SCHWAB CHARLES CORP 10-Q

Item 3. Quantitative and Qualitative Disclosures About Market Risk For discussion of the quantitative and qualitative disclosures about market risk, see Risk Management in Item 2. - 24 - Part I - FINANCIAL INFORMATION Item 1. Condensed Consolidated Financial Statements THE CHARLES SCHWAB CORPORATION Condensed Consolidated Statements of Income (In Millions, Except Per Share Amounts) (Unaudited) Three Months Ended September 30, Nine Months Ended September 30, 2022 2021 2022 2021 Net Revenues Interest revenue $ 3,357 $ 2,153 $ 8,386 $ 6,236 Interest expense ( 431 ) ( 123 ) ( 733 ) ( 348 ) Net interest revenue 2,926 2,030 7,653 5,888 Asset management and administration fees (1) 1,047 1,101 3,167 3,164 Trading revenue 930 964 2,778 3,135 Bank deposit account fees 413 323 1,059 1,011 Other 184 152 608 614 Total net revenues 5,500 4,570 15,265 13,812 Expenses Excluding Interest Compensation and benefits 1,476 1,303 4,448 4,051 Professional services 264 250 766 723 Occupancy and equipment 292 246 855 722 Advertising and market development 89 119 296 363 Communications 131 144 444 457 Depreciation and amortization 167 140 476 404 Amortization of acquired intangible assets 152 153 460 461 Regulatory fees and assessments 65 64 200 208 Other 187 140 530 733 Total expenses excluding interest 2,823 2,559 8,475 8,122 Income before taxes on income 2,677 2,011 6,790 5,690 Taxes on income 657 485 1,575 1,415 Net Income 2,020 1,526 5,215 4,275 Preferred stock dividends and other 136 120 401 364 Net Income Available to Common Stockholders $ 1,884 $ 1,406 $ 4,814 $ 3,911 Weighted-Average Common Shares Outstanding: Basic 1,887 1,888 1,892 1,885 Diluted 1,895 1,898 1,901 1,895 Earnings Per Common Shares Outstanding (2) : Basic $ 1.00 $ .74 $ 2.54 $ 2.07 Diluted $ .99 $ .74 $ 2.53 $ 2.06 (1) No fee waivers were recognized for the three months ended September 30, 2022. Includes fee waivers of $ 57 million for the nine months ended September 30, 2022, and $ 83 million and $ 246 million for the three and nine months ended September 30, 2021, respectively. (2) The Company has voting and nonvoting common stock outstanding. As the participation rights, including dividend and liquidation rights, are identical between the voting and nonvoting stock classes, basic and diluted earnings per share are the same for each class. See Note 15 for additional information. See Notes to Condensed Consolidated Financial Statements. - 25 - THE CHARLES SCHWAB CORPORATION Condensed Consolidated Statements of Comprehensive Income (In Millions) (Unaudited) Three Months Ended September 30, Nine Months Ended September 30, 2022 2021 2022 2021 Net income $ 2,020 $ 1,526 $ 5,215 $ 4,275 Other comprehensive income (loss), before tax: Change in net unrealized gain (loss) on available for sale securities: Net unrealized gain (loss) excluding transfers to held to maturity ( 9,493 ) ( 1,519 ) ( 29,299 ) ( 5,420 ) Reclassification of net unrealized loss transferred to held to maturity — — 2,429 — Other reclassifications included in other revenue 16 — ( 1 ) ( 14 ) Change in net unrealized gain (loss) on held to maturity securities: Reclassification of net unrealized loss transferred from available for sale — — ( 2,429 ) — Amortization of amounts previously recorded upon transfer to held to maturity from available for sale 83 — 297 — Other comprehensive income (loss), before tax ( 9,394 ) ( 1,519 ) ( 29,003 ) ( 5,434 ) Income tax effect 2,264 364 6,960 1,293 Other comprehensive income (loss), net of tax ( 7,130 ) ( 1,155 ) ( 22,043 ) ( 4,141 ) Comprehensive Income (Loss) $ ( 5,110 ) $ 371 $ ( 16,828 ) $ 134 See Notes to Condensed Consolidated Financial Statements. - 26 - THE CHARLES SCHWAB CORPORATION Condensed Consolidated Balance Sheets (In Millions, Except Per Share and Share Amounts) (Unaudited) September 30, 2022 December 31, 2021 Assets Cash and cash equivalents $ 46,486 $ 62,975 Cash and investments segregated and on deposit for regulatory purposes (including resale agreements of $ 13,644 and $ 13,096 at September 30, 2022 and December 31, 2021, respectively) 44,118 53,949 Receivables from brokerage clients — net 73,859 90,565 Available for sale securities (amortized cost of $ 264,816 at September 30, 2022 and $ 391,482 at December 31, 2021) 236,517 390,054 Held to maturity securities 96,323 — Bank loans — net 40,379 34,636 Equipment, office facilities, and property — net 3,687 3,442 Goodwill 11,951 11,952 Acquired intangible assets — net 8,923 9,379 Other assets 15,320 10,318 Total assets $ 577,563 $ 667,270 Liabilities and Stockholders’ Equity Bank deposits $ 395,715 $ 443,778 Payables to brokerage clients 110,012 125,671 Accrued expenses and other liabilities 13,451 17,791 Short-term borrowings 500 4,855 Long-term debt 20,844 18,914 Total liabilities 540,522 611,009 Stockholders’ equity: Preferred stock — $ .01 par value per share; aggregate liquidation preference of $ 10,450 and $ 10,100 at September 30, 2022 and December 31, 2021, respectively 10,297 9,954 Common stock — 3 billion shares authorized; $ .01 par value per share; 2,023,295,180 and 1,994,895,180 shares issued at September 30, 2022 and December 31, 2021, respectively 20 20 Nonvoting common stock — 300 million shares authorized; $ .01 par value per share; 50,893,695 and 79,293,695 shares issued at September 30, 2022 and December 31, 2021, respectively 1 1 Additional paid-in capital 26,975 26,741 Retained earnings 29,651 25,992 Treasury stock, at cost — 198,092,107 and 180,959,274 shares at September 30, 2022 and December 31, 2021, respectively ( 6,751 ) ( 5,338 ) Accumulated other comprehensive income (loss) ( 23,152 ) ( 1,109 ) Total stockholders’ equity 37,041 56,261 Total liabilities and stockholders’ equity $ 577,563 $ 667,270 See Notes to Condensed Consolidated Financial Statements. - 27 - THE CHARLES SCHWAB CORPORATION Condensed Consolidated Statements of Stockholders ’ Equity (In Millions) (Unaudited) Accumulated Other Comprehensive Income (Loss) Preferred Stock Common Stock Nonvoting Common Stock Additional Paid-in Capital Retained Earnings Treasury Stock, at cost Total Shares Amount Shares Amount Balance at June 30, 2021 $ 9,954 1,995 $ 20 79 $ 1 $ 26,708 $ 23,809 $ ( 5,450 ) $ 2,408 $ 57,450 Net income — — — — — — 1,526 — — 1,526 Other comprehensive income (loss), net of tax — — — — — — — — ( 1,155 ) ( 1,155 ) Dividends declared on preferred stock — — — — — — ( 113 ) — — ( 113 ) Dividends declared on common stock — $ .18 per share — — — — — — ( 342 ) — — ( 342 ) Stock option exercises and other — — — — — ( 13 ) — 31 — 18 Share-based compensation — — — — — 43 — — — 43 Other — — — — — 17 — ( 2 ) — 15 Balance at September 30, 2021 $ 9,954 1,995 $ 20 79 $ 1 $ 26,755 $ 24,880 $ ( 5,421 ) $ 1,253 $ 57,442 Balance at June 30, 2022 $ 10,694 1,995 $ 20 79 $ 1 $ 26,918 $ 28,174 $ ( 5,272 ) $ ( 16,022 ) $ 44,513 Net income — — — — — — 2,020 — — 2,020 Other comprehensive income (loss), net of tax — — — — — — — — ( 7,130 ) ( 7,130 ) Call of preferred stock ( 397 ) — — — — — ( 3 ) — — ( 400 ) Dividends declared on preferred stock — — — — — — ( 123 ) — — ( 123 ) Dividends declared on common stock — $ .22 per share — — — — — — ( 417 ) — — ( 417 ) Repurchase of common stock — — — — — — — ( 500 ) — ( 500 ) Repurchase of nonvoting common stock — 15 — ( 15 ) — — — ( 1,000 ) — ( 1,000 ) Conversion of nonvoting common stock to common stock — 13 — ( 13 ) — — — — — — Stock option exercises and other — — — — — ( 12 ) — 21 — 9 Share-based compensation — — — — — 50 — — — 50 Other — — — — — 19 — — — 19 Balance at September 30, 2022 $ 10,297 2,023 $ 20 51 $ 1 $ 26,975 $ 29,651 $ ( 6,751 ) $ ( 23,152 ) $ 37,041 Continued on following page. - 28 - THE CHARLES SCHWAB CORPORATION Condensed Consolidated Statements of Stockholders ’ Equity (In Millions) (Unaudited) Continued from previous page. Accumulated Other Comprehensive Income (Loss) Preferred Stock Common Stock Nonvoting Common Stock Additional Paid-in Capital Retained Earnings Treasury Stock, at cost Total Shares Amount Shares Amount Balance at December 31, 2020 $ 7,733 1,995 $ 20 79 $ 1 $ 26,515 $ 21,975 $ ( 5,578 ) $ 5,394 $ 56,060 Net income — — — — — — 4,275 — — 4,275 Other comprehensive income (loss), net of tax — — — — — — — — ( 4,141 ) ( 4,141 ) Issuance of preferred stock, net 2,806 — — — — — — — — 2,806 Redemption of preferred stock ( 585 ) — — — — — ( 15 ) — — ( 600 ) Dividends declared on preferred stock — — — — — — ( 331 ) — — ( 331 ) Dividends declared on common stock — $ .54 per share — — — — — — ( 1,024 ) — — ( 1,024 ) Stock option exercises and other — — — — — ( 5 ) — 167 — 162 Share-based compensation — — — — — 188 — — — 188 Other — — — — — 57 — ( 10 ) — 47 Balance at September 30, 2021 $ 9,954 1,995 $ 20 79 $ 1 $ 26,755 $ 24,880 $ ( 5,421 ) $ 1,253 $ 57,442 Balance at December 31, 2021 $ 9,954 1,995 $ 20 79 $ 1 $ 26,741 $ 25,992 $ ( 5,338 ) $ ( 1,109 ) $ 56,261 Net income — — — — — — 5,215 — — 5,215 Other comprehensive income (loss), net of tax — — — — — — — — ( 22,043 ) ( 22,043 ) Issuance of preferred stock, net 740 — — — — — — — — 740 Call of preferred stock ( 397 ) — — — — — ( 3 ) — — ( 400 ) Dividends declared on preferred stock — — — — — — ( 374 ) — — ( 374 ) Dividends declared on common stock — $ .62 per share — — — — — — ( 1,179 ) — — ( 1,179 ) Repurchase of common stock — — — — — — — ( 500 ) — ( 500 ) Repurchase of nonvoting common stock — 15 — ( 15 ) — — — ( 1,000 ) — ( 1,000 ) Conversion of nonvoting common stock to common stock — 13 — ( 13 ) — — — — — — Stock option exercises and other — — — — — ( 68 ) — 110 — 42 Share-based compensation — — — — — 215 — — — 215 Other — — — — — 87 — ( 23 ) — 64 Balance at September 30, 2022 $ 10,297 2,023 $ 20 51 $ 1 $ 26,975 $ 29,651 $ ( 6,751 ) $ ( 23,152 ) $ 37,041 See Notes to the Condensed Consolidated Financial Statements . - 29 - THE CHARLES SCHWAB CORPORATION Condensed Consolidated Statements of Cash Flows (in Millions) (Unaudited) Nine Months Ended September 30, 2022 2021 Cash Flows from Operating Activities Net income $ 5,215 $ 4,275 Adjustments to reconcile net income to net cash provided by (used for) operating activities: Share-based compensation 281 207 Depreciation and amortization 476 404 Amortization of acquired intangible assets 460 461 Provision (benefit) for deferred income taxes ( 57 ) ( 61 ) Premium amortization, net, on available for sale and held to maturity securities 1,163 1,784 Other 339 246 Net change in: Investments segregated and on deposit for regulatory purposes ( 1,774 ) 3,665 Receivables from brokerage clients 16,683 ( 22,143 ) Other assets 655 ( 2,980 ) Payables to brokerage clients ( 15,659 ) 8,851 Accrued expenses and other liabilities ( 3,618 ) 1,770 Net cash provided by (used for) operating activities 4,164 ( 3,521 ) Cash Flows from Investing Activities Purchases of available for sale securities ( 49,897 ) ( 130,113 ) Proceeds from sales of available for sale securities 24,019 11,339 Principal payments on available for sale securities 40,503 73,536 Principal payments on held to maturity securities 12,433 — Net change in bank loans ( 5,653 ) ( 7,819 ) Purchases of equipment, office facilities, and property ( 769 ) ( 603 ) Proceeds from sales of Federal Reserve stock 16 — Purchases of Federal Reserve stock ( 85 ) ( 224 ) Other investing activities ( 59 ) ( 86 ) Net cash provided by (used for) investing activities 20,508 ( 53,970 ) Cash Flows from Financing Activities Net change in bank deposits ( 48,063 ) 37,253 Proceeds from commercial paper and secured lines of credit 1,653 7,250 Repayments of commercial paper and secured lines of credit ( 6,011 ) ( 4,250 ) Issuance of long-term debt 2,971 7,036 Repayment of long-term debt ( 1,029 ) ( 1,215 ) Net proceeds from preferred stock offerings 740 2,806 Redemption of preferred stock — ( 600 ) Dividends paid ( 1,559 ) ( 1,369 ) Proceeds from stock options exercised 42 162 Repurchases of common stock and nonvoting common stock ( 1,455 ) — Other financing activities ( 53 ) ( 41 ) Net cash provided by (used for) financing activities ( 52,764 ) 47,032 Increase (Decrease) in Cash and Cash Equivalents, including Amounts Restricted ( 28,092 ) ( 10,459 ) Cash and Cash Equivalents, including Amounts Restricted at Beginning of Period 93,338 70,560 Cash and Cash Equivalents, including Amounts Restricted at End of Period $ 65,246 $ 60,101 Continued on following page. - 30 - THE CHARLES SCHWAB CORPORATION Condensed Consolidated Statements of Cash Flows (in Millions) (Unaudited) Continued from previous page. Nine Months Ended September 30, 2022 2021 Supplemental Cash Flow Information Non-cash investing activity: Securities transferred from available for sale to held to maturity, at fair value $ 108,805 $ — Securities purchased during the period but settled after period end $ — $ 1,531 Changes in accrued equipment, office facilities, and property purchases $ ( 28 ) $ 7 Non-cash financing activity: Common stock repurchased during the period but settled after period end $ 45 $ — Call of preferred stock $ 400 $ — Other Supplemental Cash Flow Information: Cash paid during the period for: Interest $ 722 $ 380 Income taxes $ 1,436 $ 1,615 Amounts included in the measurement of lease liabilities $ 162 $ 175 Leased assets obtained in exchange for new operating lease liabilities $ 226 $ 51 Leased assets obtained in exchange for new finance lease liabilities $ 5 $ 108 September 30, 2022 September 30, 2021 Reconciliation of cash, cash equivalents and amounts reported within the balance sheet (1) Cash and cash equivalents $ 46,486 $ 34,323 Restricted cash and cash equivalents amounts included in cash and investments segregated and on deposit for regulatory purposes 18,760 25,778 Total cash and cash equivalents, including amounts restricted shown in the statement of cash flows $ 65,246 $ 60,101 (1) For more information on the nature of restrictions on restricted cash and cash equivalents, see Note 16. See Notes to Condensed Consolidated Financial Statements. - 31 - THE CHARLES SCHWAB CORPORATION Notes to Condensed Consolidated Financial Statements (Tabular Amounts in Millions, Except Per Share Data, Ratios, or as Noted) (Unaudited) 1. Introduction and Basis of Presentation The Charles Schwab Corporation (CSC) is a savings and loan holding company. CSC engages, through its subsidiaries (collectively referred to as Schwab or the Company), in wealth management, securities brokerage, banking, asset management, custody, and financial advisory services. Principal business subsidiaries of CSC include the following: • Charles Schwab & Co., Inc. (CS&Co), incorporated in 1971, a securities broker-dealer; • TD Ameritrade, Inc., an introducing securities broker-dealer; • TD Ameritrade Clearing, Inc. (TDAC), a securities broker-dealer that provides trade execution and clearing services to TD Ameritrade, Inc.; • Charles Schwab Bank, SSB (CSB), our principal banking entity; and • Charles Schwab Investment Management, Inc. (CSIM), the investment advisor for Schwab’s proprietary mutual funds (Schwab Funds ® ) and for Schwab’s exchange-traded funds (Schwab ETFs ™ ). Unless otherwise indicated, the terms “Schwab,” “the Company,” “we,” “us,” or “our” mean CSC together with its consolidated subsidiaries. These unaudited condensed consolidated financial statements have been prepared in conformity with GAAP, which require management to make certain estimates and assumptions that affect the reported amounts in the accompanying financial statements and in the related disclosures. These estimates are based on information available as of the date of the condensed consolidated financial statements. While management makes its best judgment, actual amounts or results could differ from these estimates. In the opinion of management, all normal, recurring adjustments have been included for a fair statement of this interim financial information. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto, included in Schwab’s 2021 Form 10-K. The significant accounting policies are included in Note 2 in the 2021 Form 10-K. There have been no significant changes to these accounting policies during the first nine months of 2022. 2. New Accounting Standards Adoption of New Accounting Standards The Company did not adopt any material new accounting standards during the nine months ended September 30, 2022. New Accounting Standards Not Yet Adopted Standard Description Required Date of Adoption Effects on the Financial Statements or Other Significant Matters Accounting Standards Update (ASU) 2022-02, “Financial Instruments—Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures” Troubled Debt Restructurings (TDRs) Eliminates the accounting guidance for TDRs. Rather than applying the specific guidance for TDRs, creditors will apply the recognition and measurement guidance for loan refinancings and restructurings to determine whether a modification results in a new loan or a continuation of an existing loan. The guidance requires enhanced disclosures for certain loan refinancings and restructurings by creditors when a borrower is experiencing financial difficulty. Vintage Disclosures Requires that an entity disclose current-period gross writeoffs by year of origination for financing receivables and net investments in leases within the scope of Subtopic 326-20, Financial Instruments—Credit Losses—Measured at Amortized Cost. Adoption provides for prospective application, with an option to apply the modified retrospective transition method for the change in recognition and measurement of TDRs. January 1, 2023 The Company does not expect this guidance will have a material impact on its financial statements, including EPS. - 32 - THE CHARLES SCHWAB CORPORATION Notes to Condensed Consolidated Financial Statements (Tabular Amounts in Millions, Except Per Share Data, Ratios, or as Noted) (Unaudited) 3. Revenue Recognition Disaggregated Revenue Disaggregation of Schwab’s revenue by major source is as follows: Three Months Ended September 30, Nine Months Ended September 30, 2022 2021 2022 2021 Net interest revenue Cash and cash equivalents $ 294 $ 11 $ 461 $ 27 Cash and investments segregated 214 5 308 19 Receivables from brokerage clients 912 628 2,244 1,800 Available for sale securities 1,161 1,187 3,196 3,381 Held to maturity securities 345 — 1,062 — Bank loans 300 161 717 448 Securities lending revenue 124 159 383 557 Other interest revenue 7 2 15 4 Interest revenue 3,357 2,153 8,386 6,236 Bank deposits ( 241 ) ( 14 ) ( 285 ) ( 40 ) Payables to brokerage clients ( 41 ) ( 3 ) ( 47 ) ( 7 ) Short-term borrowings ( 4 ) ( 3 ) ( 12 ) ( 6 ) Long-term debt ( 131 ) ( 99 ) ( 363 ) ( 281 ) Securities lending expense ( 13 ) ( 4 ) ( 28 ) ( 16 ) Other interest expense ( 1 ) — 2 2 Interest expense ( 431 ) ( 123 ) ( 733 ) ( 348 ) Net interest revenue 2,926 2,030 7,653 5,888 Asset management and administration fees Mutual funds, ETFs, and CTFs 520 503 1,524 1,454 Advice solutions 452 511 1,409 1,469 Other 75 87 234 241 Asset management and administration fees 1,047 1,101 3,167 3,164 Trading revenue Commissions 435 466 1,362 1,559 Order flow revenue 432 482 1,332 1,538 Principal transactions 63 16 84 38 Trading revenue 930 964 2,778 3,135 Bank deposit account fees 413 323 1,059 1,011 Other 184 152 608 614 Total net revenues $ 5,500 $ 4,570 $ 15,265 $ 13,812 For a summary of revenue provided by our reportable segments, see Note 17. The recognition of revenue is not impacted by the operating segment in which revenue is generated. Contract balances Substantially all receivables from contracts with customers within the scope of ASC 606, Revenue From Contracts With Customers (ASC 606), are included in other assets on the condensed consolidated balance sheets, and totaled $ 581 million and $ 637 million at September 30, 2022 and December 31, 2021, respectively. Schwab did not have any other significant contract assets or contract liability balances as of September 30, 2022 or December 31, 2021. Unsatisfied performance obligations We do not have any unsatisfied performance obligations other than those that are subject to an elective practical expedient under ASC 606. The practical expedient applies to and is elected for contracts where we recognize revenue at the amount to which we have the right to invoice for services performed. - 33 - THE CHARLES SCHWAB CORPORATION Notes to Condensed Consolidated Financial Statements (Tabular Amounts in Millions, Except Per Share Data, Ratios, or as Noted) (Unaudited) 4. Investment Securities The amortized cost, gross unrealized gains and losses, and fair value of the Company’s AFS and held to maturity (HTM) investment securities are as follows: September 30, 2022 Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Fair Value Available for sale securities U.S. agency mortgage-backed securities $ 186,978 $ 2 $ 23,975 $ 163,005 U.S. Treasury securities 42,405 — 2,059 40,346 Asset-backed securities (1) 15,472 — 652 14,820 Corporate debt securities (2) 14,413 — 1,406 13,007 U.S. state and municipal securities 747 — 85 662 Non-agency commercial mortgage-backed securities 802 — 25 777 Certificates of deposit 2,545 — 21 2,524 Foreign government agency securities 1,132 — 68 1,064 Other 322 — 10 312 Total available for sale securities (3) $ 264,816 $ 2 $ 28,301 $ 236,517 Held to maturity securities U.S. agency mortgage-backed securities $ 96,323 $ — $ 15,165 $ 81,158 Total held to maturity securities $ 96,323 $ — $ 15,165 $ 81,158 December 31, 2021 Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Fair Value Available for sale securities U.S. agency mortgage-backed securities $ 335,803 $ 3,141 $ 4,589 $ 334,355 U.S. Treasury securities 21,394 13 125 21,282 Asset-backed securities (1) 17,547 79 80 17,546 Corporate debt securities (2) 12,310 143 109 12,344 U.S. state and municipal securities 1,611 81 5 1,687 Non-agency commercial mortgage-backed securities 1,170 20 — 1,190 Certificates of deposit 1,000 — 1 999 Foreign government agency securities 425 — — 425 Commercial paper 200 — — 200 Other 22 4 — 26 Total available for sale securities (3) $ 391,482 $ 3,481 $ 4,909 $ 390,054 (1) Approximately 55 % and 58 % of asset-backed securities held as of September 30, 2022 and December 31, 2021, respectively, were Federal Family Education Loan Program Asset-Backed Securities. Asset-backed securities collateralized by credit card receivables represented approximately 18 % and 30 % of the asset-backed securities held as of September 30, 2022 and December 31, 2021, respectively. (2) As of September 30, 2022 and December 31, 2021, approximately 39 % and 31 %, respectively, of the total AFS in corporate debt securities were issued by institutions in the financial services industry. (3) Included in cash and cash equivalents on the condensed consolidated balance sheets, but excluded from this table is $ 287 million of AFS commercial paper as of September 30, 2022 ( none as of December 31, 2021). These holdings have maturities of three months or less and an aggregate market value equal to amortized cost. In January 2022, the Company transferred $ 108.8 billion of U.S. agency mortgage-backed securities with a total net unrealized loss at the time of transfer of $ 2.4 billion from the AFS category to the HTM category. HTM securities, which the Company has the intent and ability to hold until maturity, are carried at amortized cost, net of any allowance for credit losses. The allowance for credit losses represents expected credit losses over the remaining expected life of HTM securities. The Company measures credit losses as the difference between the securities amortized cost basis and the net amount expected to be collected. The Company’s accounting policy excludes accrued interest when estimating any allowance for credit losses on HTM securities. HTM securities are placed on nonaccrual status on a timely basis and any accrued interest receivable is reversed through interest income. For certain securities, the Company is not required to estimate an allowance for credit losses because expected nonpayment of the amortized cost basis is zero based on historical credit loss information adjusted for current conditions and reasonable and supportable forecasts. - 34 - THE CHARLES SCHWAB CORPORATION Notes to Condensed Consolidated Financial Statements (Tabular Amounts in Millions, Except Per Share Data, Ratios, or as Noted) (Unaudited) Subsequent to September 30, 2022, on November 2, 2022, the Company transferred approximately $ 80 billion of U.S. agency mortgage-backed securities with a total pre-tax net unrealized loss at the time of transfer of approximately $ 16 billion from the AFS category to the HTM category. At September 30, 2022, our banking subsidiaries had pledged securities with a fair value of $ 65.9 billion as collateral to secure borrowing capacity on secured credit facilities with the FHLB (see Note 8). Our banking subsidiaries also pledge investment securities as collateral to secure borrowing capacity at the Federal Reserve discount window, and had pledged securities with a fair value of $ 8.8 billion as collateral for this facility at September 30, 2022. The Company also pledges securities issued by federal agencies to secure certain trust deposits. The fair value of these pledged securities was $ 1.4 billion at September 30, 2022. Securities with unrealized losses, aggregated by category and period of continuous unrealized loss, of AFS investment securities are as follows: Less than 12 months 12 months or longer Total September 30, 2022 Fair Value Unrealized Losses Fair Value Unrealized Losses Fair Value Unrealized Losses Available for sale securities U.S. agency mortgage-backed securities $ 90,036 $ 9,957 $ 72,611 $ 14,018 $ 162,647 $ 23,975 U.S. Treasury securities 35,743 1,429 4,603 630 40,346 2,059 Asset-backed securities 10,609 347 4,201 305 14,810 652 Corporate debt securities 10,162 765 2,844 641 13,006 1,406 U.S. state and municipal securities 582 62 80 23 662 85 Non-agency commercial mortgage-backed securities 777 25 — — 777 25 Certificates of deposit 2,329 16 195 5 2,524 21 Foreign government agency securities 1,064 68 — — 1,064 68 Other 313 10 — — 313 10 Total $ 151,615 $ 12,679 $ 84,534 $ 15,622 $ 236,149 $ 28,301 December 31, 2021 Available for sale securities U.S. agency mortgage-backed securities $ 186,955 $ 3,216 $ 38,007 $ 1,373 $ 224,962 $ 4,589 U.S. Treasury securities 16,658 125 21 — 16,679 125 Asset-backed securities 6,093 58 2,708 22 8,801 80 Corporate debt securities 4,713 99 197 10 4,910 109 Certificates of deposit 799 1 — — 799 1 U.S. state and municipal securities 191 4 5 1 196 5 Total $ 215,409 $ 3,503 $ 40,938 $ 1,406 $ 256,347 $ 4,909 At September 30, 2022, substantially all rated securities in the investment portfolios were investment grade. U.S. agency mortgage-backed securities do not have explicit credit ratings; however, management considers these to be of the highest credit quality and rating given the guarantee of principal and interest by the U.S. government or U.S. government-sponsored enterprises. For a description of management’s quarterly evaluation of AFS securities in unrealized loss positions see Item 8 – Note 2 in the 2021 Form 10-K. No amounts were recognized as credit loss expense and no securities were written down to fair value through earnings for the nine months ended September 30, 2022 and the year ended December 31, 2021. None of the Company’s AFS securities held as of September 30, 2022 and December 31, 2021 had an allowance for credit losses. All HTM securities as of September 30, 2022 were U.S. agency mortgage-backed securities and therefore had no allowance for credit losses because expected nonpayment of the amortized cost basis is zero. - 35 - THE CHARLES SCHWAB CORPORATION Notes to Condensed Consolidated Financial Statements (Tabular Amounts in Millions, Except Per Share Data, Ratios, or as Noted) (Unaudited) The Company had $ 645 million of accrued interest for AFS and HTM securities as of September 30, 2022 and $ 683 million of accrued interest receivable for AFS securities as of December 31, 2021. These amounts are excluded from the amortized cost basis and fair market value of AFS and HTM securities and included in other assets on the condensed consolidated balance sheets. There were no writeoffs of accrued interest receivable on AFS and HTM securities during the nine months ended September 30, 2022, or for AFS securities for the year ended December 31, 2021. In the table below, mortgage-backed securities and other asset-backed securities have been allocated to maturity groupings based on final contractual maturities. As borrowers may have the right to call or prepay certain obligations underlying our investment securities, actual maturities may differ from the scheduled contractual maturities presented below. The maturities of AFS and HTM investment securities are as follows: September 30, 2022 Within 1 year After 1 year through 5 years After 5 years through 10 years After 10 years Total Available for sale securities U.S. agency mortgage-backed securities $ 1,571 $ 13,045 $ 34,194 $ 114,195 $ 163,005 U.S. Treasury securities 20,456 19,179 711 — 40,346 Asset-backed securities 6 5,298 1,758 7,758 14,820 Corporate debt securities 945 8,888 3,174 — 13,007 U.S. state and municipal securities 37 56 402 167 662 Non-agency commercial mortgage-backed securities — — — 777 777 Certificates of deposit 2,427 97 — — 2,524 Foreign government agency securities 100 964 — — 1,064 Other 294 — — 18 312 Total fair value $ 25,836 $ 47,527 $ 40,239 $ 122,915 $ 236,517 Total amortized cost $ 26,198 $ 50,720 $ 47,162 $ 140,736 $ 264,816 Held to maturity securities U.S. agency mortgage-backed securities $ 443 $ 4,721 $ 19,679 $ 56,315 $ 81,158 Total fair value $ 443 $ 4,721 $ 19,679 $ 56,315 $ 81,158 Total amortized cost $ 451 $ 5,104 $ 23,224 $ 67,544 $ 96,323 Proceeds and gross realized gains and losses from sales of AFS investment securities are as follows: Three Months Ended September 30, Nine Months Ended September 30, 2022 2021 2022 2021 Proceeds $ 10,549 $ 1,697 $ 24,019 $ 11,339 Gross realized gains 16 2 156 39 Gross realized losses 32 2 155 25 - 36 - THE CHARLES SCHWAB CORPORATION Notes to Condensed Consolidated Financial Statements (Tabular Amounts in Millions, Except Per Share Data, Ratios, or as Noted) (Unaudited) 5. Bank Loans and Related Allowance for Credit Losses The composition of bank loans and delinquency analysis by portfolio segment and class of financing receivable is as follows: September 30, 2022 Current 30-59 days past due 60-89 days past due > 90 days past due and other nonaccrual loans (3) Total past due and other nonaccrual loans Total loans Allowance for credit losses Total bank loans – net Residential real estate: First Mortgages (1,2) $ 24,654 $ 26 $ 2 $ 12 $ 40 $ 24,694 $ 42 $ 24,652 HELOCs (1,2) 603 1 1 5 7 610 4 606 Total residential real estate 25,257 27 3 17 47 25,304 46 25,258 Pledged asset lines 14,928 2 10 — 12 14,940 — 14,940 Other 184 — — — — 184 3 181 Total bank loans $ 40,369 $ 29 $ 13 $ 17 $ 59 $ 40,428 $ 49 $ 40,379 December 31, 2021 Residential real estate: First Mortgages (1,2) $ 21,022 $ 41 $ 1 $ 26 $ 68 $ 21,090 $ 13 $ 21,077 HELOCs (1,2) 637 2 — 9 11 648 2 646 Total residential real estate 21,659 43 1 35 79 21,738 15 21,723 Pledged asset lines 12,698 3 8 — 11 12,709 — 12,709 Other 207 — — — — 207 3 204 Total bank loans $ 34,564 $ 46 $ 9 $ 35 $ 90 $ 34,654 $ 18 $ 34,636 (1) First Mortgages and HELOCs include unamortized premiums and discounts and direct origination costs of $ 97 million and $ 91 million at September 30, 2022 and December 31, 2021, respectively. (2) First Mortgage and HELOC portfolios concentrated in California as of September 30, 2022 and December 31, 2021 were 44 % and 46 %, respectively. These loans have performed in a manner consistent with the portfolio as a whole. (3) There were no loans accruing interest that were contractually 90 days or more past due at September 30, 2022 or December 31, 2021. At September 30, 2022, CSB had pledged the full balance of First Mortgages and HELOCs pursuant to a blanket lien status collateral arrangement to secure borrowing capacity on a secured credit facility with the FHLB (see Note 8). Changes in the allowance for credit losses on bank loans were as follows: September 30, 2022 September 30, 2021 Three Months Ended First Mortgages HELOCs Total residential real estate Pledged asset lines Other Total First Mortgages HELOCs Total residential real estate Pledged asset lines Other Total Balance at beginning of period $ 31 $ 3 $ 34 $ — $ 3 $ 37 $ 8 $ 2 $ 10 $ — $ 3 $ 13 Charge-offs — — — ( 4 ) — ( 4 ) — — — — ( 1 ) ( 1 ) Recoveries — 1 1 — — 1 — 1 1 — — 1 Provision for credit losses 11 — 11 4 — 15 — ( 1 ) ( 1 ) — 1 — Balance at end of period $ 42 $ 4 $ 46 $ — $ 3 $ 49 $ 8 $ 2 $ 10 $ — $ 3 $ 13 - 37 - THE CHARLES SCHWAB CORPORATION Notes to Condensed Consolidated Financial Statements (Tabular Amounts in Millions, Except Per Share Data, Ratios, or as Noted) (Unaudited) September 30, 2022 September 30, 2021 Nine Months Ended First Mortgages HELOCs Total residential real estate Pledged asset lines Other Total First Mortgages HELOCs Total residential real estate Pledged asset lines Other Total Balance at beginning of period $ 13 $ 2 $ 15 $ — $ 3 $ 18 $ 22 $ 5 $ 27 $ — $ 3 $ 30 Charge-offs — — — ( 4 ) — ( 4 ) — — — — ( 1 ) ( 1 ) Recoveries — 1 1 — — 1 — 1 1 — — 1 Provision for credit losses 29 1 30 4 — 34 ( 14 ) ( 4 ) ( 18 ) — 1 ( 17 ) Balance at end of period $ 42 $ 4 $ 46 $ — $ 3 $ 49 $ 8 $ 2 $ 10 $ — $ 3 $ 13 Consistent with Schwab’s loan charge off policy as disclosed in Item 8 – Note 2 of the 2021 Form 10-K, the Company charges off any delinquent PALs no later than 90-days past due. PALs are subject to the collateral maintenance practical expedient under ASC 326 Financial Instruments – Credit Losses . All PALs were fully collateralized by securities with fair values in excess of borrowings as of September 30, 2022 and December 31, 2021. Therefore, no allowance for credit losses for PALs as of those dates was required. The U.S. economy continues to be challenged by rising inflation, tightening monetary policy, and geopolitical unrest. Management’s macroeconomic outlook reflects slower growth in home prices and low unemployment anticipated over the near term; however, increases in Treasury yields and mortgage rates, as seen in the first nine months of 2022, have extended the expected life of the portfolio and may reduce borrower affordability. These changes to the macroeconomic outlook resulted in higher modeled projections of loss rates at September 30, 2022, compared to December 31, 2021, even as credit quality metrics continue to be strong in the Company’s bank loans portfolio. A summary of bank loan-related nonperforming assets and troubled debt restructurings is as follows: September 30, 2022 December 31, 2021 Nonaccrual loans (1) $ 17 $ 35 Other real estate owned (2) 3 1 Total nonperforming assets 20 36 Troubled debt restructurings — — Total nonperforming assets and troubled debt restructurings $ 20 $ 36 (1) Nonaccrual loans include nonaccrual troubled debt restructurings. (2) Included in other assets on the condensed consolidated balance sheets. Credit Quality In addition to monitoring delinquency, Schwab monitors the credit quality of First Mortgages and HELOCs by stratifying the portfolios by the following: • Year of origination; • Borrower FICO scores at origination (Origination FICO); • Updated borrower FICO scores (Updated FICO); • Loan-to-value (LTV) ratios at origination (Origination LTV); and • Estimated Current LTV ratios (Estimated Current LTV). Borrowers’ FICO scores are provided by an independent third-party credit reporting service and generally updated quarterly. The Origination LTV and Estimated Current LTV for a HELOC include any first lien mortgage outstanding on the same property at the time of the HELOC’s origination. The Estimated Current LTV for each loan is updated on a monthly basis by reference to a home price appreciation index. - 38 - THE CHARLES SCHWAB CORPORATION Notes to Condensed Consolidated Financial Statements (Tabular Amounts in Millions, Except Per Share Data, Ratios, or as Noted) (Unaudited) The credit quality indicators of the Company’s bank loan portfolio are detailed below: First Mortgages Amortized Cost Basis by Origination Year September 30, 2022 2022 2021 2020 2019 2018 pre-2018 Total First Mortgages Revolving HELOCs amortized cost basis HELOCs converted to term loans Total HELOCs Origination FICO <620 $ 2 $ 1 $ 1 $ — $ — $ 1 $ 5 $ — $ — $ — 620 – 679 27 32 21 2 1 14 97 — 2 2 680 – 739 708 1,246 434 119 30 222 2,759 60 50 110 ≥740 4,857 11,186 3,890 829 115 956 21,833 324 174 498 Total $ 5,594 $ 12,465 $ 4,346 $ 950 $ 146 $ 1,193 $ 24,694 $ 384 $ 226 $ 610 Origination LTV ≤70% $ 4,195 $ 10,782 $ 3,607 $ 765 $ 113 $ 884 $ 20,346 $ 329 $ 161 $ 490 >70% – ≤90% 1,399 1,683 739 185 33 307 4,346 55 64 119 >90% – ≤100% — — — — — 2 2 — 1 1 Total $ 5,594 $ 12,465 $ 4,346 $ 950 $ 146 $ 1,193 $ 24,694 $ 384 $ 226 $ 610 Updated FICO <620 $ 8 $ 8 $ 6 $ 3 $ 3 $ 10 $ 38 $ 2 $ 5 $ 7 620 – 679 74 102 41 9 3 32 261 7 12 19 680 – 739 624 994 339 90 20 157 2,224 48 31 79 ≥740 4,888 11,361 3,960 848 120 994 22,171 327 178 505 Total $ 5,594 $ 12,465 $ 4,346 $ 950 $ 146 $ 1,193 $ 24,694 $ 384 $ 226 $ 610 Estimated Current LTV (1) ≤70% $ 4,331 $ 12,196 $ 4,336 $ 950 $ 146 $ 1,189 $ 23,148 $ 382 $ 225 $ 607 >70% – ≤90% 1,263 269 10 — — 4 1,546 2 1 3 >90% – ≤100% — — — — — — — — — — >100% — — — — — — — — — — Total $ 5,594 $ 12,465 $ 4,346 $ 950 $ 146 $ 1,193 $ 24,694 $ 384 $ 226 $ 610 Percent of Loans on Nonaccrual Status 0.01 % 0.02 % 0.07 % 0.03 % 0.33 % 0.46 % 0.05 % 0.31 % 1.63 % 0.82 % (1) Represents the LTV for the full line of credit (drawn and undrawn) for revolving HELOCs. - 39 - THE CHARLES SCHWAB CORPORATION Notes to Condensed Consolidated Financial Statements (Tabular Amounts in Millions, Except Per Share Data, Ratios, or as Noted) (Unaudited) First Mortgages Amortized Cost Basis by Origination Year December 31, 2021 2021 2020 2019 2018 pre-2018 Total First Mortgages Revolving HELOCs amortized cost basis HELOCs converted to term loans Total HELOCs Origination FICO <620 $ 1 $ 1 $ — $ — $ 1 $ 3 $ — $ — $ — 620 – 679 34 25 5 1 25 90 — 2 2 680 – 739 1,306 524 146 41 313 2,330 61 60 121 ≥740 11,649 4,454 1,049 165 1,350 18,667 308 217 525 Total $ 12,990 $ 5,004 $ 1,200 $ 207 $ 1,689 $ 21,090 $ 369 $ 279 $ 648 Origination LTV ≤70% $ 11,234 $ 4,159 $ 948 $ 160 $ 1,260 $ 17,761 $ 305 $ 199 $ 504 >70% – ≤90% 1,756 845 252 47 426 3,326 64 78 142 >90% – ≤100% — — — — 3 3 — 2 2 Total $ 12,990 $ 5,004 $ 1,200 $ 207 $ 1,689 $ 21,090 $ 369 $ 279 $ 648 Updated FICO <620 $ 5 $ 2 $ 1 $ — $ 14 $ 22 $ 2 $ 6 $ 8 620 – 679 96 69 19 7 38 229 6 14 20 680 – 739 1,265 421 115 24 202 2,027 51 39 90 ≥740 11,624 4,512 1,065 176 1,435 18,812 310 220 530 Total $ 12,990 $ 5,004 $ 1,200 $ 207 $ 1,689 $ 21,090 $ 369 $ 279 $ 648 Estimated Current LTV (1) ≤70% $ 11,707 $ 4,961 $ 1,196 $ 206 $ 1,684 $ 19,754 $ 368 $ 277 $ 645 >70% – ≤90% 1,283 43 4 1 5 1,336 1 2 3 >90% – ≤100% — — — — — — — — — >100% — — — — — — — — — Total $ 12,990 $ 5,004 $ 1,200 $ 207 $ 1,689 $ 21,090 $ 369 $ 279 $ 648 Percent of Loans on Nonaccrual Status 0.03 % 0.10 % 0.03 % 0.03 % 1.03 % 0.12 % 0.64 % 2.33 % 1.39 % (1) Represents the LTV for the full line of credit (drawn and undrawn) for revolving HELOCs. At September 30, 2022, First Mortgage loans of $ 19.9 billion had adjustable interest rates. Substantially all of these mortgages have initial fixed interest rates for three to ten years and interest rates that adjust annually thereafter. Approximately 28 % of the balance of these mortgages consisted of loans with interest-only payment terms. The interest rates on approximately 92 % of the balance of these interest-only loans are not scheduled to reset for three or more years. Schwab’s mortgage loans do not include interest terms described as temporary introductory rates below current market rates. At September 30, 2022 and December 31, 2021, Schwab had $ 107 million and $ 57 million, respectively, of accrued interest on bank loans, which is excluded from the amortized cost basis of bank loans and included in other assets on the condensed consolidated balance sheets. The HELOC product has a 30 -year loan term with an initial draw period of ten years from the date of origination. After the initial draw period, the balance outstanding at such time is converted to a 20 -year amortizing loan. The interest rate during the initial draw period and the 20 -year amortizing period is a floating rate based on the prime rate plus a margin. - 40 - THE CHARLES SCHWAB CORPORATION Notes to Condensed Consolidated Financial Statements (Tabular Amounts in Millions, Except Per Share Data, Ratios, or as Noted) (Unaudited) The following table presents HELOCs converted to amortizing loans during each period presented: Three Months Ended September 30, Nine Months Ended September 30, 2022 2021 2022 2021 HELOCs converted to amortizing loans $ 3 $ 5 $ 7 $ 17 The following table presents when current outstanding HELOCs will convert to amortizing loans: September 30, 2022 Balance Converted to an amortizing loan by period end $ 226 Within 1 year 31 > 1 year – 3 years 54 > 3 years – 5 years 63 > 5 years 236 Total $ 610 At September 30, 2022, $ 468 million of the HELOC portfolio was secured by second liens on the associated properties. Second lien mortgage loans typically possess a higher degree of credit risk given the subordination to the first lien holder in the event of default. In addition to the credit monitoring activities described previously, Schwab also monitors credit risk by reviewing the delinquency status of the first lien loan on the associated property. At September 30, 2022, the borrowers on approximately 55 % of HELOC loan balances outstanding only paid the minimum amount due. 6. Variable Interest Entities As of September 30, 2022 and December 31, 2021, all of Schwab’s involvement with variable interest entities (VIEs) is through CSB’s Community Reinvestment Act (CRA)-related investments and most of these are related to Low-Income Housing Tax Credit (LIHTC) investments. As part of CSB’s community reinvestment initiatives, CSB invests in funds that make equity investments in multifamily affordable housing properties and receives tax credits and other tax benefits for these investments. Aggregate assets, liabilities, and maximum exposure to loss The aggregate assets, liabilities, and maximum exposure to loss from those VIEs in which Schwab holds a variable interest, but is not the primary beneficiary, are summarized in the table below: September 30, 2022 December 31, 2021 Aggregate assets Aggregate liabilities Maximum exposure to loss Aggregate assets Aggregate liabilities Maximum exposure to loss LIHTC investments (1) $ 1,024 $ 582 $ 1,024 $ 915 $ 530 $ 915 Other CRA investments (2) 168 — 216 161 — 211 Total $ 1,192 $ 582 $ 1,240 $ 1,076 $ 530 $ 1,126 (1) Aggregate assets and aggregate liabilities are included in other assets and accrued expenses and other liabilities, respectively, on the condensed consolidated balance sheets. (2) Other CRA investments are accounted for as loans at amortized cost, equity method investments, AFS securities, or using the adjusted cost method. Aggregate assets are included in AFS securities, bank loans – net, or other assets on the condensed consolidated balance sheets. Schwab’s maximum exposure to loss would result from the loss of the investments, including any committed amounts. CSB’s funding of these remaining commitments is dependent upon the occurrence of certain conditions, and CSB expects to pay substantially all of these commitments between 2022 and 2025. During the nine months ended September 30, 2022 and year ended December 31, 2021, Schwab did not provide or intend to provide financial or other support to the VIEs that it was not contractually required to provide. - 41 - THE CHARLES SCHWAB CORPORATION Notes to Condensed Consolidated Financial Statements (Tabular Amounts in Millions, Except Per Share Data, Ratios, or as Noted) (Unaudited) 7. Bank Deposits Bank deposits consist of interest-bearing and non-interest-bearing deposits as follows: September 30, 2022 December 31, 2021 Interest-bearing deposits: Deposits swept from brokerage accounts $ 367,943 $ 412,287 Checking 20,198 22,786 Savings and other 6,666 7,234 Total interest-bearing deposits 394,807 442,307 Non-interest-bearing deposits 908 1,471 Total bank deposits $ 395,715 $ 443,778 8. Borrowings CSC Senior Notes CSC’s Senior Notes are unsecured obligations. CSC may redeem some or all of the Senior Notes of each series prior to their maturity, subject to certain restrictions, and the payment of an applicable make-whole premium in certain instances. Interest is payable semi-annually for the fixed-rate Senior Notes and quarterly for the floating-rate Senior Notes. TDA Holding Senior Notes TDA Holding’s Senior Notes are unsecured obligations. TDA Holding may redeem some or all of the Senior Notes of each series prior to their maturity, subject to certain restrictions, and the payment of an applicable make-whole premium in certain instances. Interest is payable semi-annually for the fixed-rate Senior Notes. - 42 - THE CHARLES SCHWAB CORPORATION Notes to Condensed Consolidated Financial Statements (Tabular Amounts in Millions, Except Per Share Data, Ratios, or as Noted) (Unaudited) The following table lists long-term debt by instrument outstanding as of September 30, 2022 and December 31, 2021. Date of Issuance Principal Amount Outstanding September 30, 2022 December 31, 2021 CSC Fixed-rate Senior Notes: 3.225 % due September 1, 2022 08/29/12 $ — $ 256 2.650 % due January 25, 2023 12/07/17 800 800 3.550 % due February 1, 2024 10/31/18 500 500 0.750 % due March 18, 2024 03/18/21 1,500 1,500 3.750 % due April 1, 2024 09/24/21 350 350 3.000 % due March 10, 2025 03/10/15 375 375 4.200 % due March 24, 2025 03/24/20 600 600 3.625 % due April 1, 2025 09/24/21 418 418 3.850 % due May 21, 2025 05/22/18 750 750 3.450 % due February 13, 2026 11/13/15 350 350 0.900 % due March 11, 2026 12/11/20 1,250 1,250 1.150 % due May 13, 2026 05/13/21 1,000 1,000 3.200 % due March 2, 2027 03/02/17 650 650 2.450 % due March 3, 2027 03/03/22 1,500 — 3.300 % due April 1, 2027 09/24/21 744 744 3.200 % due January 25, 2028 12/07/17 700 700 2.000 % due March 20, 2028 03/18/21 1,250 1,250 4.000 % due February 1, 2029 10/31/18 600 600 3.250 % due May 22, 2029 05/22/19 600 600 2.750 % due October 1, 2029 09/24/21 475 475 4.625 % due March 22, 2030 03/24/20 500 500 1.650 % due March 11, 2031 12/11/20 750 750 2.300 % due May 13, 2031 05/13/21 750 750 1.950 % due December 1, 2031 08/26/21 850 850 2.900 % due March 3, 2032 03/03/22 1,000 — CSC Floating-rate Senior Notes: SOFR + 0.500 % due March 18, 2024 03/18/21 1,250 1,250 SOFR + 0.520 % due May 13, 2026 05/13/21 500 500 SOFR + 1.050 % due March 3, 2027 03/03/22 500 — Total CSC Senior Notes 20,512 17,768 TDA Holding Fixed-rate Senior Notes: 2.950 % due April 1, 2022 03/09/15 — 750 3.750 % due April 1, 2024 11/01/18 50 50 3.625 % due April 1, 2025 10/22/14 82 82 3.300 % due April 1, 2027 04/27/17 56 56 2.750 % due October 1, 2029 08/16/19 25 25 Total TDA Holding Senior Notes 213 963 Finance lease liabilities 76 94 Unamortized premium — net 141 180 Debt issuance costs ( 98 ) ( 91 ) Total long-term debt $ 20,844 $ 18,914 - 43 - THE CHARLES SCHWAB CORPORATION Notes to Condensed Consolidated Financial Statements (Tabular Amounts in Millions, Except Per Share Data, Ratios, or as Noted) (Unaudited) Annual maturities on all long-term debt outstanding at September 30, 2022 are as follows: Maturities 2022 $ 7 2023 832 2024 3,675 2025 2,237 2026 3,100 Thereafter 10,950 Total maturities 20,801 Unamortized premium — net 141 Debt issuance costs ( 98 ) Total long-term debt $ 20,844 Short-term borrowings: CSC has the ability to issue up to $ 5.0 billion of commercial paper notes with maturities of up to 270 days; and had $ 500 million outstanding at September 30, 2022 and $ 3.0 billion at December 31, 2021. CSC and CS&Co also have access to uncommitted lines of credit with external banks with total borrowing capacity of $ 1.5 billion; no amounts were outstanding as of September 30, 2022 or December 31, 2021. Our banking subsidiaries maintain secured credit facilities with the FHLB. Amounts available under these facilities are dependent on the amount of bank loans and the fair value of certain investment securities that are pledged as collateral. As of September 30, 2022 and December 31, 2021, the collateral pledged provided a total borrowing capacity of $ 82.6 billion and $ 63.5 billion, respectively, of which no amounts were outstanding at the end of either period. Our banking subsidiaries have access to funding through the Federal Reserve discount window. Amounts available are dependent upon the fair value of certain investment securities that are pledged as collateral. As of September 30, 2022 and December 31, 2021, our collateral pledged provided total borrowing capacity of $ 8.8 billion and $ 12.0 billion, respectively, of which no amounts were outstanding at the end of either period. Our banking subsidiaries may engage with external banks in repurchase agreements collateralized by investment securities as another source of short-term liquidity. The Company had no borrowings outstanding pursuant to such repurchase agreements at September 30, 2022 or December 31, 2021. TDAC maintains secured uncommitted lines of credit, under which TDAC borrows on either a demand or short-term basis and pledges client margin securities as collateral. There was no balance outstanding at September 30, 2022 and $ 1.9 billion outstanding under the secured uncommitted lines of credit as of December 31, 2021. See Note 11 for additional information. TDAC maintained one senior unsecured committed revolving credit facility as of December 31, 2021 with an aggregate borrowing capacity of $ 600 million which matured in April 2022 and was not renewed. There were no borrowings outstanding under the TDAC senior revolving facility as of December 31, 2021. - 44 - THE CHARLES SCHWAB CORPORATION Notes to Condensed Consolidated Financial Statements (Tabular Amounts in Millions, Except Per Share Data, Ratios, or as Noted) (Unaudited) 9. Commitments and Contingencies Loan Portfolio: CSB provides a co-branded loan origination program for CSB clients (the Program) with Rocket Mortgage, LLC (Rocket Mortgage ® ). Pursuant to the Program, Rocket Mortgage originates and services First Mortgages and HELOCs for CSB clients. Under the Program, CSB purchases certain First Mortgages and HELOCs that are originated by Rocket Mortgage. CSB purchased First Mortgages of $ 1.3 billion and $ 3.6 billion during the third quarters of 2022 and 2021, respectively, and $ 6.0 billion and $ 10.4 billion during the first nine months of 2022 and 2021, respectively. CSB purchased HELOCs with commitments of $ 92 million and $ 112 million during the third quarters of 2022 and 2021, respectively, and $ 252 million and $ 325 million during the first nine months of 2022 and 2021, respectively. The Company’s commitments to extend credit on bank lines of credit and to purchase First Mortgages are as follows: September 30, 2022 December 31, 2021 Commitments to extend credit related to unused HELOCs, PALs, and other lines of credit $ 4,829 $ 6,193 Commitments to purchase First Mortgage loans 769 1,824 Total $ 5,598 $ 8,017 Guarantees and indemnifications: Schwab has clients that sell (i.e., write) listed option contracts that are cleared by the Options Clearing Corporation (OCC) – a clearing house that establishes margin requirements on these transactions. We satisfy the margin requirements of these transactions through the pledging of certain client securities. For additional information on these pledged securities refer to Note 11. In connection with its securities lending activities, Schwab is required to provide collateral to certain brokerage clients. The Company satisfies the collateral requirements by providing cash as collateral. The Company also provides guarantees to securities clearing houses and exchanges under standard membership agreements, which require members to guarantee the performance of other members. Under the agreements, if another member becomes unable to satisfy its obligations to the clearing houses and exchanges, other members would be required to meet shortfalls. The Company’s liability under these arrangements is not quantifiable and may exceed the amounts it has posted as collateral. The Company also engages third-party firms to clear clients’ futures and options on futures transactions and to facilitate clients’ foreign exchange trading, and has agreed to indemnify these firms for any losses that they may incur from the client transactions introduced to them by the Company. The potential requirement for the Company to make payments under these arrangements is remote. Accordingly, no liability has been recognized for these guarantees. IDA agreement: The Company’s IDA agreement with the TD Depository Institutions became effective on October 6, 2020. The IDA agreement creates responsibilities of the Company and certain contingent obligations. Pursuant to the IDA agreement, uninvested cash within eligible brokerage client accounts is swept off-balance sheet to deposit accounts at the TD Depository Institutions. Schwab provides recordkeeping and support services to the TD Depository Institutions with respect to the deposit accounts for which Schwab receives an aggregate monthly fee. Though unlikely, in the event the sweep arrangement fee computation were to result in a negative amount in any given month, Schwab would be required to pay the TD Depository Institutions. The IDA agreement provides that, as of July 1, 2021, Schwab has the option to migrate up to $ 10 billion of IDA balances every 12 months to Schwab’s balance sheet, subject to certain limitations and adjustments. The Company’s ability to migrate these balances to its balance sheet is dependent upon multiple factors including having sufficient capital levels to sustain these incremental deposits and certain binding limitations specified in the IDA agreement, including the requirement that Schwab can only move IDA balances designated as floating-rate obligations. In addition, Schwab also must maintain a minimum $ 50 billion IDA balance through June 2031, and at least 80 % of the IDA balances must be designated as fixed-rate obligations through June 2026. The total ending IDA balance was $ 133.8 billion as of September 30, 2022 and $ 147.2 billion as of December 31, 2021. If IDA balances were to decline below the required IDA balance minimum, Schwab could be required to direct additional sweep cash from its balance sheet to the IDA program. During the first nine months of 2022, Schwab moved $ 14.6 billion of IDA balances to its balance sheet. - 45 - THE CHARLES SCHWAB CORPORATION Notes to Condensed Consolidated Financial Statements (Tabular Amounts in Millions, Except Per Share Data, Ratios, or as Noted) (Unaudited) Legal contingencies: Schwab is subject to claims and lawsuits in the ordinary course of business, including arbitrations, class actions and other litigation, some of which include claims for substantial or unspecified damages. The Company is also the subject of inquiries, investigations, and proceedings by regulatory and other governmental agencies. Predicting the outcome of a litigation or regulatory matter is inherently difficult, requiring significant judgment and evaluation of various factors, including the procedural status of the matter and any recent developments; prior experience and the experience of others in similar cases; available defenses, including potential opportunities to dispose of a case on the merits or procedural grounds before trial (e.g., motions to dismiss or for summary judgment); the progress of fact discovery; the opinions of counsel and experts regarding potential damages; and potential opportunities for settlement and the status of any settlement discussions. It may not be reasonably possible to estimate a range of potential liability until the matter is closer to resolution – pending, for example, further proceedings, the outcome of key motions or appeals, or discussions among the parties. Numerous issues may have to be developed, such as discovery of important factual matters and determination of threshold legal issues, which may include novel or unsettled questions of law. Reserves are established or adjusted or further disclosure and estimates of potential loss are provided as the matter progresses and more information becomes available. Schwab believes it has strong defenses in all significant matters currently pending and is contesting liability and any damages claimed. Nevertheless, some of these matters may result in adverse judgments or awards, including penalties, injunctions or other relief, and the Company may also determine to settle a matter because of the uncertainty and risks of litigation. Described below are matters in which there is a reasonable possibility that a material loss could be incurred or where the matter may otherwise be of significant interest to stockholders. Unless otherwise noted, the Company is unable to provide a reasonable estimate of any potential liability given the stage of proceedings in the matter. With respect to all other pending matters, based on current information and consultation with counsel, it does not appear reasonably possible that the outcome of any such matter would be material to the financial condition, operating results, or cash flows of the Company. Corrente Antitrust Litigation : On June 6, 2022, the Company was sued in the U.S. District Court for the Eastern District of Texas on behalf of a putative class of customers who purchased or sold securities through CS&Co or TD Ameritrade, Inc. from October 26, 2020 to the present. The lawsuit alleges that the Company’s acquisition of TD Ameritrade violated Section 7 of the Clayton Act because it has resulted in an anticompetitive market for the execution of retail customer orders. Plaintiffs seek unspecified damages, as well as injunctive and other relief. The Company is vigorously contesting the lawsuit and on August 29, 2022 filed a motion to dismiss the complaint, which plaintiffs have opposed. Schwab Intelligent Portfolios ® SEC Investigation : As disclosed on July 1, 2021, Schwab’s second quarter 2021 financial results included a liability and related charge of approximately $ 200 million in connection with a tentative agreement reached with SEC staff to resolve an enforcement investigation into past disclosures for the Schwab Intelligent Portfolios digital advisory solution. On June 13, 2022, the SEC announced the settlement under which CS&Co, Charles Schwab Investment Advisory, Inc., and Schwab Wealth Investment Advisory, Inc., without admitting or denying the SEC’s findings, resolved the matter and agreed to pay $ 186.5 million for deposit into a Fair Fund account for distribution to affected investors. TD Ameritrade Acquisition Litigation : As disclosed previously, on May 12, 2020, a putative class action lawsuit related to the acquisition was filed in the Delaware Court of Chancery (Hawkes v. Bettino et al.) on behalf of a proposed class of TD Ameritrade’s stockholders, excluding, among others, TD Bank. On February 5, 2021, plaintiff filed an amended complaint naming an officer and certain directors of TD Ameritrade at the time the acquisition was approved, as well as TD Bank, certain TD Bank related entities, and Schwab. The amended complaint asserts separate claims for breach of fiduciary duty by the TD Ameritrade officer, certain members of the TD Ameritrade board and TD Bank, and against Schwab for aiding and abetting such breaches, the allegation being that the amendment of the IDA agreement TD Bank negotiated directly with Schwab allowed TD Bank to divert merger consideration from TD Ameritrade’s minority public stockholders. Plaintiff seeks to recover monetary damages, costs and attorneys’ fees. Schwab and the other defendants consider the allegations to be entirely without merit and on April 29, 2021, the defendants filed motions to dismiss the amended complaint. On March 25, 2022, the parties filed a joint stipulation proposing a settlement of the lawsuit on a class basis. On September 21, 2022, the court entered final judgment and approved the terms of the settlement, under which Schwab will pay an immaterial amount on behalf of the former TD Ameritrade officer and director defendants pursuant to indemnification obligations. Crago Order Routing Litigation : On July 13, 2016, a securities class action lawsuit was filed in the U.S. District Court for the Northern District of California on behalf of a putative class of customers executing equity orders through CS&Co. The lawsuit names CS&Co and CSC as defendants and alleges that an agreement under which CS&Co routed orders to UBS Securities LLC between July 13, 2011 and December 31, 2014 violated CS&Co’s duty to seek best execution. Plaintiffs seek unspecified - 46 - THE CHARLES SCHWAB CORPORATION Notes to Condensed Consolidated Financial Statements (Tabular Amounts in Millions, Except Per Share Data, Ratios, or as Noted) (Unaudited) damages, interest, injunctive and equitable relief, and attorneys’ fees and costs. Defendants consider the allegations to be entirely without merit and have been vigorously contesting the lawsuit. After a first amended complaint was dismissed with leave to amend, plaintiffs filed a second amended complaint on August 14, 2017. Defendants again moved to dismiss, and in a decision issued December 5, 2017, the court denied the motion. Plaintiffs filed a motion for class certification on April 30, 2021, and in a decision on October 27, 2021, the court denied the motion and held that certification of a class action is inappropriate. Plaintiffs sought review of the order denying class certification by the Ninth Circuit Court of Appeals, which was denied. On September 23, 2022, plaintiffs filed a renewed motion for class action. Ford Order Routing Litigation : On September 15, 2014, TDA Holding, TD Ameritrade, Inc. and its former CEO, Frederick J. Tomczyk, were sued in the U.S. District Court for the District of Nebraska on behalf of a putative class of TD Ameritrade, Inc. clients alleging that defendants failed to seek best execution and made misrepresentations and omissions regarding its order routing practices. Plaintiffs seek unspecified damages and injunctive and other relief. Defendants consider the allegations to be entirely without merit and have been vigorously contesting the lawsuit. On September 14, 2018, the District Court granted plaintiffs’ motion for class certification, and defendants petitioned for an immediate appeal of the District Court’s class certification decision. On April 23, 2021, the U.S. Court of Appeals, 8th Circuit, issued a decision reversing the District Court’s certification of a class and remanding the case back to the District Court for further proceedings. Plaintiff renewed his motion for class certification, which the District Court granted on September 20, 2022. On October 26, 2022, the U.S. Court of Appeals, 8th Circuit, granted defendants’ petition for an immediate appeal of the District Court’s ruling. 10. Exit and Other Related Liabilities The Company completed its acquisition of TD Ameritrade effective October 6, 2020 and 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. To achieve our integration objectives, the Company expects to recognize significant additional acquisition and integration-related costs and capital expenditures throughout the integration process. Such acquisition and integration-related costs have included, and are expected to continue to include, professional fees, such as legal, advisory, and accounting fees, compensation and benefits expenses for employees and contractors involved in the integration work, and costs for technology enhancements. The Company’s acquisition and integration-related spending also includes exit and other related costs, which are primarily comprised of employee compensation and benefits such as severance pay, other termination benefits, and retention costs, as well as costs related to facility closures, such as accelerated amortization and depreciation or impairments of assets in those locations. Exit and other related costs are a component of the Company’s overall acquisition and integration-related spending, and support the Company’s ability to achieve integration objectives including expected synergies. Our 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 the effects of changes in remote working trends. Inclusive of costs recognized through September 30, 2022, Schwab currently expects to incur total exit and other related costs for the integration of TD Ameritrade ranging from $ 500 million to $ 700 million, consisting of employee compensation and benefits, facility exit costs, and certain other costs. During each of the three months ended September 30, 2022 and 2021, the Company recognized $ 9 million of acquisition-related exit costs. During the nine months ended September 30, 2022 and 2021, the Company recognized $ 29 million and $ 99 million of acquisition-related exit costs, respectively. The Company expects that remaining exit and other related costs will be incurred and charged to expense over the next 12 to 24 months; some costs are expected to be incurred after client conversion. In addition to ASC 420 Exit or Disposal Cost Obligations , certain of the costs associated with these activities are accounted for in accordance with ASC 360 Property, Plant and Equipment , ASC 712 Compensation – Nonretirement Post Employment Benefits , ASC 718 Compensation – Stock Compensation , and ASC 842 Leases . - 47 - THE CHARLES SCHWAB CORPORATION Notes to Condensed Consolidated Financial Statements (Tabular Amounts in Millions, Except Per Share Data, Ratios, or as Noted) (Unaudited) The following is a summary of the Company’s exit and other related liabilities as of September 30, 2022 and activity for the nine months ended September 30, 2022: Investor Services Employee Compensation and Benefits Advisor Services Employee Compensation and Benefits Total Balance at December 31, 2021 (1) $ 28 $ 7 $ 35 Amounts recognized in expense (2) 18 5 23 Costs paid or otherwise settled ( 11 ) ( 3 ) ( 14 ) Balance at September 30, 2022 (1) $ 35 $ 9 $ 44 (1) Included in accrued expenses and other liabilities on the condensed consolidated balance sheets. (2) Amounts recognized in expense for severance pay and other termination benefits, as well as retention costs, are primarily included in compensation and benefits on the condensed consolidated statements of income. The following table summarizes the exit and other related costs recognized in expense for the three and nine months ended September 30, 2022: Investor Services Advisor Services Three Months Ended September 30 Employee Compensation and Benefits Facility Exit Costs (1) Investor Services Total Employee Compensation and Benefits Facility Exit Costs (1) Advisor Services Total Total Compensation and benefits $ 5 $ — $ 5 $ 1 $ — $ 1 $ 6 Occupancy and equipment — 2 2 — 1 1 3 Total $ 5 $ 2 $ 7 $ 1 $ 1 $ 2 $ 9 Investor Services Advisor Services Nine Months Ended September 30 Employee Compensation and Benefits Facility Exit Costs (1) Investor Services Total Employee Compensation and Benefits Facility Exit Costs (1) Advisor Services Total Total Compensation and benefits $ 18 $ — $ 18 $ 5 $ — $ 5 $ 23 Occupancy and equipment — 4 4 — 2 2 6 Total $ 18 $ 4 $ 22 $ 5 $ 2 $ 7 $ 29 (1) Costs related to facility closures. These costs, which are comprised of accelerated amortization of right-of-use (ROU) assets, relate to the impact of abandoning leased properties. The following table summarizes the exit and other related costs recognized in expense for the three and nine months ended September 30, 2021: Investor Services Advisor Services Three Months Ended September 30 Employee Compensation and Benefits Facility Exit Costs (1) Investor Services Total Employee Compensation and Benefits Facility Exit Costs (1) Advisor Services Total Total Compensation and benefits $ 6 $ — $ 6 $ 1 $ — $ 1 $ 7 Occupancy and equipment — 2 2 — — — 2 Total $ 6 $ 2 $ 8 $ 1 $ — $ 1 $ 9 Investor Services Advisor Services Nine Months Ended September 30 Employee Compensation and Benefits Facility Exit Costs (1) Investor Services Total Employee Compensation and Benefits Facility Exit Costs (1) Advisor Services Total Total Compensation and benefits $ 63 $ — $ 63 $ 16 $ — $ 16 $ 79 Occupancy and equipment — 15 15 — 3 3 18 Professional services — 1 1 — — — 1 Other — 1 1 — — — 1 Total $ 63 $ 17 $ 80 $ 16 $ 3 $ 19 $ 99 (1) Costs related to facility closures. These costs, which are primarily comprised of accelerated amortization of ROU assets, relate to the impact of abandoning leased properties. - 48 - THE CHARLES SCHWAB CORPORATION Notes to Condensed Consolidated Financial Statements (Tabular Amounts in Millions, Except Per Share Data, Ratios, or as Noted) (Unaudited) The following table summarizes the exit and other related costs incurred from October 6, 2020 through September 30, 2022: Investor Services Advisor Services Employee Compensation and Benefits Facility Exit Costs (1) Investor Services Total Employee Compensation and Benefits Facility Exit Costs (1) Advisor Services Total Total Compensation and benefits $ 222 $ — $ 222 $ 60 $ — $ 60 $ 282 Occupancy and equipment — 28 28 — 7 7 35 Depreciation and amortization — 2 2 — 1 1 3 Professional services — 1 1 — — — 1 Other — 2 2 — — — 2 Total $ 222 $ 33 $ 255 $ 60 $ 8 $ 68 $ 323 (1) Costs related to facility closures. These costs, which are primarily comprised of accelerated amortization of ROU assets and accelerated depreciation of fixed assets, relate to the impact of abandoning leased and other properties. 11. Financial Instruments Subject to Off-Balance Sheet Credit Risk Resale agreements: Schwab enters into collateralized resale agreements principally with other broker-dealers, which could result in losses in the event the counterparty fails to purchase the securities held as collateral for the cash advanced and the fair value of the securities declines. To mitigate this risk, Schwab requires that the counterparty deliver securities to a custodian, to be held as collateral, with a fair value at or in excess of the resale price. Schwab also sets standards for the credit quality of the counterparty, monitors the fair value of the underlying securities as compared to the related receivable, including accrued interest, and requires additional collateral where deemed appropriate. The collateral provided under these resale agreements is utilized to meet obligations under broker-dealer client protection rules, which place limitations on our ability to access such segregated securities. For Schwab to repledge or sell this collateral, we would be required to deposit cash and/or securities of an equal amount into our segregated reserve bank accounts in order to meet our segregated cash and investments requirement. Schwab’s resale agreements as of September 30, 2022 and December 31, 2021 were not subject to master netting arrangements. Securities lending: Schwab loans brokerage client securities temporarily to other brokers and clearing houses in connection with its securities lending activities and receives cash as collateral for the securities loaned. Increases in security prices may cause the fair value of the securities loaned to exceed the amount of cash received as collateral. In the event the counterparty to these transactions does not return the loaned securities or provide additional cash collateral, we may be exposed to the risk of acquiring the securities at prevailing market prices in order to satisfy our client obligations. Schwab mitigates this risk by requiring credit approvals for counterparties, monitoring the fair value of securities loaned, and requiring additional cash as collateral when necessary. In addition, most of our securities lending transactions are through a program with a clearing organization, which guarantees the return of cash to us. We also borrow securities from other broker-dealers to fulfill short sales by brokerage clients and deliver cash to the lender in exchange for the securities. The fair value of these borrowed securities was $ 514 million and $ 566 million at September 30, 2022 and December 31, 2021, respectively. Our securities lending transactions are subject to enforceable master netting arrangements with other broker-dealers; however, we do not net securities lending transactions. Therefore, the securities loaned and securities borrowed are presented gross in the condensed consolidated balance sheets. - 49 - THE CHARLES SCHWAB CORPORATION Notes to Condensed Consolidated Financial Statements (Tabular Amounts in Millions, Except Per Share Data, Ratios, or as Noted) (Unaudited) The following table presents information about our resale agreements, securities lending, and other activity depicting the potential effect of rights of setoff between these recognized assets and recognized liabilities. Gross Assets/ Liabilities Gross Amounts Offset in the Condensed Consolidated Balance Sheets Net Amounts Presented in the Condensed Consolidated Balance Sheets Gross Amounts Not Offset in the Condensed Consolidated Balance Sheets Net Amount Counterparty Offsetting Collateral September 30, 2022 Assets Resale agreements (1) $ 13,644 $ — $ 13,644 $ — $ ( 13,644 ) (2) $ — Securities borrowed (3) 535 — 535 ( 99 ) ( 420 ) 16 Total $ 14,179 $ — $ 14,179 $ ( 99 ) $ ( 14,064 ) $ 16 Liabilities Securities loaned (4,5) $ 5,084 $ — $ 5,084 $ ( 99 ) $ ( 4,406 ) $ 579 Total $ 5,084 $ — $ 5,084 $ ( 99 ) $ ( 4,406 ) $ 579 December 31, 2021 Assets Resale agreements (1) $ 13,096 $ — $ 13,096 $ — $ ( 13,096 ) (2) $ — Securities borrowed (3) 582 — 582 ( 383 ) ( 195 ) 4 Total $ 13,678 $ — $ 13,678 $ ( 383 ) $ ( 13,291 ) $ 4 Liabilities Securities loaned (4,5) $ 7,158 $ — $ 7,158 $ ( 383 ) $ ( 6,015 ) $ 760 Secured short-term borrowings (6) 1,850 — 1,850 — ( 1,850 ) — Total $ 9,008 $ — $ 9,008 $ ( 383 ) $ ( 7,865 ) $ 760 (1) Included in cash and investments segregated and on deposit for regulatory purposes in the condensed consolidated balance sheets. (2) Actual collateral was greater than or equal to the value of the related assets. At September 30, 2022 and December 31, 2021, the fair value of collateral received in connection with resale agreements that are available to be repledged or sold was $ 13.8 billion and $ 13.4 billion, respectively. (3) Included in other assets in the condensed consolidated balance sheets. (4) Included in accrued expenses and other liabilities in the condensed consolidated balance sheets. The cash collateral received from counterparties under securities lending transactions was equal to or greater than the market value of the securities loaned at September 30, 2022 and December 31, 2021. (5) Securities loaned are predominantly comprised of equity securities held in client brokerage accounts with overnight and continuous remaining contractual maturities. (6) Included in short-term borrowings in the condensed consolidated balance sheets. See below for collateral pledged and Note 8 for additional information. Margin lending: Clients with margin loans have agreed to allow Schwab to pledge collateralized securities in their brokerage accounts in accordance with federal regulations. The following table summarizes the fair value of client securities that were available, under such regulations, that could have been used as collateral, as well as the fair value of securities that we had pledged to third parties under such regulations and from securities borrowed transactions: September 30, 2022 December 31, 2021 Fair value of client securities available to be pledged $ 98,176 $ 120,306 Fair value of securities pledged for: Fulfillment of requirements with the Options Clearing Corporation (1) $ 16,427 $ 16,829 Fulfillment of client short sales 4,606 5,934 Securities lending to other broker-dealers 4,306 6,269 Collateral for short-term borrowings — 2,390 Total collateral pledged to third parties $ 25,339 $ 31,422 Note: Excludes amounts available and pledged for securities lending from fully-paid client securities. The fair value of fully-paid client securities available and pledged was $ 192 million as of September 30, 2022 and $ 118 million as of December 31, 2021. (1) Securities pledged to fulfill client margin requirements for open option contracts established with the OCC. - 50 - THE CHARLES SCHWAB CORPORATION Notes to Condensed Consolidated Financial Statements (Tabular Amounts in Millions, Except Per Share Data, Ratios, or as Noted) (Unaudited) 12. Fair Values of Assets and Liabilities Assets and liabilities measured at fair value on a recurring basis Schwab’s assets and liabilities measured at fair value on a recurring basis include: certain cash equivalents, certain investments segregated and on deposit for regulatory purposes, AFS securities, and certain other assets and accrued expenses and other liabilities. The Company uses the market approach to determine the fair value of assets and liabilities. When available, the Company uses quoted prices in active markets to measure the fair value of assets and liabilities. Quoted prices for investments in exchange-traded securities represent end-of-day close prices published by exchanges. Quoted prices for money market funds and other mutual funds represent reported net asset values. When utilizing market data and bid-ask spread, the Company uses the price within the bid-ask spread that best represents fair value. When quoted prices in active markets do not exist, the Company uses prices obtained from independent third-party pricing services to measure the fair value of investment assets. We generally obtain prices from three independent third-party pricing sources for assets recorded at fair value. Our primary independent pricing service provides prices for our fixed income investments such as commercial paper; certificates of deposit; U.S. government and agency securities; state and municipal securities; corporate debt securities; asset-backed securities; foreign government agency securities; and non-agency commercial mortgage-backed securities. Such prices are based on observable trades, broker/dealer quotes, and discounted cash flows that incorporate observable information such as yields for similar types of securities (a benchmark interest rate plus observable spreads) and weighted-average maturity for the same or similar “to-be-issued” securities. We compare the prices obtained from the primary independent pricing service to the prices obtained from the additional independent pricing services to determine if the price obtained from the primary independent pricing service is reasonable. Schwab does not adjust the prices received from independent third-party pricing services unless such prices are inconsistent with the definition of fair value and result in material differences in the amounts recorded. Liabilities measured at fair value on a recurring basis include repurchase liabilities related to client-held fractional shares of equities, ETFs, and other securities, which are included in other assets on the condensed consolidated balance sheets. The Company has elected the fair value option pursuant to ASC 825 Financial Instruments for the repurchase liabilities to match the measurement and accounting of the related client-held fractional shares. The fair values of the repurchase liabilities are based on quoted market prices or other observable market data consistent with the related client-held fractional shares. Gains and losses on client-held fractional shares offset the gains and losses on the corresponding repurchase liabilities, resulting in no impact to the consolidated statements of income. The Company’s liabilities to repurchase client-held fractional shares do not have credit risk, and, as a result, the Company has not recognized any gains or losses in the condensed consolidated statements of income or comprehensive income attributable to instrument-specific credit risk for these repurchase liabilities. The repurchase liabilities are included in accrued expenses and other liabilities on the condensed consolidated balance sheets. For a description of the fair value hierarchy and Schwab’s fair value methodologies, see Item 8 – Note 2 in the 2021 Form 10-K. The Company did not adjust prices received from the primary independent third-party pricing service at September 30, 2022 or December 31, 2021. - 51 - THE CHARLES SCHWAB CORPORATION Notes to Condensed Consolidated Financial Statements (Tabular Amounts in Millions, Except Per Share Data, Ratios, or as Noted) (Unaudited) Assets and Liabilities Measured at Fair Value on a Recurring Basis The following tables present the fair value hierarchy for assets and liabilities measured at fair value on a recurring basis: September 30, 2022 Level 1 Level 2 Level 3 Balance at Fair Value Cash equivalents: Money market funds $ 16,825 $ — $ — $ 16,825 Commercial paper — 287 — 287 Total cash equivalents 16,825 287 — 17,112 Investments segregated and on deposit for regulatory purposes: Certificates of deposit — 350 — 350 U.S. Government securities — 24,622 — 24,622 Total investments segregated and on deposit for regulatory purposes — 24,972 — 24,972 Available for sale securities: U.S. agency mortgage-backed securities — 163,005 — 163,005 U.S. Treasury securities — 40,346 — 40,346 Asset-backed securities — 14,820 — 14,820 Corporate debt securities — 13,007 — 13,007 U.S. state and municipal securities — 662 — 662 Non-agency commercial mortgage-backed securities — 777 — 777 Certificates of deposit — 2,524 — 2,524 Foreign government agency securities — 1,064 — 1,064 Other — 312 — 312 Total available for sale securities — 236,517 — 236,517 Other assets: Equity, corporate debt, and other securities 665 57 — 722 Mutual funds and ETFs 518 — — 518 State and municipal debt obligations — 9 — 9 U.S. Government securities — 25 — 25 Total other assets 1,183 91 — 1,274 Total assets $ 18,008 $ 261,867 $ — $ 279,875 Accrued expenses and other liabilities $ 1,073 $ 42 $ — $ 1,115 Total liabilities $ 1,073 $ 42 $ — $ 1,115 - 52 - THE CHARLES SCHWAB CORPORATION Notes to Condensed Consolidated Financial Statements (Tabular Amounts in Millions, Except Per Share Data, Ratios, or as Noted) (Unaudited) December 31, 2021 Level 1 Level 2 Level 3 Balance at Fair Value Cash equivalents: Money market funds $ 11,719 $ — $ — $ 11,719 Total cash equivalents 11,719 — — 11,719 Investments segregated and on deposit for regulatory purposes: Certificates of deposit — 350 — 350 U.S. Government securities — 36,349 — 36,349 Total investments segregated and on deposit for regulatory purposes — 36,699 — 36,699 Available for sale securities: U.S. agency mortgage-backed securities — 334,355 — 334,355 U.S. Treasury securities — 21,282 — 21,282 Asset-backed securities — 17,546 — 17,546 Corporate debt securities — 12,344 — 12,344 U.S. state and municipal securities — 1,687 — 1,687 Non-agency commercial mortgage-backed securities — 1,190 — 1,190 Certificates of deposit — 999 — 999 Foreign government agency securities — 425 — 425 Commercial paper — 200 — 200 Other — 26 — 26 Total available for sale securities — 390,054 — 390,054 Other assets: Equity, corporate debt, and other securities 854 59 — 913 Mutual funds and ETFs 636 — — 636 State and municipal debt obligations — 32 — 32 U.S. Government securities — 3 — 3 Total other assets 1,490 94 — 1,584 Total assets $ 13,209 $ 426,847 $ — $ 440,056 Accrued expenses and other liabilities $ 1,354 $ 45 $ — $ 1,399 Total liabilities $ 1,354 $ 45 $ — $ 1,399 - 53 - THE CHARLES SCHWAB CORPORATION Notes to Condensed Consolidated Financial Statements (Tabular Amounts in Millions, Except Per Share Data, Ratios, or as Noted) (Unaudited) Fair Value of Other Financial Instruments The following tables present the fair value hierarchy for other financial instruments: September 30, 2022 Carrying Amount Level 1 Level 2 Level 3 Balance at Fair Value Assets Cash and cash equivalents $ 29,374 $ 29,374 $ — $ — $ 29,374 Cash and investments segregated and on deposit for regulatory purposes 19,115 5,488 13,627 — 19,115 Receivables from brokerage clients — net 73,848 — 73,848 — 73,848 Held to maturity securities: U.S. agency mortgage-backed securities 96,323 — 81,158 — 81,158 Total held to maturity securities 96,323 — 81,158 — 81,158 Bank loans — net: First Mortgages 24,652 — 21,694 — 21,694 HELOCs 606 — 670 — 670 Pledged asset lines 14,940 — 14,940 — 14,940 Other 181 — 181 — 181 Total bank loans — net 40,379 — 37,485 — 37,485 Other assets 3,121 — 3,121 — 3,121 Liabilities Bank deposits $ 395,715 $ — $ 395,715 $ — $ 395,715 Payables to brokerage clients 110,012 — 110,012 — 110,012 Accrued expenses and other liabilities 6,487 — 6,487 — 6,487 Short-term borrowings 500 — 500 — 500 Long-term debt 20,768 — 18,864 — 18,864 December 31, 2021 Carrying Amount Level 1 Level 2 Level 3 Balance at Fair Value Assets Cash and cash equivalents $ 51,256 $ 51,256 $ — $ — $ 51,256 Cash and investments segregated and on deposit for regulatory purposes 17,246 4,151 13,095 — 17,246 Receivables from brokerage clients — net 90,560 — 90,560 — 90,560 Bank loans — net: First Mortgages 21,077 — 21,027 — 21,027 HELOCs 646 — 668 — 668 Pledged asset lines 12,709 — 12,709 — 12,709 Other 204 — 204 — 204 Total bank loans — net 34,636 — 34,608 — 34,608 Other assets 3,561 — 3,561 — 3,561 Liabilities Bank deposits $ 443,778 $ — $ 443,778 $ — $ 443,778 Payables to brokerage clients 125,671 — 125,671 — 125,671 Accrued expenses and other liabilities 8,327 — 8,327 — 8,327 Short-term borrowings 4,855 — 4,855 — 4,855 Long-term debt 18,820 — 19,383 — 19,383 - 54 - THE CHARLES SCHWAB CORPORATION Notes to Condensed Consolidated Financial Statements (Tabular Amounts in Millions, Except Per Share Data, Ratios, or as Noted) (Unaudited) 13. Stockholders’ Equity and Mandatorily Redeemable Preferred Stock Stockholders’ Equity On March 4, 2022, the Company issued and sold 750,000 depositary shares, each representing a 1/100th ownership interest in a share of 5.000 % fixed-rate reset non-cumulative perpetual preferred stock, Series K, $ .01 par value, with a liquidation preference of $ 100,000 per share (equivalent of $ 1,000 per depositary share). The net proceeds of the offering were $ 740 million, after deducting the underwriting discount and offering expenses. 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. 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. 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. On August 1, 2022, an affiliate of TD Bank executed a permitted outside transfer, as defined in the certificate of incorporation, of 13 million shares of CSC nonvoting common stock. Shares of nonvoting common stock transferred in a permitted outside transfer are automatically converted to shares of common stock. Subsequent to September 30, 2022, on October 20, 2022, the Company announced that it will redeem on December 1, 2022 all of the 6,000 outstanding shares of its fixed-to-floating rate non-cumulative perpetual preferred stock, Series E, and the corresponding 600,000 depositary shares, each representing a 1/100th interest in a share of the Series E preferred stock. The depositary shares will be redeemed at a redemption price of $ 1,000 per depositary share for a total of $ 600 million. The redemption price does not include the regular quarterly dividend that was declared on October 26, 2022 and will be paid separately on December 1, 2022. Mandatorily Redeemable Preferred Stock On November 1, 2022, the Company redeemed all of the 400,000 outstanding shares of its fixed-to-floating rate non-cumulative perpetual preferred stock, Series A at a redemption price of $ 1,000 per share for a total of $ 400 million. The redemption price does not include the regular quarterly dividend that was declared on September 30, 2022 at a rate of 7.602 % and paid separately on November 1, 2022. The Company notified stockholders of its redemption of the Series A preferred stock 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 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. The difference between the total redemption price and the prior carrying value of the Series A preferred stock resulted in a $ 3 million deemed dividend that was included in the calculation of EPS. - 55 - THE CHARLES SCHWAB CORPORATION Notes to Condensed Consolidated Financial Statements (Tabular Amounts in Millions, Except Per Share Data, Ratios, or as Noted) (Unaudited) The Company’s preferred stock issued and outstanding is as follows: Liquidation Preference Per Share Dividend Rate in Effect at September 30, 2022 Earliest Redemption Date Date at Which Dividend Rate Resets or Becomes Floating Reset / Floating Rate Margin Over Reset / Floating Rate Shares Issued and Outstanding (in ones) at Carrying Value at September 30, 2022 (1) December 31, 2021 (1) September 30, 2022 December 31, 2021 Issue Date Fixed-rate: Series D 750,000 750,000 $ 1,000 $ 728 $ 728 03/07/16 5.950 % 06/01/21 N/A N/A N/A Series J 600,000 600,000 1,000 584 584 03/30/21 4.450 % 06/01/26 N/A N/A N/A Fixed-to-floating-rate/Fixed-rate reset: Series A (2) — 400,000 — — 397 01/26/12 — 02/01/22 02/01/22 3M LIBOR 4.820 % Series E (3) 6,000 6,000 100,000 591 591 10/31/16 6.397 % 03/01/22 03/01/22 3M LIBOR 3.315 % Series F 5,000 5,000 100,000 492 492 10/31/17 5.000 % 12/01/27 12/01/27 3M LIBOR 2.575 % Series G (4) 25,000 25,000 100,000 2,470 2,470 04/30/20 5.375 % 06/01/25 06/01/25 5 -Year Treasury 4.971 % Series H (5) 25,000 25,000 100,000 2,470 2,470 12/11/20 4.000 % 12/01/30 12/01/30 10 -Year Treasury 3.079 % Series I (4) 22,500 22,500 100,000 2,222 2,222 03/18/21 4.000 % 06/01/26 06/01/26 5 -Year Treasury 3.168 % Series K (6) 7,500 — 100,000 740 — 03/04/22 5.000 % 06/01/27 06/01/27 5 -Year Treasury 3.256 % Total preferred stock 1,441,000 1,833,500 $ 10,297 $ 9,954 (1) Represented by depositary shares, except for Series A. (2) Subsequent to September 30, 2022, Series A was redeemed on November 1, 2022. The Series A preferred stock fair value is included in accrued expenses and other liabilities on the condensed consolidated balance sheet as of September 30, 2022. (3) Subsequent to September 30, 2022, the Company announced the redemption of Series E effective December 1, 2022. (4) The dividend rate for Series G and Series I resets on each five-year anniversary from the first reset date. (5) The dividend rate for Series H resets on each ten-year anniversary from the first reset date. (6) The dividend rate for Series K resets on each five-year anniversary beginning on June 1, 2027 based on a five-year Treasury rate, representing the average of the yields on actively traded U.S. Treasury securities adjusted to constant maturity for five-year maturities. Series K is only redeemable on dividend payment dates on or after the first reset date. N/A Not applicable. Dividends declared on the Company’s preferred stock are as follows: Three Months Ended September 30, Nine Months Ended September 30, 2022 2021 2022 2021 Total Declared Per Share Amount Total Declared Per Share Amount Total Declared Per Share Amount Total Declared Per Share Amount Series A (1) $ 7.7 $ 19.43 $ — $ — $ 18.9 $ 47.73 $ 14.0 $ 35.00 Series C (2) — — — — — — 18.0 30.00 Series D 11.2 14.88 11.2 14.88 33.5 44.64 33.5 44.64 Series E 7.4 1,251.05 13.8 2,312.50 27.2 4,544.37 27.7 4,625.00 Series F — — — — 12.5 2,500.00 12.5 2,500.00 Series G 33.6 1,343.75 33.6 1,343.75 100.8 4,031.25 100.8 4,031.25 Series H 25.0 1,000.00 25.0 1,000.00 75.0 3,000.00 72.2 2,888.89 Series I (3) 22.5 1,000.00 22.5 1,000.00 67.5 3,000.00 40.7 1,811.11 Series J (4) 6.7 11.13 6.8 11.13 20.1 33.39 11.3 18.67 Series K (5) 9.3 1,250.00 — — 18.4 2,458.33 — — Total $ 123.4 $ 112.9 $ 373.9 $ 330.7 (1) 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. Prior to redemption, dividends were paid quarterly and the final dividend was paid on June 1, 2021. (3) Series I was issued on March 18, 2021. Dividends are paid quarterly, and the first dividend was paid on June 1, 2021. (4) Series J was issued on March 30, 2021. Dividends are paid quarterly, and the first dividend was paid on June 1, 2021. (5) Series K was issued on March 4, 2022. Dividends are paid quarterly, and the first dividend was paid on June 1, 2022. - 56 - THE CHARLES SCHWAB CORPORATION Notes to Condensed Consolidated Financial Statements (Tabular Amounts in Millions, Except Per Share Data, Ratios, or as Noted) (Unaudited) 14. Accumulated Other Comprehensive Income AOCI represents cumulative gains and losses that are not reflected in earnings. AOCI balances and the components of other comprehensive income (loss) are as follows: Total AOCI Balance at June 30, 2021 $ 2,408 Available for sale securities: Net unrealized gain (loss), net of tax expense (benefit) of $( 364 ) ( 1,155 ) Balance at September 30, 2021 $ 1,253 Balance at June 30, 2022 $ ( 16,022 ) Available for sale securities: Net unrealized gain (loss), net of tax expense (benefit) of $( 2,286 ) ( 7,207 ) Other reclassifications included in other revenue, net of tax expense (benefit) of $ 4 12 Held to maturity securities: Amortization of amounts previously recorded upon transfer from available for sale, net of tax expense (benefit) of $ 18 65 Balance at September 30, 2022 $ ( 23,152 ) Total AOCI Balance at December 31, 2020 $ 5,394 Available for sale securities: Net unrealized gain (loss), net of tax expense (benefit) of $( 1,289 ) ( 4,131 ) Other reclassifications included in other revenue, net of tax expense (benefit) of $( 4 ) ( 10 ) Balance at September 30, 2021 $ 1,253 Balance at December 31, 2021 $ ( 1,109 ) Available for sale securities: Net unrealized gain (loss), excluding transfers to held to maturity, net of tax expense (benefit) of $( 7,027 ) ( 22,272 ) Net unrealized loss on securities transferred to held to maturity, net of tax expense (benefit) of $ 579 (1) 1,850 Other reclassifications included in other revenue, net of tax expense (benefit) of $ — ( 1 ) Held to maturity securities: Net unrealized loss on securities transferred from available for sale, net of tax expense (benefit) of $( 579 ) (1) ( 1,850 ) Amortization of amounts previously recorded upon transfer from available for sale, net of tax expense (benefit) of $ 67 230 Balance at September 30, 2022 $ ( 23,152 ) (1) In January 2022, the Company transferred a portion of its AFS securities to the HTM category. See Note 4 for additional discussion on the transfer of AFS securities to HTM. - 57 - THE CHARLES SCHWAB CORPORATION Notes to Condensed Consolidated Financial Statements (Tabular Amounts in Millions, Except Per Share Data, Ratios, or as Noted) (Unaudited) 15. Earnings Per Common Share For the three and nine months ended September 30, 2022 and 2021, the Company had voting and nonvoting common stock outstanding. Since the rights of the voting and nonvoting common stock are identical, except with respect to voting, the net income of the Company has been allocated on a proportionate basis to the two classes. Diluted earnings per share is calculated using the treasury stock method for outstanding stock options and non-vested restricted stock units and the if-converted method for nonvoting common stock. For further details surrounding the EPS computation, see Note 25 in the 2021 Form 10-K. EPS under the basic and diluted computations for both common stock and nonvoting common stock are as follows: Three Months Ended September 30, Nine Months Ended September 30, 2022 2021 2022 2021 Common Stock Nonvoting Common Stock Common Stock Nonvoting Common Stock Common Stock Nonvoting Common Stock Common Stock Nonvoting Common Stock Basic earnings per share: Numerator Net income $ 1,956 $ 64 $ 1,462 $ 64 $ 5,014 $ 201 $ 4,096 $ 179 Preferred stock dividends and other (1) ( 132 ) ( 4 ) ( 115 ) ( 5 ) ( 385 ) ( 16 ) ( 349 ) ( 15 ) Net income available to common stockholders $ 1,824 $ 60 $ 1,347 $ 59 $ 4,629 $ 185 $ 3,747 $ 164 Denominator Weighted-average common shares outstanding — basic 1,827 60 1,809 79 1,819 73 1,806 79 Basic earnings per share $ 1.00 $ 1.00 $ .74 $ .74 $ 2.54 $ 2.54 $ 2.07 $ 2.07 Diluted earnings per share: Numerator Net income available to common stockholders $ 1,824 $ 60 $ 1,347 $ 59 $ 4,629 $ 185 $ 3,747 $ 164 Reallocation of net income available to common stockholders as a result of conversion of nonvoting to voting shares 60 — 59 — 185 — 164 — Allocation of net income available to common stockholders: $ 1,884 $ 60 $ 1,406 $ 59 $ 4,814 $ 185 $ 3,911 $ 164 Denominator Weighted-average common shares outstanding — basic 1,827 60 1,809 79 1,819 73 1,806 79 Conversion of nonvoting shares to voting shares 60 — 79 — 73 — 79 — Common stock equivalent shares related to stock incentive plans 8 — 10 — 9 — 10 — Weighted-average common shares outstanding — diluted (2) 1,895 60 1,898 79 1,901 73 1,895 79 Diluted earnings per share $ .99 $ .99 $ .74 $ .74 $ 2.53 $ 2.53 $ 2.06 $ 2.06 (1) Includes preferred stock dividends and undistributed earnings and dividends allocated to non-vested restricted stock units. (2) Antidilutive stock options and restricted stock units excluded from the calculation of diluted EPS totaled 13 million and 15 million for the three and nine months ended September 30, 2022 and 2021, respectively. - 58 - THE CHARLES SCHWAB CORPORATION Notes to Condensed Consolidated Financial Statements (Tabular Amounts in Millions, Except Per Share Data, Ratios, or as Noted) (Unaudited) 16. Regulatory Requirements At September 30, 2022, CSC and CSB met all of their respective capital requirements. Regulatory capital and ratios for CSC (consolidated) and CSB are as follows: Actual Minimum to be Well Capitalized Minimum Capital Requirement September 30, 2022 Amount Ratio Amount Ratio Amount Ratio (1) CSC Common Equity Tier 1 Risk-Based Capital $ 30,828 21.2 % N/A $ 6,544 4.5 % Tier 1 Risk-Based Capital 41,125 28.3 % N/A 8,725 6.0 % Total Risk-Based Capital 41,182 28.3 % N/A 11,633 8.0 % Tier 1 Leverage 41,125 6.8 % N/A 24,022 4.0 % Supplementary Leverage Ratio 41,125 6.8 % N/A 18,142 3.0 % CSB Common Equity Tier 1 Risk-Based Capital $ 30,468 29.4 % $ 6,739 6.5 % $ 4,665 4.5 % Tier 1 Risk-Based Capital 30,468 29.4 % 8,294 8.0 % 6,220 6.0 % Total Risk-Based Capital 30,519 29.4 % 10,367 10.0 % 8,294 8.0 % Tier 1 Leverage 30,468 7.6 % 20,148 5.0 % 16,119 4.0 % Supplementary Leverage Ratio 30,468 7.5 % N/A 12,185 3.0 % December 31, 2021 CSC Common Equity Tier 1 Risk-Based Capital $ 27,967 19.7 % N/A $ 6,389 4.5 % Tier 1 Risk-Based Capital 37,921 26.7 % N/A 8,518 6.0 % Total Risk-Based Capital 37,950 26.7 % N/A 11,358 8.0 % Tier 1 Leverage 37,921 6.2 % N/A 24,346 4.0 % Supplementary Leverage Ratio 37,921 6.2 % N/A 18,434 3.0 % CSB Common Equity Tier 1 Risk-Based Capital $ 28,014 26.8 % $ 6,787 6.5 % $ 4,698 4.5 % Tier 1 Risk-Based Capital 28,014 26.8 % 8,353 8.0 % 6,265 6.0 % Total Risk-Based Capital 28,033 26.8 % 10,441 10.0 % 8,353 8.0 % Tier 1 Leverage 28,014 7.1 % 19,790 5.0 % 15,832 4.0 % Supplementary Leverage Ratio 28,014 7.0 % N/A 12,016 3.0 % (1) Under risk-based capital rules, CSC and CSB are also required to maintain additional capital buffers above the regulatory minimum risk-based capital ratios. As of September 30, 2022, CSC was subject to a stress capital buffer of 2.5%. In June 2022, CSC received its 2022 stress capital buffer requirement from the Federal Reserve of 2.5%, which became effective beginning October 1, 2022. In addition, CSB is required to maintain a capital conservation buffer of 2.5%. CSC and CSB are also required to maintain a countercyclical capital buffer above the regulatory minimum risk-based capital ratios, which was zero for both periods presented. If a buffer falls below the minimum requirement, CSC and CSB would be subject to increasingly strict limits on capital distributions and discretionary bonus payments to executive officers. At September 30, 2022, the minimum capital ratio requirements for both CSC and CSB, inclusive of their respective buffers, were 7.0%, 8.5%, and 10.5% for Common Equity Tier 1 Risk-Based Capital, Tier 1 Risk-Based Capital, and Total Risk-Based Capital, respectively. N/A Not applicable. Based on its regulatory capital ratios at September 30, 2022, CSB is considered well capitalized (the highest category) under its respective regulatory capital rules. There are no conditions or events since September 30, 2022 that management believes have changed CSB’s capital category. At September 30, 2022, the balance sheets of Charles Schwab Premier Bank, SSB (CSPB) and Charles Schwab Trust Bank (Trust Bank) consisted primarily of investment securities, and the entities held total assets of $ 33.5 billion and $ 14.2 billion, respectively. Based on their regulatory capital ratios, at September 30, 2022, CSPB and Trust Bank are considered well capitalized under their respective regulatory capital rules. - 59 - THE CHARLES SCHWAB CORPORATION Notes to Condensed Consolidated Financial Statements (Tabular Amounts in Millions, Except Per Share Data, Ratios, or as Noted) (Unaudited) Net capital and net capital requirements for CS&Co, TDAC, and TD Ameritrade, Inc., are as follows: September 30, 2022 December 31, 2021 CS&Co Net capital $ 4,787 $ 5,231 Minimum dollar requirement 0.250 0.250 2% of aggregate debit balances 894 941 Net capital in excess of required net capital $ 3,893 $ 4,290 TDAC Net capital $ 5,241 $ 5,337 Minimum dollar requirement 1.500 1.500 2% of aggregate debit balances 739 1,007 Net capital in excess of required net capital $ 4,502 $ 4,330 TD Ameritrade, Inc. Net capital $ 837 $ 711 Minimum dollar requirement 0.250 0.250 2% of aggregate debit balances — — Net capital in excess of required net capital $ 837 $ 711 Pursuant to the SEC’s Customer Protection Rule and other applicable regulations, Schwab had cash and investments segregated for the exclusive benefit of clients at September 30, 2022. The SEC’s Customer Protection Rule requires broker-dealers to segregate client fully-paid securities and cash balances not collateralizing margin positions and not swept to money market funds or bank deposit accounts. Amounts included in cash and investments segregated and on deposit for regulatory purposes represent actual balances on deposit. Cash and cash equivalents included in cash and investments segregated and on deposit for regulatory purposes are presented as part of Schwab’s cash balances in the condensed consolidated statements of cash flows. 17. Segment Information Schwab’s two reportable segments are Investor Services and Advisor Services. Schwab structures the operating segments according to its clients and the services provided to those clients. The Investor Services segment provides retail brokerage, investment advisory, and banking and trust services to individual investors, and retirement plan services, as well as other corporate brokerage services, to businesses and their employees. The Advisor Services segment provides custodial, trading, banking and trust, and support services, as well as retirement business services, to independent RIAs, independent retirement advisors, and recordkeepers. Revenues and expenses are attributed to the two segments based on which segment services the client. Management evaluates the performance of the segments on a pre-tax basis. Segment assets and liabilities are not used for evaluating segment performance or in deciding how to allocate resources to segments. There are no revenues from transactions between the segments. - 60 - THE CHARLES SCHWAB CORPORATION Notes to Condensed Consolidated Financial Statements (Tabular Amounts in Millions, Except Per Share Data, Ratios, or as Noted) (Unaudited) Financial information for the segments is presented in the following table: Investor Services Advisor Services Total Three Months Ended September 30, 2022 2021 2022 2021 2022 2021 Net Revenues Net interest revenue $ 2,143 $ 1,530 $ 783 $ 500 $ 2,926 $ 2,030 Asset management and administration fees 755 805 292 296 1,047 1,101 Trading revenue 800 873 130 91 930 964 Bank deposit account fees 263 239 150 84 413 323 Other 151 114 33 38 184 152 Total net revenues 4,112 3,561 1,388 1,009 5,500 4,570 Expenses Excluding Interest 2,117 1,956 706 603 2,823 2,559 Income before taxes on income $ 1,995 $ 1,605 $ 682 $ 406 $ 2,677 $ 2,011 Investor Services Advisor Services Total Nine Months Ended September 30, 2022 2021 2022 2021 2022 2021 Net Revenues Net interest revenue $ 5,551 $ 4,462 $ 2,102 $ 1,426 $ 7,653 $ 5,888 Asset management and administration fees 2,299 2,316 868 848 3,167 3,164 Trading revenue 2,407 2,831 371 304 2,778 3,135 Bank deposit account fees 690 742 369 269 1,059 1,011 Other 465 462 143 152 608 614 Total net revenues 11,412 10,813 3,853 2,999 15,265 13,812 Expenses Excluding Interest 6,359 6,253 2,116 1,869 8,475 8,122 Income before taxes on income $ 5,053 $ 4,560 $ 1,737 $ 1,130 $ 6,790 $ 5,690 - 61 - THE CHARLES SCHWAB CORPORATION