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Item 7. Management’s Discussion and Analysis

2023-02-24 compared with 2022-02-24 · 478 added, 369 removed, 882 unchanged (49% of the section changed)

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our belief that developing trusted relationships will translate into more client assets which drives revenue and, along with expense discipline and thoughtful capital management, generates earnings growth and builds stockholder value;

and maintaining our market position (see Business Strategy and Competitive Environment and Products and Services in Part I, Item 1);

• Expected benefits from the TD Ameritrade and other recently completed acquisitions;

and expected timing for the TD Ameritrade client conversion (see Business and Asset Acquisitions in Part I, Item 1;

maintaining our market position;

and the impact from adjustments related to the Market Risk Rule (see Business Strategy and Competitive Environment, Products and Services and Regulation in Part I, Item 1);

• Expected benefits from the TD Ameritrade and other completed acquisitions;

and expected timing for the TD Ameritrade client transitions (see Business and Asset Acquisitions in Part I, Item 1;

Overview – Business and Asset Acquisitions in Part II, Item 7;

Business Acquisitions in Part II, Item 8 – Note 3;

and Exit and Other Related Liabilities in Note 16);

and Exit and Other Related Liabilities in Part II, Item 8 – Note 16);

• The impact of legal proceedings and regulatory matters (see Legal Proceedings in Part I, Item 3;

and Commitments and Contingencies in Part II, Item 8 – Note 15);

• Driving strategic priorities of scale and efficiency, win-win monetization and segmentation (see Overview in Part II, Item 7);

• Investments to support growth in our client base (see Overview in Part II, Item 7);

• Cost estimates and timing related to the TD Ameritrade integration, including acquisition and integration-related costs and capital expenditures, cost synergies, and exit and other related costs (see Overview – Business and Asset Acquisitions in Part II, Item 7;

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and Exit and Other Related Liabilities in Part II, Item 8 – Note 16);

• The adjustment of rates paid on client-related liabilities;

and money market fund fee waivers (see Results of Operations – Net Interest Revenue and Asset Management and Administration Fees in Part II, Item 7);

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

• Net interest revenue;

and the adjustment of rates paid on client-related liabilities (see Results of Operations – Net Interest Revenue in Part II, Item 7);

• Capital expenditures (see Results of Operations – Total Expenses Excluding Interest in Part II, Item 7);

• The phase-out of the use of LIBOR (see Risk Management – Expected Phase-out of LIBOR in Part II, Item 7);

• Sources of liquidity, capital, and level of dividends;

• Sources and uses of liquidity, capital, and level of dividends;

and Tier 1 Leverage Ratio operating objective (see Liquidity Risk, Capital Management, Regulatory Capital Requirements, and Dividends in Part II, Item 7);

• The migration of IDA balances to our balance sheet (see Capital Management – Regulatory Capital Requirements in Part II, Item 7;

• Capital management;

the return of capital to stockholders;

and the migration of IDA balances to our balance sheet (see Capital Management – Regulatory Capital Requirements in Part II, Item 7;

and Commitments and Contingencies in Part II, Item 8 – Note 15);

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Important factors that may cause actual results to differ include, but are not limited to:

• General market conditions, including equity valuations, trading activity, the level of interest rates – which can impact money market fund fee waivers, and credit spreads;

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

• The level and mix of client trading activity;

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

• Client use of our advisory and lending solutions and other products and services;

• The level of client assets, including cash balances;

• Competitive pressure on pricing, including deposit rates;

THE CHARLES SCHWAB CORPORATION

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

• The level of client assets, including cash balances;

• Competitive pressure on pricing, including deposit rates;

• Client sensitivity to rates;

• Regulatory guidance;

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

• Capital and liquidity needs and management;

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• Our ability to monetize client assets;

• The scope and duration of the COVID-19 pandemic and actions taken by governmental authorities to contain the spread of the virus and the economic impact;

• Our ability to support client activity levels;

• The risk that expected cost synergies and other benefits from the TD Ameritrade and other recent acquisitions may not be fully realized or may take longer to realize than expected and that integration-related expenses may be higher than expected;

• The ability to successfully implement integration strategies and plans relating to TD Ameritrade;

• The risk that expected cost synergies and other benefits from the TD Ameritrade acquisition may not be fully realized or may take longer to realize than expected and that integration-related expenses may be higher than expected;

• Increased compensation and other costs due to inflationary pressures;

• The ability to successfully implement integration strategies and plans relating to TD Ameritrade, including client account transitions;

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

• Real estate and workforce decisions;

• Migrations of BDA balances;

• Prepayment levels for mortgage-backed securities;

• Client cash allocations;

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

• Balance sheet positioning relative to changes in interest rates;

• Interest earning asset mix and growth;

• Prepayment levels for mortgage-backed securities;

• LIBOR trends;

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Includes daily average revenue trades by clients, trades by clients in asset-based pricing relationships, and all commission-free trades.

Debt to total capital ratio:

Calculated as total debt divided by stockholders’ equity and total debt.

Delinquency roll rates:

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Duration is typically used to measure the expected change in value of a financial instrument for a 1% change in interest rates, expressed in years.

THE CHARLES SCHWAB CORPORATION

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

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

Final Regulatory Capital Rules:

Refers to the regulatory capital rules issued by U.S.

banking agencies which implemented Basel III and relevant provisions of Dodd-Frank Act, which apply to savings and loan holding companies, as well as federal savings banks.

First mortgages:

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full-time, part-time, and temporary employees and persons employed on a contract basis.

THE CHARLES SCHWAB CORPORATION

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

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

High Quality Liquid Assets (HQLA):

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Order flow revenue:

Net compensation received from markets and firms to which our broker-dealer subsidiaries send equity and options orders.

The amount reflects rebates received for certain types of orders, less fees paid for orders where exchange fees or other charges apply.

Payments received from trade execution venues to which our broker-dealer subsidiaries send equity and option orders.

Pledged Asset Line ® (PAL):

A non-purpose revolving line of credit from a banking subsidiary secured by eligible assets held in a separate pledged brokerage account maintained at CS&Co.

THE CHARLES SCHWAB CORPORATION

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

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

Return on average common stockholders’ equity:

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End-of-period Tier 1 Capital divided by adjusted average total consolidated assets for the period.

THE CHARLES SCHWAB CORPORATION

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

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

Trading days:

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Earnings per common share — diluted 24% $ 3.50 $ 2.83 $ 2.12

33% $ 2.83 $ 2.12 $ 2.67

Net revenue growth from prior year 12 % 58 % 9 %

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Adjusted diluted EPS $ 3.90 $ 3.25 $ 2.45

$ 3.25 $ 2.45 $ 2.70

Return on tangible common equity 42 % 22 % 15 %

(1) 2022 includes outflows of $20.8 billion from certain mutual fund clearing services clients.

2021 includes outflows of $42.0 billion from certain mutual fund clearing services clients.

2020 includes inflows of $1.6 trillion related to the acquisition of TD Ameritrade, $79.9 billion related to the acquisition of the assets of USAA-IMCO, $8.5 billion related to the acquisition of Wasmer Schroeder, and $10.9 billion from a mutual fund clearing services client.

2019 includes inflows of $11.1 billion from certain mutual fund clearing services clients.

(2) 2020 includes 14.5 million new brokerage accounts related to the acquisition of TD Ameritrade and 1.1 million new brokerage accounts related to the acquisition of assets from USAA-IMCO.

(3) In connection with the acquisition of TD Ameritrade, Schwab issued approximately 586 million common shares to TD Ameritrade stockholders, increasing our weighted average common shares outstanding for the years ended December 31, 2021 and 2020, compared to the year ended December 31, 2019.

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

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2022 Compared to 2021

Schwab’s 2022 financial results reflected strong performance against a challenging economic backdrop.

Our clients faced a very difficult environment throughout the year, encountering inflation and global economic concerns, with Russia’s invasion of Ukraine exacerbating the impact.

Equity markets suffered their worst year since 2008, with the S&P 500 ® and NASDAQ Composite ® contracting 19% and 33%, respectively, in 2022, while investor sentiment remained bearish throughout the year.

At the same time, the Federal Reserve raised short-term rates at the fastest pace in 40 years, ultimately increasing the Fed Funds rate seven times to reach an upper bound of 4.50% in December.

Additionally, uncertainty around future macroeconomic growth increased in the second half of the year, weighing on longer-term rates and leading to an inverted yield curve.

Through these challenges, clients continued to turn to Schwab for help in achieving their financial goals.

Core net new assets in 2022 totaled $427.7 billion, representing an organic growth rate of 5%, which included significant tax-related outflows in April.

Total client assets were $7.05 trillion at December 31, 2022, down 13% from year-end 2021, as market value declines of approximately $1.5 trillion in client assets more than offset the Company’s continued asset gathering during the year.

DATs in 2022 were 5.9 million, down 9% from the prior year, as trading volume subsided from the extraordinary levels seen in 2021.

New brokerage accounts were also down from the prior year, as clients opened 4.0 million new brokerage accounts in 2022;

active brokerage accounts totaled 33.8 million at December 31, 2022, up 2% from year-end 2021.

Schwab’s financial performance in 2022 reflected the resiliency of our diversified financial model in a challenging macroeconomic environment and impacts from higher market interest rates.

Net income totaled $7.2 billion in 2022 and diluted EPS was $3.50, representing year-over-year growth of 23% and 24%, respectively.

Adjusted diluted EPS (1) , which excludes acquisition and integration-related costs, amortization of acquired intangible assets, and related income tax effects, was $3.90 in 2022, up from $3.25 in 2021.

Total net revenues rose 12% year-over-year to $20.8 billion in 2022.

Net interest revenue increased to $10.7 billion, rising 33% from 2021 as significantly higher market rates more than offset the impact of balance sheet contraction due to client cash allocation decisions.

Asset management and administration fees totaled $4.2 billion in 2022, down 1% year-over-year as lower market valuations throughout the year offset the benefit of lower money market fund fee waivers.

Trading revenue declined by 12% to $3.7 billion in 2022, due to lower DATs relative to the extraordinary trading volume seen in 2021 and changes in mix of client trading activity.

Bank deposit account fee revenue was $1.4 billion in 2022, up 7% from 2021 as higher average net yields more than offset lower average BDA balances.

BDA balances totaled $126.6 billion at December 31, 2022, down 20% from year-end 2021, reflecting client cash allocation decisions and migrations to our balance sheet.

Total expenses excluding interest amounted to $11.4 billion in 2022, increasing 5% from 2021, and adjusted total expenses (1) were $10.4 billion, up 7% from the prior year.

These increases reflected higher compensation and benefits expense and higher occupancy and equipment expense, as we continued to invest in our people and technology to support ongoing growth in our client base.

These increases were partially offset by lower other expense, which included a charge of approximately $200 million in 2021 (see Item 8 – Note 15).

Acquisition and integration-related costs and amortization of acquired intangibles were $392 million and $596 million, respectively, in 2022, compared with $468 million and $615 million, respectively, in 2021.

Return on average common stockholders’ equity grew to 18% in 2022 from 11% in 2021, while return on tangible common equity (1) (ROTCE) increased to 42% in 2022 compared with 22% in 2021.

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

Stockholders’ equity declined in 2022 primarily due to a significant decrease in AOCI, as higher market interest rates resulted in larger unrealized losses on our AFS investment securities portfolio.

In January and November 2022, the Company transferred $108.8 billion and $79.8 billion, respectively, of investment securities from the AFS category to the held to maturity (HTM) category (see Capital Management and Item 8 – Note 6).

The Company continued its diligent approach to balance sheet management in 2022, maintaining appropriate capital and liquidity to support client activity and returning excess capital to stockholders.

As market rates rose from near-zero levels at the beginning of the year, clients allocated a growing portion of their assets to higher yielding cash and fixed income alternatives.

Total balance sheet assets decreased 17% year-over-year to $551.8 billion at December 31, 2022 as a result of these client cash allocation decisions and unrealized losses on AFS securities, both resulting primarily from higher market interest rates.

To facilitate these client cash movements, we took steps to enhance our liquidity by limiting new portfolio investments to help build available cash and utilizing short-term funding sources including FHLB advances and retail certificates of deposit.

(1) Adjusted diluted EPS, adjusted total expenses, and return on tangible common equity are non-GAAP financial measures.

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

THE CHARLES SCHWAB CORPORATION

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

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

We increased our common stock dividend by 22% during 2022, and implemented a $15 billion share repurchase authorization in July.

Repurchases under this new authorization totaled 47 million shares for $3.4 billion in 2022.

The Company issued $750 million in preferred stock in the first quarter of 2022, and redeemed a total of $1.0 billion of preferred stock during the second half of the year.

Inclusive of these actions, the Company’s Tier 1 Leverage Ratio finished the year at 7.2%, above our operating objective of 6.50%-6.75%.

2021 Compared to 2020

Schwab delivered strong growth and financial performance in 2021, consistently executing on our “Through Clients’ Eyes” strategy throughout a fluctuating macroeconomic environment.

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Even as we worked to support heightened levels of client activity during 2021, the Company continued to drive progress across our key strategic priorities of scale and efficiency, win-win monetization, and segmentation.

We made significant progress on our integration of TD Ameritrade, and continue to expect to complete client conversion within 30 to 36 months from the October 6, 2020 acquisition date.

We also made significant progress in 2021 on our integration of TD Ameritrade.

Schwab produced strong financial performance during 2021, reflecting consistent execution of our strategy, strong client engagement, and a generally supportive macroeconomic backdrop.

Net income totaled $5.9 billion during 2021, increasing 77% from 2020, while diluted earnings per common share (EPS) amounted to $2.83, increasing 33% from the prior year.

Adjusted diluted EPS (1) , which excludes acquisition and integration-related costs, amortization of acquired intangible assets, and related income tax effects, amounted to $3.25, increasing 33% from 2020.

Our financial results were significantly impacted by the inclusion of TD Ameritrade for the full year of 2021.

Net income totaled $5.9 billion during 2021, increasing 77% from 2020, while diluted EPS amounted to $2.83, increasing 33% from the prior year.

Adjusted diluted EPS (1) amounted to $3.25, increasing 33% from 2020.

Comparisons of our financial results in 2021 with those of 2020 were significantly impacted by the first full-year inclusion of TD Ameritrade in 2021.

Total net revenues increased 58% from 2020 to reach $18.5 billion in 2021, supported by growth across all of our major revenue streams.

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BDA balances totaled $158.6 billion at December 31, 2021, down 3% from the year-end 2020 balance of $163.5 billion, reflecting migrations to Schwab’s balance sheet during 2021.

Total expenses excluding interest were $10.8 billion in 2021, increasing 46% from 2020 due to the full-year inclusion of TD Ameritrade’s results as well as higher compensation and benefits expense, which was driven by additional headcount to support our expanding client base and a higher bonus accrual, as well as merit increases and a 5% employee salary increase we implemented at the end of the third quarter.

During 2021, acquisition and integration-related costs were $468 million, increasing from $442 million in 2020, and amortization of acquired intangible assets totaled $615 million, rising from $190 million in 2020.

Exclusive of these items, adjusted total expenses (1) were $9.7 billion in 2021, increasing 44% from 2020.

Return on average common stockholders’ equity was 11% in 2021, growing from 9% in 2020, and return on tangible common equity (1) (ROTCE) was 22% in 2021, up from 15% in 2020.

Return on average common stockholders’ equity was 11% in 2021, growing from 9% in 2020, and ROTCE (1) was 22% in 2021, up from 15% in 2020.

The increases in both return on average common stockholders’ equity and ROTCE were primarily a result of significantly higher net income in 2021.

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Though significantly heightened client activity levels during the first quarter of 2021 impacted our service quality at times, we took multiple actions to better deliver the service experience our clients deserve and rely on, including enhancing online self-service capabilities, streamlining our call-routing processes, and increasing hiring.

Our efforts began yielding results early in the year, with significant improvement in client service levels by the end of the first quarter, and our service levels continued to be improved throughout the remainder of 2021 as client activity moderated.

2020 Compared to 2019

Throughout the extraordinary macroeconomic environment that persisted during 2020, Schwab continued to execute on key strategic initiatives, and produced solid financial results.

The impact of COVID-19, along with social and political turmoil, created an unprecedented combination of personal and macroeconomic challenges for our clients, employees, and stockholders.

While working through these challenges, we progressed in advancing the Company’s strategic goals to drive scale, monetization, and segmentation in ways that benefit our clients.

Among the Company’s key accomplishments in 2020 were the successful completion of the acquisition of TD Ameritrade and three other strategic acquisitions, as discussed below.

The COVID-19 pandemic’s rapid escalation in early 2020 was accompanied by volatile equity markets and the Federal Reserve’s further easing of monetary policy.

As the year progressed, government aid packages and vaccine developments helped settle the markets, with the S&P 500 ® erasing its pandemic-related losses to finish up 16% for the year.

Throughout 2020, client engagement with the financial markets greatly increased over the prior year, as client trading activity reached record levels.

Core net new assets totaled $281.9 billion in 2020, representing our third consecutive year of over $200 billion.

Total client assets reached $6.69 trillion spread across 29.6 million brokerage accounts, up 66% and 140%, respectively, from year-end 2019.

Against this backdrop, Schwab’s net income totaled $3.3 billion, down $405 million, or 11% from 2019, while the Company produced diluted EPS of $2.12, representing a decrease of 21% relative to 2019.

Adjusted diluted EPS (1) amounted to $2.45 in 2020, down 9% from $2.70 in 2019.

Total net revenues reached $11.7 billion for the year, increasing 9% from 2019.

During March 2020, the Federal Reserve acted to support the economy by cutting the Fed Funds rate from 1.75% to near zero and announcing significant asset purchase programs.

Mortgage refinancing activity subsequently accelerated, and our net interest margin was impacted by both significantly lower interest rates and increased prepayments of mortgage-backed securities held in our investment portfolio.

Strong growth in interest-earning assets via client inflows and allocation decisions, as well as our acquisitions of TD Ameritrade and assets of USAA-IMCO, helped limit the decrease in net interest revenue to 6%, resulting in a full-year 2020 total of $6.1 billion.

Growing balances in advisory solutions and a rebound in equity markets in 2020 helped drive an 8% increase in asset management and administration fees, which totaled $3.5 billion in 2020.

Record client trading activity and the addition of TD Ameritrade in the fourth quarter contributed to an 88% increase in trading revenue, which reached $1.4 billion for the year, more than offsetting a full-year impact of the commission reductions implemented in the fourth quarter of 2019.

With the TD Ameritrade acquisition, our fourth quarter 2020 results included bank deposit account fee revenue for the first time, which totaled $355 million for the period from October 6, through December 31, 2020.

Total expenses excluding interest increased 26% in 2020 to $7.4 billion, which included significant costs related to our acquisitions.

With the completion of four acquisitions during the year, acquisition and integration-related costs totaled $442 million in 2020, representing a significant increase from the $26 million incurred in 2019.

Amortization of acquired intangible assets also increased, totaling $190 million in 2020 compared with $27 million in 2019.

Exclusive of these items, adjusted total expenses (1) increased 16% from 2019.

Return on average common stockholders’ equity was 9% in 2020, down from 19% in 2019.

ROTCE (1) was 15% in 2020, down from 21% in 2019.

The 2020 decreases in both return on average common stockholders’ equity and ROTCE were due to lower net income as well as significantly higher balances of common equity due to the TDA acquisition and higher AOCI in 2020, driven by unrealized gains in our AFS investment portfolio.

(1) Adjusted diluted EPS, adjusted total expenses, and return on tangible common equity are non-GAAP financial measures.

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

THE CHARLES SCHWAB CORPORATION

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

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

Throughout 2020, the Company maintained its disciplined approach to capital management, helping sustain significant balance sheet growth.

Schwab’s consolidated total assets ended 2020 at $549 billion, representing growth of $255 billion, or 87%, from year-end 2019, reflecting both our organic growth as well as the acquisitions of TD Ameritrade and the assets of USAA-IMCO.

Through offerings in April and December, the Company issued preferred stock totaling approximately $5 billion in 2020, bringing total preferred stock to approximately $7.7 billion, or approximately 25% of Tier 1 Capital at December 31, 2020.

The Company’s Tier 1 Leverage Ratio was 6.3% at December 31, 2020.

Our efforts began yielding results early in 2021, with significant improvement in client service levels by the end of the first quarter of 2021, and our service levels continued to be improved throughout the remainder of 2021 as client activity moderated.

Business and Asset Acquisitions

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Effective October 6, 2020, the Company completed its acquisition of TD Ameritrade.

TD Ameritrade provides securities brokerage services, including trade execution, clearing services, and margin lending, through its broker-dealer subsidiaries;

and futures and foreign exchange trade execution services through its FCM and FDM subsidiary.

At the time of closing, TD Ameritrade had approximately $1.6 trillion in client assets and approximately 14.5 million brokerage accounts.

TD Ameritrade’s assets and liabilities were revalued and recorded at their estimated fair value as of the date of acquisition.

The Company expects to continue to incur significant acquisition and integration-related costs and integration-related capital expenditures throughout the integration process.

TD Ameritrade provides securities brokerage services, including trade execution, clearing services, and margin lending;

and futures and foreign exchange trade execution services.

The Company revalued and recorded TD Ameritrade’s assets and liabilities at their estimated fair value as of the date of acquisition.

The Company expects to continue to incur significant acquisition and integration-related costs and integration-related capital expenditures throughout the remaining integration process.

Such 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 has also incurred exit and other related costs to attain anticipated synergies, 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.

The Company’s estimates of the nature, amounts, and timing of recognition of acquisition and integration-related costs remain subject to change based on a number of factors, including the expected duration and complexity of the integration process and the continued uncertainty of the current economic environment.

More specifically, factors that could cause variability in our expected acquisition and integration-related costs include the level of employee attrition, workforce redeployment from eliminated positions into open roles, changes in the levels of client activity, as well as increased real estate-related exit cost variability due to effects of the COVID-19 pandemic including changes in remote working trends.

As a result of the significant growth seen beginning in late 2020 and early 2021 across key client volume metrics, including the number of active brokerage accounts, DATs, and peak daily trades, the Company determined in 2021 to increase the scope of technology work related to the integration.

In 2021, we commenced greater technology build-out to support the expanded volumes of our combined client base.

Based on our current integration plans and expanded scope of technology work, the Company continues to expect to complete client conversion within 30 to 36 months from the October 6, 2020 acquisition date, and we expect to incur total acquisition and integration-related costs and capital expenditures of between $2.0 billion and $2.2 billion.

Acquisition and integration-related costs, which are inclusive of related exit costs, totaled $468 million and $442 million for the years ended December 31, 2021 and 2020, respectively, and the Company expects to incur acquisition and integration-related costs of approximately $350-$400 million in 2022.

Over the course of the integration, we continue to expect to realize annualized cost synergies of between $1.8 billion and $2.0 billion, and, through December 31, 2021, we have achieved approximately half of this amount on an annualized run-rate basis.

The Company expects to have realized approximately 60% of our estimated annualized cost synergies by year-end 2022, with much of the remaining estimated cost synergies expected to be realized after the completion of client conversion and into 2024.

Based on our current integration plans, the Company expects to complete most client transitions from TD Ameritrade to Schwab across multiple groups over the course of 2023, with the transition of a small client group in the first half of 2024.

The first transition of client accounts was completed in February 2023.

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

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.

Acquisition and integration-related costs, which are inclusive of related exit costs, totaled $392 million, $468 million, and $442 million in 2022, 2021, and 2020, respectively, and the Company expects to incur acquisition and integration-related costs of approximately $450-$550 million in 2023.

Over the course of the integration, we continue to expect to realize annualized cost synergies of between $1.8 billion and $2.0 billion, and, through December 31, 2022, we have achieved over 65% of this amount on an annualized run-rate basis.

The Company expects to achieve the vast majority of the remaining estimated cost synergies by the end of 2024, with anticipated full year synergy realization beginning in 2025.

Estimated timing and amounts of synergy realization are subject to change as we progress in the integration.

See also Results of Operations – Total Expenses Excluding Interest, Non-GAAP Financial Measures, and Item 8 – Notes 3 and 16.

Assets of USAA-IMCO and Other Acquisitions

On May 26, 2020, the Company completed its acquisition of the assets of USAA-IMCO for $1.6 billion in cash.

Along with the asset purchase agreement, the companies entered into a long-term referral agreement that makes Schwab the exclusive provider of wealth management and investment brokerage services for USAA members.

The USAA-IMCO acquisition has added scale to the Company’s operations through the addition of 1.1 million brokerage and managed portfolio accounts with approximately $80 billion in client assets at the acquisition date.

The transaction also provides Schwab the opportunity to further expand our

THE CHARLES SCHWAB CORPORATION

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

client base by serving USAA’s members through the long-term referral agreement.

See Item 8 – Note 3 for more information on the USAA-IMCO acquisition.

In addition, during 2020 the Company completed its acquisition of technology and intellectual property of Motif, a financial technology company.

The Motif assets help us build on our existing capabilities and help accelerate our development of thematic and direct index investing for Schwab’s retail investors and RIA clients.

Also during 2020, the Company completed its acquisition of Wasmer Schroeder, which adds established strategies and new separately managed account offerings to our existing fixed income lineup.

CURRENT REGULATORY ENVIRONMENT AND OTHER DEVELOPMENTS

In December 2022, the SEC proposed a set of four related equity market structure rules that would make significant changes to how national market system (NMS) stock orders are priced, executed and reported.

The four proposed rules are described below.

• The “Order Competition Rule” would require that, before most individual investors’ orders could be executed internally by a trading center (like wholesaler market makers), those orders must first be exposed to a qualifying order-by-order auction in which both market makers and institutional investors can participate.

• “Regulation Best Execution” would establish an SEC-level best execution standard (in addition to the existing FINRA and MSRB best execution rules) for broker-dealers and require them to establish, maintain, and enforce written policies and procedures addressing how the broker-dealer will comply with the best execution standard and make routing or execution decisions for customer orders.

Regulation Best Execution would apply not only to equities, but to all securities.

• Amendments to Rule 605 of Regulation NMS requiring enhanced disclosures of order execution quality for large brokers that handle retail orders.

• A rule to (i) amend minimum pricing increments (or tick sizes) that would apply to both the quoting and trading of NMS stocks, (ii) reduce the exchange access fee caps, and (iii) require transparency of odd-lots.

The comment periods for the proposed rules end on March 31, 2023 and the impact to Schwab cannot be assessed until the final rules are released.

In November 2022, the SEC proposed a rule that would require substantial changes to the liquidity risk management programs for open-end mutual funds other than money market funds (funds) and require them to implement “swing pricing” and impose a “hard close” on the acceptance of purchase and redemption orders.

Swing pricing would require funds to adjust the fund’s current net asset value (NAV) per share by a “swing factor” if the fund has either (i) net redemptions (no threshold) or (ii) net purchases that exceed a specified threshold (2% of the fund’s net assets).

To implement the swing pricing requirements, the proposed rule also would require that a fund, its transfer agent, or a registered clearing agency receive purchase and redemption orders prior to the time the fund has established for determining the NAV, typically market close, in order to receive a given day’s NAV (a “hard close”).

Current practices permit fund orders received by a financial intermediary prior to the fund cut-off time to be transmitted to the fund after the fund cut-off time and for the order to receive that day’s NAV.

Under the proposed rule, orders received by the fund, its transfer agent or registered clearing agency after the fund cut-off time would receive the next day’s NAV.

The comment period for the proposed rule ended on February 14, 2023 and the impact to Schwab cannot be assessed until the final rule is released.

In May 2022, the federal banking agencies issued a joint notice of proposed rulemaking that would substantially revise how an insured depository institution’s CRA performance is evaluated.

The proposed rule includes revisions relating to the delineation of assessment areas, the overall evaluation framework and performance standards and metrics, the definition of community development activities and data collection and reporting.

The comment period for the proposed rule ended on August 5, 2022 and the impact to Schwab cannot be assessed until the final rule is released.

THE CHARLES SCHWAB CORPORATION

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

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

RESULTS OF OPERATIONS

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Total net revenues of $20.8 billion and $18.5 billion for the years ended December 31, 2022 and 2021, respectively, represented growth of 12% and 58% from the prior periods.

The increases in 2021 and 2020 were due primarily to our acquisition of TD Ameritrade, which contributed total net revenues of $7.6 billion in 2021 and $1.7 billion in 2020 from October 6, through December 31, 2020.

Year Ended December 31, 2022 2021 2020

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Interest revenue 44 % $ 12,227 59 % $ 8,506 46 % $ 6,531 56 %

Interest expense 14 % (476) (3) % (418) (4) % (1,064) (10) %

Interest expense N/M (1,545) (8) % (476) (3) % (418) (4) %

Net interest revenue 33 % 10,682 51 % 8,030 43 % 6,113 52 %

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Commissions (13) % 1,787 9 % 2,050 11 % 739 6 %

Order flow revenue N/M 2,053 11 % 621 6 % 135 1 %

Principal transactions (13) % 49 — 56 — 68 1 %

Order flow revenue (15) % 1,738 8 % 2,053 11 % 621 6 %

Principal transactions N/M 148 1 % 49 — 56 —

Trading revenue

(12) % 3,673 18 % 4,152 22 % 1,416 12 %

Bank deposit account fees N/M 1,315 7 % 355 3 % — —

Bank deposit account fees 7 % 1,409 7 % 1,315 7 % 355 3 %

Other 4 % 782 4 % 749 5 % 332 3 %

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and bank loans.

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

Fees earned and expenses incurred on securities lending and borrowing activities are conducted by our broker-dealer subsidiaries using assets held in client brokerage accounts.

Schwab’s interest-bearing liabilities include bank deposits, payables to brokerage clients, short-term borrowings (e.g., Federal Home Loan Bank (FHLB) advances, commercial paper, secured borrowings by our broker-dealer subsidiaries, repurchase agreements), and long-term debt.

Schwab’s interest-bearing liabilities are comprised of bank deposits, which include brokered certificates of deposit beginning in the fourth quarter of 2022;

payables to brokerage clients;

short-term borrowings (e.g., FHLB advances, commercial paper, secured borrowings by our broker-dealer subsidiaries, or repurchase agreements);

and long-term debt.

Schwab deploys the funds from these sources into the assets outlined above.

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Non-interest-bearing funding sources include stockholders’ equity, certain client cash balances, and other miscellaneous liabilities.

The Company’s investment strategy is designed to produce an increase in net interest revenue when interest rates rise while attempting to moderate the decrease in net interest revenue when interest rates fall.

In order to keep interest-rate sensitivity within established limits, management actively monitors and adjusts interest-rate sensitivity through changes in the balance sheet, primarily by adjusting the composition of our banking subsidiaries’ investment portfolios.

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

Schwab establishes the rates paid on client-

THE CHARLES SCHWAB CORPORATION

1 unchanged sentence

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

The Company’s investment strategy is structured to produce an increase in net interest revenue when interest rates rise while attempting to moderate the decrease in net interest revenue when interest rates fall.

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

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

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

See also Risk Management – Interest Rate Risk Simulations.

economic recovery continued in 2021, interest rates remained historically low.

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

Short-term rates were near zero until the Federal Reserve began its aggressive tightening cycle in March 2022 in response to rising inflation, ultimately increasing the federal funds target overnight rate seven times between March and December for a total increase of 425 basis points.

Long-term interest rates increased throughout 2022, though at a less rapid pace, leading to an inverted yield curve.

Schwab continued to see strength in net new client assets during 2022, which, along with transfers of BDA balances to the Company’s balance sheet (see Bank Deposit Account Fees), drove growth in Schwab’s average interest-earning assets in 2022 relative to 2021.

Partially offsetting this growth, we experienced significant seasonal tax outflows in the second quarter, and, due to the rapid increases to the federal funds overnight rate, changes in client cash allocations increased in the second half of 2022 which resulted in a total decrease in bank deposits and payables to brokerage clients of 18% since year-end 2021.

During 2022, the Company increased its cash holdings and reduced the duration of incremental investment securities purchases, which has provided flexibility to support such changes in client cash allocations associated with higher short-term interest rates.

During 2021, interest rates remained historically low.

Short-term rates remained near zero throughout 2021;

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Elevated levels of prepayments on mortgage-backed securities persisted throughout the continued low interest rate environment in 2021 and resulted in accelerated reinvestment of the AFS portfolio;

purchases of AFS securities totaled $171.7 billion.

purchases of AFS securities totaled $171.7 billion in 2021.

Schwab saw consistent strength in new client brokerage accounts and net new client assets throughout 2021, driving growth in Schwab’s interest-earning assets.

At the same time, client engagement in the equity markets increased and clients were net buyers of equity securities and other investment products, resulting in outflows of client cash and partially offsetting the growth in interest-earning assets.

Late in the first quarter of 2020, the Federal Reserve cut the federal funds target overnight rate from 1.75% to near zero;

on the longer end of the curve, the 10-year Treasury rate declined by over 120 basis points.

Lower interest rates across maturities persisted from the end of the first quarter through the end of 2020, while credit spreads also compressed.

Moreover, changes in the economic environment throughout 2020 resulting from the COVID-19 pandemic drove significantly higher levels of client cash sweep balances.

As these balances rapidly accumulated in the first quarter of 2020, the Company initially placed a substantial amount in excess reserves held at the Federal Reserve, and subsequently deployed a significant amount of this cash build-up throughout 2020.

AFS securities purchases in 2020 totaled $202.2 billion, and these purchases were made at rates below the average yield on the existing AFS portfolio due to the low interest rate environment.

THE CHARLES SCHWAB CORPORATION

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

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

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

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Interest revenue on investment securities is presented net of related premium amortization.

(2) On January 1, 2020, the Company transferred all of its investment securities designated as held to maturity (HTM) to the AFS category.

See Item 8 – Note 6.

(2) In January 2022 and November 2022, the Company transferred a portion of its investment securities designated as AFS to the HTM category, as described in Item 8 – Note 6.

(3) Interest revenue or expense was less than $500 thousand in the period or periods presented.

Net interest revenue increased $2.7 billion or 33%, in 2022 from 2021 primarily due to higher average yields on interest-earning assets as a result of higher market interest rates.

Net premium amortization of investment securities decreased to $1.4 billion from $2.3 billion in 2021.

These benefits were partially offset by higher rates paid on funding sources, higher average short-term borrowings and long-term debt outstanding, and lower balances of margin loans and lower securities lending revenue due to decreased market demand.

Average interest-earning assets for 2022 were higher by 8%, compared to 2021.

This increase was primarily due to higher average balances of bank deposits and payables to brokerage clients, which resulted from net new client asset inflows as well as transfers of BDA balances to our balance sheet during 2022.

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

Net interest margin increased to 1.78% in 2022, from 1.45% in 2021.

Higher market interest rates improved yields on interest-earning assets, which more than offset the higher rates paid across interest-bearing funding sources.

Net interest revenue increased $1.9 billion, or 31%, in 2021 from 2020, primarily due to the inclusion of TD Ameritrade as well as significant growth in overall interest-earning assets, including higher investment portfolio balances and margin lending, as well as growth in securities lending revenue and bank loans, partially offset by lower average yields.

Accelerated premium amortization stemming from elevated prepayments of mortgage-related debt securities in the AFS portfolio continued in 2021 and partially offset the growth in net interest revenue.

Net premium amortization of investment securities totaled $2.3 billion in

THE CHARLES SCHWAB CORPORATION

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

Net interest revenue increased $1.9 billion or 31%, in 2021 from 2020, primarily due to the inclusion of TD Ameritrade as well as significant growth in overall interest-earning assets, including higher investment portfolio balances and margin lending, as well as growth in securities lending revenue and bank loans, partially offset by lower average yields.

Accelerated premium amortization stemming from elevated prepayments of mortgage-related debt securities in the AFS portfolio continued in 2021 and partially offset the growth in net interest revenue.

Net premium amortization of investment securities totaled $2.3 billion in 2021 and $1.6 billion in 2020.

2021 and $1.6 billion in 2020.

TD Ameritrade contributed total net interest revenue of $1.9 billion during the year ended December 31, 2021 and $443 million in 2020 from October 6, through December 31, 2020.

Average interest-earning assets for 2021 were higher by 46%, compared to 2020.

This increase was largely due to higher bank deposits and payables to brokerage clients, which resulted from strong net new client asset inflows, continued heightened client cash allocations driven by the low interest rate environment, BDA balance migrations, and the inclusion of TD Ameritrade for all of 2021.

This increase was largely due to higher bank deposits and payables to brokerage clients, which resulted from strong net new client asset inflows, continued heightened client cash allocations driven by the low interest rate environment in 2021, BDA balance migrations, and the inclusion of TD Ameritrade for all of 2021.

Our net interest margin declined to 1.45% in 2021, from 1.62% in 2020.

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This more than offset the benefit of increased securities lending revenue and higher margin utilization in 2021, which comprised 39% of net interest revenue during 2021, growing from 19% of net interest revenue in 2020.

Net interest revenue decreased $403 million, or 6%, in 2020 from 2019, due primarily to lower average investment yields, partially offset by growth in interest-earning assets and our acquisition of TD Ameritrade.

Accelerated premium amortization on debt securities in 2020 also contributed to the reduction in net interest revenue, as the decline in long-term interest rates in 2020 resulted in higher prepayments of mortgage-related debt securities.

Average interest-earning assets for 2020 were higher by 40%, compared to 2019.

This increase in average interest-earning assets was primarily driven by higher client cash balances in bank deposits and payables to brokerage clients, due to higher client cash allocations and our acquisitions of TD Ameritrade and assets of USAA-IMCO.

TD Ameritrade contributed approximately $12.0 billion of average interest-earning assets and $9.6 billion of average interest-bearing liabilities to Schwab’s full-year 2020 averages.

Our net interest margin decreased to 1.62% in 2020, from 2.41% in 2019.

This decrease was driven primarily by lower yields received on interest-earning assets due largely to the Federal Reserve’s 2019 and 2020 interest rate reductions as well as higher premium amortization on mortgage-related debt securities.

Due to the low interest rate environment, purchases of investment securities in 2020 were made at rates below the average yield on the existing AFS portfolio, which negatively impacted our net interest margin.

Asset Management and Administration Fees

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Other asset management and administration fees include various asset-based fees such as trust fees, 401(k) recordkeeping fees, mutual fund clearing fees, and non-balance based service and transaction fees.

Asset management and administration fees attributable to TD Ameritrade are primarily earned on client assets invested in money market mutual funds and other mutual funds, as well as advice solutions.

Asset management and administration fees vary with changes in the balances of client assets due to market fluctuations and client activity.

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Schwab money market funds 179,791 442 0.25 % 155,821 131 0.08 % 200,119 478 0.24 %

Schwab equity and bond funds, ETFs, and

CTFs 423,999 380 0.09 % 301,598 300 0.10 % 267,213 298 0.11 %

Mutual Fund OneSource ® and other non-

transaction fee funds

Schwab equity and bond funds, ETFs, and CTFs 433,005 364 0.08 % 423,999 380 0.09 % 301,598 300 0.10 %

Mutual Fund OneSource ® and other

no-transaction-fee funds (1)

202,015 602 0.30 % 229,342 724 0.32 % 192,464 599 0.31 %

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561,416 244 0.04 % 614,787 259 0.04 % 451,350 208 0.05 %

Total asset management and administration

fees $ 4,274 $ 3,475 $ 3,211

(1) Beginning in the fourth quarter of 2019, Schwab ETF OneSource TM was discontinued as a result of the elimination of online trading commissions for U.S.

and Canadian-listed ETFs.

Total asset management and administration fees $ 4,216 $ 4,274 $ 3,475

(1) In 2022, includes transfers from other third-party mutual funds and ETFs to Mutual Fund OneSource ® and other NTF funds.

(2) Beginning in the fourth quarter of 2020, includes third-party money funds related to the acquisition of TD Ameritrade.

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

Asset management and administration fees declined by $58 million, or 1%, in 2022 from 2021, due to lower balances in Mutual Fund OneSource ® and other third-party mutual funds, as well as advice solutions, relative to 2021.

Balances declined primarily due to equity market weakness during 2022, which negatively impacted client asset valuations.

These decreases offset the benefit of lower money market fund fee waivers, which were eliminated during the second quarter of 2022 as a result of the Federal Reserve’s increases to the federal funds target overnight rate.

Asset management and administration fees increased by $799 million, or 23%, in 2021 from 2020, due to the acquisition of TD Ameritrade, as well as additional growth in advice solutions and proprietary and third-party mutual funds and ETFs, which were due in part to strength in net new client assets and equity markets in 2021.

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Asset management and administration fees attributable to TD Ameritrade were $598 million in 2021 and $131 million from October 6, through December 31, 2020.

The amount of fee waivers in coming quarters is dependent on a variety of factors, including the level of short-term interest rates and client preferences across our money market fund line-up.

Asset management and administration fees increased by $264 million, or 8%, in 2020 from 2019, primarily due to higher balances in advice solutions, including managed account assets from USAA and TD Ameritrade, overall gains in equity markets, as well as higher purchased money market funds and other third-party mutual funds and ETFs, in 2020 relative to 2019.

These increases were partially offset by the effect of money market fund fee waivers due to declining portfolio yields.

The following table presents a roll forward of client assets for the Schwab money market funds, Schwab equity and bond funds, ETFs, and CTFs, and Mutual Fund OneSource ® and other non-transaction fee (NTF) funds.

The following table presents a roll forward of client assets for the Schwab money market funds, Schwab equity and bond funds, ETFs, and CTFs, and Mutual Fund OneSource ® and other NTF funds.

The following funds generated 33%, 29%, and 40% of the asset management and administration fees earned during 2022, 2021, and 2020, respectively:

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Net market gains (losses) and other (1)

1,934 41 1,157 (77,078) 64,884 38,214 44,649 26,843 42,035

Balance at end of period $ 278,926 $ 146,509 $ 176,089 $ 412,942 $ 454,864 $ 341,689 $ 235,738 $ 234,940 $ 223,857

(1) Includes $77.7 billion of transfers from other third-party mutual funds and ETFs to Mutual Fund OneSource ® and Other NTF Funds in 2022.

THE CHARLES SCHWAB CORPORATION

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Commission revenue is affected by volume and mix of trades executed.

Order flow revenue is comprised of rebate payments received from trade execution venues to which our broker-dealer subsidiaries send equity and option orders.

Order flow revenue is comprised of payments received from trade execution venues to which our broker-dealer subsidiaries send equity and option orders.

Order flow revenue is affected by volume and mix of client trades, as well as pricing received from trade execution venues.

Principal transaction revenue is recognized primarily as a result of accommodating clients’ fixed income trading activity, and includes adjustments to the fair value of securities positions held to facilitate such client trading activity.

The following table presents trading revenue and related information:

Principal transaction revenue also includes unrealized gains and losses on cash and investments segregated for regulatory purposes.

The following tables present trading revenue, trade details, and related information:

Year Ended December 31, Growth Rate

2021-2022 2022 2021 2020

Trading Revenue 193 % $ 4,152 $ 1,416 $ 752

Commissions (13) % $ 1,787 $ 2,050 $ 739

Order flow revenue

Options (11) % 1,170 1,320 360

Equities (23) % 568 733 261

Total order flow revenue (15) % 1,738 2,053 621

Principal transactions N/M 148 49 56

Total trading revenue (12) % $ 3,673 $ 4,152 $ 1,416

N/M Not meaningful.

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

Year Ended December 31, Growth Rate

2021-2022 2022 2021 2020

Clients’ daily average trades (DATs) (in thousands) (9) % 5,925 6,507 2,603

Product as a percentage of DATs

Equities 50 % 61 % 57 %

Derivatives 23 % 21 % 16 %

ETFs 21 % 13 % 17 %

Mutual funds 5 % 4 % 9 %

Fixed income 1 % 1 % 1 %

Number of trading days — 250.5 251.5 252.0

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(3) % $ 2.47 $ 2.54 $ 2.16

Effective October 7, 2019, CS&Co eliminated online trade commissions for U.S.

and Canadian-listed stocks and ETFs, as well as the base charge on options.

TD Ameritrade, Inc.

also does not charge for these types of trades and does not have a base charge on options.

(1) Revenue per trade is calculated as trading revenue divided by DATs multiplied by the number of trading days.

Trading revenue decreased $479 million, or 12%, in 2022 compared to 2021, primarily due to lower client trading activity in 2022 relative to 2021, driven by the extraordinary trading volume experienced during the first quarter of 2021, as well as changes in the mix of client trading activity toward more ETFs and fewer single stocks, and toward more index options and futures and fewer single stock options.

These factors drove lower commissions and order flow revenue in 2022 relative to 2021.

Partially offsetting these decreases, principal transactions revenue increased as a result of higher volume in clients’ fixed income trading and higher market interest rates.

Trading revenue increased $2.7 billion, or 193%, in 2021 compared to 2020, primarily due to the acquisition of TD Ameritrade and heightened client engagement, which drove significantly higher DATs throughout 2021.

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Overall, TD Ameritrade contributed $3.3 billion of trading revenue during the year ended December 31, 2021, compared with $667 million of trading revenue from October 6, 2020 through December 31, 2020.

Trading revenue increased by $664 million, or 88%, in 2020 compared to 2019, primarily due to the acquisition of TD Ameritrade.

In addition, the Company saw a significant increase in DATs and higher order flow revenue in 2020, which were partially offset by the Company’s October 2019 pricing actions.

Order flow revenue increased by $486 million in 2020 compared to 2019.

This increase in order flow revenue in 2020 was due to the acquisition of TD Ameritrade and a higher volume of trades throughout 2020 relative to 2019.

Bank Deposit Account Fees

In connection with our acquisition of TD Ameritrade, the Company began earning bank deposit account fee revenue beginning in the fourth quarter of 2020 pursuant to the IDA agreement and arrangements with other third-party banks.

Bank deposit account fees are primarily affected by average BDA balances and the floating- and fixed-rate reference yields.

The Company earns bank deposit account fee revenue pursuant to the IDA agreement with the TD Depository Institutions and arrangements with other third-party banks.

Bank deposit account fees are primarily affected by average BDA balances and the fixed- and floating-rate reference yields.

Fees earned under the IDA agreement are affected by changes in interest rates and the composition of balances designated as fixed- and floating-rate.

Bank deposit account fees totaled $1.3 billion for the year ended December 31, 2021 and $355 million from October 6, 2020 through December 31, 2020.

During the year ended December 31, 2021 and the period of October 6, 2020 through December 31, 2020, the total average BDA balance was $158.4 billion and $161.3 billion, respectively, of which approximately 80% was designated as fixed-rate obligation amounts and approximately 20% as floating-rate obligation amounts for both periods.

During 2021, the Company transferred $10.6 billion of BDA balances to its balance sheet from the TD Depository Institutions and other third-party banks.

THE CHARLES SCHWAB CORPORATION

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

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

The following table presents bank deposit account fee revenue, average BDA balances, average net yield, and average balances earning fixed- and floating-rate yields:

December 31, Percent Change

Bank deposit account fees $ 1,409 $ 1,315 7 %

Average BDA balances $ 147,273 $ 158,434 (7) %

Average net yield 0.96 % 0.83 %

Percentage of average BDA balances designated as:

Fixed-rate balances 79 % 79 %

Floating-rate balances 21 % 21 %

In connection with our acquisition of TD Ameritrade, the Company began earning bank deposit account fee revenue beginning in the fourth quarter of 2020.

Bank deposit account fees totaled $355 million from October 6, 2020 through December 31, 2020.

During the same period, the total average BDA balance was $161.3 billion, of which 79% was designated as fixed-rate obligation amounts and 21% as floating-rate obligation amounts.

Bank deposit account fees increased $94 million, or 7%, in 2022 compared to 2021.

This was primarily due to higher market interest rates, which helped to increase the average net yield in 2022.

The Company transferred net amounts of $21.0 billion and $10.6 billion of BDA balances to its balance sheet from the TD Depository Institutions and other third-party banks during 2022 and 2021, respectively.

The transfer of these balances to our balance sheet, as well as client cash allocation decisions in response to higher short-term market interest rates in 2022, led to the decrease in average BDA balances in 2022 compared to 2021.

The percentages of BDA balances designated as fixed-rate and floating-rate obligations as of December 31, 2022 were 87% and 13%, respectively.

Subsequent to December 31, 2022, the Company ended its arrangements with the other third-party banks to simplify bank sweep operations ahead of the first TD Ameritrade client transition group in February 2023.

As a result of ending these arrangements, the Company incurred breakage fees of $97 million in January 2023, recognized as a reduction to bank deposit account fee revenue.

The BDA balances previously held at these other third-party banks were moved to the TD Depository Institutions.

In addition, the FDIC implemented a 2-basis-point increase to the initial base deposit insurance assessment rate, which became effective for the first quarterly assessment period in 2023.

This increase in the FDIC’s deposit insurance assessment will result in a decrease to bank deposit account fees revenue in 2023, which will be dependent on BDA balance levels.

See Item 1 – Regulation for additional information.

Transfers of BDA balances to Schwab’s balance sheet result in lower balances upon which bank deposit account fee revenue is earned but provide a source of funding to invest in interest-earning assets to increase net interest revenue.

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Other Revenue

Other revenue includes exchange processing fees, certain service fees, software fees, and non-recurring gains.

Other revenue includes exchange processing fees, certain service fees, other gains and losses from the sale of assets, and the provision for credit losses on bank loans.

Other revenue increased $33 million, or 4%, in 2022 compared to 2021 primarily due to higher exchange processing fees, partially offset by a higher provision for credit losses on bank loans, certain lower service fees due to lower trading volume, and net losses on sales of AFS securities in 2022.

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

In addition, other revenue in 2022 included $46 million in gains on the sale of Schwab Compliance Technologies, Inc.

and certain investments.

Other revenue increased $417 million, or 126%, in 2021 compared to 2020 primarily due to the full-year inclusion of TD Ameritrade’s results in 2021.

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

Other revenue increased $90 million, or 37%, in 2020 compared to 2019 primarily due to higher exchange processing fees resulting from higher trade volumes and the acquisition of TD Ameritrade.

Subsequent to year-end 2022, the SEC announced it would decrease its fee rates effective February 27, 2023 by approximately 65% from the rate in effect since May 2022.

This change will result in lower exchange processing fees per security transaction in other revenue and a corresponding decrease in other expense, resulting in no impact to net income.

Total Expenses Excluding Interest

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Depreciation and amortization 19 % 652 549 414

Amortization of acquired intangible assets N/M 615 190 27

Amortization of acquired intangible assets (3) % 596 615 190

Regulatory fees and assessments (5) % 262 275 163

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Average 7 % 34.7 32.5 23.9

N/M Not meaningful.

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

Total expenses excluding interest increased $3.4 billion, or 46%, in 2021 from 2020, and $1.5 billion, or 26%, in 2020 from 2019.

Total expenses excluding interest included amounts from TD Ameritrade of $3.1 billion in 2021 and $943 million in 2020 from October 6, through December 31, 2020.

Adjusted total expenses, which excludes acquisition and integration-related costs and amortization of acquired intangible assets, increased $3.0 billion, or 44%, in 2021 from 2020 and $939 million, or 16%, in 2020 from 2019.

Total expenses excluding interest increased $567 million, or 5%, in 2022 from 2021, and $3.4 billion, or 46%, in 2021 from 2020.

Adjusted total expenses, which excludes acquisition and integration-related costs and amortization of acquired intangible assets, increased $662 million, or 7%, in 2022 from 2021 and $3.0 billion, or 44%, in 2021 from 2020.

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

Total compensation and benefits increased in 2021 from 2020 due to the inclusion of TD Ameritrade and growth in employee headcount.

Total compensation and benefits increased in 2022 from 2021 due to growth in employee headcount to support our expanding client base, annual merit increases, as well as a 5% employee salary increase and other targeted compensation adjustments that went into effect in late 2021.

The 2021 increase reflected TDA’s full-year contribution of $1.2 billion of compensation and benefits expense compared with $453 million in 2020.

The increase in 2021 was also due to additional headcount to support our expanding client base and service levels amidst heightened client engagement, a higher bonus accrual, annual merit increases, as well as a 5% employee salary increase and other targeted compensation adjustments that went into effect in late 2021.

Total compensation and benefits expense increased from 2020 to 2019, primarily due to an overall increase in employee headcount related to our acquisitions of TDA and USAA-IMCO.

The increase in 2020 from 2019 also reflected the Company’s payment of $1,000 to all non-officer employees in March 2020 to help them cover costs incurred due to the COVID-19 pandemic.

Compensation and benefits included acquisition and integration-related costs of $283 million and $235 million in 2021 and 2020, respectively.

Professional services expense increased in 2021 from 2020, primarily due to the inclusion of TDA’s results of operations and overall growth in the business.

The increase in 2020 from 2019 was primarily due to acquisition and integration-related costs in 2020 of $158 million.

Occupancy and equipment expense increased in 2021 from 2020, primarily due the inclusion of TDA’s results of operations, costs related to the integration of TD Ameritrade, and overall growth in the business.

The increase in 2020 from 2019 was

Compensation and benefits included acquisition and integration-related costs of $220 million, $283 million, and $235 million in 2022, 2021, and 2020, respectively.

In support of upcoming TDA client account transitions, we anticipate hiring additional headcount in 2023 to temporarily expand our client service capacity, which will result in higher compensation and benefits expense in 2023.

Professional services expense increased in 2022 from 2021, primarily due to increased utilization of technology-related and other professional services to support overall growth of the business and enhancement to technological infrastructure to support our expanding client base, as well as the integration of TD Ameritrade.

The increase in 2021 from 2020 was primarily due to the inclusion of TDA’s results of operations and overall growth in the business.

Professional services included acquisition and integration-related costs of $140 million, $132 million, and $158 million in 2022, 2021, and 2020, respectively.

In support of

THE CHARLES SCHWAB CORPORATION

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

primarily due to the inclusion of TDA’s results of operations from October 6, 2020 forward, as well as an increase in technology equipment costs associated with higher client trade volumes and overall growth in the business.

Advertising and market development expense increased in 2021 from 2020, primarily due the inclusion of TDA’s results of operations.

Communications expense increased in 2021 from 2020 primarily due to the inclusion of TDA’s results of operations, as well as higher communications expense due to higher customer trade volumes and overall growth of the business.

The increase in 2020 from 2019 was primarily due to the inclusion of TDA’s results of operations from October 6, 2020 forward and higher news and quotation services expenses due to higher trade volumes.

Depreciation and amortization expenses grew in 2021 from 2020, primarily from growth in fixed assets from the TDA acquisition.

As a result of capital expenditures to support growth in the business and the integration of TD Ameritrade, 2021 also reflected higher amortization of purchased and internally developed software and higher depreciation of hardware, as well as higher depreciation of buildings.

The growth in 2020 from 2019 was primarily due to higher amortization of purchased and internally developed software, higher depreciation and amortization of equipment, office facilities, and property recognized in the TDA acquisition, as well as higher depreciation of buildings and equipment related to the expansion of our U.S.

campuses in 2019 and 2020.

As a result of significant capital expenditures in 2021 and anticipated for 2022 as described below, the Company expects to recognize higher depreciation and amortization expense in 2022.

The periods over which depreciation and amortization are recognized on these capitalized costs are based on the expected useful lives of the types of assets capitalized and when the assets are placed into service.

Amortization of acquired intangible assets increased in 2021 from 2020 and in 2020 from 2019 as a result of the acquisitions completed during 2020.

Regulatory fees and assessments increased in 2021 from 2020, primarily as result of the inclusion of TDA’s results of operations and overall growth in the business, including higher FDIC assessments due to asset growth.

The increase in 2020 from 2019 was primarily due to the inclusion of TDA’s results of operations from October 6, 2020 forward, and higher FDIC insurance assessments and other regulatory assessments due to growth in assets and overall growth of the business in 2020.

Other expenses increased in 2021 from 2020, primarily due to the inclusion of TDA’s results of operations and a charge of approximately $200 million for a regulatory matter in 2021 (see Item 8 – Note 15), partially offset by certain lower clearing charges and exchange fees.

The increase in 2020 from 2019 was primarily from the inclusion of TDA’s results of operations from October 6, 2020 forward, and increases in processing fees and related expenses due to higher client trade volumes and market volatility.

These increases were partially offset by lower travel and entertainment expense in 2020.

Other expenses in 2020 included acquisition and integration-related costs of $30 million.

upcoming TDA client account transitions, we anticipate additional integration-related professional services costs in 2023, which will result in higher professional services expense in 2023.

Occupancy and equipment expense increased in 2022 from 2021, primarily due to an increase in software maintenance and other agreements as well as other technology equipment costs to support growth of the business and the integration of TD Ameritrade.

The increase in 2021 from 2020 was primarily due to the inclusion of TDA’s results of operations, costs related to the integration of TD Ameritrade, and overall growth in the business.

Occupancy and equipment included acquisition and integration-related costs of $21 million and $39 million in 2022 and 2021, respectively.

Advertising and market development expense decreased in 2022 from 2021, primarily as a result of decreases in spending for marketing communications for TD Ameritrade.

The increase in 2021 from 2020 was primarily due the inclusion of TDA’s results of operations.

Communications expense was flat in 2022 compared to 2021.

The increase in 2021 from 2020 was primarily due to the inclusion of TDA’s results of operations, as well as higher communications expense due to higher customer trade volumes and overall growth of the business.

Depreciation and amortization expense increased in 2022 from 2021, primarily as a result of higher amortization of purchased and internally developed software and higher depreciation of hardware, driven by capital expenditures in 2021 and 2022 to support the TDA integration and enhance our technological infrastructure to support growth of the business.

The growth in depreciation and amortization in 2021 from 2020 was primarily due to growth in fixed assets from the TDA acquisition, and also reflected higher amortization of purchased and internally developed software and higher depreciation of hardware, as well as higher depreciation of buildings.

Capital expenditures in 2022 and anticipated for 2023 as described below are expected to result in higher depreciation and amortization expense in 2023.

Amortization of acquired intangible assets decreased slightly in 2022 from 2021, as certain assets from the TDA acquisition were fully amortized by the beginning of the fourth quarter of 2022.

The increase in 2021 from 2020 was a result of our 2020 acquisitions.

Regulatory fees and assessments decreased in 2022 from 2021, primarily as a result of lower client trading activity, partially offset by higher FDIC assessments and other regulatory assessments due to year-over-year average asset growth and overall growth of the business.

The increase in 2021 from 2020 was primarily due to the inclusion of TDA’s results of operations and overall growth in the business, including higher FDIC assessments due to asset growth.

The FDIC implemented a 2-basis-point increase to the initial base deposit insurance assessment rate, which became effective for the first quarterly assessment period in 2023.

Dependent on average asset levels, this increase in the FDIC’s deposit insurance assessment may result in an increase in regulatory fees and assessments in 2023.

See Item 1 – Regulation for additional information.

Other expense decreased in 2022 from 2021, primarily due to the recognition of a charge of approximately $200 million for a now-settled regulatory matter in 2021 (see Item 8 – Note 15), partially offset by higher exchange processing fees as a result of fee rate increases beginning in the second quarter of 2022 and also higher clearing charges.

The increase in 2021 from 2020 was primarily due to inclusion of TDA’s results of operations and the charge of the regulatory matter, partially offset by lower clearing charges and exchange fees.

Subsequent to year-end 2022, the SEC announced it would decrease its fee rates effective February 27, 2023 by approximately 65% from the rate in effect since May 2022.

This change will result in lower exchange processing fees per security transaction in other expense and a corresponding decrease in other revenue, resulting in no impact to net income.

Capital expenditures primarily include capitalized software costs, information technology and telecommunications equipment, and buildings.

Total capital expenditures were $1.0 billion, $741 million, and $753 million in 2021, 2020, and 2019, respectively.

The increase in capital expenditures in 2021 from 2020 was primarily due to higher information technology and telecommunications equipment and higher capitalized software costs, partially offset by lower building expansion in 2021.

The increases in spending in 2021 reflect investments made to support our TDA integration efforts and enhance our technological infrastructure to support greater capacity for our expanding client base.

Capital expenditures decreased in 2020 compared to 2019 primarily due to lower building expansion in 2020, largely offset by higher capitalized software costs.

Total capital expenditures were $952 million, $1,041 million, and $741 million in 2022, 2021, and 2020, respectively.

Capital expenditures decreased 9% in 2022 compared to 2021, as higher capitalized software costs were offset by lower building expansion and capitalized information technology equipment.

Extensive work continued in 2022 on the integration of TDA and enhancement of our technological infrastructure to support greater capacity for our expanding client base.

Capital expenditures increased in 2021 compared to 2020 primarily due to higher information technology and telecommunications equipment and higher capitalized software costs reflecting investments made to support our TDA integration efforts and an expanding client base, partially offset by lower building expansion.

Capitalized software costs totaled $614 million, $559 million, and $453 million in 2022, 2021, and 2020, respectively.

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Investments in buildings were $22 million, $102 million, and $173 million in 2022, 2021, and 2020, respectively.

Capital expenditures were 6% of total net revenues in 2021, within our estimated range for the year.

In 2022, we will continue to invest to support the TDA integration and greater capacity for our expanding client base.

We anticipate capital expenditures in 2022 will be approximately 4-5% of total net revenues.

Our longer term expectation for capital expenditures remains in the range of 3-5% of total net revenues.

THE CHARLES SCHWAB CORPORATION

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

Capital expenditures were 5% of total net revenues in 2022, within our estimated range for the year.

In 2023, we will continue to invest to support the TDA integration and greater capacity for our expanding client base, and we anticipate capital expenditures in 2023 will be approximately 3-4% of total net revenues.

Our longer term expectation for capital expenditures remains in the range of 3-5% of total net revenues.

Taxes on Income

Schwab’s effective income tax rate on income before taxes was 23.5% in 2022, 24.1% in 2021, and 23.3% in 2020.

The increase in the effective tax rate in 2021 from 2020 was primarily related to non-recurring federal tax benefits recognized in 2020, including settlement of the IRS examination for tax years 2011-2014, the tax impact of a non-deductible regulatory matter charge in 2021 (see Item 8 – Note 15), and additional income tax expense from the filing of 2020 tax returns during 2021.

The decrease in the effective tax rate in 2022 from 2021 was primarily related to the reversal of tax reserves in 2022 due to the resolution of certain state tax matters and tax benefits recognized on the portion of the 2021 regulatory matter charge (see Item 8 – Note 15) that was determined upon final settlement to be deductible.

Partially offsetting the decreases in the effective tax rate from these items was a decrease in equity compensation tax deduction benefits, higher state income tax rates, and an increase in non-deductible compensation in 2022.

The increase in the effective tax rate in 2021 from 2020 was primarily related to non-recurring federal tax benefits recognized in 2020, including settlement of the IRS examination for tax years 2011-2014, the tax impact of the 2021 regulatory matter charge, and additional income tax expense from the filing of 2020 tax returns during 2021.

Partially offsetting the increases in the effective tax rate from these items was an increase in equity compensation tax deduction benefits during 2021.

The decrease in the effective tax rate in 2020 from 2019 was primarily due to federal and state tax benefits recognized during 2020, including settlement of the IRS examination of tax years 2011-2014, the expiration of the statute of limitations on certain federal and state uncertain tax positions, and tax benefits realized from the filing of state tax returns, as well as an increase in Low-Income Housing Tax Credit (LIHTC) benefits.

Offsetting the decrease in the effective tax rate from these items was an increase in nondeductible acquisition costs and FDIC insurance premium disallowance, as well as a decrease in equity compensation tax deduction benefits.

Segment Information

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revenues and expenses from TD Ameritrade and our other 2020 acquisitions are attributed to both Investor Services and Advisor Services based on which segment services the client.

See Item 8 – Note 3 for more information regarding acquisitions.

See Item 8 – Note 3 for more information regarding business acquisitions.

THE CHARLES SCHWAB CORPORATION

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

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

Financial information for our segments is presented in the following table:

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administration fees (3)% 3,049 3,130 2,544 2% 1,167 1,144 931 (1)% 4,216 4,274 3,475

Trading revenue N/M 3,753 1,156 503 53% 399 260 249 193% 4,152 1,416 752

Trading revenue (15)% 3,181 3,753 1,156 23% 492 399 260 (12)% 3,673 4,152 1,416

Bank deposit account

fees N/M 964 255 — N/M 351 100 — N/M 1,315 355 —

fees (5)% 916 964 255 40% 493 351 100 7% 1,409 1,315 355

Other 8% 605 562 262 (5)% 177 187 70 4% 782 749 332

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(9)% $ 182.8 $ 200.9 $1,106.4 (29)% $ 224.1 $ 315.3 $ 846.1 (21)% $ 406.9 $ 516.2 $ 1,952.5

(1) In 2021, Investor Services includes outflows of $42.0 billion from mutual fund clearing services clients.

(1) In 2022 and 2021, Investor Services includes outflows of $20.8 billion and $42.0 billion, respectively, from mutual fund clearing services clients.

In 2020, Investor Services includes inflows of $10.9 billion from mutual fund clearing services clients.

(2) In 2020, Investor Services includes inflows of $890.7 billion related to the acquisition of TD Ameritrade and $79.9 billion related to the acquisition of assets of USAA-IMCO.

Additionally, 2020 and 2019 include inflows of $10.9 billion and $11.1 billion, respectively, from certain mutual fund clearing services clients.

(3) In 2020, Advisor Services includes inflows of $680.6 billion related to the acquisition of TD Ameritrade and $8.5 billion related to the acquisition of Wasmer Schroeder.

N/M Not meaningful.

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

THE CHARLES SCHWAB CORPORATION

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

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

Segment Net Revenues

Investor Services and Advisor Services total net revenues increased by 8% and 28%, respectively, in 2022 compared to 2021.

Investor Services growth was primarily driven by increases in net interest revenue as described above, partially offset by decreases in trading revenue due to lower client trading activity and changes in the mix of trading activity, resulting in lower commissions and order flow revenue, and a decrease in bank deposit account fees.

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

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

Other revenues increased for Investor Services in 2022 from 2021 due to higher exchange processing fees, partially offset by a higher provision for credit losses on bank loans, certain lower service fees, and lower net gains on sales of AFS securities.

Investor Services and Advisor Services total net revenues increased by 68% and 32%, respectively, in 2021 compared to 2020.

Both segments experienced growth in all revenue line items, primarily due to the full-year inclusion of TD Ameritrade’s results in 2021.

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Bank deposit account fee revenue was earned at both segments for the full year in 2021 compared to only the fourth quarter of 2020, following the October 6, 2020 TD Ameritrade acquisition.

Investor Services total net revenues increased by 13% in 2020 from 2019, while Advisor Services total net revenues remained relatively consistent year-over-year.

Investor Services’ growth was primarily due to an increase in trading revenue, higher asset management and administration fees, and the initial recognition of bank deposit account fees in the fourth quarter of 2020, partially offset by lower net interest revenue.

For Advisor Services, bank deposit account fees largely offset a decrease in net interest revenue, while trading revenue and asset management and administration fees were consistent with 2019.

Trading revenue increased significantly in the Investor Services segment primarily due to the TD Ameritrade acquisition and higher trade volumes in 2020.

Asset management and administration fees increased in 2020 for Investor Services primarily due to higher balances in advice solutions, including managed account assets from USAA and TD Ameritrade, as well as higher purchased money market funds and other third-party mutual funds and ETFs, partially offset by the effect of money fund fee waivers.

Net interest revenue decreased for both segments primarily due to lower average investment yields, partially offset by growth in interest-earning assets.

Segment Expenses Excluding Interest

Investor Services and Advisor Services total expenses excluding interest increased by 3% and 14%, respectively, in 2022 compared to 2021.

Both segments saw higher compensation and benefits expenses due to increases in headcount to support our expanding client base, annual merit increases, as well as a 5% employee salary increase and other targeted compensation adjustments that went into effect in late 2021.

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

In addition, depreciation and amortization increased for both segments primarily

THE CHARLES SCHWAB CORPORATION

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

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

due to higher amortization of purchased and internally developed software and higher depreciation of hardware, driven by capital expenditures in 2021 and 2022 to enhance our technological infrastructure to support growth of the business.

For Investor Services, these increases were partially offset by lower other expenses due to a charge of approximately $200 million in 2021 for a now-settled regulatory matter (see Item 8 – Note 15), partially offset by higher exchange fees and clearing charges, and lower advertising and market development expense due to reduced spending for marketing communications for TD Ameritrade.

Investor Services and Advisor Services total expenses excluding interest increased by 50% and 35%, respectively, in 2021 compared to 2020, primarily due to the inclusion of a full year of TD Ameritrade’s results of operations.

In addition, both segments saw higher compensation and benefits expenses due to additional headcount increases to support our expanding client base and service levels amidst heightened client engagement, higher bonus accrual, as well as annual merit increases and a 5% employee salary increase that went into effect late in the third quarter.

For Investor Services, total expenses excluding interest also increased due to a charge of approximately $200 million in 2021 for a regulatory matter (see Item 8 – Note 15).

Investor Services and Advisor Services total expenses excluding interest increased by 29% and 17%, respectively, in 2020 compared to 2019, primarily due to the inclusion of TD Ameritrade’s expenses from October 6, 2020 forward and acquisition and integration-related costs.

Compensation and benefits increased in both segments primarily due to the acquisition of TDA and overall headcount growth to support our expanding client base, with Investor Services increasing more significantly due to greater headcount growth from the TDA acquisition and the hiring of approximately 400 former USAA employees in connection with the USAA-IMCO acquisition.

Both segments also saw increases in professional services, depreciation and amortization, amortization of acquired intangible assets, and other expenses, primarily due to the inclusion of TDA’s expenses from October 6, 2020 forward as well as acquisition and integration-related costs, with Investor Services’ expenses increasing more significantly due to overall size of the segment’s client base and greater client base growth from TDA.

RISK MANAGEMENT

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Despite our efforts to identify areas of risk and implement risk management policies and procedures, there can be no assurance that Schwab will not suffer unexpected losses due to these risks.

Our risk management process is comprised of risk identification and assessment, risk measurement, risk monitoring and reporting, and risk mitigation controls;

Our risk management process is comprised of risk identification and assessment, risk response, risk measurement and monitoring, and risk reporting and escalation;

we use periodic risk and control self-assessments, control testing programs, and internal audit reviews to evaluate the effectiveness of these internal controls.

The activities and governance that comprise the risk management process are described below.

THE CHARLES SCHWAB CORPORATION

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

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

As part of our integration of TD Ameritrade, the Company has aligned TD Ameritrade’s risk management practices with Schwab’s risk appetite.

As part of our ongoing integration of TD Ameritrade, the Company has aligned TD Ameritrade’s risk management practices with Schwab’s risk appetite.

Our integration work included evaluating new or changed risks impacting the combined company, and taking action through various means.

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The Chief Risk Officer regularly reports activities of the Global Risk Committee to the Risk Committee of the Board of Directors.

The Board Risk Committee in turn assists the Board of Directors in fulfilling its oversight responsibilities with respect to our risk management program, including approving risk appetite statements and related key risk appetite metrics and reviewing reports relating to risk issues from functional areas of corporate risk management, legal, and internal audit.

The Board Risk Committee in turn assists the Board of Directors in fulfilling its oversight responsibilities with respect

THE CHARLES SCHWAB CORPORATION

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

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

to our risk management program, including approving risk appetite statements and related key risk appetite metrics and reviewing reports relating to risk issues from functional areas of corporate risk management, legal, and internal audit.

Functional risk sub-committees focusing on specific areas of risk report to the Global Risk Committee.

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• Operational Risk Oversight Committee – provides oversight of and approves operational risk management policies, risk tolerance levels, and operational risk governance processes, and includes sub-committees covering Information Security, Technology, Fraud, Third-Party Risk, Data, and Model Governance;

• Compliance Risk Committee – provides oversight of compliance risk management programs (inclusive of Anti-Money Laundering/Sanctions, Conduct, Fiduciary, and Privacy), policies, and risk tolerance levels providing an aggregate view of compliance risk exposure and employee conduct, including subcommittees covering Fiduciary and Conflicts of Interest Risk and International Compliance Risk;

• Financial Risk Oversight Committee – provides oversight of and approves credit, market, liquidity, and capital risk policies, limits, and exposures;

• Financial Risk Oversight Committee – provides oversight of and approves credit, market, liquidity, and capital risk policies, limits, and exposures and includes the Liquidity and Capital Subcommittee;

• New Products and Services Risk Oversight Committee – provides oversight of, and approves corporate policy and procedures relating to, the risk governance of new products and services.

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The Company’s finance, internal audit, legal, and corporate risk management departments assist management and the various risk committees in evaluating, testing, and monitoring risk management.

THE CHARLES SCHWAB CORPORATION

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

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

In addition, the Disclosure Committee is responsible for monitoring and evaluating the effectiveness of our disclosure controls and procedures and internal control over financial reporting as of the end of each fiscal quarter.

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Operational Risk

Operational risk arises due to potential inadequacies or failures related to people, internal processes, and systems, or from external events or relationships impacting the Company and/or any of its key business partners and third parties.

Operational risk arises due to potential inadequacies or failures related to internal processes, people, and systems, or from external events or relationships impacting the Company and/or any of its key business partners and vendors.

While operational risk is inherent in all business activities, we rely on a system of internal controls and risk management practices designed to keep operational risk and operational losses within the Company’s risk appetite.

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We use advanced monitoring systems to identify suspicious activity and deter unauthorized access by internal or external actors.

We also maintain policies and procedures, which apply to employees, contractors, and third parties, regarding the standard of care expected with all data, whether the data is internal company information, employee information, or non-public client information.

THE CHARLES SCHWAB CORPORATION

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

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

public client information.

This includes limiting the number of employees who have access to clients’ personal information and internal authentication measures enforced to protect against the unauthorized use of employee credentials.

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Model use includes, but is not limited to, calculating capital requirements for hypothetical stressful environments, estimating interest and credit risk for loans and other balance sheet assets, and providing guidance in the management of client portfolios.

We have established a policy that aligns with Federal Reserve guidance on Model Risk Management SR11-7 to describe the roles and responsibilities of all key stakeholders in model development, management, and use.

We have established a policy that aligns with regulatory guidance to describe the roles and responsibilities of all key stakeholders in model development, management, and use.

All models are registered in a centralized database and classified into different risk ratings depending on their potential financial, reputational, or regulatory impact to the Company.

The model risk rating determines the scope of model governance activities.

THE CHARLES SCHWAB CORPORATION

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

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

Incentive Compensation risk is the potential for adverse consequences resulting from compensation plans that do not balance the execution of our strategy with risk and financial rewards, potentially encouraging imprudent risk-taking by employees.

We have implemented risk management processes, including a policy, to identify, evaluate, assess, and manage risks associated with incentive compensation plans and the activities of certain employees, defined as Covered Employees, who have the authority to expose the Company to material amounts of risk.

Compliance Risk

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Conduct-related matters are escalated through appropriate channels by the Corporate Responsibility Officer.

THE CHARLES SCHWAB CORPORATION

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

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

Fiduciary risk is the potential for financial or reputational loss through breach of fiduciary duties to a client.

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Guidance and control are provided through the creation, approval, and ongoing review of applicable policies by business units and various risk committees.

Credit risk is the potential for loss due to a borrower, counterparty, or issuer failing to perform its contractual obligations.

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To manage the risks of such losses, we have established policies and procedures, which include setting and reviewing credit limits, monitoring of credit limits and quality of counterparties, and adjusting margin, PAL, option, and futures requirements for certain securities and instruments.

THE CHARLES SCHWAB CORPORATION

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

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

Liquidity and Investment Portfolios

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Additionally, for margin loans, PALs, options and futures positions, and securities lending agreements, collateral arrangements require that the fair value of such collateral sufficiently exceeds the credit exposure in order to maintain a fully secured position.

THE CHARLES SCHWAB CORPORATION

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

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

Other Counterparty Exposures

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To remain within these limits, we manage the maturity, repricing, and cash flow characteristics of the investment portfolios.

We may also utilize derivative instruments such as interest rate swaps to assist with managing interest rate risk.

Management monitors established guidelines to stay within the Company’s risk appetite.

Our measurement of interest rate risk involves assumptions that are inherently uncertain and, as a result, cannot precisely estimate the impact of changes in interest rates on net interest revenue, bank deposit account fees, or EVE.

Actual results may differ from simulated results due to balance growth or decline and the timing, magnitude, and frequency of interest rate changes,

THE CHARLES SCHWAB CORPORATION

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

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

as well as changes in market conditions and management strategies, including changes in asset and liability mix.

Actual results may differ from simulated results due to balance growth or decline and the timing, magnitude, and frequency of interest rate changes, as well as changes in market conditions and management strategies, including changes in asset and liability mix.

Financial instruments are also subject to the risk that valuations will be negatively affected by changes in demand and the underlying market for a financial instrument.

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Net interest revenue is affected by various factors, such as the distribution and composition of interest-earning assets and interest-bearing liabilities, the spread between yields earned on interest-earning assets and rates paid on interest-bearing liabilities, which may reprice at different times or by different amounts, and the spread between short- and long-term interest rates.

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

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

These assets are sensitive to changes in interest rates and changes in prepayment levels that tend to increase in a declining rate environment and decrease in a rising rate environment.

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

THE CHARLES SCHWAB CORPORATION

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

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

Higher short-term interest rates would positively impact net interest margin as yields on interest-earning assets are expected to rise faster than the cost of funding sources.

A decline in short-term interest rates could negatively impact the yield on the Company’s investment and loan portfolios to a greater degree than any offsetting reduction in interest expense from funding sources, compressing net interest margin.

The following table shows the simulated change to net interest revenue over the next 12 months beginning December 31, 2022 and 2021 of a gradual 100 basis point increase or decrease in market interest rates relative to prevailing market rates at the end of each reporting period:

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Decrease of 100 basis points (3.2)% (4.5)%

The Company’s simulated increase of 100 basis points in market interest rates had a slightly lower impact on net interest revenue at year-end 2021 compared with year-end 2020 due to an increase in the Company’s projected repricing of client deposit rates across higher market interest rate scenarios, which was partially offset as a result of holding a higher allocation of floating-rate assets on the balance sheet at December 31, 2021 relative to the prior year-end.

A simulated decrease of 100 basis points in market interest rates had a slightly larger impact year-over-year primarily as a result of holding a higher allocation of floating-rate assets.

Higher short-term interest rates would positively impact net interest revenue as yields on interest-earning assets are expected to rise faster than the cost of funding sources.

A decline in interest rates could negatively impact the yield on the Company’s investment and loan portfolio to a greater degree than any offsetting reduction in interest expense from funding sources, compressing net interest margin.

THE CHARLES SCHWAB CORPORATION

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

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

The Company’s simulated increase of 100 basis points in market interest rates had a lower impact on net interest revenue at year-end 2022 compared with year-end 2021 primarily due to an increased sensitivity to the Company’s higher projected client deposit rates, lower special reserve and margin loan balances at the Company’s broker-dealer subsidiaries, and reduced cash and adjustable-rate balances across the Company’s banking entities.

A simulated decrease of 100 basis points in market interest rates had a lower impact on net interest revenue at year-end 2022 compared to the prior year-end primarily due to higher starting client deposit rates which, relative to the December 31, 2021 simulation, provide greater responsiveness to lower simulated interest rates.

In addition to measuring the effect of a gradual 100 basis point parallel increase or decrease in current interest rates, we regularly simulate the effects of larger parallel- and non-parallel shifts in interest rates on net interest revenue.

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Phase-out of LIBOR

The Company continues to prepare for the phasing-out of LIBOR, undertaking many efforts coordinated by its firm-wide transition team.

The LIBOR transition team is overseen by executive leadership and has organized its efforts to address both client-impacting and non-client-impacting workstreams.

The Company continues to prepare for the phasing-out of LIBOR with efforts coordinated by its firm-wide transition team.

The LIBOR transition team is overseen by executive leadership and has organized its work to address both client-impacting and non-client-impacting workstreams.

From a client perspective, the Company has established pages on the client-facing websites for CS&Co and TD Ameritrade, Inc.

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As of December 31, 2022, substantially all of the Company’s remaining investment securities with exposure to LIBOR provide for appropriate fallback in the event LIBOR is no longer available.

Consistent with guidance from the Alternative Reference Rate Committee, a group of private-market participants jointly convened by the Federal Reserve Board and the Federal Reserve Bank of New York to help ensure a successful transition from LIBOR, the Company phased-out the use of LIBOR as a reference rate in new loans prior to year-end 2021, and the Company’s portfolio of legacy loans have fallback language if LIBOR is no longer available.

Consistent with guidance from the Alternative Reference Rate Committee, a group of private-market participants jointly

THE CHARLES SCHWAB CORPORATION

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

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

convened by the Federal Reserve Board and the Federal Reserve Bank of New York to help ensure a successful transition from LIBOR, beginning in 2022, the Company no longer uses LIBOR as a reference rate in new loans, and the Company’s portfolio of legacy loans have fallback language if LIBOR is no longer available.

Certain of the Company’s technology systems and financial models have historically utilized LIBOR, and we have now substantially transitioned our financial models and systems to alternative reference rates.

In addition, we have transitioned the Company’s IDA agreement and certain intercompany lending agreements that previously were tied to LIBOR to other appropriate reference rates.

On March 15, 2022, President Biden signed the Consolidated Appropriations Act of 2022 into law, which includes the Adjustable Interest Rate (LIBOR) Act, containing legislation related to the transition away from LIBOR.

This legislation is intended to establish a uniform process for replacing LIBOR in existing contracts and securities that continue after the cessation of LIBOR and do not contain clearly defined or practicable fallback provisions.

On December 16, 2022, the Federal Reserve Board adopted the final rule that implements the LIBOR Act.

The final rule provides default rules for certain contracts that use LIBOR, which would implement the LIBOR Act with replacement rates based on SOFR.

The Company believes the LIBOR Act and the Federal Reserve Board’s final regulation help provide clarity for the transition of our legacy LIBOR contracts, including investment securities and loans to alternative reference rates in an orderly manner.

Additional transition efforts to prepare for the phasing-out of LIBOR are ongoing.

The floating dividend rates for our Series A, E, and F preferred stock are based on LIBOR.

In addition, operational work remains to transition our legacy loan portfolio, in accordance with expected regulatory guidance, to alternate reference rates that are consistent with the fallback language included in the contracts.

In 2022, Schwab redeemed Series A and Series E preferred stock;

both of which referenced LIBOR for dividend payments.

In addition, operational work is underway to transition our legacy loan portfolio, in accordance with regulatory guidance, to alternate reference rates by the first rate reset after LIBOR’s cessation.

Liquidity Risk

Liquidity risk is the potential that Schwab will be unable to sell assets or meet cash flow obligations when they come due without incurring unacceptable losses.

THE CHARLES SCHWAB CORPORATION

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

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

Due to its role as a source of financial strength, CSC’s liquidity needs are primarily driven by the liquidity and capital needs of:

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We seek to maintain client confidence in the balance sheet and the safety of client assets by maintaining liquidity and diversity of funding sources to allow the Company to meet its obligations.

To this end, we have established limits and contingency funding scenarios to support liquidity levels during both business as usual and stressed conditions.

We employ a variety of methodologies to monitor and manage liquidity.

We conduct regular liquidity stress testing to develop a consolidated view of liquidity risk exposures and to ensure our ability to maintain sufficient liquidity during market-related or company-specific liquidity stress events.

Liquidity is also tested at certain subsidiaries and results are reported to the Financial Risk Oversight Committee.

To this end, we have established limits and contingency funding plans to support liquidity levels during both business as usual and stressed conditions.

We employ a variety of metrics to monitor and manage liquidity.

We conduct regular liquidity stress testing to develop a view of liquidity risk exposures and to ensure our ability to maintain sufficient liquidity during market-related or company-specific liquidity stress events.

Liquidity sources are also tested periodically and results are reported to the Financial Risk Oversight Committee.

A number of early warning indicators are monitored to help identify emerging liquidity stresses in the market or within the organization and are reviewed with management as appropriate.

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These funds are used to purchase investment securities and extend loans to clients.

Other sources of funds may include cash flows from operations, maturities and sales of investment securities, repayments on loans, securities lending of assets held in client brokerage accounts, repurchase agreements, and cash provided by external financing.

THE CHARLES SCHWAB CORPORATION

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

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

To meet daily funding needs, we maintain liquidity in the form of overnight cash deposits and short-term investments.

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The following table describes external debt facilities available at December 31, 2022:

Description Borrower Outstanding Available

Federal Home Loan Bank secured credit facilities Banking subsidiaries $ — $ 63,476

Federal Reserve discount window Banking subsidiaries — 11,957

Uncommitted, unsecured lines of credit with various external banks CSC, CS&Co — 1,522

Unsecured commercial paper (1)

CSC 3,006 1,994

Committed, unsecured credit facility with various external banks TDAC — 600

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

(1) In October 2021, the Company increased the amount of commercial paper available to issue from $1.5 billion to $5.0 billion.

Description Borrower Outstanding Available Maturity of Amounts Outstanding Weighted-Average Interest Rate on Amounts Outstanding

Federal Home Loan Bank (FHLB) secured credit facilities Banking subsidiaries $ 12,400 $ 68,562 June 2023 - November 2023 4.88%

Federal Reserve discount window Banking subsidiaries — 7,783 N/A —

Repurchase agreements Banking subsidiaries 4,402 — (1)

August 2023 - September 2023 4.99%

Uncommitted, unsecured lines of credit with various external banks CSC, CS&Co — 1,607 N/A —

Unsecured commercial paper CSC 250 4,750 March 2023 4.67%

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

(1) Secured borrowing capacity is made available based on the banking subsidiaries’ ability to provide collateral deemed acceptable by each respective counterparty.

See Item 8 – Note 17 for additional information.

(2) Secured borrowing capacity is made available based on TDAC’s ability to provide acceptable collateral to the lenders as determined by the credit agreements.

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These credit facilities are also available as backup financing in the event the outflow of client cash from the banking subsidiaries’ respective balance sheets is greater than maturities and paydowns on investment securities and bank loans.

THE CHARLES SCHWAB CORPORATION

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

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

CSC’s banking subsidiaries must each maintain positive tangible capital, as defined by the Federal Housing Finance Agency, in order to place new draws upon these credit facilities, and the Company manages capital with consideration of minimum tangible capital ratios at our banking subsidiaries.

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

Our banking subsidiaries also have access to short-term secured funding through the Federal Reserve discount window.

Amounts available under the Federal Reserve discount window are dependent on the fair value of certain investment securities that are pledged as collateral.

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

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

Our banking subsidiaries are also counterparties to the standing repo facility with the Federal Reserve Bank of New York.

CSC has a commercial paper program of which proceeds are used for general corporate purposes.

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

THE CHARLES SCHWAB CORPORATION

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

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

CS&Co maintains uncommitted, unsecured bank credit lines with a group of banks as a source of short-term liquidity, which can also be accessed by CSC.

TDAC maintains a senior unsecured committed revolving credit facility with an aggregate borrowing capacity of $600 million, which matures in April 2022.

TDAC also 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.

To support growth in margin loan balances at our broker-dealer subsidiaries while meeting our LCR requirements, the Company issues commercial paper or draws on secured lines of credit, in addition to capital markets issuances.

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.

The following table provides information about retail brokered certificates of deposit issued at CSB in the fourth quarter of 2022 and outstanding as of December 31, 2022:

Amount Outstanding Maturity Weighted-Average Interest Rate

Retail brokered certificates of deposit $ 6,047 September 2023 - December 2023 4.75%

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

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

In the fourth quarter of 2022, our banking subsidiaries began to raise temporary supplemental term funding via a variety of sources, including both fixed- and floating-rate FHLB advances, repurchase agreements, and the issuance of retail brokered certificates of deposit.

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

Subsequent to December 31, 2022, the Company’s banking entities had drawn an additional $13.0 billion of FHLB advances.

The current average interest rate on these advances was 5.12%, with the earliest maturity occurring in June 2023.

Our banking subsidiaries also borrowed an additional $3.4 billion under repurchase agreements with external financial institutions subsequent to December 31, 2022.

The current average interest rate on these repurchase borrowings was 4.91% with the earliest maturity occurring in March 2023.

The Company also issued $9.4 billion of retail brokered certificates of deposit subsequent to December 31, 2022 at a weighted average interest rate of 4.71%, with the earliest maturity occurring in July 2023.

Liquidity Coverage Ratio

Beginning October 1, 2021, Schwab became subject to the full (100%) LCR, which requires the Company to hold HQLA in an amount equal to at least 100% of the Company’s projected net cash outflows over a prospective 30-calendar-day period of acute liquidity stress, calculated each business day.

Schwab is subject to the full LCR rule, which requires the Company to hold HQLA in an amount equal to at least 100% of the Company’s projected net cash outflows over a prospective 30-calendar-day period of acute liquidity stress, calculated on each business day.

See Item 1 – Regulation for additional information.

The Company was in compliance with the full LCR rule at December 31, 2021, and the table below presents information about our average daily LCR:

The Company was in compliance with the LCR rule at December 31, 2022, and the table below presents information about our average daily LCR:

Average for the

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Net cash outflows $ 76,754

The Company had $4.9 billion of short-term borrowings outstanding as of December 31, 2021 and none at December 31, 2020.

Long-term debt is primarily comprised of Senior Notes and totaled $18.9 billion and $13.6 billion at December 31, 2021 and 2020, respectively.

To support growth in margin loan balances at our broker-dealer subsidiaries while meeting our LCR requirements, the Company may issue commercial paper or draw on secured lines of credit, in addition to capital markets issuances.

Long-Term Borrowings

The Company’s long-term debt is primarily comprised of Senior Notes and totaled $20.8 billion and $18.9 billion at December 31, 2022 and 2021, respectively.

The following table provides information about our Senior Notes outstanding as of December 31, 2022:

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

All debt issuances in 2021, 2020, and 2019 were senior unsecured obligations.

All long-term debt issuances in 2022, 2021, and 2020 were senior unsecured obligations.

Additional details of these debt issuances are as follows:

Issuance Date Issuance Amount Maturity Date Interest Rate Interest Payable

May 22, 2019 $ 600 5/22/2029 3.250% Semi-annually

March 24, 2020 $ 600 3/24/2025 4.200% Semi-annually

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December 11, 2020 $ 750 3/11/2031 1.650% Semi-annually

March 18, 2021 $ 1,250 3/18/2024 SOFR (1) + 0.500%

March 18, 2021 $ 1,250 3/18/2024 SOFR + 0.500% Quarterly

March 18, 2021 $ 1,500 3/18/2024 0.750% Semi-annually

March 18, 2021 $ 1,250 3/20/2028 2.000% Semi-annually

May 13, 2021 $ 500 5/13/2026 SOFR (1) + 0.520%

May 13, 2021 $ 500 5/13/2026 SOFR + 0.520% Quarterly

May 13, 2021 $ 1,000 5/13/2026 1.150% Semi-annually

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August 26, 2021 $ 850 12/1/2031 1.950% Semi-annually

(1) Secured Overnight Financing Rate

March 3, 2022 $ 500 3/3/2027 SOFR + 1.050% Quarterly

March 3, 2022 $ 1,500 3/3/2027 2.450% Semi-annually

March 3, 2022 $ 1,000 3/3/2032 2.900% Semi-annually

During the third quarter of 2021, we completed a debt exchange offer related to certain senior notes issued by TDA Holding for an equivalent amount of senior notes issued by CSC.

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Equity Issuances and Redemptions

CSC’s preferred stock issued and net proceeds for 2020 and 2021 shown below.

The Company did not issue any equity through external offerings during 2019.

CSC’s preferred stock issued and net proceeds for 2022, 2021, and 2020 are shown below:

Date Issued and Sold Net Proceeds

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Series J March 30, 2021 $ 584

Series K March 4, 2022 $ 740

On June 1, 2021, the Company redeemed all of the outstanding shares of its 6.00% Non-Cumulative Perpetual Preferred Stock, Series C, and the corresponding depositary shares.

The depositary shares were redeemed at a redemption price of $25 per depositary share for a total of $600 million.

The redemption was funded with the net proceeds from the Series J preferred stock offering.

On November 1, 2022, the Company redeemed all of the outstanding shares of its Fixed-to-Floating Rate Non-Cumulative Perpetual Preferred Stock, Series A at a redemption price of $1,000 per share for a total of $400 million.

On December 1, 2022, the Company redeemed all of the Fixed-to-Floating Rate Non-Cumulative Perpetual Preferred Stock, Series E, and the corresponding depositary shares.

The depositary shares were redeemed at a redemption price of $1,000 per depositary share for a total of $600 million.

For further discussion, see Item 8 – Note 13 for the Company’s outstanding debt and borrowing facilities and Item 8 – Note 19 for equity outstanding balances, issuances, and redemptions.

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and lease payments including legally-binding minimum lease payments for leases signed but not yet commenced.

For information on our contractual obligations for credit-related financial instruments, short-term borrowings and long-term debt, and leases, see Part II, Item 8 – Notes 15, 13, and 14, respectively.

As of December 31, 2021, the Company had total short-term purchase obligations of $484 million and total long-term purchase obligations of $532 million.

For information on our contractual

THE CHARLES SCHWAB CORPORATION

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

obligations for credit-related financial instruments, short-term borrowings and long-term debt, and leases, see Part II, Item 8 – Notes 15, 13, and 14, respectively.

As of December 31, 2022, the Company had total short-term purchase obligations of $562 million and total long-term purchase obligations of $510 million.

Schwab also enters into guarantees and other similar arrangements in the ordinary course of business.

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Pursuant to the IDA agreement, certain brokerage client deposits are required to be swept off-balance sheet to the TD Depository Institutions.

We also maintain agreements pursuant to which certain client brokerage cash deposits are swept to other third-party depository institutions.

See Item 8 – Notes 3 and 15 for additional information on the IDA agreement.

See Item 8 – Note 15 for additional information on the IDA agreement.

CAPITAL MANAGEMENT

Schwab seeks to manage capital to a level and composition sufficient to support execution of our business strategy, including anticipated balance sheet growth inclusive of migration of IDA balances (see further discussion below), providing financial support to our subsidiaries, and sustained access to the capital markets, while at the same time meeting our regulatory capital requirements and serving as a source of financial strength to our banking subsidiaries.

Schwab also seeks to return excess capital to stockholders.

We may return excess capital through such activities as dividends, repurchases of common shares, preferred stock redemptions, and repurchases of our preferred stock represented by depositary shares.

Schwab’s primary sources of capital are funds generated by the operations of subsidiaries and securities issuances by CSC in the capital markets.

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Subject to regulatory capital requirements and any required approvals, any excess capital held by subsidiaries is transferred to CSC in the form of dividends and returns of capital.

When subsidiaries have need of additional capital, funds are provided by CSC as equity investments and also as subordinated loans (in a form approved as regulatory capital by regulators) for CS&Co.

At the banking subsidiaries, dividends and returns of capital are managed with consideration of minimum tangible common equity levels and sufficient capital above regulatory capital requirements.

When subsidiaries have need of additional capital, funds are provided by CSC as equity investments and also as subordinated loans.

The details and method used for each cash infusion are based on an analysis of the particular entity’s needs and financing alternatives.

The amounts and structure of infusions must take into consideration maintenance of regulatory capital requirements, debt/equity ratios, and equity double leverage ratios.

The amounts and structure of infusions take into consideration maintenance of regulatory capital requirements, debt/equity ratios, and equity double leverage ratios.

Schwab conducts regular capital stress testing to assess the potential financial impacts of various adverse macroeconomic and company-specific events to which the Company could be subjected.

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CSC is subject to capital requirements set by the Federal Reserve and is required to serve as a source of strength for our banking subsidiaries and to provide financial assistance if our banking subsidiaries experience financial distress.

Schwab is required to maintain a Tier 1 Leverage Ratio for CSC of at least 4%, and we have a long-term operating objective of 6.75%-7.00%.

Schwab is required to maintain a Tier 1 Leverage Ratio for CSC of at least 4%, and we have a long-term operating objective.

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

Due to the relatively low risk of our balance sheet assets and risk-based capital ratios at CSC and CSB that are well in excess of regulatory requirements, the Tier 1 Leverage Ratio is the most restrictive capital constraint on CSC’s asset growth.

THE CHARLES SCHWAB CORPORATION

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

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

Our banking subsidiaries are subject to capital requirements set by their regulators that are substantially similar to those imposed on CSC by the Federal Reserve.

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Based on its regulatory capital ratios at December 31, 2022, CSB is considered well capitalized.

THE CHARLES SCHWAB CORPORATION

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

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

CSB is also subject to regulatory requirements that restrict and govern the terms of affiliate transactions.

In addition, CSB is required to provide notice to, and may be required to obtain approval from, the Federal Reserve and the Texas Department of Savings and Mortgage Lending (TDSML) to declare dividends to CSC.

Our banking subsidiaries are required to provide notice to, and may be required to obtain approval from, the Federal Reserve and the banking subsidiaries’ state regulators in order to declare and pay dividends to CSC.

In 2023, we expect to be required to obtain approval from the Federal Reserve for our banking subsidiaries to declare and pay dividends in excess of the amount of recent net income and retained earnings.

As broker-dealers, CS&Co, TDAC, and TD Ameritrade, Inc., are subject to regulatory requirements of the Uniform Net Capital Rule, which is intended to ensure the general financial soundness and liquidity of broker-dealers.

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AOCI adjustment (1)

(22,620) (19,680) (1,109) (1,004)

Common Equity Tier 1 Capital $ 30,590 $ 27,296 $ 27,967 $ 28,014

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Supplementary Leverage Ratio 7.1 % 7.3 % 6.2 % 7.0 %

As a result of significant inflows of client cash in 2020, our Tier 1 Leverage Ratio for consolidated CSC and CSB declined below our long-term operating objectives.

In 2021, the Company’s issuances of preferred stock and strength in earnings helped to largely maintain our Tier 1 Leverage Ratio, even as bank deposits and payables to brokerage clients grew by a total of $107.2 billion, or 23%, during the year.

We ended 2021 with a consolidated Tier 1 Leverage Ratio of 6.2%, down slightly from the prior year-end of 6.3%.

Earnings in 2021 as well as capital contributions from CSC drove an increase in CSB’s Tier 1 Leverage Ratio from 5.5% at year-end 2020 to 7.1% at year-end 2021.

Though our Tier 1 Leverage Ratio is below our long-term operating objective for consolidated CSC, this ratio is well above the regulatory minimum.

The pace of return to our long-term operating objective over time depends on a number of factors including the overall size of the Company’s balance sheet, earnings, and capital issuance and deployment.

IDA Agreement

Through December 31, 2021, Schwab had moved $10.1 billion of IDA balances to its balance sheet, which included uninsured balances and certain international account balances.

The Company’s overall capital management strategy includes supporting migration of IDA balances in future periods as available pursuant to the terms of the IDA agreement.

The Company’s ability to migrate these balances to its balance sheet is dependent upon multiple factors including having sufficient capital levels to sustain

(1) Changes in market interest rates can result in unrealized gains or losses on AFS securities, which are included in AOCI.

As a Category III banking organization, CSC has elected to exclude AOCI from regulatory capital.

The Company’s consolidated Tier 1 Leverage Ratio increased to 7.2% at December 31, 2022 from 6.2% at year-end 2021.

This increase resulted primarily from lower bank deposits and payables to brokerage clients, which decreased by a total of $105.3 billion, or 18%, in 2022 due to client cash allocation decisions resulting from the rising interest rate environment;

strength in earnings in 2022;

and our March 2022 issuance of Series K preferred stock.

Partially offsetting these factors were

THE CHARLES SCHWAB CORPORATION

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

these incremental deposits and the availability of IDA balances designated as floating-rate obligations.

common stock repurchases of $3.4 billion and $1.0 billion in preferred stock redemptions.

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

In January and November of 2022, the Company transferred investment securities from the AFS category to the HTM category, with aggregate fair values of $108.8 billion and $79.8 billion, respectively, and net unrealized losses at the time of transfer of $2.4 billion and $15.8 billion, respectively.

The transfer of these securities to the HTM category reduces the Company’s exposure to fluctuations in AOCI that can result from unrealized gains and losses on AFS securities due to changes in market interest rates.

The unrealized loss at the time of transfer is amortized over the remaining life of the security, offsetting the amortization of the security’s premium or discount, and resulting in no impact to net income.

IDA Agreement

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

During 2022 and 2021, Schwab moved net amounts of $13.7 billion and $10.1 billion, respectively, of IDA balances to its balance sheet.

The Company’s overall capital management strategy includes supporting migration of IDA balances in future periods as available pursuant to the terms of the IDA agreement.

The Company’s ability to migrate these balances to its balance sheet is dependent upon multiple factors including having sufficient capital levels to sustain these incremental deposits.

See Item 8 – Note 15 for further information on the IDA agreement.

Since the initial dividend in 1989, CSC has paid 131 consecutive quarterly dividends and has increased the quarterly dividend rate 25 times, resulting in a 20% compounded annual growth rate, excluding the special cash dividend of $1.00 per common share in 2007.

Since the initial dividend in 1989, and as of December 31, 2022, CSC has paid 135 consecutive quarterly dividends and has increased the quarterly dividend rate 27 times, resulting in a 20% compounded annual growth rate, excluding the special cash dividend of $1.00 per common share in 2007.

While the payment and amount of dividends are at the discretion of the Board of Directors, subject to certain regulatory and other restrictions, CSC currently targets its common and nonvoting common stock cash dividend at approximately 20% to 30% of net income.

The Board of Directors of the Company declared a quarterly cash dividend increase per common share during 2020 as shown below:

The Board of Directors of the Company declared quarterly cash dividend increases per common share during 2022 as shown below:

Date of Declaration Quarterly Cash Increase Per Common Share % Increase New Quarterly Dividend Per Common Share

January 26, 2022 $ .02 11 % $ .20

In addition, on January 26, 2022, the Board of Directors of the Company declared a two cent, or 11%, increase in the quarterly cash dividend to $0.20 per common share.

The following table details the CSC cash dividends paid and per share amounts:

July 27, 2022 .02 10 % .22

In addition, on January 26, 2023, the Board of Directors of the Company declared a three cent, or 14%, increase in the quarterly cash dividend to $.25 per common share.

THE CHARLES SCHWAB CORPORATION

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

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

The following table details CSC’s cash dividends paid and per share amounts:

Year Ended December 31, 2022 2021

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Common and Nonvoting Common Stock $ 1,591 $ .84 $ 1,366 $ .72

Series A Preferred Stock (1)

Preferred Stock:

33 82.73 28 70.00

Series C Preferred Stock (2)

N/A N/A 18 30.00

45 59.52 45 59.52

Series D Preferred Stock (3)

37 6,161.42 28 4,625.00

Series E Preferred Stock (4)

25 5,000.00 25 5,000.00

Series F Preferred Stock (5)

134 5,375.00 134 5,375.00

Series G Preferred Stock (6)

100 4,000.00 97 3,888.89

Series H Preferred Stock (7)

97 3,888.89 N/A N/A

Series I Preferred Stock (8)

63 2,811.11 N/A N/A

Series J Preferred Stock (9)

90 4,000.00 63 2,811.11

27 44.52 18 29.80

28 3,708.33 N/A N/A

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

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

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

(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) Dividends paid quarterly.

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

(4) Series E was redeemed on December 1, 2022.

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

The final dividend was paid on December 1, 2022.

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

(6) Series G Preferred Stock was issued on April 30, 2020.

Dividends are paid quarterly, and the first dividend was paid on September 1, 2020.

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

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

Dividends are paid quarterly, and the first dividend was paid on March 1, 2021.

(8) Series I Preferred Stock was issued on March 18, 2021.

(7) Series I was issued on March 18, 2021.

Dividends are paid quarterly, and the first dividend was paid on June 1, 2021.

(9) Series J Preferred Stock was issued on March 30, 2021.

(8) Series J was issued on March 30, 2021.

Dividends are paid quarterly, and the first dividend was paid on June 1, 2021.

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

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

N/A Not applicable.

Share Repurchases

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

The authorization does not have an expiration date.

There were no repurchases of CSC’s common stock under this authorization during the years ended December 31, 2021 or 2020.

As of December 31, 2021, $1.8 billion remained on our existing authorization.

THE CHARLES SCHWAB CORPORATION

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

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

On July 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 32 million shares of its common stock under the new authorization for $2.4 billion during the year ended December 31, 2022.

There were no repurchases of CSC’s common stock under the terminated authorization during the years ended December 31, 2022 and 2021.

As of December 31, 2022, $11.6 billion remained on the new authorization.

Beginning in 2023, share repurchases, net of issuances, are subject to a nondeductible 1% excise tax which we expect to recognize as a direct and incremental cost associated with these transactions.

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

FOREIGN EXPOSURE

At December 31, 2022, Schwab had exposure to non-sovereign financial and non-financial institutions in foreign countries, as well as agencies of foreign governments.

At December 31, 2022, the fair value of these holdings totaled $16.4 billion, with the top three exposures being to issuers and counterparties domiciled in France at $5.1 billion, the United Kingdom at $4.8 billion, and Canada at $1.7 billion.

At December 31, 2021, the fair value of these holdings totaled $12.5 billion, with the top three exposures being to issuers and counterparties domiciled in the United Kingdom at $5.2 billion, France at $3.9 billion, and Sweden at $754 million.

At December 31, 2020, the fair value of these holdings totaled $10.1 billion, with the top three exposures being to issuers and counterparties domiciled in France at $6.7 billion, Germany at $1.2 billion, and Canada at $880 million.

In addition, Schwab had outstanding margin loans to foreign residents of $2.5 billion and $3.3 billion at December 31, 2022 and 2021, respectively.

THE CHARLES SCHWAB CORPORATION

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

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

FAIR VALUE OF FINANCIAL INSTRUMENTS

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See Item 8 – Note 22 for more information on the Company’s income taxes.

THE CHARLES SCHWAB CORPORATION

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

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

Legal and Regulatory Reserves

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The acquisition method requires us to make significant estimates and assumptions, especially at the acquisition date as we allocate the purchase price to the estimated fair values of acquired tangible and intangible assets and the liabilities assumed.

We also use our best estimates to determine the useful lives of the tangible and definite-lived intangible assets, which impact the periods over which depreciation and amortization of those assets are recognized.

We also use our best estimates to determine the

THE CHARLES SCHWAB CORPORATION

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

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

useful lives of the tangible and definite-lived intangible assets, which impact the periods over which depreciation and amortization of those assets are recognized.

These best estimates and assumptions are inherently uncertain as they pertain to forward looking views of our businesses, client behavior, and market conditions.

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The results of the 2022 annual goodwill impairment testing for our other two reporting units indicated that the estimated fair values substantially exceeded their carrying amounts.

THE CHARLES SCHWAB CORPORATION

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

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

NON-GAAP FINANCIAL MEASURES

In addition to disclosing financial results in accordance with generally accepted accounting principles in the U.S.

(GAAP), Management’s Discussion and Analysis of Financial Condition and Results of Operations contain references to the non-GAAP financial measures described below.

(GAAP), Management’s Discussion and Analysis of Financial Condition and Results of Operations contains references to the non-GAAP financial measures described below.

We believe these non-GAAP financial measures provide useful supplemental information about the financial performance of the Company, and facilitate meaningful comparison of Schwab’s results in the current period to both historic and future results.

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The Compensation Committee of CSC’s Board of Directors maintains discretion in evaluating performance against these criteria.

THE CHARLES SCHWAB CORPORATION

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

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

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

7 unchanged sentences

(1) Acquisition and integration-related costs for 2022 primarily consist of $220 million of compensation and benefits, $140 million of professional services, and $21 million of occupancy and equipment.

Acquisition and integration-related costs for 2021 primarily consist of $283 million of compensation and benefits, $132 million of professional services, and $39 million of occupancy and equipment.

Acquisition and integration-related costs for 2020 primarily consist of $235 million of compensation and benefits, $158 million of professional services, and $30 million of other expense.

Substantially all acquisition and integration-related costs for 2019 are included in professional services expense.

THE CHARLES SCHWAB CORPORATION

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

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

Year Ended December 31,

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Average acquired intangible assets — net (9,084) (9,685) (5,059)

Average deferred tax liabilities related to goodwill and acquired intangible assets — net 1,919 1,005 67

Average deferred tax liabilities related to goodwill and acquired intangible

assets — net 1,870 1,919 1,005

Average tangible common equity $ 17,439 $ 27,600 $ 22,996

7 unchanged sentences

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

What changed 10-K

Item 7. Management’s Discussion and Analysis