What changed in this filing

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Item 2. Management’s Discussion and Analysis

2022-11-08 compared with 2022-08-08 · 232 added, 202 removed, 622 unchanged (41% of the section changed)

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

• Tier 1 Leverage Ratio operating objective (see Overview 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);

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 and Exit and Other Related Liabilities in Part I – Item 1 – Financial Information – Notes to Condensed Consolidated Financial Statements (Item 1) – Note 10);

• The expected impact of proposed and final rules (see Current Regulatory Environment and other Developments);

• Rates paid on client-related liabilities;

net interest revenue (see Results of Operations);

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

• Sources of liquidity and capital (see Liquidity Risk and Capital Management);

• Sources and uses of liquidity and capital (see Liquidity Risk and Capital Management);

• 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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• 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;

THE CHARLES SCHWAB CORPORATION

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

• 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;

• 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;

• Increased compensation and other costs due to inflationary pressures;

• The timing and scope of integration-related and other technology projects;

• Re al estate and workforce decisions;

• Client cash allocations;

• Migrations of bank deposit account balances (BDA balances);

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• Prepayment levels for mortgage-backed securities;

• Client cash allocations;

• LIBOR trends;

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

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

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

Three Months Ended

June 30, Percent

Change Six Months Ended

June 30, Percent

September 30, Percent

Change Nine Months Ended

September 30, Percent

2022 2021 2022 2021

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Return on tangible common equity 74 % 23 % 42 % 21 %

(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.

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

The first nine 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 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.

During the first nine months of 2022, our clients faced a challenging macroeconomic environment that included rising inflation, the Federal Reserve’s corresponding aggressive monetary tightening policy, Russia’s continued war in Ukraine, and increasing challenges across other global economies.

Equity markets declined substantially throughout the first nine months of 2022, with the S&P 500 extending year-to-date losses to 25% through September 30.

Against this backdrop, clients’ daily average trades (DATs) in the third quarter remained consistent with the prior year quarter at 5.5 million, while declining 8% to 6.1 million on a year-to-date basis as investor sentiment softened, particularly compared with the extraordinary client trading levels seen in early 2021.

New brokerage accounts were also down from the prior year, as clients opened 897 thousand and 3.1 million new brokerage accounts in the third quarter and first nine months of 2022, respectively.

Active brokerage accounts were 33.9 million at September 30, 2022, increasing 4% year-over-year.

Core net new assets were $114.6 billion in the third quarter and brought the year-to-date 2022 total to $299.3 billion.

We ended the third quarter of 2022 with total client assets of $6.64 trillion, down 13% from September 30, 2021, and down 18% from year-end 2021, as declines in market valuations of approximately $1.4 trillion over the past 12 months outweighed our continued asset gathering.

THE CHARLES SCHWAB CORPORATION

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

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.

Schwab’s financial results in the third quarter and first nine months of 2022 reflected the strength of our business and significant benefits from higher market interest rates.

Net income totaled $2.0 billion and $5.2 billion in the third quarter and first nine months of 2022, respectively, increasing 32% and 22% from the comparable periods in 2021.

Diluted earnings per common share (EPS) was $.99 and $2.53 in the third quarter and first nine months of 2022, respectively, rising 34% and 23% 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 $1.10 and $2.83 in the third quarter and first nine months of 2022, respectively, up 31% and 18% from the comparable periods in 2021.

Total net revenues were $5.5 billion and $15.3 billion in the third quarter and first nine months of 2022, respectively, rising 20% and 11% from the comparable periods in 2021.

Net interest revenue increased to $2.9 billion and $7.7 billion for the third quarter and first nine months of 2022, representing growth of 44% and 30% over the prior year periods primarily as a result of significantly higher market rates.

Asset management and administration fees of $1.0 billion and $3.2 billion in the third quarter and first nine months of 2022, respectively, were down 5% from the third quarter of 2021 and largely flat with the first nine months of 2021, as significant declines in equity market valuations offset the benefit of lower money market fund fee waivers.

Trading revenue totaled $930 million and $2.8 billion in the third quarter and first nine months of 2022, respectively, down 4% and 11% from the same periods in 2021, due primarily to changes in the mix of client trading activity, and, for the year-to-date period, lower DATs in 2022 relative to the extraordinary client trading volume seen early in 2021.

Bank deposit account fee revenue was $413 million and $1.1 billion in the third quarter and first nine months of 2022, respectively, increasing 28% and 5% from the same periods in 2021, as higher average net yields more than offset lower average BDA balances.

BDA balances totaled $139.6 billion at September 30, 2022, down 9% from September 30, 2021 and down 12% from year-end 2021.

Total expenses excluding interest amounted to $2.8 billion and $8.5 billion in the third quarter and first nine months of 2022, respectively, increasing 10% and 4% from the same periods in 2021.

Adjusted total expenses (1) were $2.6 billion and

$7.7 billion for the third quarter and first nine months of 2022, respectively, increasing 12% and 6% from the same periods in 2021.

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

The year-to-date 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 25% and 18% for the third quarter and first nine months of 2022, respectively, compared with 12% and 11% in the comparable periods in 2021.

Return on tangible common equity (1) (ROTCE) was 74% and 42% in the third quarter and first nine months of 2022, respectively, compared with 23% and 21% in the same periods in the prior year.

The increases in both return on average common stockholders’ equity and ROTCE were due primarily to lower stockholders’ equity and higher net income.

Stockholders’ equity declined in the first nine months of 2022 due to a significant 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 diligent approach to balance sheet management amid a rapidly evolving macroeconomic environment in the first nine months of 2022, maintaining appropriate capital and liquidity to support client activity and returning excess capital to stockholders.

Total balance sheet assets of $577.6 billion at September 30, 2022 were down 9% in the third quarter and down 13% from year-end 2021, primarily due to decreases in bank deposits and payables to brokerage clients as a result of client cash allocation decisions and unrealized losses on AFS securities, both primarily resulting from higher market interest rates.

During the third quarter, the Board of Directors approved a 10% increase in our common dividend and a $15 billion share repurchase authorization;

repurchases under this new authorization totaled $1.5 billion in the third quarter.

As announced in September, the Company redeemed its $400 million Series A Preferred Stock effective November 1, 2022, and we announced in October the redemption of our $600 million Series E Preferred Stock, effective December 1, 2022.

In addition, during the third quarter, we lowered our operating objective for the Company’s consolidated Tier 1 Leverage Ratio by 25 basis points to 6.50%-6.75%.

The Company’s Tier 1 Leverage Ratio was 6.8% at September 30, 2022, slightly above our new operating objective.

(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.

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

THE CHARLES SCHWAB CORPORATION

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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 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.

Integration work continued during the first nine months of 2022.

Based on our current integration plans and expanded scope of technology work, the Company now expects to complete most client conversions across multiple groups over the course of 2023, with certain client groups to be completed in early 2024.

We now expect to incur total acquisition and integration-related costs and capital expenditures of between $2.4 billion and $2.5 billion, which reflects increased costs resulting from incremental complexity in conversion work, due in part to the replacement of certain vendor resources following Russia’s invasion of Ukraine, as well as overall inflationary pressures.

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 economic environment.

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.

Acquisition and integration-related costs, which are inclusive of related exit costs, totaled $101 million and $291 million for the third quarter and first nine months of 2022, respectively, and $104 million and $367 million for the third quarter and first nine 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 September 30, 2022, we have achieved over half of this amount on an annualized run-rate basis.

The Company expects to realize the vast majority of the remaining estimated cost synergies by the end of 2024.

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

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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.

This 2.5% stress capital buffer became applicable on 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

Inflation Reduction Act of 2022:

Excise Tax on Share Repurchases

In August 2022, the Inflation Reduction Act of 2022 (Inflation Reduction Act) was enacted into law.

Among many other items, the Inflation Reduction Act imposes a nondeductible 1% excise tax on a publicly traded corporation on the fair market value of certain stock that it repurchases, net of issuances, effective for repurchases after December 31, 2022.

The Company believes share repurchases made under its current repurchase authorization beginning in 2023 will become subject to this tax.

We expect to recognize the tax as a direct and incremental cost associated with these transactions.

For repurchases of common stock, we expect the tax will be recorded as part of the cost basis of the treasury stock repurchased, resulting in no income statement impact.

Federal Deposit Insurance Corporation (FDIC) Assessment Rate Increase

In October 2022, the FDIC adopted a final rule to increase the initial base deposit insurance assessment rates by 2 basis points, beginning with the first quarterly assessment period of 2023.

The FDIC has stated that this 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 will remain in effect until the DIF reserve ratio meets the FDIC’s long-term goal of 2%.

A 2 basis point increase in the initial base deposit insurance assessment rate will result in a corresponding increase in regulatory fees and assessments, as well as a corresponding decrease in bank deposit account fee revenue based on IDA balances.

THE CHARLES SCHWAB CORPORATION

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(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 June 30, Percent

Three Months Ended September 30, Percent

Change Amount % of

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Interest revenue 56 % $ 3,357 61 % $ 2,153 47 %

Interest expense 37 % (166) (3) % (121) (3) %

Interest expense N/M (431) (8) % (123) (3) %

Net interest revenue 44 % 2,926 53 % 2,030 44 %

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Order flow revenue (10) % 432 8 % 482 11 %

Principal transactions 9% 12 — 11 —

Principal transactions N/M 63 1 % 16 —

Trading revenue (4) % 930 17 % 964 21 %

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Total net revenues 20 % $ 5,500 100 % $ 4,570 100 %

Six Months Ended June 30, Percent

Nine Months Ended September 30, Percent

Change Amount % of

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Total net revenues 11 % $ 15,265 100 % $ 13,812 100 %

N/M Not meaningful.

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

THE CHARLES SCHWAB CORPORATION

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

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.

Schwab establishes the rates paid on client-related liabilities, and management expects that it will generally adjust the rates paid on these liabilities at some fraction of any movement in short-term rates.

Interest expense on long-term debt, short-term borrowings, and other funding sources is impacted by market interest rates at the time of borrowing and changes in interest rates on floating-rate debt.

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

Short-term rates were near zero until the Federal Reserve began its aggressive tightening cycle in response to rising inflation beginning in March 2022, ultimately increasing the federal funds target overnight rate five times between March and September for a total increase of 300 basis points, while long-term interest rates increased throughout the first nine months of the year.

Schwab continued to see strength in net new client assets during the first nine 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 average interest-earning assets in the third quarter and first nine months of 2022 relative to the same periods in 2021.

Partially offsetting this growth, we experienced significant seasonal tax outflows in the second quarter, and, due to the rapid increases to the federal funds overnight rate, changes in client cash allocations increased in the third quarter which resulted in a total decrease in bank deposits and payables to brokerage clients of 9% during the third quarter and 11% since year-end 2021.

In recent quarters, the Company increased its cash holdings and reduced the duration of incremental investment securities purchases, which has provided flexibility to support such 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 June 30, Average Balance Interest Revenue/ Expense Average Yield/Rate Average Balance Interest Revenue/ Expense Average Yield/Rate

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

Interest-earning assets

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

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

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

Interest-earning assets

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(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.

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.

Net interest revenue increased $896 million, or 44%, and $1.8 billion, or 30%, in the third quarter and first nine 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.

Net premium amortization of investment securities decreased to $295 million and $1.2 billion in the third quarter and first nine months of 2022, respectively, from $560 million and $1.8 billion in the third quarter and first nine months of 2021, respectively.

These benefits were partially offset by higher rates paid on bank deposits, payables to brokerage clients, and long-term debt, as well as lower balances of margin loans and lower securities lending revenue due to decreased market demand.

Average interest-earning assets for the third quarter and first nine months of 2022 were higher by 6% and 15%, 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 third quarter of 2021 and the first nine months of 2022.

These year-over-year increases were partially offset by client cash allocation decisions in response to higher short-term market interest rates in the second and third quarters of 2022, as clients moved certain cash balances out of bank deposits and payables to brokerage clients.

Net interest margin increased to 1.97% and 1.65% during the third quarter and first nine months of 2022, respectively, from 1.45% and 1.46% 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 partially offset by higher rates paid on our funding sources driven primarily by bank deposits, payables to brokerage clients, and recent debt issuances and floating-rate long-term debt balances.

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 June 30, 2022 2021

Three Months Ended September 30, 2022 2021

Assets Revenue Average

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Total asset management and administration fees $ 1,047 $ 1,101

Six Months Ended June 30, 2022 2021

Nine Months Ended September 30, 2022 2021

Assets Revenue Average

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

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

Asset management and administration fees declined by $54 million, or 5%, in the third quarter of 2022 and were essentially flat in the first nine months of 2022, compared to the same periods in 2021.

The decrease in the third quarter of 2022 was a result of lower balances in Mutual Fund OneSource ® and other third-party mutual funds, as well as advice solutions, relative to the same period in 2021.

Balances declined primarily due to equity market weakness during the first nine months of 2022, which negatively impacted client asset valuations.

These decreases were partially offset during the third quarter, and fully offset in the year-to-date period, by lower money market fund fee waivers, which were eliminated during the second quarter of 2022 as a result of the Federal Reserve’s increases to the federal funds target overnight rate.

THE CHARLES SCHWAB CORPORATION

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(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:

These funds generated 34% and 32% of the asset management and administration fees earned in the third quarter and first nine months of 2022, respectively, compared with 29% of the asset management and administration fees earned in both the third quarter and first nine months of 2021:

Market Funds Schwab Equity and

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and Other NTF funds

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

Three Months Ended September 30, 2022 2021 2022 2021 2022 2021

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

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and Other NTF funds

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

Nine Months Ended September 30, 2022 2021 2022 2021 2022 2021

Balance at beginning of period $ 146,509 $ 176,089 $ 454,864 $ 341,689 $ 234,940 $ 223,857

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The following table presents trading revenue and related information:

Three Months Ended June 30, Percent

Change Six Months Ended

June 30, Percent

Three Months Ended

September 30, Percent

Change Nine Months Ended

September 30, Percent

2022 2021 2022 2021

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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 $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.

Trading revenue decreased $34 million and $357 million in the third quarter and first nine months of 2022, respectively, compared to the same periods in 2021.

The decrease in the third quarter of 2022 compared to the third quarter of 2021 was primarily due to changes in the mix of client trading activity toward more ETFs and fewer single stocks, and toward more index options and futures and fewer single stock options, resulting in lower commissions and order flow revenue, which decreased 7% and 10%, respectively, from the third quarter of 2021.

The decrease in the first nine 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 trading activity.

These factors drove lower commissions and order flow revenue, which each decreased 13% from the first nine months of 2021.

THE CHARLES SCHWAB CORPORATION

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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 Company earns bank deposit account fee revenue pursuant to the 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 June 30, Percent Change Six Months Ended June 30, Percent Change

Three Months Ended

September 30, Percent Change Nine Months Ended

September 30, Percent Change

2022 2021 2022 2021

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Floating-rate balances 21 % 19 % 22 % 20 %

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.

Bank deposit account fees increased $90 million, or 28%, and $48 million, or 5%, in the third quarter and first nine months of 2022, respectively, compared to the same periods in 2021.

These increases were primarily due to higher market interest rates, which helped to increase the average net yield in the third quarter and first nine months of 2022.

The Company transferred $20.1 billion and $10.5 billion of BDA balances to its balance sheet during the first nine months of 2022 and 2021, respectively.

The transfer of these balances to our balance sheet, as well as client cash allocation decisions in response to higher short-term market interest rates in the second and third quarters of 2022, led to the decrease in average BDA balances in the first nine months of 2022 compared with the first nine 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 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.

Other revenue increased $32 million in the third quarter of 2022 compared to the same period in 2021, primarily due to higher exchange processing fees, partially offset by a higher provision for credit losses on bank loans and losses on sales of AFS securities.

Exchange processing fees increased as a result of an SEC fee rate increase which became effective in 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 $6 million in the first nine months of 2022 compared to the same period in 2021, primarily due to the higher provision for credit losses, certain lower service fees due to lower trading volume, and lower net gains on sales of AFS securities, partially offset by higher exchange processing fees.

In addition, other revenue in the first nine months of 2022 included a gain of $46 million on the sale of Schwab Compliance Technologies, Inc.

and certain investments.

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Three Months Ended

June 30, Percent

Change Six Months Ended

June 30, Percent

September 30, Percent

Change Nine Months Ended

September 30, Percent

2022 2021 2022 2021

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Average 35.2 32.4 9 % 34.5 32.3 7 %

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.

Expenses excluding interest increased by $264 million and $353 million in the third quarter and first nine 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 12% and 6% in the third quarter and first nine 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 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.

Total compensation and benefits increased in the third quarter and first nine 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 $57 million and $58 million in the third quarter of 2022 and 2021, respectively, and $166 million and $227 million in the first nine months of 2022 and 2021, respectively.

Professional services expense increased in the third quarter and first nine 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 $36 million and $35 million in the third quarter of 2022 and 2021, respectively, and $102 million and $99 million in the first nine months of 2022 and 2021, respectively.

Occupancy and equipment expense increased in the third quarter and first nine 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 $6 million and $7 million in the third quarter of 2022 and 2021, respectively, and $14 million and $30 million in the first nine months of 2022 and 2021, respectively.

Advertising and market development expense decreased in the third quarter and first nine 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)

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.

Communications expense decreased in the third quarter and first nine months of 2022 compared to the same periods in 2021, primarily due to lower client trading activity.

Depreciation and amortization expense increased in the third quarter and first nine 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 third quarter and first nine 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 third quarter of 2022 were largely consistent with the third quarter of 2021, and decreased in the first nine months of the year from the first nine months of 2021.

The year-to-date decrease in 2022 primarily resulted from 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 increased in the third quarter of 2022 while decreasing in the first nine months of 2022 compared to the same periods in 2021.

The increase in the third quarter of 2022 was primarily due to higher exchange processing fees as a result of fee rate increases beginning in the second quarter of 2022, while the decrease in the first nine months of 2022 was 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).

Capital expenditures were $193 million and $176 million in the third quarter of 2022 and 2021, respectively, and $741 million and $610 million for the first nine months of 2022 and 2021, respectively.

The increases in capital expenditures from the prior year were primarily related to continued work on the 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 $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.

Taxes on income were $657 million and $485 million for the third quarters of 2022 and 2021, respectively, resulting in effective income tax rates on income before taxes of 24.5% and 24.1%, respectively.

Taxes on income were $1.6 billion and $1.4 billion for the first nine months of 2022 and 2021, respectively, resulting in effective income tax rates on income before taxes of 23.2% and 24.9%, respectively.

The increase in the effective tax rate in the third quarter of 2022 compared to the same period in 2021 was primarily related to increased 2022 state tax expense.

The decrease in the effective tax rate in the first nine months of 2022 compared to the same period 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 June 30, Percent Change 2022 2021 Percent Change 2022 2021 Percent Change 2022 2021

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

Net interest revenue 40 % $ 2,143 $ 1,530 57 % $ 783 $ 500 44 % $ 2,926 $ 2,030

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Net New Client Assets (in billions) (5) % $ 55.1 $ 57.9 (27) % $ 59.5 $ 81.1 (18) % $ 114.6 $ 139.0

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

THE CHARLES SCHWAB CORPORATION

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Investor Services Advisor Services Total

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

Nine Months Ended September 30, Percent Change 2022 2021 Percent Change 2022 2021 Percent Change 2022 2021

Net interest revenue 24 % $ 5,551 $ 4,462 47 % $ 2,102 $ 1,426 30 % $ 7,653 $ 5,888

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(29) % $ 118.5 $ 167.5 (25) % $ 160.0 $ 214.1 (27) % $ 278.5 $ 381.6

(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.

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

In the first nine 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.

Investor Services total net revenues increased by 15% and 6% in the third quarter and first nine months of 2022, respectively, compared to the same periods in 2021, while Advisor Services total net revenues increased by 38% and 28% in the third quarter and first nine 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 changes in the mix of client trading activity, resulting in lower commissions and order flow revenue.

Advisor Services growth was primarily driven by increases in net interest revenue as described above, as well as increases in trading revenue primarily due to market volatility and bank deposit account fees primarily due to a rising interest rate environment.

Asset management and administration fees were essentially flat for Advisor Services for both periods, while declining slightly for Investor Services as equity market weakness during the first nine months of 2022 weighed on client asset valuations, partially offset by the elimination of money market fund fee waivers.

Other revenues increased for Investor Services in the third quarter of 2022 from the same period in 2021 due to higher exchange processing fees, partially offset by an increased provision for credit losses on bank loans and losses on sales of AFS securities.

Segment Expenses Excluding Interest

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.

Investor Services total expenses excluding interest increased by 8% and 2% in the third quarter and first nine months of 2022, respectively, compared to the same periods in 2021, while Advisor Services total expenses excluding interest increased by 17% and 13% in the third quarter and first nine 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.

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, driven by capital expenditures in 2021 and the first nine months of 2022 to enhance our technological infrastructure to support growth of the business.

For Investor Services, these increases in the first nine months of 2022 compared to the same period in 2021 were partially offset by lower other expenses due to a charge of approximately $200 million in the second quarter of 2021 for a now-settled regulatory matter (see Item 1 – Note 9).

In addition, increases in both segments were partially offset by decreases in advertising and market development expense due to reduced spending for marketing communications for TD Ameritrade.

RISK MANAGEMENT

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

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

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

September 30, 2022 December 31, 2021

Increase of 100 basis points 5.3 % 14.1 %

Decrease of 100 basis points (4.6) % (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 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.

The Company’s simulated increase of 100 basis points in market interest rates had a lower impact on net interest revenue as of September 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 slightly larger impact on net interest revenue as of September 30, 2022 compared to December 31, 2021 primarily due to increased sensitivity from a higher allocation to 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.

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

As of June 30, 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 September 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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In addition to internal sources of liquidity, Schwab has access to external funding.

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

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

Description Borrower Outstanding Available

Federal Home Loan Bank secured credit facilities Banking subsidiaries $ — $ 64,688

Federal Home Loan Bank (FHLB) secured credit facilities (1)

Banking subsidiaries $ — $ 82,561

Federal Reserve discount window Banking subsidiaries — 8,823

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Secured uncommitted lines of credit with various external banks (2)

(1) CSC’s banking subsidiaries must each maintain positive tangible capital, as defined by the FHLB, in order to draw upon these credit facilities.

Tangible capital pursuant to the FHLB’s requirements for our banking subsidiaries is common equity less goodwill and intangible assets.

(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 investment 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 June 30, 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.

As a result of rapidly increasing short-term interest rates in the second and third quarters of 2022, the Company saw an increase in the pace at which clients moved certain cash balances out of our sweep features and into higher yielding alternatives.

As these outflows have continued, they have outpaced excess cash on hand and cash generated by maturities and paydowns on our investment and loan portfolios.

In October 2022, our banking subsidiaries began to draw upon the FHLB secured credit facilities to provide temporary supplemental funding.

As of October 31, 2022, $9.0 billion was outstanding under these facilities, including both fixed- and floating-rate advances.

The current average interest rate on these advances was 4.25%, with the earliest maturity occurring in June 2023.

The Company expects to use temporary supplemental funding, including FHLB advances, until the Company’s primary sources of liquidity are again greater than any outflows associated with client cash allocation decisions.

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.

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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 June 30, 2022, and the table below presents information about our average daily LCR:

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

Average for the

Three Months Ended

June 30, 2022

September 30, 2022

Total eligible HQLA $ 110,712

Net cash outflows $ 93,748

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

The Company had short-term borrowings outstanding of $500 million and $4.9 billion as of September 30, 2022 and December 31, 2021, respectively.

Long-term debt is primarily comprised of Senior Notes and totaled $20.8 billion and $18.9 billion at September 30, 2022 and December 31, 2021, respectively.

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 provides information about our Senior Notes outstanding at September 30, 2022:

September 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 six months of 2022 were senior unsecured obligations.

The below debt issuances in the first nine 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%

Equity Issuances

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

Equity Issuances and Redemptions

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

Date Issued and Sold Net Proceeds

Series K March 4, 2022 $ 740

On November 1, 2022, the Company redeemed all of the outstanding shares of its Fixed-to-Floating Rate Non-Cumulative Perpetual Preferred Stock, Series A.

The Company notified stockholders of its redemption on September 22, 2022, upon which it met the definition of a mandatorily redeemable financial instrument and the criteria for liability classification in accordance with Accounting Standards Codification (ASC) 480, Distinguishing Liabilities from Equity .

The Series A preferred stock fair value of $400 million is included in accrued expenses and other liabilities on the condensed consolidated balance sheet as of September 30, 2022.

In addition, on October 20, 2022, the Company announced it will redeem on December 1, 2022 all of the outstanding shares of its Fixed-to-Floating Rate Non-Cumulative Perpetual Preferred Stock, Series E, and the corresponding depositary shares.

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.

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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 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 CHARLES SCHWAB CORPORATION

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(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

Regulatory Capital Requirements

As of September 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 September 30, 2022 and December 31, 2021:

September 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 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%.

In the third quarter of 2022, the Company lowered its operating objective for the consolidated Tier 1 Leverage Ratio down 25 basis points from 6.75% - 7.00% to 6.50% - 6.75%.

Capital operating objectives and limits for our subsidiaries remain unchanged.

The Company’s consolidated Tier 1 Leverage Ratio increased to 6.8% at September 30, 2022 from 6.2% at year-end 2021.

This increase resulted from strength in earnings in the first nine months of 2022, our March 2022 issuance of preferred stock net of the announced redemption of Series A, and a decrease of $63.7 billion, or 11%, in total bank deposits and payables to brokerage clients due to seasonal tax outflows and 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 third quarter of 2022 at 7.6%.

IDA Agreement

Certain brokerage client deposits are swept off-balance sheet to the TD Depository Institutions pursuant to the IDA agreement.

During the first six months of 2022, Schwab moved $14.6 billion of IDA balances to its balance sheet.

During the first nine 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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(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

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.

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

Nine Months Ended September 30, Cash Paid Per Share

Amount Cash Paid Per Share

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18 2,458.33 N/A N/A

(1) Dividends were paid semi-annually until February 1, 2022 and are paid quarterly thereafter.

(1) Subsequent to September 30, 2022, Series A was redeemed on November 1, 2022.

Prior to redemption, dividends were paid semi-annually until February 1, 2022 and quarterly thereafter.

The final dividend was paid on November 1, 2022.

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

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(3) Dividends paid quarterly.

(4) Dividends were paid semi-annually until March 1, 2022 and are paid quarterly thereafter.

(4) Dividends paid semi-annually until March 1, 2022 and quarterly thereafter.

Subsequent to September 30, 2022, the Company announced the redemption of Series E effective December 1, 2022.

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

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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 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.

On July 27, 2022, CSC publicly announced that its Board of Directors terminated the existing share repurchase authorization of up to $4.0 billion of common stock and replaced it with a new authorization to repurchase up to $15.0 billion of common stock.

The new share repurchase authorization does not have an expiration date.

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.

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CSC repurchased an additional $500 million of common stock under the new authorization during the three months ended September 30, 2022.

There were no repurchases of CSC’s common stock under the terminated authorization during the three and nine months ended September 30, 2022 and 2021.

As of September 30, 2022, $13.5 billion remained on the new authorization.

Foreign Exposure

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.

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

At September 30, 2022, the fair value of these holdings totaled $18.0 billion, with the top three exposures being to issuers and counterparties domiciled in France at $5.8 billion, the United Kingdom at $4.7 billion, and Canada at $1.7 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

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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.

In addition, Schwab had outstanding margin loans to foreign residents of $3.2 billion and $3.3 billion at September 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 six months of 2022.

There have been no changes to critical accounting estimates during the first nine 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 June 30, Six Months Ended June 30,

Three Months Ended

September 30, Nine Months Ended

September 30,

2022 2021 2022 2021

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Adjusted total expenses (non-GAAP) $ 2,570 $ 2,302 $ 7,724 $ 7,294

(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,

(1) Acquisition and integration-related costs for the three and nine months ended September 30, 2022 primarily consist of $57 million and $166 million of compensation and benefits, $36 million and $102 million of professional services, and $6 million and $14 million of occupancy and equipment.

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

Three Months Ended

September 30, Nine Months Ended

September 30,

2022 2021 2022 2021

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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 June 30, Six Months Ended June 30,

Three Months Ended

September 30, Nine Months Ended

September 30,

2022 2021 2022 2021

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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