What changed in this filing

/stocks — the workspaceLOADING

Item 2. Management’s Discussion and Analysis

2021-11-08 compared with 2021-08-06 · 190 added, 193 removed, 659 unchanged (37% of the section changed)

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• The phase-out of the use of LIBOR (see Risk Management);

• Sources of liquidity and capital;

capital management;

Tier 1 Leverage operating objective;

sources of liquidity and capital (see Capital Management);

• The migration of IDA balances to our balance sheet (see Capital Management and Commitments and Contingencies in Item 1 – Note 10);

Tier 1 Leverage Ratio operating objective (see Liquidity Risk and Capital Management);

• The migration of Insured Deposit Account (IDA) agreement balances to our balance sheet (see Capital Management and Commitments and Contingencies in Item 1 – Note 10);

• The likelihood of indemnification and guarantee payment obligations and clients failing to fulfill contractual obligations (see Commitments and Contingencies in Item 1 – Note 10);

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• Capital and liquidity needs and management;

• Our ability to manage expenses;

THE CHARLES SCHWAB CORPORATION

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(Tabular Amounts in Millions, Except Ratios, or as Noted)

• Our ability to manage expenses;

• Our ability to attract and retain talent;

• Our ability to develop and launch new and enhanced products, services, and capabilities, as well as enhance our infrastructure, in a timely and successful manner;

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Management focuses on several client activity and financial metrics in evaluating Schwab’s financial position and operating performance.

Results for the second quarter and first six months of 2021 and 2020 are:

Results for the third quarter and first nine months of 2021 and 2020 are:

Three Months Ended

June 30, Percent

Change Six Months Ended

June 30, Percent

September 30, Percent

Change Nine Months Ended

September 30, Percent

2021 2020 2021 2020

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$ 139.0 $ 51.2 171 % $ 381.6 $ 261.8 46 %

Core net new client assets (in billions) $ 108.8 $ 46.6 133 % $ 257.0 $ 119.8 115 %

Core net new client assets (in billions) $ 139.0 $ 42.7 N/M $ 396.0 $ 162.5 144 %

Client assets (in billions, at quarter end) $ 7,614.0 $ 4,395.3 73 %

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Return on tangible common equity 23 % 12 % 21 % 14 %

(1) The first six months of 2021 includes an outflow of $14.4 billion from a mutual fund clearing services client.

The second quarter and first six months of 2020 include inflows of $79.9 billion related to the acquisition of the assets of USAA’s Investment Management Company (USAA-IMCO) and $10.9 billion from a mutual fund clearing services client.

(2) The second quarter and first six months of 2020 include 1.1 million new brokerage accounts related to the acquisition of assets from USAA-IMCO.

(3) In connection with the acquisition of TD Ameritrade, Schwab issued approximately 586 million common shares to TD Ameritrade stockholders, increasing our weighted average common shares outstanding for the second quarter and first six months of 2021 relative to the same periods in 2020.

(1) The first nine months of 2021 includes an outflow of $14.4 billion from a mutual fund clearing services client.

The third quarter and first nine months of 2020 include inflows of $8.5 billion related to the acquisition of Wasmer, Schroeder & Company, LLC.

The first nine months of 2020 also includes $79.9 billion related to the acquisition of the assets of USAA’s Investment Management Company (USAA-IMCO) and an inflow of $10.9 billion from a mutual fund clearing services client.

(2) The first nine months of 2020 include 1.1 million new brokerage accounts related to the acquisition of assets from USAA-IMCO.

(3) In connection with the acquisition of TD Ameritrade, Schwab issued approximately 586 million common shares to TD Ameritrade stockholders, increasing our weighted average common shares outstanding for the third quarter and first nine months of 2021 relative to the same periods in 2020.

(4) See Non-GAAP Financial Measures for further details and a reconciliation of such measures to GAAP reported results.

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See Non-GAAP Financial Measures.

During the second quarter and first six months of 2021, the U.S.

saw signs of returning normalcy in everyday life as vaccinations accelerated, social activities largely resumed, and people started returning to corporate offices.

Schwab successfully re-opened nearly all of our 406 branch offices, including 80 independent branches during the second quarter.

Throughout the first six months of 2021, equity markets continued to rise, with both the S&P 500 ® and NASDAQ ® achieving record highs during the second quarter, while longer-term interest rates fluctuated as investors digested economic recovery data and Federal Reserve commentary.

Schwab continued to support highly engaged investors throughout the first six months of 2021, even as trading activity levels moderated in the second quarter from the surge seen in the first quarter.

Clients opened 1.7 million and 4.8 million new

N/M Not meaningful.

Percentage changes greater than 200% are presented as not meaningful

Throughout the first nine months of 2021, Schwab continued to drive business momentum while supporting investors through an uneven economic recovery.

While positive sentiment largely persisted during the first nine months of 2021, a variety of factors in the macroeconomic landscape, such as the pace of economic growth and the potential path of inflation, affected investor sentiment in the third quarter, as the S&P 500 ® ended September essentially flat versus June 30 and up 15% for the year.

Clients opened 1.2 million new brokerage accounts during the third quarter, bringing year-to-date new brokerage accounts to 6.0 million.

Client engagement remained strong throughout the first nine months of 2021, softening modestly from the second quarter to the third quarter as daily average trades (DATs) of 5.5 million in the third quarter represented a decrease of

THE CHARLES SCHWAB CORPORATION

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(Tabular Amounts in Millions, Except Ratios, or as Noted)

brokerage accounts during the second quarter and first six months of 2021, respectively.

Daily average trades (DATs) were 6.0 million during the second quarter of 2021, representing a 28% slowdown from the first quarter’s average of 8.4 million, but still 4% higher than the fourth quarter of 2020.

Core net new assets totaled $108.8 billion during the second quarter of 2021, rising 133% from the second quarter of 2020.

This continued strong asset gathering brought core net new assets for the first six months of 2021 to $257.0 billion, representing a year-to-date organic growth rate of 8%, and total client assets reached $7.57 trillion as of June 30, 2021, up 7% during the quarter and up 84% from the year-earlier period.

Against this backdrop, Schwab delivered solid financial performance during the second quarter and first six months of 2021.

Net income totaled $1.3 billion and $2.7 billion during the second quarter and first six months of 2021, respectively, increasing 89% and 88% from the same periods in 2020.

Diluted earnings per common share (EPS) totaled $.59 and $1.32 during the second quarter and first six months of 2021, respectively, rising 23% from both comparable periods in 2020.

Adjusted diluted EPS (1) , which excludes acquisition and integration-related costs, amortization of acquired intangible assets, and related income tax effects, amounted to $.70 and $1.55 for the second quarter and first six months of 2021, up 30% and 36%, respectively, from the same prior year periods.

Our financial results in the second quarter and first half of 2021 were significantly impacted by the inclusion of TD Ameritrade, as detailed further in Results of Operations.

Total net revenues were $4.5 billion and $9.2 billion in the second quarter and first half of 2021, up 85% and 82%, respectively from the same periods in the prior year.

Net interest revenue totaled $1.9 billion and $3.9 billion during the second quarter and first half of 2021, respectively, rising 40% and 30% from the comparable periods in 2020 and reflective of the inclusion of TD Ameritrade.

Net interest revenue in the second quarter grew 2% from the first quarter of 2021, as modest growth in interest-earning assets, including growth in bank loans and higher margin loan utilization, helped offset the Federal Reserve’s ongoing Zero Interest Rate Policy and persistent prepayment activity within our investment securities portfolio.

Asset management and administration fees totaled $1.0 billion and $2.1 billion in the second quarter and first half of 2021, increasing 31% and 27%, respectively, from the same periods in 2020.

These increases were due to the inclusion of TD Ameritrade in the first half of 2021, as well as strong asset gathering, positive equity markets, and growth in advice solutions balances, partially offset by money market fund fee waivers.

Strong asset gathering and sustained growth in advice solutions in the second quarter of 2021 also helped drive a 3% increase in asset management and administration fees from the first quarter of the year.

Trading revenue was $955 million and $2.2 billion in the second quarter and first half of 2021, respectively, up from $193 million and $381 million in the same periods in 2020.

This growth was due to the inclusion of TD Ameritrade in the first half of 2021 and the overall strong trading environment.

Trading revenue decreased 21% in the second quarter of 2021 relative to the first quarter of the year, as client activity remained strong relative to past levels but decreased from the first quarter’s surge.

Bank deposit account fees totaled $337 million and $688 million during the second quarter and first six months of 2021, respectively.

BDA balances ended the second quarter at $161.8 billion, down 1% from year-end 2020.

Total expenses excluding interest were $2.8 billion and $5.6 billion in the second quarter and first half of 2021, increasing 80% and 78%, respectively, from the comparable prior year periods.

These increases are due primarily to the inclusion of TD Ameritrade’s results and a $200 million charge for a regulatory matter recorded in the second quarter of 2021 (see Item 1 – Note 10).

During the second quarter and first six months of 2021, acquisition and integration-related costs totaled $144 million and $263 million, respectively, and amortization of acquired intangible assets was $154 million and $308 million, respectively.

Exclusive of these items, adjusted total expenses (1) were $2.5 billion and $5.0 billion for the second quarter and first six months of 2021, up 71% and 67%, respectively, from the same periods in 2020.

Total expenses excluding interest increased 2% in the second quarter of 2021 relative to the first quarter of the year, and adjusted total expenses increased 1%.

Return on average common stockholders’ equity was 10% for both the second quarter and first six months of 2021, compared with 10% and 12% for the same periods in 2020.

Return on tangible common equity (1) (ROTCE) was 20% and 21% in the second quarter and first six months of 2021, respectively, up from 12% and 15% in the comparable respective periods in 2020, due primarily to higher net income.

8% from the second quarter of 2021.

Third quarter core net new assets of $139.0 billion brought the year-to-date 2021 total to $396.0 billion, representing an 8% annualized organic growth rate.

Total client assets ended the third quarter of 2021 at $7.61 trillion, up 1% from June 30, 2021 and up 14% from December 31, 2020.

Schwab’s dedicated employees are critical to the Company’s success, including helping to advance key strategic initiatives such as the TD Ameritrade integration.

During the third quarter of 2021, we implemented a special 5% pay increase effective at the end of the quarter for nearly all of our more than thirty thousand employees, and introduced a hybrid workplace program designed to provide flexibility as we seek to continue to attract and retain talent in a competitive landscape.

Schwab’s strong financial performance in the third quarter and first nine months of 2021 reflects consistent execution of our strategy.

Net income for the third quarter and first nine months totaled $1.5 billion and $4.3 billion, respectively, increasing 119% and 98% from the same periods in 2020.

The Company’s diluted earnings per common share (EPS) totaled $.74 and $2.06 in the third quarter and first nine months of 2021, respectively, increasing 54% and 34% from the comparable periods in 2020.

Adjusted diluted EPS (1) , which excludes acquisition and integration-related costs, amortization of acquired intangible assets, and related income tax effects, amounted to $.84 and $2.39 for the third quarter and first nine months of 2021, up 65% and 44%, respectively, from the same periods in 2020.

Our financial results in the third quarter and first nine months of 2021 were significantly impacted by our acquisition of TD Ameritrade, as detailed further in Results of Operations.

Total net revenues were $4.6 billion and $13.8 billion in the third quarter and first nine months of 2021, representing growth of 87% and 84%, respectively, from the same periods in the prior year.

Net interest revenue was $2.0 billion and $5.9 billion in the third quarter and first nine months of 2021, respectively, rising 51% and 37% from the comparable periods in 2020.

Net interest revenue grew 4% versus the second quarter of 2021 due largely to growth in interest-earning assets, including strength in lending activity and rising investment portfolio balances, partially offset by a decline in securities lending revenue and a lower average yield on outstanding margin loans.

Asset management and administration fees totaled $1.1 billion and $3.2 billion in the third quarter and first nine months of 2021, respectively, growing 28% and 27%, respectively, from the comparable periods in 2020.

These increases were due primarily to the inclusion of TD Ameritrade as well as rising balances in advice solutions and both proprietary and third-party mutual fund and ETFs, partially offset by lower revenue on money market funds.

Rising balances in both proprietary and third-party mutual funds and ETFs and advice solutions in the third quarter of 2021 contributed to 5% sequential growth in asset management and administration fees from the second quarter.

Trading revenue was $964 million in the third quarter and $3.1 billion in the first nine months of 2021, respectively, up from $181 million and $562 million in the comparable periods of the prior year.

This growth was due to the inclusion of TD Ameritrade in the first nine months of 2021, the overall strong trading environment, and mix of trades.

Trading revenue in the third quarter was 1% higher than the second quarter of 2021, as a higher proportion of options trades helped increase revenue per trade, offsetting the impact of an 8% decrease in DATs.

Bank deposit account fees totaled $323 million and $1.0 billion during the third quarter and first nine months of 2021, respectively, as bank deposit account balances (BDA balances) ended the third quarter at $153.3 billion, down 6% from year-end 2020 due primarily to migrations to Schwab’s balance sheet.

Total expenses excluding interest were $2.6 billion and $8.1 billion during the third quarter and first nine months of 2021, respectively, rising 64% and 73% from the comparable periods in 2020.

These increases were primarily due to the inclusion of TD Ameritrade’s results and higher compensation and benefits expense driven by additional headcount to support our expanding client base.

During the third quarter and first nine months of 2021, acquisition and integration-related costs totaled $104 million and $367 million, respectively, and amortization of acquired intangible assets was $153 million and $461 million, respectively.

Exclusive of these items, adjusted total expenses (1) were $2.3 billion and $7.3 billion for the third quarter and first nine months of 2021, up 54% and 63%, respectively, from the same periods in 2020.

Total expenses excluding interest decreased 9% in the third quarter of 2021 from the second quarter of the year while adjusted total expenses decreased 8%;

both changes were driven primarily by lower other expenses due to the second quarter’s charge for a regulatory matter (see Item 1 – Note 10).

Return on average common stockholders’ equity was 12% and 11% for the third quarter and first nine months of 2021, respectively, compared with 10% and 12% from the same periods in 2020.

Return on tangible common equity (1) (ROTCE) was 23% and 21% for the third quarter and first nine months of the year, respectively, up from 12% and 14% for the comparable periods in 2020, rising primarily as a result of higher net income.

(1) Adjusted diluted EPS, adjusted total expenses, and return on tangible common equity are non-GAAP financial measures.

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(Tabular Amounts in Millions, Except Ratios, or as Noted)

The Company maintained a consistent approach to balance sheet management throughout the first half of 2021.

We continued to support organic growth and prepared for initial BDA balance migrations, which began in July.

We supplemented our funding mix in the second quarter by issuing $2.25 billion in long-term senior notes and repaying $1.2 billion in similar debt that matured in May.

In addition, we issued senior notes totaling $4.0 billion in March 2021.

During the first quarter, we completed two preferred stock offerings:

Series I for $2.25 billion and Series J for $600 million, and in June, we redeemed our $600 million Series C preferred stock.

Consolidated balance sheet assets totaled $575 billion at June 30 th , up 2% from the first quarter and up 5% from year-end 2020.

Our Tier 1 Leverage Ratio of 6.4% was consistent with the first quarter and up slightly from year-end 2020’s ratio of 6.3%.

Throughout the first nine months of 2021, the Company continued its consistent approach to balance sheet management, supporting growth and liquidity.

Total balance sheet assets rose to $607.5 billion as of September 30, 2021, increasing 6% from the end of the second quarter and 11% from December 31, 2020, as the Company saw continued organic growth in client cash balances, as well as initial BDA balance migrations.

In addition to issuances of debt and preferred stock earlier in 2021, during the third quarter the Company issued $850 million in long-term senior notes and also completed a tender offer to exchange $2.0 billion of TDA Holding senior notes for an equivalent amount of CSC senior notes.

At the end of the third quarter, Schwab’s Tier 1 Leverage Ratio was 6.3%, down slightly from 6.4% at June 30, 2021.

Though significantly heightened client activity levels during the first quarter of 2021 impacted our service quality at times, we have taken multiple steps to better deliver the service experience our clients deserve and rely on, including enhancing online self-service capabilities, streamlining our call-routing processes, and increasing hiring.

Our efforts have been yielding results, with significant improvement in client service levels by the end of the first quarter of 2021, and our service levels continued to improve in the second quarter as client activity moderated.

Integration of TD Ameritrade

Against a backdrop of elevated client activity and volume in the first six months of 2021, including the unprecedented client activity in the first quarter of the year, the Company continued its integration of TD Ameritrade.

As a result of the significant growth seen in recent quarters across key client volume metrics, including the number of active brokerage accounts, DATs, and peak daily trades, the Company has increased the scope of technology work related to the integration.

We have commenced greater technology build-out to support the expanded volumes of our combined client base.

Based on our current integration plans and expanded scope of technology work, the Company expects to complete client conversion within 30 to 36 months from the date of acquisition, and we expect to incur total acquisition and integration-related costs and capital expenditures of between $2.0 billion and $2.2 billion.

The Company’s estimates of the nature, amounts, and timing of recognition of acquisition and integration-related costs remain subject to change based on a number of factors, including the expected duration and complexity of the integration process and the heightened uncertainty of the current economic environment.

In the first nine months of 2021, we commenced greater technology build-out to support the expanded volumes of our combined client base.

Based on our current integration plans and expanded scope of technology work, the Company continues to expect to complete client conversion within 30 to 36 months from the October 6, 2020 acquisition, and we expect to incur total acquisition and integration-related costs and capital expenditures of between $2.0 billion and $2.2 billion.

The Company’s estimates of the nature, amounts, and timing of recognition of acquisition and integration-related costs remain subject to change based on a number of factors, including the expected duration and complexity of the integration process and the continued uncertainty of the current economic environment.

More specifically, factors that could cause variability in our expected acquisition and integration-related costs include the level of employee attrition, workforce redeployment from eliminated positions into open roles, changes in the levels of client activity, as well as increased real estate-related exit cost variability due to effects of the COVID-19 pandemic.

Over the course of the integration, we continue to expect to realize annualized cost synergies of between $1.8 billion and

$2.0 billion.

Through the second quarter of 2021, we have achieved approximately one-third of this amount on an annualized run-rate basis, and currently expect to achieve approximately 40% by the end of the first year following acquisition.

$2.0 billion, and, through the third quarter of 2021, we have achieved approximately 40% of this amount on an annualized run-rate basis.

Estimated timing and amounts of synergy realization are subject to change as we progress in the integration.

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Liquidity Coverage Ratio

As a result of our average weighted short-term wholesale funding for the past four quarters exceeding $75 billion, we became subject to daily reporting of our liquidity coverage ratio (LCR) and net stable funding ratio (NSFR) to the Federal Reserve on July 1, 2021, and will become subject to the full (100%) LCR and NSFR (up from 85%) on October 1, 2021.

As a result of our average weighted short-term wholesale funding for the past four quarters exceeding $75 billion, we became subject to daily reporting of our liquidity coverage ratio (LCR) and net stable funding ratio (NSFR) to the Federal Reserve on July 1, 2021, and became subject to the full (100%) LCR and NSFR (up from 85%) on October 1, 2021.

Financial Holding Company Election

On March 16, 2021, CSC’s declaration electing to be treated as a Financial Holding Company (FHC) was deemed effective by the Federal Reserve.

In addition to the activities that savings and loan holding companies that have not elected to be treated as an FHC are permitted to conduct, the Company may now also engage in activities that are financial in nature or incidental to a financial activity (FHC Activities), including securities underwriting, dealing and making markets in securities, various insurance underwriting activities, and making merchant banking investments in non-financial companies.

In addition to the activities that a savings and loan holding company that has not elected to be treated as an FHC is permitted to conduct, the Company may now also engage in activities that are financial in nature or incidental to a financial activity (FHC Activities), including securities underwriting, dealing and making markets in securities, various insurance underwriting activities, and making merchant banking investments in non-financial companies.

The Federal Reserve has the authority to limit an FHC’s ability to conduct otherwise permissible FHC Activities if the FHC or any of its depository institution subsidiaries ceases to meet the applicable eligibility requirements, including requirements that the FHC and each of its depository institution subsidiaries maintain their status as “well-capitalized” and “well-managed.” If the Federal Reserve finds that an FHC fails to meet these requirements, the FHC and its subsidiaries may not commence any new FHC Activity, either de novo or through an acquisition, without prior Federal Reserve approval.

The Federal Reserve may also

THE CHARLES SCHWAB CORPORATION

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(Tabular Amounts in Millions, Except Ratios, or as Noted)

the FHC and each of its depository institution subsidiaries maintain their status as “well-capitalized” and “well-managed.” If the Federal Reserve finds that an FHC fails to meet these requirements, the FHC and its subsidiaries may not commence any new FHC Activity, either de novo or through an acquisition, without prior Federal Reserve approval.

The Federal Reserve may also impose any additional limitations or conditions on the conduct or activities of the FHC or any of its subsidiaries as it deems appropriate.

impose any additional limitations or conditions on the conduct or activities of the FHC or any of its subsidiaries as it deems appropriate.

If the FHC still fails to satisfy the applicable eligibility requirements 180 days after the Federal Reserve’s finding, the agency may require divestiture of all of the FHC’s depository institution subsidiaries or, alternatively, the FHC may elect to cease all of its FHC Activities.

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The following tables present a comparison of revenue by category:

Three Months Ended June 30, Percent

Three Months Ended September 30, Percent

Change Amount % of

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Bank deposit account fees N/M 323 7 % — —

Other N/M 241 6 % 67 2 %

Other 138 % 152 4 % 64 3 %

Total net revenues 87 % $ 4,570 100 % $ 2,448 100 %

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(Tabular Amounts in Millions, Except Ratios, or as Noted)

Six Months Ended June 30, Percent

Nine Months Ended September 30, Percent

Change Amount % of

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Revenue on interest-earning assets is affected by various factors, such as the composition of assets, prevailing interest rates and spreads at the time of origination or purchase, changes in interest rates on floating rate securities and loans, and changes in prepayment levels for mortgage-backed and other asset-backed securities and loans.

economic recovery advanced in the first half of 2021, interest rates remained historically low.

Short-term rates remained near zero throughout the first half of 2021;

longer-term interest rates began to rise in the first quarter, yet declined slightly during the second quarter.

The overall environment continued to contribute to elevated levels of prepayments on mortgage-backed securities, resulting in accelerated reinvestment of the available for sale (AFS) portfolio during the first half of 2021.

Client engagement in the equity markets greatly increased early in 2021, and clients were net buyers of equity securities and other investment products throughout the first half of the year, resulting in outflows of client cash.

At the same time, Schwab saw significant growth in new client brokerage accounts and net new client assets, driving further growth in Schwab’s interest-earning assets.

economic recovery continued in the first nine months of 2021, interest rates remained historically low.

Short-term rates remained near zero throughout the first nine months of 2021;

longer-term interest rates began to rise early in the year, and remained largely unchanged in the third quarter.

In addition, elevated levels of prepayments on mortgage-backed securities, though moderating slightly in the third quarter, persisted throughout the period and resulted in accelerated reinvestment of the available for sale (AFS) portfolio.

Moreover, Schwab saw significant growth in new client brokerage accounts and net new client assets throughout the first nine months of 2021, driving growth in Schwab’s interest-earning assets.

At the same time, client engagement in the equity markets increased and clients were net buyers of equity securities and other investment products, resulting in outflows of client cash and partially offsetting the growth in interest-earning assets.

THE CHARLES SCHWAB CORPORATION

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The following tables present net interest revenue information corresponding to interest-earning assets and funding sources on the condensed consolidated balance sheets:

Three Months Ended June 30, Average Balance Interest Revenue/ Expense Average Yield/Rate Average Balance Interest Revenue/ Expense Average Yield/Rate

Three Months Ended September 30, Average Balance Interest Revenue/ Expense Average Yield/Rate Average Balance Interest Revenue/ Expense Average Yield/Rate

Interest-earning assets

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(Tabular Amounts in Millions, Except Ratios, or as Noted)

Six Months Ended June 30, Average Balance Interest Revenue/ Expense Average Yield/Rate Average Balance Interest Revenue/ Expense Average Yield/Rate

Nine Months Ended September 30, Average Balance Interest Revenue/ Expense Average Yield/Rate Average Balance Interest Revenue/ Expense Average Yield/Rate

Interest-earning assets

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(4) Interest revenue or expense was less than $500 thousand in the period or periods presented.

Net interest revenue increased $558 million, or 40%, and $897 million or 30% in the second quarter and first six months of 2021 compared to the same periods in 2020.

These increases were due largely to significant growth in margin loans and securities lending revenue as a result of our acquisition of TD Ameritrade.

The increases in net interest revenue were also supported by overall growth in interest-earning assets, including growth in bank loans, partially offset by lower average yields.

Net interest revenue increased $687 million, or 51%, and $1.6 billion or 37% in the third quarter and first nine months of 2021 compared to the same periods in 2020.

These increases were due largely to significant growth in margin loans and securities lending revenue, driven significantly by our acquisition of TD Ameritrade.

The increases in net interest revenue were also supported by overall growth in interest-earning assets, including growth in investment portfolio balances and bank loans, partially offset by lower average yields.

Accelerated premium amortization stemming from the elevated prepayment of mortgage-related debt securities in the AFS portfolio partially offset the growth in net interest revenue.

TD Ameritrade contributed $558 million and $1.1 billion of net interest revenue during the second quarter and first six months of 2021, respectively.

Average interest-earning assets for the second quarter and first six months of 2021 were higher by 46% and 60%, respectively, compared to the same periods in 2020.

TD Ameritrade contributed $534 million and $1.6 billion of net interest revenue during the third quarter and first nine months of 2021, respectively.

Average interest-earning assets for the third quarter and first nine months of 2021 were higher by 44% and 54%, respectively, compared to the same periods in 2020.

This increase resulted from higher bank deposits and payables to brokerage clients, due to heightened client cash balances driven by the low interest rate environment and strong net new client cash inflows, as well as our 2020 acquisitions of TD Ameritrade and USAA-IMCO.

Our net interest margin decreased to 1.46% and 1.47% during the second quarter and first six months of 2021, respectively, down from 1.53% and 1.80% during the same periods in 2020.

This decrease was driven primarily by lower yields received on interest-earning assets, in part due to purchases of investment securities throughout 2020 and the first six months of 2021 which were made at rates below the average yield on the AFS portfolio.

This more than offset the benefit from increased margin utilization and securities lending, which comprised 41% and 40% of net interest revenue during the second quarter and first six months of 2021, respectively, compared to 11% and 12% of net interest revenue for the same periods in 2020.

Our net interest margin increased to 1.45% during the third quarter of 2021 from 1.38% during the same period in 2020, and decreased for the first nine months of 2021 to 1.46% from 1.64% in the year-to-date period in 2020.

The improvement in the quarter-to-date net interest margin was due primarily to increased margin utilization and securities lending revenue, which comprised 39% and 40% of net interest revenue for the three and nine months ended September 30, 2021, respectively, growing from 12% of net interest revenue for both comparable periods in 2020.

Lower yields received on interest-earning assets, in part due to purchases of investment securities in 2020 and 2021 at rates below the average yield on the AFS portfolio, more than offset the benefit of growth in margin utilization and securities lending for the year-to-date period, resulting in an overall decrease in net interest margin for the first nine months of 2021 relative to the same period in 2020.

THE CHARLES SCHWAB CORPORATION

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The following tables present asset management and administration fees, average client assets, and average fee yields:

Three Months Ended June 30, 2021 2020

Three Months Ended September 30, 2021 2020

Assets Revenue Average

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Total asset management and administration fees $ 1,101 $ 860

Six Months Ended June 30, Average

Nine Months Ended September 30, Average

Assets Revenue Average

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(4) Includes miscellaneous service and transaction fees relating to mutual funds and ETFs that are not balance-based.

Asset management and administration fees increased by $246 million, or 31%, and $435 million, or 27% in the second quarter and first six months of 2021, respectively compared to the same periods in 2020.

These increases were due to the acquisition of TD Ameritrade, as well as additional growth in advice solutions, including managed account assets from USAA, and overall strength in the equity markets during the first six months of 2021 relative to the same period in 2020.

These increases were partially offset by the effect of money market fund fee waivers due to declining portfolio yields.

TD Ameritrade contributed $146 million and $288 million of asset management and administration fees in the second quarter and first six months of 2021, respectively.

Asset management and administration fees increased by $241 million, or 28%, and $676 million, or 27% in the third quarter and first nine months of 2021, respectively, compared to the same periods in 2020.

These increases were due to the acquisition of TD Ameritrade, as well as additional growth in advice solutions, including managed account assets from USAA, growth in net new client assets and overall strength in the equity markets during the first nine months of 2021.

These increases were partially offset by the effect of money market fund fee waivers due to lower portfolio yields as well as lower money market fund balances.

TD Ameritrade contributed $152 million and $440 million of asset management and administration fees in the third quarter and first nine months of 2021, respectively.

The amount of fee waivers in coming quarters is dependent on a variety of factors, including the level of short-term interest rates and client preferences across our money market fund line-up.

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The following tables present a roll forward of client assets for the Schwab money market funds, Schwab equity and bond funds, exchange-traded funds (ETFs), and collective trust funds (CTFs), and Mutual Fund OneSource ® and other non-transaction fee (NTF) funds.

These funds generated 29% of the asset management and administration fees earned in both the second quarter and first six months of 2021, compared to 44% and 45% of the asset management and administration fees earned in the second quarter and first six months of 2020, respectively:

These funds generated 29% of the asset management and administration fees earned in both the third quarter and first nine months of 2021, compared to 39% and 43% of the asset management and administration fees earned in the third quarter and first nine months of 2020, respectively:

Market Funds Schwab Equity and

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and Other NTF funds

Three Months Ended June 30, 2021 2020 2021 2020 2021 2020

Three Months Ended September 30, 2021 2020 2021 2020 2021 2020

Balance at beginning of period $ 151,943 $ 211,558 $ 411,091 $ 273,346 $ 240,181 $ 192,999

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and Other NTF funds

Six Months Ended June 30, 2021 2020 2021 2020 2021 2020

Nine Months Ended September 30, 2021 2020 2021 2020 2021 2020

Balance at beginning of period $ 176,089 $ 200,826 $ 341,689 $ 286,275 $ 223,857 $ 202,068

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The following table presents trading revenue and related information:

Three Months Ended June 30, Percent

Change Six Months Ended

June 30, Percent

Three Months Ended September 30, Percent

Change Nine Months Ended

September 30, Percent

2021 2020 2021 2020

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Percentage changes greater than 200% are presented as not meaningful.

Trading revenue increased $762 million and $1.8 billion in the second quarter and first six months of 2021, respectively, compared to the same periods in 2020, primarily due to the acquisition of TD Ameritrade and heightened client engagement, which together drove significantly higher DATs throughout the first six months of 2021.

Trading revenue increased $783 million and $2.6 billion in the third quarter and first nine months of 2021, respectively, compared to the same periods in 2020, primarily due to the acquisition of TD Ameritrade and heightened client engagement, which together drove significantly higher DATs throughout the first nine months of 2021.

This increased trading activity and a higher percentage of options trades drove significant growth in commissions and order flow revenue.

Overall, TD Ameritrade contributed $767 million and $1.7 billion of trading revenue in the second quarter and first six months of 2021, respectively.

Overall, TD Ameritrade contributed $743 million and $2.5 billion of trading revenue in the third quarter and first nine months of 2021, respectively.

Bank Deposit Account Fees

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Fees earned under the IDA agreement are affected by changes in interest rates and the composition of balances designated as fixed- and floating-rate.

Bank deposit account fees totaled $337 million and $688 million during the second quarter and first six months of 2021, respectively.

During the six months ended June 30, 2021, the total average BDA balance was approximately $164.1 billion, of which approximately 80% was designated as fixed-rate obligation amounts and approximately 20% as floating-rate obligation amounts.

Bank deposit account fees totaled $323 million and $1.0 billion during the third quarter and first nine months of 2021, respectively.

During the third quarter and first nine months ended September 30, 2021, the total average BDA balance was approximately $151.5 billion and $159.8 billion, respectively, of which approximately 80% was designated as fixed-rate

THE CHARLES SCHWAB CORPORATION

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(Tabular Amounts in Millions, Except Ratios, or as Noted)

obligation amounts and approximately 20% as floating-rate obligation amounts.

In the first nine months of 2021, the Company transferred $10.5 billion of BDA balances to its balance sheet from the TD Depository Institutions and other third-party banks.

Other Revenue

Other revenue includes exchange processing fees, certain service fees, software fees, and non-recurring gains.

Other revenue increased $174 million and $365 million in the second quarter and first six months of 2021, respectively, compared to the same periods in 2020 primarily due to the acquisition of TD Ameritrade, higher service fees resulting from higher trade volume and growth in customer base, and a gain on the sale of an investment during the second quarter of 2021.

Other revenue increased $88 million and $453 million in the third quarter and first nine months of 2021, respectively, compared to the same periods in 2020 primarily due to the acquisition of TD Ameritrade as well as higher service fees resulting from higher trade volume and growth in our customer base during the first nine months of 2021.

Total Expenses Excluding Interest

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Three Months Ended

June 30, Percent

Change Six Months Ended

June 30, Percent

September 30, Percent

Change Nine Months Ended

September 30, Percent

2021 2020 2021 2020

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Depreciation and amortization 140 97 44 % 404 284 42 %

135 97 39 % 264 187 41 %

Amortization of acquired intangible assets (1)

154 12 N/M 308 18 N/M

Amortization of acquired intangible assets 153 25 N/M 461 43 N/M

Regulatory fees and assessments 64 36 78 % 208 106 96 %

Other 355 100 N/M 593 177 N/M

Other 140 73 92 % 733 250 193 %

Total expenses excluding interest $ 2,559 $ 1,559 64 % $ 8,122 $ 4,691 73 %

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Average 32.4 22.1 47 % 32.3 21.1 53 %

(1) Beginning in the third quarter of 2020, amortization of acquired intangible assets was reclassified from depreciation and amortization.

Prior periods have been reclassified to reflect this change.

N/M Not meaningful.

Percentage changes greater than 200% are presented as not meaningful.

Expenses excluding interest increased by 80% and 78% in the second quarter and first six months of 2021, respectively, compared to the same periods in 2020.

In the second quarter and first six months of 2021, total expenses excluding interest included $0.9 billion and $1.8 billion, respectively, from TD Ameritrade.

Adjusted total expenses, which excludes acquisition and integration-related costs and amortization of acquired intangible assets, increased 71% and 67% in the second quarter and first six months of 2021, respectively, compared to the same periods in 2020.

Expenses excluding interest increased by 64% and 73% in the third quarter and first nine months of 2021, respectively, compared to the same periods in 2020.

In the third quarter and first nine months of 2021, total expenses excluding interest included $735 million and $2.5 billion, respectively, from TD Ameritrade.

Adjusted total expenses, which excludes acquisition and integration-related costs and amortization of acquired intangible assets, increased 54% and 63% in the third quarter and first nine months of 2021, respectively, compared to the same periods in 2020.

See Non-GAAP Financial Measures for further details and a reconciliation of such measures to GAAP reported results.

Total compensation and benefits increased in the second quarter and first six months of 2021, compared to the same periods in 2020, primarily due to an overall increase in employee headcount, driven primarily by our acquisition of TD Ameritrade.

Total compensation and benefits increased in the third quarter and first nine months of 2021, compared to the same periods in 2020, primarily due to an overall increase in employee headcount, driven primarily by our acquisition of TD Ameritrade.

The increase was also due to additional headcount to support our expanding client base and service levels amidst heightened client engagement, as well as annual merit increases and higher bonus accrual.

Compensation and benefits in the second quarter and first six months of 2021 included $97 million and $169 million, respectively, of acquisition and integration-related costs, up from $13 million and $21 million in the second quarter and first six months of 2020, respectively.

Professional services expense increased in the second quarter and first six month of 2021 compared to the same periods in 2020, primarily due to the inclusion of TDA’s results of operations and overall growth in the business.

Compensation and benefits in the third quarter and first nine months of 2021 included $58 million and $227 million, respectively, of acquisition and integration-related costs, up from $13 million and $34 million in the third quarter and first nine months of 2020, respectively.

Professional services expense increased in the third quarter and first nine month of 2021 compared to the same periods in 2020, primarily due to the inclusion of TDA’s results of operations and overall growth in the business.

THE CHARLES SCHWAB CORPORATION

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(Tabular Amounts in Millions, Except Ratios, or as Noted)

Occupancy and equipment expense increased in the second quarter and first six months of 2021 compared to the same periods in 2020, primarily due to the inclusion of TDA’s results of operations and costs related to the integration of TD Ameritrade, as well as an increase in technology equipment costs associated with higher customer trade volumes and overall growth in the business.

Advertising and market development expense increased in the second quarter and first six months of 2021 compared to the same periods in 2020, primarily due to the inclusion of TDA’s results of operations.

Communications expense increased in the second quarter and first six months of 2021 compared to the same periods in 2020, primarily due to the inclusion of TDA’s results of operations, as well as higher communications expenses due to higher customer trade volumes and overall growth of the business.

Depreciation and amortization expenses grew in the second quarter and first six months of 2021 compared to the same periods in 2020, primarily resulting from growth in fixed assets due to the TDA acquisition, higher amortization of purchased and internally developed software, higher depreciation of buildings related to expansion of our campuses in the U.S., and higher depreciation of hardware.

Occupancy and equipment expense increased in the third quarter and first nine months of 2021 compared to the same periods in 2020, primarily due to the inclusion of TDA’s results of operations and costs related to the integration of TD Ameritrade, as well as an increase in technology equipment costs associated with higher customer trade volumes and overall growth in the business.

Advertising and market development expense increased in the third quarter and first nine months of 2021 compared to the same periods in 2020, primarily due to the inclusion of TDA’s results of operations.

Communications expense increased in the third quarter and first nine months of 2021 compared to the same periods in 2020, primarily due to the inclusion of TDA’s results of operations, as well as higher communications expenses due to higher customer trade volumes and overall growth of the business.

Depreciation and amortization expenses grew in the third quarter and first nine months of 2021 compared to the same periods in 2020, primarily resulting from growth in fixed assets due to the TDA acquisition, higher amortization of purchased and internally developed software, higher depreciation of hardware, and higher depreciation of buildings related to expansion of our campuses in the U.S.

Amortization of acquired intangible assets increased in 2021 as a result of acquisitions completed in 2020.

Regulatory fees and assessments increased in the second quarter and first six months of 2021 compared to the same periods in 2020, primarily as a result of the inclusion of TDA’s results of operations and overall growth in the business, including higher FDIC assessments due to asset growth.

Other expense increased in the second quarter and first six months of 2021 compared to the same periods in 2020, primarily due to the inclusion of TDA’s results of operations and a $200 million regulatory matter charge in the second quarter of 2021 (see Item 1 – Note 10).

Capital expenditures were $225 million and $434 million in the second quarter and first six months of 2021, respectively, compared with $169 million and $419 million in the second quarter and first six months of 2020, respectively.

The increases in capital expenditures from the prior year were primarily due to higher hardware costs offset by lower building expansion and lower capitalized software costs in 2021, relative to the first six months of 2020.

We anticipate capital expenditures for full-year 2021 to be approximately 6-7% of total net revenues.

Regulatory fees and assessments increased in the third quarter and first nine months of 2021 compared to the same periods in 2020, primarily as a result of the inclusion of TDA’s results of operations and overall growth in the business, including higher FDIC assessments due to asset growth.

Other expense increased in the third quarter and first nine months of 2021 compared to the same periods in 2020, primarily due to the inclusion of TDA’s results of operations and a charge of approximately $200 million for a regulatory matter in the first nine months of 2021 (see Item 1 – Note 10).

Capital expenditures were $176 million and $610 million in the third quarter and first nine months of 2021, respectively, compared with $122 million and $541 million in the third quarter and first nine months of 2020, respectively.

The increases in capital expenditures from the prior year were primarily due to higher hardware and capitalized software costs, partially offset by lower building expansion in 2021 relative to the first nine months of 2020.

In consideration of revenue growth and timing of capital expenditures through the first nine months of the year, we anticipate capital expenditures for full-year 2021 to be approximately 5-6% of total net revenues.

Taxes on Income

Taxes on income were $454 million and $217 million for the second quarters of 2021 and 2020, respectively, resulting in effective income tax rates on income before taxes of 26.4% and 24.4%, respectively.

Taxes on income were $930 million and $469 million for the first six months of 2021 and 2020, respectively, resulting in effective income tax rates on income before taxes of 25.3% and 24.2%, respectively.

The increase in the effective tax rate in the second quarter and first six months of 2021 compared to the same periods in 2020 was primarily related to increased state tax expense due to uncertain tax position accruals, the tax impact of a non-deductible regulatory matter charge in the second quarter of 2021 (see Item 1 – Note 10), and the impact of state rate changes on the Company’s deferred tax liabilities.

Partially offsetting the increases in the effective tax rates from these items was an increase in equity compensation tax benefits during the second quarter and first six months of 2021.

Taxes on income were $485 million and $191 million for the third quarters of 2021 and 2020, respectively, resulting in effective income tax rates on income before taxes of 24.1% and 21.5%, respectively.

Taxes on income were $1.4 billion and $660 million for the first nine months of 2021 and 2020, respectively, resulting in effective income tax rates on income before taxes of 24.9% and 23.4%, respectively.

The increase in the effective tax rate in the third quarter of 2021 compared to the same period in 2020 was primarily related to non-recurring federal tax benefits recognized during the third quarter of 2020 including settlement of the IRS examination for tax years 2011-2014, as well as the tax impact of a non-deductible regulatory matter charge in 2021 (see Item 1 – Note 10).

Partially offsetting the increases in the effective tax rate from these items was an increase in equity compensation tax benefits during the third quarter of 2021.

The increase in the effective tax rate in the first nine months of 2021 compared to the same period in 2020 was primarily due to the factors noted above, as well as increased state tax expense due to uncertain tax position accruals during the first nine months of 2021.

THE CHARLES SCHWAB CORPORATION

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Investor Services Advisor Services Total

Three Months Ended June 30, Percent Change 2021 2020 Percent Change 2021 2020 Percent Change 2021 2020

Three Months Ended September 30, Percent Change 2021 2020 Percent Change 2021 2020 Percent Change 2021 2020

Net interest revenue 61 % $ 1,530 $ 948 27 % $ 500 $ 395 51 % $ 2,030 $ 1,343

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Bank deposit account fees N/M 239 — N/M 84 — N/M 323 —

Other N/M 170 51 N/M 71 16 N/M 241 67

Other 124 % 114 51 192 % 38 13 138 % 152 64

Total net revenues 100 % 3,561 1,781 51 % 1,009 667 87 % 4,570 2,448

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Net New Client Assets (in billions) (1)

(61) % $ 44.5 $ 113.0 164 % $ 64.3 $ 24.4 (21) % $ 108.8 $ 137.4

N/M $ 57.9 $ 18.9 151 % $ 81.1 $ 32.3 171 % $ 139.0 $ 51.2

Investor Services Advisor Services Total

Six Months Ended June 30, Percent Change 2021 2020 Percent Change 2021 2020 Percent Change 2021 2020

Nine Months Ended September 30, Percent Change 2021 2020 Percent Change 2021 2020 Percent Change 2021 2020

Net interest revenue 47 % $ 4,462 $ 3,028 12 % $ 1,426 $ 1,276 37 % $ 5,888 $ 4,304

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— $ 167.5 $ 167.2 126 % $ 214.1 $ 94.6 46 % $ 381.6 $ 261.8

(1) In the first six months of 2021, Investor Services includes an outflow of $14.4 billion from a mutual fund clearing services client.

For the second quarter and first six months of 2020, Investor Services includes inflows of $79.9 billion related to the acquisition of assets of USAA-IMCO and $10.9 billion from a mutual fund clearing services client.

(1) In the first nine months of 2021, Investor Services includes an outflow of $14.4 billion from a mutual fund clearing services client.

In the third quarter and the first nine months of 2020, Advisor Services includes an inflow of $8.5 billion related to the acquisition of Wasmer, Schroeder & Company, LLC.

Also for the first nine months of 2020, Investor Services includes inflows of $79.9 billion related to the acquisition of assets of USAA-IMCO and $10.9 billion from a mutual fund clearing services client.

N/M Not meaningful.

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Segment Net Revenues

Investor Services and Advisor Services total net revenues increased by 105% and 38%, respectively, in the second quarter and 102% and 35%, respectively, for the first six months of 2021 compared to the same periods in 2020.

Investor Services and Advisor Services total net revenues increased by 100% and 51%, respectively, in the third quarter and 101% and 40%, respectively, for the first nine months of 2021 compared to the same periods in 2020.

Both segments saw growth in all revenue line items, primarily due to our October 6, 2020 acquisition of TD Ameritrade.

Net interest revenue increased for both segments due to significant growth from TDA in margin loans and securities lending revenue, as well as overall growth in interest-earning assets, including growth in bank loans, partially offset by lower average yields.

Growth in asset management and administration fees in Investor Services was supported by growth in advice solutions, including managed account assets from USAA, and asset management and administration fees grew in both segments as a result of overall strength in the equity markets, partially offset by money market fund fee waivers.

Net interest revenue increased for both segments due to significant growth in margin loans and securities lending revenue, as well as overall growth in interest-earning assets, partially offset by lower average yields.

Growth in asset management and administration fees in Investor Services was supported by growth in advice solutions, and asset management and administration fees grew in both segments as a result of overall strength in the equity markets, partially offset by money market fund fee waivers and lower money market fund balances.

The increases in trading revenue for both segments were supported by heightened client trading activity.

Bank deposit account fee revenue was earned at both segments during the first six months of 2021, following the TDA acquisition.

Bank deposit account fee revenue was earned at both segments during the first nine months of 2021, following the TDA acquisition.

Increases in other revenue for both segments were primarily due to the TD Ameritrade acquisition.

Segment Expenses Excluding Interest

Investor Services and Advisor Services total expenses excluding interest increased by 87% and 57%, respectively, in the second quarter and 85% and 56%, respectively, for the first six months of 2021, compared to the same periods in 2020, primarily due to

THE CHARLES SCHWAB CORPORATION

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(Tabular Amounts in Millions, Except Ratios, or as Noted)

the inclusion of TD Ameritrade’s results of operations and, for Investor Services, a $200 million regulatory matter charge in the second quarter of 2021 (see Item 1 – Note 10).

Segment Expenses Excluding Interest

Investor Services and Advisor Services total expenses excluding interest increased by 68% and 54%, respectively, in the third quarter and 79% and 55%, respectively, for the first nine months of 2021, compared to the same periods in 2020, primarily due to the inclusion of TD Ameritrade’s results of operations and, for Investor Services, a charge of approximately $200 million for a regulatory matter in the first nine months of 2021 (see Item 1 – Note 10).

In addition, both segments saw higher compensation and benefits expenses due to additional increases in headcount to support our expanding client base and service levels amidst heightened client engagement, as well as annual merit increases and higher bonus accrual.

For Investor Services, total expenses excluding interest also increased as a result of our hiring former USAA employees in connection with the 2020 acquisition of assets of USAA-IMCO.

For Investor Services, total expenses excluding interest also increased for the year-to-date period as a result of our hiring former USAA employees in connection with the 2020 acquisition of assets of USAA-IMCO.

RISK MANAGEMENT

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The Company has a comprehensive risk management program to identify and manage these risks and their associated potential for financial and reputational impact.

As part of our integration of TD Ameritrade, the Company is aligning TD Ameritrade’s historical risk exposures with Schwab’s risk appetite.

As part of our integration of TD Ameritrade, the Company continues to align TD Ameritrade’s risk management practices with Schwab’s risk appetite.

Our integration work includes evaluating new or changed risks impacting the combined company, and may involve modifications to our existing risk management processes.

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As we actively manage the consolidated balance sheet and interest rate exposure, in all likelihood we would take steps to manage additional interest rate exposure that could result from changes in the interest rate environment.

The following table shows the simulated change to net interest revenue over the next 12 months beginning June 30, 2021 and December 31, 2020 of a gradual 100 basis point increase or decrease in market interest rates relative to prevailing market rates at the end of each reporting period:

June 30, 2021 December 31, 2020

The following table shows the simulated change to net interest revenue over the next 12 months beginning September 30, 2021 and December 31, 2020 of a gradual 100 basis point increase or decrease in market interest rates relative to prevailing market rates at the end of each reporting period:

September 30, 2021 December 31, 2020

Increase of 100 basis points 13.6 % 14.2 %

Decrease of 100 basis points (4.0) % (4.3) %

Net interest revenue sensitivities as of June 30, 2021 remained relatively consistent with December 31, 2020, due to the continued low interest rate environment.

Higher short-term interest rates would positively impact net interest revenue as yields on interest-earning assets are expected to rise faster than the cost of funding sources.

A decline in interest rates could negatively

THE CHARLES SCHWAB CORPORATION

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(Tabular Amounts in Millions, Except Ratios, or as Noted)

impact the yield on the Company’s investment and loan portfolio to a greater degree than any offsetting reduction in interest expense from funding sources, compressing net interest margin.

Net interest revenue sensitivities as of September 30, 2021 remained relatively consistent with December 31, 2020, due to the continued low interest rate environment.

Higher short-term interest rates would positively impact net interest revenue as yields on interest-earning assets are expected to rise faster than the cost of funding sources.

A decline in interest rates could negatively impact the yield on the Company’s investment and loan portfolio to a greater degree than any offsetting reduction in interest expense from funding sources, compressing net interest margin.

In addition to measuring the effect of a gradual 100 basis point parallel increase or decrease in current interest rates, we regularly simulate the effects of larger parallel- and non-parallel shifts in interest rates on net interest revenue.

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Consistent with the presentation on the consolidated statement of income, the sensitivity of bank deposit account fee revenue to interest rate changes is assessed separately from the net interest revenue simulation described above.

As of June 30, 2021, simulated changes in bank deposit account fee revenue from gradual 100 basis point changes in market interest rates relative to prevailing market rates did not have a significant impact on the Company’s total net revenues.

As of September 30, 2021, simulated changes in bank deposit account fee revenue from gradual 100 basis point changes in market interest rates relative to prevailing market rates did not have a significant impact on the Company’s total net revenues.

Economic Value of Equity Simulation

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Phase-out of LIBOR

The Company has established a firm-wide team to address the phasing-out of LIBOR.

The Company has established a team to address the phasing-out of LIBOR.

As part of our efforts, we have assessed our LIBOR exposures, the largest of which are certain investment securities and loans.

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In addition to internal sources of liquidity, Schwab has access to external funding.

The following table describes external debt facilities available at June 30, 2021:

The following table describes external debt facilities available at September 30, 2021:

Description Borrower Outstanding Available

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Uncommitted, unsecured lines of credit with various external banks CSC, CS&Co — 1,522

Unsecured commercial paper CSC 1,500 —

Unsecured commercial paper (3)

Committed, unsecured credit facility with various external banks TDAC — 600

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(2) Amounts available are dependent on the fair value of certain investment securities that are pledged as collateral.

(3) In October 2021, the Company increased the amount of commercial paper available to issue from $1.5 billion to $5.0 billion.

(4) Secured borrowing capacity is made available based on TDAC’s ability to provide acceptable collateral to the lenders as determined by the credit agreements.

CSC’s ratings for Commercial Paper Notes are P1 by Moody’s Investor Service (Moody’s), A1 by Standard & Poor’s Rating Group (Standard & Poor’s), and F1 by Fitch Ratings, Ltd (Fitch) at June 30, 2021 and December 31, 2020.

CSC also has a universal automatic shelf registration statement on file with the SEC, which enables it to issue debt, equity, and other securities.

Liquidity Coverage Ratio

Schwab is currently subject to a reduced LCR rule requiring the Company to hold high quality liquid assets (HQLA) in an amount equal to at least 85% of the Company’s projected net cash outflows over a prospective 30-calendar-day period of acute liquidity stress, calculated on each business day.

See Part I – Item 1 – Regulation in the 2020 Form 10-K for additional information.

The Company was in compliance with the reduced LCR rule at June 30, 2021.

Schwab will become subject to the full (100%) LCR on October 1, 2021.

For the nine months ended September 30, 2021, Schwab was subject to a reduced LCR rule requiring the Company to hold high quality liquid assets (HQLA) in an amount equal to at least 85% of the Company’s projected net cash outflows over a prospective 30-calendar-day period of acute liquidity stress, calculated on each business day.

The Company was in compliance with the reduced LCR rule at September 30, 2021.

On October 1, 2021, Schwab became subject to the full (100%) LCR.

See Overview – Current Regulatory Environment and Other Developments and Part I – Item 1 – Regulation in the 2020 Form 10-K for additional information.

The table below presents information about our average daily LCR:

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Three Months Ended

June 30, 2021

September 30, 2021

Total eligible high quality liquid assets $ 92,745

Net cash outflows $ 85,056

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 are details of the Senior Notes:

June 30, 2021 Par

September 30, 2021 Par

Outstanding Maturity Weighted Average

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CSC Senior Notes $ 17,768 2022 - 2031 2.34% A2 A A

TDA Senior Notes $ 3,550 2021 - 2029 2.79% A2 A —

TDA Holding Senior Notes $ 1,563 2021 - 2029 2.10% A2 A —

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)

New Debt Issuances

Schwab’s debt issuances in 2021 were senior unsecured obligations.

The below debt issuances in 2021 were senior unsecured obligations.

Interest is payable semi-annually for the fixed-rate Senior Notes and quarterly for the floating-rate Senior Notes.

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05/13/2021 $ 750 05/13/2031 2.300%

08/26/2021 $ 850 12/01/2031 1.950%

In addition, during the third quarter of 2021, we completed a debt exchange offer related to certain senior notes issued by TDA Holding for an equivalent amount of senior notes issued by CSC.

For further discussion of the exchange, see Item 1 – Note 9.

Equity Issuances

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As a result of significant inflows of client cash in 2020, our Tier 1 Leverage Ratio declined below our long-term operating objective for consolidated CSC of 6.75%-7.00%, ending 2020 at 6.3%.

Due to our issuances of preferred stock and strength in earnings in the first half of 2021, our Tier 1 Leverage Ratio was 6.4% at June 30, 2021, consistent with the first quarter.

The Company’s issuances of preferred stock and strength in earnings in the first nine months of 2021 helped maintain our Tier 1 Leverage Ratio, as we ended the third quarter at 6.3%.

Though still below our long-term operating objective, this ratio is well above the regulatory minimum.

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We continue to manage our capital position in accordance with our policy and strategy described above and in further detail in our 2020 Form 10-K.

Regulatory Capital Requirements

CSC and our banking subsidiaries are subject to various capital requirements set by regulatory agencies as discussed in further detail in the 2020 Form 10-K and in Item 1 – Note 17.

As of September 30, 2021, CSC and our banking subsidiaries are considered well capitalized.

THE CHARLES SCHWAB CORPORATION

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(Tabular Amounts in Millions, Except Ratios, or as Noted)

Regulatory Capital Requirements

CSC and our banking subsidiaries are subject to various capital requirements set by regulatory agencies as discussed in further detail in the 2020 Form 10-K and in Item 1 – Note 17.

As of June 30, 2021, CSC and our banking subsidiaries are considered well capitalized.

The following table details CSC’s consolidated and CSB’s capital ratios as of June 30, 2021 and December 31, 2020:

June 30, 2021 December 31, 2020

The following table details CSC’s consolidated and CSB’s capital ratios as of September 30, 2021 and December 31, 2020:

September 30, 2021 December 31, 2020

CSC CSB CSC CSB

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are subject to regulatory requirements of the Uniform Net Capital Rule, which is intended to ensure the general financial soundness and liquidity of broker-dealers.

At June 30, 2021, CS&Co, TDAC, and TD Ameritrade, Inc.

At September 30, 2021, CS&Co, TDAC, and TD Ameritrade, Inc.

were in compliance with their respective net capital requirements.

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IDA Agreement

Pursuant to the IDA agreement, Schwab moved $8.7 billion of uninsured IDA balances out of the IDA sweep program in July 2021.

The IDA agreement also provides that, starting July 1, 2021, Schwab has the option to migrate up to $10 billion of IDA balances every 12 months to Schwab’s balance sheet, subject to certain limitations and adjustments.

Inclusive of the uninsured balances and transfers relating to certain international accounts, IDA balances moved to Schwab’s balance sheet totaled $9.9 billion through July 31, 2021.

Through September 30, 2021, Schwab had moved $10.0 billion of IDA balances to its balance sheet, which included uninsured balances and certain international account balances.

The Company’s overall capital management strategy includes supporting migration of IDA balances in future periods as available pursuant to the terms of the IDA agreement.

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(Tabular Amounts in Millions, Except Ratios, or as Noted)

Cash dividends paid and per share amounts for the first six months of 2021 and 2020 are as follows:

Six Months Ended June 30, Cash Paid Per Share

Cash dividends paid and per share amounts for the first nine months of 2021 and 2020 are as follows:

Nine Months Ended September 30, Cash Paid Per Share

Amount Cash Paid Per Share

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Series G Preferred Stock (6)

67 2,687.50 N/A N/A

101 4,031.25 45 1,806.60

Series H Preferred Stock (7)

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The authorization does not have an expiration date.

There were no repurchases of CSC’s common stock under this authorization during the first six months of 2021 or 2020.

As of June 30, 2021, $1.8 billion remained on our existing authorization.

There were no repurchases of CSC’s common stock under this authorization during the first nine months of 2021 or 2020.

As of September 30, 2021, $1.8 billion remained on our existing authorization.

Foreign Exposure

At June 30, 2021, Schwab had exposure to non-sovereign financial and non-financial institutions in foreign countries, as well as agencies of foreign governments.

At June 30, 2021, the fair value of these holdings totaled $10.4 billion, with the top three exposures being to issuers and counterparties domiciled in France at $5.3 billion, Germany at $1.2 billion, and Canada at $845 million.

At September 30, 2021, Schwab had exposure to non-sovereign financial and non-financial institutions in foreign countries.

At September 30, 2021, the fair value of these holdings totaled $12.8 billion, with the top three exposures being to issuers and counterparties domiciled in France at $5.8 billion, the United Kingdom at $3.7 billion, and Sweden at $755 million.

At December 31, 2020, the fair value of these holdings totaled $10.1 billion, with the top three exposures being to issuers and counterparties domiciled in France at $6.7 billion, Germany at $1.2 billion, and Canada at $880 million.

In addition, Schwab had outstanding margin loans to foreign residents of $3.2 billion and $2.2 billion at June 30, 2021 and December 31, 2020, respectively.

In addition, Schwab had outstanding margin loans to foreign residents of $3.3 billion and $2.2 billion at September 30, 2021 and December 31, 2020, respectively.

Off-Balance Sheet Arrangements

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Concurrent with the closing of the acquisition of TD Ameritrade effective October 6, 2020, the IDA agreement with the TD Depository Institutions became effective.

Pursuant to the IDA agreement, certain brokerage client deposits are required to be swept off-balance sheet to the TD Depository Institutions.

TD Ameritrade also maintains agreements pursuant to which client brokerage cash deposits are swept to other third-party depository institutions.

Pursuant to the IDA agreement, certain brokerage client deposits are swept off-balance sheet to the TD Depository Institutions.

The Company also maintains agreements pursuant to which TD Ameritrade client brokerage cash deposits are swept to other third-party depository institutions.

See Item 1 – Note 10 for additional information on the IDA agreement.

4 unchanged sentences

Certain of our accounting policies that involve a higher degree of judgment and complexity are discussed in Part II – Item 7 – Management’s Discussion and Analysis of Financial Condition and Results of Operations – Critical Accounting Estimates in the 2020 Form 10-K.

There have been no changes to critical accounting estimates during the first six months of 2021.

There have been no changes to critical accounting estimates during the first nine months of 2021.

NON-GAAP FINANCIAL MEASURES

22 unchanged sentences

The following tables present reconciliations of GAAP measures to non-GAAP measures:

Three Months Ended June 30, Six Months Ended June 30,

Three Months Ended September 30, Nine Months Ended September 30,

2021 2020 2021 2020

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Adjusted total expenses (non-GAAP) $ 2,302 $ 1,492 $ 7,294 $ 4,488

(1) Acquisition and integration-related costs for the three and six months ended June 30, 2021 primarily consist of $97 million and $169 million of compensation and benefits, $37 million and $64 million of professional services, and $7 million and $23 million of occupancy and equipment.

Acquisition and integration-related costs for the three and six months ended June 30, 2020 primarily consist of $46 million and $69 million of professional services and $20 million and $24 million of other.

Three Months Ended June 30, Six Months Ended June 30,

(1) Acquisition and integration-related costs for the three and nine months ended September 30, 2021 primarily consist of $58 million and $227 million of compensation and benefits, $35 million and $99 million of professional services, and $7 million and $30 million of occupancy and equipment.

Acquisition and integration-related costs for the three and nine months ended September 30, 2020 primarily consist of $29 million and $98 million of professional services and $13 million and $34 million of compensation and benefits.

Three Months Ended September 30, Nine Months Ended September 30,

2021 2020 2021 2020

9 unchanged sentences

(1) The income tax effects of the non-GAAP adjustments are determined using an effective tax rate reflecting the exclusion of non-deductible acquisition costs and are used to present the acquisition and integration-related costs and amortization of acquired intangible assets on an after-tax basis.

Three Months Ended June 30, Six Months Ended June 30,

Three Months Ended September 30, Nine Months Ended September 30,

2021 2020 2021 2020

12 unchanged sentences

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis