Fair Values of Assets and Liabilities

6 Months Ended

Jun. 30, 2012

Fair Values of Assets and Liabilities

7. 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. The Company did not transfer any assets or liabilities between Level 1 and Level 2 during the first half of 2012, or the year ended December 31, 2011.

• 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.

• 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 June 30, 2012, or December 31, 2011.

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. The Company uses the market and income approaches to determine the fair value of assets and liabilities. 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. When comparing to relevant market data with a bid-ask spread, the Company uses the price within the bid-ask spread that best represents fair value. 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 June 30, 2012, and December 31, 2011, 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:

June 30, 2012	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Balance at Fair Value
Cash equivalents:
Money market funds	$	162	$	—	$	—	$	162
Commercial paper		—		682		—		682
Total cash equivalents		162		682		—		844
Investments segregated and on deposit for regulatory purposes:
Certificates of deposit		—		2,624		—		2,624
Corporate debt securities		—		678		—		678
Total investments segregated and on deposit for regulatory purposes		—		3,302		—		3,302
Other securities owned:
Schwab Funds® money market funds		135		—		—		135
Equity and bond mutual funds		186		—		—		186
State and municipal debt obligations		—		71		—		71
Equity, U.S. Government and corporate debt, and other securities		3		30		—		33
Total other securities owned		324		101		—		425
Securities available for sale:
U.S. agency residential mortgage-backed securities		—		24,387		—		24,387
Non-agency residential mortgage-backed securities		—		776		—		776
Certificates of deposit		—		5,356		—		5,356
Corporate debt securities		—		4,845		—		4,845
U.S. agency notes		—		101		—		101
Asset-backed and other securities		—		4,584		—		4,584
Total securities available for sale		—		40,049		—		40,049
Total	$	486	$	44,134	$	—	$	44,620

December 31, 2011	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Balance at Fair Value
Cash equivalents:
Money market funds	$	8	$	—	$	—	$	8
Commercial paper		—		814		—		814
Total cash equivalents		8		814		—		822
Investments segregated and on deposit for regulatory purposes:
Certificates of deposit		—		2,374		—		2,374
Corporate debt securities		—		767		—		767
U.S. Government securities		—		650		—		650
Total investments segregated and on deposit for regulatory purposes		—		3,791		—		3,791
Other securities owned:
Schwab Funds® money market funds		332		—		—		332
Equity and bond mutual funds		183		—		—		183
State and municipal debt obligations		—		46		—		46
Equity, U.S. Government and corporate debt, and other securities		12		20		—		32
Total other securities owned		527		66		—		593
Securities available for sale:
U.S. agency residential mortgage-backed securities		—		20,921		—		20,921
Non-agency residential mortgage-backed securities		—		907		—		907
Certificates of deposit		—		3,622		—		3,622
Corporate debt securities		—		3,571		—		3,571
U.S. agency notes		—		1,800		—		1,800
Asset-backed and other securities		—		3,144		—		3,144
Total securities available for sale		—		33,965		—		33,965
Total	$	535	$	38,636	$	—	$	39,171

Financial Instruments Not Recorded at Fair Value

Descriptions of the valuation methodologies and assumptions used to estimate the fair value of financial instruments not recorded at fair value are described below. There were no significant changes in these methodologies or assumptions during the first half of 2012.

Cash and cash equivalents, receivables from/payables to brokers, dealers, and clearing organizations, and receivables from/payables to brokerage clients are short-term in nature and accordingly are recorded at amounts that approximate fair value. Cash and cash equivalents include cash and highly liquid investments with original maturities of three months or less. Receivables from/payables to brokers, dealers, and clearing organizations, and receivables from/payables to brokerage clients are recorded at or near transaction price and historically have been settled or converted to cash at approximately that 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 securities, asset-backed securities collateralized by credit card and auto loans, and corporate debt 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 similar to investment assets recorded at fair value as discussed above.

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 prices obtained from independent third-party pricing services for mortgage-backed securities collateralized by similar types of loans similar to investment assets recorded at fair value as discussed above. The Company may adjust the independent third-party prices to account for differences between the weighted average lives and coupon rates of comparable mortgage-backed securities and loans to banking clients.

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 – Financial instruments included in other assets primarily consist of cost method investments and Federal Home Loan Bank (FHLB) stock, whose carrying values approximate their fair values. FHLB stock is recorded at par, which approximates fair value as there is a quoted market price for this stock based on the requirements of the FHLB.

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.

Accrued expenses and other liabilities – Financial instruments included in accrued expenses and other liabilities consist of drafts payable and certain amounts due under contractual obligations which are short-term in nature and accordingly are recorded at amounts that approximate fair value.

Long-term debt includes Senior Notes, Senior Medium-Term Notes, Series A, Junior Subordinated Notes, and a finance lease obligation. The fair values 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 Company validates indicative prices for its debt through comparison to other independent non-binding quotes. 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 rates earned on these balances are based on 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 following table presents the fair value hierarchy for financial instruments not recorded at fair value at June 30, 2012:

	Carrying Amount		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Balance at Fair Value
Assets:
Cash and cash equivalents	$	7,245	$	—	$	7,245	$	—	$	7,245
Cash and investments segregated and on deposit for regulatory purposes		19,417		—		19,417		—		19,417
Receivables from brokers, dealers, and clearing organizations		317		—		317		—		317
Receivables from brokerage clients – net		11,952		—		11,952		—		11,952
Securities held to maturity:
U.S. agency residential mortgage-backed securities		15,227		—		15,730		—		15,730
Other securities		279		—		279		—		279
Total securities held to maturity		15,506		—		16,009		—		16,009
Loans to banking clients – net:
Residential real estate mortgages		5,640		—		5,742		—		5,742
Home equity lines of credit		3,391		—		3,368		—		3,368
Personal loans secured by securities		787		—		787		—		787
Other		19		—		19		—		19
Total loans to banking clients – net		9,837		—		9,916		—		9,916
Loans held for sale		2		—		3		—		3
Other assets		62		—		62		—		62
Total	$	64,338	$	—	$	64,921	$	—	$	64,921
Liabilities:
Deposits from banking clients	$	66,257	$	—	$	66,257	$	—	$	66,257
Payables to brokers, dealers, and clearing organizations		1,332		—		1,332		—		1,332
Payables to brokerage clients		31,833		—		31,833		—		31,833
Accrued expenses and other liabilities		501		—		501		—		501
Long-term debt		1,999		—		2,189		—		2,189
Total	$	101,922	$	—	$	102,112	$	—	$	102,112

The following table presents the Company’s fair value estimates for financial instruments not recorded at fair value at December 31, 2011. The table excludes short-term financial assets and liabilities, for which carrying amounts approximate fair value, and financial instruments recorded at fair value.

	Carrying Amount		Fair Value
Financial Assets:
Securities held to maturity	$	15,108	$	15,539
Loans to banking clients – net	$	9,812	$	9,671
Loans held for sale	$	70	$	73
Financial Liabilities:
Long-term debt	$	2,001	$	2,159