What changed in this filing

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Item 2. Management’s Discussion and Analysis

2022-08-08 compared with 2022-05-09 · 345 added, 202 removed, 479 unchanged (53% of the section changed)

43 unchanged sentences

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);

• Investments to support growth in our client base (see Overview);

• 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);

• Net interest revenue (see Results of Operations);

• Capital expenditures (see Results of Operations);

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

• Sources of liquidity and capital (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 9);

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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;

• General market conditions, including equity valuations and the level of interest rates;

• The level and mix of client trading activity;

• Our ability to attract and retain clients, develop trusted relationships, and grow client assets;

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• Client sensitivity to rates;

• Regulatory guidance;

• Regulatory guidance and adverse impacts from new legislation or rulemaking;

• Capital and liquidity needs and management;

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(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;

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• Balance sheet positioning relative to changes in interest rates;

• Interest earning asset mix and growth;

• Prepayment levels for mortgage-backed securities;

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

Results for the first quarter of 2022 and 2021 are as follows:

Results for the second quarter and first six months of 2022 and 2021 are as follows:

Three Months Ended

March 31, Percent

June 30, Percent

Change Six Months Ended

June 30, Percent

2022 2021 2022 2021

Client Metrics

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Return on tangible common equity 45 % 20 % 32 % 21 %

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

(1) The second quarter and first six months of 2022 include an outflow of $20.8 billion from a mutual fund clearing services client.

The first six months 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.

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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.

Schwab’s business momentum remained strong in the first six months of 2022, as we supported our clients amidst increasing challenges in the U.S.

economy, including rising inflation and the Federal Reserve’s corresponding aggressive tightening stance, as well as ongoing geopolitical turmoil driven by the war in Ukraine.

Equity markets were volatile throughout the first six months of the year, declining significantly from year-end 2021 and entering bear-market territory during the second quarter.

Against this backdrop, clients remained engaged in the first six months of 2022.

While year-to-date clients’ daily average trades (DATs) declined 11% from the first half of 2021 as a result of the extraordinary client trading levels seen early in 2021, second quarter DATs were 6.2 million, rising 3% above the second quarter of 2021.

Though new brokerage accounts were down from the extraordinary levels in early 2021, clients opened 1.0 million and 2.2 million new brokerage accounts in the second quarter and first six months of 2022, respectively.

Active brokerage accounts increased 5% year-over-year to reach 33.9 million at June 30, 2022.

Core net new assets totaled $64.2 billion and $184.7 billion in the second quarter and first six months of 2022, respectively, even as these totals were impacted significantly by tax-season outflows experienced in the second quarter.

THE CHARLES SCHWAB CORPORATION

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(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.

ended the second quarter of 2022 with $6.83 trillion in client assets, down 10% from June 30, 2021, and down 16% from year-end 2021, reflecting the impacts of significant declines in market valuations in the first half of 2022.

Schwab’s financial results for the second quarter and first six months of 2022 reflected the strength of our operating model.

Net income totaled $1.8 billion and $3.2 billion in the second quarter and first six months of 2022, respectively, rising 42% and 16% from the comparable periods in 2021.

Diluted earnings per share (EPS) totaled $.87 and $1.54 for the second quarter and first six months of 2022, respectively, increasing 47% and 17% from the same periods in the prior year.

Adjusted diluted EPS (1) , which excludes acquisition and integration-related costs, amortization of acquired intangible assets, and related income tax effects, was $.97 and $1.74 in the second quarter and first six months of 2022, respectively, up 39% and 12% from the comparable periods in 2021.

Schwab’s financial results for the second quarter of 2021 included a charge of approximately $200 million in other expense regarding a now settled regulatory matter (see Item 1 – Note 9).

Total net revenues were $5.1 billion and $9.8 billion in the second quarter and first half of 2022, respectively, up 13% and 6% from the same periods in the prior year.

Net interest revenue was $2.5 billion and $4.7 billion in the second quarter and first half of 2022, respectively, rising 31% and 23% from the same prior year periods as higher market interest rates and growth in interest-earning assets more than offset the impact of decreases in securities lending activity.

Asset management and administration fees of $1.1 billion and $2.1 billion in the second quarter and first half of 2022, respectively, were unchanged from the second quarter of 2021 and up 3% from the first half of 2021, as the benefits of lower money market fund fee waivers and growth in proprietary mutual funds and ETFs were largely offset by significant declines in equity market valuations.

Trading revenue was $885 million and $1.8 billion in the second quarter and first six months of 2022, respectively, down 7% and 15% from the same periods in 2021, due primarily to changes in the mix of client activity and, for the year-to-date period, lower DATs relative to the extraordinary client trading seen early in 2021.

Bank deposit account fee revenue totaled $352 million and $646 million in the second quarter and first half of 2022, respectively, rising 4% and decreasing 6% from the comparable periods in 2021.

BDA balances totaled $155.6 billion at June 30, 2022, down 4% from June 30, 2021 and down 2% from year-end 2021, reflecting migrations to our balance sheet partially offset by growth in client cash balances.

Total expenses excluding interest of $2.8 billion in the second quarter of 2022 increased slightly from the second quarter of 2021, while the year-to-date amount of $5.7 billion increased 2% from the first half of 2021.

During the second quarter and first six months of 2022, acquisition and integration-related costs totaled $94 million and $190 million, respectively, and amortization of acquired intangible assets was $154 million and $308 million, respectively.

Exclusive of these items, adjusted total expenses (1) were $2.6 billion and $5.2 billion for the second quarter and first half of 2022, respectively, increasing 2% and 3% from the same periods in 2021.

The increases in total expenses excluding interest and adjusted total expenses reflect higher compensation and benefits expense and higher occupancy and equipment expense, as we continue to invest in our people and our ability to support current and ongoing growth in our client base.

These increases were partially offset by lower other expense, which included a charge of approximately $200 million in the second quarter of 2021 (see Item 1 – Note 9).

Return on average common stockholders’ equity increased to 19% and 15% for the second quarter and first six months of 2022, respectively, compared with 10% in both comparable periods in 2021.

Return on tangible common equity (1) (ROTCE) was 45% and 32% in the second quarter and first six months of 2022, respectively, compared with 20% and 21% in the same periods in the prior year.

The increases in both return on average common stockholders’ equity and ROTCE in the second quarter and first six months of 2022 were due primarily to lower stockholders’ equity and higher net income.

Stockholders’ equity declined in the first six months of 2022 due to a decrease in accumulated other comprehensive income (AOCI) as higher market interest rates resulted in larger unrealized losses on our available for sale (AFS) portfolio.

The Company continued its disciplined approach to balance sheet management in the first six months of the year, including the maintenance of appropriate capital and liquidity to support client activity.

Total balance sheet assets were $638 billion at June 30, 2022, down 6% in the second quarter and down 4% from year-end 2021.

These decreases were due to several factors, including significant client tax disbursements in April, larger unrealized losses on the AFS portfolio, lower margin loans due to softening investor sentiment, and client cash allocation decisions as interest rates increased.

Migrations of Insured Deposit Account (IDA) balances from the TD Depository Institutions to Schwab’s balance sheet totaled $14.6 billion in the first half of 2022.

During the first quarter of 2022, we issued $750 million in preferred stock to support balance sheet growth seen early in the year from IDA balance migrations, and we also issued $3.0 billion in senior notes primarily for ongoing liquidity purposes.

At June 30, 2022, Schwab’s Tier 1 Leverage Ratio was 6.4%, increasing from 6.2% at 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.

THE CHARLES SCHWAB CORPORATION

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(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.

Integration of TD Ameritrade

Integration work continued during the first six months 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 over the course of 2023, ending in the fourth quarter.

We also continue to expect to incur total acquisition and integration-related costs and capital expenditures of between $2.0 billion and $2.2 billion.

More specifically, factors that could cause variability in our expected acquisition and integration-related costs include the level of employee attrition and availability of third-party labor, workforce redeployment from eliminated positions into open roles, changes in the levels of client activity, as well as changes in the scope and cost of technology and real estate-related exit cost variability due to effects of changes in remote working trends.

Acquisition and integration-related costs, which are inclusive of related exit costs, totaled $94 million and $190 million for the second quarter and first six months of 2022, respectively, and $144 million and $263 million for the second quarter and first six months of 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 June 30, 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.

Subsequent Events

On July 27, 2022, CSC publicly announced that its Board of Directors terminated the existing share repurchase authorization and replaced it with a new authorization to repurchase up to $15.0 billion of common stock, and declared a 2 cent, or 10%, increase in the quarterly cash dividend to $.22 per common share.

The share repurchase authorization does not have an expiration date.

On August 1, 2022, CSC purchased, directly from an affiliate of The Toronto-Dominion Bank (TD Bank), 15 million shares of nonvoting common stock for a total of $1.0 billion, or approximately $66.53 per share.

The shares of nonvoting common stock automatically converted into common stock and were purchased under CSC’s new share repurchase authorization.

The purchase price paid by CSC was equal to the lowest price per share that the affiliate of TD Bank received in a contemporaneous share sale facilitated by a third-party market maker, which resulted in a purchase price lower than the closing price on August 1, 2022.

In addition, on July 27, 2022, CSC’s Board of Directors appointed Walter W.

Bettinger II, Chief Executive Officer of CSC, as Co-Chairman of the Board of Directors, along with Founder and Co-Chairman Charles R.

Concurrently, CSC’s Board of Directors approved amendments to the CSC bylaws to clarify that there may be more than one named Chairman of the Board.

Current Regulatory Environment and Other Developments

Results of the Federal Reserve’s 2022 Comprehensive Capital Analysis and Review

In June 2022, the Company received the results of the Federal Reserve’s 2022 Comprehensive Capital Analysis and Review (CCAR).

These results included the Federal Reserve’s estimate of CSC’s minimum capital ratios under the supervisory severely adverse scenario for the nine-quarter horizon beginning December 31, 2021 and ending March 31, 2024.

Based on these results, CSC’s calculated stress capital buffer was below the 2.5% minimum, resulting in a stress capital buffer at the 2.5% floor.

This 2.5% stress capital buffer will be applicable beginning October 1, 2022.

See Item 1 – Note 16 for additional information regarding our capital requirements.

Federal Deposit Insurance Corporation (FDIC) Assessment Rate Proposal

In June 2022, the FDIC issued a notice of proposed rulemaking that would increase initial base deposit insurance assessment rates by 2 basis points, beginning with the first quarterly assessment period of 2023.

The proposed change is intended to raise the FDIC’s Deposit Insurance Fund (DIF) reserve ratio to the minimum threshold within the FDIC’s established DIF restoration plan, and would be in effect until the DIF reserve ratio meets the FDIC’s long-term goal of 2%.

A 2 basis point increase in the

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)

initial base deposit insurance assessment rate would result in a corresponding increase in regulatory fees and assessments, as well as a corresponding decrease in bank deposit account fees based on IDA balances.

The proposed rule is subject to a comment period which will end August 20, 2022.

RESULTS OF OPERATIONS

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The following tables present a comparison of revenue by category:

Three Months Ended March 31, Percent

Three Months Ended June 30, Percent

Change Amount % of

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Total net revenues 13% $ 5,093 100 % $ 4,527 100 %

Six Months Ended June 30, Percent

Change Amount % of

Revenues Amount % of

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.

Interest revenue 23% $ 5,029 51 % $ 4,083 44 %

Interest expense 34% (302) (3) % (225) (2) %

Net interest revenue 23 % 4,727 48 % 3,858 42 %

Asset management and administration fees

Mutual funds, ETFs, and CTFs 6% 1,004 10 % 951 10 %

Advice solutions — 957 10 % 958 10 %

Other 3% 159 2 % 154 2 %

Asset management and administration fees 3 % 2,120 22 % 2,063 22 %

Trading revenue

Commissions (15) % 927 9 % 1,093 12 %

Order flow revenue (15) % 900 9 % 1,056 11 %

Principal transactions (5) % 21 1 % 22 1 %

Trading revenue (15) % 1,848 19 % 2,171 24 %

Bank deposit account fees (6) % 646 7 % 688 7 %

Other (8) % 424 4 % 462 5 %

Total net revenues 6% $ 9,765 100 % $ 9,242 100 %

THE CHARLES SCHWAB CORPORATION

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

Net Interest Revenue

Interest rates increased significantly from year-end 2021 through June 30, 2022.

Short-term rates were near zero until the Federal Reserve began its tightening cycle in March 2022, ultimately increasing the federal funds target overnight rate three times between March and June 2022 for a total increase of 150 basis points, while long-term interest rates increased throughout the first six months of the year.

Despite significant seasonal tax-related client cash outflows in the second quarter, Schwab continued to see strength in net new client assets throughout the first six 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, sustained equity market volatility and softening investor sentiment during the second quarter and the first six months of 2022 reduced demand for margin loans, which declined 16% 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 changes in client cash allocations associated with higher short-term interest rates.

These steps also help keep Schwab positioned to benefit from interest rate increases.

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

Three Months Ended March 31, Average Balance Interest Revenue/ Expense Average Yield/Rate Average Balance Interest Revenue/ Expense Average Yield/Rate

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

Interest-earning assets

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Short-term borrowings 2,587 4 0.69 % 3,245 3 0.33 %

Long-term debt 21,119 124 2.34 % 18,349 97 2.12 %

Total interest-bearing liabilities 575,426 160 0.11 % 476,987 115 0.10 %

Non-interest-bearing funding sources

48,177 53,653

Securities lending expense

Other interest expense

Total funding sources $ 623,603 $ 166 0.11 % $ 530,640 $ 121 0.09 %

Net interest revenue $ 2,544 1.62 % $ 1,947 1.46 %

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)

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

Interest-earning assets

Cash and cash equivalents $ 68,920 $ 167 0.48 % $ 40,414 $ 16 0.08 %

Cash and investments segregated 51,570 94 0.36 % 44,573 14 0.06 %

Receivables from brokerage clients 81,618 1,332 3.24 % 71,760 1,172 3.25 %

Available for sale securities (1,2)

285,927 2,035 1.42 % 341,500 2,194 1.28 %

Held to maturity securities (1,2)

102,580 717 1.40 % — — —

Bank loans 37,351 417 2.24 % 25,862 287 2.22 %

Total interest-earning assets 627,966 4,762 1.51 % 524,109 3,683 1.40%

Securities lending revenue 259 398

Other interest revenue 8 2

Total interest-earning assets $ 627,966 $ 5,029 1.60 % $ 524,109 $ 4,083 1.55 %

Funding sources

Bank deposits $ 451,306 $ 44 0.02 % $ 365,576 $ 26 0.01%

Payables to brokerage clients 103,846 6 0.01 % 87,353 4 0.01%

Short-term borrowings 3,646 8 0.46 % 2,175 3 0.30%

Long-term debt 20,495 232 2.26 % 16,308 182 2.23%

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(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.

Net interest revenue increased $597 million, or 31%, and $869 million or 23% in the second quarter and first six months of 2022, respectively, compared to the same periods in 2021.

These increases were due primarily to higher average yields on substantially all interest-earning assets as a result of higher market interest rates as well as overall growth in interest-earning assets.

Net premium amortization of investment securities decreased to $382 million and $868 million in the second quarter and first six months of 2022, respectively, from $600 million and $1.2 billion in the second quarter and first six months of 2021, respectively.

These benefits were partially offset by lower securities lending revenue due to decreased market demand and higher interest expense on higher balances of long-term debt and bank deposits.

Average interest-earning assets for the second quarter and first six months of 2022 were higher by 18% and 20%, respectively, compared to the same periods in 2021.

These increases were primarily due to growth in bank deposits and payables to brokerage clients, which resulted from net new client asset inflows as well as transfers of BDA balances to our balance sheet in the second half of 2021 and the first six months of 2022.

Net interest margin increased to 1.62% and 1.50% during the second quarter and first six months of 2022, respectively, from 1.46% and 1.47% during the same periods in 2021.

These increases were primarily driven by improved yields on substantially all interest-earning assets as a result of higher market interest rates.

Higher interest rates on recent issuances and floating-rate long-term debt balances, as well as higher rates paid on bank deposits, resulted in a slight increase in the yield on total funding sources during the second quarter and first six months of 2022 compared with the same periods in 2021.

THE CHARLES SCHWAB CORPORATION

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The following table presents asset management and administration fees, average client assets, and average fee yields:

Three Months Ended March 31, 2022 2021

Three Months Ended June 30, 2022 2021

Assets Revenue Average

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Total asset management and administration fees $ 1,052 $ 1,047

Six Months Ended June 30, 2022 2021

Assets Revenue Average

Schwab money market funds before fee waivers $ 145,371 $ 208 0.29 % $ 163,370 $ 236 0.29 %

Fee waivers (57) (163)

Schwab money market funds $ 145,371 151 0.21 % $ 163,370 73 0.09 %

Schwab equity and bond funds, ETFs, and CTFs 444,036 189 0.09 % 396,296 180 0.09 %

Mutual Fund OneSource ® and other non-transaction fee funds

202,538 314 0.31 % 225,673 352 0.31 %

Other third-party mutual funds and ETFs 833,969 350 0.08 % 872,822 346 0.08 %

Total mutual funds, ETFs, and CTFs (1)

$ 1,625,914 1,004 0.12 % $ 1,658,161 951 0.12 %

Advice solutions (1)

Fee-based $ 454,830 957 0.42 % $ 436,368 958 0.44 %

Non-fee-based 88,509 — — 86,312 — —

Total advice solutions $ 543,339 957 0.36 % $ 522,680 958 0.37 %

Other balance-based fees (2)

591,695 128 0.04 % 591,090 127 0.04 %

Total asset management and administration fees $ 2,120 $ 2,063

(1) Average client assets for advice solutions may also include the asset balances contained in the mutual fund and/or ETF categories listed above.

1 unchanged sentence

(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.

Asset management and administration fees were essentially flat in the second quarter of 2022 and increased by $57 million, or 3%, in the first six months of 2022, compared to the same periods in 2021.

The increase during the first six months of 2022 was a result of a significant decrease in money market fund fee waivers due to improved portfolio yields as well as growth in proprietary mutual funds and ETFs.

These increases were partially offset by lower balances in Mutual Fund OneSource ® and money market funds, as well as equity market weakness during the first six months of 2022, which negatively impacted client asset valuations.

As a result of the Federal Reserve’s three increases to the federal funds target overnight rate totaling 150 basis points during the first six months of 2022, money market fund fee waivers were eliminated by the end of the second quarter of 2022.

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:

These funds generated 33% and 31% of the asset management and administration fees earned in the second

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)

quarter and first six months of 2022, respectively, compared with 29% of the asset management and administration fees earned in both the second quarter and first six months of 2021:

Market Funds Schwab Equity and

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and Other NTF funds

Three Months Ended March 31, 2022 2021 2022 2021 2022 2021

Three Months Ended June 30, 2022 2021 2022 2021 2022 2021

Balance at beginning of period $ 143,105 $ 163,581 $ 444,277 $ 373,817 $ 235,465 $ 227,289

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Balance at end of period $ 159,231 $ 151,943 $ 387,211 $ 411,091 $ 196,578 $ 240,181

Market Funds Schwab Equity and

Bond Funds, ETFs, and CTFs Mutual Fund OneSource ®

and Other NTF funds

Six Months Ended June 30, 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) 12,592 (24,169) 15,145 26,680 (18,763) (6,472)

Net market gains (losses) and other 130 23 (82,798) 42,722 (19,599) 22,796

Balance at end of period $ 159,231 $ 151,943 $ 387,211 $ 411,091 $ 196,578 $ 240,181

Trading Revenue

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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.

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

Three Months Ended June 30, Percent

Change Six Months Ended

June 30, Percent

2022 2021 2022 2021

Trading revenue $ 885 $ 955 (7) % $ 1,848 $ 2,171 (15) %

Clients’ daily average trades (DATs) (in thousands) 6,578 8,414 (22) %

DATs (in thousands) 6,227 6,042 3 % 6,403 7,209 (11) %

Number of trading days 62.0 63.0 (2) % 124.0 124.0 —

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(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.

Trading revenue decreased $70 million and $323 million in the second quarter and first six months of 2022, respectively, compared to the same periods in 2021.

The decrease in the second quarter of 2022 compared to the second quarter of 2021 was primarily due to changes in the mix of client activity, resulting in lower commissions and order flow revenue, which each decreased 8% from the second quarter of 2021.

The decrease in the first six months of 2022 compared to the same period in 2021 was 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, as well as changes in the mix of client activity.

These factors drove lower commissions and order flow revenue, which each decreased 15% from the first six months of 2021.

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)

Bank Deposit Account Fees

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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

Three Months Ended June 30, Percent Change Six Months Ended June 30, Percent Change

2022 2021 2022 2021

Bank deposit account fees $ 352 $ 337 4% $ 646 $ 688 (6) %

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Floating-rate balances 23 % 21 % 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.

Bank deposit account fees increased $15 million, or 4%, in the second quarter of 2022 compared to the second quarter of 2021, primarily due to a rising interest rate environment, which helped to increase the average net yield in the second quarter of 2022.

During the first six months of 2022, bank deposit account fees decreased $42 million, or 6%, as compared to the first six months of 2021, primarily due to lower average BDA balances.

The Company transferred $10.6 billion and $16.3 billion of BDA balances to its balance sheet during the second half of 2021 and first six months of 2022, respectively.

The transfer of these balances to our balance sheet was the primary driver in the change of average BDA balances in the first six months of 2022 compared with the first six months 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.

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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.

Other revenue increased $19 million in the second quarter of 2022 compared to the same period in 2021, due primarily to higher exchange processing fees and other service fees, partially offset by a higher provision for credit losses on bank loans.

Exchange processing fees increased as a result of an SEC fee rate increase during the second quarter of 2022, and the provision for credit losses on bank loans increased as a result of higher loan loss factors driven primarily by higher forecasted interest rates and growth of the loan portfolio.

Other revenue decreased $38 million in the first six months of 2022 compared to the same period in 2021, primarily due to the higher provision for credit losses.

In addition, other revenue in the second quarter and first six months of 2022 included gains of $37 million and $46 million, respectively, on the sale of Schwab Compliance Technologies, Inc.

and certain investments.

THE CHARLES SCHWAB CORPORATION

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Three Months Ended

March 31, Percent

June 30, Percent

Change Six Months Ended

June 30, Percent

2022 2021 2022 2021

Compensation and benefits

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Average 34.5 32.4 6 % 34.2 32.3 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.

Expenses excluding interest increased by $11 million and $89 million in the second quarter and first six months of 2022, respectively, compared to the same periods in 2021.

Adjusted total expenses, which excludes acquisition and integration-related costs and amortization of acquired intangible assets, increased 2% and 3% in the second quarter and first six months of 2022, respectively, compared to the same periods 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.

Total compensation and benefits increased in the second quarter and first six months of 2022 compared to the same periods 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 included acquisition and integration-related costs of $53 million and $97 million in the second quarter of 2022 and 2021, respectively, and $109 million and $169 million in the first six months of 2022 and 2021, respectively.

Professional services expense increased in the second quarter and first six months of 2022 compared to the same periods 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 $35 million and $37 million in the second quarter of 2022 and 2021, respectively, and $66 million and $64 million in the first six months of 2022 and 2021, respectively.

Occupancy and equipment expense increased in the second quarter and first six months of 2022 compared to the same periods in 2021, primarily due to an increase in software maintenance and other agreements as well as other technology equipment costs to support growth of the business and the integration of TD Ameritrade.

Occupancy and equipment included acquisition and integration-related costs of $4 million and $7 million in the second quarter of 2022 and 2021, respectively, and $8 million and $23 million in the first six months of 2022 and 2021, respectively.

Advertising and market development expense decreased in the second quarter and first six months of 2022 compared to the same periods in 2021, primarily due to decreases in spending for marketing communications for TD Ameritrade.

THE CHARLES SCHWAB CORPORATION

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(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.

Communications expense increased slightly in the second quarter compared with the second quarter of 2021 while remaining unchanged during the first six months of 2022 compared to the same period in 2021.

The increase during the second quarter of 2022 was due to overall growth in the business, partially offset by lower telecommunications spending.

Depreciation and amortization expense increased in the second quarter and first six months of 2022 compared to the same periods 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 second quarter and first six months of 2022 to support the TDA integration and enhance our technological infrastructure to support growth of the business.

Regulatory fees and assessments in the second quarter of 2022 were largely consistent with the second quarter of 2021, and decreased in the first six months of the year from the first six months of 2021.

These changes primarily resulted from lower client trading activity in 2022, 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 second quarter and first six months of 2022 compared to the same periods in 2021, primarily due to the recognition in the second quarter of 2021 of approximately $200 million for a now-settled regulatory matter (see Item 1 – Note 9).

The decrease was partially offset by higher exchange processing fees as a result of fee rate increases during the second quarter of 2022.

Capital expenditures were $339 million and $225 million in the second quarter of 2022 and 2021, respectively, and $548 million and $434 million for the first six months of 2022 and 2021, respectively.

The increases in capital expenditures from the prior year were primarily related to continued work on TDA integration and enhancement of 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.

Taxes on income were $481 million and $454 million for the second quarters of 2022 and 2021, respectively, resulting in effective income tax rates on income before taxes of 21.2% and 26.4%, respectively.

Taxes on income were $918 million and $930 million for the first six months of 2022 and 2021, respectively, resulting in effective income tax rates on income before taxes of 22.3% and 25.3%, respectively.

The decrease in the effective tax rates in the second quarter and first six months of 2022 compared to the same periods in 2021 was primarily related to the reversal of tax reserves in 2022 due to the resolution of certain state matters and tax benefits recognized on the portion of the regulatory matter charge that was determined upon settlement to be deductible.

Segment Information

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Investor Services Advisor Services Total

Three Months Ended March 31, Percent Change 2022 2021 Percent Change 2022 2021 Percent Change 2022 2021

Three Months Ended June 30, Percent Change 2022 2021 Percent Change 2022 2021 Percent Change 2022 2021

Net interest revenue 24 % $ 1,834 $ 1,478 51 % $ 710 $ 469 31 % $ 2,544 $ 1,947

8 unchanged sentences

(80) % $ 8.8 $ 44.5 (46) % $ 34.6 $ 64.3 (60) % $ 43.4 $ 108.8

(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

THE CHARLES SCHWAB CORPORATION

1 unchanged sentence

(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.

Investor Services Advisor Services Total

Six Months Ended June 30, Percent Change 2022 2021 Percent Change 2022 2021 Percent Change 2022 2021

Net interest revenue 16 % $ 3,408 $ 2,932 42 % $ 1,319 $ 926 23 % $ 4,727 $ 3,858

Asset management and administration fees 2 % 1,544 1,511 4 % 576 552 3 % 2,120 2,063

Trading revenue (18) % 1,607 1,958 13 % 241 213 (15) % 1,848 2,171

Bank deposit account fees (15) % 427 503 18 % 219 185 (6) % 646 688

Other (10) % 314 348 (4) % 110 114 (8) % 424 462

Total net revenues 1 % 7,300 7,252 24 % 2,465 1,990 6 % 9,765 9,242

Expenses Excluding Interest (1) % 4,242 4,297 11 % 1,410 1,266 2 % 5,652 5,563

Income before taxes on income 3 % $ 3,058 $ 2,955 46 % $ 1,055 $ 724 12 % $ 4,113 $ 3,679

Net New Client Assets (in billions) (1)

(42) % $ 63.4 $ 109.6 (24) % $ 100.5 $ 133.0 (32) % $ 163.9 $ 242.6

(1) In the second quarter and first six months of 2022, Investor Services includes an outflow of $20.8 billion from a mutual fund clearing services client.

In the first six months 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 increased by 7% and 1% in the second quarter and first six months of 2022, respectively, compared to the same periods in 2021, while Advisor Services total net revenues increased by 32% and 24% in the second quarter and first six months of 2022, respectively, compared to the same periods in 2021.

Investor Services growth was primarily driven by increases in net interest revenue as described above, partially offset by decreases in trading revenue due to lower trading activity and bank deposit account fees as a result of migrating BDA balances to Schwab’s balance sheet during the second half of 2021 and the first six months of 2022.

Advisor Services growth was primarily driven by increases in net interest revenue as described above, and increases in trading revenue and bank deposit account fees primarily due to growth in the business.

Asset management and administration fees increased slightly more for Advisor Services due to client asset growth, even as equity market weakness largely offset the reduction of money market fee waivers for both segments in the second quarter and first six months of 2022 compared with the same periods in 2021.

Both segments saw increases in other revenue for the second quarter of 2022 compared to the same period in 2021, due to higher exchange processing fees and other service fees, partially offset by an increased provision for credit losses on bank loans, while both segments decreased in the first six months of 2022 from the same period in 2021 primarily due to the higher provision for credit losses on bank loans.

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.

Investor Services total expenses excluding interest decreased by 4% and 1% in the second quarter and first six months of 2022, respectively, compared to the same periods in 2021, while Advisor Services total expenses excluding interest increased by 14% and 11% in the second quarter and first six months of 2022, respectively, compared to the same periods in 2021.

Both segments saw higher compensation and benefits expenses due to 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.

Occupancy and equipment expenses increased in both segments, primarily due to an increase in software maintenance and other agreements as well as other technology equipment costs to support growth of the business and the integration of TD Ameritrade.

In addition, depreciation and amortization increased for both segments primarily due to higher amortization of purchased and internally developed software and higher depreciation of hardware, along with increases to enhance our technological infrastructure to support growth of the business.

For Investor Services, these increases were more than offset by lower other expenses due to a charge of approximately $200 million in the second quarter of 2021 for a regulatory matter (see Item 1 – Note 9), resulting in a slight decrease in total expenses excluding interest in the second quarter and first six months of 2022 compared to the same periods in 2021.

RISK MANAGEMENT

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

As part of our 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.

As part of our ongoing 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,

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)

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.

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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.

Interest-earning assets include investment securities, margin loans, bank loans, and cash and cash equivalents.

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.

2 unchanged sentences

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 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

The following table shows the simulated change to net interest revenue over the next 12 months beginning June 30, 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:

June 30, 2022 December 31, 2021

Increase of 100 basis points 6.2 % 14.1 %

Decrease of 100 basis points (6.1) % (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.

The Company’s simulated increase of 100 basis points in market interest rates had a lower impact on net interest revenue as of June 30, 2022 compared to December 31, 2021 primarily due to increased sensitivity to the Company’s higher projected client deposit rates and decreased sensitivity to the Company’s mortgage-backed investment securities.

A simulated decrease of 100 basis points in market interest rates had a larger impact on net interest revenue as of June 30, 2022 compared to December 31, 2021 primarily due to increased sensitivity of cash and short-term investments.

This increased sensitivity was partially offset by higher starting client deposit rates which, relative to the December 31, 2021 simulation, provide greater responsiveness to lower simulated interest rates.

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.

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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.

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)

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.

As of June 30, 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

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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.

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)

On July 19, 2022, the Federal Reserve Board released a proposal that provides default rules for certain contracts that use LIBOR, which would implement the LIBOR Act with replacement rates based on the Secured Overnight Financing Rate (SOFR).

The Company believes the LIBOR Act and the Federal Reserve Board’s proposed regulation help 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.

Liquidity Risk

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Treasury securities.

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 March 31, 2022:

The following table describes external debt facilities available at June 30, 2022:

Description Borrower Outstanding Available

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Unsecured commercial paper CSC 600 4,400

Committed, unsecured credit facility with various external banks (1)

Secured uncommitted lines of credit with various external banks (1)

(1) This facility matured on April 21, 2022 and was not renewed.

(1) 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.

Our banking subsidiaries may also engage with external banks in repurchase agreements collateralized by investment securities as another source of short-term liquidity.

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

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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.

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

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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:

The Company was in compliance with the LCR rule at June 30, 2022, and the table below presents information about our average daily LCR:

Average for the

Three Months Ended

March 31, 2022

June 30, 2022

Total eligible HQLA $ 123,188

Net cash outflows $ 108,227

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

The Company had short-term borrowings outstanding of $1.4 billion and $4.9 billion as of June 30, 2022 and December 31, 2021, respectively.

Long-term debt is primarily comprised of Senior Notes and totaled $21.1 billion and $18.9 billion at June 30, 2022 and December 31, 2021, respectively.

The following table provides information about our Senior Notes outstanding at June 30, 2022:

June 30, 2022 Par

Outstanding Maturity Weighted Average

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TDA Holding Senior Notes $ 213 2024 - 2029 3.47% A2 A —

THE CHARLES SCHWAB CORPORATION

Management’s Discussion and Analysis of Financial Condition and Results of Operations

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

New Debt Issuances

The below debt issuances in the first quarter of 2022 were senior unsecured obligations.

The below debt issuances in the first six months 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.

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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:

CSC’s preferred stock issued and net proceeds for the first six months of 2022 are as follows:

Date Issued and Sold Net Proceeds

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For information on these arrangements, see Item 1 – Notes 5, 6, 8, 9, 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)

CAPITAL MANAGEMENT

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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.

As of June 30, 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

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 June 30, 2022 and December 31, 2021:

June 30, 2022 December 31, 2021

CSC CSB CSC CSB

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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.

THE CHARLES SCHWAB CORPORATION

Management’s Discussion and Analysis of Financial Condition and Results of Operations

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

The Company’s consolidated Tier 1 Leverage Ratio increased to 6.4% at June 30, 2022 from 6.2% at year-end 2021.

This increase resulted from strength in earnings in the first six months of 2022, our March 2022 issuance of preferred stock, and a decrease of $12.6 billion, or 2%, in total bank deposits and payables to brokerage clients due to seasonal tax outflows and certain client cash allocation decisions resulting from the rising interest rate environment.

CSB’s Tier 1 Leverage Ratio also increased from year-end 2021, ending the first six months of 2022 at 7.3%.

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.

During the first six months of 2022, Schwab moved $14.6 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.

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See Item 1 – Note 9 for further information on the IDA agreement.

Cash dividends paid and per share amounts for the first three months of 2022 and 2021 are as follows:

Three Months Ended March 31, Cash Paid Per Share

THE CHARLES SCHWAB CORPORATION

Management’s Discussion and Analysis of Financial Condition and Results of Operations

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

Cash dividends paid and per share amounts for the first six months of 2022 and 2021 are as follows:

Six Months Ended June 30, Cash Paid Per Share

Amount Cash Paid Per Share

Common and Nonvoting Common Stock $ 762 $ .40 $ 682 $ .36

Series A Preferred Stock (1)

Preferred Stock:

19 47.70 14 35.00

Series C Preferred Stock (2)

Series D Preferred Stock (3)

22 29.76 22 29.76

Series E Preferred Stock (4)

20 3,293.32 14 2,312.50

Series F Preferred Stock (5)

Series G Preferred Stock (3)

13 2,500.00 13 2,500.00

Series H Preferred Stock (6)

67 2,687.50 67 2,687.50

Series I Preferred Stock (7)

50 2,000.00 47 1,888.89

Series J Preferred Stock (8)

Series K Preferred Stock (9)

45 2,000.00 18 811.11

13 22.26 5 7.54

9 1,208.33 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.

(2) Series C was redeemed on June 1, 2021.

Prior to redemption, dividends were paid quarterly and the final dividend was paid on June 1, 2021.

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(5) Dividends paid semi-annually until December 1, 2027 and quarterly thereafter.

(6) Series H Preferred Stock was issued on December 11, 2020.

(6) Series H 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.

(7) Series I 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.

(8) Series J 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.

(9) Series K was issued on March 4, 2022.

Dividends are paid quarterly, and the first dividend was paid on June 1, 2022.

N/A Not applicable.

On July 27, 2022, the Board of Directors of CSC declared a two cent, or 10%, increase in the quarterly cash dividend to $.22 per common share.

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.

On January 30, 2019, CSC publicly announced that its Board of Directors authorized a share repurchase program to repurchase up to $4.0 billion of common stock.

There were no repurchases of CSC’s common stock under this authorization during the first six months of 2022 or 2021.

As of June 30, 2022, $1.8 billion remained on the authorization.

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.

On August 1, 2022, CSC purchased, directly from an affiliate of TD Bank, 15 million shares of nonvoting common stock for a total of $1.0 billion, or approximately $66.53 per share.

The shares of nonvoting common stock automatically converted into common stock and were purchased under CSC’s new share repurchase authorization.

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.

At June 30, 2022, Schwab had exposure to non-sovereign financial and non-financial institutions in foreign countries, as well as agencies of foreign governments.

At June 30, 2022, the fair value of these holdings totaled $20.7 billion, with the top three exposures being to issuers and counterparties domiciled in the United Kingdom at $6.9 billion, France at $6.6 billion, and Canada at $1.6 billion.

THE CHARLES SCHWAB CORPORATION

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

Sweden at $754 million.

In addition, Schwab had outstanding margin loans to foreign residents of $4.1 billion and $3.3 billion at June 30, 2022 and December 31, 2021, respectively.

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.

There have been no changes to critical accounting estimates during the first six months of 2022.

NON-GAAP FINANCIAL MEASURES

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

Three Months Ended March 31,

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

2022 2021 2022 2021

Total expenses excluding interest (GAAP) $ 2,819 $ 2,808 $ 5,652 $ 5,563

Acquisition and integration-related costs (1)

(94) (144) (190) (263)

Amortization of acquired intangible assets (154) (154) (308) (308)

Adjusted total expenses (non-GAAP) $ 2,571 $ 2,510 $ 5,154 $ 4,992

(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,

Amount Diluted EPS Amount Diluted EPS

(1) Acquisition and integration-related costs for the three and six months ended June 30, 2022 primarily consist of $53 million and $109 million of compensation and benefits, $35 million and $66 million of professional services, and $4 million and $8 million of occupancy and equipment.

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

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

2022 2021 2022 2021

Amount Diluted EPS Amount Diluted EPS Amount Diluted EPS Amount Diluted EPS

Net income available to common stockholders (GAAP),

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(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,

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

2022 2021 2022 2021

Return on average common stockholders’ equity (GAAP) 19 % 10 % 15 % 10 %

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

What changed 10-Q

Item 2. Management’s Discussion and Analysis