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. CSC engages, through its subsidiaries (collectively referred to as Schwab or the Company), 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, investment advisory, and banking and trust 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 trust, and support services, as well as retirement business services, to independent registered investment advisors (RIAs), independent retirement advisors, and recordkeepers. 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 $7.86 trillion in 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. 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, 2021 (2021 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) - 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) 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,” “seek,” 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); • Capital management; sources of liquidity and capital; Tier 1 Leverage Ratio operating objective (see Overview, Liquidity Risk, and Capital Management); • Expected timing for the TD Ameritrade client conversions; 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, Exit and Other Related Liabilities in Part I – Item 1 – Financial Information – Notes to Condensed Consolidated Financial Statements (Item 1) – Note 10); • Net interest revenue; money market fund fee waivers (see Results of Operations); • Capital expenditures (see Results of Operations); • The phase-out of the use of LIBOR (see Risk 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 9); • The expected impact of new accounting standards not yet adopted (see New Accounting Standards in Item 1 – Note 2); • The likelihood of indemnification and guarantee payment obligations and clients failing to fulfill contractual obligations (see Commitments and Contingencies in Item 1 – Note 9); and • The impact of legal proceedings and regulatory matters (see Commitments and Contingencies in Item 1 – Note 9 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, and the level of interest rates; • Our ability to attract and retain clients, develop trusted relationships, and grow client assets; • Client use of our advisory and lending solutions and other products and services; • The level of client assets, including cash balances; • Competitive pressure on pricing, including deposit rates; • Client sensitivity to rates; • Regulatory guidance; • Capital and liquidity needs and management; • 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; - 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) • 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 and that integration-related expenses may be higher than expected; • The timing and scope of integration-related and other technology projects; • Re al estate and workforce decisions; • Migrations of bank deposit account balances (BDA balances); • Balance sheet positioning relative to changes in interest rates; • 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 2021 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 first quarter of 2022 and 2021 are as follows: Three Months Ended March 31, Percent Change 2022 2021 Client Metrics Net new client assets (in billions) (1) $ 120.5 $ 133.8 (10) % Core net new client assets (in billions) $ 120.5 $ 148.2 (19) % Client assets (in billions, at quarter end) $ 7,862.1 $ 7,069.1 11 % Average client assets (in billions) $ 7,766.4 $ 6,952.2 12 % New brokerage accounts (in thousands) 1,202 3,153 (62) % Active brokerage accounts (in thousands, at quarter end) 33,577 31,902 5 % Assets receiving ongoing advisory services (in billions, at quarter end) $ 3,943.5 $ 3,493.1 13 % Client cash as a percentage of client assets (at quarter end) 11.4 % 11.5 % Company Financial Information and Metrics Total net revenues $ 4,672 $ 4,715 (1) % Total expenses excluding interest 2,833 2,755 3 % Income before taxes on income 1,839 1,960 (6) % Taxes on income 437 476 (8) % Net income 1,402 1,484 (6) % Preferred stock dividends and other 124 96 29 % Net income available to common stockholders $ 1,278 $ 1,388 (8) % Earnings per common share — diluted $ .67 $ .73 (8) % Net revenue growth from prior year (1) % 80 % Pre-tax profit margin 39.4 % 41.6 % Return on average common stockholders’ equity (annualized) 12 % 12 % Expenses excluding interest as a percentage of average client assets (annualized) 0.15 % 0.16 % Consolidated Tier 1 Leverage Ratio (at quarter end) 6.1 % 6.4 % Non-GAAP Financial Measures (2) Adjusted total expenses (3) $ 2,583 $ 2,482 Adjusted diluted EPS $ .77 $ .84 Return on tangible common equity 26 % 24 % (1) The first quarter of 2021 includes an outflow of $14.4 billion from a mutual fund clearing services client. (2) See Non-GAAP Financial Measures for further details and a reconciliation of such measures to GAAP reported results. (3) Adjusted total expenses is a non-GAAP financial measure adjusting total expenses excluding interest. See Non-GAAP Financial Measures. Schwab’s business momentum remained strong during the first quarter of 2022, as we supported clients through a challenging macroeconomic environment that included continued progress against the COVID-19 pandemic, rising inflation, geopolitical turmoil driven by the Russian invasion of Ukraine, the Federal Reserve initiating its first tightening cycle since late 2015, and volatile equity markets that remained below year-end 2021 levels for much of the quarter. Against this backdrop, client engagement remained strong during the first quarter of 2022, though client trading activity and new brokerage account openings were substantially lower than the extraordinary levels seen in the first quarter of 2021. Clients’ daily average trades (DATs) totaled 6.6 million in the first quarter of 2022, decreasing 22% from 8.4 million seen in the first quarter of the prior year. Clients opened 1.2 million new brokerage accounts in the first quarter of 2022, and core net new assets totaled $120.5 billion, which represents a 6% annualized organic growth rate. We ended the first quarter of 2022 with 33.6 million active brokerage accounts and $7.86 trillion in total client assets, up 5% and 11%, respectively, over year-earlier levels. - 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) Schwab’s first quarter 2022 financial results reflected the Company’s ongoing success with clients while contending with the effects of a challenging environment. First quarter 2022 net income totaled $1.4 billion, down 6% from the first quarter of 2021, and the Company produced diluted earnings per common share (EPS) of $.67, down 8% from the first quarter of 2021. Adjusted diluted EPS (1) , which excludes acquisition and integration-related costs, amortization of acquired intangible assets, and related income tax effects, was $.77, a decrease of 8% from the first quarter of 2021. Total net revenues were $4.7 billion in the first quarter of 2022, down 1% from the first quarter of 2021, with growth in net interest revenue and asset management and administration fees largely offsetting the effects of decreases in other revenue streams. Net interest revenue totaled $2.2 billion in the first quarter of 2022, increasing 14% over the first quarter of 2021 primarily due to growth in interest-earning assets and some improvement in short-term interest rates. Asset management and administration fees totaled $1.1 billion, increasing 5% from the first quarter of 2021 as a result of growth in advice solutions balances and proprietary mutual funds and ETFs, as well as lower money market fund fee waivers. Growth in net interest revenue and asset management and administration fees was somewhat muted by equity market weakness and volatility, which affected margin loan balances and securities lending activity as well as client asset valuations. Trading revenue was $963 million in the first quarter of 2022, down 21% from the first quarter of 2021. Client trading activity remained strong as DATs increased 8% from the fourth quarter of 2021, though volume was down significantly from the extraordinary levels seen in the first quarter of 2021. Bank deposit account fee revenues totaled $294 million in the first quarter of 2022, down 16% from the first quarter of 2021. Bank deposit account balances (BDA balances) totaled $154.8 billion at March 31, 2022, down 6% from March 31, 2021 and down 2% from year-end 2021, reflecting migrations to Schwab’s balance sheet in 2021 and the first quarter of 2022 partially offset by growth in client cash balances. Total expenses excluding interest increased 3% from the first quarter of 2021 to $2.8 billion in the first quarter of 2022, which included $96 million of acquisition and integration-related costs and $154 million of amortization of acquired intangible assets. Exclusive of these items, adjusted total expenses (1) were $2.6 billion in the first quarter of 2022, increasing 4% from the first quarter of 2021. These increases in expenses reflect higher compensation and benefits expense as we invest in our people and our ability to support current and ongoing growth in our client base. Return on average common stockholders’ equity remained consistent year-over-year at 12%, while return on tangible common equity (1) increased to 26% in the first quarter of 2022 from 24% in the year-earlier period due to lower stockholders’ equity. The decrease in stockholders’ equity was due to a decrease in AOCI as higher market interest rates resulted in larger unrealized losses on our available for sale (AFS) portfolio. The Company’s priority for capital management remains centered on maintaining flexibility for supporting ongoing growth. Total balance sheet assets increased 2% from year-end 2021, primarily as a result of the migration of $12.7 billion of Insured Deposit Account (IDA) balances onto our balance sheet during the first quarter of the year. To support our capital position for this growth in assets in the first quarter of 2022, we issued $750 million in preferred stock. During the first quarter we also issued $3.0 billion in senior notes primarily for ongoing liquidity purposes. At the end of the first quarter of 2022, Schwab’s Tier 1 Leverage Ratio was 6.1%, down slightly from year-end 2021. (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. Integration of TD Ameritrade 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”). Integration work continued during the first quarter of 2022. Based on our current integration plans and expanded scope of technology work, the Company continues to expect to complete client conversions across multiple groups within approximately 30 to 36 months from the October 6, 2020 acquisition date, ending in the fourth quarter of 2023. We continue to 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 including changes in remote working trends. - 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) Acquisition and integration-related costs, which are inclusive of related exit costs, totaled $96 million and $119 million for the first quarters of 2022 and 2021, respectively. 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 March 31, 2022, we have achieved over half 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 Part II – Item 7 – Overview in our 2021 Form 10-K and Item 1 – Note 10 for additional information regarding our integration of TD Ameritrade. RESULTS OF OPERATIONS Total Net Revenues The following tables present a comparison of revenue by category: 2022 2021 Three Months Ended March 31, Percent Change Amount % of Total Net Revenues Amount % of Total Net Revenues Net interest revenue Interest revenue 15 % $ 2,319 50 % $ 2,015 43 % Interest expense 31 % (136) (3) % (104) (2) % Net interest revenue 14 % 2,183 47 % 1,911 41 % Asset management and administration fees Mutual funds, exchange-traded funds (ETFs), and collective trust funds (CTFs) 4 % 489 10 % 470 10 % Advice solutions 6 % 496 11 % 468 10 % Other 6 % 83 2 % 78 2 % Asset management and administration fees 5 % 1,068 23 % 1,016 22 % Trading revenue Commissions (21) % 484 10 % 614 13 % Order flow revenue (20) % 470 10 % 591 13 % Principal transactions (18) % 9 — 11 — Trading revenue (21) % 963 20 % 1,216 26 % Bank deposit account fees (16) % 294 6 % 351 7 % Other (26) % 164 4 % 221 4 % Total net revenues (1) % $ 4,672 100 % $ 4,715 100 % 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. Interest rates largely remained historically low for much of the first quarter of 2022. Short-term rates remained near zero until the Federal Reserve increased the federal funds target overnight rate by 25 basis points near the end of the quarter, while long-term interest rates steadily increased during the quarter. Schwab continued to see strength in net new client assets and consistent client cash allocation levels throughout the first three months of 2022, which, along with transfers of BDA balances to the Company’s balance sheet (see Bank Deposit Account Fees), drove growth in Schwab’s interest-earning assets. Partially offsetting this growth, equity market volatility and softening investor sentiment during the first quarter of 2022 reduced demand for margin loans, which declined 7% from year-end 2021. In addition, over recent quarters, the Company has increased its cash holdings and reduced the duration of incremental investment securities purchases to provide flexibility to support potential changes in client cash allocations associated with expected higher short-term interest rates. These steps also help keep Schwab positioned to benefit if rates increase further. - 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) The following table presents net interest revenue information corresponding to interest-earning assets and funding sources on the condensed consolidated balance sheets: 2022 2021 Three Months Ended March 31, Average Balance Interest Revenue/ Expense Average Yield/Rate Average Balance Interest Revenue/ Expense Average Yield/Rate Interest-earning assets Cash and cash equivalents $ 72,465 $ 34 0.19 % $ 38,898 $ 7 0.08 % Cash and investments segregated 51,913 15 0.11 % 48,149 10 0.08 % Receivables from brokerage clients 84,204 626 2.97 % 67,738 563 3.32 % Available for sale securities (1,2) 284,526 947 1.33 % 338,245 1,091 1.29 % Held to maturity securities (1,2) 103,416 378 1.46 % — — — Bank loans 35,852 187 2.10 % 24,476 139 2.27 % Total interest-earning assets 632,376 2,187 1.38 % 517,506 1,810 1.40 % Securities lending revenue 129 204 Other interest revenue 3 1 Total interest-earning assets $ 632,376 $ 2,319 1.47 % $ 517,506 $ 2,015 1.56 % Funding sources Bank deposits $ 452,692 $ 16 0.01 % $ 363,099 $ 13 0.01 % Payables to brokerage clients 105,929 2 0.01 % 87,339 2 0.01 % Short-term borrowings (3) 4,717 4 0.33 % 1,093 — 0.22 % Long-term debt 19,864 108 2.18 % 14,245 85 2.37 % Total interest-bearing liabilities 583,202 130 0.09 % 465,776 100 0.09 % Non-interest-bearing funding sources 49,174 51,730 Securities lending expense 7 5 Other interest expense (1) (1) Total funding sources $ 632,376 $ 136 0.09 % $ 517,506 $ 104 0.08 % Net interest revenue $ 2,183 1.38 % $ 1,911 1.48 % (1) Amounts have been calculated based on amortized cost. Interest revenue on investment securities is presented net of related premium amortization. (2) In January 2022, the Company transferred a portion of its investment securities designated as available for sale to the held to maturity category, as described in Item 1 – Note 4. (3) Interest revenue or expense was less than $500 thousand in the period or periods presented. Net interest revenue increased $272 million, or 14%, in the first quarter 2022 compared to the same period in 2021. This increase was due to overall growth in interest-earning assets, as well as higher average yields on investment securities as a result of some improvement in market interest rates and lower premium amortization. Net premium amortization of investment securities decreased to $486 million in the first quarter of 2022 from $624 million in the first quarter of 2021. These positive effects were partially offset by lower securities lending revenue and lower average yields in margin and bank lending. Average interest-earning assets for the first quarter of 2022 were higher by 22% compared to the same period in 2021. This increase was primarily due to growth in bank deposits and payables to brokerage clients, which resulted from strong net new client asset inflows and transfers of BDA balances to our balance sheet in the second half of 2021 and the first quarter of 2022. Net interest margin decreased to 1.38% during the first quarter of 2022 from 1.48% during the same period in 2021. This decrease was primarily driven by lower securities lending revenue resulting from lower market demand, as well as lower yields received on margin and bank lending which were consistent with yields seen in the fourth quarter of 2021. Partially offsetting these decreases, yields on investment securities improved as a result of higher market interest rates. New issuances of long-term debt since the first quarter of 2021 have been at lower interest rates, thereby increasing interest expense but lowering the average rate, and helping the average yield on funding sources during the first quarter of 2022 to remain relatively consistent with the first quarter of 2021. - 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) Asset Management and Administration Fees The following table presents asset management and administration fees, average client assets, and average fee yields: Three Months Ended March 31, 2022 2021 Average Client Assets Revenue Average Fee Average Client Assets Revenue Average Fee Schwab money market funds before fee waivers $ 144,732 $ 102 0.29 % $ 169,683 $ 122 0.29 % Fee waivers (54) (78) Schwab money market funds $ 144,732 48 0.13 % $ 169,683 44 0.11 % Schwab equity and bond funds, ETFs, and CTFs 456,326 97 0.09 % 377,282 86 0.09 % Mutual Fund OneSource ® and other non-transaction fee funds 212,641 165 0.31 % 222,455 172 0.31 % Other third-party mutual funds and ETFs 872,212 179 0.08 % 849,409 168 0.08 % Total mutual funds, ETFs, and CTFs (1) $ 1,685,911 489 0.12 % $ 1,618,829 470 0.12 % Advice solutions (1) Fee-based $ 469,325 496 0.43 % $ 424,629 468 0.45 % Non-fee-based 90,335 — — 84,767 — — Total advice solutions $ 559,660 496 0.36 % $ 509,396 468 0.37 % Other balance-based fees (2) 616,679 67 0.04 % 576,562 64 0.05 % Other (3) 16 14 Total asset management and administration fees $ 1,068 $ 1,016 (1) Average client assets for advice solutions may also include the asset balances contained in the mutual fund and/or ETF categories listed above. (2) Includes various asset-related fees, such as trust fees, 401(k) recordkeeping fees, and mutual fund clearing fees and other service fees. (3) Includes miscellaneous service and transaction fees relating to mutual funds and ETFs that are not balance-based. Asset management and administration fees increased by $52 million, or 5%, in the first quarter of 2022 compared to the same period in 2021. This increase was due to growth in advice solutions and proprietary mutual funds and ETFs, as well as lower money market fund fee waivers due to improved portfolio yields during the first three months of 2022. These increases were partially offset by lower balances in money market funds and Mutual Fund OneSource ® , as well as equity market weakness and volatility during the first quarter of 2022, which negatively impacted client asset valuations. The Company anticipates that money market fund fee waivers will be substantially eliminated following an additional increase to the federal funds target rate of 25 basis points beyond the increase in March. The following table presents 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% and 30% of the asset management and administration fees earned in the first quarter of 2022 and 2021, respectively: Schwab Money Market Funds Schwab Equity and Bond Funds, ETFs, and CTFs Mutual Fund OneSource ® and Other NTF funds Three Months Ended March 31, 2022 2021 2022 2021 2022 2021 Balance at beginning of period $ 146,509 $ 176,089 $ 454,864 $ 341,689 $ 234,940 $ 223,857 Net inflows (outflows) (3,420) (12,522) 9,461 12,805 (8,556) (4,688) Net market gains (losses) and other 16 14 (20,048) 19,323 9,081 8,120 Balance at end of period $ 143,105 $ 163,581 $ 444,277 $ 373,817 $ 235,465 $ 227,289 Trading Revenue Trading revenue includes commissions, order flow revenue, and principal transaction revenues. Commissions and order flow revenue are primarily affected by volume and mix of client trades executed. Principal transaction revenue is recognized primarily as a result of accommodating clients’ fixed income trading activity, and includes adjustments to the fair value of securities positions held to facilitate such client trading activity. - 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 table presents trading revenue and related information: Three Months Ended March 31, Percent Change 2022 2021 Trading revenue $ 963 $ 1,216 (21) % Clients’ daily average trades (DATs) (in thousands) 6,578 8,414 (22) % Number of trading days 62.0 61.0 2 % Revenue per trade (1) $ 2.36 $ 2.37 — (1) Revenue per trade is calculated as trading revenue divided by DATs multiplied by the number of trading days. Trading revenue decreased $253 million in the first quarter of 2022 compared to the same period in 2021, primarily due to lower client trading activity during the first quarter of 2022 relative to the extraordinary trading volume experienced during the first quarter of 2021. This decreased trading activity in the first quarter of 2022 resulted in lower commissions and order flow revenue, which declined 21% and 20%, respectively, relative to the first quarter of 2021. Bank Deposit Account Fees The Company earns 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. The following table presents bank deposit account fee revenue, average BDA balances, average net yield, and average balances earning floating- and fixed-rate yields: Three Months Ended March 31, Percent Change 2022 2021 Bank deposit account fees $ 294 $ 351 (16) % Average BDA balances $ 155,809 $ 166,750 (7) % Average net yield 0.75 % 0.84 % Percentage of average BDA balances designated as: Fixed-rate balances 77 % 79 % Floating-rate balances 23 % 21 % Bank deposit account fees decreased $57 million, or 16%, in the first quarter of 2022 compared with the first quarter of 2021. This decrease was primarily due to lower average BDA balances and lower average net yield. The Company transferred $10.6 billion and $12.7 billion of BDA balances to its balance sheet during the second half of 2021 and first quarter of 2022, respectively. The transfer of these balances to our balance sheet was the primary driver of the decrease in average BDA balances in the first quarter of 2022 compared with the first quarter of 2021. Transfers of BDA balances to Schwab’s balance sheet result in lower balances upon which bank deposit account fee revenue is earned but provide a source of funding to invest in interest-earning assets to increase net interest revenue. See also Capital Management and Item 1 – Note 9 for discussion of the IDA agreement and the potential to move IDA balances to Schwab’s balance sheet. Other Revenue Other revenue includes exchange processing fees, certain service fees, software fees, non-recurring gains, and the provision for credit losses on bank loans. Other revenue decreased $57 million in the first quarter of 2022 compared to the same period in 2021 primarily due to an increase in the provision for credit losses on bank loans and lower exchange processing fees. The provision for credit losses on bank loans increased as a result of higher loan loss factors driven primarily by higher forecasted interest rates during the first quarter of 2022 and growth of the loan portfolio. Exchange processing fees decreased as a result of lower average SEC fee rates and lower trading volume. - 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) Total Expenses Excluding Interest The following table shows a comparison of expenses excluding interest: Three Months Ended March 31, Percent Change 2022 2021 Compensation and benefits Salaries and wages $ 853 $ 776 10 % Incentive compensation 417 409 2 % Employee benefits and other 276 245 13 % Total compensation and benefits $ 1,546 $ 1,430 8 % Professional services 244 226 8 % Occupancy and equipment 269 237 14 % Advertising and market development 102 116 (12) % Communications 144 147 (2) % Depreciation and amortization 150 129 16 % Amortization of acquired intangible assets 154 154 — Regulatory fees and assessments 68 78 (13) % Other 156 238 (34) % Total expenses excluding interest $ 2,833 $ 2,755 3 % Expenses as a percentage of total net revenues Compensation and benefits 33 % 30 % Advertising and market development 2 % 2 % Full-time equivalent employees (in thousands) At quarter end 34.2 32.0 7 % Average 33.9 32.1 6 % Expenses excluding interest increased by $78 million, or 3%, in the first quarter of 2022 compared to the same period in 2021. Adjusted total expenses, which excludes acquisition and integration-related costs and amortization of acquired intangible assets, increased 4% in the first quarter of 2022 compared to the same period in 2021. 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 first quarter of 2022 compared to the same period in 2021, primarily due to growth in employee headcount to support our expanding client base, annual merit increases, as well as a 5% employee salary increase and other targeted compensation adjustments that went into effect in late 2021. Compensation and benefits in the first quarter of 2022 included $56 million of acquisition and integration-related costs, down from $72 million in the first quarter of 2021. Professional services expense increased in the first quarter of 2022 compared to the same period in 2021, primarily due to increased utilization of technology-related and other professional services to support overall growth of the business and enhancement to technological infrastructure to support our expanding client base, as well as the integration of TD Ameritrade. Professional services included acquisition and integration-related costs of $31 million and $27 million in the first quarter of 2022 and 2021, respectively. Occupancy and equipment expense increased in the first quarter of 2022 compared to the same period in 2021, primarily due to an increase in software maintenance and licensing as well as other technology equipment costs to support growth of the business and the integration of TD Ameritrade. Occupancy and equipment included $4 million and $16 million of acquisition and integration-related costs in the first quarter of 2022 and 2021, respectively. Advertising and market development expense decreased in the first quarter of 2022 compared to the same period in 2021, primarily due to decreases in spending for marketing communications for TD Ameritrade. Communications expense decreased slightly in the first quarter of 2022 compared to the same period in 2021, primarily due to lower news and quotation services expenses, driven by lower trade volumes, as well as lower telecommunications spending. - 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) Depreciation and amortization expense increased in the first quarter of 2022 compared to the same period in 2021, primarily as a result of higher amortization of purchased and internally developed software and higher depreciation of hardware, driven by capital expenditures in 2021 and the first quarter of 2022 to support the TDA integration and enhance our technological infrastructure to support growth of the business. Regulatory fees and assessments decreased in the first quarter of 2022 compared to the same period in 2021, primarily as a result of lower client trading activity, partially offset by higher FDIC assessments and other regulatory assessments due to asset growth and overall growth of the business. Other expense decreased in the first quarter of 2022 compared to the same period in 2021, primarily due to lower exchange processing fees, brokerage clearing fees, and lower charges for trade errors and bad debt expense. These decreases were due to lower client trading volume and, for exchange processing fees, lower average SEC fee rates. Capital expenditures were $209 million in both the first quarter of 2022 and 2021, with spending in both periods primarily related to TDA integration and to enhance our technological infrastructure to support greater capacity for our expanding client base. We continue to anticipate capital expenditures for full-year 2022 will be approximately 4-5% of total net revenues. Taxes on Income Taxes on income were $437 million and $476 million for the first quarters of 2022 and 2021, respectively, resulting in effective income tax rates on income before taxes of 23.8% and 24.3%, respectively. The decrease in the effective tax rate in the first quarter of 2022 compared to the same period in 2021 was primarily due to the impact of blended state tax rate changes on the Company’s deferred taxes and a decrease in state tax expense due to uncertain tax position accruals during the first quarter of 2022. Segment Information Financial information for our segments is presented in the following tables: Investor Services Advisor Services Total Three Months Ended March 31, Percent Change 2022 2021 Percent Change 2022 2021 Percent Change 2022 2021 Net Revenues Net interest revenue 8 % $ 1,574 $ 1,454 33 % $ 609 $ 457 14 % $ 2,183 $ 1,911 Asset management and administration fees 5 % 781 742 5 % 287 274 5 % 1,068 1,016 Trading revenue (23) % 844 1,097 — 119 119 (21) % 963 1,216 Bank deposit account fees (21) % 200 254 (3) % 94 97 (16) % 294 351 Other (29) % 127 178 (14) % 37 43 (26) % 164 221 Total net revenues (5) % 3,526 3,725 16 % 1,146 990 (1) % 4,672 4,715 Expenses Excluding Interest 1 % 2,131 2,109 9 % 702 646 3 % 2,833 2,755 Income before taxes on income (14) % $ 1,395 $ 1,616 29 % $ 444 $ 344 (6) % $ 1,839 $ 1,960 Net New Client Assets (in billions) (1) (16) % $ 54.6 $ 65.1 (4) % $ 65.9 $ 68.7 (10) % $ 120.5 $ 133.8 (1) In the first quarter of 2021, Investor Services includes an outflow of $14.4 billion from a mutual fund clearing services client. Segment Net Revenues Investor Services total net revenues decreased by 5% in the first quarter of 2022 compared to the same quarter in 2021, while Advisor Services total net revenues increased by 16% in the first quarter of 2022 compared to the same quarter in 2021. Net interest revenue increased for both segments due to overall growth in interest-earning assets and higher average yields on investment securities, partially offset by lower securities lending revenue in Investor Services and lower average yields on margin and bank lending in both segments. Asset management and administration fees increased in Investor Services primarily due to growth in advice solutions, while both segments benefited from growth in proprietary mutual funds and ETFs, and lower money market fund fee waivers. Trading revenue decreased for Investor Services primarily as a result of reduced client trading activity, while Advisor Services trading revenue remained consistent in the first quarter of 2022 compared to the same quarter in 2021. Bank deposit account fee revenue decreased for Investor Services, and to a lesser degree Advisor Services, primarily as a result of migrating BDA balances to Schwab’s balance sheet during the second half of 2021 and the first quarter of 2022, and - 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) lower average net yield. Declines in other revenue for both segments were primarily due to an increase in the provision for credit losses on bank loans and lower exchange processing fees in the first quarter of 2022 compared to the same quarter in 2021. Segment Expenses Excluding Interest Investor Services and Advisor Services total expenses excluding interest increased by 1% and 9%, respectively, in the first quarter of 2022 compared to the same period in 2021. These increases were primarily a result of higher compensation and benefits expenses in both segments due to additional increases in headcount to support our expanding client base, annual merit increases, as well as a 5% employee salary increase and other targeted compensation adjustments that went into effect in late 2021. In addition, both segments saw higher occupancy and equipment expenses in the first quarter of 2022 compared to the same period in 2021, primarily due to an increase in software maintenance and licensing as well as other technology equipment costs to support growth of the business and the integration of TD Ameritrade. These increases were partially offset by decreases of other expenses in both segments, primarily due to lower exchange processing fees, brokerage clearing fees, and lower charges for trade errors and bad debt expense. These decreases were due to lower client trading volume and, for exchange processing fees, lower average SEC fee rates. 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 on-going integration of TD Ameritrade, the Company has aligned TD Ameritrade’s risk management practices with Schwab’s risk appetite. Our integration work included evaluating new or changed risks impacting the combined company, and taking action through various means. 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 Part II – Item 7 – Management’s Discussion and Analysis of Financial Condition and Results of Operations – Risk Management in the 2021 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. - 12 - THE CHARLES SCHWAB CORPORATION Management’s Discussion and Analysis of Financial Condition and Results of Operations (Tabular Amounts in Millions, Except Ratios, or as Noted) The following table shows the simulated change to net interest revenue over the next 12 months beginning March 31, 2022 and December 31, 2021 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: March 31, 2022 December 31, 2021 Increase of 100 basis points 12.0 % 14.1 % Decrease of 100 basis points (8.0) % (4.5) % The Company’s simulated increase of 100 basis points in market interest rates had a lower impact on net interest revenue as of March 31, 2022 compared to December 31, 2021 primarily due to an increase in the Company’s projected repricing of client deposit rates across higher market interest rate scenarios and decreased sensitivity to prepayments on the Company’s mortgage-backed investment securities. This was partially offset as a result of higher cash and segregated cash and investments balances at March 31, 2022 relative to year-end. A simulated decrease of 100 basis points in market interest rates had a larger impact on net interest revenue as of March 31, 2022 compared to December 31, 2021 primarily as a result of holding a higher allocation of floating-rate assets. 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 March 31, 2022 and December 31, 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 made significant progress to prepare for the phasing-out of LIBOR, as described in Part II – Item 7 – Management’s Discussion and Analysis of Financial Condition and Results of Operations – Risk Management in the 2021 Form 10-K, and additional transition efforts to prepare for the phasing-out of LIBOR are ongoing. On March 15, 2022, President Biden signed the Consolidated Appropriations Act of 2022 into law, which includes the Adjustable Interest Rate (LIBOR) Act, containing legislation related to the transition away from LIBOR. This legislation is intended to establish a uniform process for replacing LIBOR in existing contracts and securities that continue after the cessation of LIBOR and do not contain clearly defined or practicable fallback provisions. The Company believes this legislation helps provide clarity for the transition of our legacy LIBOR contracts, including investment securities, loans, and preferred stock, to alternative reference rates in an orderly manner. - 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) Liquidity Risk Liquidity risk is the potential that Schwab will be unable to sell assets or meet cash flow obligations when they come due without incurring unacceptable losses. We have established liquidity policies to support the successful execution of business strategies, while ensuring ongoing and sufficient liquidity to meet operational needs and satisfy applicable regulatory requirements under both normal and stressed conditions. We employ a variety of methodologies to monitor and manage liquidity, which are described below and in greater detail in Part II – Item 7 – Management’s Discussion and Analysis of Financial Condition and Results of Operations – Risk Management – Liquidity Risk in our 2021 10-K. 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. In addition to internal sources of liquidity, Schwab has access to external funding. The following table describes external debt facilities available at March 31, 2022: Description Borrower Outstanding Available Federal Home Loan Bank secured credit facilities Banking subsidiaries $ — $ 68,208 Federal Reserve discount window Banking subsidiaries — 10,309 Uncommitted, unsecured lines of credit with various external banks CSC, CS&Co — 1,522 Unsecured commercial paper CSC 2,386 2,614 Committed, unsecured credit facility with various external banks (1) TDAC — 600 Secured uncommitted lines of credit with various external banks (2) TDAC 1,850 — (1) This facility matured on April 21, 2022 and was not renewed. (2) Secured borrowing capacity is made available based on TDAC’s ability to provide acceptable collateral to the lenders as determined by the credit agreements. Our banking subsidiaries may also engage with external banks in repurchase agreements collateralized by investments securities as another source of short-term liquidity. 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 March 31, 2022 and December 31, 2021. CSC also has a universal automatic shelf registration statement on file with the SEC, which enables it to issue debt, equity, and other securities. See Part II – Item 7 – Management’s Discussion and Analysis of Financial Condition and Results of Operations – Risk Management – Liquidity Risk in the 2021 Form 10-K for additional information on these and other borrowing facilities. To support growth in margin loan balances at our broker-dealer subsidiaries while meeting our LCR requirements, the Company may issue commercial paper or draw on secured lines of credit, in addition to capital markets issuances. - 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) Liquidity Coverage Ratio Schwab is subject to the full LCR rule, which requires the Company to hold high quality liquid assets (HQLA) in an amount equal to at least 100% 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 – Business – Regulation in the 2021 Form 10-K for additional information. The Company was in compliance with the LCR rule at March 31, 2022, and the table below presents information about our average daily LCR: Average for the Three Months Ended March 31, 2022 Total eligible HQLA $ 129,040 Net cash outflows $ 115,861 LCR 111 % Borrowings The Company had short-term borrowings outstanding of $4.2 billion and $4.9 billion as of March 31, 2022 and December 31, 2021, respectively. Long-term debt is primarily comprised of Senior Notes and totaled $21.9 billion and $18.9 billion at March 31, 2022 and December 31, 2021, respectively. The following table provides information about our Senior Notes outstanding at March 31, 2022: March 31, 2022 Par Outstanding Maturity Weighted Average Interest Rate Moody’s Standard & Poor’s Fitch CSC Senior Notes $ 20,768 2022 - 2032 2.46% A2 A A TDA Holding Senior Notes $ 963 2022 - 2029 3.06% A2 A — New Debt Issuances The below debt issuances in the first quarter of 2022 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 March 3, 2022 $ 500 03/03/2027 SOFR (1) + 1.050% March 3, 2022 $ 1,500 03/03/2027 2.450% March 3, 2022 $ 1,000 03/03/2032 2.900% (1) Secured Overnight Financing Rate Equity Issuances CSC’s preferred stock issued and net proceeds for the first quarter of 2022 are as follows: Date Issued and Sold Net Proceeds Series K March 4, 2022 $ 740 For further discussion, see Item 1 – Note 8 for the Company’s outstanding debt and borrowing facilities and Item 1 – Note 13 for equity outstanding balances, issuances, and redemptions. Schwab additionally enters into guarantees and other similar arrangements in the ordinary course of business. For information on these arrangements, see Item 1 – Notes 5, 6, 8, 9, and 11. - 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) 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. Regulatory Capital Requirements CSC and certain subsidiaries including our banking and broker-dealer subsidiaries are subject to various capital requirements set by regulatory agencies as discussed in further detail in Part II – Item 7 – Management’s Discussion and Analysis of Financial Condition and Results of Operations – Capital Management of the 2021 Form 10-K and in Item 1 – Note 16. As of March 31, 2022, CSC and our banking subsidiaries are considered well capitalized, and CS&Co, TDAC, and TD Ameritrade, Inc. were in compliance with their respective net capital requirements. The following table details CSC’s consolidated and CSB’s capital ratios as of March 31, 2022 and December 31, 2021: March 31, 2022 December 31, 2021 CSC CSB CSC CSB Total stockholders’ equity $ 48,098 $ 21,036 $ 56,261 $ 27,035 Less: Preferred stock 10,694 — 9,954 — Common Equity Tier 1 Capital before regulatory adjustments $ 37,404 $ 21,036 $ 46,307 $ 27,035 Less: Goodwill, net of associated deferred tax liabilities $ 11,857 $ 13 $ 11,857 $ 13 Other intangible assets, net of associated deferred tax liabilities 7,446 — 7,579 — Deferred tax assets, net of valuation allowances and deferred tax liabilities 27 25 13 12 AOCI adjustment (1) (11,045) (9,674) (1,109) (1,004) Common Equity Tier 1 Capital $ 29,119 $ 30,672 $ 27,967 $ 28,014 Tier 1 Capital $ 39,813 $ 30,672 $ 37,921 $ 28,014 Total Capital 39,850 30,701 37,950 28,033 Risk-Weighted Assets 154,355 113,108 141,969 104,409 Total Leverage Exposure 653,783 435,882 614,466 400,532 Common Equity Tier 1 Capital/Risk-Weighted Assets 18.9 % 27.1 % 19.7 % 26.8 % Tier 1 Capital/Risk-Weighted Assets 25.8 % 27.1 % 26.7 % 26.8 % Total Capital/Risk-Weighted Assets 25.8 % 27.1 % 26.7 % 26.8 % Tier 1 Leverage Ratio 6.1 % 7.1 % 6.2 % 7.1 % Supplementary Leverage Ratio 6.1 % 7.0 % 6.2 % 7.0 % (1) Changes in market interest rates can result in unrealized gains or losses on AFS securities, which are included in AOCI. As a Category III banking organization, CSC has elected to exclude AOCI from regulatory capital. The Company’s issuance of preferred stock and quarterly earnings in the first quarter of 2022 helped to largely maintain our Tier 1 Leverage Ratio, as bank deposits and payables to brokerage clients grew by a total of $21.7 billion, or 4%, during the quarter. We ended the first quarter of 2022 with a consolidated Tier 1 Leverage Ratio of 6.1%, down slightly from 6.2% at year-end 2021. CSB’s Tier 1 Leverage Ratio remained consistent with year-end 2021, ending the first quarter of 2022 at 7.1%. Though our Tier 1 Leverage Ratio is below our long-term operating objective for consolidated CSC, 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 in further detail in our 2021 Form 10-K. - 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) IDA Agreement Certain brokerage client deposits are swept off-balance sheet to the TD Depository Institutions pursuant to the IDA agreement. During the first quarter of 2022, Schwab moved $12.7 billion of IDA balances to its balance sheet. 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 9 for further information on the IDA agreement. Dividends Cash dividends paid and per share amounts for the first three months of 2022 and 2021 are as follows: 2022 2021 Three Months Ended March 31, Cash Paid Per Share Amount Cash Paid Per Share Amount Common and Nonvoting Common Stock $ 381 $ .20 $ 341 $ .18 Series A Preferred Stock (1) 14 35.00 14 35.00 Series C Preferred Stock (2) — — 9 15.00 Series D Preferred Stock (3) 11 14.88 11 14.88 Series E Preferred Stock (4) 14 2,312.50 14 2,312.50 Series F Preferred Stock (5) — — — — Series G Preferred Stock (3) 34 1,343.75 34 1,343.75 Series H Preferred Stock (6) 25 1,000.00 22 888.89 Series I Preferred Stock (7) 23 1,000.00 — — Series J Preferred Stock (8) 7 11.13 — — Series K Preferred Stock (9) — — N/A N/A (1) Dividends were paid semi-annually until February 1, 2022 and are paid 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 were paid semi-annually until March 1, 2022 and are paid quarterly thereafter. (5) Dividends paid semi-annually until December 1, 2027 and quarterly thereafter. (6) Series H Preferred Stock was issued on December 11, 2020. Dividends are paid quarterly, and the first dividend was paid on March 1, 2021. (7) Series I Preferred Stock was issued on March 18, 2021. Dividends are paid quarterly, and the first dividend was paid on June 1, 2021. (8) Series J Preferred Stock was issued on March 30, 2021. Dividends are paid quarterly, and the first dividend was paid on June 1, 2021. (9) Series K Preferred Stock was issued on March 4, 2022. Dividends are paid quarterly, and the first dividend will be paid on June 1, 2022. 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 three months of 2022 or 2021. As of March 31, 2022, $1.8 billion remained on the authorization. OTHER Foreign Exposure At March 31, 2022, Schwab had exposure to non-sovereign financial and non-financial institutions in foreign countries, as well as agencies of foreign governments. At March 31, 2022, the fair value of these holdings totaled $18.6 billion, with the top three exposures being to issuers and counterparties domiciled in the United Kingdom at $6.4 billion, France at $5.4 billion, and Canada at $1.8 billion. At December 31, 2021, the fair value of these holdings totaled $12.5 billion, with the top three exposures being to issuers and counterparties domiciled in the United Kingdom at $5.2 billion, France at $3.9 billion, and Sweden at $754 million. In addition, Schwab had outstanding margin loans to foreign residents of $3.8 billion and $3.3 billion at March 31, 2022 and December 31, 2021, respectively. - 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) 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 2021 Form 10-K. There have been no changes to critical accounting estimates during the first three months of 2022. 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. 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. - 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) The following tables present reconciliations of GAAP measures to non-GAAP measures: Three Months Ended March 31, 2022 2021 Total expenses excluding interest (GAAP) $ 2,833 $ 2,755 Acquisition and integration-related costs (1) (96) (119) Amortization of acquired intangible assets (154) (154) Adjusted total expenses (non-GAAP) $ 2,583 $ 2,482 (1) Acquisition and integration-related costs for the three months ended March 31, 2022 primarily consist of $56 million of compensation and benefits, $31 million of professional services, and $4 million of occupancy and equipment. Acquisition and integration-related costs for the three months ended March 31, 2021 primarily consist of $72 million of compensation and benefits, $27 million of professional services, and $16 million of occupancy and equipment. Three Months Ended March 31, 2022 2021 Amount Diluted EPS Amount Diluted EPS Net income available to common stockholders (GAAP), Earnings per common share — diluted (GAAP) $ 1,278 $ .67 $ 1,388 $ .73 Acquisition and integration-related costs 96 .05 119 .06 Amortization of acquired intangible assets 154 .08 154 .08 Income tax effects (1) (61) (.03) (67) (.03) Adjusted net income available to common stockholders (non-GAAP), Adjusted diluted EPS (non-GAAP) $ 1,467 $ .77 $ 1,594 $ .84 (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 March 31, 2022 2021 Return on average common stockholders’ equity (GAAP) 12 % 12 % Average common stockholders’ equity $ 41,856 $ 46,691 Less: Average goodwill (11,952) (11,952) Less: Average acquired intangible assets — net (9,303) (9,915) Plus: Average deferred tax liabilities related to goodwill and acquired intangible assets — net 1,886 1,935 Average tangible common equity $ 22,487 $ 26,759 Adjusted net income available to common stockholders (1) $ 1,467 $ 1,594 Return on tangible common equity (non-GAAP) 26 % 24 % (1) See table above for the reconciliation of net income available to common stockholders to adjusted net income available to common stockholders (non-GAAP). - 19 - THE CHARLES SCHWAB CORPORATION