
-
1,160
$
5,150
$
3,122
$
1,230
$
1,212
$
1.07
$
1.06
$
1.06
$
1.05
.22
$
-
$
1,157
$
$
$
$
$
$
$
$
$
$
4,994
3,141
1,120
2,407
.93
.92
1.98
1.96
.20
1.00
1,222
41%
37%
20%
37.9%
43%
36%
20%
41.7%
45%
30%
24%
38.3%
46%
33%
21%
39.3%
47%
33%
17%
39.6%
3%
50%
$
190
4%
$
127
3%
$
139
3%
$
194
4%
$
168
3%
10%
29.7%
12%
1%
18.3%
8%
(19%)
30.4%
17%
3%
39.4%
31%
16%
37.1%
55%
17%
-
24%
$
$
$
108,553
2,001
7,714
14
$
$
$
92,568
2,006
6,226
15
$
$
$
75,431
1,512
5,073
15
$
$
$
51,675
883
4,061
13
$
$
$
42,286
899
3,732
11
21%
24%
23%
18%
19%
10%
14.1
12.8
12.4
13.4
13.3
4%
$
350
$
337
$
338
$
383
$
387
27%
22%
20%
1%
(2%)
Note: Information is presented on a continuing operations basis unless otherwise noted.
(1) The compounded 4-year growth rate is computed using the following formula: Compound annual growth rate = (Ending Value / Beginning Value) .25 - 1
(2) Net income in 2007 includes a gain of $1.2 billion, after tax, on the sale of U.S. Trust, which was presented as discontinued operations.
(3) Both basic and diluted earnings per share in 2008 and 2007 include discontinued operations.
(4) Trading revenue includes commission and principal transaction revenues.
N/M Not meaningful.
- 16 -
THE CHARLES SCHWAB CORPORATION
Management’s Discussion and Analysis of Financial Condition and Results of Operations
(Tabular Amounts in Millions, Except Ratios, or as Noted)
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of
Operations
OVERVIEW
Management of the Company focuses on several key financial and client activity metrics in evaluating the Company’s
financial position and operating performance. Results for the years ended December 31, 2011, 2010, and 2009 are shown in
the following table:
Growth Rate
1-Year
2010-2011
2011
2010
2009
N/M
7%
13%
26.6
$
$ 1,574.5
399.7
145.9
$
$ 1,677.7
451.1
Year Ended December 31,
Client Activity Metrics:
Net new client assets (1) (in billions)
Client assets (in billions, at year end)
Clients’ daily average trades (2) (in thousands)
Company Financial Metrics:
Net revenues
Expenses excluding interest
Income before taxes on income
Taxes on income
Net income
Earnings per share – diluted
Net revenue growth (decline) from prior year
Pre-tax profit margin
Return on stockholders’ equity
Net revenue per average full-time equivalent employee
(in thousands)
338
(1) Includes inflows of $56.1 billion and $7.5 billion in 2011 from a mutual fund clearing services client and the acquisition
of optionsXpress, respectively. Includes net outflows of $51.5 billion in 2010 related to the planned deconversion of a
mutual fund clearing services client.
4,248
3,469
779
(325)
454
.38
1%
18.3%
8%
4,691
3,299
1,392
(528)
864
.70
10%
29.7%
12%
4,193
2,917
1,276
(489)
787
.68
(19%)
30.4%
17%
10%
(5%)
79%
62%
90%
84%
87.3
$
$ 1,422.6
414.8
350
337
$
$
$
$
$
$
4%
$
$
$
$
$
$
(2) Beginning in 2010, amounts include all commission-free trades, including the Company’s Mutual Fund OneSource®
funds and ETFs, and other proprietary products. Prior period amounts have been recast to reflect this change.
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 Company’s products and services appeal to new and
existing clients in a given operating environment.
Client assets is the market value of all client assets custodied at the Company. Management considers client assets to
be indicative of the Company’s appeal in the marketplace. Additionally, fluctuations in certain components of client
assets (e.g., Mutual Fund OneSource funds) directly impact asset management and administration fees.
Clients’ daily average trades is an indicator of client engagement with securities markets and the most prominent
driver of trading revenue.
Management believes that earnings per share, net revenue growth, pre-tax profit margin, and return on stockholders’
equity provide broad indicators of the Company’s overall financial health, operating efficiency, and ability to
generate acceptable returns within the context of a given operating environment.
Net revenue per average full-time equivalent employee is considered by management to be the Company’s broadest
measure of productivity.
The Company’s 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
- 17 -
THE CHARLES SCHWAB CORPORATION
Management’s Discussion and Analysis of Financial Condition and Results of Operations
(Tabular Amounts in Millions, Except Ratios, or as Noted)
mutual fund offerings, as well as fee-based advisory solutions. 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 rates, the amount and mix of interest-earning assets and interest-
bearing funding sources, the Company’s ability to attract new clients, and client activity levels. The Company generates
trading revenue through commissions earned for executing trades for clients and principal transaction revenue from trading
activity in fixed income securities. Trading revenue is impacted by trading volumes, the volatility of prices in the equity and
fixed income markets, and commission rates.
2011 Compared to 2010
Economic and market conditions were challenging throughout 2011, marked by volatility in the equity markets, lower market
valuations, and further declines in interest rates. The Standard and Poor’s 500 Index, Nasdaq Composite Index, and Dow
Jones Industrial Average decreased on average 6%, 5%, and 4%, respectively, between the first and second halves of the
year. The federal funds target rate remained unchanged during the year at a range of zero to 0.25% and the three-month
Treasury Bill and 10-year Treasury yields declined by 11 and 141 basis points to 0.01% and 1.88%, respectively.
The Company’s key client activity metrics in 2011 were stable in the midst of a weakened economic and market
environment. Net new client assets totaled $145.9 billion in 2011. Core net new client assets, which exclude significant one-
time flows, totaled $82.3 billion in 2011 up from $78.1 billion in 2010. Total client assets ended the year at $1.68 trillion, up
7% from 2010. In addition, clients’ daily average trades were 451,100, up 13% from 2010.
Net revenues increased by 10% in 2011 from 2010 due to increases in all of the Company’s major sources of net revenues.
Asset management and administration fees increased primarily due to an increase in revenue from the Company’s advice
solutions and continued asset inflows, partially offset by money market mutual fund fee waivers, which increased to
$568 million in 2011 from $433 million in 2010. Net interest revenue increased primarily due to higher average balances of
interest-earning assets during the year, partially offset by the effect of lower interest rate spreads resulting from higher
amortization of premiums relating to residential mortgage-backed securities caused by higher mortgage prepayments in 2011.
Trading revenue increased primarily due to higher daily average revenue trades and the addition of optionsXpress, which was
acquired in September 2011.
While total expenses excluding interest were lower by 5% in 2011 compared to 2010, the Company experienced increases in
compensation and benefits, professional services, occupancy and equipment, and advertising and market development
expenses in aggregate of $266 million in 2011 compared to 2010. Significant charges in 2010 included class action litigation
and regulatory reserves relating to the Schwab YieldPlus Fund®, losses recognized for Schwab money market mutual funds,
and a charge relating to the termination of the Company’s Invest First® and WorldPoints(a) Visa(b) credit card program for a
total of $482 million.
As a result of the Company’s ongoing investment in clients and sustained expense discipline, the Company achieved a pre-
tax profit margin of 29.7% and return on stockholders’ equity of 12% in 2011.
2010 Compared to 2009
The equity markets improved during 2010 and remained well above their prior year lows. The Nasdaq Composite Index, the
Standard & Poor’s 500 Index, and the Dow Jones Industrial Average increased 17%, 13%, and 11%, respectively. The low
interest rate environment continued throughout the year as the federal funds target rate remained unchanged during the year
at a range of zero to 0.25%.
The Company’s sustained investment in expanding and improving product and service capabilities for its clients was
reflected in the strength of its key client activity metrics in 2010 - net new client assets totaled $78.1 billion, excluding
(a) WorldPoints is a registered trademark of FIA Card Services, N.A.
(b) Visa is a registered trademark of Visa International Service Association.
- 18 -
THE CHARLES SCHWAB CORPORATION
Management’s Discussion and Analysis of Financial Condition and Results of Operations
(Tabular Amounts in Millions, Except Ratios, or as Noted)
outflows related to a single mutual fund clearing client who completed a planned transfer to an internal platform during the
year, and total client assets ended 2010 at $1.57 trillion, up 11% from 2009. Client trading activity slowed during the year as
clients’ daily average trades decreased 4% from 2009 to 399,700.
Net revenues were relatively flat in 2010 from 2009. The Company, however, experienced a change in the mix of its revenue
sources as the increase in net interest revenue was offset by decreases in trading revenue, asset management and
administration fees, and other revenue. Net interest revenue increased due to higher average balances of interest-earning
assets, partially offset by a decrease in the average yield earned. Trading revenue decreased due to lower average revenue per
revenue trade resulting from improved online trade pricing for clients, which was implemented in January 2010, and slightly
lower daily average revenue trades in 2010. While the low interest rate environment caused over $200 million of additional
money market mutual fund fee waivers from the prior year, the decrease in asset management and administration fees was
limited to 3% due to higher average asset valuations and continued asset inflows. Other revenue was lower in comparison to
2009 primarily due to a gain of $31 million on the repurchase of a portion of the Company’s long-term debt in 2009.
Expenses excluding interest were higher by 19% in 2010 compared to 2009 primarily due to the recognition of certain
significant charges in 2010. The Company recognized class action litigation and regulatory reserves of $320 million relating
to the Schwab YieldPlus Fund. Additionally, the Company decided to cover the net remaining losses recognized by Schwab
money market mutual funds as a result of their investments in a single structured investment vehicle that defaulted in 2008
and recorded a charge of $132 million in 2010. Also, as a result of challenging credit card industry economics, the Company
ended its sponsorship in its Invest First® and WorldPoints(a) Visa(b) credit cards and recorded a charge of $30 million. The
Company’s ongoing expense discipline helped limit the growth in all other expense categories in the aggregate to 3% over
the prior year.
Business Acquisitions
On September 1, 2011, the Company completed its acquisition of all of the outstanding common shares of optionsXpress, an
online brokerage firm primarily focused on equity option securities and futures, for total consideration of $714 million.
Under the terms of the merger agreement, optionsXpress stockholders received 1.02 shares of the Company’s common
stock for each share of optionsXpress stock. As a result, the Company issued 59 million shares of the Company’s common
stock valued at $710 million, based on the closing price of the Company’s common stock on September 1, 2011. The
Company also assumed optionsXpress’ stock-based compensation awards valued at $4 million.
On November 9, 2010, the Company acquired substantially all of the assets of Windward for $106 million in common stock
and $44 million in cash. Windward was an investment advisory firm that managed diversified investment portfolios
comprised primarily of ETFs.
For more information on the acquisitions of optionsXpress and Windward, see “Item 8 – Financial Statements and
Supplementary Data – Notes to Consolidated Financial Statements – 3. Business Acquisitions.”
Subsequent Event
On January 26, 2012, the Company issued and sold 400,000 shares of fixed-to-floating rate non-cumulative perpetual
preferred stock, Series A, $0.01 par value, with a liquidation preference of $1,000 per share (Series A Preferred Stock). The
Series A Preferred Stock has a fixed dividend rate of 7% until 2022 and a floating rate thereafter. Net proceeds received from
the sale were $394 million and are being used for general corporate purposes, including, without limitation, to support the
Company’s balance sheet growth and the potential migration of certain client cash balances to deposit accounts at Schwab
Bank.
(a) WorldPoints is a registered trademark of FIA Card Services, N.A.
(b) Visa is a registered trademark of Visa International Service Association.
- 19 -
THE CHARLES SCHWAB CORPORATION
Management’s Discussion and Analysis of Financial Condition and Results of Operations
(Tabular Amounts in Millions, Except Ratios, or as Noted)
CURRENT MARKET AND REGULATORY ENVIRONMENT
The economic and market environment was challenging throughout 2011. Further declines in interest rates continue to
constrain growth in the Company’s net revenues.
While the federal funds target rate was unchanged at a range of zero to 0.25% in 2011, the Federal Reserve took action
during the middle of the year to lower longer term interest rates. Further declines in interest rates in 2011 have accelerated the
prepayment activity in the Company’s portfolios of residential mortgage-backed securities, which resulted in higher premium
amortization. To the extent rates remain at these low levels, the Company’s net interest revenue will continue to be
constrained, even as growth in average balances helps to increase such revenue. The low interest rate environment also
affects asset management and administration fees. The overall yields on certain Schwab-sponsored money market mutual
funds have remained at levels at or below the management fees on those funds. The Company continues to waive a portion of
its management fees, which it began in the first quarter of 2009, so that the funds can continue providing a positive return to
clients. These and other money market mutual funds may not be able to replace maturing securities with securities of equal or
higher yields. As a result, the yields on such funds may remain around or decline from their current levels, and therefore
below the management fees on those funds. To the extent this occurs, the Company may continue to waive fees and such
waivers could increase from the fourth quarter 2011 level, which would negatively affect asset management and
administration fees.
The Company recorded net impairment charges of $31 million and $36 million related to certain non-agency residential
mortgage-backed securities in 2011 and 2010, respectively, due to credit deterioration of the securities’ underlying loans.
Further deterioration in the performance of the underlying loans in the Company’s residential mortgage-backed securities
portfolio could result in the recognition of additional impairment charges.
The Company is pursuing lawsuits in state court in San Francisco for rescission and damages against issuers, underwriters,
and dealers of 51 individual non-agency residential mortgage-backed securities on which the Company has experienced
realized and unrealized losses. The lawsuits allege that offering documents for the securities contained material untrue and
misleading statements about the securities and the underwriting standards and credit quality of the underlying loans. On
January 27, 2012, the court denied defendants’ motions to dismiss the claims with respect to all but 4 of the 51 securities, and
allowed the cases to proceed to discovery.
The “Dodd-Frank Wall Street Reform and Consumer Protection Act” was signed into law in July 2010. Among other things,
the legislation authorizes various assessments and fees and requires the establishment of minimum leverage and risk-based
capital requirements for insured depository institutions. The legislation also eliminated the Office of Thrift Supervision
effective July 21, 2011 and, as a result, the Federal Reserve became CSC’s primary regulator and the Office of the
Comptroller of the Currency became the primary regulator of Schwab Bank. CSC is continuing to review the impact the
legislation, studies and related rule-making will have on the Company’s business, financial condition, and results of
operations.
- 20 -
THE CHARLES SCHWAB CORPORATION
Management’s Discussion and Analysis of Financial Condition and Results of Operations
(Tabular Amounts in Millions, Except Ratios, or as Noted)
RESULTS OF OPERATIONS
The following discussion presents an analysis of the Company’s results of operations for the years ended December 31, 2011,
2010, and 2009.
Net Revenues
The Company’s major sources of net revenues are asset management and administration fees, net interest revenue, and
trading revenue, which all increased in 2011 as compared to 2010. Asset management and administration fees and trading
revenue decreased, while net interest revenue increased in 2010 as compared to 2009.
Year Ended December 31,
2011
2010
2009
Growth Rate
2010-2011
Amount
% of
Total Net
Revenues
Asset management and administration fees
Schwab money market funds before fee waivers
Fee waivers
Schwab money market funds after fee waivers
Equity and bond funds
Mutual Fund OneSource
Total mutual funds
Advice solutions
Other
Asset management and administration fees
Net interest revenue
Interest revenue
Interest expense
Net interest revenue
Trading revenue
Commissions
Principal transactions
Trading revenue
Other
Provision for loan losses
Net impairment losses on securities
Total net revenues
-
31%
(31%)
4%
12%
5%
36%
10%
6%
10%
(12%)
13%
12%
2%
12%
19%
(33%)
(14%)
10%
Asset Management and Administration Fees
$
865
(568)
297
118
680
1,095
522
311
1,928
1,900
(175)
1,725
866
61
927
160
(18)
6%
3%
14%
23%
11%
7%
41%
41%
(4%)
37%
19%
1%
20%
3%
-
Amount
$
865
(433)
432
114
608
1,154
384
284
1,822
1,723
(199)
1,524
770
60
830
135
(27)
% of
Total Net
Revenues
% of
Total Net
Amount Revenues
$ 1,011
(224)
787
108
446
1,341
278
256
1,875
1,428
(183)
1,245
884
112
996
175
(38)
(60)
$ 4,193
18%
3%
11%
32%
7%
6%
45%
34%
(4%)
30%
21%
3%
24%
3%
(1%)
(1%)
100%
10%
3%
14%
27%
9%
7%
43%
41%
(5%)
36%
18%
2%
20%
3%
(1%)
(1%)
100%
(31)
$ 4,691
(1%)
100%
(36)
$ 4,248
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 assets invested in these funds. The Company also earns asset management fees for advice solutions, which include
advisory and managed account services that 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. Other asset management and administration fees include various asset based fees,
such as trust fees, 401k record keeping fees, and mutual fund clearing and other service fees. 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 and
Regulatory Environment.”
Asset management and administration fees increased by $106 million, or 6%, in 2011 from 2010 primarily due to an increase
in advice solutions fees, partially offset by a decrease in mutual fund service fees. Asset management and administration fees
- 21 -
THE CHARLES SCHWAB CORPORATION
Management’s Discussion and Analysis of Financial Condition and Results of Operations
(Tabular Amounts in Millions, Except Ratios, or as Noted)
decreased by $53 million, or 3%, in 2010 from 2009 primarily due to the decrease in mutual fund service fees, partially offset
by an increase in advice solutions fees.
Given the low interest rate environment in 2011, 2010, and 2009, the overall yields on certain Schwab-sponsored money
market mutual funds have remained at levels at or below the management fees on those funds. As a result, the Company
waived a portion of its fees in order to provide a positive return to clients. Mutual fund service fees decreased by $59 million,
or 5%, in 2011 from 2010 and by $187 million, or 14%, in 2010 from 2009 primarily due to the increase in money market
mutual fund fee waivers, offset by higher average balances of client assets invested in the Company’s Mutual Fund
OneSource funds as a result of continued asset inflows.
Advice solutions fees increased by $138 million, or 36%, in 2011 from 2010 and by $106 million, or 38%, in 2010 from 2009
primarily due to higher average balances of client assets enrolled in retail advisory and managed account programs, including
Schwab Private Client and Schwab Managed Portfolios™. The increase in 2011 was also attributed to the integration of
Windhaven, which was acquired in November 2010. Additionally, the increases in advice solutions fees were due to
temporary fees rebates of $63 million and $68 million, which reduced advice solutions fees in 2010 and 2009, respectively,
under a rebate program that ended in 2010.
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’s investment strategy is structured to produce an increase in
net interest revenue when interest rates rise and, conversely, a 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
may attempt to mitigate some of this negative impact by extending the maturities of assets in investment portfolios to lock in
asset yields, and 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. The current low interest rate environment limits the extent to which the Company can reduce interest expense paid on
funding sources. 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 and Regulatory
Environment.”
In clearing its clients’ trades, Schwab and optionsXpress, Inc. hold cash balances payable to clients. In most cases, Schwab
and optionsXpress, Inc. pay their clients interest on cash balances awaiting investment, and in turn invest these funds and
earn interest revenue. Receivables from brokerage clients consist primarily of margin loans to brokerage clients. Margin
loans are loans made to clients on a secured basis to purchase securities. Pursuant to applicable 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 Company’s consolidated balance
sheet. When investing segregated client cash balances, Schwab and optionsXpress, Inc. must adhere to applicable 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 of deposit issued by
U.S. banks and thrifts, and resale agreements collateralized by qualified securities. Additionally, Schwab and optionsXpress,
Inc. have established policies for the minimum credit quality and maximum maturity of these investments.
Schwab Bank maintains investment portfolios for liquidity as well as to invest funds from deposits in excess of loans to
banking clients and liquidity limits. Schwab Bank’s securities available for sale include residential mortgage-backed
securities, certificates of deposit, corporate debt securities, U.S. agency notes, and asset-backed and other securities. Schwab
Bank’s securities held to maturity include residential mortgage-backed and other securities. Schwab Bank lends funds to
banking clients primarily in the form of mortgage loans and HELOCs. These loans are largely funded by interest-bearing
deposits from banking clients.
- 22 -
$
33
80
1
351
1
521
74
241
5
1,307
121
$ 1,428
$
107
3
71
181
2
$
183
$ 1,245
0.42%
0.49%
0.28%
5.20%
0.79%
2.81%
3.86%
3.61%
4.55%
2.23%
2.44%
0.34%
0.02%
5.77%
0.36%
0.32%
2.12%
THE CHARLES SCHWAB CORPORATION
Management’s Discussion and Analysis of Financial Condition and Results of Operations
(Tabular Amounts in Millions, Except Ratios, or as Noted)
The Company’s interest-earning assets are financed primarily by brokerage client cash balances and deposits from banking
clients. Noninterest-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:
2011
Average
Interest
Average Revenue/ Yield/
Rate
Expense
Balance
2010
Interest Average
Average Revenue/ Yield/
Rate
Balance
Expense
2009
Interest
Average Revenue/
Expense
Balance
Average
Yield/
Rate
Year Ended December 31,
Interest-earning assets:
Cash and cash equivalents
Cash and investments segregated
Broker-related receivables (1)
Receivables from brokerage clients
Other securities owned (1)
Securities available for sale (2)
Securities held to maturity
Loans to banking clients
Loans held for sale
Total interest-earning assets
Other interest revenue
Total interest-earning assets
$ 5,554 $
25,831
310
10,637
-
27,486
16,050
9,472
65
95,405
13
39
-
467
-
456
492
310
3
1,780
120
$ 95,405 $ 1,900
0.23%
0.15%
0.05%
4.39%
-
1.66%
3.07%
3.27%
4.62%
1.87%
$ 7,269
19,543
317
8,981
74
24,209
10,440
7,987
80
78,900
1.99%
$ 78,900
$
19
57
-
437
-
486
361
275
4
1,639
84
$ 1,723
0.26%
0.29%
0.08%
4.87%
0.45%
2.01%
3.46%
3.44%
5.00%
2.08%
$ 7,848
16,291
363
6,749
126
18,558
1,915
6,671
110
58,631
2.18%
$ 58,631
Funding sources:
Deposits from banking clients
Payables to brokerage clients
Long-term debt
Total interest-bearing liabilities
Noninterest-bearing funding sources
Other interest expense
Total funding sources
Net interest revenue
(1)
(2) Amounts have been calculated based on amortized cost.
$ 52,701 $
29,992
2,004
84,697
10,708
$ 95,405 $
2
175
$ 1,725
62
3
108
173
Interest revenue was less than $500,000 in the period or periods presented.
0.12%
0.01%
5.39%
0.20%
0.18%
1.81%
$ 44,858
22,715
1,648
69,221
9,679
$ 78,900
$
105
2
92
199
0.23%
0.01%
5.58%
0.29%
-
$
199
$ 1,524
0.25%
1.93%
$ 31,249
18,002
1,231
50,482
8,149
$ 58,631
Net interest revenue increased in 2011 from 2010 primarily due to higher average balances of interest-earning assets, partially
offset by the effect of lower interest rate spreads resulting from higher amortization of premiums relating to residential
mortgage-backed securities. The growth in average balances of deposits from banking clients and payables to brokerage
clients funded the increases in the balances of receivables from brokerage clients, securities available for sale, and securities
held to maturity. Further declines in interest rates in 2011 accelerated the prepayment activity in the Company’s portfolio of
residential mortgage-backed securities, which resulted in higher premium amortization.
Net interest revenue increased in 2010 from 2009 due to higher average balances of interest-earning assets. This resulted
from significant growth in the average balance of deposits from banking clients, which in turn funded increases in the
average balances of securities held to maturity, securities available for sale, and loans to banking clients. These interest-
earning assets are invested at rates above the cost of supporting funding sources. The increase in net interest revenue was
partially offset by the decline in the yields of almost all interest-earning assets compared to 2009.
Trading Revenue
Trading revenue includes commission and principal transaction revenues. Commission revenue is affected by the number of
revenue trades executed and the average revenue earned per revenue trade. Principal transaction revenue is primarily
comprised of revenue from client fixed income securities trading activity. Factors that influence principal transaction revenue
include the volume of client trades and market price volatility.
Trading revenue increased by $97 million, or 12%, in 2011 from 2010 primarily due to higher daily average revenue trades
and the addition of optionsXpress. Trading revenue decreased by $166 million, or 17%, in 2010 from 2009 due to lower
- 23 -
THE CHARLES SCHWAB CORPORATION
Management’s Discussion and Analysis of Financial Condition and Results of Operations
(Tabular Amounts in Millions, Except Ratios, or as Noted)
average revenue per revenue trade resulting from improved online trade pricing for clients and lower daily average revenue
trades.
As shown in the following table, daily average revenue trades increased by 12% in 2011. The increase was primarily due to a
higher volume of option, equity, and mutual fund trades. Average revenue per revenue trade remained relatively flat in 2011.
Daily average revenue trades decreased 5% in 2010 from 2009 primarily due to a lower volume of equity and principal
transaction trades, partially offset by a higher volume of option trades. Average revenue per revenue trade decreased 11% in
2010 from 2009 primarily due to lower online equity trade commissions, which were implemented in January 2010.
Year Ended December 31,
Daily average revenue trades (1) (in thousands)
Number of trading days
Average revenue per revenue trade
(1)
Growth Rate
2010-2011
12%
-
(1%)
2011
303.8
251.5
$ 12.15
2010
270.7
251.5
$ 12.28
2009
285.8
251.0
$ 13.86
Includes all client trades that generate trading revenue (i.e., commission revenue or revenue from fixed income securities
trading).
Other Revenue
Other revenue includes software fee revenue relating to the Company’s portfolio management services, exchange processing
fee revenue, gains on sales of mortgage loans, and other service fee revenues. Other revenue increased by $25 million, or
19%, in 2011 compared to 2010 primarily due to increases in software and exchange processing fee revenues, as well as the
addition of education services revenue from the acquisition of optionsXpress. Other revenue was lower by $40 million, or
23%, in 2010 compared to 2009 primarily due to a gain of $31 million on the repurchase of a portion of the Company’s long-
term debt in 2009.
Provision for Loan Losses
The provision for loan losses decreased by $9 million, or 33%, in 2011 from 2010, due to a decrease in overall expected loss
rates resulting primarily from a decrease in first mortgage loan delinquencies. The provision for loan losses decreased by
$11 million, or 29%, in 2010 from 2009, primarily due to stabilization in the levels of loan delinquencies and nonaccrual
loans in 2010 compared to 2009. Charge-offs were $19 million, $20 million, and $13 million in 2011, 2010, and 2009,
respectively. For further discussion on the Company’s credit risk and the allowance for loan losses, see “Risk Management –
Credit Risk” and “Item 8 – Financial Statements and Supplementary Data – Notes to Consolidated Financial Statements – 7.
Loans to Banking Clients and Related Allowance for Loan Losses.”
Net Impairment Losses on Securities
Net impairment losses on securities were $31 million, $36 million, and $60 million in 2011, 2010, and 2009, respectively.
These charges relate to certain non-agency residential mortgage-backed securities in the Company’s available for sale
portfolio as a result of credit deterioration of the securities’ underlying loans. For further discussion, see “Item 8 – Financial
Statements and Supplementary Data – Notes to Consolidated Financial Statements – 6. Securities Available for Sale and
Securities Held to Maturity.”
- 24 -
THE CHARLES SCHWAB CORPORATION
Management’s Discussion and Analysis of Financial Condition and Results of Operations
(Tabular Amounts in Millions, Except Ratios, or as Noted)
Expenses Excluding Interest
As shown in the table below, expenses excluding interest were lower in 2011 compared to 2010 primarily due to certain
significant charges in 2010, including class action litigation and regulatory reserves relating to the Schwab YieldPlus Fund
and losses recognized for Schwab money market mutual funds. The decrease in expenses excluding interest caused by these
charges in 2010 was offset by increases in compensation and benefits, professional services, occupancy and equipment, and
advertising and market development expenses in 2011. Expenses excluding interest were higher in 2010 compared to 2009
primarily due to the charges previously discussed.
Year Ended December 31,
Compensation and benefits
Professional services
Occupancy and equipment
Advertising and market development
Communications
Depreciation and amortization
Class action litigation and regulatory reserve
Money market mutual fund charges
Other
Total expenses excluding interest
Expenses as a percentage of total net revenues:
Total expenses excluding interest
Advertising and market development
N/M Not meaningful.
Compensation and Benefits
Growth Rate
2010-2011
10%
13%
11%
16%
6%
6%
N/M
N/M
(5%)
(5%)
2011
$ 1,732
387
301
228
220
155
7
-
269
$ 3,299
2010
$ 1,573
341
272
196
207
146
320
132
282
$ 3,469
2009
$ 1,544
275
318
191
206
159
-
-
224
$ 2,917
70%
5%
82%
5%
70%
5%
Compensation and benefits expense includes salaries and wages, incentive compensation, and related employee benefits and
taxes. Incentive compensation includes variable compensation, discretionary bonus costs, and stock-based compensation.
Variable compensation includes payments to certain individuals based on their sales performance. Discretionary bonus costs
are based on the Company’s overall performance as measured by earnings per share, and therefore will fluctuate with this
measure. In 2009, discretionary bonus costs were based on the achievement of specified performance objectives, including
revenue growth and pre-tax profit margin. Stock-based compensation primarily includes employee and board of director
stock options, restricted stock awards, and restricted stock units.
- 25 -
THE CHARLES SCHWAB CORPORATION
Management’s Discussion and Analysis of Financial Condition and Results of Operations
(Tabular Amounts in Millions, Except Ratios, or as Noted)
Compensation and benefits expense increased by $159 million, or 10%, in 2011 from 2010 primarily due to increases in
salaries and wages and incentive compensation. Compensation and benefits expense increased by $29 million, or 2%, in 2010
from 2009 primarily due to an increase in incentive compensation. The following table shows a comparison of certain
compensation and benefits components and employee data:
Growth Rate
2010-2011
9%
15%
8%
10%
Year Ended December 31,
Salaries and wages
Incentive compensation
Employee benefits and other
Total compensation and benefits expense
Compensation and benefits expense as a 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) (1)
At year end
Average
(1)
10%
6%
2011
$ 1,012
444
276
$ 1,732
$
2010
931
386
256
$ 1,573
$
2009
930
355
259
$ 1,544
22%
9%
6%
37%
14.1
13.4
22%
9%
6%
37%
12.8
12.6
22%
8%
7%
37%
12.4
12.4
Includes full-time, part-time and temporary employees, and persons employed on a contract basis, and excludes
employees of outsourced service providers.
Salaries and wages increased in 2011 from 2010 primarily due to increases in full-time employees and persons employed on
a contract basis. The increase in full-time employees was partially due to the addition of full-time employees from the
optionsXpress acquisition in September 2011. Incentive compensation increased in 2011 from 2010 primarily due to an
increase in discretionary bonus costs and higher variable compensation. Discretionary bonus costs increased based on the
Company’s overall performance in 2011, as well as an increase in full time employees. Variable compensation was higher
primarily due to the integration of Windhaven, which was acquired in November 2010. Employee benefits and other expense
increased in 2011 from 2010 primarily due to increases in payroll taxes and the Company’s 401(k) plan contribution expense
as a result of increases in incentive compensation and full-time employees.
Salaries and wages were relatively flat in 2010 from 2009 primarily due to increases in persons employed on a contract basis
and full-time employees, offset by severance expense of $58 million in 2009 relating to the Company’s cost reduction
measures. Incentive compensation increased in 2010 from 2009 primarily due to higher variable compensation resulting from
product sales performance in the Company’s branch offices and higher stock-based compensation relating to the amortization
of its stock options and restricted stock units.
Expenses Excluding Compensation and Benefits
Professional services expense increased in 2011 from 2010 primarily due to an increase in fees relating to the Company’s
technology investments and client facing infrastructure, and approximately $10 million in costs relating to the integration of
optionsXpress. Professional services expense increased in 2010 from 2009 primarily due to increases in fees relating to
technology services and enhancements, and investment advisor fees relating to the Company’s managed account service
programs.
Occupancy and equipment expense increased in 2011 from 2010 primarily due to an increase in the Company’s investments
in data processing equipment. Occupancy and equipment expense decreased in 2010 from 2009 primarily due to facilities
charges of $43 million in 2009 relating to the Company’s cost reduction measures.
Advertising and market development expense increased in 2011 from 2010 primarily due to higher spending on customer and
branch promotions and electronic media.
- 26 -
THE CHARLES SCHWAB CORPORATION
Management’s Discussion and Analysis of Financial Condition and Results of Operations
(Tabular Amounts in Millions, Except Ratios, or as Noted)
Communications expense increased in 2011 from 2010 primarily due to higher telephone service expense and third-party
news and information expense.
Depreciation and amortization expense increased in 2011 from 2010 primarily due to higher amortization of intangible assets
resulting from the acquisitions of optionsXpress and Windhaven. Depreciation and amortization expense decreased in 2010
from 2009 primarily due to certain assets becoming fully depreciated.
In 2011 and 2010, the Company recorded class action litigation and regulatory reserves relating to the Schwab YieldPlus
Fund. For further discussion of the Schwab YieldPlus Fund litigation and regulatory matters, see “Item 8 – Financial
Statements and Supplementary Data – Notes to Consolidated Financial Statements – 15. Commitments and Contingencies.”
In 2010, the Company decided to cover the net remaining losses of $132 million recognized by Schwab money market
mutual funds as a result of their investments in a single structured investment vehicle that defaulted in 2008.
Other expense was lower in 2011 compared to 2010 primarily due to a charge of $30 million in 2010, relating to the
Company’s Invest First and WorldPoints Visa credit cards, as the Company ended its sponsorship due to challenging credit
card industry economics. Other expense was higher in 2010 as compared to 2009 primarily due to this charge and an increase
in employee travel expenses.
Taxes on Income
The Company’s effective income tax rate on income before taxes was 37.9% in 2011, 41.7% in 2010, and 38.3% in 2009.
The decrease in 2011 from 2010 was due to a lower effective state income tax rate in 2011 and the impact of non-deductible
penalties relating to the Schwab YieldPlus Fund regulatory settlements recorded in 2010. The increase in 2010 from 2009
was primarily due to the impact of non-deductible penalties in 2010.
Segment Information
The Company provides financial services to individuals and institutional clients through two segments – Investor Services
and Institutional Services. The Investor Services segment provides retail brokerage and banking services to individual
investors. The Institutional Services segment provides custodial, trading, and support services to independent investment
advisors. The Institutional Services segment also provides retirement plan services, specialty brokerage services, and mutual
fund clearing services, and supports the availability of Schwab proprietary mutual funds and collective trust funds on third-
party platforms. Banking revenues and expenses are allocated to the Company’s two segments based on which segment
services the client. The Company evaluates the performance of its segments on a pre-tax basis, excluding items such as
impairment charges on non-financial assets, discontinued operations, extraordinary items, and significant restructuring and
other charges. Segment assets and liabilities are not disclosed because the balances are not used for evaluating segment
performance and deciding how to allocate resources to segments.
- 27 -
THE CHARLES SCHWAB CORPORATION
Management’s Discussion and Analysis of Financial Condition and Results of Operations
(Tabular Amounts in Millions, Except Ratios, or as Noted)
Financial information for the Company’s reportable segments is presented in the following tables:
Year Ended December 31,
Net Revenues
Asset management and
administration fees
Net interest revenue
Trading revenue
Other
Provision for loan losses
Net impairment losses
on securities
Total net revenues
Expenses Excluding
Interest
Income before taxes on income
Growth Rate
2010-2011
Investor Services
Institutional Services
2011
2010
2009
Growth Rate
2010-2011
2011
2010
2009
8%
13%
12%
21%
(35%)
(16%)
12%
$ 1,053
1,468
625
85
(15)
$ 976
1,297
557
70
(23)
$ 968
1,058
679
93
(34)
(27)
3,189
(32)
2,845
(54)
2,710
9%
19%
2,261
$ 928
2,065
$ 780
1,906
$ 804
3%
13%
11%
15%
(25%)
$ 875
257
302
75
(3)
$ 846
227
273
65
(4)
$ 907
187
317
82
(4)
-
7%
8%
5%
(4)
1,502
(4)
1,403
(6)
1,483
1,039
$ 463
960
$ 443
929
$ 554
Growth Rate
2010-2011
-
-
-
-
-
Year Ended December 31,
Net Revenues
Asset management and
administration fees
Net interest revenue
Trading revenue
Other
Provision for loan losses
Net impairment losses
on securities
Total net revenues
Expenses Excluding
Interest
N/M
Income before taxes on income N/M
Taxes on income
Net Income
N/M Not meaningful.
-
-
Unallocated
Total
2011
2010
2009
Growth Rate
2010-2011
2011
2010
2009
$
$
-
-
-
-
-
-
-
$
-
-
-
-
-
-
-
-
-
-
-
-
-
-
(1)
1
444
$ (444) $
82
(82)
$
6%
13%
12%
19%
(33%)
(14%)
10%
$ 1,928
1,725
927
160
(18)
$ 1,822
1,524
830
135
(27)
$ 1,875
1,245
996
175
(38)
(31)
4,691
(36)
4,248
(60)
4,193
(5%)
79%
62%
90%
3,299
$ 1,392
(528)
$ 864
3,469
$ 779
(325)
$ 454
2,917
$ 1,276
(489)
$ 787
Investor Services
Net revenues increased by $344 million, or 12%, in 2011 from 2010 primarily due to increases in net interest revenue, asset
management and administration fees, and trading revenue. Net interest revenue increased primarily due to higher average
balances of interest-earning assets during the year, partially offset by the effect of higher premium amortization relating to
residential mortgage-backed securities caused by higher mortgage prepayments in 2011. Asset management and
administration fees increased primarily due to an increase in revenue from the Company’s advice solutions and continued
asset inflows, offset by money market mutual fund fee waivers. Trading revenue increased primarily due to higher daily
average revenue trades and the addition of optionsXpress, which was acquired in September 2011. Expenses excluding
interest increased by $196 million, or 9%, in 2011 from 2010 primarily due to increases in compensation and benefits,
professional services, and advertising and market development expenses, which included the integration of optionsXpress.
- 28 -
THE CHARLES SCHWAB CORPORATION
Management’s Discussion and Analysis of Financial Condition and Results of Operations
(Tabular Amounts in Millions, Except Ratios, or as Noted)
Net revenues increased by $135 million, or 5%, in 2010 from 2009 primarily due to an increase in net interest revenue and
lower net impairment losses on securities, partially offset by decreases in trading revenue and other revenue. Net interest
revenue increased due to higher average balances of interest-earning assets, partially offset by a decrease in the average yield
earned. Trading revenue decreased due to lower average revenue per revenue trade resulting from improved online trade
pricing for clients, which was implemented in January 2010, and slightly lower daily average revenue trades in 2010. Other
revenue was lower in comparison to 2009 due to a gain on the repurchase of a portion of the Company’s long-term debt in
2009. While the low interest rate environment caused additional money market mutual fund fee waivers from 2009, asset
management and administration fees were relatively flat due to higher average asset valuations and continued asset inflows.
Expenses excluding interest increased by $159 million, or 8%, in 2010 from 2009 primarily due to increases in compensation
and benefits, professional services, and other expenses. Other expense includes a charge relating to the Company’s
termination of its sponsorship in its Invest First and WorldPoints Visa credit cards in 2010 as a result of challenging credit
card economics.
Institutional Services
Net revenues increased by $99 million, or 7%, in 2011 from 2010 primarily due to increases in net interest revenue, asset
management and administration fees, and trading revenue. Net interest revenue increased primarily due to higher average
balances of interest-earning assets during the year, partially offset by the effect of higher premium amortization relating to
residential mortgage-backed securities caused by higher mortgage prepayments in 2011. Asset management and
administration fees increased primarily due to an increase in mutual fund service fees relating to the Company’s Mutual Fund
OneSource funds as a result of continued asset inflows, offset by money market mutual fund fee waivers. Trading revenue
increased primarily due to higher daily average revenue trades. Expenses excluding interest increased by $79 million, or 8%,
in 2011 from 2010 primarily due to increases in compensation and benefits and professional services expenses.
Net revenues decreased by $80 million, or 5%, in 2010 from 2009 due to decreases in asset management and administration
fees, trading revenue, and other revenue, offset by an increase in net interest revenue. Asset management and administration
fees decreased primarily due to money market mutual fund fee waivers, partially offset by the effect of higher average asset
valuations and continued asset inflows. Additionally, in August 2010 management transferred client assets associated with the
Schwab Advisor Network to the Investor Services segment and started recording the related asset management and
administration fee revenue to that segment. Trading revenue decreased due to lower average revenue per revenue trade
resulting from improved online trade pricing for clients, which was implemented in January 2010, and slightly lower daily
average revenue trades in 2010. Other revenue was lower in comparison to 2009 due to a gain on the repurchase of a portion
of the Company’s long-term debt in 2009. Net interest revenue increased due to higher average balances of interest-earning
assets, partially offset by a decrease in the average yield earned. Expenses excluding interest increased by $31 million, or 3%,
in 2010 from 2009 primarily due to an increase in compensation and benefits expense.
Unallocated
Expenses excluding interest in 2010 include class action litigation and regulatory reserves relating to the Schwab YieldPlus
Fund and a charge relating to the Company’s decision to cover the net remaining losses recognized by Schwab money market
mutual funds as a result of their investments in a single structured investment vehicle that defaulted in 2008. Expenses
excluding interest in 2009 include facilities and severance charges relating to the Company’s cost reduction measures.
LIQUIDITY AND CAPITAL RESOURCES
CSC conducts substantially all of its business through its wholly-owned subsidiaries. The Company’s capital structure is
designed to provide each subsidiary with capital and liquidity to meet its operational needs and regulatory requirements.
CSC is a savings and loan holding company and Schwab Bank, CSC’s depository institution, is a federal savings bank. Prior
to July 21, 2011, CSC and Schwab Bank were both subject to supervision and regulation by the OTS. The Dodd-Frank Act
eliminated the OTS effective July 21, 2011, and as a result, the Federal Reserve became CSC’s primary regulator and the
Office of the Comptroller of the Currency became the primary regulator of Schwab Bank.
- 29 -
THE CHARLES SCHWAB CORPORATION
Management’s Discussion and Analysis of Financial Condition and Results of Operations
(Tabular Amounts in Millions, Except Ratios, or as Noted)
Liquidity
CSC
While CSC is not currently subject to specific statutory capital requirements, CSC is required to serve as a source of strength
for Schwab Bank and must have the ability to provide financial assistance if Schwab Bank experiences financial distress. To
manage capital adequacy, the Company currently utilizes a target Tier 1 Leverage Ratio, as defined by the Board of
Governors of the Federal Reserve System, of at least 6%. At December 31, 2011, the Company’s Tier 1 Leverage Ratio was
6.3%.
CSC’s liquidity needs are generally met through cash generated by its subsidiaries, as well as cash provided by external
financing. CSC has a universal automatic shelf registration statement (Shelf Registration Statement) on file with the SEC
which enables CSC to issue debt, equity and other securities. CSC maintains excess liquidity in the form of overnight cash
deposits and short-term investments to cover daily funding needs and to support growth in the Company’s 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, Schwab Bank, and optionsXpress, Inc. are subject to
regulatory requirements that may restrict them from certain transactions with CSC, as further discussed below. Management
believes that funds generated by the operations of CSC’s subsidiaries will continue to be the primary funding source in
meeting CSC’s liquidity needs, providing adequate liquidity to meet Schwab Bank’s capital guidelines, and maintaining
Schwab and optionsXpress, Inc.’s net capital.
In January 2012, the Company completed an equity offering of 400,000 shares of its preferred stock under the Shelf
Registration Statement. For further discussion of the equity offering, see “Subsequent Event”.
CSC has liquidity needs that arise from the funding of cash dividends, acquisitions, and investments, as well as its Senior
Notes, Senior Medium-Term Notes, Series A (Medium-Term Notes), and Junior Subordinated Notes. The following are
details of CSC’s long-term debt:
December 31, 2011
Senior Notes
Medium Term Notes
Junior Subordinated Notes (1)
Par
Outstanding
$
$
$
1,450
250
202
Maturity
Interest Rate
2014 – 2020 4.45% to 4.950% fixed
2017
2067
6.375% fixed
7.50% fixed until 2017,
floating thereafter
Moody’s
A2
A2
Baa1
Standard
& Poor’s
A
A
BBB+
Fitch
A
A
BBB+
(1) The Junior Subordinated Notes themselves are not rated, however, the trust preferred securities related to these Junior
Subordinated Notes are rated.
CSC has authorization from its Board of Directors to issue unsecured commercial paper notes (Commercial Paper Notes) not
to exceed $1.5 billion. Management has set a current limit for the commercial paper program of $800 million. The maturities
of the Commercial Paper Notes may vary, but are not to exceed 270 days from the date of issue. The commercial paper is not
redeemable prior to maturity and cannot be voluntarily prepaid. The proceeds of the commercial paper program are to be
used for general corporate purposes. There were no borrowings of Commercial Paper Notes outstanding at December 31,
2011. CSC’s ratings for these short-term borrowings are P1 by Moody’s, A1 by Standard & Poor’s, and F1 by Fitch.
CSC maintains an $800 million committed, unsecured credit facility with a group of 11 banks, which is scheduled to expire
in June 2012. This facility replaced a similar facility that expired in June 2011 and was unused in 2011. The funds under this
facility are available for general corporate purposes, including repayment of the Commercial Paper Notes discussed above.
The financial covenants under this facility require Schwab to maintain a minimum net capital ratio, as defined, Schwab Bank
to be well capitalized, as defined, and CSC to maintain a minimum level of stockholders’ equity. At December 31, 2011, the
minimum level of stockholders’ equity required under this facility was $5.0 billion (CSC’s stockholders’ equity at
December 31, 2011 was $7.7 billion). Management believes that these restrictions will not have a material effect on CSC’s
ability to meet foreseeable dividend or funding requirements.
- 30 -
THE CHARLES SCHWAB CORPORATION
Management’s Discussion and Analysis of Financial Condition and Results of Operations
(Tabular Amounts in Millions, Except Ratios, or as Noted)
CSC also has direct access to $750 million of the $875 million uncommitted, unsecured bank credit lines discussed below,
that are primarily utilized by Schwab to manage short-term liquidity. These lines were not used by CSC during 2011.
In addition, Schwab provides CSC with a $1.0 billion credit facility maturing in December 2014. This facility replaced a
similar facility that expired in December 2011. There were no funds drawn under this facility at December 31, 2011.
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,
or making unsecured advances or loans to its parent company or employees if such payment would result in a net capital
amount of less than 5% of aggregate debit balances or less than 120% of its minimum dollar requirement of $250,000. At
December 31, 2011, Schwab’s net capital was $1.2 billion (10% of aggregate debit balances), which was $948 million in
excess of its minimum required net capital and $588 million in excess of 5% of aggregate debit balances.
Most of Schwab’s assets are readily convertible to cash, consisting primarily of short-term (i.e., less than 150 days)
investment-grade, interest-earning investments (the majority of which are segregated for the exclusive benefit of clients
pursuant to regulatory requirements), receivables from brokerage clients, and receivables from brokers, dealers, and clearing
organizations. Client margin loans are demand loan obligations secured by readily marketable securities. Receivables from
and payables to brokers, dealers, and clearing organizations primarily represent current open transactions, which usually
settle, or can be closed out, within a 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 $33.5 billion and $29.9 billion at December 31, 2011 and 2010, respectively.
Management believes that brokerage client cash balances and operating earnings will continue to be the primary sources of
liquidity for Schwab.
Schwab has a finance lease obligation related to an office building and land under a 20-year lease. The remaining finance
lease obligation of $100 million at December 31, 2011, is being reduced by a portion of the lease payments over the
remaining lease term of 13 years.
To manage short-term liquidity, Schwab maintains uncommitted, unsecured bank credit lines with a group of six banks
totaling $875 million at December 31, 2011. The need for short-term borrowings arises primarily from timing differences
between cash flow requirements, scheduled liquidation of interest-earnings investments, and movements of cash to meet
regulatory brokerage client cash segregation requirements. Schwab borrowed an average of $41 million per day for nine days
in 2011 under these lines. There were no borrowings outstanding under these lines at December 31, 2011.
To partially satisfy the margin requirement of client option transactions with the Options Clearing Corporation (OCC),
Schwab has unsecured standby letter of credit agreements (LOCs) with eight banks in favor of the OCC aggregating
$350 million at December 31, 2011. In 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, 2011, the aggregate face amount of these LOCs
totaled $78 million. There were no funds drawn under any of these LOCs during 2011.
To manage Schwab’s regulatory capital requirement, CSC provides Schwab with a $1.4 billion subordinated revolving credit
facility, which is scheduled to expire in March 2012. The amount outstanding under this facility at December 31, 2011, was
$245 million. Borrowings under this subordinated lending arrangement qualify as regulatory capital for Schwab.
In addition, CSC provides Schwab with a $2.5 billion credit facility, which is scheduled to expire in December 2014. This
facility replaced a similar facility that expired in December 2011. Borrowings under this facility do not qualify as regulatory
capital for Schwab. There were no funds drawn under this facility at December 31, 2011.
- 31 -
THE CHARLES SCHWAB CORPORATION
Management’s Discussion and Analysis of Financial Condition and Results of Operations
(Tabular Amounts in Millions, Except Ratios, or as Noted)
Schwab Bank
Schwab Bank is required to maintain capital levels as specified in federal banking laws and regulations. Failure to meet the
minimum levels could result in certain mandatory, and possibly additional discretionary actions by the regulators that, if
undertaken, could have a direct material effect on Schwab Bank. Based on its regulatory capital ratios at December 31, 2011,
Schwab Bank is considered well capitalized. Schwab Bank’s regulatory capital and ratios at December 31, 2011, are as
follows:
Tier 1 Risk-Based Capital
Total Risk-Based Capital
Tier 1 Core Capital
Tangible Equity
N/A Not applicable.
Actual
Amount
$ 4,984
$ 5,036
$ 4,984
$ 4,984
Ratio
23.4%
23.7%
7.5%
7.5%
Minimum Capital
Requirement
Amount
$
850
$ 1,701
$ 2,642
$ 1,321
Ratio
4.0%
8.0%
4.0%
2.0%
Minimum to be
Well Capitalized
Ratio
6.0%
10.0%
5.0%
Amount
$ 1,276
$ 2,126
$ 3,302
N/A
Management has established a target Tier 1 Core Capital Ratio for Schwab Bank of at least 7.5%. Schwab Bank’s current
liquidity needs are generally met through deposits from banking clients and equity capital.
The excess cash held in certain Schwab brokerage client accounts is swept into deposit accounts at Schwab Bank. At
December 31, 2011, these balances totaled $40.6 billion.
Schwab Bank has access to traditional funding sources such as deposits, federal funds purchased, and repurchase agreements.
Additionally, Schwab Bank has access to short-term funding through the Federal Reserve Bank (FRB) discount window.
Amounts available under the FRB discount window are dependent on the fair value of certain of Schwab Bank’s securities
available for sale and securities held to maturity that are pledged as collateral. Schwab Bank maintains policies and
procedures necessary to access this funding and tests discount window borrowing procedures annually. At December 31,
2011, $1.2 billion was available under this arrangement. There were no funds drawn under this arrangement during 2011.
Schwab Bank maintains a credit facility with the Federal Home Loan Bank System. Amounts available under this facility are
dependent on the amount of Schwab Bank’s residential real estate mortgages and HELOCs that are pledged as collateral. At
December 31, 2011, $5.2 billion was available under this facility. There were no funds drawn under this facility during 2011.
CSC provides Schwab Bank with a $100 million short-term credit facility, which is scheduled to expire in December 2014.
This facility replaced a similar facility that expired in December 2011. Borrowings under this facility do not qualify as
regulatory capital for Schwab Bank. There were no funds drawn under these facilities during 2011.
optionsXpress
optionsXpress, Inc., a wholly-owned subsidiary of optionsXpress, is a registered broker-dealer and is subject to regulatory
requirements that are intended to ensure the general financial soundness and liquidity of broker-dealers. These regulations
prohibit optionsXpress, Inc. from paying cash dividends or making unsecured advances or loans to its parent company or
employees if such payment would result in a net capital amount of less than 5% of aggregate debit balances or less than
120% of its minimum dollar requirement of $250,000. At December 31, 2011, optionsXpress Inc.’s net capital was
$78 million (29% of aggregate debit balances), which was $73 million in excess of its minimum required net capital and
$65 million in excess of 5% of aggregate debit balances.
optionsXpress, Inc. is also subject to Commodity Futures Trading Commission Regulation 1.17 (Reg. 1.17) under the
Commodity Exchange Act, which also requires the maintenance of minimum net capital. optionsXpress, Inc. as a futures
commission merchant, is required to maintain minimum net capital equal to the greater of its net capital requirement under
- 32 -
THE CHARLES SCHWAB CORPORATION
Management’s Discussion and Analysis of Financial Condition and Results of Operations
(Tabular Amounts in Millions, Except Ratios, or as Noted)
Reg. 1.17 ($1 million), or the sum of 8% of the total risk margin requirements for all positions carried in customer accounts
and 8% of the total risk margin requirements for all positions carried in non-customer accounts (as defined in Reg. 1.17).
Liquidity needs relating to client trading and margin borrowing activities are met primarily through cash balances in
brokerage client accounts, which were $1.2 billion at December 31, 2011. Management believes that brokerage client cash
balances and operating earnings will continue to be the primary sources of liquidity for optionsXpress, Inc.
CSC provides optionsXpress, Inc. with a $100 million credit facility, which is scheduled to expire in December 2014.
Borrowings under this facility do not qualify as regulatory capital for optionsXpress, Inc. There were no funds drawn under
this facility since the acquisition date.
optionsXpress has a term loan with CSC, of which $118 million was outstanding at December 31, 2011, and matures in
December 2014.
Capital Resources
The Company monitors both the relative composition and absolute level of its capital structure. Management is focused on
limiting the Company’s use of capital and currently targets a long-term debt to total financial capital ratio not to exceed 30%.
The Company’s total financial capital (long-term debt plus stockholders’ equity) at December 31, 2011, was $9.7 billion, up
$1.5 billion, or 18%, from December 31, 2010. At December 31, 2011, the Company had long-term debt of $2.0 billion, or
21% of total financial capital, that bears interest at a weighted-average rate of 5.24%. At December 31, 2010, the Company
had long-term debt of $2.0 billion, or 24% of total financial capital. The Company repaid $116 million of long-term debt in
2011, which included the pay off of long-term debt acquired from optionsXpress of $110 million subsequent to the
acquisition date. In 2010, the Company issued $700 million of additional Senior Notes that mature in 2020 and have a fixed
interest rate of 4.45%. The Company repaid $205 million of long-term debt in 2010, which included the maturity of
$200 million of Medium-Term Notes.
The Company’s 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 a 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 Company’s 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 and issuances of
CSC’s preferred and common stock. The combination of these factors can cause significant fluctuations in the cash position
during specific time periods.
Capital Expenditures
The Company’s capital expenditures were $190 million (4% of net revenues) and $127 million (3% of net revenues) in 2011
and 2010, respectively. Capital expenditures in 2011 and 2010 were primarily for software and equipment relating to the
Company’s information technology systems, capitalized costs for developing internal-use software, and leasehold
improvements. Capitalized costs for developing internal-use software were $57 million and $21 million in 2011 and 2010,
respectively.
Management currently anticipates that 2012 capital expenditures will be approximately 30% lower than 2011 spending
primarily due to decreased spending on software and equipment relating to the Company’s information technology systems,
capitalized costs for developing internal-use software, and leasehold improvements. As has been the case in recent years, the
Company may adjust its capital expenditures periodically as business conditions change. Management believes that funds
generated by its operations will continue to be the primary funding source of its capital expenditures.
- 33 -
THE CHARLES SCHWAB CORPORATION
Management’s Discussion and Analysis of Financial Condition and Results of Operations
(Tabular Amounts in Millions, Except Ratios, or as Noted)
Equity Offering
On January 26, 2010, the Company sold 29,670,300 shares of its common stock, $.01 par value, at a public offering price of
$19.00 per share. Net proceeds received from the offering were $543 million and were used to support the Company’s
balance sheet growth, including expansion of its deposit base and migration of certain client balances from money market
funds into deposit accounts at Schwab Bank.
Dividends
CSC paid common stock cash dividends of $295 million ($0.24 per share) and $288 million ($0.24 per share) in 2011 and
2010, respectively. Since the initial dividend in 1989, CSC has paid 91 consecutive quarterly dividends and has increased the
quarterly dividend rate 19 times, including a 20% increase in the third quarter of 2008. Since 1989, dividends have increased
by a 24% compounded annual growth rate, excluding the special cash dividend of $1.00 per common share in 2007. While
the payment and amount of dividends are at the discretion of the Board of Directors, subject to certain regulatory and other
restrictions, the Company currently targets its cash dividend at approximately 20% to 30% of net income.
Under the terms of the Series A Preferred Stock issued in January 2012, the Company’s ability to pay dividends on, make
distributions with respect to, or to repurchase, redeem or acquire its common stock is subject to restrictions in the event that
the Company does not declare and either pay or set aside a sum sufficient for payment of dividends on the Series A Preferred
Stock for the immediately preceding dividend period.
Share Repurchases
There were no repurchases of CSC’s common stock in 2011 or 2010. As of December 31, 2011, CSC had remaining
authority from the Board of Directors to repurchase up to $596 million of its common stock, which does not have an
expiration date.
Business Acquisitions
On September 1, 2011, the Company completed its acquisition of all of the outstanding common shares of optionsXpress, an
online brokerage firm primarily focused on equity option securities and futures, for total consideration of $714 million.
Under the terms of the merger agreement, optionsXpress stockholders received 1.02 shares of the Company’s common stock
for each share of optionsXpress stock. As a result, the Company issued 59 million shares of the Company’s common stock
valued at $710 million, based on the closing price of the Company’s common stock on September 1, 2011. The Company
also assumed optionsXpress’ stock-based compensation awards valued at $4 million.
On November 9, 2010, the Company acquired substantially all of the assets of Windward for $106 million in common stock
and $44 million in cash.
For more information on the acquisitions of optionsXpress and Windward, see “Item 8 – Financial Statements and
Supplementary Data – Notes to Consolidated Financial Statements – 3. Business Acquisitions”.
Off-Balance Sheet Arrangements
The Company enters into various off-balance sheet arrangements in the ordinary course of business, primarily to meet the
needs of its clients. These arrangements include firm commitments to extend credit. Additionally, the Company enters into
guarantees and other similar arrangements as part of transactions in the ordinary course of business. For information on each
of these arrangements, see “Item 8 – Financial Statements and Supplementary Data – Notes to Consolidated Financial
Statements – 15. Commitments and Contingencies.”
- 34 -
THE CHARLES SCHWAB CORPORATION
Management’s Discussion and Analysis of Financial Condition and Results of Operations
(Tabular Amounts in Millions, Except Ratios, or as Noted)
Contractual Obligations
The Company’s principal contractual obligations as of December 31, 2011, are shown in the following table. Management
believes that funds generated by its continuing operations, as well as cash provided by external financing, will continue to be
the primary funding sources in meeting these obligations. 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).
Credit-related financial instruments (1)
Long-term debt (2)
Leases (3)
Purchase obligations (4)
Total
(1) Represents Schwab Bank’s firm commitments to extend credit to banking clients.
(2)
725
930
150
81
$ 1,886
$
1-3
Years
Less than
1 Year
757
$
99
96
118
$ 1,070
3-5
Years
$ 1,130
125
110
33
$ 1,398
More than
5 Years
$ 3,186
1,309
201
1
$ 4,697
Total
$ 5,798
2,463
557
233
$ 9,051
Includes estimated future interest payments through 2020 for Senior Notes and through 2017 for Medium-Term Notes
and Junior Subordinated Notes. The Junior Subordinated Notes have a fixed interest rate of 7.50% until 2017 and a
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 a finance lease obligation and unamortized discounts and premiums.
(3) Represents minimum rental commitments, net of sublease commitments, and includes facilities under the Company’s
past restructuring initiatives and rental commitments under a finance lease obligation.
(4) Consists of purchase obligations for services such as advertising and marketing, telecommunications, professional
services, and hardware- and software-related agreements. Includes purchase obligations that can be canceled by the
Company without penalty.
RISK MANAGEMENT
Overview
The Company’s business activities expose it to a variety of risks, including technology, operations, credit, market, liquidity,
legal, and reputational 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 Company’s 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 Company’s risk exposures and leading the continued development of the Company’s risk management policies and
practices.
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 Company’s liquidity, capital
resources, interest rate risk, and investments;
Credit and Market Risk Oversight Committee, which focuses on credit exposures resulting from client borrowing
activity (e.g., margin lending activities and loans to banking clients), investing activities of certain of the Company’s
proprietary funds, corporate credit and investment activity, and market risk resulting from the Company taking
positions in certain securities to facilitate client trading activity;
- 35 -
THE CHARLES SCHWAB CORPORATION
Management’s Discussion and Analysis of Financial Condition and Results of Operations
(Tabular Amounts in Millions, Except Ratios, or as Noted)
Information Security and Privacy Steering Committee, which oversees information security and privacy policies,
procedures and controls;
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;
Investment Products Review Board, which provides senior level oversight of investment products and services made
available to clients; and
Operational Risk Management Committee, which focuses on risks relating to potential inadequate or failed internal
processes, people and systems, and from external events and relationships (e.g., vendors and business partners).
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 Company’s Disclosure Committee is responsible for monitoring and evaluating the effectiveness of the Company’s (a)
disclosure controls and procedures and (b) internal control over financial reporting as of the end of each fiscal quarter. The
Disclosure Committee reports on this evaluation to the CEO and CFO prior to their certification required by Sections 302 and
906 of the Sarbanes Oxley Act of 2002.
The Company’s compliance, finance, internal audit, legal, and corporate risk management departments assist management
and the various risk committees in evaluating, testing, and monitoring the Company’s risk management.
Risk is inherent in the Company’s business. Consequently, despite the Company’s efforts to identify 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 Company’s 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
constrain the Company’s ability to gather, process, and communicate information and process client transactions efficiently
and securely, without interruptions. The Company’s operations are highly dependent on the integrity of its technology
systems and the Company’s success depends, in part, on its ability to make timely enhancements and additions to its
technology in anticipation of evolving client needs. To the extent the Company experiences system interruptions, errors or
downtime (which could result from a variety of causes, including changes in client use patterns, technological failure,
changes to its systems, linkages with third-party systems, and power failures), the Company’s business and operations could
be significantly negatively impacted. To minimize business interruptions, Schwab 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,
distributed denial of service attacks, terrorist attacks, 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.
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.
- 36 -
THE CHARLES SCHWAB CORPORATION
Management’s Discussion and Analysis of Financial Condition and Results of Operations
(Tabular Amounts in Millions, Except Ratios, or as Noted)
Despite the Company’s risk management efforts, it is not always possible to deter or prevent technological or operational
failure, or fraud or other misconduct, and the precautions taken by the Company may not be effective in all cases. The
Company may be subject to litigation, losses, and regulatory actions in such cases, and may be required to expend significant
additional resources to remediate vulnerabilities or other exposures.
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, servicing, 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 Company’s 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 to protect its research and development efforts, and its brands, through the use of copyrights, patents,
trade secrets, and contracts.
Credit Risk
Credit risk is the potential for loss due to a borrower, counterparty, or issuer failing to perform its contractual obligations.
The Company’s direct exposure to credit risk mainly results from margin lending activities, securities lending activities,
mortgage lending activities, its role as a counterparty in financial contracts and investing activities. 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
Company’s credit extensions are supported by collateral arrangements. Collateral arrangements relating to margin loans,
securities lending agreements, and resale agreements include provisions that require additional collateral in the event that
market fluctuations result in declines in the value of collateral received.
The Company’s credit risk exposure related to loans to banking clients is actively managed through individual and portfolio
reviews performed by management. Management regularly reviews asset quality including concentrations, delinquencies,
nonaccrual loans, charge-offs, and recoveries. All are factors in the determination of an appropriate allowance for loan losses,
which is reviewed quarterly by senior management. The Company’s mortgage loan portfolios primarily include first lien
residential real estate mortgage loans (First Mortgage) of $5.6 billion and HELOCs of $3.5 billion at December 31, 2011.
The Company’s First Mortgage portfolio underwriting requirements are generally consistent with the underwriting
requirements in the secondary market for loan portfolios. The Company’s guidelines include maximum loan-to-value (LTV)
ratios, cash out limits, and minimum Fair Issac & Company (FICO) credit scores. The specific guidelines are dependent on
the individual characteristics of a loan (for example, whether the property is a primary or secondary residence, whether the
loan is for investment property, whether the loan is for an initial purchase of a home or refinance of an existing home, and
whether the loan is conforming or jumbo). These credit underwriting standards have limited the exposure to the types of
loans that experienced high foreclosures and loss rates elsewhere in the industry in recent years. There have been no
significant changes to the LTV ratio or FICO credit score guidelines related to the Company’s First Mortgage or HELOC
portfolios during 2011. At December 31, 2011, the weighted-average originated LTV ratios were 60% and 59% for the First
Mortgage and HELOC portfolios, respectively. The computation of the origination LTV ratio for a HELOC includes any first
lien mortgage outstanding on the same property at the time of origination. At December 31, 2011, 22% of HELOCs
($755 million of the HELOC portfolio) were in a first lien position. The weighted-average originated FICO credit scores
were 766 and 768 for the First Mortgage and HELOC portfolios, respectively.
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 a FICO credit score of less than 620 at origination), unless the
borrower has compensating credit factors. At December 31, 2011, approximately 1% of both the First Mortgage and HELOC
portfolios consisted of loans to borrowers with FICO credit scores of less than 620.
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THE CHARLES SCHWAB CORPORATION
Management’s Discussion and Analysis of Financial Condition and Results of Operations
(Tabular Amounts in Millions, Except Ratios, or as Noted)
The following table presents certain of the Company’s loan quality metrics as a percentage of total outstanding loans:
December 31,
Loan delinquencies (1)
Nonaccrual loans
Allowance for loan losses
(1) Loan delinquencies are defined as loans that are 30 days or more past due.
2011
0.81%
0.53%
0.55%
2010
0.96%
0.58%
0.60%
The Company has exposure to credit risk associated with its securities available for sale and securities held to maturity
portfolios, whose fair values totaled $34.0 billion and $15.5 billion at December 31, 2011, respectively. These portfolios
include U.S. agency and non-agency residential mortgage-backed securities, certificates of deposit, corporate debt securities,
U.S. agency notes, and asset-backed and other 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. government-sponsored enterprises. Included in non-agency residential mortgage-backed
securities are securities collateralized by loans that are considered to be “Prime” (defined by the Company as loans to
borrowers with a FICO credit score of 620 or higher at origination), and “Alt-A” (defined by the Company as Prime loans
with reduced documentation at origination).
Residential mortgage-backed securities, particularly Alt-A securities experienced continued credit deterioration in 2011,
including increased payment delinquency rates and losses on foreclosures of underlying mortgages. For a discussion of the
impact of current market conditions on residential mortgage-backed securities, see “Current Market and Regulatory
Environment.” At December 31, 2011, non-agency residential mortgage-backed securities consisted of 3%, based on
amortized cost, of total residential mortgage-backed securities. These securities were originated between 2003 and 2007. At
December 31, 2011, all of the corporate debt securities and non-mortgage asset-backed securities were rated investment
grade (defined as a rating equivalent to a Moody’s rating of “Baa” or higher, or a Standard & Poor’s rating of “BBB-” or
higher).
Schwab performs clearing services for all securities transactions in its client accounts. Schwab has exposure to credit risk due
to its obligation to settle transactions with clearing corporations, mutual funds, and other financial institutions even if
Schwab’s client or a counterparty fails to meet its obligations to Schwab.
The Company sponsors a number of proprietary money market mutual funds and other proprietary funds. Although the
Company has no obligation to do so, the Company may decide 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
Company’s liquidity. If the Company chose not to provide credit, liquidity or other support in such a situation, the Company
could suffer reputational damage and its business could be adversely affected.
Concentration Risk
The Company has exposure to concentration risk when holding large positions in financial instruments collateralized by
assets with similar economic characteristics or in securities of a single issuer or industry.
The fair value of the Company’s investments in residential mortgage-backed securities totaled $37.0 billion at December 31,
2011. Of these, $36.1 billion were U.S. agency securities and $907 million 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 in non-agency residential mortgage-backed securities are securities
collateralized by Alt-A loans. At December 31, 2011, the amortized cost and fair value of Alt-A mortgage-backed securities
were $390 million and $279 million, respectively.
- 38 -
THE CHARLES SCHWAB CORPORATION
Management’s Discussion and Analysis of Financial Condition and Results of Operations
(Tabular Amounts in Millions, Except Ratios, or as Noted)
The Company’s investments in corporate debt securities and commercial paper totaled $5.6 billion at December 31, 2011,
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 Company’s consolidated balance sheets. At December 31, 2011, the Company
held $867 million of corporate debt securities issued by financial institutions and guaranteed under the FDIC Temporary
Liquidity Guarantee Program.
The Company’s loans to banking clients include $5.6 billion of adjustable rate first lien residential real estate mortgage loans
at December 31, 2011. The Company’s adjustable rate mortgages have initial fixed interest rates for three to ten years and
interest rates that adjust annually thereafter. Approximately 60% of these mortgages consisted of loans with interest-only
payment terms. The interest rates on approximately 65% of these interest-only loans are not scheduled to reset for three or
more years. The Company’s mortgage loans do not include interest terms described as temporary introductory rates below
current market rates. At December 31, 2011, 44% of the residential real estate mortgages and 50% of the HELOC 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 a 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 Company’s primary credit exposure on these resale transactions is with its counterparty. The Company
would have exposure to the U.S. Government and agency securities only in the event of the counterparty’s default on the
resale agreements. The fair value of U.S. Government and agency securities held as collateral for resale agreements totaled
$18.3 billion at December 31, 2011.
European Holdings
The Company has exposure to non-sovereign financial institutions in Europe. The following table shows the amortized cost
and fair values of cash equivalents, cash segregated and on deposit for regulatory purposes, securities available for sale, and
securities held to maturity by each country in Europe in which the issuer or counterparty is domiciled. The Company has no
direct exposure to sovereign governments in Europe. The Company does not have unfunded commitments to counterparties
in Europe, nor does it have exposure as a result of credit default protection purchased or sold separately as of December 31,
2011.
The determination of the domicile of exposure varies by the type of investment. For time deposits and certificates of deposit,
the exposure is grouped in the country in which the financial institution is chartered under the regulatory framework of the
European country. For asset-backed commercial paper, the exposure is grouped by the country of the sponsoring bank that
provides the credit and liquidity support for such instruments. For corporate debt securities, the exposure is grouped by the
country in which the issuer is domiciled. In situations in which the Company invests in a corporate debt security of a U.S.
subsidiary of a European parent company, such holdings will be attributable to the European country only if significant
reliance is placed on the European parent company for credit support underlying the security. For substantially all of the
holdings listed below, the issuers or counterparties were financial institutions. All of the Company’s resale agreements,
which are included in investments segregated and on deposit for regulatory purposes, are collateralized by U.S. government
securities. Additionally, the Company’s securities lending activities are collateralized by cash. Therefore, the Company’s
resale agreements and securities lending activities are not included in the table below even if the counterparty is a European
institution.
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THE CHARLES SCHWAB CORPORATION
Management’s Discussion and Analysis of Financial Condition and Results of Operations
(Tabular Amounts in Millions, Except Ratios, or as Noted)
Cash equivalents:
Time deposits
Commercial paper
Cash segregated and on deposit for
regulatory purposes:
Trust deposits
Securities available for sale:
Certificates of deposit
Corporate debt securities
Securities held to maturity:
Corporate debt securities
Total fair value
Total amortized cost
Maturities:
Overnight
1 day – < 6 months
6 months – < 1 year
1 year – 2 years
> 2 years
Total fair value
Denmark
France
Germany Netherlands Sweden Switzerland Kingdom
Total
Fair Value as of December 31, 2011
United
$
$
$
$
$
-
-
-
-
214
-
214
212
-
-
-
214
-
214
$
850
350
$
389
20
$
-
400
300
74
-
$ 1,574
$ 1,575
$ 1,200
174
100
100
-
$ 1,574
150
-
-
959
959
789
20
-
150
-
959
$
$
$
$
$
$
$
$
-
-
-
300
187
-
487
492
-
200
-
187
100
487
$
-
-
-
499
97
117
$ 713
$ 716
$
-
200
117
299
97
$ 713
$
$
$
$
$
-
-
-
550
-
100
650
650
-
150
274
126
100
650
$ 200
200
$ 1,439
570
-
400
700
550
2,499
1,122
-
$ 1,650
$ 1,650
217
$ 6,247
$ 6,254
$
200
700
650
100
-
$ 1,650
$ 2,189
1,444
1,141
1,176
297
$ 6,247
In addition to the direct holdings of European companies listed above, the Company also has indirect exposure to Europe
through its investments in Schwab sponsored money market funds (collectively, the Funds) resulting from clearing activities.
At December 31, 2011, the Company had $332 million in investments in these Funds. Certain of the Funds’ positions include
certificates of deposits, time deposits, commercial paper and corporate debt securities issued by counterparties in Europe.
Management mitigates exposure to European holdings by employing a separate team of credit analysts that evaluate each
issuer, counterparty, and country. Management monitors its exposure to European issuers by 1) performing risk assessments
of the foreign countries, which include evaluating the size of the country and economy, currency trends, political landscape
and the countries’ regulatory environment and developments, 2) performing ad hoc stress tests that evaluate the impact of
sovereign governments’ debt write-downs on the issuers and counterparties to our investments, 3) reviewing publicly
available stress tests that are published by various regulators in the European market, 4) establishing credit and maturity
limits by issuer, and 5) monitoring aggregate exposures by country.
Market Risk
Market risk is the potential for changes in revenue or the value of financial instruments held by the Company as a result of
fluctuations in interest rates, equity prices or market conditions. For discussion of the Company’s 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 a 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
- 40 -
THE CHARLES SCHWAB CORPORATION
Management’s Discussion and Analysis of Financial Condition and Results of Operations
(Tabular Amounts in Millions, Except Ratios, or as Noted)
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 Company’s controls.
Claims against the Company may increase due to a variety of factors, such as if clients suffer losses during a 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 IAs. 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 legal and compliance risk through policies and procedures reasonably designed to avoid
litigation claims and prevent 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 Company’s 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 Company’s business activities.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company uses fair value measurements to record certain financial assets and liabilities at fair value, and to determine fair
value disclosures. Assets are measured at fair value using quoted prices or market-based information and accordingly are
classified as Level 1 or Level 2 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, 2011 or 2010. See
“Item 8 – Financial Statements and Supplementary Data – Notes to Consolidated Financial Statements – 17. Fair Values of
Assets and Liabilities” for more information on the Company’s assets and liabilities recorded at fair value.
When available, the Company uses quoted prices in active markets to measure the fair value of assets and liabilities. When
quoted prices do not exist, the Company uses prices obtained from independent third-party pricing services to measure the
fair value of investment assets. The Company validates prices received from the pricing services using various methods,
including comparison to prices received from additional pricing services, 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 independent third-party pricing services unless such prices are inconsistent with the definition of fair
value and result in a material difference in the recorded amounts. At December 31, 2011 and 2010, the Company did not
adjust prices received from independent third-party pricing services.
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 Company’s 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 a material adverse impact on the Company’s 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 Company’s financial statements for reasonableness and
adequacy.
- 41 -
THE CHARLES SCHWAB CORPORATION
Management’s Discussion and Analysis of Financial Condition and Results of Operations
(Tabular Amounts in Millions, Except Ratios, or as Noted)
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 a quarterly
basis. Debt securities with unrealized losses are considered OTTI if the Company intends to sell the security or if it is more
likely than not that the Company will be required to sell such security prior to any anticipated recovery. If management
determines that a 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.
A 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 security’s effective interest rate.
The evaluation of whether the Company expects to recover the amortized cost of a 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 to real estate owned; the actual
amount of loss incurred on the underlying 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 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 Company’s
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’ expected remaining maturities.
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 a potential impairment of
goodwill on April 1, 2011, management estimated the fair value of each of the Company’s reporting units (generally defined
as the Company’s businesses for which financial information is available and reviewed regularly by management) and
compared this value to the carrying value of the reporting unit. The estimated fair value of each reporting unit substantially
exceeded its carrying value, and therefore management concluded that no amount of goodwill was impaired. The estimated
fair value of the reporting units was established using a discounted cash flow model that includes significant assumptions
about the future operating results and cash flows of each reporting unit. Adverse changes in the Company’s planned business
operations such as unanticipated competition, a loss of key personnel, the sale of a reporting unit or a significant portion of a
reporting unit, or other unforeseen developments could result in an impairment of the Company’s recorded goodwill.
Allowance for Loan Losses: The adequacy of the allowance is reviewed quarterly by management, taking into consideration
current economic conditions, the existing loan portfolio composition, past loss experience, and risks inherent in the portfolio.
The process to establish an allowance for loan losses utilizes loan-level statistical models that estimate prepayments, defaults,
and probable losses for the loan segments based on predicted behavior of individual loans within the segments. The
methodology considers the effects of borrower behavior and a variety of factors including, but not limited to, interest rates,
housing price movements as measured by a housing price index, economic conditions, estimated defaults and foreclosures
measured by historical and expected delinquencies, changes in prepayment speeds, loan-to-value ratios, past loss experience,
estimates of future loss severities, borrower credit risk measured by FICO scores, and the adequacy of collateral. The
methodology also evaluates concentrations in the loan segments including loan products, year of origination, geographical
distribution of collateral, and the portion of borrowers who have other client relationships with the Company.
The more significant variables considered include a measure of delinquency roll rates, loss severity, housing prices, and
interest rates. Delinquency roll rates (i.e., the rates at which loans transition through delinquency stages and ultimately result
- 42 -
THE CHARLES SCHWAB CORPORATION
Management’s Discussion and Analysis of Financial Condition and Results of Operations
(Tabular Amounts in Millions, Except Ratios, or as Noted)
in a loss) are estimated from the Company’s historical loss experience adjusted for current trends and market information.
Loss severity estimates are based on the Company’s historical loss experience and market trends. Housing price trends are
derived from historical home price indices and econometric forecasts of future home values. Factors affecting the home price
index include: housing inventory, unemployment, interest rates, and inflation expectations. Interest rate projections are based
on the current term structure of interest rates and historical volatilities to project various possible future interest rate paths.
This quarterly analysis results in a loss factor that is applied to the outstanding balances to determine the allowance for loan
loss for each loan segment.
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 coverage and indemnification, and the opinions and views of legal counsel. In
many cases, including most class action lawsuits, it is not possible to determine whether a loss will be incurred, or to estimate
the range of that loss, until the matter is close to resolution, in which case no accrual is made until that time. Reserves are
adjusted as more information becomes available or when an event occurs requiring a change. Significant judgment is required
in making these estimates, and the actual cost of resolving a matter may ultimately differ materially from the amount
reserved.
The Company’s management has discussed the development and selection of these critical accounting estimates with the
Audit Committee. Additionally, management has reviewed with the Audit Committee the Company’s significant estimates
discussed in this Management’s Discussion and Analysis of Financial Condition and Results of Operations.
FORWARD-LOOKING STATEMENTS
In addition to historical information, this Annual Report on Form 10-K contains “forward-looking statements” within the
meaning of Section 27A of the Securities Act, and Section 21E of the Securities Exchange Act of 1934. Forward-looking
statements are identified by words such as “believe,” “anticipate,” “expect,” “intend,” “plan,” “will,” “may,” “estimate,”
“appear,” “aim,” “target,” “could,” and other similar expressions. In addition, any statements that refer to expectations,
projections, or other characterizations of future events or circumstances are forward-looking statements.
These forward-looking statements, which reflect management’s beliefs, objectives, and expectations as of the date hereof, are
necessarily estimates based on the best judgment of the Company’s senior management. These statements relate to, among
other things:
the Company’s ability to pursue its business strategy (see “Part I – Item 1. – Business – Business Strategy and
Competitive Environment”);
the impact of legal proceedings and regulatory matters (see “Part I – Item 3. – Legal Proceedings” and “Item 8 –
Financial Statements and Supplementary Data – Notes to Consolidated Financial Statements –15. Commitments and
Contingencies – Legal Contingencies”);
the impact of current market conditions on the Company’s results of operations (see “Current Market and
Regulatory Environment” and “Item 8 – Financial Statements and Supplementary Data – Notes to Consolidated
Financial Statements – 6. 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” and “Item 8 – Financial Statements and Supplementary
Data – Notes to Consolidated Financial Statements – 24. Regulatory Requirements”);
capital expenditures (see “Liquidity and Capital Resources – Capital Resources”);
the impact of changes in management’s estimates on the Company’s results of operations (see “Critical Accounting
Estimates”);
the impact of changes in the likelihood of indemnification and guarantee payment obligations on the Company’s
results of operations (see “Item 8 – Financial Statements and Supplementary Data – Notes to Consolidated Financial
Statements – 15. Commitments and Contingencies”); and
- 43 -
THE CHARLES SCHWAB CORPORATION
Management’s Discussion and Analysis of Financial Condition and Results of Operations
(Tabular Amounts in Millions, Except Ratios, or as Noted)
the impact on the Company’s results of operations of recording stock option expense (see “Item 8 – Financial
Statements and Supplementary Data – Notes to Consolidated Financial Statements – 20. Employee Incentive,
Deferred Compensation, and Retirement Plans”).
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 that may cause actual results to differ include, but are not limited to:
changes in general economic and financial market conditions;
changes in revenues and profit margin due to changes in interest rates;
adverse developments in litigation or regulatory matters;
the extent of any charges associated with litigation and regulatory matters;
amounts recovered on insurance policies;
the Company’s ability to attract and retain clients and grow client assets and relationships;
the Company’s ability to develop and launch new products, services and capabilities in a timely and successful
manner;
fluctuations in client asset values due to changes in equity valuations;
the performance or valuation of securities available for sale and securities held to maturity;
trading activity;
the level of interest rates, including yields available on money market mutual fund eligible instruments;
the adverse impact of financial reform legislation and related regulations;
the amount of loans to the Company’s brokerage and banking clients;
the level of the Company’s stock repurchase activity;
the level of brokerage client cash balances and deposits from banking clients;
the availability and terms of external financing;
capital needs;
optionsXpress integration costs and operating expenses;
level of expenses;
the timing and impact of changes in the Company’s level of investments in software, equipment, and leasehold
improvements; and
potential breaches of contractual terms for which the Company has indemnification and guarantee obligations.
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 1A – Risk Factors.”
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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 a result of
fluctuations in interest rates, equity prices or market conditions.
For the Company’s market risk related to interest rates, a sensitivity analysis, referred to as a net interest revenue simulation
model, is shown below. The Company is exposed to interest rate risk primarily from changes in market 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 mortgage-backed securities. These assets are sensitive to
changes in interest rates and to changes to prepayment levels, which tend to increase in a declining rate environment.
To mitigate the risk of loss, the Company has established policies and procedures which include setting guidelines on the
amount of net interest revenue at risk, and monitoring the net interest margin and average maturity of its interest-earning
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 a result of fluctuations in equity prices. The Company’s 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 Company’s 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 a financial instrument. Recent conditions in the credit markets
have significantly reduced market liquidity in a wide range of financial instruments, including the types of instruments held by
the Company, and fair value can differ significantly from the value implied by the credit quality and actual performance of the
instrument’s underlying cash flows.
Financial instruments held by the Company are also subject to valuation risk as a 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 7 – Management’s Discussion and Analysis of Financial Condition and Results of
Operations – Current Market and Regulatory Environment”.
The Company’s market risk related to financial instruments held for trading 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. Key variables in the model include
the repricing of financial instruments, prepayment, reinvestment, and product pricing assumptions. The Company uses
constant balances and market rates in the model assumptions in order to minimize the number of variables and to better isolate
risks. The simulations involve assumptions that are inherently uncertain and, as a result, cannot precisely estimate net interest
- 45 -
THE CHARLES SCHWAB CORPORATION
revenue or 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’s investment strategy is structured to produce an increase in
net interest revenue when interest rates rise and, conversely, a 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 a 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 a gradual
100 basis point increase or decrease in market interest rates relative to the Company’s current market rates forecast on
simulated net interest revenue over the next 12 months beginning December 31, 2011 and 2010.
December 31,
Increase of 100 basis points
Decrease of 100 basis points
2011
19.1%
(8.1%)
2010
13.5%
(4.8%)
The sensitivities shown in the simulation reflect the fact that short-term interest rates in 2011 remained at historically low
levels, including the federal funds target rate, which was unchanged at a range of zero to 0.25%. The current low interest rate
environment limits the extent to which the Company can reduce interest expense paid on funding sources in a declining
interest rate scenario. A decline in interest rates could therefore negatively impact the yield on the Company’s investment
portfolio to a greater degree than any offsetting reduction in interest expense, further compressing net interest margin. Any
increases in short-term interest rates result in a greater impact as yields on interest-earning assets are expected to rise faster
than the cost of funding sources.
- 46 -
THE CHARLES SCHWAB CORPORATION
Item 8.
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 ---------------------------------------------------------------------------------------
Introduction and Basis of Presentation --------------------------------------------------------------------------------
Note 1.
Summary of Significant Accounting Policies ------------------------------------------------------------------------
Note 2.
Note 3. Business Acquisitions ---------------------------------------------------------------------------------------------------
Note 4. Receivables from Brokerage Clients ----------------------------------------------------------------------------------
Note 5. Other Securities Owned -------------------------------------------------------------------------------------------------
Securities Available for Sale and Securities Held to Maturity -----------------------------------------------------
Note 6.
Loans to Banking Clients and Related Allowance for Loan Losses -----------------------------------------------
Note 7.
Equipment, Office Facilities, and Property ---------------------------------------------------------------------------
Note 8.
Note 9.
Intangible Assets and Goodwill ----------------------------------------------------------------------------------------
Note 10. Other Assets --------------------------------------------------------------------------------------------------------------
Note 11. Deposits from Banking Clients -----------------------------------------------------------------------------------------
Note 12. Payables to Brokers, Dealers, and Clearing Organizations ---------------------------------------------------------
Note 13. Payables to Brokerage Clients ------------------------------------------------------------------------------------------
Note 14. Borrowings ----------------------------------------------------------------------------------------------------------------
Note 15. Commitments and Contingencies --------------------------------------------------------------------------------------
Note 16. Financial Instruments Subject to Off-Balance Sheet Risk, Credit Risk, or Market Risk -----------------------
Note 17. Fair Values of Assets and Liabilities ----------------------------------------------------------------------------------
Note 18. Equity Offering -----------------------------------------------------------------------------------------------------------
Note 19. Accumulated Other Comprehensive Income (Loss) -----------------------------------------------------------------
Note 20. Employee Incentive, Deferred Compensation, and Retirement Plans ---------------------------------------------
Note 21. Money Market Mutual Fund Charges ---------------------------------------------------------------------------------
Note 22. Taxes on Income ---------------------------------------------------------------------------------------------------------
Note 23. Earnings Per Share -------------------------------------------------------------------------------------------------------
Note 24. Regulatory Requirements -----------------------------------------------------------------------------------------------
Note 25. Segment Information ----------------------------------------------------------------------------------------------------
Note 26. Subsequent Event --------------------------------------------------------------------------------------------------------
Note 27. The Charles Schwab Corporation – Parent Company Only Financial Statements -------------------------------
Note 28. Quarterly Financial Information (Unaudited) ------------------------------------------------------------------------
Report of Independent Registered Public Accounting Firm ---------------------------------------------------------------------
Management’s Report on Internal Control Over Financial Reporting ----------------------------------------------------------
48
49
50
51
52
52
52
56
58
59
59
63
66
67
67
68
68
68
68
70
72
75
78
79
80
82
82
84
84
86
87
88
90
91
92
- 47 -
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
Provision for loan losses
Net impairment losses on securities (1)
Total net revenues
Expenses Excluding Interest
Compensation and benefits
Professional services
Occupancy and equipment
Advertising and market development
Communications
Depreciation and amortization
Class action litigation and regulatory reserve
Money market mutual fund charges
Other
Total expenses excluding interest
Income before taxes on income
Taxes on income
Net Income
2011
2010
2009
$
1,928
1,900
(175)
1,725
927
160
(18)
(31)
4,691
$
1,822
1,723
(199)
1,524
830
135
(27)
(36)
4,248
$
1,875
1,428
(183)
1,245
996
175
(38)
(60)
4,193
1,732
387
301
228
220
155
7
-
269
3,299
1,392
(528)
1,573
341
272
196
207
146
320
132
282
3,469
779
(325)
1,544
275
318
191
206
159
-
-
224
2,917
1,276
(489)
$
864
$
454
$
787
Weighted-Average Common Shares Outstanding — Diluted
1,229
1,194
1,160
Earnings Per Share — Basic
Earnings Per Share — Diluted
$
.70
$
.38
$
.68
$
.70
$
.38
$
.68
(1)
Net impairment losses on securities include total other-than-temporary impairment losses of $18 million,
$41 million, and $278 million, net of $(13) million, $5 million, and $218 million recognized in other
comprehensive income in 2011, 2010, and 2009, respectively.
See Notes to Consolidated Financial Statements.
- 48 -
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 $17,899 and $12,697 at December 31, 2011 and 2010, respectively)
Receivables from brokers, dealers, and clearing organizations
Receivables from brokerage clients — net
Other securities owned — at fair value
Securities available for sale
Securities held to maturity (fair value — $15,539 and $17,848 at December 31, 2011
and 2010, respectively)
Loans to banking clients — net
Loans held for sale
Equipment, office facilities, and property — net
Goodwill
Intangible assets — net
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 — 9,940,000 shares authorized; $.01 par value per share; none issued
Common stock — 3 billion shares authorized; $.01 par value per share; 1,487,543,446
shares and 1,428,604,522 shares issued at December 31, 2011 and 2010, respectively
Additional paid-in capital
Retained earnings
Treasury stock, at cost — 216,378,623 shares and 226,222,313 shares
at December 31, 2011 and 2010, respectively
Accumulated other comprehensive income
Total stockholders’ equity
Total liabilities and stockholders’ equity
See Notes to Consolidated Financial Statements.
2011
2010
$
8,679
$
4,931
26,034
230
11,072
593
33,965
15,108
9,812
70
685
1,161
326
818
108,553
$
$
60,854
1,098
35,489
1,397
2,001
100,839
-
15
3,826
7,978
22,749
415
11,235
337
23,993
17,762
8,725
185
624
631
54
927
92,568
$
$
50,590
1,389
30,861
1,496
2,006
86,342
-
14
3,034
7,409
(4,113)
8
7,714
108,553
$
(4,247)
16
6,226
92,568
$
- 49 -
THE CHARLES SCHWAB CORPORATION
Consolidated Statements of Cash Flows
(In Millions)
Year Ended December 31,
Cash Flows from Operating Activities
Net income
Adjustments to reconcile net income to net cash provided by (used for) operating activities:
Provision for loan losses
Net impairment losses on securities
Stock-based compensation
Depreciation and amortization
Provision (benefit) for deferred income taxes
Premium (discount) amortization, net, on securities available for sale and securities
held to maturity
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
Receivables from brokers, dealers, and clearing organizations
Receivables from brokerage clients
Other securities owned
Other assets
Payables to brokers, dealers, and clearing organizations
Payables to brokerage clients
Accrued expenses and other liabilities
Net cash provided by (used for) operating 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 of equipment, office facilities, and property
Cash acquired in business acquisition, net of cash paid
Other investing activities
Net cash used for investing activities
Cash Flows from Financing Activities
Net change in deposits from banking clients
Issuance of long-term debt
Repayment of long-term debt
Net proceeds from common stock offering
Dividends paid
Proceeds from stock options exercised and other
Other financing activities
Net cash provided by financing activities
Increase (Decrease) in Cash and Cash Equivalents
Cash and Cash Equivalents at Beginning of Year
Cash and Cash Equivalents at End of Year
Supplemental Cash Flow Information
Cash paid during the year for:
Interest
Income taxes
Non-cash investing activities:
Common stock issued and equity awards assumed for business acquisitions (See note
"3 - Business Acquisitions")
Securities purchased during the year but settled after year end
Non-cash financing activity:
2011
2010
2009
$
864
$ 454
$
787
18
31
99
155
52
136
9
(1,574)
1,703
(2,211)
220
341
(231)
(15)
(357)
3,407
(183)
2,464
(18,434)
500
7,978
(2,253)
4,786
(1,125)
(180)
54
7
(8,667)
10,264
-
(116)
-
(295)
96
2
9,951
3,748
4,931
8,679
$
27
36
87
146
(51)
35
(3)
(2,015)
1,943
(4,376)
148
(2,612)
581
133
283
4,886
289
(9)
(15,697)
871
13,261
(14,906)
2,672
(1,443)
(129)
(44)
5
(15,410)
38
60
75
159
16
(18)
(32)
(2,746)
2,695
(3,688)
202
(1,503)
(290)
(253)
56
5,990
(111)
1,437
(14,342)
107
7,063
(5,470)
139
(1,411)
(140)
-
(3)
(14,057)
11,328
701
(205)
543
(288)
35
(5)
12,109
(3,310)
8,241
4,931
$
14,979
747
(80)
-
(279)
53
(1)
15,419
2,799
5,442
8,241
$
$
$
168
517
$
$
178
327
$
$
173
446
$
$
714
58
$
106
$
-
$
-
$
1,267
Transfer of trust related balances to deposits from banking clients
$
-
$
442
$
-
See Notes to Consolidated Financial Statements.
- 50 -
THE CHARLES SCHWAB CORPORATION
Consolidated Statements of Stockholders’ Equity
(In Millions)
Balance at December 31, 2008
Comprehensive income:
Net income
Other comprehensive income, net of tax:
Net unrealized gain on securities
available for sale
Total comprehensive income
Dividends declared on common stock
Stock option exercises and other
Stock-based compensation and
related tax effects
Other
Balance at December 31, 2009
Comprehensive income:
Net income
Other comprehensive income, net of tax:
Net unrealized gain on securities
available for sale
Net unrealized loss on cash flow
hedging instruments
Total comprehensive income
Issuance of common stock
Issuance of common stock for business
acquisition
Dividends declared on common stock
Stock option exercises and other
Stock-based compensation and
related tax effects
Other
Balance at December 31, 2010
Comprehensive income:
Net income
Other comprehensive income, net of tax:
Net unrealized loss on securities
available for sale
Foreign currency translation adjustment
Total comprehensive income
Issuance of common stock for business
acquisition
Dividends declared on common stock
Stock option exercises and other
Stock-based compensation and
related tax effects
Other
Balance at December 31, 2011
See Notes to Consolidated Financial Statements.
Common Stock
Shares
1,392
Amount
$
14
Additional
Paid-In
Capital
$
2,214
Retained
Earnings
6,735
$
Accumulated
Other
Treasury Stock, Comprehensive
Income (Loss)
$
(553)
(4,349)
$
at cost
Total
$
4,061
-
-
-
-
-
-
1,392
-
-
-
30
7
-
-
-
-
1,429
-
-
-
59
-
-
-
-
-
-
-
-
14
-
-
-
-
-
-
-
-
-
14
-
-
-
1
-
-
-
-
-
-
80
4
2,298
-
-
-
543
106
-
(4)
87
4
3,034
-
-
-
713
-
(24)
787
-
(279)
-
-
-
7,243
454
-
-
-
-
(288)
-
-
-
7,409
864
-
-
-
(295)
-
-
-
-
52
-
6
(4,291)
-
-
-
-
-
-
39
-
5
(4,247)
-
-
-
-
-
122
-
787
362
-
-
-
-
(191)
-
208
(1)
-
-
-
-
-
-
16
-
(7)
(1)
-
-
-
362
1,149
(279)
52
80
10
5,073
454
208
(1)
661
543
106
(288)
35
87
9
6,226
864
(7)
(1)
856
714
(295)
98
-
-
1,488
-
-
15
$
99
4
3,826
$
-
-
7,978
$
-
12
(4,113)
$
-
-
$
8
99
16
7,714
$
- 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)
1.
Introduction and Basis of Presentation
The Charles Schwab Corporation (CSC) is a savings and loan holding company engaged, through its subsidiaries, in securities
brokerage, banking, and related financial services. Charles Schwab & Co., Inc. (Schwab) is a securities broker-dealer with
over 300 domestic branch offices in 45 states, as well as a branch in each of the Commonwealth of Puerto Rico and London,
U.K. In addition, Schwab serves clients in Hong Kong through one of CSC’s subsidiaries. Other subsidiaries include Charles
Schwab Bank (Schwab Bank), a federal savings bank, and Charles Schwab Investment Management, Inc. (CSIM), the
investment advisor for Schwab’s proprietary mutual funds, which are referred to as the Schwab Funds®, and for Schwab’s
exchange-traded funds, which are referred to as the Schwab ETFsTM.
The accompanying consolidated financial statements include CSC and its majority-owned subsidiaries (collectively referred
to as the Company). Intercompany balances and transactions have been eliminated. These consolidated financial statements
have been prepared in conformity with accounting principles generally accepted in the United States, which require
management to make certain estimates and assumptions that affect the reported amounts in the accompanying financial
statements. Certain estimates relate to other-than-temporary impairment of securities available for sale and securities held to
maturity, valuation of goodwill, allowance for loan losses, and legal reserves. Actual results may differ from those estimates.
Certain prior-period amounts have been reclassified to conform to the current period presentation.
2.
Summary of Significant Accounting Policies
Asset management and administration fees, which include mutual fund service fees and fees for other asset-based financial
services provided to individual and institutional clients, are recognized as revenue over the period that the related service is
provided, based upon average asset balances. The Company earns mutual fund service fees for shareholder services,
administration, investment management services, 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 assets invested in these funds. The Company also earns asset management fees for advice solutions, which include
advisory and managed account services that 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. Other asset management and administration fees include various asset based fees, such as
trust fees, 401k record keeping fees, and mutual fund clearing and other fees.
In 2011, 2010 and 2009, the Company waived a portion of its asset management fees earned from certain Schwab-sponsored
money market mutual funds in order to provide a positive return to clients. Under agreements with these funds, the Company
may recover such fee waivers depending on the future performance of the funds and approval by the boards of the respective
funds until the third anniversary of the end of the fiscal year in which such fee waiver occurs, subject to certain limitations.
Recoveries of previously-waived asset management fees are recognized as revenue when substantially all uncertainties about
timing and amount of realization are resolved. Amounts recognized in revenue for recoveries of previously-waived asset
management fees were not material in 2011, 2010 or 2009.
Interest revenue represents interest earned on certain assets, which include cash and cash equivalents, cash and investments
segregated, receivables from brokers, dealers, and clearing organizations, 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 or daily 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 a trade date basis.
Cash and cash equivalents: The Company considers all highly liquid investments with original maturities of three months or
less that are not segregated and on deposit for regulatory purposes to be cash equivalents. Cash and cash equivalents include
- 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)
money market funds, deposits with banks, certificates of deposit, federal funds sold, commercial paper, and treasury
securities. Cash and cash equivalents also include balances that Schwab Bank maintains at the Federal Reserve 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 a market value equal to or in excess of the principal amount
loaned and accrued interest under resale agreements. Collateral is valued daily by the Company, with additional collateral
obtained to ensure full collateralization. Cash and investments segregated also include certificates of deposit and
U.S. Government securities, as well as corporate debt securities guaranteed by the Federal Deposit Insurance Corporation
(FDIC) under the Temporary Liquidity Guarantee Program. Certificates of deposit, U.S. Government securities, and corporate
debt securities are recorded at fair value.
Receivables from brokerage clients include margin loans to clients and are recorded net of an allowance for doubtful
accounts. 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, certificates of deposit, equity and bond mutual funds,
state and municipal debt obligations, equity securities, 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 include U.S. agency and non-agency
residential mortgage-backed securities, certificates of deposit, corporate debt securities, U.S. agency notes, and asset-backed
and other securities. Securities available for sale are recorded at fair value and unrealized gains and losses are reported, net of
taxes, in accumulated other comprehensive income (loss) included in stockholders’ equity. Securities held to maturity include
U.S. agency residential mortgage-backed securities and other securities. Securities held to maturity are recorded at amortized
cost based on the Company’s positive intent and ability to hold these securities to maturity. Realized gains and losses from
sales of securities available for sale are determined on a specific identification basis and are included in other revenue.
Management evaluates whether securities available for sale and securities held to maturity are other-than-temporarily
impaired (OTTI) on a quarterly basis. Debt securities with unrealized losses are considered OTTI if the Company intends to
sell the security or if it is more likely than not that the Company will be required to sell such security prior to any anticipated
recovery. If management determines that a 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.
A 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 security’s effective interest rate.
The evaluation of whether the Company expects to recover the amortized cost of a 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 to real estate owned; the actual
amount of loss incurred on the underlying 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 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 Company’s
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’ expected remaining maturities.
- 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)
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 to ensure full collateralization. Fees
received or paid are recorded in interest revenue or interest expense.
Loans to banking clients are recorded at their contractual principal amounts and include unamortized direct origination costs.
Additionally, loans are recorded net of an allowance for loan losses. The Company’s loan portfolio includes four loan
segments: residential real estate mortgages, home equity lines of credit (HELOC), personal loans secured by securities and
other loans. Residential real estate mortgages include two loan classes: originated first mortgages and purchased first
mortgages. Loan segments are defined as the level to which the Company disaggregates its loan portfolio when developing
and documenting a methodology for determining the allowance for loan losses. A loan class is defined as a group of loans
within a loan segment that has homogeneous risk characteristics.
The Company records an allowance for loan losses through a charge to earnings based on management’s evaluation of the
existing portfolio. The adequacy of the allowance is reviewed quarterly by management, taking into consideration current
economic conditions, the existing loan portfolio composition, past loss experience, and risks inherent in the portfolio.
The process to establish an allowance for loan losses utilizes loan-level statistical models that estimate prepayments, defaults,
and probable losses for the loan segments based on predicted behavior of individual loans within the segments. The
methodology considers the effects of borrower behavior and a variety of factors including, but not limited to, interest rates,
housing price movements as measured by a housing price index, economic conditions, estimated defaults and foreclosures
measured by historical and expected delinquencies, changes in prepayment speeds, loan-to-value ratios, past loss experience,
estimates of future loss severities, borrower credit risk measured by Fair Isaac Corporation (FICO) scores, and the adequacy
of collateral. The methodology also evaluates concentrations in the loan segments including loan products, year of
origination, geographical distribution of collateral, and the portion of borrowers who have other client relationships with the
Company.
The more significant variables considered include a measure of delinquency roll rates, loss severity, housing prices, and
interest rates. Delinquency roll rates (i.e., the rates at which loans transition through delinquency stages and ultimately result
in a loss) are estimated from the Company’s historical loss experience adjusted for current trends and market information.
Loss severity estimates are based on the Company’s historical loss experience and market trends. Housing price trends are
derived from historical home price indices and econometric forecasts of future home values. Factors affecting the home price
index include: housing inventory, unemployment, interest rates, and inflation expectations. Interest rate projections are based
on the current term structure of interest rates and historical volatilities to project various possible future interest rate paths.
This quarterly analysis results in a loss factor that is applied to the outstanding balances to determine the allowance for loan
loss for each loan segment.
Nonaccrual loans: Residential real estate mortgages, HELOC, personal, and other 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 a 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, a loan may be returned to accrual status when all delinquent
interest and principal is repaid and the loan is performing in accordance with the terms of the loan agreement, or when the
loan is both well-secured and in the process of collection and collectability is no longer doubtful.
Loans held for sale include fixed-rate and adjustable-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.
- 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)
Equipment, office facilities, and property are recorded at cost net of accumulated depreciation and amortization, except for
land, which is recorded at cost. Equipment and office facilities are depreciated on a straight-line basis over an estimated
useful life of three to ten years. Buildings are depreciated on a straight-line basis over 20 to 40 years. Leasehold
improvements are amortized on a straight-line basis over the shorter of the estimated useful life of the asset or the term of the
lease. Software and certain costs incurred for purchasing or developing software for internal use are amortized on a straight-
line basis over an estimated useful life of three or five years. Equipment, office facilities, and property are reviewed for
impairment whenever events or changes in circumstances indicate that the carrying amount of such assets may not be
recoverable.
Goodwill represents the fair value of acquired businesses in excess of the fair value of the individually identified net assets
acquired. Goodwill is not amortized but is tested for impairment annually or whenever indications of impairment exist. In
testing for a potential impairment of goodwill, management estimates the fair value of each of the Company’s reporting units
(defined as the Company’s 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 a 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 unit’s goodwill is greater than the estimated fair value, an impairment charge is recognized for
the excess. The Company’s annual impairment testing date is April 1st. The Company did not recognize any goodwill
impairment in 2011, 2010, or 2009.
Intangible assets include customer relationships, technology, tradenames, and other intangible assets and are recorded at fair
value. The Company utilizes independent third-party valuation specialists to determine the fair value of intangible assets
acquired in a business combination, and does not have any internally generated intangible assets. Subsequently, intangible
assets are amortized over their useful lives in a manner that best reflects their economic benefit. Intangible assets are reviewed
for impairment whenever events or changes in circumstances indicate that the carrying amount of such assets may not be
recoverable. The Company does not have any indefinite-lived intangible assets.
Guarantees and indemnifications: The Company recognizes, at the inception of a guarantee, a liability equal to the estimated
fair value of the obligation undertaken in issuing the guarantee. The fair values of the obligations relating to standby letter of
credit agreements (LOCs) are estimated based on fees charged 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
Company’s unrecognized tax benefits, which are included in accrued expenses and other liabilities, represent the difference
between positions taken on tax return filings and estimated potential tax settlement outcomes.
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 Company’s historical forfeiture experience and revised in
subsequent periods if actual forfeitures differ from those estimates.
Adoption of New Accounting Standards
Goodwill Impairment Test: In December 2010, the Financial Accounting Standards Board (FASB) issued new guidance on
when to perform the second step in the two-step goodwill impairment test, which is effective for all goodwill impairment tests
- 55 -
THE CHARLES SCHWAB CORPORATION
Notes to Consolidated Financial Statements
(Tabular Amounts in Millions, Except Per Share Data, Option Price Amounts, Ratios, or as Noted)
performed after January 1, 2011. Specifically, if the carrying value of a reporting unit, as computed in step one of the
goodwill impairment test, is zero or negative, step two must be performed when it is “more likely than not” that goodwill is
impaired; under these circumstances, entities can no longer assume that no impairment exists because fair value, as computed
in step two, would generally be greater than zero. The adoption of this new guidance did not have a material impact on the
Company’s financial position, results of operations, earnings per share (EPS), or cash flows.
A Creditor’s Determination of Whether a Restructuring Is a Troubled Debt Restructuring: In April 2011, the FASB issued
new guidance clarifying when a debt restructuring by a creditor constitutes a troubled debt restructuring, which is effective
July 1, 2011 for all restructurings that occur on or after January 1, 2011. This guidance clarifies that a troubled debt
restructuring only exists when a creditor makes a concession in interest rates or payment terms to a debtor experiencing
financial difficulties. It provides additional guidance on determining what constitutes a concession, and on the use of
probability in determining if a debtor could be experiencing financial difficulty prior to defaulting on payments. The adoption
of this new guidance did not have a material impact on the Company’s financial position, results of operations, EPS, or cash
flows.
New Accounting Standard Not Yet Adopted
Testing Goodwill for Impairment: In September 2011, the FASB issued new guidance allowing companies to consider
qualitative factors before performing a quantitative assessment when determining whether goodwill is impaired, which is
effective for goodwill impairment tests performed after January 1, 2012. Specifically, there is no longer a requirement to
perform the two-step goodwill impairment test unless the entity determines that based on qualitative factors, it is more likely
than not that the fair value of a reporting unit is less than its carrying amount. The adoption of this new guidance is not
expected to have a material impact on the Company’s financial position, results of operations, EPS, or cash flows.
3.
Business Acquisitions
optionsXpress Holdings, Inc.
On September 1, 2011, the Company completed its acquisition of all of the outstanding common shares of optionsXpress
Holdings, Inc. (optionsXpress) for total consideration of $714 million. optionsXpress is an online brokerage firm primarily
focused on equity option securities and futures. The optionsXpress brokerage platform provides active investors and traders
trading tools, analytics and education to execute a variety of investment strategies. The combination of optionsXpress and
Schwab offers active investors an additional level of service and platform capabilities.
Under the terms of the merger agreement, optionsXpress stockholders received 1.02 shares of the Company’s common stock
for each share of optionsXpress stock. As a result, the Company issued 59 million shares of the Company’s common stock
valued at $710 million, based on the closing price of the Company’s common stock on September 1, 2011. The Company also
assumed optionsXpress’ stock-based compensation awards valued at $4 million.
The results of optionsXpress’ operations have been included in the Company’s consolidated statement of income for the year
ended December 31, 2011, from the date of acquisition. optionsXpress’ net revenues were $68 million and their net loss was
not material for the period September 1, 2011 through December 31, 2011.
- 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)
The following table summarizes the preliminary allocation of the purchase price to the net assets of optionsXpress as of
September 1, 2011:
Fair value of common stock issued
Fair value of equity awards assumed
Total consideration paid (1)
Fair value of net assets acquired
Preliminary goodwill
(1) Represents a non-cash investing activity.
$
$
$
$
710
4
714
207
507
The following table summarizes the preliminary fair values of the assets acquired and liabilities assumed as of the acquisition
date. The allocation of the purchase price is preliminary and subject to further adjustment as information relative to closing
date fair values and related tax balances are finalized.
September 1,
2011
Assets
Cash and cash equivalents
Cash and investments segregated and on deposit for regulatory purposes
Receivables from brokers, dealers, and clearing organizations
Receivables from brokerage clients
Other securities owned - at fair value
Intangible assets
Other assets
Total assets acquired (1)
Liabilities
Payables to brokerage clients
Deferred tax liability
Long-term debt (2)
Accrued expenses and other liabilities
Total liabilities assumed (1)
Net assets acquired
(1) All assets and liabilities, except for cash and cash equivalents, represent non-cash investing activities.
(2) The Company paid off long-term debt acquired from optionsXpress subsequent to the date of acquisition in
$
84
1,074
40
185
32
285
24
$ 1,724
$ 1,221
95
110
91
$ 1,517
207
$
September 2011.
Preliminary goodwill of $507 million was assigned to the Investor Services segment and will not be deductible for tax
purposes.
The Company recorded preliminary intangible assets of $285 million, which are subject to amortization and will be amortized
over their estimated useful lives. The following table summarizes the preliminary estimated fair value and useful lives of the
intangible assets.
September 1, 2011
Customer relationships
Technology
Trade name
Total intangible assets
- 57 -
$
Estimated
Fair Value
200
70
15
285
$
Estimated
Useful Life
(In Years)
11
9
9
THE CHARLES SCHWAB CORPORATION
Notes to Consolidated Financial Statements
(Tabular Amounts in Millions, Except Per Share Data, Option Price Amounts, Ratios, or as Noted)
Pro Forma Financial Information (Unaudited)
The following table presents unaudited pro forma financial information as if optionsXpress had been acquired on January 1,
2009. Pro forma net income for the year ended December 31, 2011, was adjusted to exclude $16 million, after tax, of
acquisition related costs incurred by the Company in 2011. Pro forma net income for the year ended December 31, 2009, was
adjusted to include these costs. Additionally, pro forma net income below excludes $15 million, before tax, of acquisition
related costs because these costs were incurred by optionsXpress prior to the acquisition date. Pro forma net income also
reflects the impact of amortizing purchase accounting adjustments relating to intangible assets, net of tax, of $20 million,
$22 million, and $24 million, for the years ended December 31, 2011, 2010, and 2009, respectively.
Year Ended December 31,
Net revenues
Net income
Basic EPS
Diluted EPS
2011
$ 4,857
896
$
.71
$
.71
$
2010
$ 4,479
481
$
.39
$
.38
$
2009
$ 4,426
804
$
.66
$
$
.66
The unaudited pro forma financial information above is presented for illustrative purposes only and is not necessarily
indicative of the results that actually would have occurred had the acquisition been completed at the beginning of 2009, nor is
it indicative of the results of operations for future periods.
Windward Investment Management, Inc.
On November 9, 2010, the Company completed its acquisition of substantially all of the assets of Windward Investment
Management, Inc. (Windward) for $106 million in common stock and $44 million in cash. Windward was an investment
advisory firm that managed diversified investment portfolios comprised primarily of exchange-traded fund securities. As a
result of the acquisition, Windhaven Investment Management, Inc. was formed as a wholly-owned subsidiary of Schwab
Holdings, Inc.
The Company’s consolidated financial statements include the net assets and results of operations associated with this
acquisition from November 9, 2010. Pro forma financial information for the business acquired from Windward is not
presented as it is not material to the Company’s consolidated financial statements. As a result of a fair value allocation, the
Company recorded goodwill of $103 million and intangible assets of $47 million, both of which are deductible for tax
purposes over a period of 15 years. The intangible assets, which primarily relate to customer relationships and technology, are
being amortized on a straight-line basis over 11 years and 9 years, respectively. The goodwill was allocated to the Investor
Services and Institutional Services segments in the amounts of $30 million and $73 million, respectively.
In connection with the acquisition, the Company established employee retention and incentive programs that provide for cash
payments up to an aggregate $100 million. These payments are contingent upon the employees’ continued employment and
achievement of certain assets under management thresholds prior to specified time periods concluding 102 months (the
Service Period) following the acquisition, with payments due at intervals throughout the period if earned. These payments
will be recorded as compensation expense if such payments are deemed probable, and will be recognized over the Service
Period. The estimated liability under this program was not material at December 31, 2011 or 2010.
4.
Receivables from Brokerage Clients
Receivables from brokerage clients are recorded net of an allowance for doubtful accounts. The allowance for doubtful
accounts was not material at December 31, 2011 or 2010. Receivables from brokerage clients consist primarily of margin
loans to brokerage clients of $10.2 billion and $10.3 billion at December 31, 2011 and 2010, respectively. Securities owned
by brokerage clients are held as collateral for margin loans. Such collateral is not reflected in the consolidated financial
statements. The average yield earned on margin loans was 4.39% and 4.87% in 2011 and 2010, respectively.
- 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)
5.
Other Securities Owned
A summary of other securities owned is as follows:
December 31,
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 (1)
(1) Securities pledged were not material at December 31, 2011 or 2010.
2011
332
183
46
32
593
$
$
2010
$ 172
99
47
19
$ 337
The Company’s 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 mutual fund investments held at CSC,
investments made by the Company relating to its deferred compensation plan, 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, 2011 or 2010, and are recorded at fair value in
accrued expenses and other liabilities.
6.
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, 2011
Securities available for sale:
U.S. agency residential mortgage-backed securities
Non-agency residential mortgage-backed securities
Certificates of deposit
Corporate debt securities
U.S. agency notes
Asset-backed and other securities
Total securities available for sale
Securities held to maturity:
U.S. agency residential mortgage-backed securities
Other securities
Total securities held to maturity
Amortized
Cost
$ 20,666
1,130
3,623
3,592
1,795
3,144
$ 33,950
$ 14,770
338
$ 15,108
Gross
Unrealized
Gains
Gross
Unrealized
Losses
$
$
$
$
269
-
2
5
5
7
288
430
3
433
$
$
$
$
14
223
3
26
-
7
273
2
-
2
Fair
Value
$ 20,921
907
3,622
3,571
1,800
3,144
$ 33,965
$ 15,198
341
$ 15,539
- 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)
December 31, 2010
Securities available for sale:
U.S. agency residential mortgage-backed securities
Non-agency residential mortgage-backed securities
Certificates of deposit
Corporate debt securities
U.S. agency notes
Asset-backed securities
Total securities available for sale
Securities held to maturity:
U.S. agency residential mortgage-backed securities
Other securities
Total securities held to maturity
Amortized
Cost
$ 12,879
1,701
1,874
2,261
2,757
2,495
$ 23,967
$ 16,722
1,040
$ 17,762
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Fair
Value
$
$
$
$
222
3
1
8
23
9
266
209
14
223
$
$
$
$
3
234
-
1
-
2
240
137
-
137
$ 13,098
1,470
1,875
2,268
2,780
2,502
$ 23,993
$ 16,794
1,054
$ 17,848
A summary of securities with unrealized losses, aggregated by category and period of continuous unrealized loss, is as
follows:
Less than
12 months
Fair Unrealized
Value
12 months
or longer
Fair Unrealized
Value
Total
Fair Unrealized
Value
$
Losses
Losses
December 31, 2011
Securities available for sale:
U.S. agency residential mortgage-backed securities $ 5,551
121
Non-agency residential mortgage-backed securities
2,158
Certificates of deposit
1,888
Corporate debt securities
1,376
Asset-backed and other securities
Total
$ 11,094
Securities held to maturity:
384
U.S. agency residential mortgage-backed securities $
$
Total
384
Total securities with unrealized losses (1)
$ 11,478
(1) The number of investment positions with unrealized losses totaled 296 for securities available for sale and 3 for securities
$ 5,551 $
867
2,158
1,888
1,528
$ 11,992 $
-
215
-
-
1
$ 216
384 $
$
$
384 $
$ 12,376 $
-
746
-
-
152
898
14
223
3
26
7
273
-
$
$
-
$ 216
14
8
3
26
6
57
-
-
898
2
2
275
2
2
59
Losses
$
$
$
$
$
$
$
$
$
$
held to maturity.
- 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)
Less than
12 months
Fair Unrealized
Value
12 months
or longer
Fair Unrealized
Value
Total
Fair Unrealized
Value
Losses
Losses
Losses
December 31, 2010
Securities available for sale:
U.S. agency residential mortgage-backed securities $
Non-agency residential mortgage-backed securities
Corporate debt securities
Asset-backed securities
Total
Securities held to maturity:
U.S. agency residential mortgage-backed securities $ 6,880
$ 6,880
Total
Total securities with unrealized losses (1)
$ 9,009
(1) The number of investment positions with unrealized losses totaled 178 for securities available for sale and 37 for
707
-
549
873
$ 2,129
-
1,207
-
-
$ 1,207
707
1,207
549
873
$ 3,336
-
234
-
-
$ 234
-
$
$
-
$ 1,207
$ 6,880
$ 6,880
$ 10,216
-
$
$
-
$ 234
137
137
143
3
-
1
2
6
$
$
$
$
$
$
$
$
$
3
234
1
2
$ 240
$ 137
$ 137
$ 377
securities held to maturity.
Unrealized losses in securities available for sale of $273 million as of December 31, 2011, were concentrated in non-agency
residential mortgage-backed securities. Included in non-agency residential mortgage-backed securities are securities
collateralized by loans that are considered to be “Prime” (defined as loans to borrowers with a Fair Isaac & Company credit
score of 620 or higher at origination), and “Alt-A” (defined as Prime loans with reduced documentation at origination). At
December 31, 2011, the amortized cost and fair value of Alt-A residential mortgage-backed securities were $390 million and
$279 million, respectively.
Management evaluates whether securities available for sale and securities held to maturity are other-than-temporarily
impaired (OTTI) on a quarterly basis as described in note “2 – Summary of Significant Accounting Policies.”
Certain Alt-A and Prime residential mortgage-backed securities experienced continued credit deterioration in 2011, including
increased payment delinquency rates and losses on foreclosures of underlying mortgages. Based on the Company’s 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 OTTI. The Company employs a buy and hold strategy relative to its mortgage-
related securities, and does not intend to sell these securities and it will not be required to sell these securities before
anticipated recovery of the unrealized losses on these securities. Further, the Company has an adequate liquidity position at
December 31, 2011, with cash and cash equivalents totaling $8.7 billion, a loan-to-deposit ratio of 16%, 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 it is not “more likely than not” that the Company will be required to sell these securities,
the Company recognized an impairment charge equal to the securities’ expected credit losses of $31 million in 2011. The
expected credit losses were measured as the difference between the present value of expected cash flows and the amortized
cost of the securities. Further deterioration in the performance of the underlying loans in the Company’s residential mortgage-
backed securities portfolio could result in the recognition of additional impairment charges.
Actual credit losses on the Company’s residential mortgage-backed securities were not material in 2011 or 2010. There were
no actual credit losses on the Company’s residential mortgage-backed securities in 2009.
- 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)
The following table is a rollforward of the amount of credit losses recognized in earnings for OTTI securities held by the
Company during the period for which a portion of the impairment was recognized in other comprehensive income:
Year Ended December 31,
Balance at beginning of year
Credit losses recognized into current year earnings on debt securities for
which an other-than-temporary impairment was not previously recognized
Credit losses recognized into current year earnings on debt securities for
which an other-than-temporary impairment was previously recognized
Balance at the end of year
2011
96
$
2010
60
$
6
25
127
$
7
29
96
$
2009
-
60
-
60
$
$
The maturities of securities available for sale and securities held to maturity at December 31, 2011, are as follows:
After 1 year After 5 years
Within
1 year
through
5 years
through
10 years
After
10 years
Total
$
$
-
-
1,897
954
-
225
$ 3,076
$ 3,076
Securities available for sale:
U.S. agency residential mortgage-backed securities (1)
Non-agency residential mortgage-backed securities (1)
Certificates of deposit
Corporate debt securities
U.S. agency notes
Asset-backed and other securities
Total fair value
Total amortized cost
Securities held to maturity:
U.S. agency residential mortgage-backed securities (1)
Other securities
341
$
Total fair value
$ 15,539
$ 15,108
Total amortized cost
$
(1) Residential mortgage-backed securities have been allocated to maturity groupings based on final contractual maturities.
Actual maturities will differ from final contractual maturities because borrowers on a certain portion of loans underlying
these securities have the right to prepay their obligations.
$ 2,950
13
-
100
-
534
$ 3,597
$ 3,512
$ 17,969
894
-
-
-
1,573
$ 20,436
$ 20,491
2
-
1,725
2,517
1,800
812
$ 6,856
$ 6,871
$ 20,921
907
3,622
3,571
1,800
3,144
$ 2,581
-
$ 2,581
$ 2,507
$ 12,617
-
$ 12,617
$ 12,263
$ 33,965
$ 33,950
-
117
117
116
-
224
224
222
$ 15,198
$
$
$
$
Proceeds and gross realized gains (losses) from sales of securities available for sale are as follows:
Year Ended December 31,
Proceeds
Gross realized gains
Gross realized losses
2011
500
1
-
$
$
$
2010
871
1
-
$
$
$
2009
107
1
(4)
$
$
$
- 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)
7.
Loans to Banking Clients and Related Allowance for Loan Losses
The composition of loans to banking clients by loan segment is as follows:
December 31,
Residential real estate mortgages
Home equity lines of credit
Personal loans secured by securities
Other
Total loans to banking clients (1)
Allowance for loan losses
Total loans to banking clients – net
(1) Loans are evaluated for impairment by loan segment.
2011
$ 5,596
3,509
742
19
9,866
(54)
$ 9,812
2010
$ 4,695
3,500
562
21
8,778
(53)
$ 8,725
The allowance for loan losses is established through charges to earnings based on management’s evaluation of the existing
portfolio. The adequacy of the allowance is reviewed quarterly by management, taking into consideration current economic
conditions, the existing loan portfolio composition, past loss experience, and risks inherent in the portfolio, as described in
note “2 – Summary of Significant Accounting Policies.”
In addition to the allowance for loan losses, the Company maintains a separate reserve for the losses inherent in unused
commitments on its HELOC loans. This reserve is included in accrued expenses and other liabilities and was not material at
December 31, 2011 or 2010.
Changes in the allowance for loan losses were as follows:
Year Ended
December 31, 2011
Balance at beginning of year
Charge-offs
Recoveries
Provision for loan losses
Balance at end of year
Residential
real estate
mortgages
38
(11)
1
12
40
$
$
$
Home
equity lines
of credit
15
(8)
1
6
14
$
December 31, December 31,
Total
53
(19)
2
18
54
$
$
2010
45
(20)
1
27
53
$
$
2009
20
(13)
-
38
45
$
$
Included in the loan portfolio are nonaccrual loans totaling $52 million and $51 million at December 31, 2011 and 2010,
respectively. There were no loans accruing interest that were contractually 90 days or more past due at December 31, 2011 or
2010. The amount of interest revenue that would have been earned on nonaccrual loans, versus actual interest revenue
recognized on these loans, was not material to the Company’s results of operations in 2011 or 2010. Nonperforming assets,
which include nonaccrual loans and other real estate owned, totaled $56 million and $54 million at December 31, 2011 and
2010, respectively. The Company considers loan modifications in which it makes an economic concession to a borrower
experiencing financial difficulty to be a troubled debt restructuring. Troubled debt restructurings were not material at
December 31, 2011 or 2010.
- 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)
The delinquency aging analysis by loan class is as follows:
December 31, 2011
Residential real estate mortgages:
Originated first mortgages
Purchased first mortgages
Home equity lines of credit
Personal loans secured by securities
Other
Total loans to banking clients
December 31, 2010
Residential real estate mortgages:
Originated first mortgages
Purchased first mortgages
Home equity lines of credit
Personal loans secured by securities
Other
Total loans to banking clients
Current
30-59 days
past due
60-89 days Greater than Total
past due
90 days
past due
Total
loans
$
$
$
$
5,380
152
3,494
741
19
9,786
4,527
100
3,489
557
21
8,694
$
$
$
$
16
2
5
1
-
24
18
2
5
-
-
25
$
$
$
$
2
-
2
-
-
4
5
1
2
-
-
8
$
$
$
$
39
5
8
-
-
52
38
4
4
5
-
51
$
$
$
$
57
7
15
1
-
80
61
7
11
5
-
84
$ 5,437
159
3,509
742
19
$ 9,866
$ 4,588
107
3,500
562
21
$ 8,778
In addition to monitoring the delinquency characteristics as presented in the aging analysis above, the Company monitors the
credit quality of residential real estate mortgages and HELOCs by stratifying the portfolios by the year of origination,
borrower FICO scores at origination, updated FICO scores, and loan-to-value ratios at origination (Origination LTV), as
presented in the following tables. Borrowers’ FICO scores are provided by an independent third party credit reporting service
and were last updated in December 2011. The Company monitors the credit quality of personal loans secured by securities by
reviewing the fair value of collateral to ensure adequate collateralization of at least 100% of the principal amount of the loans.
All of these personal loans were fully collateralized by securities with fair values in excess of borrowing amounts at
December 31, 2011 and 2010.
- 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)
Originated first
mortgages
Residential real estate mortgages
Purchased first
mortgages
$ 291
278
538
553
1,757
2,020
$ 5,437
$
9
108
1,030
4,290
$ 5,437
$
55
162
831
4,389
$ 5,437
$
52
8
8
10
17
64
$ 159
$
2
19
43
95
$ 159
$
7
11
44
97
$ 159
Total
$ 343
286
546
563
1,774
2,084
$ 5,596
$
11
127
1,073
4,385
$ 5,596
$
62
173
875
4,486
$ 5,596
Home equity
lines of credit
$ 1,074
232
1,262
412
311
218
$ 3,509
$
-
24
667
2,818
$ 3,509
$
49
112
520
2,828
$ 3,509
December 31, 2011
Year of origination
Pre-2007
2007
2008
2009
2010
2011
Total
Origination FICO
< 620
620 - 679
680 - 739
≥ 740
Total
Updated FICO
< 620
620 - 679
680 - 739
≥ 740
Total
Origination LTV (1)
≤ 70%
71% - 89%
≥ 90%
Total
$ 2,378
1,091
40
$ 3,509
(1) The computation of the Origination LTV ratio for a HELOC includes any first lien mortgage outstanding on the same
property at the time of origination. At December 31, 2011, $755 million of $3.5 billion in HELOCs were in a first lien
position.
$ 3,598
1,964
34
$ 5,596
$ 3,507
1,904
26
$ 5,437
91
60
8
$ 159
$
- 65 -
THE CHARLES SCHWAB CORPORATION
Notes to Consolidated Financial Statements
(Tabular Amounts in Millions, Except Per Share Data, Option Price Amounts, Ratios, or as Noted)
Originated first
mortgages
Residential real estate mortgages
Purchased first
mortgages
$ 352
384
728
884
2,240
$ 4,588
$
9
115
907
3,557
$ 4,588
$
63
147
730
3,648
$ 4,588
$
58
9
8
12
20
$ 107
$
2
15
33
57
$ 107
$
9
8
29
61
$ 107
Total
$ 410
393
736
896
2,260
$ 4,695
$
11
130
940
3,614
$ 4,695
$
72
155
759
3,709
$ 4,695
Home equity
lines of credit
$ 1,132
245
1,345
466
312
$ 3,500
$
-
26
677
2,797
$ 3,500
$
49
99
499
2,853
$ 3,500
December 31, 2010
Year of origination
Pre-2007
2007
2008
2009
2010
Total
Origination FICO
< 620
620 - 679
680 - 739
≥ 740
Total
Updated FICO
< 620
620 - 679
680 - 739
≥ 740
Total
Origination LTV (1)
≤ 70%
71% - 89%
≥ 90%
Total
$ 2,375
1,092
33
$ 3,500
(1) The computation of the Origination LTV ratio for a HELOC includes any first lien mortgage outstanding on the same
property at the time of origination. At December 31, 2010, $742 million of $3.5 billion in HELOCs were in a first lien
position.
$ 2,966
1,710
19
$ 4,695
$ 2,911
1,659
18
$ 4,588
55
51
1
$ 107
$
8.
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
- 66 -
2011
993
446
430
307
131
104
59
17
2,487
(1,802)
685
$
$
2010
902
438
405
282
118
91
57
15
2,308
(1,684)
624
$
$
THE CHARLES SCHWAB CORPORATION
Notes to Consolidated Financial Statements
(Tabular Amounts in Millions, Except Per Share Data, Option Price Amounts, Ratios, or as Noted)
9.
Intangible Assets and Goodwill
The gross carrying value of intangible assets and accumulated amortization was:
December 31, 2011
December 31, 2010
Gross
Net
Gross
Net
Customer relationships
Technology
Trade name
Other
Total intangible assets
$
Carrying Accumulated Carrying
Value Amortization Value
$ 245
88
15
2
$ 350
$ 228
82
14
2
$ 326
17
6
1
-
24
$
Carrying Accumulated Carrying
Value Amortization Value
$
$
$
42
14
-
2
58
$
$
2
2
-
-
4
40
12
-
2
54
Amortization expense for intangible assets was $20 million in 2011 and not material in 2010 or 2009.
Estimated future annual amortization expense for intangible assets as of December 31, 2011 is as follows:
2012
2013
2014
2015
2016
Thereafter
$
$
$
$
$
$
$
47
42
39
36
34
128
The changes in the carrying amount of goodwill, as allocated to the Company’s reportable segments for purposes of testing
goodwill for impairment going forward, are presented in the following table:
Balance at December 31, 2010
Goodwill acquired during the period
Balance at December 31, 2011
10. Other Assets
The components of other assets are as follows:
Investor
Services
$ 446
507
$ 953
Institutional
Services
$ 185
23
$ 208
Total
$ 631
530
$ 1,161
December 31,
Accounts receivable (1)
Prepaid expenses
Interest and dividends receivable
Other investments
Deferred tax asset – net
Other
$
Total other assets
(1) Accounts receivable includes accrued service fee income and a receivable from the Company’s loan servicer.
2011
330
153
142
57
27
109
818
$
$
$
2010
320
172
134
56
170
75
927
- 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)
11. Deposits from Banking Clients
Deposits from banking clients consist of interest-bearing and noninterest-bearing deposits as follows:
December 31,
Interest-bearing deposits:
Deposits swept from brokerage accounts
Checking
Savings and other
Total interest-bearing deposits
Noninterest-bearing deposits
Total deposits from banking clients
2011
2010
$ 40,617
10,765
8,997
60,379
475
$ 60,854
$ 30,980
9,890
9,241
50,111
479
$ 50,590
Demand deposit overdrafts included as other loans within loans to banking clients were not material at December 31, 2011 or
2010.
In 2010, the Company entered into deposit account agreements with existing trust clients and accordingly transferred balances
totaling $442 million from payables to brokerage clients and accrued expenses and other liabilities to noninterest-bearing
deposits from banking clients.
12. Payables to Brokers, Dealers, and Clearing Organizations
Payables to brokers, dealers, and clearing organizations include securities loaned of $852 million and $1.3 billion at
December 31, 2011 and 2010, respectively. The cash collateral received from counterparties under securities lending
transactions was equal to or greater than the market value of the securities loaned at December 31, 2011 and 2010.
13. Payables to Brokerage Clients
The principal source of funding for Schwab’s 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 $30.6 billion and
$26.2 billion at December 31, 2011 and 2010, respectively. The average rate paid on cash balances in interest-bearing
brokerage client accounts was 0.01% in 2011 and 2010.
14. Borrowings
Long-term debt including unamortized debt discounts and premiums, where applicable, consists of the following:
December 31,
Senior Notes
Senior Medium-Term Notes, Series A
Junior Subordinated Notes
Finance lease obligation
Total long-term debt
2011
$ 1,450
249
202
100
$ 2,001
2010
$ 1,449
249
202
106
$ 2,006
CSC has a universal automatic shelf registration statement (Shelf Registration Statement) on file with the Securities and
Exchange Commission (SEC), which enables CSC to issue debt, equity and other securities. This Shelf Registration Statement
was filed in December 2011 to replace the prior Shelf Registration Statement, which expired in the same month.
- 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)
The Senior Notes outstanding at December 31, 2011 have maturities ranging from 2014 to 2020 and fixed interest rates
ranging from 4.45% to 4.950% with interest payable semi-annually. The Company issued $700 million of these Senior Notes
in 2010 under the prior Shelf Registration Statement. These Senior Notes mature in 2020 and have a fixed interest rate of
4.45%.
The Senior Medium-Term Notes, Series A (Medium-Term Notes) outstanding at December 31, 2011, mature in 2017 and
have a fixed interest rate of 6.375% with interest payable semi-annually. In 2010, $200 million of Medium-Term Notes
matured.
CSC and Schwab Capital Trust I, a statutory trust formed under the laws of the State of Delaware (Trust), previously closed a
public offering of $300 million of the Trust’s fixed to floating-rate trust preferred securities. The proceeds from the sale of the
trust preferred securities were invested by the Trust in fixed to floating rate Junior Subordinated Notes issued by CSC. The
Junior Subordinated Notes, which mature in 2067, have a fixed interest rate of 7.50% until 2017, and a floating rate
thereafter. The Junior Subordinated Notes may be redeemed at a redemption price of principal plus accrued but unpaid
interest on November 15, 2017, on or after November 15, 2037, or following the occurrence of certain events, and at a make-
whole redemption price at any other time. In 2010, the Company terminated the replacement capital covenant related to the
trust preferred securities, upon receiving the requisite consents, in order to have more flexibility to manage its capital
structure. The replacement capital covenant had restricted the Company from redeeming, repaying or purchasing the Junior
Subordinated Notes or the trust preferred securities unless it received proceeds of the issuance of certain replacement capital
securities, among other conditions.
Schwab has a finance lease obligation related to an office building and land under a 20-year lease. The remaining finance
lease obligation of $100 million at December 31, 2011, is being reduced by a portion of the lease payments over the
remaining lease term of 13 years.
Annual maturities on long-term debt outstanding at December 31, 2011, are as follows:
2012
2013
2014
2015
2016
Thereafter
Total maturities
Unamortized discount, net
Total long-term debt
$
6
6
756
7
7
1,220
2,002
(1)
$ 2,001
CSC has authorization from its Board of Directors to issue unsecured commercial paper notes (Commercial Paper Notes) not
to exceed $1.5 billion. Management has set a current limit for the commercial paper program of $800 million. The maturities
of the Commercial Paper Notes may vary, but are not to exceed 270 days from the date of issue. The commercial paper is not
redeemable prior to maturity and cannot be voluntarily prepaid. The proceeds of the commercial paper program are to be used
for general corporate purposes. There were no borrowings of Commercial Paper Notes outstanding at December 31, 2011 or
2010.
CSC maintains an $800 million committed, unsecured credit facility with a group of 11 banks, which is scheduled to expire in
June 2012. This facility replaced a similar facility that expired in June 2011. The funds under this facility are available for
general corporate purposes, including repayment of the Commercial Paper Notes discussed above. The financial covenants
under this facility require Schwab to maintain a minimum net capital ratio, as defined, Schwab Bank to be well capitalized, as
defined, and CSC to maintain a minimum level of stockholders’ equity. At December 31, 2011, the minimum level of
stockholders’ equity required under this facility was $5.0 billion (CSC’s stockholders’ equity at December 31, 2011 was
$7.7 billion). There were no borrowings outstanding under this facility at December 31, 2011 or 2010.
- 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)
To manage short-term liquidity, Schwab maintains uncommitted, unsecured bank credit lines with a group of six banks
totaling $875 million at December 31, 2011. CSC has direct access to $750 million of these credit lines. There were no
borrowings outstanding under these lines at December 31, 2011 or 2010.
To partially satisfy the margin requirement of client option transactions with the Options Clearing Corporation (OCC),
Schwab has unsecured standby LOCs with eight banks in favor of the OCC aggregating $350 million at December 31, 2011.
In 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, 2011, the aggregate face amount of these LOCs totaled $78 million. There were no funds
drawn under any of these LOCs at December 31, 2011 or 2010.
15. Commitments and Contingencies
Operating leases and other commitments: The Company has non-cancelable operating leases for office space and equipment.
Future annual minimum rental commitments under these leases, net of contractual subleases, at December 31, 2011, are as
follows:
2012
2013
2014
2015
2016
Thereafter
Total
Operating
Leases
116
$
96
83
72
64
139
570
$
Subleases
30
$
26
24
24
24
18
146
$
Net
86
70
59
48
40
121
424
$
$
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 $187 million, $168 million, and $213 million in 2011, 2010, and 2009,
respectively. Rent expense in 2009 included charges of $37 million relating to the Company’s 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, 2011, the
Company has purchase obligations as follows:
2012
2013
2014
2015
2016
Thereafter
Total
$
$
118
48
33
27
6
1
233
Guarantees and indemnifications: 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
indemnifications 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 a liability for these indemnifications and believes that the occurrence of events that would trigger payments
under these agreements is remote.
- 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)
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. The Company partially satisfies the margin requirements by
arranging unsecured standby LOCs, in favor of the clearing houses, which are issued by multiple banks. At December 31,
2011, the aggregate face amount of these LOCs totaled $350 million. In 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, 2011, the aggregate face
amount of these LOCs totaled $78 million. There were no funds drawn under any of these LOCs at December 31, 2011.
The Company also provides guarantees to securities clearing houses and exchanges under standard membership agreements,
which require members to guarantee the performance of other members. Under the agreements, if another member becomes
unable to satisfy its obligations to the clearing houses and exchanges, other members would be required to meet shortfalls.
The Company’s 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.
The Company believes it has strong defenses in all significant matters currently pending and is contesting liability and any
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 a matter because of the uncertainty and risks of
litigation. Described below are certain matters in which there is a reasonable possibility that a material loss could be incurred
or where the matter may otherwise be of significant interest to stockholders. With respect to all other pending matters, based
on current information and consultation with counsel, it does not appear that the outcome of any such matter could be material
to the financial condition, operating results or cash flows of the Company. However, predicting the outcome of a litigation or
regulatory matter is inherently difficult, requiring significant judgment and evaluation of various factors, including the
procedural status of the matter and any recent developments; prior experience and the experience of others in similar cases;
available defenses, including potential opportunities to dispose of a case on the merits or procedural grounds before trial (e.g.,
motions to dismiss or for summary judgment); the progress of fact discovery; the opinions of counsel and experts regarding
potential damages; potential opportunities for settlement and the status of any settlement discussions; and potential insurance
coverage and indemnification. Often, as in the case of the Auction Rate Securities Regulatory Inquiries and Total Bond
Market Fund Litigation matters described below, it is not possible to reasonably estimate potential liability, if any, or a range
of potential liability until the matter is closer to resolution, or pending the outcome of key motions or appeals. Numerous
issues may have to be developed, such as discovery of important factual matters and determination of threshold legal issues,
which may include novel or unsettled questions of law. Reserves are established or adjusted or further disclosure and
estimates of potential loss are provided as the matter progresses and more information becomes available.
Auction Rate Securities Regulatory Inquiries: Schwab has been responding to industry wide inquiries from federal and state
regulators regarding sales of auction rate securities to clients who were unable to sell their holdings when the normal auction
process for those securities froze unexpectedly in February 2008. On August 17, 2009, a civil complaint was filed against
Schwab in New York state court by the Attorney General of the State of New York (NYAG) alleging material
misrepresentations and omissions by Schwab regarding the risks of auction rate securities, and seeking restitution,
disgorgement, penalties and other relief, including repurchase of securities held in client accounts. As reflected in a statement
issued August 17, 2009, Schwab has responded that the allegations are without merit, and has been contesting all charges. By
order dated October 24, 2011, the court granted Schwab’s motion to dismiss the complaint. On November 30, 2011, the
NYAG filed notice of its intention to appeal the ruling.
Total Bond Market Fund Litigation: On August 28, 2008, a 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 Fund™ (Northstar lawsuit). The
- 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)
lawsuit, which alleges violations of state law and federal securities law in connection with the fund’s investment policy,
names Schwab Investments (registrant and issuer of the fund’s shares) and CSIM as defendants. Allegations include that the
fund improperly deviated from its stated investment objectives by investing in collateralized mortgage obligations (CMOs)
and investing more than 25% of fund assets in CMOs and mortgage-backed securities without obtaining a shareholder vote.
Plaintiffs seek unspecified compensatory and rescission damages, unspecified equitable and injunctive relief, and costs and
attorneys’ fees. Plaintiffs’ federal securities law claim and certain of plaintiffs’ state law claims were dismissed in proceedings
before the court and following a successful petition by defendants to the Ninth Circuit Court of Appeals. On August 8, 2011,
the court dismissed plaintiffs’ remaining claims with prejudice. Plaintiffs have appealed to the Ninth Circuit, where the case is
currently pending.
A second class action lawsuit filed on September 3, 2010, in the U.S. District Court for the Northern District of California,
which raised similar allegations on behalf of investors in the fund (Smit lawsuit), was dismissed with prejudice on April 19,
2011.
optionsXpress Merger Litigation: Between March 21, 2011 and April 6, 2011, ten purported class action lawsuits were filed
by optionsXpress stockholders challenging the terms of the Company’s merger agreement to acquire optionsXpress. Named
defendants included the Company, optionsXpress and members of its board of directors. Seven lawsuits were filed in the
Circuit Court of Cook County, Illinois and consolidated in a single amended complaint on May 9, 2011 (Consolidated Illinois
Action); and three lawsuits were filed in the Court of Chancery of the State of Delaware and consolidated in a single amended
complaint on April 25, 2011 (Consolidated Delaware Action). On April 28, 2011, the Delaware court stayed the Consolidated
Delaware Action in favor of the Consolidated Illinois Action.
On June 16, 2011, the Illinois court dismissed all claims against the Company with prejudice. On July 29, 2011, the parties
entered into a settlement agreement under which the remaining defendants agreed to provide certain supplemental merger
disclosures in exchange for full releases of all claims related to the merger, including all claims in the Consolidated Illinois
Action and the Consolidated Delaware Action. Defendants also agreed not to oppose any fee application by plaintiffs’ counsel
that did not exceed $650,000. The settlement received final approval from the Illinois court on December 7, 2011.
optionsXpress Regulatory Matters: The Company is in discussions with the Securities and Exchange Commission (SEC), the
Chicago Board Options Exchange and FINRA to resolve several optionsXpress regulatory matters which predate the
Company’s acquisition of optionsXpress. optionsXpress entities and individual employees have received Wells notices
concerning potential violations of SEC Regulation SHO (short sale delivery rules) in connection with certain customer trading
activities, and potential violations of the broker-dealer registration requirements in connection with an unregistered
optionsXpress entity. The Company has recorded a contingent liability associated with these matters, which was not material
at December 31, 2011.
YieldPlus Fund Litigation: As disclosed previously, the Company recorded total charges in 2010 of $199 million, net of
insurance proceeds of $39 million under applicable policies, for settlements to resolve consolidated class action litigation in
the U.S. District Court for the Northern District of California relating to the Schwab YieldPlus Fund. On April 19, 2011, the
court granted final approval of the settlement agreements and entered final judgment in the litigation.
16. Financial Instruments Subject to Off-Balance Sheet Risk, Credit Risk, or Market Risk
Securities lending: The Company loans client securities temporarily to other brokers in connection with its securities lending
activities and 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 satisfy its client obligations. The Company mitigates this risk by requiring
credit approvals for counterparties, by monitoring the fair value of securities loaned, and requiring additional cash as
collateral when necessary. The fair value of client securities pledged in securities lending transactions to other broker-dealers
was $783 million and $1.2 billion at December 31, 2011 and 2010, respectively. Additionally, the Company borrows
- 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)
securities from other broker-dealers to fulfill short sales by clients. The fair value of these borrowed securities was
$44 million and $113 million at December 31, 2011 and 2010, respectively.
Client trade settlement: The Company is obligated to settle transactions with brokers and other financial institutions even if
the Company’s clients fail to meet their obligations to the Company. Clients are required to complete their transactions on
settlement date, generally three business days after the 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 in
excess of amounts prescribed by regulatory requirements for certain types of trades, and therefore the potential for Schwab to
make payments under these client transactions is remote. Accordingly, no liability has been recognized for these transactions.
Margin lending: The Company provides margin loans to its clients which are collateralized by securities in their brokerage
accounts and may be liable for the margin requirement of its client margin securities transactions. As clients write options or
sell securities short, the Company may incur losses if the clients 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 the Company to pledge collateralized
securities in their brokerage accounts in accordance with federal regulations and was allowed, under such regulations, to
pledge securities with a fair value of $14.7 billion and $15.0 billion at December 31, 2011 and 2010, respectively. The fair
value of client securities pledged to fulfill the short sales of its clients was $1.2 billion and $1.4 billion at December 31, 2011
and 2010, respectively. The fair value of client securities pledged to fulfill the Company’s proprietary short sales, which
resulted from facilitating clients’ dividend reinvestment elections, was $101 million and $99 million at December 31, 2011
and 2010, respectively. The Company has also pledged a 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 not material at December 31, 2011 or 2010. The Company may also pledge client securities to fulfill client
margin requirements for open option contracts established with the OCC. The fair value of these pledged securities to the
OCC was $1.3 billion and $1.2 billion at December 31, 2011 and 2010, respectively.
Financial instruments held for trading purposes: The Company maintains inventories in securities on a long and short basis
relating to its fixed income operations. The Company could incur losses or gains as a 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 a custodian, to be held as collateral, with a 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, 2011
and 2010, the fair value of collateral received in connection with resale agreements that are available to be repledged or sold
was $18.3 billion and $13.0 billion, respectively. Schwab utilizes the collateral provided under repurchase agreements to meet
obligations under broker-dealer client protection rules, which place limitations on its ability to access such segregated
securities. For Schwab to repledge or sell this collateral, it would be required to deposit cash and/or securities of an equal
amount into its segregated reserve bank accounts in order to meet its segregated cash and investment requirement.
Concentration risk: The Company has exposure to concentration risk when holding large positions of financial instruments
collateralized by assets with similar economic characteristics or in securities of a single issuer or industry. For discussion on
the Company’s exposure to concentration risk relating to residential mortgage-backed securities, see note “6 – Securities
Available for Sale and Securities Held to Maturity.”
The Company’s investments in corporate debt securities and commercial paper totaled $5.6 billion and $4.6 billion at
December 31, 2011 and 2010, 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, cash and investments segregated and on
- 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)
deposit for regulatory purposes, cash and cash equivalents, and other securities owned. At December 31, 2011 and 2010, the
Company held $867 million and $1.9 billion, respectively, of corporate debt securities issued by financial institutions and
guaranteed under the FDIC Temporary Liquidity Guarantee Program.
The Company’s loans to banking clients include $5.6 billion and $4.7 billion of adjustable rate first lien residential real estate
mortgage loans at December 31, 2011 and 2010, respectively. The Company’s adjustable rate mortgages have initial fixed
interest rates for three to ten years and interest rates that adjust annually thereafter. At December 31, 2011, approximately
60% of these mortgages consisted of loans with interest-only payment terms. At December 31, 2011, the interest rates on
approximately 65% of these interest-only loans are not scheduled to reset for three or more years. The Company’s mortgage
loans do not include interest terms described as temporary introductory rates below current market rates. At December 31,
2011, 44% of the residential real estate mortgages and 50% of the HELOC balances were secured by properties which are
located in California. At December 31, 2010, 42% of the residential real estate mortgages and 49% of the HELOC 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 a 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 Company’s primary credit exposure on these resale transactions is with its counterparty. The Company
would have exposure to the U.S. Government and agency securities only in the event of the counterparty’s default on the
resale agreements. The fair value of U.S. Government and agency securities held as collateral for resale agreements totaled
$18.3 billion and $13.0 billion at December 31, 2011 and 2010, respectively.
Commitments to extend credit: 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 expected to be held. Collateral requirements vary by type of loan. These commitments are
legally binding agreements to lend to a client that generally have fixed expiration dates or other termination clauses, may
require payment of a fee and are not secured by collateral until funds are advanced. Schwab Bank also has commitments to
extend credit related to its clients’ unused HELOC. Total amounts outstanding for these commitments to extend credit were
$5.8 billion and $6.1 billion at December 31, 2011 and 2010, respectively.
Forward sale and interest rate lock commitments: Schwab Bank’s loans held for sale portfolio consists of fixed-rate and
adjustable-rate residential mortgage loans, which are subject to a 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 Company’s consolidated balance sheet at fair value with gains or losses
recorded in other comprehensive income (loss). Amounts included in other comprehensive income (loss) are reclassified into
earnings when the related loan is sold. At December 31, 2011 and 2010, the derivative asset and liability 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 on mortgage loans to be held for sale with principal balances totaling
approximately $347 million and $628 million at December 31, 2011 and 2010, respectively. At December 31, 2011 and 2010,
the derivative asset and liability for these interest rate lock commitments and the related forward sale commitments were not
material.
- 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)
17. 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 a 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. A 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 management’s 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 a particular input requires judgment. The fair value hierarchy includes three levels based on the objectivity of
the inputs as follows:
Level 1 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, options, and equity securities. The Company did not transfer any assets or liabilities between Level 1 and
Level 2 during 2011 or 2010.
Level 2 inputs are inputs other than quoted prices included in Level 1 that are observable for the asset or liability,
either directly or indirectly. Level 2 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 includes residential mortgage-
backed securities, corporate debt securities, certificates of deposit, commercial paper, U.S. agency and municipal
debt securities, U.S. Treasury securities, and asset-backed and other securities.
Level 3 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 3
inputs as of December 31, 2011 or 2010.
- 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)
Assets and Liabilities Recorded at Fair Value
The Company’s assets recorded at fair value include certain cash equivalents, investments segregated and on deposit for
regulatory purposes, other securities owned, and securities available for sale. When available, the Company uses quoted
prices in active markets to measure the fair value of assets. When quoted prices do not exist, the Company uses prices
obtained from independent third-party pricing services to measure the fair value of investment assets. The Company validates
prices received from the pricing services using various methods, including comparison to prices received from additional
pricing services, 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 independent third-party pricing services
unless such prices are inconsistent with the definition of fair value and result in a material difference in the recorded amounts.
At December 31, 2011 and 2010, the Company did not adjust prices received from independent third-party pricing services.
Liabilities recorded at fair value were not material, and therefore are not included in the following tables.
The following tables present the fair value hierarchy for assets measured at fair value:
Quoted Prices
in Active Markets
for Identical
Assets
(Level 1)
Significant
Significant
Other Observable Unobservable
Inputs
(Level 2)
Inputs
(Level 3)
Balance at
Fair Value
$
8
-
8
-
-
-
-
332
183
-
12
527
-
-
-
-
-
-
-
535
$
-
814
814
2,374
767
650
3,791
-
-
46
20
66
20,921
907
3,622
3,571
1,800
3,144
33,965
$ 38,636
$
$
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
$
8
814
822
2,374
767
650
3,791
332
183
46
32
593
20,921
907
3,622
3,571
1,800
3,144
33,965
$ 39,171
December 31, 2011
Cash equivalents:
Money market funds
Commercial paper
Total cash equivalents
Investments segregated and on deposit for regulatory purposes:
Certificates of deposit
Corporate debt securities
U.S. Government securities
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
Certificates of deposit
Corporate debt securities
U.S. agency notes
Asset-backed and other securities
Total securities available for sale
Total
$
- 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)
December 31, 2010
Cash equivalents:
Money market funds
Commercial paper
Total cash equivalents
Investments segregated and on deposit for regulatory purposes:
Certificates of deposit
Corporate debt securities
U.S. Government securities
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
Certificates of deposit
Corporate debt securities
U.S. agency notes
Asset-backed securities
Total securities available for sale
Total
$
Fair Value of Assets and Liabilities Not Recorded at Fair Value
Quoted Prices
in Active Markets
for Identical
Assets
(Level 1)
Significant
Significant
Other Observable Unobservable
Inputs
(Level 2)
Inputs
(Level 3)
Balance at
Fair Value
$
988
-
988
-
-
-
-
172
99
-
1
272
-
-
-
-
-
-
-
1,260
$
-
242
242
2,201
1,704
3,190
7,095
-
-
47
18
65
13,098
1,470
1,875
2,268
2,780
2,502
23,993
$ 31,395
$
$
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
$
988
242
1,230
2,201
1,704
3,190
7,095
172
99
47
19
337
13,098
1,470
1,875
2,268
2,780
2,502
23,993
$ 32,655
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
2011.
Other 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 and other securities. Securities held to maturity
are recorded at amortized cost. The fair value of these securities is obtained using an independent third-party pricing service,
as discussed above.
- 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)
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 loan losses. The fair value of the Company’s loans to banking
clients is estimated based on market prices for mortgage-backed securities collateralized by similar types of loans.
Loans held for sale include fixed-rate and adjustable-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 Company’s loans held for sale is estimated using
quoted market prices for securities backed by similar types of loans.
Other assets include cost method investments whose carrying values approximate their fair values. Other assets also include
Federal Home Loan Bank stock recorded at par, which approximates fair value.
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 includes Senior Notes, Senior Medium-Term Notes, Series A, Junior Subordinated Notes, and a finance lease
obligation. The fair value of the Senior Notes, Senior Medium-Term Notes, Series A, and Junior Subordinated Notes are
estimated using indicative, non-binding quotes from independent brokers. The finance lease obligation is recorded at carrying
value, which approximates fair value.
Firm commitments to extend credit: The Company extends credit to banking clients through HELOC and personal loans
secured by securities. The Company considers the fair value of these unused commitments to be not material because the
interest rate earned on these balances are based on the market interest rate indices and reset monthly. Future utilization of
HELOC and personal loan commitments will earn a then-current market interest rate. The Company does not charge a fee to
maintain a HELOC or personal loan.
The table below presents the Company’s fair value estimates 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
18. Equity Offering
2011
2010
Carrying
Amount
Fair
Value
Carrying
Amount
Fair
Value
$ 15,108
9,812
$
70
$
$ 15,539
9,671
$
73
$
$ 17,762
8,725
$
185
$
$ 17,848
8,469
$
194
$
$
2,001
$
2,159
$
2,006
$
2,116
On January 26, 2010, the Company sold 29,670,300 shares of its common stock, $.01 par value, at a public offering price of
$19.00 per share. Net proceeds received from the offering were $543 million and were used to support the Company’s
balance sheet growth, including expansion of its deposit base and migration of certain client balances from money market
funds into deposit accounts at Schwab Bank.
- 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)
19. Accumulated Other Comprehensive Income (Loss)
Accumulated other comprehensive income (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 (loss) gain arising
during the year
Reclassification of impairment
charges included in earnings
Other reclassifications of net losses
in earnings
Net unrealized (loss) gain on securities
available for sale
Foreign currency translation adjustment
Net unrealized loss on cash flow
hedging instruments
2011
Before Tax Net of
effect
tax
tax
2010
Before Tax Net of
effect
tax
tax
2009
Before Tax Net of
effect
tax
tax
$ (43) $ 16 $ (27)
$ 300 $ (115) $ 185
$ 536 $ (212) $ 324
31
(12)
19
36
(14)
22
60
(24)
36
1
(11)
(1)
-
-
4
-
-
1
(7)
(1)
-
1
-
1
3
(1)
2
337
-
(129) 208
-
-
599
-
(237) 362
-
-
(1)
-
(1)
-
-
-
Other comprehensive (loss) income
$ (12) $
4 $
(8)
$ 336 $ (129) $ 207
$ 599 $ (237) $ 362
Accumulated other comprehensive income (loss) balances were as follows:
Net unrealized Total accumulated
Foreign
currency
translation
adjustment
$
loss on cash
flow hedging
instruments
$
other
comprehensive
income (loss)
$ (553)
-
362
(191)
-
207
16
-
(8)
8
$
-
-
-
-
-
(1)
(1)
-
-
(1)
-
-
-
-
-
-
-
-
(1)
(1)
$
$
Net unrealized gain (loss)
on securities available for sale
Portion of
unrealized gain
(loss) on Non-OTTI
securities
$ (553)
149
327
(77)
21
144
88
8
-
96
$
Portion of
unrealized loss
on OTTI
securities
-
$
(149)
35
(114)
(21)
64
(71)
(8)
(7)
(86)
$
Balance at December 31, 2008
Transfer to OTTI securities
Other net changes
Balance at December 31, 2009
Transfer to OTTI securities
Other net changes
Balance at December 31, 2010
Transfer to OTTI securities
Other net changes
Balance at December 31, 2011
- 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)
20. Employee Incentive, Deferred Compensation, and Retirement Plans
A summary of the Company’s stock-based compensation 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
2011
$ 61
12
23
3
$ 99
$ (37)
2010
$ 53
21
10
3
$ 87
$ (33)
2009
$ 44
27
1
3
$ 75
$ (29)
The Company issues shares for stock options and restricted stock awards from treasury stock. At December 31, 2011, the
Company was authorized to grant up to 52 million common shares under its existing stock incentive plans.
As of December 31, 2011, there was $192 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 2016
with a remaining weighted-average service period of 2.8 years.
Stock Option Plans
The Company’s 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 a three- to five-year period from the
date of grant. Certain options were granted at an exercise price above the market value of common stock on the date of grant
(i.e., premium-priced options).
The Company’s stock option activity is summarized below:
Outstanding at December 31, 2010
Granted
Exercised
Forfeited
Expired
Outstanding at December 31, 2011
Vested and expected to vest at December 31, 2011
Vested and exercisable at December 31, 2011
Weighted-
Average
Exercise Price
per Share
$ 16.41
$ 13.07
$ 12.03
$ 16.32
$ 17.21
$ 16.20
$ 16.31
$ 17.53
Number
of Options
60
13
(8)
(2)
(5)
58
54
31
Weighted-
Average
Remaining
Contractual
Life (in years)
Aggregate
Intrinsic
Value
6.30
6.15
4.24
$
$
$
4
4
3
The aggregate intrinsic value in the table above represents the difference between CSC’s closing stock price and the exercise
price of each in-the-money option on the last trading day of the period presented.
- 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)
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
2011
$ 4.16
96
$
7
$
38
$
2010
$ 5.36
35
$
5
$
17
$
2009
$ 6.42
53
$
8
$
25
$
Management uses a 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 CSC’s stock. Dividend yield is based on the average
historical CSC dividend yield. The risk-free interest rate is based on the yield of a U.S. Treasury zero-coupon issue with a
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
Company’s 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
Expected life (in years)
Restricted Stock Plans
2011
.85%
36%
2.1%
0.0 – 6.3
2010
.71%
35%
2.8%
3.0 – 5.9
2009
.58%
52%
3.0%
1.4 – 5.3
The Company’s stock incentive plans provide for granting restricted stock awards and restricted stock units to employees,
officers, and directors. Restricted stock units are awards that entitle the holder to receive shares of CSC’s common stock
following a vesting period.
Restricted stock awards and units are restricted from transfer or sale and generally vest annually over a three- to five-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 Company’s stock on the date of grant. The grant date fair value is
amortized to compensation expense on a straight-line basis over the requisite service period. The total fair value of the
restricted stock awards and units that vested during each of the years 2011, 2010, and 2009 was $24 million, $27 million, and
$28 million, respectively.
The Company’s restricted stock awards and units activity is summarized below:
Outstanding at December 31, 2010
Granted
Vested
Forfeited
Outstanding at December 31, 2011
Restricted Stock Awards
Weighted-
Average Grant
Date Fair Value
per Share
$ 20.49
$
-
$ 20.69
-
$
-
$
Number
of Shares
1
-
(1)
-
-
Restricted Stock Units
Weighted-
Average Grant
Date Fair Value
per Unit
$ 16.04
$ 11.94
$ 16.28
$
-
$ 13.23
Number
of Units
4
5
(1)
-
8
- 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)
Employee Stock Purchase Plan
Under the Company’s Employee Stock Purchase Plan (ESPP), eligible employees can purchase shares of CSC’s common
stock using amounts withheld through payroll deductions, subject to limitations. Payroll deductions are accumulated during
six-month offering periods that start each year on February 1st and August 1st. Share purchases are made on the last trading
day of each three-month purchase period within the offering period. The three-month purchase periods end on January 31st,
April 30th, July 31st, and October 31st of each year. The purchase price for each share of common stock is 85% of the fair
market value of the shares on the last trading day of the purchase period. At December 31, 2011, the Company had 45 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 Company’s
deferred compensation plan for officers permits participants to defer the receipt of certain cash compensation. The deferred
compensation liability was $128 million and $139 million at December 31, 2011 and 2010, respectively. The Company’s
deferred compensation plan for non-employee directors permits participants to defer receipt of all or a portion of their director
fees and to receive either a grant of stock options, or upon ceasing to serve as a director, the number of shares of CSC’s
common stock that would have resulted from investing the deferred fee amount into CSC’s common stock.
Retirement Plan
Upon completing three months of consecutive service, employees of the Company can participate in the Company’s qualified
retirement plan, the SchwabPlan® Retirement Savings and Investment Plan. The Company may match certain employee
contributions or make additional contributions to this plan at its discretion. The Company’s total contribution expense was
$53 million, $50 million, and $49 million in 2011, 2010, and 2009, respectively.
21. Money Market Mutual Fund Charges
In 2010, the Company decided to cover the net remaining losses recognized by Schwab money market mutual funds as a
result of their investments in a single structured investment vehicle that defaulted in 2008 and recorded a charge of
$132 million.
22. Taxes on Income
The components of income tax expense are as follows:
Year Ended December 31,
Current:
Federal
State
Total current
Deferred:
Federal
State
Total deferred
Taxes on income
2011
2010
2009
$
$
424
52
476
44
8
52
528
$
$
326
50
376
(43)
(8)
(51)
325
$
$
400
73
473
12
4
16
489
- 82 -
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 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
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
Unrealized gain on securities available for sale – net
Total deferred tax liabilities
Deferred tax asset – net
2011
2010
$
$
173
37
8
40
9
267
(42)
(162)
(11)
(20)
(5)
(240)
27
$
$
124
44
8
104
10
290
(34)
(45)
(11)
(20)
(10)
(120)
170
The Company determined that no material valuation allowance against deferred tax assets at December 31, 2011 and 2010
was necessary.
A reconciliation of the federal statutory income tax rate to the effective income tax rate is as follows:
2010
Year Ended December 31,
35.0%
Federal statutory income tax rate
3.3
State income taxes, net of federal tax benefit
Non-deductible penalties (1)
2.7
0.7
Other
Effective income tax rate
41.7%
(1) Amount reflects the impact of regulatory settlements relating to the Schwab YieldPlus Fund in 2010.
2011
35.0%
2.5
-
0.4
37.9%
2009
35.0%
3.7
-
(0.4)
38.3%
The Company’s unrecognized tax benefits, which are included in accrued expenses and other liabilities, represent the
difference between positions taken on tax return filings and estimated potential tax settlement outcomes. Resolving these
uncertain tax matters as of December 31, 2011, in the Company’s favor would reduce taxes on income by $9 million, net of
the federal tax benefit.
A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:
December 31,
Balance at beginning of year
Additions for tax positions related to the current year
Additions for tax positions related to prior years
Reductions for tax positions related to prior years
Reductions due to lapse of statute of limitations
Reductions for settlements with tax authorities
Balance at end of year
2011
11
1
2
-
(1)
-
13
$
$
2010
10
4
3
(2)
(3)
(1)
11
$
$
The Company classifies interest and penalties related to unrecognized tax benefits as a component of income tax expense,
which were not material in 2011, 2010, or 2009. The Company’s liability for estimated interest on unrecognized tax benefits
was not material at December 31, 2011 or 2010.
- 83 -
THE CHARLES SCHWAB CORPORATION
Notes to Consolidated Financial Statements
(Tabular Amounts in Millions, Except Per Share Data, Option Price Amounts, Ratios, or as Noted)
Federal tax examinations for all years ending through December 31, 2007, have been completed. The years open to
examination by state and local governments vary by jurisdiction.
23. Earnings Per Share
Basic EPS is computed by dividing net income available to common stockholders 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 include the effect of outstanding stock
options and unvested restricted stock awards and units. EPS under the basic and diluted computations is as follows:
Year Ended December 31,
2009
Net income available to common stockholders (1)
787
Weighted-average common shares outstanding — basic
1,156
Common stock equivalent shares related to stock incentive plans
4
Weighted-average common shares outstanding — diluted (2)
1,160
Basic EPS
.68
.68
Diluted EPS
(1) Net income available to participating securities (unvested restricted shares) was not material in 2011, 2010, or 2009.
(2) Antidilutive stock options and restricted stock awards excluded from the calculation of diluted EPS were 63 million,
2011
864
1,227
2
1,229
.70
.70
2010
454
1,191
3
1,194
.38
.38
$
$
$
$
$
$
$
$
$
52 million, and 53 million shares in 2011, 2010, and 2009, respectively.
24. Regulatory Requirements
CSC is a savings and loan holding company and Schwab Bank, CSC’s depository institution subsidiary, is a federal savings
bank. Prior to July 21, 2011, CSC and Schwab Bank were both subject to supervision and regulation by the Office of Thrift
Supervision (OTS). The “Dodd-Frank Wall Street Reform and Consumer Protection Act” legislation (Dodd-Frank Act)
eliminated the OTS effective July 21, 2011. As a result, the Board of Governors of the Federal Reserve System (Federal
Reserve) became CSC’s primary regulator and the Office of the Comptroller of the Currency became the primary regulator of
Schwab Bank. Effective July 21, 2011, CSC is required by the Dodd-Frank Act to serve as a source of strength for Schwab
Bank. While under the OTS, CSC was required to have a “prudential level of capital” to support CSC’s risk profile. The OTS
did not historically subject savings and loan holding companies, such as CSC, to consolidated regulatory capital
requirements. However, under the Dodd-Frank Act, CSC will be subject to new minimum leverage and minimum risk-based
capital ratio requirements that will be set by the Federal Reserve that are at least as stringent as the requirements generally
applicable to insured depository institutions as of July 21, 2011.
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 also govern transactions with CSC and
its non-depository institution subsidiaries, including loans and other extensions of credit, investments and 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 a 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 minimum capital levels as specified in
federal banking laws and regulations. Failure to meet the minimum levels could result in certain mandatory, and possibly
additional discretionary actions by the regulators that, if undertaken, could have a direct material effect on Schwab Bank. At
December 31, 2011, CSC and Schwab Bank met the capital level requirements.
- 84 -
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, 2011
Tier 1 Risk-Based Capital
Total Risk-Based Capital
Tier 1 Core Capital
Tangible Equity
December 31, 2010
Tier 1 Risk-Based Capital
Total Risk-Based Capital
Tier 1 Core Capital
Tangible Equity
N/A Not applicable.
Actual
Minimum Capital
Requirement
Amount
Ratio
Amount
Ratio
Minimum to be
Well Capitalized
Ratio
Amount
$ 4,984
$ 5,036
$ 4,984
$ 4,984
$ 4,157
$ 4,209
$ 4,157
$ 4,157
23.4%
23.7%
7.5%
7.5%
23.7%
24.0%
7.6%
7.6%
850
$
$ 1,701
$ 2,642
$ 1,321
$
702
$ 1,404
$ 2,195
$ 1,098
4.0%
8.0%
4.0%
2.0%
4.0%
8.0%
4.0%
2.0%
$ 1,276
$ 2,126
$ 3,302
N/A
$ 1,053
$ 1,755
$ 2,744
N/A
6.0%
10.0%
5.0%
6.0%
10.0%
5.0%
Based on its regulatory capital ratios at December 31, 2011 and 2010, Schwab Bank is considered well capitalized (the
highest category) pursuant to banking regulatory guidelines. There are no conditions or events since December 31, 2011, that
management believes have changed Schwab Bank’s capital category.
The Federal Reserve requires Schwab Bank to maintain reserve balances at the Federal Reserve Bank based on certain deposit
levels. Schwab Bank’s average reserve requirement was $1.1 billion and $918 million in 2011 and 2010, respectively.
CSC’s principal U.S. broker-dealers are Schwab and optionsXpress, Inc. optionsXpress, Inc. is a wholly-owned subsidiary of
optionsXpress. Schwab and optionsXpress, Inc. are both subject to Rule 15c3-1 under the Securities Exchange Act of 1934
(the Uniform Net Capital Rule). Schwab and optionsXpress, Inc. compute 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 a minimum dollar requirement ($250,000 for Schwab),
which is based on the type of business conducted by the broker-dealer. Under the alternative method, a broker-dealer may not
repay subordinated borrowings, pay cash dividends, or make any unsecured advances or loans to its parent company or
employees if such payment would result in a net capital amount of less than 5% of aggregate debit balances or less than 120%
of its minimum dollar requirement.
optionsXpress, Inc. is also subject to Commodity Futures Trading Commission Regulation 1.17 (Reg. 1.17) under the
Commodity Exchange Act, which also requires the maintenance of minimum net capital. optionsXpress, Inc., as a futures
commission merchant, is required to maintain minimum net capital equal to the greater of its net capital requirement under
Reg. 1.17 ($1 million), or the sum of 8% of the total risk margin requirements for all positions carried in client accounts and
8% of the total risk margin requirements for all positions carried in non-client accounts (as defined in Reg. 1.17).
Net capital and net capital requirements for Schwab and optionsXpress, Inc. at December 31, 2011, are as follows:
% of
Aggregate
Net Capital Debit Balances
Schwab
optionsXpress, Inc.
$ 1,188
78
$
10%
29%
Minimum
Net Capital
Required
$ 0.250
1
$
2% of
Aggregate
Debit Balances
$
$
240
5
Net Capital
in Excess of
5% of
Aggregate
Net Capital
in Excess of
Required
Net Capital Debit Balances
$
$
948
73
588
65
$
$
Schwab and optionsXpress, Inc. are also subject to Rule 15c3-3 under the Securities Exchange Act of 1934 and/or other
applicable regulations, which require them to maintain cash or qualified securities in a segregated reserve account for the
- 85 -
THE CHARLES SCHWAB CORPORATION
Notes to Consolidated Financial Statements
(Tabular Amounts in Millions, Except Per Share Data, Option Price Amounts, Ratios, or as Noted)
exclusive benefit of clients. In accordance with Rule 15c3-3, Schwab and optionsXpress, Inc. had portions of their cash and
investments segregated for the exclusive benefit of clients at December 31, 2011. 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, 2011 for Schwab and optionsXpress, Inc.
totaled $26.3 billion. On January 4, 2012, Schwab and optionsXpress, Inc. deposited a net amount of $1.1 billion of excess
segregated cash into their segregated reserve bank accounts. Cash and investments required to be segregated and on deposit
for regulatory purposes at December 31, 2010 for Schwab was $22.0 billion. On January 4, 2011, Schwab withdrew a net
amount of $194 million of excess segregated cash from its segregated reserve bank accounts.
25.
Segment Information
Operating segments are defined as components of a company in which separate financial information is evaluated regularly by
the chief operating decision maker, or decision-making group, in deciding how to allocate 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 Company’s two reportable segments are Investor Services and Institutional Services.
The Investor Services segment provides retail brokerage and banking services to individual investors. The Institutional
Services segment provides custodial, trading, and support services to independent investment advisors. The Institutional
Services segment also provides retirement plan services, specialty brokerage services, and mutual fund clearing services, and
supports the availability of Schwab proprietary mutual funds and collective trust funds on third-party platforms. Banking
revenues and expenses are allocated to the Company’s two segments based on which segment services the client.
The accounting policies of the segments are the same as those described in note “2 – Summary of Significant Accounting
Policies.” Financial information for the Company’s 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 expenses (e.g., compensation and benefits, depreciation and amortization, and professional services) to the
business activities driving segment expenses (e.g., client service, opening new accounts, or business development) and a
funds transfer pricing methodology to allocate certain revenues.
The Company evaluates the performance of its segments on a pre-tax basis, excluding items such as impairment charges on
non-financial assets, discontinued operations, extraordinary items, and significant restructuring and other charges. Segment
assets and liabilities are not disclosed because the balances are not used for evaluating segment performance and deciding
how to allocate resources to segments. 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.
- 86 -
THE CHARLES SCHWAB CORPORATION
Notes to Consolidated Financial Statements
(Tabular Amounts in Millions, Except Per Share Data, Option Price Amounts, Ratios, or as Noted)
Financial information for the Company’s reportable segments is presented in the following table:
Year Ended December 31,
2011
2010
2009
2011
2010
2009
2011
2010
2009
2011
Investor Services
Institutional Services
Unallocated
Total
2010
2009
$ 1,053 $
1,468
625
85
(15)
Net Revenues
Asset management and
administration fees
Net interest revenue
Trading revenue
Other
Provision for loan losses
Net impairment losses
on securities
(27)
3,189
Total net revenues
Expenses Excluding Interest (1) 2,261
Income before taxes on income $
Taxes on income
Net Income
928 $
976 $
968 $
1,297
557
70
(23)
1,058
679
93
(34)
875 $
257
302
75
(3)
846 $
227
273
65
(4)
907 $
187
317
82
(4)
- $
-
-
-
-
(32)
2,845
(54)
(4)
2,710 1,502
(4)
1,403
(6)
1,483
-
-
2,065
1,906 1,039
804 $
463 $
780 $
960
443 $
929
554 $
(1)
1 $
444
(444) $
82 3,299
(82) $ 1,392 $
- $
-
-
-
-
-
-
- $ 1,928 $ 1,822 $ 1,875
1,524 1,245
- 1,725
996
927
-
175
160
-
(38)
(18)
-
830
135
(27)
-
(31)
- 4,691
(36)
(60)
4,248 4,193
3,469 2,917
779 $ 1,276
(489)
(325)
787
454 $
(528)
864 $
$
Capital expenditures
$
120 $
91 $
95 $
70 $
36 $
44 $
- $
- $
- $
190 $
127 $
Depreciation and amortization $
47 $
(1) Unallocated amount primarily includes class action litigation and regulatory reserves of $320 million and money market mutual fund charges of
155 $
108 $
52 $
93 $
100 $
1 $
59 $
- $
- $
146 $
139
159
$132 million in 2010, and facilities and severance charges relating to the Company’s cost reduction measures in 2009.
Fees received from Schwab’s proprietary mutual funds represented approximately 10%, 14%, and 23% of the Company’s net
revenues in 2011, 2010, and 2009, respectively. Except for Schwab’s proprietary mutual funds, which are considered a single
client for purposes of this computation, no single client accounted for more than 10% of the Company’s net revenues in 2011,
2010, or 2009. Substantially all of the Company’s revenues and assets are generated or located in the U.S. The percentage of
Schwab’s total client accounts located in California was approximately 23% at December 31, 2011, 2010, and 2009.
26.
Subsequent Event
On January 26, 2012, the Company issued and sold 400,000 shares of fixed-to-floating rate non-cumulative perpetual
preferred stock, Series A, $0.01 par value, with a liquidation preference of $1,000 per share (Series A Preferred Stock). The
Series A Preferred Stock has a fixed dividend rate of 7% until 2022 and a floating rate thereafter. Net proceeds received from
the sale were $394 million and are being used for general corporate purposes, including, without limitation, to support the
Company’s balance sheet growth and the potential migration of certain client cash balances to deposit accounts at Schwab
Bank.
Under the terms of the Series A Preferred Stock issued in January 2012, the Company’s ability to pay dividends on, make
distributions with respect to, or to repurchase, redeem or acquire its common stock is subject to restrictions in the event that
the Company does not declare and either pay or set aside a sum sufficient for payment of dividends on the Series A Preferred
Stock for the immediately preceding dividend period.
- 87 -
THE CHARLES SCHWAB CORPORATION
Notes to Consolidated Financial Statements
(Tabular Amounts in Millions, Except Per Share Data, Option Price Amounts, Ratios, or as Noted)
27. The Charles Schwab Corporation – Parent Company Only Financial Statements
Condensed Statements of Income
Year Ended December 31,
Interest revenue
Interest expense
Net interest revenue
Other revenues
Expenses excluding interest
Loss before income tax benefit and equity in net income of subsidiaries
Income tax benefit
Loss before equity in net income of subsidiaries
Equity in net income of subsidiaries:
Equity in undistributed net income of subsidiaries
Dividends from bank subsidiary
Dividends from non-bank subsidiaries
Net Income
$
$
2011
4
(103)
(99)
8
(30)
(121)
43
(78)
600
150
192
864
Condensed Balance Sheets
December 31,
Assets
Cash and cash equivalents
Receivables from subsidiaries
Other securities owned – at fair value
Loans to non-bank subsidiaries
Investment in non-bank subsidiaries
Investment in bank subsidiary
Equipment, office facilities, and property – net
Other assets
Total assets
Liabilities and Stockholders’ Equity
Accrued expenses and other liabilities
Payables to subsidiaries
Long-term debt
Total liabilities
Stockholders’ equity
Total liabilities and stockholders’ equity
2010
3
(86)
(83)
6
(18)
(95)
36
(59)
478
-
35
454
2011
852
57
77
363
3,363
5,009
4
64
9,789
158
16
1,901
2,075
7,714
9,789
$
$
$
$
$
$
2009
8
(66)
(58)
33
(15)
(40)
16
(24)
228
-
583
787
2010
1,149
92
91
265
2,509
4,189
5
91
8,391
232
33
1,900
2,165
6,226
8,391
$
$
$
$
$
$
- 88 -
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:
Equity in undistributed earnings of subsidiaries
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 subsidiaries – net
Increase in investments in subsidiaries
Cash payments for business combinations
and investments, net of cash acquired
Net cash used for investing activities
Cash Flows from Financing Activities
Issuance of long-term debt
Repayment of long-term debt
Net proceeds from common stock offering
Dividends paid
Proceeds from stock options exercised and other
Other financing activities
Net cash (used for) provided by financing activities
(Decrease) Increase in Cash and Cash Equivalents
Cash and Cash Equivalents at Beginning of Year
Cash and Cash Equivalents at End of Year
2011
2010
2009
$
864
$
454
$
787
(591)
3
1
-
6
26
(76)
233
24
(366)
8
(334)
-
-
-
(295)
96
3
(196)
(297)
1,149
852
$
(478)
3
(3)
11
422
40
(2)
447
63
(1,025)
4
(958)
701
(200)
543
(288)
35
(6)
785
274
875
1,149
$
(253)
20
(35)
23
(404)
(16)
(1)
121
279
(725)
-
(446)
747
(76)
-
(279)
53
-
445
120
755
875
$
- 89 -
THE CHARLES SCHWAB CORPORATION
Notes to Consolidated Financial Statements
(Tabular Amounts in Millions, Except Per Share Data, Option Price Amounts, Ratios, or as Noted)
28. Quarterly Financial Information (Unaudited)
Fourth
Quarter
Third
Quarter
Second
Quarter
First
Quarter
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
13.41
10.75
1,113
861
163
1,271
.13
.13
.06
1,181
821
220
1,229
.18
.18
.06
1,190
804
238
1,210
.20
.20
.06
Year Ended December 31, 2011:
Net Revenues
Expenses Excluding Interest
Net Income
Weighted Average Common Shares Outstanding – 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 (1):
High
Low
Year Ended December 31, 2010:
Net Revenues
Expenses Excluding Interest
Net Income
Weighted Average Common Shares Outstanding – 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 (1):
High
Low
(1) Price/earnings ratio is computed by dividing the high and low market prices by diluted earnings per share for the
1,127
898
119
1,200
.10
.10
.06
1,063
864
124
1,194
.10
.10
.06
1,080
742
205
1,195
.17
.17
.06
15.43
12.76
16.72
11.03
17.42
13.98
18.72
15.78
19.88
14.18
47
38
19
15
38
31
25
16
31
26
41
30
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
1,207
813
243
1,207
.20
.20
.06
19.45
17.16
34
30
978
965
6
1,188
-
-
.06
19.78
17.50
40
36
preceding 12-month period ending on the last day of the quarter presented.
- 90 -
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, 2011 and 2010, and the related consolidated statements of income, stockholders’ equity, and cash flows for each of the three
years in the period ended December 31, 2011. Our audits also included the financial statement schedule of the Company on page F-2. We
also have audited the Company’s internal control over financial reporting as of December 31, 2011, based on criteria established in Internal
Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. The Company’s
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 Management’s 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 Company’s 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 a 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 a material weakness exists, and 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 a reasonable basis for our opinions.
A company’s internal control over financial reporting is a process designed by, or under the supervision of, the company’s principal
executive and principal financial officers, or persons performing similar functions, and effected by the company’s 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. A company’s internal control over
financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately
and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are
recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles and that
receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the
company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of
the company’s assets that could have a 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 a timely basis. Also,
projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that
the controls may become inadequate because of changes 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, 2011 and 2010, and the results of their operations and their cash flows for each of the three years in the
period ended December 31, 2011, 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 a 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, 2011, based on the criteria established in Internal Control –
Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.
/s/ Deloitte & Touche LLP
San Francisco, California
February 23, 2012
- 91 -
THE CHARLES SCHWAB CORPORATION
Management’s Report on Internal Control Over Financial Reporting
Management of The Charles Schwab Corporation, together with its subsidiaries (the Company), is responsible for establishing
and maintaining adequate internal control over financial reporting. The Company’s internal control over financial reporting is
a process designed under the supervision of and effected by the Company’s 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, 2011, management conducted an assessment of the effectiveness of the Company’s 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
Company’s internal control over financial reporting was effective as of December 31, 2011.
The Company’s 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 Company’s assets that could
have a material effect on the Company’s financial statements.
The Company’s internal control over financial reporting as of December 31, 2011, has been audited by Deloitte & Touche
LLP, an independent registered public accounting firm, as stated in their report appearing on the previous page.
- 92 -
THE CHARLES SCHWAB CORPORATION
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial
Disclosure
None.
Item 9A. Controls and Procedures
Evaluation of disclosure controls and procedures: The management of the Company, with the participation of the Company’s
Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the Company’s disclosure controls
and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934) as of December 31, 2011. Based on
this evaluation, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that the Company’s
disclosure controls and procedures were effective as of December 31, 2011.
Changes in internal control over financial reporting: No change in the Company’s internal control over financial reporting
(as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934) was identified during the quarter ended
December 31, 2011, that has materially affected, or is reasonably likely to materially affect, the Company’s internal control
over financial reporting.
Management’s Report on Internal Control Over Financial Reporting and the Report of Independent Registered Public
Accounting Firm are included in “Item 8 – Financial Statements and Supplementary Data.”
Item 9B. Other Information
None.
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 Company’s definitive proxy statement for its annual meeting of stockholders to be filed with the SEC pursuant
to Regulation 14A by April 30, 2012 (the Proxy Statement) under “Members of the Board of Directors,” “Corporate
Governance Information,” “Director Nominations,” and “Section 16(a) Beneficial Ownership Reporting Compliance.” The
Company’s Code of Conduct and Business Ethics, applicable to directors and all employees, including senior financial
officers, is available on the Company’s 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 to the Securities Exchange Act of 1934, the Company will make such disclosures on this website.
- 93 -
THE CHARLES SCHWAB CORPORATION
Executive Officers of the Registrant
The following table provides certain information about each of the Company’s executive officers as of December 31, 2011.
Executive Officers of the Registrant
Name
Age
Title
Charles R. Schwab
Walter W. Bettinger II
Jay L. Allen
Benjamin L. Brigeman
John S. Clendening
Carrie E. Dwyer
Joseph R. Martinetto
James D. McCool
74
51
55
49
49
61
49
53
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 – Shared Strategic Services
Executive Vice President, General Counsel and Corporate
Secretary
Executive Vice President and Chief Financial Officer
Executive Vice President – Institutional Services
Mr. Schwab has been Chairman of the Board and a director of CSC since its incorporation in 1986. He also served as Chief
Executive Officer of CSC from 1986 to 1997, and as Co-Chief Executive Officer from 1998 until 2003. He was re-appointed
Chief Executive Officer in 2004 and served in that role until 2008. Mr. Schwab is also Chairman of Charles Schwab & Co.,
Inc. and Charles Schwab Bank, and a trustee of The Charles Schwab Family of Funds, Schwab Investments, Schwab Capital
Trust, Schwab Annuity Portfolios, Laudus Trust, and Laudus Institutional Trust, all registered investment companies.
Mr. Bettinger has been President and Chief Executive Officer of CSC since 2008. In 2010, he took on responsibility as Chief
Executive Officer of Charles Schwab Bank. He also serves on the Board of Directors of CSC, Charles Schwab & Co., Inc.
and Charles Schwab Bank, and as a trustee of The Charles Schwab Family of Funds, Schwab Investments, Schwab Capital
Trust, Schwab Annuity Portfolios, Laudus Trust, Laudus Institutional Trust, and Schwab Strategic Trust, all registered
investment companies. Prior to assuming his current role, Mr. Bettinger served as President and Chief Operating Officer of
CSC from 2007 until 2008 and as Executive Vice President and President – Schwab Investor Services of CSC and Schwab
from 2005 to 2007. He served as Executive 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 – Human Resources and Employee Services of CSC and Schwab since 2007.
He served as Senior Vice President – 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.
Mr. Brigeman served as Executive Vice President – Investor Services of CSC and Schwab from 2007 to February 2012. Mr.
Brigeman was Senior Vice President – 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. Mr. Brigeman
stepped down as Executive Vice President – Investor Services of CSC and Schwab, effective February 15, 2012.
- 94 -
THE CHARLES SCHWAB CORPORATION
Mr. Clendening has been Executive Vice President – Shared Strategic Services of CSC and Schwab since 2009. He served as
Executive Vice President – Solution Services of CSC and Schwab from 2008 to 2009 and as Executive Vice President –
Client Experience, Schwab Investor Services of CSC in 2007 and of Schwab from 2006 to 2008. Mr. Clendening served as
Executive Vice President and President – Individual Investor Enterprise Marketing of Schwab from 2005 to 2007. He joined
Schwab in 2004 as Senior Vice President – Individual Investor Enterprise Marketing.
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.
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.
Mr. McCool has been Executive Vice President – Institutional Services of CSC and Schwab since 2008. Mr. McCool served
as Executive Vice President – Schwab Corporate and Retirement Services of CSC from 2007 until 2008 and of Schwab from
2006 until 2008. Mr. McCool served as Senior Vice President – Corporate Services of Schwab from 2004 until 2006. Mr.
McCool also served as President and Chief Executive Officer of The Charles Schwab Trust Company (CSTC) from 2005
until 2007. Mr. McCool served as Senior Vice President – Plan Administrative Services of CSTC from 2004 until 2005, Chief
Operating Officer of CSTC from 2003 until 2004, and Vice President – Development and Business Technology of CSTC
from 2002 until 2003. Mr. McCool joined Schwab in 1995.
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 Discussion and Analysis,” “Executive Compensation Tables – 2011 Summary Compensation
Table,” “Executive Compensation Tables – 2011 Grants of Plan-Based Awards Table,” “Executive Compensation Tables –
Narrative to Summary Compensation and Grants of Plan-Based Awards Tables,” “Executive Compensation Tables – 2011
Termination and Change in Control Benefits Table,” “Executive Compensation Tables – Outstanding Equity Awards as of
December 31, 2011,” “Executive Compensation Tables – 2011 Option Exercises and Stock Vested Table,” “Executive
Compensation Tables – 2011 Nonqualified Deferred Compensation Table,” “Director Compensation,” and “Compensation
Committee Interlocks and Insider Participation.” In addition, the information from a portion of the Proxy Statement under
“Compensation Committee Report,” is incorporated by reference from the Proxy Statement and furnished on this Form 10-K,
and shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, nor shall it be deemed
incorporated by reference in any filing under the Securities Act of 1933.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters
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 “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 “Director Independence.”
- 95 -
THE CHARLES SCHWAB CORPORATION
Item 14. Principal Accountant Fees and Services
The information required to be furnished pursuant to this item is incorporated by reference from a portion of the Proxy
Statement under “Auditor Fees.”
PART IV
Item 15. Exhibits and Financial Statement Schedule
(a) Documents filed as part of this Report
1. Financial Statements
The financial statements and independent auditors’ report are included in “Item 8 – 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
2. 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-1.
(b) Exhibits
The exhibits listed below are filed as part of this annual report on Form 10-K.
Exhibit
Number
2.1
3.11
3.14
3.15
Exhibit
Agreement and Plan of Merger, dated March 18, 2011, by and among The Charles Schwab
Corporation, Neon Acquisition Corp. and optionsXpress Holdings, Inc., filed as Exhibit 2.1 to the
Registrant’s Form 8-K dated March 18, 2011 and incorporated herein by reference.
Fifth Restated Certificate of Incorporation, effective May 7, 2001, of the Registrant, filed as
Exhibit 3.11 to the Registrant’s Form 10-Q for the quarter ended September 30, 2011 and incorporated
herein by reference.
Fourth Restated Bylaws, as amended on January 27, 2010, of the Registrant, filed as Exhibit 3.1 to the
Registrant’s Form 8-K dated January 27, 2010 and incorporated herein by reference.
Certificate of Designations of Fixed to Floating Rate Non-Cumulative Perpetual Preferred Stock, Series
A of The Charles Schwab Corporation filed as Exhibit 3.15 to the Registrant’s Form 8-K dated
January 24, 2012 and incorporated herein by reference.
- 96 -
THE CHARLES SCHWAB CORPORATION
Exhibit
Number
4.2
10.1
10.4
10.57
10.72
10.271
10.272
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 a consolidated basis. Copies of instruments with respect to long-term debt of lesser
amounts will be provided to the SEC upon request.
Exhibit
Voting Agreement, dated as of March 18, 2011, by and among The Charles Schwab Corporation, G-Bar
Limited Partnership, JG 2002 delta Trust and optionsXpress Holdings, Inc., filed as Exhibit 10.1 to the
Registrant’s Form 8-K dated March 18, 2011 and incorporated herein by reference.
Form of Release Agreement dated as of March 31, 1987 among BAC, Registrant, Schwab Holdings,
Inc., Charles Schwab & Co., Inc. and former shareholders of Schwab Holdings, Inc., filed as the
identically-numbered exhibit to Registrant’s Registration Statement No. 33-16192 on Form S-1 and
incorporated herein by reference.
Registration Rights and Stock Restriction Agreement, dated as of March 31, 1987, between the
Registrant and the holders of the Common Stock, filed as Exhibit 4.23 to Registrant’s Registration
Statement No. 33-16192 on Form S-1 and incorporated herein by reference.
Restatement of Assignment and License, as amended January 25, 1988, among Charles Schwab & Co.,
Inc., Charles R. Schwab and the Registrant, filed as Exhibit 10.72 to the Registrant’s Form 10-K for the
year ended December 31, 2009 and incorporated herein by reference.
The Charles Schwab Corporation Directors’ Deferred Compensation Plan, as amended through
December 8, 2004, filed as Exhibit 10.271 to the Registrant’s Form 10-K for the year ended
December 31, 2009 and incorporated herein by reference.
The Charles Schwab Corporation Deferred Compensation Plan, as amended through December 8, 2004,
filed as Exhibit 10.272 to the Registrant’s Form 10-K for the year ended December 31, 2009 and
incorporated herein by reference.
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 W. Bettinger under The Charles Schwab
Corporation 2004 Stock Incentive Plan dated February 20, 2007, filed as Exhibit 10.289 to the
Registrant’s Form 10-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 Registrant’s
Form 10-Q for the quarter ended March 31, 2007 and incorporated herein by reference.
10.294
10.295
10.296
Form of Notice and Restricted Stock Agreement for Joseph R. Martinetto under The Charles Schwab
Corporation 2004 Stock Incentive Plan dated May 18, 2007, filed as Exhibit 10.294 to the Registrant’s
Form 10-Q for the quarter ended June 30, 2007 and incorporated herein by reference.
Form of Notice and Nonqualified Stock Option Agreement for Joseph R. Martinetto under The Charles
Schwab Corporation 2004 Stock Incentive Plan dated May 18, 2007, filed as Exhibit 10.295 to the
Registrant’s Form 10-Q for the quarter ended June 30, 2007 and incorporated herein by reference.
Stock Purchase Agreement dated July 2, 2007, by and among Charles R. Schwab, Helen O. Schwab,
The Charles & Helen Schwab Living Trust, HOS Family Partners, LLC, 188 Partners, LP, and the
Charles & Helen Schwab Foundation, and The Charles Schwab Corporation, filed as Exhibit 10.296 to
the Registrant’s Form 10-Q for the quarter ended June 30, 2007 and incorporated herein by reference.
(2)
(2)
(2)
(2)
(2)
(2)
(2)
- 97 -
THE CHARLES SCHWAB CORPORATION
Exhibit
Number
Exhibit
10.298 Directed Employee Benefit Trust Agreement under the SchwabPlan Retirement Savings and Investment
Plan dated August 17, 2007, filed as Exhibit 10.298 to the Registrant’s Form 10-Q for the quarter ended
September 30, 2007 and incorporated herein by reference.
10.300
10.301
10.302
10.306
10.307
10.309
10.311
10.312
10.314
10.316
10.317
10.318
The Charles Schwab Corporation Employee Stock Incentive Plan, as amended and restated as of
December 12, 2007, filed as Exhibit 10.300 to the Registrant’s Form 10-K for the year ended
December 31, 2007 and incorporated herein by reference.
The Charles Schwab Corporation 1992 Stock Incentive Plan, as amended and restated as of
December 12, 2007, filed as Exhibit 10.301 to the Registrant’s Form 10-K for the year ended
December 31, 2007 and incorporated herein by reference.
The Charles Schwab Corporation 2001 Stock Incentive Plan, as amended and restated as of
December 12, 2007, filed as Exhibit 10.302 to the Registrant’s Form 10-K for the year ended
December 31, 2007 and incorporated herein by reference.
Form of Notice and Nonqualified Stock Option Agreement under The Charles Schwab Corporation
2004 Stock Incentive Plan, filed as Exhibit 10.306 to the Registrant’s Form 10-K for the year ended
December 31, 2007 and incorporated herein by reference.
Form of Notice and Restricted Stock Agreement under The Charles Schwab Corporation 2004 Stock
Incentive Plan, filed as Exhibit 10.307 to the Registrant’s Form 10-K for the year ended December 31,
2007 and incorporated herein by reference.
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 Registrant’s Form 10-K for the year ended
December 31, 2007 and incorporated herein by reference.
Form of Notice and Restricted Stock Agreement for Non-Employee Directors under The Charles
Schwab Corporation 2004 Stock Incentive Plan, filed as Exhibit 10.311 to the Registrant’s Form 10-K
for the year ended December 31, 2007 and incorporated herein by reference.
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 Registrant’s Form 10-K for the
year ended December 31, 2007 and incorporated herein by reference.
Employment Agreement dated as of March 13, 2008, between the Registrant and Charles R. Schwab,
filed as Exhibit 10.314 to the Registrant’s Form 10-Q for the quarter ended March 31, 2008 and
incorporated herein by reference.
Form of Notice and Restricted Stock Agreement for Walter W. Bettinger under the Charles Schwab
Corporation 2004 Stock Incentive Plan dated October 1, 2008, filed as Exhibit 10.316 to the
Registrant’s Form 10-Q for the quarter ended September 30, 2008 and incorporated herein by reference.
Form of Notice and Nonqualified Stock Option Agreement for Walter W. Bettinger under The Charles
Schwab Corporation 2004 Stock Incentive Plan dated October 1, 2008, filed as Exhibit 10.317 to the
Registrant’s Form 10-Q for the quarter ended September 30, 2008 and incorporated herein by reference.
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 Registrant’s Form 10-K for the
year ended December 31, 2008 and incorporated herein by reference.
(2)
(2)
(2)
(2)
(2)
(2)
(2)
(2)
(2)
(2)
(2)
(2)
(2)
- 98 -
THE CHARLES SCHWAB CORPORATION
Exhibit
Number
10.319
10.321
10.322
10.323
10.327
10.331
10.332
10.333
10.335
10.336
10.337
10.338
10.339
Exhibit
Form of Notice and Restricted Stock Unit Agreement for Non-Employee Directors under the Charles
Schwab Corporation 2004 Stock Incentive Plan, filed as Exhibit 10.319 to the Registrant’s Form 10-K
for the year ended December 31, 2008 and incorporated herein by reference.
The Charles Schwab Corporation Long Term Incentive Plan, as amended and restated as of October 23,
2008, filed as Exhibit 10.321 to the Registrant’s Form 10-K for the year ended December 31, 2008 and
incorporated herein by reference.
The Charles Schwab Corporation Deferred Compensation Plan II, as amended and restated as of
October 23, 2008, filed as Exhibit 10.322 to the Registrant’s Form 10-K for the year ended
December 31, 2008 and incorporated herein by reference.
The Charles Schwab Corporation Directors’ Deferred Compensation Plan II, as amended and restated
as of October 23, 2008, filed as Exhibit 10.323 to the Registrant’s Form 10-K for the year ended
December 31, 2008 and incorporated herein by reference.
The Charles Schwab Corporation 2004 Stock Incentive Plan, as amended and restated as of
December 10, 2009, filed as Exhibit 10.327 to the Registrant’s Form 10-K for the year ended
December 31, 2009 and incorporated herein by reference.
The Charles Schwab Corporation Corporate Executive Bonus Plan, restated to include amendments
approved at the Annual Meeting of Stockholders on May 13, 2010, filed as Exhibit 10.331 to the
Registrant’s Form 10-Q for the quarter ended June 30, 2010 and incorporated herein by reference.
Credit Agreement (364-Day Commitment) dated as of June 11, 2010, between the Registrant and the
financial institutions listed therein, filed as Exhibit 10.332 to the Registrant’s Form 10-Q for the quarter
ended June 30, 2010 and incorporated herein by reference.
Form of Notice and Retainer Restricted Stock Unit Agreement for Non-Employee Directors under The
Charles Schwab Corporation 2004 Stock Incentive Plan, filed as Exhibit 10.333 to the Registrant’s
Form 10-Q for the quarter ended September 30, 2010 and incorporated herein by reference.
Form of Notice and Restricted Stock Unit Agreement under The Charles Schwab Corporation 2004
Stock Incentive Plan, filed as Exhibit 10.335 to the Registrant’s Form 10-Q for the quarter ended
September 30, 2010 and incorporated herein by reference.
Form of Notice and Performance-Based Restricted Stock Unit Agreement under The Charles Schwab
Corporation 2004 Stock Incentive Plan, filed as Exhibit 10.336 to the Registrant’s Form 10-K for the
year ended December 31, 2010 and incorporated herein by reference.
The Charles Schwab Severance Pay Plan, as amended and restated effective July 1, 2011, filed as
Exhibit 10.337 to the Registrant’s Form 10-K for the year ended December 31, 2010 and incorporated
herein by reference.
The Charles Schwab Corporation 2004 Stock Incentive Plan, as approved at the Annual Meeting of
Stockholders on May 17, 2011 (supersedes Exhibit 10.327), filed as Exhibit 10.338 to the Registrant’s
Form 10-Q for the quarter ended June 30, 2011 and incorporated herein by reference.
Credit Agreement (364 – Day Commitment) dated as of June 10, 2011, between the Registrant and
financial institutions listed therein (supersedes Exhibit 10.332), filed as Exhibit 10.339 to the
Registrant’s Form 10-Q for the quarter ended June 30, 2011 and incorporated herein by reference.
(2)
(2)
(2)
(2)
(2)
(2)
(2)
(2)
(2)
(2)
(2)
- 99 -
THE CHARLES SCHWAB CORPORATION
Exhibit
Number
10.340
The Charles Schwab Severance Pay Plan, as Amended and Restated Effective January 1, 2012
(supersedes Exhibit 10.337).
Exhibit
10.341
Form of Notice and Restricted Stock Unit Agreement for Non-Employee Directors under The Charles
Schwab Corporation 2004 Stock Incentive Plan (supersedes Exhibit 10.319).
10.342
Form of Notice and Retainer Stock Option Agreement for Non-Employee Directors under The Charles
Schwab Corporation 2004 Stock Incentive Plan (supersedes exhibit 10.312).
10.343
Form of Notice and Performance-Based Restricted Stock Unit Agreement under The Charles Schwab
Corporation 2004 Stock Incentive Plan (supersedes Exhibit 10.336).
10.344
Form of Notice and Retainer Restricted Stock Unit Agreement for Non-Employee Directors under The
Charles Schwab Corporation 2004 Stock Incentive Plan (supersedes Exhibit 10.333).
10.345
Form of Notice and Nonqualified Stock Option Agreement under The Charles Schwab Corporation
2004 Stock Incentive Plan (supersedes Exhibit 10.306).
10.346
Form of Notice and Restricted Stock Unit Agreement under The Charles Schwab Corporation 2004
Stock Incentive Plan (supersedes Exhibit 10.335).
10.347
Form of Notice and Stock Option Agreement for Non-Employee Directors under The Charles Schwab
Corporation Directors’ Deferred Compensation Plan II.
12.1
Computation of Ratio of Earnings to Fixed Charges.
21.1
Subsidiaries of the Registrant.
23.1
Independent Registered Public Accounting Firm’s Consent.
31.1
31.2
32.1
32.2
Certification Pursuant to Rule 13a-14(a)/15d-14(a), As Adopted Pursuant to Section 302 of The
Sarbanes-Oxley Act of 2002.
Certification Pursuant to Rule 13a-14(a)/15d-14(a), As Adopted Pursuant to Section 302 of The
Sarbanes-Oxley Act of 2002.
Certification Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of The Sarbanes-
Oxley Act of 2002.
Certification Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of The Sarbanes-
Oxley Act of 2002.
101.INS 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
- 100 -
(2)
(2)
(2)
(2)
(2)
(2)
(2)
(2)
(1)
(1)
(3)
(3)
(3)
(3)
(3)
THE CHARLES SCHWAB CORPORATION
Exhibit
Number
Exhibit
101.PRE XBRL Taxonomy Extension Presentation
(3)
(1)
(2)
(3)
Furnished as an exhibit to this annual report on Form 10-K.
Management contract or compensatory plan.
Attached as Exhibit 101 to this Annual Report on Form 10-K for the annual period ended December 31,
2011, are the following materials formatted in XBRL (Extensible Business Reporting Language) (i) 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 (v) Notes to
Consolidated Financial Statements.
- 101 -
THE CHARLES SCHWAB CORPORATION
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this
report to be signed on its behalf by the undersigned, thereunto duly authorized, on February 23, 2012.
THE CHARLES SCHWAB CORPORATION
(Registrant)
BY:
/s/ Walter W. Bettinger II
Walter W. 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 23, 2012.
Signature / Title
Signature / Title
/s/ Walter W. Bettinger II
Walter W. Bettinger II,
President and Chief Executive Officer
/s/ Joseph R. Martinetto
Joseph R. Martinetto,
Executive Vice President
and Chief Financial Officer
(principal financial and accounting
officer)
/s/ Charles R. Schwab
Charles R. Schwab, Chairman of the Board
/s/ Nancy H. Bechtle
Nancy H. Bechtle, Director
/s/ C. Preston Butcher
C. Preston Butcher, Director
/s/ Stephen T. McLin
Stephen T. McLin, Director
/s/ Paula A. Sneed
Paula A. Sneed, Director
/s/ Robert N. Wilson
Robert N. Wilson, Director
/s/ Frank C. Herringer
Frank C. Herringer, Director
/s/ Arun Sarin
Arun Sarin, Director
/s/ Roger O. Walther
Roger O. Walther, Director
- 102 -
THE CHARLES SCHWAB CORPORATION
Index to Financial Statement Schedule
Schedule II - Valuation and Qualifying Accounts
Supplemental Financial Data for Charles Schwab Bank (Unaudited)
Page
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 Company’s consolidated financial statements and notes in
“Item 8 – Financial Statements and Supplementary Data.”
F-1
THE CHARLES SCHWAB CORPORATION
SCHEDULE II
Valuation and Qualifying Accounts
(In millions)
Balance at
Beginning
of Year
Additions
Charged
to Expense
Other (1)
Written off
of Year
Balance at
End
$
1
$
6
$
3
$
(8)
$
2
$
2
$
3
$
-
$
(4)
$
1
$
4
$
3
$
2
$
(7)
$
2
Description
For the year ended December 31, 2011:
Allowance for doubtful accounts of
brokerage clients (2)
For the year ended December 31, 2010:
Allowance for doubtful accounts of
brokerage clients (2)
For the year ended December 31, 2009:
Allowance for doubtful accounts of
brokerage clients (2)
(1)
Includes collections of previously written-off accounts
(2) Excludes banking-related valuation and qualifying accounts. See "Item 8 - Financial Statements and Supplementary Data -
Notes to Consolidated Financial Statements - 7. Loans to Banking Clients and Related Allowance for Loan 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 3 –
Statistical Disclosure by Bank Holding Companies. The accompanying unaudited financial information represents Charles
Schwab Bank (Schwab Bank), which is a subsidiary of The Charles Schwab Corporation (CSC). CSC is a savings and loan
holding company and Schwab Bank is a federal savings bank. The following information excludes intercompany balances
and transactions with CSC and its affiliates.
1.
Three-year Net Interest Revenue and Average Balances
For the Year Ended December 31,
Average
Balance
2011
Interest
Average
Rate
Average
Balance
2010
Interest
Average
Rate
Average
Balance
2009
Interest
Average
Rate
Assets:
Cash and cash equivalents (1)
Securities available for sale (2)
Securities held to maturity
Loans to banking clients (3)
Loans held for sale
Other interest-earning assets
Total interest-earning assets
Net unrealized gain (loss) on
securities available for sale
Noninterest-earning assets
Total Assets
Liabilities and Stockholder's Equity:
Interest-bearing banking deposits
Total sources on which interest is paid
Noninterest-bearing liabilities
Stockholder's equity
Total Liabilities and Stockholder's Equity
64
212
57,528
$
$
52,701
52,701
345
4,482
57,528
$
$
4,142
$
11
27,477
16,050
9,468
65
50
456
492
310
3
1
57,252
1,273
0.27%
1.66%
3.07%
3.27%
4.62%
2.00%
2.22%
$
5,890
$
16
24,209
10,440
7,983
80
51
486
361
275
4
1
48,653
1,143
0.27%
2.01%
3.46%
3.44%
5.00%
1.96%
2.35%
(109)
297
48,841
$
0.40%
2.81%
3.86%
3.61%
4.55%
0.49%
2.58%
$
6,352
$
26
521
74
241
5
-
867
18,558
1,915
6,668
110
30
33,633
(614)
331
33,350
$
62
62
0.12%
0.12%
$
44,858
44,858
105
105
0.23%
0.23%
$
31,249
31,249
107
107
0.34%
0.34%
299
3,684
48,841
$
513
1,588
33,350
$
Net interest revenue
$
1,211
$
1,038
$
760
Net yield on interest-earning assets
2.12%
2.13%
2.26%
(1) Includes deposits with banks, short-term investments, and federal funds sold.
(2) Amounts have been calculated based on amortized cost.
(3) Includes average principal balances of nonaccrual loans.
F-3
THE CHARLES SCHWAB CORPORATION
Supplemental Financial Data for Charles Schwab Bank (Unaudited)
(Dollars in Millions)
2.
Analysis of Change in Net Interest Revenue
An analysis of the year-to-year changes in the categories of interest revenue and interest expense resulting from changes in
volume and rate is as follows:
2011 Compared to 2010
Increase (Decrease) Due to
Change in:
2010 Compared to 2009
Increase (Decrease) Due to
Change in:
Average
Volume
Average
Rate
Total
Average
Volume
Average
Rate
Total
Interest-earning assets:
Cash and cash equivalents (1)
Securities available for sale (2)
Securities held to maturity
Loans to banking clients (3)
Loans held for sale
Other interest-earning assets
Total interest-earning assets
Interest-bearing sources of funds:
Interest-bearing banking deposits
Total sources on which interest is paid
$
$
$
$
$
$
(4)
65
194
51
(1)
-
305
(1)
(95)
(63)
(16)
-
-
(175)
(5)
(30)
131
35
(1)
-
130
(2)
159
329
47
(1)
-
532
(8)
(194)
(42)
(13)
-
1
(256)
(10)
(35)
287
34
(1)
1
276
$
$
$
$
$
$
$
$
18
18
$
$
(61)
(61)
$
$
(43)
(43)
$
$
46
46
$
$
(48)
(48)
$
$
(2)
(2)
Change in net interest revenue
$
287
$
(114)
$
173
$
486
$
(208)
$
278
Changes that are not due solely to volume or rate have been allocated to rate.
(1) Includes deposits with banks and short-term investments.
(2) Amounts have been calculated based on amortized cost.
(3) Includes average principal balances of nonaccrual loans.
F-4
THE CHARLES SCHWAB CORPORATION
Supplemental Financial Data for Charles Schwab Bank (Unaudited)
(Dollars in Millions)
3.
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
Unrealized
Gains
Gross
Unrealized
Losses
$
$
$
$
269
-
2
5
5
7
288
430
3
433
$
$
$
$
14
223
3
26
-
7
273
2
-
2
Gross
Unrealized
Gains
Gross
Unrealized
Losses
$
$
$
$
222
3
1
8
23
9
266
209
14
223
$
$
$
$
3
234
-
1
-
2
240
137
-
137
Fair
Value
$ 20,921
907
3,622
3,571
1,800
3,136
$ 33,957
$ 15,198
341
$ 15,539
Fair
Value
$ 13,098
1,470
1,875
2,268
2,780
2,502
$ 23,993
$ 16,794
1,054
$ 17,848
December 31, 2011
Securities available for sale:
U.S. agency residential mortgage-backed securities
Non-agency residential mortgage-backed securities
Certificates of deposit
Corporate debt securities
U.S. agency notes
Asset-backed and other securities
Total securities available for sale
Securities held to maturity:
U.S. agency residential mortgage-backed securities
Other securities
Total securities held to maturity
December 31, 2010
Securities available for sale:
U.S. agency residential mortgage-backed securities
Non-agency residential mortgage-backed securities
Certificates of deposit
Corporate debt securities
U.S. agency notes
Asset-backed securities
Total securities available for sale
Securities held to maturity:
U.S. agency residential mortgage-backed securities
Other securities
Total securities held to maturity
Amortized
Cost
$ 20,666
1,130
3,623
3,592
1,795
3,136
$ 33,942
$ 14,770
338
$ 15,108
Amortized
Cost
$ 12,879
1,701
1,874
2,261
2,757
2,495
$ 23,967
$ 16,722
1,040
$ 17,762
F-5
THE CHARLES SCHWAB CORPORATION
Supplemental Financial Data for Charles Schwab Bank (Unaudited)
(Dollars in Millions)
December 31, 2009
Securities available for sale:
U.S. agency residential mortgage-backed securities
Non-agency residential mortgage-backed securities
Certificates of deposit
Corporate debt securities
U.S. agency notes
Asset-backed securities
Total securities available for sale
Securities held to maturity:
U.S. agency residential mortgage-backed securities
Other securities
Total securities held to maturity
Amortized
Cost
$ 11,601
2,460
1,950
2,368
2,975
1,077
$ 22,431
$
$
5,105
1,734
6,839
Gross
Unrealized
Gains
Gross
Unrealized
Losses
$
$
$
$
199
-
3
13
4
12
231
36
32
68
$
$
$
$
21
519
-
1
1
-
542
27
-
27
Fair
Value
$ 11,779
1,941
1,953
2,380
2,978
1,089
$ 22,120
$ 5,114
1,766
$ 6,880
The maturities and related weighted-average yields of securities available for sale and securities held to maturity at
December 31, 2011, are as follows:
After 1 year After 5 years
Within
1 year
through
5 years
through
10 years
After
10 years
Total
$
$
$
Securities available for sale:
U.S. agency residential mortgage-backed securities (1)
Non-agency residential mortgage-backed securities (1)
Certificates of deposit
Corporate debt securities
U.S. agency notes
Asset-backed and other securities
Total fair value
Total amortized cost
Weighted-average yield (2)
Securities held to maturity:
U.S. agency residential mortgage-backed securities (1)
Other securities
Total fair value
Total amortized cost
Weighted-average yield (2)
(1) Residential mortgage-backed securities have been allocated over maturity groupings based on final contractual
$ 17,969
894
-
-
-
1,565
$ 20,428
$ 20,483
1.70%
-
-
1,897
954
-
225
$ 3,076
$ 3,076
1.29%
2
-
1,725
2,517
1,800
812
$ 6,856
$ 6,871
1.11%
2,950
13
-
100
-
534
3,597
3,512
1.83%
$ 12,617
-
$ 12,617
$ 12,263
2.59%
-
224
224
222
3.00%
-
117
117
116
2.67%
2,581
-
2,581
2,507
2.57%
$
$
$
$
$
$
$
$
$
$
$
$ 20,921
907
3,622
3,571
1,800
3,136
$ 33,957
$ 33,942
1.56%
$ 15,198
341
$ 15,539
$ 15,108
2.60%
maturities. Actual maturities will differ from final contractual maturities because borrowers on a certain portion of loans
underlying these have the right to prepay their obligations.
(2) The weighted-average yield is computed using the amortized cost at December 31, 2011.
F-6
THE CHARLES SCHWAB CORPORATION
Supplemental Financial Data for Charles Schwab Bank (Unaudited)
(Dollars in Millions)
4.
Cross-border Holdings
The table below sets forth the amount of Schwab Bank’s cross-border holdings, based on carrying value, as of December 31,
2011. Such holdings, by country, that exceed 1% of total assets are disclosed separately, and such holdings, by country, that
are between 0.75% and 1% of total assets are listed in the aggregate. Cross-border holdings are comprised of cash
equivalents, securities available for sale, and securities held to maturity.
Country
United Kingdom
Canada
Sweden
Switzerland, France and Australia
Total
Banks and other
financial institutions
Exposure as a %
of total assets
$
$
1,450
1,098
712
1,849
5,109
2.2%
1.7%
1.1%
2.8%
As of December 31, 2010, cross-border holdings in the United Kingdom were $1.5 billion (2.7% of total assets). As of
December 31, 2009, cross-border holdings in the Netherlands and the United Kingdom were $351 million (0.8% of total
assets) and $983 million (2.3% of total assets), respectively.
5.
Loans to Banking Clients and Related Allowance for Loan Losses
The composition of the loan portfolio is as follows:
December 31,
2011
2010
2009
2008
2007
Residential real estate mortgages
Home equity lines of credit
Personal loans secured by securities
Other
Total loans to banking clients
$ 5,596
3,509
742
16
$ 9,863
$ 4,695
3,500
562
16
$ 8,773
$ 3,710
3,304
366
11
$ 7,391
$ 3,195
2,662
187
18
$ 6,062
$ 2,101
1,234
102
13
$ 3,450
An analysis of nonaccrual loans is as follows:
December 31,
Nonaccrual loans
Average nonaccrual loans
2011
52
51
$
$
2010
51
40
$
$
2009
2008
2007
$
$
34
17
$
$
8
6
$
$
4
1
Changes in the allowance for loan losses were as follows:
December 31,
Balance at beginning of year
Charge-offs
Recoveries
Provision for loan losses
Balance at end of year
2011
2010
2009
2008
2007
$
$
53
(19)
2
18
54
$
$
45
(20)
1
27
53
$
$
20
(13)
-
38
45
$
$
7
(4)
-
17
20
$
$
4
-
-
3
7
F-7
THE CHARLES SCHWAB CORPORATION
Supplemental Financial Data for Charles Schwab Bank (Unaudited)
(Dollars in Millions)
The maturities of the loan portfolio at December 31, 2011, are as follows:
Residential real estate mortgages (1)
Home equity lines of credit (2)
Personal loans secured by securities
Other
Total
(1) Maturities are based upon the contractual terms of the loans.
(2) Maturities are based on an initial draw period of 10 years.
Within
1 year
After 1 year
through
5 years
$
$
-
-
52
5
57
$
-
1,074
690
-
$ 1,764
After
5 years
5,596
2,435
-
11
8,042
$
$
Total
$ 5,596
3,509
742
16
$ 9,863
The interest sensitivity of loans with contractual maturities in excess of one year at December 31, 2011, is as follows:
Loans with predetermined interest rates
Loans with floating or adjustable interest rates
Total
6.
Summary of Credit Loss on Banking Loans Experience
After
1 year
$
$
473
9,333
9,806
December 31,
2011
2010
2009
2008
2007
Average loans
Allowance to year end loans
Allowance to nonperforming loans
Nonperforming assets to average loans
and real estate owned
$ 9,468
.55%
104%
$ 7,983
.60%
104%
$ 6,668
.61%
132%
$ 4,831
.33%
235%
$ 2,786
.20%
173%
.59%
.68%
.51%
.18%
.14%
7.
Deposits from Banking Clients
Analysis of average daily deposits:
Certificates of deposit of $100,000 or more
Money market and other savings deposits
Interest-bearing demand deposits
Total deposits
2011
2010
2009
Amount
Rate
Amount
Rate
Amount
Rate
$
-
42,342
10,359
$ 52,701
-
0.09%
0.22%
$
-
35,794
9,064
$ 44,858
-
0.18%
0.45%
$
-
24,879
6,370
$ 31,249
-
0.14%
0.60%
At December 31, 2011, the Company had one certificate of deposit of $100,000 or more, in the amount of $501,784, with a
contractual maturity of over twelve months.
8.
Ratios
December 31,
Return on average stockholder’s equity
Return on average total assets
Average stockholder’s equity as a percentage
of average total assets
2011
2010
2009
13.99%
1.10%
14.22%
1.07%
21.95%
1.05%
7.83%
7.54%
4.76%
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,
2011
2010
2009
2008
2007
Earnings from continuing operations before taxes on earnings
$
1,392
$
779
$
1,276
$
2,028
$
1,853
Fixed charges
Interest expense:
Deposits from banking clients
Payables to brokerage clients
Short-term borrowings
Long-term debt
Other
Total
Interest portion of rental expense
Total fixed charges (A)
62
3
-
108
2
175
62
237
105
2
-
92
-
199
56
255
107
3
-
71
2
183
71
254
104
55
1
59
7
226
62
288
238
329
-
38
15
620
60
680
Earnings from continuing operations before taxes on earnings
and fixed charges (B)
$
1,629
$
1,034
$
1,530
$
2,316
$
2,533
Ratio of earnings to fixed charges (B) ÷ (A) (1)
6.9
4.1
6.0
8.0
3.7
Ratio of earnings to fixed charges, excluding deposits from banking
clients and payables to brokerage clients interest expense (2)
9.1
6.3
9.9
16.7
17.4
(1)
(2)
The ratio of earnings to fixed charges is calculated in accordance with SEC requirements. For such purposes, “earnings” consist
of earnings from continuing operations 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 a fixed charge.
THE CHARLES SCHWAB CORPORATION
Subsidiaries of the Registrant
EXHIBIT 21.1
Pursuant to Item 601 (b)(21)(ii) of Regulation S-K, certain subsidiaries of the Registrant have been omitted
which, considered in the aggregate as a single subsidiary, would not constitute a significant subsidiary (as
defined in Rule 1-02(w) of Regulation S-X) as of December 31, 2011.
The following is a listing of the significant subsidiaries of the Registrant:
Schwab Holdings, Inc. (holding company for Charles Schwab & Co., Inc.), a Delaware corporation
Charles Schwab & Co., Inc., a California corporation
Charles Schwab Bank, a Federal Savings Association
Charles Schwab Investment Management, Inc., a Delaware corporation
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We consent to the incorporation by reference in the following Registration Statements of our report dated February 23, 2012, relating to the
consolidated financial statements and financial statement schedule of The Charles Schwab Corporation and the effectiveness of The Charles
Schwab Corporation’s internal control over financial reporting, appearing in this Annual Report on Form 10-K of The Charles Schwab
Corporation for the year ended December 31, 2011.
EXHIBIT 23.1
Filed on Form S-3:
Registration Statement No. 333-178525
Filed on Form S-8:
(Debt Securities, Preferred Stock, Depository Shares, Common Stock, Purchase
Contracts, Warrants, and Units Consisting of Two or More Securities)
Registration Statement No. 333-175862
(The Charles Schwab Corporation 2004 Stock Incentive Plan)
Registration Statement No. 333-173635
(optionsXpress Holdings, Inc. 2008 Equity Incentive Plan, optionsXpress
Holdings, Inc. 2005 Equity Incentive Plan, and optionsXpress, Inc. 2001 Equity
Incentive Plan)
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. 333-71322
(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)
/s/ Deloitte & Touche LLP
San Francisco, California
February 23, 2012
THE CHARLES SCHWAB CORPORATION
Exhibit 31.1
CERTIFICATION PURSUANT TO RULE 13a-14(a)/15d-14(a), AS ADOPTED PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Walter W. Bettinger II, certify that:
1.
I have reviewed this Annual Report on Form 10-K of The Charles Schwab Corporation;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a 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;
3. 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;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as
defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a) 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;
b) 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;
c) Evaluated the effectiveness of the registrant’s 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
d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred
during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual
report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control
over financial reporting; and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over
financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons
performing the equivalent functions):
a) 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 registrant’s ability to record, process, summarize
and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in
the registrant’s internal control over financial reporting.
Date: February 23, 2012
/s/ Walter W. Bettinger II
Walter W. Bettinger II
President and Chief Executive Officer
THE CHARLES SCHWAB CORPORATION
Exhibit 31.2
CERTIFICATION PURSUANT TO RULE 13a-14(a)/15d-14(a), AS ADOPTED PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Joseph R. Martinetto, certify that:
1.
I have reviewed this Annual Report on Form 10-K of The Charles Schwab Corporation;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a 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;
3. 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;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as
defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a) 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;
b) 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;
c) Evaluated the effectiveness of the registrant’s 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
d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred
during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual
report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control
over financial reporting; and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over
financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons
performing the equivalent functions):
a) 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 registrant’s ability to record, process, summarize
and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in
the registrant’s internal control over financial reporting.
Date: February 23, 2012
/s/ Joseph R. Martinetto
Joseph R. Martinetto
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, 2011 (the Report), I, Walter W. 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:
(1)
(2)
The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of
1934; and
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/ Walter W. Bettinger II
Walter W. Bettinger II
President and Chief Executive Officer
Date: February 23, 2012
A 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, 2011 (the Report), I, Joseph R. Martinetto, Executive Vice President and Chief Financial 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:
(1)
(2)
The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of
1934; and
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 R. Martinetto
Joseph R. Martinetto
Executive Vice President and
Chief Financial Officer
Date: February 23, 2012
A 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.
i
BOARD OF DIRECTORS
CHARLES R. SCHWAB
Chairman of the Board,
The Charles Schwab Corporation
Age: 74. Director since 1986;
term expires in 2013.
NANCY H. BECHTLE
Chairman, Sugar Bowl Corporation
Age: 74. Director since 1992;
term expires in 2012.
Member of the Compensation
Committee; Nominating and Corporate
Governance Committee.
WALTER W. BETTINGER II
President and Chief Executive Officer,
The Charles Schwab Corporation
Age: 51. Director since 2008;
term expires in 2012.
C. PRESTON BUTCHER
Chairman and Chief Executive Officer,
Legacy Partners, a real estate development
and management firm
Age: 73. Director since 1988;
term expires in 2012.
Member of the Audit Committee;
Nominating and Corporate
Governance Committee.
FRANK C. HERRINGER
Chairman of the Board of Transamerica
Corporation, a financial services company
Age: 69. Director since 1996;
term expires in 2014.
Chairman of the Nominating
and Corporate Governance
Committee; member of the
Compensation Committee.
PAULA A. SNEED
Chairman and Chief Executive Officer,
Phelps Prescott Group, LLC, a strategy
and management consulting firm
Age: 64. Director since 2002;
term expires in 2013.
Member of the Compensation
Committee; Nominating and
Corporate Governance Committee.
STEPHEN T. McLIN
Chairman and Chief Executive
Officer, STM Holdings LLC, which
offers merger and acquisition advice
Age: 65. Director since 1988;
term expires in 2014.
Chairman of the Audit Committee;
member of the Nominating and
Corporate Governance Committee.
ARUN SARIN
Former Chief Executive Officer,
Vodafone Group Plc, a mobile
telecommunications company
Age: 57. Director since 2009;
term expires in 2013.
Member of the Audit Committee;
Nominating and Corporate
Governance Committee.
ROGER O. WALTHER
Chairman and Chief Executive Officer,
Tusker Corporation, a real estate and
business management company
Age: 76. Director since 1989;
term expires in 2014.
Chairman of the Compensation
Committee; member of the Nominating
and Corporate Governance Committee.
ROBERT N. WILSON
Chairman, Still River Systems,
a medical device company
Age: 71. Director since 2003;
term expires in 2014.
Member of the Compensation
Committee; Nominating and
Corporate Governance Committee.
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CORPORATE INFORMATION
THE CHARLES SCHWAB
CORPORATION
211 Main Street
San Francisco, CA 94105
(415) 667-7000
www.aboutschwab.com
The Charles Schwab Corporation is a
leading provider of financial services,
with more than 300 offices and 8.6 million
active brokerage accounts, 1.49 million
corporate retirement plan participants,
780,000 banking accounts, and $1.68 tril-
lion in client assets. Through its operating
subsidiaries, the company provides a full
range of securities brokerage, banking,
money management, and financial
advisory services to individual investors
and independent investment advisors.
Our ticker symbol is SCHW and our
common stock is listed on NYSE.
CEO AND CFO CERTIFICATIONS
The Charles Schwab Corporation has
included as exhibits to its Annual
Report on Form 10-K for the year
ended December 31, 2011, filed with the
Securities and Exchange Commission,
certificates of its Chief Executive Officer
and Chief Financial Officer certifying the
quality of the company’s public disclosure.
PUBLICATIONS
To obtain the company’s annual report,
10-K, 10-Q, quarterly earnings report,
or other publications without charge,
contact:
Charles Schwab Investor Relations
211 Main Street
San Francisco, CA 94105
(415) 667-1959
These documents may also be viewed
in the Investor Relations section of
the company’s website at
www.aboutschwab.com.
© 2012 The Charles Schwab Corporation. All rights reserved.
TRADEMARKS OR REGISTERED
TRADEMARKS
Charles Schwab, Schwab, Talk to Chuck,
Schwab Bank, and other trademarks ap-
pearing herein, which may be indicated by
“®” and “™”, are registered trademarks or
trademarks of Charles Schwab & Co., Inc.,
in the U.S. and/or other countries. These
trademarks and registered trademarks are
proprietary to Charles Schwab & Co., Inc.,
in the U.S. and/or other countries.
ANNUAL MEETING
The annual meeting of stockholders will
be conducted at 2:00 p.m. (Pacific Time)
on Thursday, May 17, 2012, at 211 Main
Street, San Francisco, CA, and via the
Internet. To register, visit
www.schwabevents.com/corporation
STOCK OWNERSHIP SERVICES
All stockholders of record are welcome
to participate in The Charles Schwab
Corporation Dividend Reinvestment and
Stock Purchase Plan, managed by Wells
Fargo Bank, N.A. For information on
the Dividend Reinvestment and Stock
Purchase Plan, or for assistance on stock
ownership questions, contact:
Transfer Agent & Registrar
Wells Fargo Bank, N.A.
Shareowner Services
P.O. Box 64854
St. Paul, MN 55164
(800) 468-9716
www.wellsfargo.com/shareownerservices
INDEPENDENT AUDITORS
Deloitte & Touche LLP
555 Mission Street
San Francisco, CA 94105
(415) 783-4000
www.deloitte.com
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, scrs.schwab.com
THE CHARLES SCHWAB
CORPORATION
Office of the Corporate Secretary
(415) 667-9807
CHARLES SCHWAB FOUNDATION
Carrie Schwab-Pomerantz,
President, Charles Schwab Foundation,
and Senior Vice President
Phone: (877) 408-5438
www.aboutschwab.com/community
INVESTOR RELATIONS
Richard G. Fowler, Senior Vice President,
Investor Relations
Phone: (415) 667-1841
E-mail: investor.relations@schwab.com
LEGISLATIVE AND
REGULATORY AFFAIRS
Jeffrey T. Brown, Senior Vice President,
Legislative and Regulatory Affairs
325 7th Street NW, Suite 200
Washington, DC 20004
(202) 662-4902
NEWS MEDIA
Greg Gable, Senior Vice President,
Corporate Public Relations
Media Hotline: (888) 767-5432
E-mail: public.relations@schwab.com
OUTSIDE COUNSEL
Arnold & Porter LLP
3 Embarcadero Center, 7th Floor
San Francisco, CA 94111-4024
(415) 434-1600
www.arnoldporter.com
More people. More stories.
Experience the real-life
relationships we have with our
clients at aboutschwab.com.
THE CHARLES SCHWAB CORPORATION
211 Main Street
San Francisco, CA 94105
(415) 667-7000
www.schwab.com
www.aboutschwab.com
MKT10448-24 (3/12)