SCHWAB CHARLES CORP 10-Q

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations INTRODUCTION The Charles Schwab Corporation (CSC) is a savings and loan holding company. Incorporated in 1986, CSC engages, through its subsidiaries, in wealth management, securities brokerage, banking, asset management, custody, and financial advisory services. Principal business subsidiaries of CSC include the following: • Charles Schwab & Co., Inc. (CS&Co), incorporated in 1971, a securities broker-dealer; • TD Ameritrade, Inc., an introducing securities broker-dealer; • TD Ameritrade Clearing, Inc. (TDAC), a securities broker-dealer that provides trade execution and clearing services to TD Ameritrade, Inc.; • Charles Schwab Bank, SSB (CSB), our principal banking entity; and • Charles Schwab Investment Management, Inc. (CSIM), the investment advisor for Schwab’s proprietary mutual funds (Schwab Funds ® ) and for Schwab’s exchange-traded funds (Schwab ETFs ™ ). Unless otherwise indicated, the terms “Schwab,” “the Company,” “we,” “us,” or “our” mean CSC together with its consolidated subsidiaries. Schwab provides financial services to individuals and institutional clients through two segments – Investor Services and Advisor Services. The Investor Services segment provides retail brokerage and banking services to individual investors, and retirement plan services, as well as other corporate brokerage services, to businesses and their employees. The Advisor Services segment provides custodial, trading, banking, and support services, as well as retirement business services, to independent registered investment advisors (RIAs), independent retirement advisors, and recordkeepers. Effective October 6, 2020, the Company completed its acquisition of TD Ameritrade Holding Corporation (TDA Holding) and its consolidated subsidiaries (collectively referred to as “TD Ameritrade” or “TDA”). TD Ameritrade provides securities brokerage services, including trade execution, clearing services, and margin lending, through its broker-dealer subsidiaries; and futures and foreign exchange trade execution services through its futures commission merchant (FCM) and forex dealer member (FDM) subsidiary. The TD Ameritrade acquisition is further described in Note 3 of the notes to the condensed consolidated financial statements below. Our consolidated financial statements include the results of operations and financial condition of TD Ameritrade beginning on October 6, 2020. Schwab was founded on the belief that all Americans deserve access to a better investing experience. Although much has changed in the intervening years, our purpose remains clear – to champion every client’s goals with passion and integrity. Guided by this purpose and our vision of creating the most trusted leader in investment services, management has adopted a strategy described as “Through Clients’ Eyes.” This strategy emphasizes placing clients’ perspectives, needs, and desires at the forefront. Because investing plays a fundamental role in building financial security, we strive to deliver a better investing experience for our clients – individual investors and the people and institutions who serve them – by disrupting longstanding industry practices on their behalf and providing superior service. We also aim to offer a broad range of products and solutions to meet client needs with a focus on transparency, value, and trust. In addition, management works to couple Schwab’s scale and resources with ongoing expense discipline to keep costs low and ensure that products and solutions are affordable as well as responsive to client needs. In combination, these are the key elements of our “no trade-offs” approach to serving investors. We believe that following this strategy is the best way to maximize our market valuation and stockholder returns over time. Management estimates that investable wealth in the United States (U.S.) (consisting of assets in defined contribution, retail wealth management and brokerage, and registered investment advisor channels, along with bank deposits) currently exceeds $70 trillion, which means the Company’s $7.61 trillion in total client assets leaves substantial opportunity for growth. Our strategy is based on the principle that developing trusted relationships will translate into more assets from both new and existing clients, ultimately driving more revenue, and along with expense discipline and thoughtful capital management, will generate earnings growth and build long-term stockholder value. - 1 - 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) This Management’s Discussion and Analysis should be read in conjunction with our Annual Report on Form 10-K for the fiscal year ended December 31, 2020 (2020 Form 10-K). On our website, https://www.aboutschwab.com , we post the following filings after they are electronically filed with or furnished to the Securities and Exchange Commission (SEC or Commission): annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and any amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934. In addition, the website also includes the Dodd-Frank stress test results, our regulatory capital disclosures based on Basel III, and our average liquidity coverage ratio (LCR). The SEC maintains a website at https://www.sec.gov that contains reports, proxy statements, and other information that we file electronically with them. FORWARD-LOOKING STATEMENTS In addition to historical information, this Quarterly Report on Form 10-Q 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,” “could,” “would,” “expand,” “aim,” “maintain,” “continue,” 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 estimates based on the best judgment of Schwab’s senior management. These statements relate to, among other things: • Maximizing our market valuation and stockholder returns over time; our belief that developing trusted relationships will translate into more client assets which drives revenue and, along with expense discipline and thoughtful capital management, generates earnings growth and builds stockholder value (see Introduction in Part I, Item 2); • Expected benefits from the TD Ameritrade acquisition; scope of technology work related to the integration; expected timing for the client conversion; cost estimates and timing related to the TD Ameritrade integration, including acquisition and integration-related costs and capital expenditures, cost synergies, and exit and other related costs (see Overview, Business Acquisitions in Part I, Item 1, Financial Information – Notes to Condensed Consolidated Financial Statements (Item 1) – Note 3, and Exit and Other Related Liabilities in Item 1 – Note 11); • Money market fund fee waivers (see Results of Operations); • 2021 capital expenditures (see Results of Operations); • The phase-out of the use of LIBOR (see Risk Management); • Sources of liquidity and capital; capital management; 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); and • The impact of legal proceedings and regulatory matters (see Commitments and Contingencies in Item 1 – Note 10 and Legal Proceedings in Part II, Item 1). 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 Quarterly Report on Form 10-Q 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: • General market conditions, including equity valuations, trading activity, the level of interest rates – which can impact money market fund fee waivers, and credit spreads; • Our ability to attract and retain clients, develop trusted relationships, and grow client assets; • Client use of our advice solutions and other products and services; • The level of client assets, including cash balances; • Competitive pressure on pricing, including deposit rates; • Client sensitivity to interest rates; • Regulatory guidance; • Capital and liquidity needs and management; - 2 - 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) • 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; • Our ability to monetize client assets in a win-win manner; • The scope and duration of the COVID-19 pandemic and actions taken by governmental authorities to contain the spread of the virus and the economic impact; • Our ability to support client activity levels; • The risk that expected cost synergies and other benefits from the TD Ameritrade acquisition may not be fully realized or may take longer to realize than expected; • The timing and scope of integration-related and other technology projects; • Real estate and workforce decisions; • Migrations of bank deposit account balances (BDA balances); • Prepayment levels for mortgage-backed securities; • Client cash allocations; • LIBOR trends; • Adverse developments in litigation or regulatory matters and any related charges; and • Potential breaches of contractual terms for which we have indemnification and guarantee obligations. Certain of these factors, as well as general risk factors affecting the Company, are discussed in greater detail in Part I – Item 1A – Risk Factors in the 2020 Form 10-K. - 3 - 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) OVERVIEW Management focuses on several client activity and financial metrics in evaluating Schwab’s financial position and operating performance. Results for the third quarter and first nine months of 2021 and 2020 are: Three Months Ended September 30, Percent Change Nine Months Ended September 30, Percent Change 2021 2020 2021 2020 Client Metrics Net new client assets (in billions) (1) $ 139.0 $ 51.2 171 % $ 381.6 $ 261.8 46 % 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 % Average client assets (in billions) $ 7,699.7 $ 4,331.5 78 % $ 7,336.9 $ 4,033.3 82 % New brokerage accounts (in thousands) (2) 1,178 592 99 % 5,988 2,853 110 % Active brokerage accounts (in thousands, at quarter end) 32,675 14,393 127 % Assets receiving ongoing advisory services (in billions, at quarter end) $ 3,783.3 $ 2,231.3 70 % Client cash as a percentage of client assets (at quarter end) 10.8 % 12.8 % Company Financial Information and Metrics Total net revenues $ 4,570 $ 2,448 87 % $ 13,812 $ 7,515 84 % Total expenses excluding interest 2,559 1,559 64 % 8,122 4,691 73 % Income before taxes on income 2,011 889 126 % 5,690 2,824 101 % Taxes on income 485 191 154 % 1,415 660 114 % Net income 1,526 698 119 % 4,275 2,164 98 % Preferred stock dividends and other 120 83 45 % 364 171 113 % Net income available to common stockholders $ 1,406 $ 615 129 % $ 3,911 $ 1,993 96 % Earnings per common share — diluted (3) $ .74 $ .48 54 % $ 2.06 $ 1.54 34 % Net revenue growth from prior year 87 % (10) % 84 % (7) % Pre-tax profit margin 44.0 % 36.3 % 41.2 % 37.6 % Return on average common stockholders’ equity (annualized) 12 % 10 % 11 % 12 % Expenses excluding interest as a percentage of average client assets (annualized) 0.13 % 0.14 % 0.15 % 0.16 % Consolidated Tier 1 Leverage Ratio (at quarter end) 6.3 % 5.7 % Non-GAAP Financial Measures (4) Adjusted total expenses (5) $ 2,302 $ 1,492 $ 7,294 $ 4,488 Adjusted diluted EPS (3) $ .84 $ .51 $ 2.39 $ 1.66 Return on tangible common equity 23 % 12 % 21 % 14 % (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. (5) Adjusted total expenses is a non-GAAP financial measure adjusting total expenses excluding interest. See Non-GAAP Financial Measures. 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 - 4 - 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) 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. Please see Non-GAAP Financial Measures for further details and a reconciliation of such measures to GAAP reported results. - 5 - 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) 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 and third quarters as client activity moderated. 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. 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, 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. Refer to Item 7 – Overview in our 2020 Form 10-K and Item 1 – Note 11 for additional information regarding our integration of TD Ameritrade. Current Regulatory Environment and Other Developments 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 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 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 - 6 - 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) 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. In addition, if any depository institution controlled by an FHC fails to maintain at least a “Satisfactory” rating under the Community Reinvestment Act, the FHC and its subsidiaries are prohibited from engaging in additional FHC Activities. RESULTS OF OPERATIONS Total Net Revenues The following tables present a comparison of revenue by category: 2021 2020 Three Months Ended September 30, Percent Change Amount % of Total Net Revenues Amount % of Total Net Revenues Net interest revenue Interest revenue 50 % $ 2,153 47 % $ 1,432 59 % Interest expense 38 % (123) (3) % (89) (4) % Net interest revenue 51 % 2,030 44 % 1,343 55 % Asset management and administration fees Mutual funds, exchange-traded funds (ETFs), and collective trust funds (CTFs) 19 % 503 11 % 423 17 % Advice solutions 37 % 511 11 % 373 15 % Other 36 % 87 2 % 64 3 % Asset management and administration fees 28 % 1,101 24 % 860 35 % Trading revenue Commissions N/M 466 10 % 108 4 % Order flow revenue N/M 482 11 % 67 3 % Principal transactions 167 % 16 — 6 — Trading revenue N/M 964 21 % 181 7 % Bank deposit account fees N/M 323 7 % — — Other 138 % 152 4 % 64 3 % Total net revenues 87 % $ 4,570 100 % $ 2,448 100 % - 7 - 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) 2021 2020 Nine Months Ended September 30, Percent Change Amount % of Total Net Revenues Amount % of Total Net Revenues Net interest revenue Interest revenue 35 % $ 6,236 45 % $ 4,626 61 % Interest expense 8 % (348) (2) % (322) (4) % Net interest revenue 37 % 5,888 43 % 4,304 57 % Asset management and administration fees Mutual funds, ETFs, and CTFs 12 % 1,454 11 % 1,300 17 % Advice solutions 47 % 1,469 11 % 999 13 % Other 28 % 241 1 % 189 3 % Asset management and administration fees 27 % 3,164 23 % 2,488 33 % Trading revenue Commissions N/M 1,559 11 % 332 4 % Order flow revenue N/M 1,538 11 % 194 3 % Principal transactions 6 % 38 1 % 36 1 % Trading revenue N/M 3,135 23 % 562 8 % Bank deposit account fees N/M 1,011 7 % — — Other N/M 614 4 % 161 2 % Total net revenues 84 % $ 13,812 100 % $ 7,515 100 % N/M Not meaningful. Percentage changes greater than 200% are presented as not meaningful. Net Interest Revenue 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. As the U.S. 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. - 8 - 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 tables present net interest revenue information corresponding to interest-earning assets and funding sources on the condensed consolidated balance sheets: 2021 2020 Three Months Ended September 30, Average Balance Interest Revenue/ Expense Average Yield/Rate Average Balance Interest Revenue/ Expense Average Yield/Rate Interest-earning assets Cash and cash equivalents $ 38,732 $ 11 0.12 % $ 32,628 $ 8 0.10 % Cash and investments segregated 42,617 5 0.04 % 33,214 14 0.16 % Receivables from brokerage clients 80,873 628 3.04 % 21,242 125 2.31 % Available for sale securities (1) 362,204 1,187 1.30 % 276,081 1,103 1.59 % Bank loans 30,235 161 2.12 % 21,668 134 2.46 % Total interest-earning assets 554,661 1,992 1.42 % 384,833 1,384 1.43 % Securities lending revenue (2) 159 47 Other interest revenue (2) 2 1 Total interest-earning assets (3) $ 554,661 $ 2,153 1.54 % $ 384,833 $ 1,432 1.47 % Funding sources Bank deposits $ 384,561 $ 14 0.01 % $ 310,685 $ 12 0.02 % Payables to brokerage clients 92,498 3 0.01 % 40,169 1 0.01 % Short-term borrowings (4) 3,485 3 0.34 % 5 — 0.12 % Long-term debt 19,030 99 2.10 % 7,992 69 3.46 % Total interest-bearing liabilities 499,574 119 0.09 % 358,851 82 0.09 % Non-interest-bearing funding sources (3) 55,087 25,982 Securities lending expense (2) 4 10 Other interest expense (2) — (3) Total funding sources (3) $ 554,661 $ 123 0.09 % $ 384,833 $ 89 0.09 % Net interest revenue $ 2,030 1.45 % $ 1,343 1.38 % - 9 - 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) 2021 2020 Nine Months Ended September 30, Average Balance Interest Revenue/ Expense Average Yield/Rate Average Balance Interest Revenue/ Expense Average Yield/Rate Interest-earning assets Cash and cash equivalents $ 39,848 $ 27 0.09 % $ 40,410 $ 112 0.37 % Cash and investments segregated 43,914 19 0.06 % 30,162 128 0.56 % Receivables from brokerage clients 74,831 1,800 3.17 % 19,442 404 2.73 % Available for sale securities (1) 348,477 3,381 1.29 % 236,204 3,434 1.93 % Bank loans 27,336 448 2.18 % 20,248 411 2.70 % Total interest-earning assets 534,406 5,675 1.41 % 346,466 4,489 1.72 % Securities lending revenue (2) 557 133 Other interest revenue (2) 4 4 Total interest-earning assets (3) $ 534,406 $ 6,236 1.55 % $ 346,466 $ 4,626 1.77 % Funding sources Bank deposits $ 371,974 $ 40 0.01 % $ 275,860 $ 81 0.04 % Payables to brokerage clients 89,087 7 0.01 % 36,001 10 0.04 % Short-term borrowings (4) 2,617 6 0.32 % 16 — 0.29 % Long-term debt 17,225 281 2.18 % 8,014 212 3.53 % Total interest-bearing liabilities $ 480,903 $ 334 0.09 % $ 319,891 $ 303 0.13 % Non-interest-bearing funding sources (3) 53,503 26,575 Securities lending expense (2) 16 26 Other interest expense (2) (2) (7) Total funding sources (3) $ 534,406 $ 348 0.09 % $ 346,466 $ 322 0.13 % Net interest revenue $ 5,888 1.46 % $ 4,304 1.64 % (1) Amounts have been calculated based on amortized cost. (2) Beginning in the fourth quarter of 2020, securities lending revenue has been reclassified from broker-related receivables and other revenue. Securities lending expense has been reclassified from other expense. Prior period amounts have been reclassified to reflect this change. (3) Beginning in the fourth quarter of 2020, broker-related receivables were removed from total interest earning assets and netted against non-interest-bearing funding sources, resulting in an immaterial reduction to total interest-earning assets and total funding sources. Prior period amounts have been reclassified to reflect this change. (4) Interest revenue or expense was less than $500 thousand in the period or periods presented. 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 $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 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. - 10 - 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) Asset Management and Administration Fees The following tables present asset management and administration fees, average client assets, and average fee yields: Three Months Ended September 30, 2021 2020 Average Client Assets Revenue Average Fee Average Client Assets Revenue Average Fee Schwab money market funds before fee waivers $ 149,508 $ 112 0.30 % $ 199,822 $ 153 0.30 % Fee waivers (83) (44) Schwab money market funds $ 149,508 29 0.08 % $ 199,822 109 0.22 % Schwab equity and bond funds, ETFs, and CTFs 441,344 99 0.09 % 306,899 75 0.10 % Mutual Fund OneSource ® and other non-transaction fee funds 234,582 188 0.32 % 197,809 154 0.31 % Other third-party mutual funds and ETFs (1) 918,363 187 0.08 % 469,822 85 0.07 % Total mutual funds, ETFs, and CTFs (2) $ 1,743,797 503 0.11 % $ 1,174,352 423 0.14 % Advice solutions (2) Fee-based $ 463,827 511 0.44 % $ 307,983 373 0.48 % Non-fee-based 90,649 — — 73,850 — — Total advice solutions $ 554,476 511 0.37 % $ 381,833 373 0.39 % Other balance-based fees (3) 632,806 68 0.04 % 443,929 51 0.05 % Other (4) 19 13 Total asset management and administration fees $ 1,101 $ 860 2021 2020 Nine Months Ended September 30, Average Client Assets Revenue Average Fee Average Client Assets Revenue Average Fee Schwab money market funds before fee waivers $ 158,749 $ 348 0.29% $ 205,544 $ 469 0.30% Fee waivers (246) (59) Schwab money market funds $ 158,749 102 0.09% $ 205,544 410 0.27% Schwab equity and bond funds, ETFs, and CTFs 411,312 279 0.09% 290,759 219 0.10% Mutual Fund OneSource ® and other non-transaction fee funds 228,643 540 0.32% 187,153 436 0.31% Other third-party mutual funds and ETFs (1) 888,003 533 0.08% 446,007 235 0.07% Total mutual funds, ETFs, and CTFs (2) $ 1,686,707 1,454 0.12% $ 1,129,463 1,300 0.15% Advice solutions (2) Fee-based $ 445,521 1,469 0.44% $ 277,297 999 0.48% Non-fee-based 87,758 — — 71,438 — — Total advice solutions $ 533,279 1,469 0.37% $ 348,735 999 0.38% Other balance-based fees (3) 604,995 195 0.04% 428,191 150 0.05% Other (4) 46 39 Total asset management and administration fees $ 3,164 $ 2,488 (1) Beginning in the fourth quarter of 2020, includes third-party money funds related to the acquisition of TD Ameritrade. (2) Average client assets for advice solutions may also include the asset balances contained in the mutual fund and/or ETF categories listed above. (3) Includes various asset-related fees, such as trust fees, 401(k) recordkeeping fees, and mutual fund clearing fees and other service fees. (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 $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. - 11 - 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 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 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: Schwab Money Market Funds Schwab Equity and Bond Funds, ETFs, and CTFs Mutual Fund OneSource ® and Other NTF funds 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 Net inflows (outflows) (4,203) (21,280) 11,067 3,564 (3,347) (2,504) Net market gains (losses) and other 8 34 (3,187) 17,539 (2,085) 13,098 Balance at end of period $ 147,748 $ 190,312 $ 418,971 $ 294,449 $ 234,749 $ 203,593 Schwab Money Market Funds Schwab Equity and Bond Funds, ETFs, and CTFs Mutual Fund OneSource ® and Other NTF funds 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 Net inflows (outflows) (28,372) (11,665) 37,747 8,679 (9,819) (17,557) Net market gains (losses) and other 31 1,151 39,535 (505) 20,711 19,082 Balance at end of period $ 147,748 $ 190,312 $ 418,971 $ 294,449 $ 234,749 $ 203,593 Trading Revenue The following table presents trading revenue and related information: Three Months Ended September 30, Percent Change Nine Months Ended September 30, Percent Change 2021 2020 2021 2020 Trading revenue $ 964 $ 181 N/M $ 3,135 $ 562 N/M Clients’ daily average trades (DATs) (in thousands) 5,549 1,460 N/M 6,644 1,539 N/M Number of trading days 64.0 64.0 — 188.0 189.0 (1) % Revenue per trade (1) $ 2.71 $ 1.94 40 % $ 2.51 $ 1.93 30 % (1) Revenue per trade is calculated as trading revenue divided by DATs multiplied by the number of trading days. N/M Not meaningful. Percentage changes greater than 200% are presented as not meaningful. 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 $743 million and $2.5 billion of trading revenue in the third quarter and first nine months of 2021, respectively. Bank Deposit Account Fees Beginning in the fourth quarter of 2020, the Company began earning bank deposit account fee revenue pursuant to the Insured Deposit Account agreement (IDA agreement) with TD Bank USA, National Association and TD Bank, National Association (together, the TD Depository Institutions) and arrangements with other third-party banks. Bank deposit account fees are primarily affected by average BDA balances and floating- and fixed-rate reference yields. 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 $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 - 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) 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 $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 The following table shows a comparison of expenses excluding interest: Three Months Ended September 30, Percent Change Nine Months Ended September 30, Percent Change 2021 2020 2021 2020 Compensation and benefits Salaries and wages $ 769 $ 532 45 % $ 2,341 $ 1,557 50 % Incentive compensation 342 179 91 % 1,082 587 84 % Employee benefits and other 192 129 49 % 628 412 52 % Total compensation and benefits $ 1,303 $ 840 55 % $ 4,051 $ 2,556 58 % Professional services 250 194 29 % 723 574 26 % Occupancy and equipment 246 155 59 % 722 449 61 % Advertising and market development 119 66 80 % 363 203 79 % Communications 144 73 97 % 457 226 102 % Depreciation and amortization 140 97 44 % 404 284 42 % Amortization of acquired intangible assets 153 25 N/M 461 43 N/M Regulatory fees and assessments 64 36 78 % 208 106 96 % Other 140 73 92 % 733 250 193 % Total expenses excluding interest $ 2,559 $ 1,559 64 % $ 8,122 $ 4,691 73 % Expenses as a percentage of total net revenues Compensation and benefits 29 % 34 % 29 % 34 % Advertising and market development 3 % 3 % 3 % 3 % Full-time equivalent employees (in thousands) At quarter end 32.4 22.1 47 % Average 32.4 22.1 47 % 32.3 21.1 53 % N/M Not meaningful. Percentage changes greater than 200% are presented as not meaningful. 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 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 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. - 13 - 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) 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 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 $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. - 14 - 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) Segment Information Financial information for our segments is presented in the following tables: Investor Services Advisor Services Total Three Months Ended September 30, Percent Change 2021 2020 Percent Change 2021 2020 Percent Change 2021 2020 Net Revenues Net interest revenue 61 % $ 1,530 $ 948 27 % $ 500 $ 395 51 % $ 2,030 $ 1,343 Asset management and administration fees 25 % 805 643 36 % 296 217 28 % 1,101 860 Trading revenue N/M 873 139 117 % 91 42 N/M 964 181 Bank deposit account fees N/M 239 — N/M 84 — N/M 323 — 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 Expenses Excluding Interest 68 % 1,956 1,167 54 % 603 392 64 % 2,559 1,559 Income before taxes on income 161 % $ 1,605 $ 614 48 % $ 406 $ 275 126 % $ 2,011 $ 889 Net New Client Assets (in billions) (1) N/M $ 57.9 $ 18.9 151 % $ 81.1 $ 32.3 171 % $ 139.0 $ 51.2 Investor Services Advisor Services Total Nine Months Ended September 30, Percent Change 2021 2020 Percent Change 2021 2020 Percent Change 2021 2020 Net Revenues Net interest revenue 47 % $ 4,462 $ 3,028 12 % $ 1,426 $ 1,276 37 % $ 5,888 $ 4,304 Asset management and administration fees 27 % 2,316 1,826 28 % 848 662 27 % 3,164 2,488 Trading revenue N/M 2,831 396 83 % 304 166 N/M 3,135 562 Bank deposit account fees N/M 742 — N/M 269 — N/M 1,011 — Other N/M 462 122 N/M 152 39 N/M 614 161 Total net revenues 101 % 10,813 5,372 40 % 2,999 2,143 84 % 13,812 7,515 Expenses Excluding Interest 79 % 6,253 3,489 55 % 1,869 1,202 73 % 8,122 4,691 Income before taxes on income 142 % $ 4,560 $ 1,883 20 % $ 1,130 $ 941 101 % $ 5,690 $ 2,824 Net New Client Assets (in billions) (1) — $ 167.5 $ 167.2 126 % $ 214.1 $ 94.6 46 % $ 381.6 $ 261.8 (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. Percentage changes greater than 200% are presented as not meaningful. Segment Net Revenues 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 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 nine months of 2021, following the TDA acquisition. Increases in other revenue for both segments were primarily due to the TD Ameritrade acquisition. - 15 - 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) 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 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 Schwab’s business activities expose it to a variety of risks, including operational, compliance, credit, market, and liquidity risks. 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 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. Though integration work continues, the Company’s operations, inclusive of TD Ameritrade, remain consistent with our Enterprise Risk Management (ERM) framework. For a discussion of our risk management programs, see Item 7 – Risk Management in the 2020 Form 10-K. Interest Rate Risk Simulations Net Interest Revenue Simulation For our net interest revenue sensitivity analysis, we use net interest revenue simulation modeling techniques to evaluate and manage the effect of changing interest rates. The simulations include all balance sheet interest rate-sensitive assets and liabilities. Key assumptions include the projection of interest rate scenarios with rate floors, prepayment speeds of mortgage-related investments, repricing of financial instruments, and reinvestment of matured or paid-down securities and loans. 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 reprice at different times or by different amounts, and the spread between short and long-term interest rates. Interest-earning assets include investment securities, margin loans, and bank loans. These assets are sensitive to changes in interest rates and changes in prepayment levels that tend to increase in a declining rate environment and decrease in a rising rate environment. Because we establish the rates paid on certain brokerage client cash balances and bank deposits and the rates charged on certain margin and bank loans, and control the composition of our investment securities, we have some ability to manage our net interest spread, depending on competitive factors and market conditions. Net interest revenue sensitivity analysis assumes 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 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 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) % - 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) 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. Bank Deposit Account Fees Simulation 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 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 Management also uses economic value of equity (EVE) simulations to measure interest rate risk. EVE sensitivity measures the long-term impact of interest rate changes on the net present value of assets and liabilities. EVE is calculated by subjecting the balance sheet to hypothetical instantaneous shifts in the level of interest rates. This analysis is highly dependent upon asset and liability assumptions based on historical behaviors as well as our expectations of the economic environment. Key assumptions in our EVE calculation include projection of interest rate scenarios with rate floors, prepayment speeds of mortgage-related investments, term structure models of interest rates, non-maturity deposit behavior, and pricing assumptions. Our net interest revenue, bank deposit account fee revenue, and EVE simulations reflect the assumption of non-negative investment yields. Phase-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. In purchasing new investment securities, we ensure that appropriate fall-back language is in the security’s prospectus in the event that LIBOR is unavailable or deemed unreliable, and we have sold certain securities lacking appropriate fall-back language. We are updating loan agreements to ensure new LIBOR-based loans adequately provide for an alternative to LIBOR. Furthermore, we plan to phase-out the use of LIBOR as a reference rate in our new lending products before the end of December 2021, per guidance from the Federal Reserve Board. Liquidity Risk Funding Sources Schwab’s primary source of funds is cash generated by client activity which includes bank deposits and cash balances in client brokerage accounts. These funds are used to purchase investment securities and extend loans to clients. Other sources of funds may include cash flows from operations, maturities and sales of investment securities, repayments on loans, securities lending of assets held in client brokerage accounts, repurchase agreements, and cash provided by external financing. To meet daily funding needs, we maintain liquidity in the form of overnight cash deposits and short-term investments. For unanticipated liquidity needs, we also maintain a buffer of highly liquid investments, including U.S. Treasury securities. - 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) In addition to internal sources of liquidity, Schwab has access to external funding. The following table describes external debt facilities available at September 30, 2021: Description Borrower Outstanding Available Federal Home Loan Bank secured credit facility (1) Banking subsidiaries $ — $ 63,612 Federal Reserve discount window (2) Banking subsidiaries — 9,886 Uncommitted, unsecured lines of credit with various external banks CSC, CS&Co — 1,522 Unsecured commercial paper (3) CSC 1,500 — Committed, unsecured credit facility with various external banks TDAC — 600 Secured uncommitted lines of credit with various external banks (4) TDAC 1,500 — (1) Amounts available are dependent on the amount of First Mortgages, HELOCs, and the fair value of certain investment securities that are pledged as collateral. (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 September 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 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: Average for the Three Months Ended September 30, 2021 Total eligible high quality liquid assets $ 92,745 Net cash outflows $ 85,056 LCR 109 % Borrowings The following are details of the Senior Notes: September 30, 2021 Par Outstanding Maturity Weighted Average Interest Rate Moody’s Standard & Poor’s Fitch CSC Senior Notes $ 17,768 2022 - 2031 2.34% A2 A A TDA Holding Senior Notes $ 1,563 2021 - 2029 2.10% A2 A — - 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) New Debt Issuances 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. Additional details are as follows: Issuance Date Issuance Amount Maturity Date Interest Rate 03/18/2021 $ 1,250 03/18/2024 SOFR + 0.500% 03/18/2021 $ 1,500 03/18/2024 0.750% 03/18/2021 $ 1,250 03/20/2028 2.000% 05/13/2021 $ 500 05/13/2026 SOFR + 0.520% 05/13/2021 $ 1,000 05/13/2026 1.150% 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 CSC’s preferred stock issued and net proceeds for 2021 are as follows: Date Issued and Sold Net Proceeds Series I March 18, 2021 $ 2,222 Series J March 30, 2021 $ 584 On June 1, 2021, the Company redeemed all of the outstanding shares of its 6.00% Non-Cumulative Perpetual Preferred Stock, Series C, and the corresponding depositary shares. The redemption was funded with the net proceeds from the Series J preferred stock offering. For further discussion of CSC’s long-term debt and information on the equity offerings, see Item 1 – Notes 9 and 14. CAPITAL MANAGEMENT Schwab seeks to manage capital to a level and composition sufficient to support execution of our business strategy, including anticipated balance sheet growth inclusive of migration of IDA balances (see further discussion below), providing financial support to our subsidiaries, and sustained access to the capital markets, while at the same time meeting our regulatory capital requirements and serving as a source of financial strength to our banking subsidiaries. Schwab’s primary sources of capital are funds generated by the operations of subsidiaries and securities issuances by CSC in the capital markets. To ensure that Schwab has sufficient capital to absorb unanticipated losses or declines in asset values, we have adopted a policy to remain well capitalized even in stressed scenarios. 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%. 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. The pace of return to our long-term operating objective over time depends on a number of factors including the overall size of the Company’s balance sheet, earnings, and capital issuance and deployment. 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. - 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) 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 Total stockholders’ equity $ 57,442 $ 27,570 $ 56,060 $ 22,223 Less: Preferred stock 9,954 — 7,733 — Common Equity Tier 1 Capital before regulatory adjustments $ 47,488 $ 27,570 $ 48,327 $ 22,223 Less: Goodwill, net of associated deferred tax liabilities $ 11,897 $ 13 $ 11,897 $ 13 Other intangible assets, net of associated deferred tax liabilities 7,705 — 8,103 — Deferred tax assets, net of valuation allowances and deferred tax liabilities 17 12 17 12 AOCI adjustment 1,253 1,047 5,394 4,672 Common Equity Tier 1 Capital $ 26,616 $ 26,498 $ 22,916 $ 17,526 Tier 1 Capital $ 36,570 $ 26,498 $ 30,649 $ 17,526 Total Capital 36,591 26,512 30,688 17,558 Risk-Weighted Assets 135,932 101,372 123,881 91,062 Total Leverage Exposure 582,837 379,478 491,469 325,437 Common Equity Tier 1 Capital/Risk-Weighted Assets 19.6 % 26.1 % 18.5 % 19.2 % Tier 1 Capital/Risk-Weighted Assets 26.9 % 26.1 % 24.7 % 19.2 % Total Capital/Risk-Weighted Assets 26.9 % 26.2 % 24.8 % 19.3 % Tier 1 Leverage Ratio 6.3 % 7.1 % 6.3 % 5.5 % Supplementary Leverage Ratio 6.3 % 7.0 % 6.2 % 5.4 % CSB is also subject to regulatory requirements that restrict and govern the terms of affiliate transactions. In addition, CSB is required to provide notice to, and may be required to obtain approval from, the Federal Reserve and the Texas Department of Savings and Mortgage Lending (TDSML) to declare dividends to CSC. As broker-dealers, CS&Co, TDAC, and TD Ameritrade, Inc. 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 September 30, 2021, CS&Co, TDAC, and TD Ameritrade, Inc. were in compliance with their respective net capital requirements. In addition to the capital requirements above, Schwab’s subsidiaries are subject to other regulatory requirements intended to ensure financial soundness and liquidity. See Item 1 – Note 17 for additional information on the components of stockholders’ equity and information on the capital requirements of significant subsidiaries. IDA Agreement 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. The Company’s ability to migrate these balances to its balance sheet is dependent upon multiple factors including having sufficient capital levels to sustain these incremental deposits and the availability of IDA balances designated as floating-rate obligations. See Item 1 – Note 10 for further information on the IDA agreement. - 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) Dividends Cash dividends paid and per share amounts for the first nine months of 2021 and 2020 are as follows: 2021 2020 Nine Months Ended September 30, Cash Paid Per Share Amount Cash Paid Per Share Amount Common and Nonvoting Common Stock $ 1,024 $ .54 $ 700 $ .54 Series A Preferred Stock (1) 28 70.00 28 70.00 Series C Preferred Stock (2) 18 30.00 27 45.00 Series D Preferred Stock (3) 33 44.64 33 44.64 Series E Preferred Stock (4) 28 4,625.00 28 4,625.00 Series F Preferred Stock (5) 13 2,500.00 13 2,500.00 Series G Preferred Stock (6) 101 4,031.25 45 1,806.60 Series H Preferred Stock (7) 72 2,888.89 N/A N/A Series I Preferred Stock (8) 41 1,811.11 N/A N/A Series J Preferred Stock (9) 11 18.67 N/A N/A (1) Dividends paid semi-annually until February 1, 2022 and quarterly thereafter. (2) Series C Preferred Stock was redeemed on June 1, 2021. Prior to redemption, dividends were paid quarterly and the final dividend was paid on June 1, 2021. (3) Dividends paid quarterly. (4) Dividends paid semi-annually until March 1, 2022 and quarterly thereafter. (5) Dividends paid semi-annually until December 1, 2027 and quarterly thereafter. (6) Series G Preferred Stock was issued on April 30, 2020. Dividends are paid quarterly, and the first dividend was paid on September 1, 2020. (7) Series H Preferred Stock was issued on December 11, 2020. Dividends are paid quarterly, and the first dividend was paid on March 1, 2021. (8) Series I Preferred Stock was issued on March 18, 2021. Dividends are paid quarterly, and the first dividend was paid on June 1, 2021. (9) Series J Preferred Stock was issued on March 30, 2021. Dividends are paid quarterly, and the first dividend was paid on June 1, 2021. N/A Not applicable. Share Repurchases On January 30, 2019, CSC publicly announced that its Board of Directors authorized the repurchase of up to $4.0 billion of common stock. The authorization does not have an expiration date. 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. OTHER Foreign Exposure 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 $3.3 billion and $2.2 billion at September 30, 2021 and December 31, 2020, respectively. Off-Balance Sheet Arrangements Schwab enters into various off-balance sheet arrangements in the ordinary course of business, primarily to meet the needs of our clients. These arrangements include firm commitments to extend credit. Additionally, Schwab enters into guarantees and other similar arrangements in the ordinary course of business. For information on each of these arrangements, see Item 1 – Notes 6, 7, 9, 10, and 12. 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 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. - 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) CRITICAL ACCOUNTING ESTIMATES 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 nine months of 2021. NON-GAAP FINANCIAL MEASURES In addition to disclosing financial results in accordance with generally accepted accounting principles in the U.S. (GAAP), Management’s Discussion and Analysis of Financial Condition and Results of Operations contain references to the non-GAAP financial measures described below. We believe these non-GAAP financial measures provide useful supplemental information about the financial performance of the Company, and facilitate meaningful comparison of Schwab’s results in the current period to both historic and future results. These non-GAAP measures should not be considered a substitute for, or superior to, financial measures calculated in accordance with GAAP, and may not be comparable to non-GAAP financial measures presented by other companies. Schwab’s use of non-GAAP measures is reflective of certain adjustments made to GAAP financial measures as described below. Non-GAAP Adjustment or Measure Definition Usefulness to Investors and Uses by Management Acquisition and integration-related costs and amortization of acquired intangible assets Schwab adjusts certain GAAP financial measures to exclude the impact of acquisition and integration-related costs incurred as a result of the Company’s acquisitions, amortization of acquired intangible assets, and, where applicable, the income tax effect of these expenses. Adjustments made to exclude amortization of acquired intangible assets are reflective of all acquired intangible assets, which were recorded as part of purchase accounting. These acquired intangible assets contribute to the Company’s revenue generation. Amortization of acquired intangible assets will continue in future periods over their remaining useful lives. We exclude acquisition and integration-related costs and amortization of acquired intangible assets for the purpose of calculating certain non-GAAP measures because we believe doing so provides additional transparency of Schwab’s ongoing operations, and is useful in both evaluating the operating performance of the business and facilitating comparison of results with prior and future periods. Acquisition and integration-related costs fluctuate based on the timing of acquisitions and integration activities, thereby limiting comparability of results among periods, and are not representative of the costs of running the Company’s ongoing business. Amortization of acquired intangible assets is excluded because management does not believe it is indicative of the Company’s underlying operating performance. Return on tangible common equity Return on tangible common equity represents annualized adjusted net income available to common stockholders as a percentage of average tangible common equity. Tangible common equity represents common equity less goodwill, acquired intangible assets – net, and related deferred tax liabilities. Acquisitions typically result in the recognition of significant amounts of goodwill and acquired intangible assets. We believe return on tangible common equity may be useful to investors as a supplemental measure to facilitate assessing capital efficiency and returns relative to the composition of Schwab’s balance sheet. Beginning in 2021, the Company also uses adjusted diluted EPS and return on tangible common equity as components of performance criteria for employee bonus and certain executive management incentive compensation arrangements. The Compensation Committee of CSC’s Board of Directors maintains discretion in evaluating performance against these criteria. - 22 - 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 tables present reconciliations of GAAP measures to non-GAAP measures: Three Months Ended September 30, Nine Months Ended September 30, 2021 2020 2021 2020 Total expenses excluding interest (GAAP) $ 2,559 $ 1,559 $ 8,122 $ 4,691 Acquisition and integration-related costs (1) (104) (42) (367) (160) Amortization of acquired intangible assets (153) (25) (461) (43) Adjusted total expenses (non-GAAP) $ 2,302 $ 1,492 $ 7,294 $ 4,488 (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 Amount Diluted EPS Amount Diluted EPS Amount Diluted EPS Amount Diluted EPS Net income available to common stockholders (GAAP), Earnings per common share — diluted (GAAP) $ 1,406 $ .74 $ 615 $ .48 $ 3,911 $ 2.06 $ 1,993 $ 1.54 Acquisition and integration-related costs 104 .05 42 .03 367 .19 160 .12 Amortization of acquired intangible assets 153 .08 25 .02 461 .24 43 .03 Income tax effects (1) (61) (.03) (16) (.02) (208) (.10) (49) (.03) Adjusted net income available to common stockholders (non-GAAP), Adjusted diluted EPS (non-GAAP) $ 1,602 $ .84 $ 666 $ .51 $ 4,531 $ 2.39 $ 2,147 $ 1.66 (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 September 30, Nine Months Ended September 30, 2021 2020 2021 2020 Return on average common stockholders’ equity (GAAP) 12 % 10 % 11 % 12 % Average common stockholders’ equity $ 47,492 $ 25,810 $ 47,908 $ 22,511 Less: Average goodwill (11,952) (1,735) (11,952) (1,482) Less: Average acquired intangible assets — net (9,609) (1,268) (9,762) (693) Plus: Average deferred tax liabilities related to goodwill and acquired intangible assets — net 1,895 67 1,913 67 Average tangible common equity $ 27,826 $ 22,874 $ 28,107 $ 20,403 Adjusted net income available to common stockholders (1) $ 1,602 $ 666 $ 4,531 $ 2,147 Return on tangible common equity (non-GAAP) 23 % 12 % 21 % 14 % (1) See table above for the reconciliation of net income available to common stockholders to adjusted net income available to common stockholders (non-GAAP). - 23 - THE CHARLES SCHWAB CORPORATION