SCHWAB CHARLES CORP 10-K

Item 8. Financial Statements and Supplementary Data TABLE OF CONTENTS Consolidated Statements of Income 64 Consolidated Statements of Comprehensive Income 65 Consolidated Balance Sheets 66 Consolidated Statements of Stockholders’ Equity 67 Consolidated Statements of Cash Flows 68 Notes to Consolidated Financial Statements 70 Note 1. Introduction and Basis of Presentation 70 Note 2. Summary of Significant Accounting Policies 71 Note 3. Business Acquisitions 79 Note 4. Revenue Recognition 83 Note 5. Receivables from and Payables to Brokerage Clients 84 Note 6. Investment Securities 85 Note 7. Bank Loans and Related Allowance for Credit Losses 88 Note 8. Equipment, Office Facilities, and Property 92 Note 9. Goodwill and Acquired Intangible Assets 93 Note 10. Other Assets 94 Note 11. Variable Interest Entities 94 Note 12. Bank Deposits 95 Note 13. Borrowings 95 Note 14. Leases 98 Note 15. Commitments and Contingencies 98 Note 16. Exit and Other Related Liabilities 101 Note 17. Financial Instruments Subject to Off-Balance Sheet Credit Risk 103 Note 18. Fair Values of Assets and Liabilities 106 Note 19. Stockholders ’ Equity 109 Note 20. Accumulated Other Comprehensive Income 112 Note 21. Employee Incentive, Retirement, Deferred Compensation, and Career Achievement Plans 113 Note 22. Taxes on Income 116 Note 23. Regulatory Requirements 117 Note 24. Segment Information 119 Note 25. Earnings Per Common Share 120 Note 26. The Charles Schwab Corporation – Parent Company Only Financial Statements 122 Report of Independent Registered Public Accounting Firm (PCAOB ID No. 34 ) 124 Management’s Report on Internal Control Over Financial Reporting 126 - 63 - THE CHARLES SCHWAB CORPORATION Consolidated Statements of Income (In Millions, Except Per Share Amounts) Year Ended December 31, 2022 2021 2020 Net Revenues Interest revenue $ 12,227 $ 8,506 $ 6,531 Interest expense ( 1,545 ) ( 476 ) ( 418 ) Net interest revenue 10,682 8,030 6,113 Asset management and administration fees (1) 4,216 4,274 3,475 Trading revenue 3,673 4,152 1,416 Bank deposit account fees 1,409 1,315 355 Other 782 749 332 Total net revenues 20,762 18,520 11,691 Expenses Excluding Interest Compensation and benefits 5,936 5,450 3,954 Professional services 1,032 994 843 Occupancy and equipment 1,175 976 703 Advertising and market development 419 485 326 Communications 588 587 353 Depreciation and amortization 652 549 414 Amortization of acquired intangible assets 596 615 190 Regulatory fees and assessments 262 275 163 Other 714 876 445 Total expenses excluding interest 11,374 10,807 7,391 Income before taxes on income 9,388 7,713 4,300 Taxes on income 2,205 1,858 1,001 Net Income 7,183 5,855 3,299 Preferred stock dividends and other 548 495 256 Net Income Available to Common Stockholders $ 6,635 $ 5,360 $ 3,043 Weighted-Average Common Shares Outstanding: Basic 1,885 1,887 1,429 Diluted 1,894 1,897 1,435 Earnings Per Common Shares Outstanding (2) : Basic $ 3.52 $ 2.84 $ 2.13 Diluted $ 3.50 $ 2.83 $ 2.12 (1) Includes fee waivers of $ 57 million, $ 326 million, and $ 127 million for the years ended December 31, 2022, 2021, and 2020, respectively. (2) T he Company has voting and nonvoting common stock outstanding. As the participation rights, including dividend and liquidation rights, are identical between the voting and nonvoting stock classes, basic and diluted earnings per share are the same for each class. See Notes 19 and 25 for additional information. See Notes to Consolidated Financial Statements. - 64 - THE CHARLES SCHWAB CORPORATION Consolidated Statements of Comprehensive Income (In Millions) Year Ended December 31, 2022 2021 2020 Net income $ 7,183 $ 5,855 $ 3,299 Other comprehensive income (loss), before tax: Change in net unrealized gain (loss) on available for sale securities: Net unrealized gain (loss) excluding transfers to held to maturity ( 29,100 ) ( 8,521 ) 6,961 Reclassification of net unrealized loss transferred to held to maturity 18,228 — — Other reclassifications included in other revenue 9 ( 4 ) ( 4 ) Change in net unrealized gain (loss) on held to maturity securities: Reclassification of net unrealized loss transferred from available for sale ( 18,228 ) — — Amortization of amounts previously recorded upon transfer to held to maturity from available for sale 707 — — Other 60 ( 11 ) 8 Other comprehensive income (loss), before tax ( 28,324 ) ( 8,536 ) 6,965 Income tax effect 6,812 2,033 ( 1,659 ) Other comprehensive income (loss), net of tax ( 21,512 ) ( 6,503 ) 5,306 Comprehensive Income (Loss) $ ( 14,329 ) $ ( 648 ) $ 8,605 See Notes to Consolidated Financial Statements. - 65 - THE CHARLES SCHWAB CORPORATION Consolidated Balance Sheets (In Millions, Except Per Share and Share Amounts) December 31, 2022 2021 Assets Cash and cash equivalents $ 40,195 $ 62,975 Cash and investments segregated and on deposit for regulatory purposes (including resale agreements of $ 12,159 and $ 13,096 at December 31, 2022 and 2021, respectively) 42,983 53,949 Receivables from brokerage clients — net 66,591 90,565 Available for sale securities (amortized cost of $ 160,162 and $ 391,482 at December 31, 2022 and 2021, respectively; including assets pledged of $ 41 at December 31, 2022) 147,871 390,054 Held to maturity securities (including assets pledged of $ 4,522 at December 31, 2022) 173,074 — Bank loans — net 40,505 34,636 Equipment, office facilities, and property — net 3,714 3,442 Goodwill 11,951 11,952 Acquired intangible assets — net 8,789 9,379 Other assets 16,099 10,318 Total assets $ 551,772 $ 667,270 Liabilities and Stockholders’ Equity Bank deposits $ 366,724 $ 443,778 Payables to brokerage clients 97,438 125,671 Accrued expenses and other liabilities 13,124 17,791 Short-term borrowings 17,050 4,855 Long-term debt 20,828 18,914 Total liabilities 515,164 611,009 Stockholders’ equity: Preferred stock — $ .01 par value per share; aggregate liquidation preference of $ 9,850 and $ 10,100 at December 31, 2022 and 2021, respectively 9,706 9,954 Common stock — 3 billion shares authorized; $ .01 par value per share; 2,023,295,180 and 1,994,895,180 shares issued at December 31, 2022 and 2021, respectively 20 20 Nonvoting common stock — 300 million shares authorized; $ .01 par value per share; 50,893,695 and 79,293,695 shares issued at December 31, 2022 and 2021, respectively 1 1 Additional paid-in capital 27,075 26,741 Retained earnings 31,066 25,992 Treasury stock, at cost — 221,033,042 and 180,959,274 shares at December 31, 2022 and 2021, respectively ( 8,639 ) ( 5,338 ) Accumulated other comprehensive income (loss) ( 22,621 ) ( 1,109 ) Total stockholders’ equity 36,608 56,261 Total liabilities and stockholders’ equity $ 551,772 $ 667,270 See Notes to Consolidated Financial Statements. - 66 - THE CHARLES SCHWAB CORPORATION Consolidated Statements of Stockholders’ Equity (In Millions) Nonvoting Common Stock Additional Paid-In Capital Accumulated Other Comprehensive Income (Loss) Preferred Stock Common Stock Retained Earnings Treasury Stock, at cost Shares Amount Shares Amount Total Balance at December 31, 2019 $ 2,793 1,488 $ 15 — $ — $ 4,656 $ 19,960 $ ( 5,767 ) $ 88 $ 21,745 Net income — — — — — — 3,299 — — 3,299 Other comprehensive income (loss), net of tax — — — — — — — — 5,306 5,306 Acquisition of TD Ameritrade — 509 5 77 1 21,757 — ( 5 ) — 21,758 Issuance of preferred stock, net 4,940 — — — — — — — — 4,940 Dividends declared on preferred stock — — — — — — ( 240 ) — — ( 240 ) Dividends declared on common stock — $ .72 per share — — — — — — ( 1,040 ) — — ( 1,040 ) Stock option exercises and other — — — — — ( 121 ) — 200 — 79 Share-based compensation — — — — — 192 — — — 192 Other — ( 2 ) — 2 — 31 ( 4 ) ( 6 ) — 21 Balance at December 31, 2020 7,733 1,995 20 79 1 26,515 21,975 ( 5,578 ) 5,394 56,060 Net income — — — — — — 5,855 — — 5,855 Other comprehensive income (loss), net of tax — — — — — — — — ( 6,503 ) ( 6,503 ) Issuance of preferred stock, net 2,806 — — — — — — — — 2,806 Redemption of preferred stock ( 585 ) — — — — — ( 15 ) — — ( 600 ) Dividends declared on preferred stock — — — — — — ( 456 ) — — ( 456 ) Dividends declared on common stock — $ .72 per share — — — — — — ( 1,367 ) — — ( 1,367 ) Stock option exercises and other — — — — — ( 84 ) — 305 — 221 Share-based compensation — — — — — 229 — — — 229 Other — — — — — 81 — ( 65 ) — 16 Balance at December 31, 2021 9,954 1,995 20 79 1 26,741 25,992 ( 5,338 ) ( 1,109 ) 56,261 Net income — — — — — — 7,183 — — 7,183 Other comprehensive income (loss), net of tax — — — — — — — — ( 21,512 ) ( 21,512 ) Issuance of preferred stock, net 740 — — — — — — — — 740 Redemption of preferred stock ( 988 ) — — — — — ( 12 ) — — ( 1,000 ) Dividends declared on preferred stock — — — — — — ( 505 ) — — ( 505 ) Dividends declared on common stock — $ .84 per share — — — — — — ( 1,592 ) — — ( 1,592 ) Repurchase of common stock — — — — — — — ( 2,435 ) — ( 2,435 ) Repurchase of nonvoting common stock — 15 — ( 15 ) — — — ( 1,000 ) — ( 1,000 ) Conversion of nonvoting common stock to common stock — 13 — ( 13 ) — — — — — — Stock option exercises and other — — — — — ( 124 ) — 188 — 64 Share-based compensation — — — — — 348 — — — 348 Other — — — — — 110 — ( 54 ) — 56 Balance at December 31, 2022 $ 9,706 2,023 $ 20 51 $ 1 $ 27,075 $ 31,066 $ ( 8,639 ) $ ( 22,621 ) $ 36,608 See Notes to Consolidated Financial Statements. - 67 - THE CHARLES SCHWAB CORPORATION Consolidated Statements of Cash Flows (In Millions) Year Ended December 31, 2022 2021 2020 Cash Flows from Operating Activities Net income $ 7,183 $ 5,855 $ 3,299 Adjustments to reconcile net income to net cash provided by (used for) operating activities: Share-based compensation 366 254 204 Depreciation and amortization 652 549 414 Amortization of acquired intangible assets 596 615 190 Provision (benefit) for deferred income taxes ( 18 ) 53 ( 138 ) Premium amortization, net, on available for sale and held to maturity securities 1,375 2,346 1,586 Other 490 372 349 Net change in: Investments segregated and on deposit for regulatory purposes ( 874 ) ( 3,398 ) ( 10,208 ) Receivables from brokerage clients 23,947 ( 26,168 ) ( 14,609 ) Other assets 99 ( 1,152 ) 4 Payables to brokerage clients ( 28,233 ) 21,470 22,909 Accrued expenses and other liabilities ( 3,526 ) 1,322 2,852 Net cash provided by (used for) operating activities 2,057 2,118 6,852 Cash Flows from Investing Activities Purchases of available for sale securities ( 51,009 ) ( 171,732 ) ( 202,171 ) Proceeds from sales of available for sale securities 24,704 13,306 4,801 Principal payments on available for sale securities 49,944 94,912 63,247 Principal payments on held to maturity securities 15,712 — — Net change in bank loans ( 5,788 ) ( 10,845 ) ( 5,675 ) Cash acquired in acquisitions, net of cash paid — — 14,748 Purchases of equipment, office facilities, and property ( 971 ) ( 916 ) ( 631 ) Purchases of Federal Home Loan Bank stock ( 518 ) — ( 26 ) Proceeds from sales of Federal Home Loan Bank stock 19 — 32 Purchases of Federal Reserve stock ( 106 ) ( 245 ) ( 191 ) Proceeds from sales of Federal Reserve stock 197 — — Other investing activities ( 136 ) ( 143 ) 15 Net cash provided by (used for) investing activities 32,048 ( 75,663 ) ( 125,851 ) Cash Flows from Financing Activities Net change in bank deposits ( 77,054 ) 85,756 137,928 Proceeds from commercial paper and secured lines of credit 1,900 11,107 1,234 Repayments of commercial paper and secured lines of credit ( 6,511 ) ( 6,255 ) ( 1,234 ) Net change in other short-term borrowings 16,802 — — Issuances of long-term debt 2,971 7,036 3,070 Repayments of long-term debt ( 1,036 ) ( 1,822 ) ( 700 ) Repurchases of common stock and nonvoting common stock ( 3,395 ) — — Net proceeds from preferred stock offerings 740 2,806 4,940 Redemption of preferred stock ( 1,000 ) ( 600 ) — Dividends paid ( 2,110 ) ( 1,822 ) ( 1,280 ) Proceeds from stock options exercised 64 221 79 Other financing activities ( 94 ) ( 104 ) ( 55 ) Net cash provided by (used for) financing activities ( 68,723 ) 96,323 143,982 Increase (Decrease) in Cash and Cash Equivalents, including Amounts Restricted ( 34,618 ) 22,778 24,983 Cash and Cash Equivalents, including Amounts Restricted at Beginning of Year 93,338 70,560 45,577 Cash and Cash Equivalents, including Amounts Restricted at End of Year $ 58,720 $ 93,338 $ 70,560 Continued on following page. - 68 - THE CHARLES SCHWAB CORPORATION Continued from previous page. Year Ended December 31, 2022 2021 2020 Supplemental Cash Flow Information Non-cash investing activity: Securities transferred from held to maturity to available for sale, at fair value $ — $ — $ 136,099 Securities transferred from available for sale to held to maturity, at fair value $ 188,555 $ — $ — Changes in accrued equipment, office facilities, and property purchases $ ( 19 ) $ 125 $ 110 Acquisition of TD Ameritrade $ — $ — $ 21,758 Non-cash financing activity: Common stock repurchased during the period but settled after period end $ 40 — $ — Other Supplemental Cash Flow Information Cash paid during the period for: Interest $ 1,355 $ 501 $ 434 Income taxes $ 2,130 $ 2,053 $ 803 Amounts included in the measurement of lease liabilities $ 228 $ 212 $ 163 Leased assets obtained in exchange for new operating lease liabilities $ 274 $ 89 $ 160 Leased assets obtained in exchange for new finance lease liabilities $ 4 $ 109 $ — December 31, 2022 2021 2020 Reconciliation of cash, cash equivalents and amounts reported within the balance sheet (1) Cash and cash equivalents $ 40,195 $ 62,975 $ 40,348 Restricted cash and cash equivalents amounts included in cash and investments segregated and on deposit for regulatory purposes 18,525 30,363 30,212 Total cash and cash equivalents, including amounts restricted shown in the statement of cash flows $ 58,720 $ 93,338 $ 70,560 (1) For more information on the nature of restrictions on restricted cash and cash equivalents, see Note 23. See Notes to Consolidated Financial Statements. - 69 - THE CHARLES SCHWAB CORPORATION Notes to Consolidated Financial Statements (Tabular Amounts in Millions, Except Per Share Data, Option Price Amounts, Ratios, or as Noted) 1. Introduction and Basis of Presentation The Charles Schwab Corporation (CSC) is a savings and loan holding company. CSC engages, through its subsidiaries (collectively referred to as Schwab or the Company), in wealth management, securities brokerage, banking, asset management, custody, and financial advisory services. Principal business subsidiaries of CSC include the following: • Charles Schwab & Co., Inc. (CS&Co), incorporated in 1971, a securities broker-dealer; • TD Ameritrade, Inc., an introducing securities broker-dealer; • TD Ameritrade Clearing, Inc. (TDAC), a securities broker-dealer that provides trade execution and clearing services to TD Ameritrade, Inc.; • Charles Schwab Bank, SSB (CSB), our principal banking entity; and • Charles Schwab Investment Management, Inc. (CSIM), the investment advisor for Schwab’s proprietary mutual funds (Schwab Funds ® ) and for Schwab’s exchange-traded funds (Schwab ETFs ™ ). Schwab’s securities broker-dealers have approximately 400 domestic branch offices in 48 states and the District of Columbia, as well as locations in Puerto Rico, the United Kingdom, Hong Kong, and Singapore. Unless otherwise indicated, the terms “Schwab,” “the Company,” “we,” “us,” or “our” mean CSC together with its consolidated subsidiaries. The accompanying consolidated financial statements include CSC and its subsidiaries. Intercompany balances and transactions have been eliminated. These consolidated financial statements have been prepared in conformity with GAAP, which require management to make certain estimates and assumptions that affect the reported amounts in the accompanying financial statements and in the related disclosures. These estimates are based on information available as of the date of the consolidated financial statements. While management makes its best judgment, actual amounts or results could differ from these estimates. Certain estimates relate to taxes on income, legal and regulatory reserves, and fair values of assets acquired and liabilities assumed, as well as goodwill recognized, in business combinations. Effective October 6, 2020, the Company completed its acquisition of TDA Holding and its consolidated subsidiaries (collectively referred to as “TD Ameritrade” or “TDA”). Our consolidated financial statements include the results of operations and financial condition of TD Ameritrade beginning on October 6, 2020. See Note 3 for additional information on our acquisition of TD Ameritrade. Principles of Consolidation Schwab evaluates all entities in which it has financial interests for consolidation, except for money market funds, which are specifically excluded from consolidation guidance. When an entity is evaluated for consolidation, Schwab determines whether its interest in the entity constitutes a controlling financial interest under either the variable interest entity (VIE) model or the voting interest entity (VOE) model. In evaluating whether Schwab’s interest in a VIE is a controlling financial interest, we consider whether our involvement in the context of the design, purpose, and risks of the VIE, as well as any involvement of related parties, provides us with (i) the power to direct the most significant activities of the VIE, and (ii) the obligation to absorb losses or receive benefits that are significant to the VIE. If both of these conditions exist, then Schwab would be the primary beneficiary of that VIE and consolidate it. Based upon the assessments for all of our interests in VIEs, there are no cases where the Company is the primary beneficiary; therefore, we are not required to consolidate any VIEs. See Note 11 for further information about VIEs. Schwab consolidates all VOEs in which it has majority-voting interests. Investments in entities in which Schwab does not have a controlling financial interest are accounted for under the equity method of accounting when we have the ability to exercise significant influence over operating and financing decisions of the entity or by accounting policy for investments in certain types of limited liability entities. Investments in entities for which Schwab does not apply the equity method are generally carried at cost and adjusted for impairment and observable price changes of the identical or similar investments of the same issuer (adjusted cost method), except for certain investments in qualified affordable housing projects which are accounted for under the proportional amortization method. All equity method, adjusted cost method, and proportional amortization method investments are included in other assets on the consolidated balance sheets. - 70 - THE CHARLES SCHWAB CORPORATION Notes to Consolidated Financial Statements (Tabular Amounts in Millions, Except Per Share Data, Option Price Amounts, Ratios, or as Noted) 2. Summary of Significant Accounting Policies Revenue recognition Net interest revenue Net interest revenue is not within the scope of Accounting Standards Codification (ASC) 606 Revenue From Contracts With Customers (ASC 606), because it is generated from financial instruments covered by various other areas of GAAP. Net interest revenue is the difference between interest generated on interest-earning assets and interest paid on funding sources. Our primary interest-earning assets include cash and cash equivalents; segregated cash and investments; margin loans; investment securities; and bank loans. Fees earned and incurred on securities borrowing and lending activities, which are conducted by the Company’s broker-dealer subsidiaries on assets held in client brokerage accounts, are also included in interest revenue and expense. Asset management and administration fees The majority of asset management and administration fees are generated through our proprietary and third-party mutual fund and ETF offerings, as well as fee-based advisory solutions. Mutual fund and ETF service fees are charged for investment management, shareholder, and administration services provided to Schwab Funds ® and Schwab ETFs ™ , as well as recordkeeping, shareholder, and administration services provided to third-party funds. Advice solutions fees are charged for brokerage and asset management services provided to advice solutions clients. Both mutual fund and ETF service fees and advice solutions fees are earned and recognized over time. Fees are generally based on a percentage of the daily value of assets under management and are collected on a monthly or quarterly basis. Trading revenue Trading revenue is primarily generated through commissions earned for executing trades for clients in individual equities, options, fixed income securities, and certain third-party mutual funds and ETFs, as well as order flow revenue. Commissions revenue is earned when the trades are executed and collected when the trades are settled. 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 recognized when the trades are executed and is collected on a monthly or quarterly basis. Bank deposit account fees Bank deposit account fees consist of revenues resulting from sweep programs offered to certain clients whereby uninvested client cash is swept off-balance sheet to FDIC-insured (up to specified limits) accounts at the TD Depository Institutions and other third-party depository institutions. The Company provides marketing, recordkeeping, and support services related to these sweep programs to the TD Depository Institutions and other third-party depository institutions in exchange for bank deposit account fees. These revenues are based on floating and fixed yields as elected by the Company subject to certain requirements, less interest paid to clients and other applicable fees. Bank deposit account fees are earned and recognized over time and collected on a monthly basis. Other revenue Other revenue includes exchange processing fees, service fees, and other gains and losses from the sale of assets. Generally, the most significant portion of other revenue is exchange processing fees, which are comprised of fees the Company’s broker-dealer subsidiaries charge clients to offset the exchange processing fees imposed on us by third-parties. Exchange processing fees are earned and collected when the trade is executed and are recognized gross of amounts remitted to the third-parties, which are included in other expenses. Unsatisfied performance obligations We do not have any unsatisfied performance obligations other than those that are subject to an elective practical expedient under ASC 606. The practical expedient applies to and is elected for contracts where we recognize revenue at the amount to which we have the right to invoice for services performed. - 71 - THE CHARLES SCHWAB CORPORATION Notes to Consolidated Financial Statements (Tabular Amounts in Millions, Except Per Share Data, Option Price Amounts, Ratios, or as Noted) Cash and cash equivalents Schwab considers all highly liquid investments that mature in three months or less from the time of acquisition and that are not segregated and on deposit for regulatory purposes to be cash and cash equivalents. Cash and cash equivalents include money market funds, deposits with banks, certificates of deposit, commercial paper, and U.S. Treasury securities. Cash and cash equivalents also include balances that our banking subsidiaries maintain at the Federal Reserve. Cash and investments segregated and on deposit for regulatory purposes Pursuant to the Customer Protection Rule and other applicable regulations, Schwab maintains cash or qualified securities in segregated reserve accounts for the exclusive benefit of clients. Cash and investments segregated and on deposit for regulatory purposes include resale agreements, certificates of deposit, and U.S. Government securities. See Resale and repurchase agreements below in this Note 2 for further information on the resale agreements. Certificates of deposit and U.S. Government securities are recorded at fair value and unrealized gains and losses are included in earnings. Receivables from brokerage clients Receivables from brokerage clients include margin loans and other trading receivables from brokerage clients. Margin loans are collateralized by client securities and are carried at the amount receivable, net of an allowance for credit losses. Collateral is required to be maintained at specified minimum levels at all times. The Company monitors margin levels and requires clients to provide additional collateral, or reduce margin positions, to meet minimum collateral requirements if the fair value of the collateral changes. Schwab applies the practical expedient based on collateral maintenance provisions under ASC 326 Financial Instruments – Credit Losses (ASC 326), in estimating an allowance for credit losses for margin loans. This practical expedient can be applied for financial assets with collateral maintenance provisions requiring the borrower to continually adjust the amount of the collateral securing the financial assets as a result of fair value changes in the collateral. In accordance with the practical expedient, when the Company reasonably expects that borrowers (or counterparties, as applicable) will replenish the collateral as required, there is no expectation of credit losses when the collateral’s fair value is greater than the amortized cost of the financial asset. If the amortized cost exceeds the fair value of collateral, then credit losses are estimated only on the unsecured portion. An allowance for credit losses on unsecured or partially secured receivables from brokerage clients is estimated based on the aging of those receivables. Unsecured balances due to confirmed fraud are reserved immediately. The Company’s policy is to charge off any unsecured margin loans, including the accrued interest on such loans, no later than at 90 days past due. Accrued interest charged off is recognized as credit loss expense and is included in other expenses in the consolidated statements of income. Clients with margin loans have agreed to allow Schwab to pledge collateralized securities in accordance with federal regulations. The collateral is not reflected in the consolidated financial statements. Other securities owned at fair value Other securities owned are included in other assets on the consolidated balance sheets and recorded at fair value based on quoted market prices or other observable market data. Unrealized gains and losses are included in earnings. Client-held fractional shares are included in other securities owned for client positions for which off-balance sheet treatment pursuant to ASC 940 Financial Services – Brokers and Dealers is not applicable and the derecognition criteria in ASC 860 Transfers and Servicing, are not met. These client-held fractional shares have related repurchase liabilities that are accounted for at fair value with unrealized gains and losses included in earnings. See Fair values of assets and liabilities below in this Note 2 for further information on these repurchase liabilities. Investment securities AFS investment securities are recorded at fair value and unrealized gains and losses, other than losses related to credit factors, are reported, net of taxes, in AOCI included in stockholders’ equity. HTM investment securities are recorded at amortized cost, net of any allowance for credit losses, based on the Company’s positive intent and ability to hold these securities to maturity. Realized gains and losses from sales of AFS investment securities are determined using the specific-identification method and are included in other revenue. Interest income on investment securities is recognized using the effective interest method based on the contractual terms of the security. Where applicable, prepayments are accounted for as they occur (i.e., prepayments are not estimated). Accrued interest receivable for AFS and HTM investment securities are included in other assets in the Company’s consolidated balance sheets. - 72 - THE CHARLES SCHWAB CORPORATION Notes to Consolidated Financial Statements (Tabular Amounts in Millions, Except Per Share Data, Option Price Amounts, Ratios, or as Noted) An AFS investment security is impaired if the fair value of the security is less than its amortized cost basis. Management evaluates AFS investment securities with unrealized losses to determine whether the security’s impairment has resulted from a credit loss or other factors. This evaluation is performed quarterly on an individual security basis. The evaluation of whether the AFS security impairment has resulted from a credit loss is inherently judgmental. This evaluation considers multiple factors including: the financial condition of the issuer; the payment structure of the security; external credit ratings; our internal credit ratings; the security’s market implied credit spread; for asset-backed securities, the amount of credit support provided by the structure of the security to absorb credit losses on the underlying collateral; recent events specific to the issuer and the issuer’s industry; and whether all scheduled principal and interest payments have been received. If management determines that the impairment of an AFS investment security (or a portion of the impairment) is related to credit losses, an allowance for credit losses is recorded for that security through a charge to earnings. The allowance for credit losses on AFS investment securities is measured as the difference between the amortized cost and the present value of expected cash flows and is limited to the difference between amortized cost and the fair value of the security. The Company estimates credit losses on a discounted cash flow basis using the security’s effective interest rate. If it is determined that the Company intends to sell the impaired security or if it is more likely than not that the Company will be required to sell the security before any anticipated recovery of the amortized cost basis, any allowance for credit losses of that security will be written off and the amortized cost basis of the security will be written down to fair value with any incremental impairment recorded through earnings. The Company separately evaluates its HTM investment securities for any expected credit losses. If HTM investment securities share risk characteristics, management evaluates those securities on a collective basis. An allowance for credit losses is recorded through a charge to earnings based on an estimate of current expected credit losses over the remaining expected lives of the HTM investment securities. Management reviews the allowance for credit losses quarterly, taking into consideration current conditions, reasonable and supportable forecasts, past events, and historical experience that affect the expected collectability of the reported amounts. For the purposes of identifying and measuring impairment of AFS investment securities and for the purposes of estimating the allowance for credit losses on all investment securities, the Company excludes accrued interest from the amortized cost basis and when applicable, the fair value, of investment securities. Changes in the allowance for credit losses on investment securities are recorded through earnings in the period of the change. For some of the AFS and HTM investment securities the Company has an expectation that nonpayment of the amortized cost basis is zero based on a long history with no credit losses and considering current conditions and reasonable and supportable forecasts. This applies to a limited set of securities that are guaranteed by the U.S. Treasury, U.S. government agencies, and sovereign entities of high credit quality. The expectation that nonpayment of the amortized cost basis is zero is continually reevaluated. AFS and HTM investment securities are placed on nonaccrual status on a timely basis and any accrued interest receivable is reversed through interest income. Resale and repurchase agreements Resale and repurchase agreements are accounted for as collateralized financing transactions with a receivable or payable recorded at their contractual amounts plus accrued interest. Schwab’s resale agreements are typically collateralized by U.S. Government and agency securities and the receivable is included in cash and investments segregated and on deposit for regulatory purposes in the consolidated balance sheets. Securities received under resale agreements are not recorded on the consolidated balance sheets. Securities transferred to counterparties under repurchase agreements continue to be recognized on the Company’s consolidated balance sheets in the respective financial statement line item and at the respective measurement basis. Payables for repurchase agreements are included in short-term borrowings on the consolidated balance sheets. The Company monitors its collateral requirements under these agreements daily and collateral is adjusted to ensure full collateralization. Interest received or paid is recorded in interest revenue or interest expense, respectively. Schwab applies the practical expedient based on collateral maintenance provisions in estimating an allowance for credit losses for resale agreements. Securities borrowed and securities loaned Securities borrowing and lending transactions are accounted for as collateralized financing transactions. Securities borrowed transactions require Schwab to deliver cash to the lender in exchange for securities; the receivables from these transactions are - 73 - THE CHARLES SCHWAB CORPORATION Notes to Consolidated Financial Statements (Tabular Amounts in Millions, Except Per Share Data, Option Price Amounts, Ratios, or as Noted) included in other assets on the consolidated balance sheets. For securities loaned, Schwab receives collateral in the form of cash in an amount equal to or greater than the market value of securities loaned; the payables from these transactions are included in accrued expenses and other liabilities on the consolidated balance sheets. The market value of securities borrowed and loaned is monitored and collateral is adjusted to ensure full collateralization. Fees received or paid are recorded in interest revenue or interest expense. Schwab applies the practical expedient based on collateral maintenance provisions in estimating an allowance for credit losses for securities borrowed receivables. Bank loans and related allowance for loan losses Bank loans held for investments are recorded at amortized cost, which is comprised of the contractual principal amounts adjusted for unamortized direct origination costs or net purchase discounts or premiums. Direct origination costs and premiums and discounts are recognized in interest revenue using the effective interest method over the contractual life of the loan and are adjusted for actual prepayments. Additionally, management estimates an allowance for credit losses, which is deducted from the amortized cost basis of loans to arrive at the amount expected to be collected. The bank loan portfolio includes three portfolio segments: residential real estate, PALs, and other loans. We use these segments when developing and documenting our methodology for determining the allowance for credit losses. The residential real estate portfolio segment is divided into two classes of financing receivables for purposes of monitoring and assessing credit risk: First Mortgages and HELOCs. Schwab records an allowance for credit losses through a charge to earnings based on our estimate of current expected credit losses for the existing portfolio. We review the allowance for credit losses quarterly, taking into consideration current economic conditions, reasonable and supportable forecasts, the composition of the existing loan portfolio, past loss experience, and any other risks inherent in the portfolio to ensure that the allowance for credit losses is maintained at an appropriate level. PALs are collateralized by marketable securities with liquid markets. Credit lines are over-collateralized and borrowers are required to maintain collateral at specified levels at all times. The required collateral levels are determined based on the type of security pledged. Additionally, collateral market value is monitored on a daily basis and a borrower’s credit line may be reduced or collateral may be liquidated if the collateral is in danger of falling below specified levels. As such, the credit loss inherent within this portfolio is limited. Schwab applies the practical expedient based on collateral maintenance provisions in estimating an allowance for credit losses for PALs. The methodology to establish an allowance for credit losses for the residential real estate portfolio segment utilizes statistical models that estimate prepayments, defaults, and expected losses for this portfolio segment based on predicted behavior of individual loans within the segment. The methodology also evaluates concentrations in the classes of financing receivables, including loan products within those classes, year of origination, and geographical distribution of collateral. Expected credit losses are forecast using a loan-level simulation of the delinquency status of the loans over the term of the loans. The simulation starts with the current relevant risk indicators, including the current delinquent status of each loan, the estimated current LTV ratio of each loan, the term and structure of each loan, borrower FICO scores, and current key interest rates including U.S. Treasury, SOFR, and LIBOR rates. The more significant variables in the simulation include delinquency roll rates, loss severity, housing prices, interest rates, and the unemployment rate. Delinquency roll rates (i.e., the rates at which loans transition through delinquency stages and ultimately result in a loss) are estimated from our historical loss experience adjusted for current trends and market information, which includes current and forecasted conditions. Loss severity (i.e., loss given default) estimates are based on our historical loss experience and market trends, both current and forecasted. Housing price trends are derived from historical home price indices and econometric forecasts of future home values. Factors affecting the home price index include housing inventory, unemployment, interest rates, and inflation expectations. Interest rate projections are based on the current term structure of interest rates and historical volatilities to project various possible future interest rate paths. The unemployment rate forecast is typically based on the recent consensus of regularly published economic surveys. Linear interpolation is applied to revert to long-term trends after the reasonable and supportable forecast period. The methodology described above results in loss factors that are applied to the amortized cost basis of loans, exclusive of accrued interest receivable, to determine the allowance for credit losses for First Mortgages and HELOCs. Management also estimates a liability for expected credit losses on the Company’s commitments to extend credit related to unused HELOCs and commitments to purchase first mortgages. See Note 15 for additional information on these commitments. The liability is calculated by applying the loss factors described above to the commitments expected to be funded and is included in accrued expenses and other liabilities on the consolidated balance sheets. The liability for expected credit losses on these commitments and related activity were immaterial for all periods presented. - 74 - THE CHARLES SCHWAB CORPORATION Notes to Consolidated Financial Statements (Tabular Amounts in Millions, Except Per Share Data, Option Price Amounts, Ratios, or as Noted) Nonaccrual, nonperforming and impaired loans First Mortgages, HELOCs, PALs, and other loans are placed on nonaccrual status upon becoming 90 days past due as to interest or principal (unless the loans are well-secured and in the process of collection), or when the full timely collection of interest or principal becomes uncertain, including loans to borrowers who have filed for bankruptcy. HELOC loans secured by a second lien are placed on non-accrual status if the associated first lien is 90 days or more delinquent, regardless of the payment status of the HELOC. When a loan is placed on nonaccrual status, the accrued and unpaid interest receivable is reversed and the loan is accounted for on the cash or cost recovery method until qualifying for return to accrual status. Generally, a nonaccrual loan may be returned to accrual status when all delinquent interest and principal is repaid and the borrower demonstrates a sustained period of performance, or when the loan is both well-secured and in the process of collection and collectability is no longer doubtful. Loans on nonaccrual status and other real estate owned are considered nonperforming assets. Loan charge-offs The Company charges off a loan in the period that it is deemed uncollectible and records a reduction in the allowance for credit losses and the loan balance. Our charge-off policy for First Mortgage and HELOC loans is to assess the value of the property when the loan has been delinquent for 180 days or has been discharged in bankruptcy proceedings, regardless of whether the property is in foreclosure, and charge off the amount of the loan balance in excess of the estimated current value of the underlying property less estimated costs to sell. The Company’s policy for PALs is to charge off any unsecured balances no later than at 90 days past due. Equipment, office facilities, and property Equipment, office facilities, and property are recorded at cost net of accumulated depreciation and amortization, except for land, which is recorded at cost. Equipment, office facilities, and property include certain capitalized costs of acquired or internally developed software. Costs for internally developed software are capitalized when the costs relate to development of approved projects for our internal needs that result in additional functionality. Costs related to preliminary project and post-project activities are expensed as incurred. Equipment, office facilities, and property (other than land) are depreciated on a straight-line basis over their estimated useful lives. Estimated useful lives are as follows: All equipment types and furniture 3 to 10 years Buildings 40 years Building and land improvements 20 years Software 3 to 10 years (1) Leasehold improvements Lesser of useful life or lease term (1) Amortized over contractual term if less than three years . Equipment, office facilities, and property are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. Equipment, office facilities, and property acquired in a business combination are recognized at their estimated fair values as of the date of acquisition. The fair values of real property, personal property, construction in progress, and land acquired are estimated using a sales comparison and cost approach, including consideration of functional and economic obsolescence. The Company determined the weighted-average useful lives of the assets based on the current condition and expected future use of the assets as of the date of acquisition. Goodwill Goodwill is not amortized but is tested for impairment annually or whenever indications of impairment exist. Impairment exists when the carrying amount of a reporting unit exceeds its estimated fair value, resulting in an impairment charge for this excess, with the maximum charge limited to the carrying value of goodwill allocated to that reporting unit. Our annual impairment testing date is April 1 st . Schwab can elect to qualitatively assess goodwill for impairment if it is more likely than not that the fair value of a reporting unit exceeds its carrying value. A qualitative assessment considers macroeconomic and other industry-specific factors, such as trends in short-term and long-term interest rates and the ability to access capital, and Company specific factors such as market capitalization in excess of net assets, trends in revenue generating activities, and merger or acquisition activity. - 75 - THE CHARLES SCHWAB CORPORATION Notes to Consolidated Financial Statements (Tabular Amounts in Millions, Except Per Share Data, Option Price Amounts, Ratios, or as Noted) If the Company elects to bypass qualitatively assessing goodwill, or it is not more likely than not that the fair value of a reporting unit exceeds its carrying value, management estimates the fair values of each of the Company’s reporting units (defined as the Company’s businesses for which financial information is available and reviewed regularly by management) and compares it to their carrying values. The estimated fair values of the reporting units are established using an income approach based on a discounted cash flow model that includes significant assumptions about the future operating results and cash flows of each reporting unit, a market approach which compares each reporting unit to comparable companies in their respective industries, as well as a market capitalization analysis. Intangible assets Finite-lived intangible assets are amortized over their useful lives in a manner that best reflects their economic benefit. All intangible assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. Intangible assets acquired in a business combination are recognized at their estimated fair values as of the date of acquisition. The fair values of the intangible assets acquired in the TD Ameritrade and USAA-IMCO acquisitions were determined using the following valuation methods: Acquired intangible asset Acquisition Method Client relationships TD Ameritrade, USAA-IMCO Multi-period excess earnings Trade names TD Ameritrade Relief from royalty Royalty-free license USAA-IMCO Relief from royalty Brokerage referral agreement USAA-IMCO With-and-without Existing technology TD Ameritrade Cost The multi-period excess earnings method starts with a forecast of all of the expected future net cash flows associated with the asset and the relief from royalty method starts with a forecast of the royalties saved by the Company because it owns the asset. The with-and-without method quantifies the difference between forecasted cash flows with the asset and without the asset. The forecasts are then adjusted to present value by applying an appropriate discount rate that reflects the risks associated with the cash flow streams. The cost approach uses replacement cost as an indicator of fair value. Low-income housing tax credit (LIHTC) investments We account for investments in qualified affordable housing projects using the proportional amortization method if the applicable requirements are met. The proportional amortization method amortizes the cost of the investment over the period in which the investor expects to receive tax credits and other tax benefits, and the resulting amortization is recognized as a component of taxes on income. The carrying value of LIHTC investments is included in other assets on the consolidated balance sheets. Unfunded commitments related to LIHTC investments are included in accrued expenses and other liabilities on the consolidated balance sheets. Leases Leases primarily consist of operating leases for corporate offices, branch locations, and server equipment. We determine if an arrangement is a lease at inception. Leases with an initial term of 12 months or less are not recorded on the balance sheet; we recognize lease expense for these leases on a straight-line basis over the lease term. The Company has also elected to not record leases acquired in a business combination on the balance sheet if the remaining term as of the acquisition date is 12 months or less. Right-of-use (ROU) assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments arising from the lease. At the commencement date, we determine classification as either an operating lease or finance lease and the ROU asset and lease liability is recognized based on the present value of lease payments over the lease term. The lease liability may include payments that depend on a rate or index (such as the Consumer Price Index), measured using the rate or index at the commencement date. Payments that vary because of changes in facts or circumstances occurring after the commencement date are considered variable. These payments are not recognized as part of the lease liability and are expensed in the period incurred. Lease expense for operating leases is recognized on a straight-line basis over the lease term. The amortization of finance lease ROU assets and the interest expense on finance lease liabilities are recognized over the lease term. The Company’s lease agreements do not contain any material residual value guarantees or material restrictive covenants. - 76 - THE CHARLES SCHWAB CORPORATION Notes to Consolidated Financial Statements (Tabular Amounts in Millions, Except Per Share Data, Option Price Amounts, Ratios, or as Noted) We have lease agreements with lease and non-lease components. For the majority of our leases (real estate leases), the Company has elected the practical expedient to account for the lease and non-lease components as a single lease component. We have not elected the practical expedient for equipment leases and account for lease and non-lease components separately for that class of leases. As the rates implicit in our leases are not readily determinable, we use our incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments. Our lease terms may include periods covered by options to extend when it is reasonably certain that we will exercise those options. The lease terms may also include periods covered by options to terminate when it is reasonably certain that we will not exercise that option. Advertising and market development Advertising and market development activities include the cost to produce and distribute marketing campaigns as well as client incentives and discounts. Where it applies to these costs, the Company’s accounting policy is to expense when incurred. Income taxes Schwab provides for income taxes on all transactions that have been recognized in the consolidated financial statements. Accordingly, deferred tax assets are adjusted to reflect the tax rates at which future taxable amounts will likely be settled or realized. The effects of tax rate changes on future deferred tax assets and deferred tax liabilities, as well as other changes in income tax laws, are recorded in earnings in the period such changes are enacted. Uncertain tax positions are evaluated to determine whether they are more likely than not to be sustained upon examination. When tax positions are more likely than not to be sustained upon examination the difference between positions taken on tax return filings and estimated potential tax settlement outcomes are recognized in accrued expenses and other liabilities. If a position is not more likely than not to be sustained, then none of the tax benefit is recognized in Schwab’s financial statements. Accrued interest and penalties relating to unrecognized tax benefits are recorded in taxes on income. Schwab records amounts within AOCI net of taxes. Income tax effects are released from AOCI using the specific-identification method. Share-based compensation Share-based compensation includes employee and board of director stock options and restricted stock units. Schwab measures compensation expense for these share-based payment arrangements based on their estimated fair values as of the grant date. The grant date fair value is amortized to compensation expense on a straight-line basis over the requisite service period. Share-based compensation expense is based on options or units expected to vest and therefore is reduced for estimated forfeitures. Per the Company’s accounting policy election, forfeitures are estimated at the time of grant and reviewed annually based on the Company’s historical forfeiture experience. Share-based compensation expense is adjusted in subsequent periods if actual forfeitures differ from estimated forfeitures. For share-based payment awards with performance conditions, management assesses and estimates their expected level of achievement. Share-based compensation expense is recognized based on the level of achievement deemed probable and changes in the estimated outcome are reflected as a cumulative adjustment to expense in the period of the change in estimate. The excess tax benefits or deficiencies from the exercise of stock options and the vesting of restricted stock units are recorded in taxes on income. Fair values of assets and liabilities Fair value is defined as the price that would be received to sell an asset or the price paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair value measurement accounting guidance describes the fair value hierarchy for disclosing assets and liabilities measured at fair value based on the inputs used to value them. The fair value hierarchy maximizes the use of observable inputs and minimizes the use of unobservable inputs. Observable inputs are based on market pricing data obtained from third-party sources independent of the Company. A quoted price in an active market provides the most reliable evidence of fair value and is generally used to measure fair value whenever available. Unobservable inputs reflect management’s judgment about the assumptions market participants would use in pricing the asset or liability. Where inputs used to measure fair value of an asset or liability are from different levels of the hierarchy, the asset or liability is categorized based on the lowest level input that is significant to the fair value measurement in its entirety. Assessing - 77 - THE CHARLES SCHWAB CORPORATION Notes to Consolidated Financial Statements (Tabular Amounts in Millions, Except Per Share Data, Option Price Amounts, Ratios, or as Noted) the significance of a particular input requires judgment. The fair value hierarchy includes three levels based on the objectivity of the inputs as follows: • Level 1 inputs are quoted prices in active markets as of the measurement date for identical assets or liabilities that the Company has the ability to access. • Level 2 inputs are inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. Level 2 inputs include quoted prices for similar assets and liabilities in active markets, and inputs other than quoted prices that are observable for the asset or liability, such as interest rates, benchmark yields, issuer spreads, new issue data, and collateral performance. • Level 3 inputs are unobservable inputs for the asset or liability, and include situations where there is little, if any, market activity for the asset or liability. Assets and liabilities measured at fair value on a recurring basis Schwab’s assets and liabilities measured at fair value on a recurring basis include: certain cash equivalents, certain investments segregated and on deposit for regulatory purposes, AFS securities, certain other assets, and accrued expenses and other liabilities. The Company uses the market approach to determine the fair value of assets and liabilities. When available, the Company uses quoted prices in active markets to measure the fair value of assets and liabilities. Quoted prices for investments in exchange-traded securities represent end-of-day close prices published by exchanges. Quoted prices for money market funds and other mutual funds represent reported net asset values. When utilizing market data and bid-ask spread, the Company uses the price within the bid-ask spread that best represents fair value. When quoted prices in active markets do not exist, the Company uses prices obtained from independent third-party pricing services to measure the fair value of investment assets, and we generally obtain prices from three independent third-party pricing sources for such assets recorded at fair value. Our primary independent pricing service provides prices for our fixed income investments such as commercial paper; certificates of deposits; U.S. government and agency securities; state and municipal securities; corporate debt securities; asset-backed securities; foreign government agency securities; and non-agency commercial mortgage-backed securities. Such prices are based on observable trades, broker/dealer quotes, and discounted cash flows that incorporate observable information such as yields for similar types of securities (a benchmark interest rate plus observable spreads) and weighted-average maturity for the same or similar “to-be-issued” securities. We compare the prices obtained from the primary independent pricing service to the prices obtained from the additional independent pricing services to determine if the price obtained from the primary independent pricing service is reasonable. Schwab does not adjust the prices received from independent third-party pricing services unless such prices are inconsistent with the definition of fair value and result in material differences in the amounts recorded. Liabilities measured at fair value on a recurring basis include repurchase liabilities related to client-held fractional shares of equities, ETFs, and other securities. See Other securities owned at fair value above in this Note 2 for the treatment of client-held fractional shares. The Company has elected the fair value option pursuant to ASC 825 Financial Instruments for the repurchase liabilities to match the measurement and accounting of the related client-held fractional shares. The fair values of the repurchase liabilities are based on quoted market prices or other observable market data consistent with the related client-held fractional shares. Unrealized gains and losses on client-held fractional shares offset the unrealized gains and losses on the corresponding repurchase liabilities, resulting in no impact to the consolidated statements of income. The Company’s liabilities to repurchase client-held fractional shares do not have credit risk, and, as a result, the Company has not recognized any gains or losses in the consolidated statements of income or comprehensive income attributable to instrument-specific credit risk for these repurchase liabilities. The repurchase liabilities are included in accrued expenses and other liabilities on the consolidated balance sheet. - 78 - THE CHARLES SCHWAB CORPORATION Notes to Consolidated Financial Statements (Tabular Amounts in Millions, Except Per Share Data, Option Price Amounts, Ratios, or as Noted) New Accounting Standards Adoption of New Accounting Standards No new accounting standards that are material to the Company were adopted during the year ended December 31, 2022. New Accounting Standards Not Yet Adopted Standard Description Required Date of Adoption Effects on the Financial Statements or Other Significant Matters Accounting Standards Update (ASU) 2022-02, “Financial Instruments—Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures” Troubled Debt Restructurings (TDRs) Eliminates the accounting guidance for TDRs. Rather than applying the specific guidance for TDRs, creditors will apply the recognition and measurement guidance for loan refinancings and restructurings to determine whether a modification results in a new loan or a continuation of an existing loan. The guidance requires enhanced disclosures for certain loan refinancings and restructurings by creditors when a borrower is experiencing financial difficulty. Vintage Disclosures Requires that an entity disclose current-period gross writeoffs by year of origination for financing receivables and net investments in leases within the scope of Subtopic 326-20, Financial Instruments—Credit Losses—Measured at Amortized Cost. Adoption provides for prospective application, with an option to apply the modified retrospective transition method for the change in recognition and measurement of TDRs. January 1, 2023 The Company adopted this guidance prospectively on January 1, 2023. As such, there was no impact to the Company’s consolidated financial statements upon initial adoption. Adopting this guidance changed the Company’s accounting treatment for the loan modifications in scope of ASU 2022-02 prospectively from the adoption date. The Company’s vintage disclosures in Note 7, Bank Loans and Related Allowance for Credit Losses, will be updated prospectively to include gross write offs. 3. Business Acquisitions TD Ameritrade On October 6, 2020, Schwab completed its acquisition of TD Ameritrade for $ 21.8 billion in stock. As a result of the acquisition, TDA Holding became a wholly-owned subsidiary of CSC. TD Ameritrade provides securities brokerage services, including trade execution, clearing services, and margin lend ing; a nd futures and foreign exchange trade execution services. In exchange for each share of TD Ameritrade common stock, TD Ameritrade stockholders received 1.0837 shares of CSC common stock, except for TD Bank and its affiliates which received a portion in nonvoting common stock. In connection with the transaction, Schwab issued approximately 586 million common shares to TD Ameritrade stockholders consisting of approximately 509 million shares of common stock and approximately 77 million shares of nonvoting common stock. For further details on nonvoting common stock, see Note 19. The fair value of the purchase price transferred upon completion of the acquisition includes the fair value of CSC common stock and nonvoting common stock that was issued to TD Ameritrade stockholders, as well as the fair value of assumed TD Ameritrade equity awards attributable to pre-combination services. The purchase price was calculated as follows: Fair value of consideration for TD Ameritrade outstanding common stock $ 21,664 Fair value of replaced TD Ameritrade equity awards attributable to pre-combination services (1) 94 Purchase price $ 21,758 (1) Share-based awards held by TD Ameritrade employees prior to the acquisition date were assumed by Schwab and converted into share-based awards with respect to CSC common stock, after giving effect to the exchange ratio of 1.0837 . Such share-based awards are otherwise subject to the same terms and conditions as were applicable immediately before the merger, except for performance-based restricted stock units which were converted into time-based restricted stock units. The portion of the fair value of the share-based awards that relates to services performed by the employees prior to the acquisition date is included in the purchase price. - 79 - THE CHARLES SCHWAB CORPORATION Notes to Consolidated Financial Statements (Tabular Amounts in Millions, Except Per Share Data, Option Price Amounts, Ratios, or as Noted) The Company accounted for the TD Ameritrade acquisition as a business combination under GAAP and accordingly, the purchase price was allocated to the assets acquired and liabilities assumed based on their fair values, except for certain exceptions to the recognition principle of acquisition accounting, such as leases, share-based payments, and income taxes, as of the date of acquisition. I nformation regarding the acquisition is final and there were no adjustments to the provisional purchase price and fair value estimates presented in the 2020 Form 10-K. The following table summarizes the purchase price, fair values of the assets acquired and liabilities assumed, and resulting goodwill as of the October 6, 2020 acquisition date: Purchase price $ 21,758 Fair value of assets acquired: Cash and cash equivalents 3,484 Cash and investments segregated and on deposit for regulatory purposes 14,236 Receivables from brokerage clients 28,009 Available for sale securities 1,779 Acquired intangible assets 8,880 Equipment, office facilities, and property 470 Other assets 3,088 Total assets acquired 59,946 Fair value of liabilities assumed: Payables to brokerage clients 37,599 Accrued expenses and other liabilities 6,975 Long-term debt 3,829 Total liabilities assumed 48,403 Fair value of net identifiable assets acquired 11,543 Goodwill $ 10,215 The identifiable tangible and intangible assets of $ 470 million and $ 8.9 billion, respectively, are subject to depreciation and amortization. The following table summarizes the major classes of tangible and intangible assets and their respective fair values and weighted-average useful lives: Fair Value Weighted-Average Useful Life (Years) Equipment, office facilities, and property Real property (1) $ 226 37 Personal property (2) 162 2 Construction in progress 49 N/A Land 33 N/A Total equipment, office facilities, and property $ 470 Acquired intangible assets Client relationships $ 8,700 20 Existing technology 165 2 Trade names 15 2 Total acquired intangible assets $ 8,880 (1) Consists primarily of buildings. (2) Consists primarily of equipment and leasehold improvements. N/A Not applicable. Goodwill of $ 10.2 billion is primarily attributable to the scale, skill sets, operations, and synergies that can be leveraged to enable the combined company to build a stronger enterprise and will not be deductible for tax purposes. The goodwill assigned to the Investor Services and Advisor Services segments were $ 6.4 billion and $ 3.8 billion, respectively. - 80 - THE CHARLES SCHWAB CORPORATION Notes to Consolidated Financial Statements (Tabular Amounts in Millions, Except Per Share Data, Option Price Amounts, Ratios, or as Noted) The Company’s consolidated statements of income include total net revenues and net income attributable to the TD Ameritrade acquisition of $ 1.7 billion and $ 583 million, respectively, for the period October 6, 2020 through December 31, 2020. In connection with the TD Ameritrade acquisition, the Company incurred various professional fees and other costs such as advisory, legal, and accounting fees. In total, the Company incurred acquisition costs of $ 56 million for the year ended December 31, 2020, which are primarily included in professional services on the consolidated statement of income. USAA-IMCO 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 over one 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 client base by serving USAA’s members through the long-term referral agreement. The Company accounted for the USAA-IMCO acquisition as a business combination under GAAP and accordingly, the purchase price was allocated to the assets acquired and liabilities assumed based on their fair values as of the date of acquisition. During the three months ended September 30, 2020, we made a $ 43 million post-closing adjustment to the purchase price resulting in reductions of $ 9 million and $ 34 million to our initial estimates of the fair value of the intangible assets acquired and goodwill, respectively. The Company finalized the valuation of assets and liabilities during the three months ended December 31, 2020, resulting in no additional adjustments to the estimated fair values as of the date of acquisition. The following table summarizes the purchase price, fair values of the assets acquired and liabilities assumed, and resulting goodwill as of the May 26, 2020 acquisition date, adjusted for the post-closing adjustments described above: Purchase price $ 1,581 Fair value of assets acquired: Cash segregated and on deposit for regulatory purposes 4,392 Receivables from brokerage clients 80 Acquired intangible assets 1,109 Total assets acquired 5,581 Fair value of liabilities assumed: Payables to brokerage clients 4,472 Total liabilities assumed 4,472 Fair value of net identifiable assets acquired 1,109 Goodwill $ 472 The identifiable intangible assets of $ 1.1 billion are subject to amortization. The following table summarizes the major classes of intangible assets acquired and their respective fair values and weighted-average useful lives: Fair Value Weighted-Average Useful Life (Years) Customer relationships $ 962 18 Brokerage referral agreement (1) 142 20 Royalty-free license 5 7 Total acquired intangible assets $ 1,109 (1) The brokerage referral agreement has an initial term of 5 years and is automatically renewable for one-year increments thereafter. Goodwill of $ 472 million, primarily attributable to the additional scale and anticipated synergies from the USAA-IMCO acquisition, was assigned to the Investor Services segment and is deductible for tax purposes. The Company’s consolidated statements of income include total net revenues and net loss attributable to the USAA-IMCO acquisition of $ 235 million and $ 51 million, respectively, for the period May 26, 2020 through December 31, 2020. - 81 - THE CHARLES SCHWAB CORPORATION Notes to Consolidated Financial Statements (Tabular Amounts in Millions, Except Per Share Data, Option Price Amounts, Ratios, or as Noted) In connection with the acquisition, the Company agreed to reimburse USAA for certain contract termination and other fees and severance costs incurred by USAA. These costs totaled $ 21 million for the year ended December 31, 2020 and are included in other expense on the consolidated statements of income. Additionally, the Company incurred various professional fees and other costs related to the USAA-IMCO acquisition, such as advisory, legal, and accounting fees. In total, the Company incurred acquisition costs of $ 54 million for the year ended December 31, 2020, which are primarily included in professional services, other expense, and compensation and benefits on the consolidated statement of income. Pro Forma Financial Information (Unaudited) The following table presents unaudited pro forma financial information as if the TD Ameritrade and USAA-IMCO acquisitions had occurred on January 1, 2019. The unaudited pro forma results reflect after-tax adjustments for acquisition costs, amortization and depreciation of acquired intangible and tangible assets, the impact of the amended IDA agreement which reduced the service fee on client cash deposits held at the TD Depository Institutions to 15 basis points from the 25 basis points paid by TD Ameritrade under its previous IDA agreement, and other immaterial adjustments for the effects of purchase accounting, and do not reflect potential revenue growth or cost savings that may be realized as a result of the acquisitions. In accordance with ASC 805 Business Combinations , pro forma net income for the year ended December 31, 2020 excludes after-tax acquisition costs for both Schwab and the acquirees of $ 156 million. The unaudited pro forma financial information is presented for informational purposes only, and is not necessarily indicative of future operations or results had the TD Ameritrade and USAA-IMCO acquisitions been completed as of January 1, 2019. Year Ended December 31, 2020 Total net revenues $ 16,617 Net income available to common stockholders 4,617 - 82 - THE CHARLES SCHWAB CORPORATION Notes to Consolidated Financial Statements (Tabular Amounts in Millions, Except Per Share Data, Option Price Amounts, Ratios, or as Noted) 4. Revenue Recognition Disaggregated Revenue Disaggregation of Schwab’s revenue by major source is as follows: Year Ended December 31, 2022 2021 2020 Net interest revenue Cash and cash equivalents $ 812 $ 40 $ 120 Cash and investments segregated 691 24 141 Receivables from brokerage clients 3,321 2,455 848 Available for sale securities 4,139 4,641 4,537 Held to maturity securities 1,688 — — Bank loans 1,083 620 545 Securities lending revenue 471 720 334 Other interest revenue 22 6 6 Interest revenue 12,227 8,506 6,531 Bank deposits ( 723 ) ( 54 ) ( 93 ) Payables to brokerage clients ( 123 ) ( 9 ) ( 12 ) Short-term borrowings ( 154 ) ( 9 ) — Long-term debt ( 498 ) ( 384 ) ( 289 ) Securities lending expense ( 48 ) ( 24 ) ( 33 ) Other interest expense 1 4 9 Interest expense ( 1,545 ) ( 476 ) ( 418 ) Net interest revenue 10,682 8,030 6,113 Asset management and administration fees Mutual funds, ETFs, and CTFs 2,055 1,961 1,770 Advice solutions 1,854 1,993 1,443 Other 307 320 262 Asset management and administration fees 4,216 4,274 3,475 Trading revenue Commissions 1,787 2,050 739 Order flow revenue 1,738 2,053 621 Principal transactions 148 49 56 Trading revenue 3,673 4,152 1,416 Bank deposit account fees 1,409 1,315 355 Other 782 749 332 Total net revenues $ 20,762 $ 18,520 $ 11,691 For a summary of revenue provided by our reportable segments, see Note 24. The recognition of revenue is not impacted by the operating segment in which revenue is generated. - 83 - THE CHARLES SCHWAB CORPORATION Notes to Consolidated Financial Statements (Tabular Amounts in Millions, Except Per Share Data, Option Price Amounts, Ratios, or as Noted) 5. Receivables from and Payables to Brokerage Clients Receivables from and payables to brokerage clients are detailed below: December 31, 2022 2021 Receivables Margin loans $ 63,065 $ 87,365 Other brokerage receivables 3,526 3,200 Receivables from brokerage clients — net (1) $ 66,591 $ 90,565 Payables Interest-bearing payables $ 81,583 $ 107,551 Non-interest-bearing payables 15,855 18,120 Payables to brokerage clients $ 97,438 $ 125,671 (1) The allowance for credit losses for receivables from brokerage clients and related activity was immaterial for all periods presented. At December 31, 2022 and 2021, approximately 17 % of total CS&Co and TD Ameritrade, Inc. client accounts were located in California. - 84 - THE CHARLES SCHWAB CORPORATION Notes to Consolidated Financial Statements (Tabular Amounts in Millions, Except Per Share Data, Option Price Amounts, Ratios, or as Noted) 6. Investment Securities The amortized cost, gross unrealized gains and losses, and fair value of the Company’s AFS and HTM investment securities are as follows: December 31, 2022 Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Fair Value Available for sale securities U.S. agency mortgage-backed securities $ 85,994 $ — $ 8,306 $ 77,688 U.S. Treasury securities 41,879 — 1,877 40,002 Asset-backed securities (1) 13,672 — 649 13,023 Corporate debt securities (2) 13,830 — 1,275 12,555 Certificates of deposit 2,245 — 14 2,231 Foreign government agency securities 1,033 — 64 969 U.S. state and municipal securities 713 — 75 638 Non-agency commercial mortgage-backed securities 473 — 23 450 Other 323 — 8 315 Total available for sale securities (3) $ 160,162 $ — $ 12,291 $ 147,871 Held to maturity securities U.S. agency mortgage-backed securities $ 173,074 $ 1,442 $ 15,580 $ 158,936 Total held to maturity securities $ 173,074 $ 1,442 $ 15,580 $ 158,936 December 31, 2021 Available for sale securities U.S. agency mortgage-backed securities $ 335,803 $ 3,141 $ 4,589 $ 334,355 U.S. Treasury securities 21,394 13 125 21,282 Asset-backed securities (1) 17,547 79 80 17,546 Corporate debt securities (2) 12,310 143 109 12,344 U.S. state and municipal securities 1,611 81 5 1,687 Non-agency commercial mortgage-backed securities 1,170 20 — 1,190 Certificates of deposit 1,000 — 1 999 Foreign government agency securities 425 — — 425 Commercial paper 200 — — 200 Other 22 4 — 26 Total available for sale securities $ 391,482 $ 3,481 $ 4,909 $ 390,054 (1) Approximately 57 % and 58 % of asset-backed securities held as of December 31, 2022 and 2021, respectively, were Federal Family Education Loan Program Asset-Backed Securities. Asset-backed securities collateralized by credit card receivables represented approximately 18 % and 30 % of the asset-backed securities held as of December 31, 2022 and 2021, respectively. (2) As of December 31, 2022 and 2021, approximately 37 % and 31 %, respectively, of the total AFS corporate debt securities were issued by institutions in the financial services industry. (3) Included in cash and cash equivalents on the condensed consolidated balance sheets, but excluded from this table, is $ 48 million of AFS commercial paper as of December 31, 2022 ( none as of December 31, 2021). These holdings have maturities of three months or less at the time of acquisition, and an aggregate market value equal to amortized cost. In January and November 2022, the Company transferred $ 108.8 billion and $ 79.8 billion, respectively, of U.S. agency mortgage-backed securities with a total net unrealized loss at the time of transfer of $ 2.4 billion and $ 15.8 billion, respectively, from the AFS category to the HTM category. At December 31, 2022, our banking subsidiaries had pledged securities with a fair value of $ 63.1 billion as collateral to secure borrowing capacity on secured credit facilities with the FHLB (see Note 13). Our banking subsidiaries also pledge investment securities as collateral to secure borrowing capacity at the Federal Reserve discount window, and had pledged securities with a - 85 - THE CHARLES SCHWAB CORPORATION Notes to Consolidated Financial Statements (Tabular Amounts in Millions, Except Per Share Data, Option Price Amounts, Ratios, or as Noted) fair value of $ 7.8 billion as collateral for this facility at December 31, 2022. The Company also pledges securities issued by federal agencies to secure certain trust deposits. The fair value of these pledged securities was $ 1.3 billion at December 31, 2022. At December 31, 2022, our banking subsidiaries had pledged HTM and AFS securities as collateral under repurchase agreements with external financial institutions. HTM securities pledged were U.S. agency mortgage-backed securities with an aggregate amortized cost of $ 4.5 billion, and AFS securities pledged were U.S. Treasury securities with an aggregate fair value of $ 41 million. Securities pledged as collateral under these repurchase agreements may be sold, repledged, or otherwise used by the counterparties. See Notes 2, 13, and 17 for additional information on these repurchase agreements. Securities with unrealized losses, aggregated by category and period of continuous unrealized loss, of AFS investment securities are as follows: Less than 12 months 12 months or longer Total December 31, 2022 Fair Value Unrealized Losses Fair Value Unrealized Losses Fair Value Unrealized Losses Available for sale securities U.S. agency mortgage-backed securities $ 34,938 $ 2,025 $ 42,558 $ 6,281 $ 77,496 $ 8,306 U.S. Treasury securities 27,063 716 12,519 1,161 39,582 1,877 Asset-backed securities 6,717 217 6,299 432 13,016 649 Corporate debt securities 8,552 542 3,998 733 12,550 1,275 Certificates of deposit 2,033 10 196 4 2,229 14 Foreign government agency securities 756 50 214 14 970 64 U.S. state and municipal securities 482 31 157 44 639 75 Non-agency commercial mortgage-backed securities 443 23 — — 443 23 Other 315 8 — — 315 8 Total $ 81,299 $ 3,622 $ 65,941 $ 8,669 $ 147,240 $ 12,291 December 31, 2021 Available for sale securities U.S. agency mortgage-backed securities $ 186,955 $ 3,216 $ 38,007 $ 1,373 $ 224,962 $ 4,589 U.S. Treasury securities 16,658 125 21 — 16,679 125 Asset-backed securities 6,093 58 2,708 22 8,801 80 Corporate debt securities 4,713 99 197 10 4,910 109 Certificates of deposit 799 1 — — 799 1 U.S. state and municipal securities 191 4 5 1 196 5 Total $ 215,409 $ 3,503 $ 40,938 $ 1,406 $ 256,347 $ 4,909 At December 31, 2022, substantially all rated securities in the investment portfolios were investment grade. U.S. agency mortgage-backed securities do not have explicit credit ratings; however, management considers these to be of the highest credit quality and rating given the guarantee of principal and interest by the U.S. government or U.S. government-sponsored enterprises. For a description of management’s quarterly evaluation of AFS securities in unrealized loss positions, see Note 2. No amounts were recognized as credit loss expense and no securities were written down to fair value through earnings for the years ended December 31, 2022 and 2021. None of the Company’s AFS securities held as of December 31, 2022 and 2021 had an allowance for credit losses. All HTM securities as of December 31, 2022 were U.S. agency mortgage-backed securities and therefore had no allowance for credit losses because expected nonpayment of the amortized cost basis is zero. The Company had $ 685 million of accrued interest receivable for AFS and HTM securities as of December 31, 2022 and $ 683 million of accrued interest receivable for AFS securities as of December 31, 2021. These amounts are excluded from the amortized cost basis and fair market value of AFS and HTM securities and included in other assets on the consolidated balance - 86 - THE CHARLES SCHWAB CORPORATION Notes to Consolidated Financial Statements (Tabular Amounts in Millions, Except Per Share Data, Option Price Amounts, Ratios, or as Noted) sheets. There were no write-offs of accrued interest receivable on AFS and HTM securities during the year ended December 31, 2022, or for AFS securities for the year ended December 31, 2021. In the table below, mortgage-backed securities and other asset-backed securities have been allocated to maturity groupings based on final contractual maturities. As borrowers may have the right to call or prepay certain obligations underlying our investment securities, actual maturities may differ from the scheduled contractual maturities presented below. The maturities of AFS and HTM investment securities are as follows: December 31, 2022 Within 1 year After 1 year through 5 years After 5 years through 10 years After 10 years Total Available for sale securities U.S. agency mortgage-backed securities $ 1,202 $ 14,515 $ 14,721 $ 47,250 $ 77,688 U.S. Treasury securities 21,210 18,075 717 — 40,002 Asset-backed securities — 4,198 1,714 7,111 13,023 Corporate debt securities 382 9,138 3,035 — 12,555 Certificates of deposit 2,134 97 — — 2,231 Foreign government agency securities — 969 — — 969 U.S. state and municipal securities 37 30 417 154 638 Non-agency commercial mortgage-backed securities — — — 450 450 Other 295 — — 20 315 Total fair value $ 25,260 $ 47,022 $ 20,604 $ 54,985 $ 147,871 Total amortized cost $ 25,580 $ 50,074 $ 23,237 $ 61,271 $ 160,162 Weighted-average yield (1) 2.27 % 1.94 % 1.99 % 2.29 % 2.13 % Held to maturity securities U.S. agency mortgage-backed securities $ 409 $ 5,441 $ 38,888 $ 114,198 $ 158,936 Total fair value $ 409 $ 5,441 $ 38,888 $ 114,198 $ 158,936 Total amortized cost $ 420 $ 5,839 $ 42,235 $ 124,580 $ 173,074 Weighted-average yield (1) 2.51 % 2.39 % 1.72 % 1.71 % 1.74 % (1) The weighted-average yield is computed using the amortized cost at December 31, 2022. Proceeds and gross realized gains and losses from sales of AFS investment securities are as follows: Year Ended December 31, 2022 2021 2020 Proceeds $ 24,704 $ 13,306 $ 4,801 Gross realized gains 157 40 5 Gross realized losses 166 36 1 - 87 - THE CHARLES SCHWAB CORPORATION Notes to Consolidated Financial Statements (Tabular Amounts in Millions, Except Per Share Data, Option Price Amounts, Ratios, or as Noted) 7. Bank Loans and Related Allowance for Credit Losses The composition of bank loans and delinquency analysis by portfolio segment and class of financing receivable is as follows: December 31, 2022 Current 30-59 days past due 60-89 days past due > 90 days past due and other nonaccrual loans (3) Total past due and other nonaccrual loans Total loans Allowance for credit losses Total bank loans – net Residential real estate: First Mortgages (1,2) $ 25,157 $ 25 $ 2 $ 14 $ 41 $ 25,198 $ 66 $ 25,132 HELOCs (1,2) 590 2 — 5 7 597 4 593 Total residential real estate 25,747 27 2 19 48 25,795 70 25,725 Pledged asset lines 14,584 4 — 4 8 14,592 — 14,592 Other 191 — — — — 191 3 188 Total bank loans $ 40,522 $ 31 $ 2 $ 23 $ 56 $ 40,578 $ 73 $ 40,505 December 31, 2021 Residential real estate: First Mortgages (1,2) $ 21,022 $ 41 $ 1 $ 26 $ 68 $ 21,090 $ 13 $ 21,077 HELOCs (1,2) 637 2 — 9 11 648 2 646 Total residential real estate 21,659 43 1 35 79 21,738 15 21,723 Pledged asset lines 12,698 3 8 — 11 12,709 — 12,709 Other 207 — — — — 207 3 204 Total bank loans $ 34,564 $ 46 $ 9 $ 35 $ 90 $ 34,654 $ 18 $ 34,636 (1) First Mortgages and HELOCs include unamortized premiums and discounts and direct origination costs of $ 98 million and $ 91 million at December 31, 2022 and 2021, respectively. (2) At December 31, 2022 and 2021, 43 % and 46 %, respectively, of the First Mortgage and HELOC portfolios were concentrated in California. These loans have performed in a manner consistent with the portfolio as a whole. (3) There were no loans accruing interest that were contractually 90 days or more past due at December 31, 2022 or 2021. At December 31, 2022, CSB had pledged the full balance of First Mortgages and HELOCs pursuant to a blanket lien status collateral arrangement to secure borrowing capacity on a secured credit facility with the FHLB (see Note 13). - 88 - THE CHARLES SCHWAB CORPORATION Notes to Consolidated Financial Statements (Tabular Amounts in Millions, Except Per Share Data, Option Price Amounts, Ratios, or as Noted) Changes in the allowance for credit losses on bank loans were as follows: December 31, 2022 First Mortgages HELOCs Total residential real estate Pledged asset lines Other Total Balance at beginning of year $ 13 $ 2 $ 15 $ — $ 3 $ 18 Charge-offs — — — ( 4 ) — ( 4 ) Recoveries — 1 1 — — 1 Provision for credit losses 53 1 54 4 — 58 Balance at end of year $ 66 $ 4 $ 70 $ — $ 3 $ 73 December 31, 2021 Balance at beginning of year $ 22 $ 5 $ 27 $ — $ 3 $ 30 Charge-offs — — — — ( 1 ) ( 1 ) Recoveries — 1 1 — — 1 Provision for credit losses ( 9 ) ( 4 ) ( 13 ) — 1 ( 12 ) Balance at end of year $ 13 $ 2 $ 15 $ — $ 3 $ 18 December 31, 2020 Balance at beginning of year $ 11 $ 4 $ 15 $ — $ 3 $ 18 Adoption of ASU 2016-13 1 — 1 — — 1 Recoveries 1 — 1 — — 1 Provision for credit losses 9 1 10 — — 10 Balance at end of year $ 22 $ 5 $ 27 $ — $ 3 $ 30 As discussed in Note 2, the Company charges off any unsecured PAL balances no later than 90-days past due. PALs are also subject to the collateral maintenance practical expedient under ASC 326 Financial Instruments — Credit Losses . All PALs were fully collateralized by securities with fair values in excess of borrowings as of December 31, 2022 and 2021, respectively. Therefore, no allowance for credit losses for PALs as of those dates was required. The U.S. economy continues to be challenged by elevated inflation, tightening monetary policy, and geopolitical unrest. Management’s macroeconomic outlook reflects a near-term home price depreciation, which combined with increases in Treasury yields and mortgage rates, have extended the expected life of the portfolio and reduced borrower affordability. These changes to the macroeconomic outlook resulted in higher modeled projections of loss rates at December 31, 2022, compared to December 31, 2021, even as credit quality metrics continued to be strong in the Company’s bank loans portfolio. A summary of bank loan-related nonperforming assets and troubled debt restructurings is as follows: December 31, 2022 2021 Nonaccrual loans (1) $ 23 $ 35 Other real estate owned (2) 2 1 Total nonperforming assets 25 36 Troubled debt restructurings — — Total nonperforming assets and troubled debt restructurings $ 25 $ 36 (1) Nonaccrual loans include nonaccrual troubled debt restructurings. (2) Included in other assets on the consolidated balance sheets. - 89 - THE CHARLES SCHWAB CORPORATION Notes to Consolidated Financial Statements (Tabular Amounts in Millions, Except Per Share Data, Option Price Amounts, Ratios, or as Noted) Credit Quality In addition to monitoring delinquency, Schwab monitors the credit quality of First Mortgages and HELOCs by stratifying the portfolios by the following: • Year of origination; • Borrower FICO scores at origination (Origination FICO); • Updated borrower FICO scores (Updated FICO); • Loan-to-value (LTV) ratios at origination (Origination LTV); and • Estimated Current LTV ratios (Estimated Current LTV). Borrowers’ FICO scores are provided by an independent third-party credit reporting service and generally updated quarterly. The Origination LTV and Estimated Current LTV for a HELOC include any first lien mortgage outstanding on the same property at the time of the HELOC’s origination. The Estimated Current LTV for each loan is updated on a monthly basis by reference to a home price appreciation index. The credit quality indicators of the Company’s First Mortgages and HELOCs are detailed below: First Mortgages Amortized Cost Basis by Origination Year December 31, 2022 2022 2021 2020 2019 2018 pre-2018 Total First Mortgages Revolving HELOCs amortized cost basis HELOCs converted to term loans Total HELOCs Origination FICO <620 $ 3 $ 1 $ — $ — $ — $ 1 $ 5 $ — $ — $ — 620 – 679 28 31 21 2 1 14 97 — 2 2 680 – 739 820 1,224 430 116 30 213 2,833 59 47 106 ≥740 5,593 11,037 3,819 811 112 891 22,263 323 166 489 Total $ 6,444 $ 12,293 $ 4,270 $ 929 $ 143 $ 1,119 $ 25,198 $ 382 $ 215 $ 597 Origination LTV ≤70% $ 4,771 $ 10,641 $ 3,549 $ 749 $ 111 $ 829 $ 20,650 $ 332 $ 153 $ 485 >70% – ≤90% 1,673 1,652 721 180 32 288 4,546 50 61 111 >90% – ≤100% — — — — — 2 2 — 1 1 Total $ 6,444 $ 12,293 $ 4,270 $ 929 $ 143 $ 1,119 $ 25,198 $ 382 $ 215 $ 597 Updated FICO <620 $ 11 $ 12 $ 7 $ 2 $ 2 $ 11 $ 45 $ 2 $ 5 $ 7 620 – 679 87 127 42 10 6 37 309 6 10 16 680 – 739 711 1,079 378 89 21 140 2,418 52 35 87 ≥740 5,635 11,075 3,843 828 114 931 22,426 322 165 487 Total $ 6,444 $ 12,293 $ 4,270 $ 929 $ 143 $ 1,119 $ 25,198 $ 382 $ 215 $ 597 Estimated Current LTV (1) ≤70% $ 4,574 $ 11,751 $ 4,255 $ 928 $ 143 $ 1,114 $ 22,765 $ 380 $ 214 $ 594 >70% – ≤90% 1,845 542 15 1 — 5 2,408 2 1 3 >90% – ≤100% 25 — — — — — 25 — — — >100% — — — — — — — — — — Total $ 6,444 $ 12,293 $ 4,270 $ 929 $ 143 $ 1,119 $ 25,198 $ 382 $ 215 $ 597 Percent of Loans on Nonaccrual Status 0.02 % 0.03 % 0.09 % 0.02 % 0.02 % 0.48 % 0.06 % 0.34 % 1.90 % 0.84 % (1) Represents the LTV for the full line of credit (drawn and undrawn) for revolving HELOCs. - 90 - THE CHARLES SCHWAB CORPORATION Notes to Consolidated Financial Statements (Tabular Amounts in Millions, Except Per Share Data, Option Price Amounts, Ratios, or as Noted) First Mortgages Amortized Cost Basis by Origination Year December 31, 2021 2021 2020 2019 2018 pre-2018 Total First Mortgages Revolving HELOCs amortized cost basis HELOCs converted to term loans Total HELOCs Origination FICO <620 $ 1 $ 1 $ — $ — $ 1 $ 3 $ — $ — $ — 620 – 679 34 25 5 1 25 90 — 2 2 680 – 739 1,306 524 146 41 313 2,330 61 60 121 ≥740 11,649 4,454 1,049 165 1,350 18,667 308 217 525 Total $ 12,990 $ 5,004 $ 1,200 $ 207 $ 1,689 $ 21,090 $ 369 $ 279 $ 648 Origination LTV ≤70% $ 11,234 $ 4,159 $ 948 $ 160 $ 1,260 $ 17,761 $ 305 $ 199 $ 504 >70% – ≤90% 1,756 845 252 47 426 3,326 64 78 142 >90% – ≤100% — — — — 3 3 — 2 2 Total $ 12,990 $ 5,004 $ 1,200 $ 207 $ 1,689 $ 21,090 $ 369 $ 279 $ 648 Updated FICO <620 $ 5 $ 2 $ 1 $ — $ 14 $ 22 $ 2 $ 6 $ 8 620 – 679 96 69 19 7 38 229 6 14 20 680 – 739 1,265 421 115 24 202 2,027 51 39 90 ≥740 11,624 4,512 1,065 176 1,435 18,812 310 220 530 Total $ 12,990 $ 5,004 $ 1,200 $ 207 $ 1,689 $ 21,090 $ 369 $ 279 $ 648 Estimated Current LTV (1) ≤70% $ 11,707 $ 4,961 $ 1,196 $ 206 $ 1,684 $ 19,754 $ 368 $ 277 $ 645 >70% – ≤90% 1,283 43 4 1 5 1,336 1 2 3 >90% – ≤100% — — — — — — — — — >100% — — — — — — — — — Total $ 12,990 $ 5,004 $ 1,200 $ 207 $ 1,689 $ 21,090 $ 369 $ 279 $ 648 Percent of Loans on Nonaccrual Status 0.03 % 0.10 % 0.03 % 0.03 % 1.03 % 0.12 % 0.64 % 2.33 % 1.39 % (1) Represents the LTV for the full line of credit (drawn and undrawn) for revolving HELOCs. At December 31, 2022, First Mortgage loans of $ 20.5 billion had adjustable interest rates. Substantially all of these mortgages have initial fixed interest rates for three to ten years and interest rates that adjust annually thereafter. Approximately 28 % of the balance of these mortgages consisted of loans with interest-only payment terms. The interest rates on approximately 92 % of the balance of these interest-only loans are not scheduled to reset for three or more years. Schwab’s mortgage loans do not include interest terms described as temporary introductory rates below current market rates. At December 31, 2022 and 2021, Schwab had $ 134 million and $ 57 million, respectively, of accrued interest on bank loans, which is excluded from the amortized cost basis of bank loans and is included in other assets on the consolidated balance sheets. The HELOC product has a 30 -year loan term with an initial draw period of ten years from the date of origination. After the initial draw period, the balance outstanding at such time is converted to a 20 -year amortizing loan. The interest rate during the initial draw period and the 20 -year amortizing period is a floating rate based on the prime rate plus a margin. The following table presents HELOCs converted to amortizing loans during each period presented: December 31, 2022 2021 HELOCs converted to amortizing loans $ 13 $ 19 - 91 - THE CHARLES SCHWAB CORPORATION Notes to Consolidated Financial Statements (Tabular Amounts in Millions, Except Per Share Data, Option Price Amounts, Ratios, or as Noted) The following table presents when current outstanding HELOCs will convert to amortizing loans: December 31, 2022 Balance Converted to an amortizing loan by period end $ 215 Within 1 year 35 > 1 year – 3 years 46 > 3 years – 5 years 61 > 5 years 240 Total $ 597 At December 31, 2022, $ 460 million of the HELOC portfolio was secured by second liens on the associated properties. Second lien mortgage loans typically possess a higher degree of credit risk given the subordination to the first lien holder in the event of default. In addition to the credit monitoring activities described previously, Schwab also monitors credit risk by reviewing the delinquency status of the first lien loan on the associated property. At December 31, 2022, the borrowers on approximately 57 % of HELOC loan balances outstanding only paid the minimum amount due. 8. Equipment, Office Facilities, and Property Equipment, office facilities, and property are detailed below: December 31, 2022 2021 Software $ 2,940 $ 2,524 Buildings 1,693 1,640 Information technology and telecommunications equipment 1,008 679 Leasehold improvements 472 462 Construction in progress 274 429 Land 209 208 Other 351 388 Total equipment, office facilities, and property 6,947 6,330 Accumulated depreciation and amortization ( 3,233 ) ( 2,888 ) Total equipment, office facilities, and property — net $ 3,714 $ 3,442 - 92 - THE CHARLES SCHWAB CORPORATION Notes to Consolidated Financial Statements (Tabular Amounts in Millions, Except Per Share Data, Option Price Amounts, Ratios, or as Noted) 9. Goodwill and Acquired Intangible Assets Acquired intangible assets and goodwill are detailed below: December 31, 2022 December 31, 2021 Gross Carrying Value Accumulated Amortization Net Carrying Value Gross Carrying Value Accumulated Amortization Net Carrying Value Client relationships $ 10,085 $ ( 1,422 ) $ 8,663 $ 10,089 $ ( 908 ) $ 9,181 Technology 299 ( 261 ) 38 305 ( 197 ) 108 Trade names 120 ( 32 ) 88 116 ( 26 ) 90 Total acquired intangible assets $ 10,504 $ ( 1,715 ) $ 8,789 $ 10,510 $ ( 1,131 ) $ 9,379 Estimated future annual amortization expense for acquired intangible assets as of December 31, 2022 is as follows: 2023 $ 534 2024 518 2025 512 2026 508 2027 507 Thereafter 6,124 Total $ 8,703 Note: The above schedule excludes indefinite-lived intangible assets of $ 86 million. The changes in the carrying amount of goodwill, as allocated to our reportable segments, are presented in the following table: Investor Services Advisor Services Total Balance at December 31, 2020 $ 7,970 $ 3,982 $ 11,952 Goodwill acquired and other changes during the period — — — December 31, 2021 7,970 3,982 11,952 Goodwill acquired and other changes during the period ( 1 ) — ( 1 ) Balance at December 31, 2022 $ 7,969 $ 3,982 $ 11,951 See Note 3 for additional information on the Company’s acquisitions. We performed an assessment of each of the Company’s reporting units as of our annual testing date. Based on this analysis, we concluded that goodwill was not impaired. There were no indicators that goodwill was impaired after our annual testing date. Schwab did no t recognize any goodwill impairment in any of the years presented. - 93 - THE CHARLES SCHWAB CORPORATION Notes to Consolidated Financial Statements (Tabular Amounts in Millions, Except Per Share Data, Option Price Amounts, Ratios, or as Noted) 10. Other Assets The components of other assets are as follows: December 31, 2022 2021 Deferred tax assets (1) $ 5,370 $ — Other receivables from brokers, dealers, and clearing organizations 2,171 2,475 Other investments (2) 2,130 1,526 Receivables — interest, dividends, and other 1,919 1,615 Other securities owned at fair value (3) 1,432 1,584 Operating lease ROU assets 894 842 Securities borrowed 705 582 Customer contract receivables (4) 560 637 Capitalized contract costs 379 344 Other 539 713 Total other assets $ 16,099 $ 10,318 (1) At December 31, 2021, the Company had deferred tax liabilities of $ 1.5 billion (see Note 22), which are included in accrued expenses and other liabilities on the consolidated balance sheet. (2) Includes LIHTC investments and certain other CRA-related investments (see Note 11). This item also includes investments in FHLB stock of $ 528 million and $ 29 million at December 31, 2022 and 2021, respectively, which are required to be held as a condition of borrowing with the FHLB (see Note 13) and can only be sold to the issuer at its par value. Any cash dividends received from investments in FHLB stock are recognized as interest revenue in the consolidated statements of income. CSB, CSPB, and Trust Bank are members of the Federal Reserve and as a condition of membership, are required to hold Federal Reserve stock. Other investments also includes investments in FRB stock of $ 345 million and $ 436 million at December 31, 2022 and 2021, respectively. (3) Includes fractional shares held in client brokerage accounts. Corresponding repurchase liabilities in an equal amount for these client-held fractional shares are included in accrued expenses and other liabilities on the consolidated balance sheet. See also Notes 2 and 18. (4) Represents substantially all receivables from contracts with customers within the scope of ASC 606. Schwab did not have any other significant contract assets or contract liability balances as of December 31, 2022 or 2021. Capitalized contract costs Capitalized contract costs relate to incremental costs of obtaining a contract with a customer, including sales commissions paid to employees for obtaining contracts with clients, and are presented in the table above. These costs are amortized to expense on a straight-line basis over a period that is consistent with how the related revenue is recognized. Amortization expense related to capitalized contract costs was $ 77 million, $ 69 million, and $ 63 million during the years ended December 31, 2022, 2021, and 2020, respectively, which was recorded in compensation and benefits expense on the consolidated statements of income. 11. Variable Interest Entities As of December 31, 2022 and 2021, substantially all of Schwab’s involvement with VIEs is through CSB’s CRA-related investments and most of these are related to LIHTC investments. As part of CSB’s community reinvestment initiatives, CSB invests in funds that make equity investments in multifamily affordable housing properties and receives tax credits and other tax benefits for these investments. During 2022, 2021, and 2020, CSB recorded amortization of $ 96 million, $ 71 million, and $ 56 million, respectively, and recognized tax credits and other tax benefits of $ 121 million, $ 90 million, and $ 69 million, respectively, associated with these investments. The amortization, as well as the tax credits and other tax benefits, are included in taxes on income. - 94 - THE CHARLES SCHWAB CORPORATION Notes to Consolidated Financial Statements (Tabular Amounts in Millions, Except Per Share Data, Option Price Amounts, Ratios, or as Noted) Aggregate assets, liabilities, and maximum exposure to loss The aggregate assets, liabilities, and maximum exposure to loss from those VIEs in which Schwab holds a variable interest, but is not the primary beneficiary, are summarized in the table below: December 31, 2022 December 31, 2021 Aggregate assets Aggregate liabilities Maximum exposure to loss Aggregate assets Aggregate liabilities Maximum exposure to loss LIHTC investments (1) $ 1,094 $ 619 $ 1,094 $ 915 $ 530 $ 915 Other investments (2) 167 — 215 161 — 211 Total $ 1,261 $ 619 $ 1,309 $ 1,076 $ 530 $ 1,126 (1) Aggregate assets and aggregate liabilities are included in other assets and accrued expenses and other liabilities, respectively, on the consolidated balance sheets. (2) Other investments include non-LIHTC CRA investments that are accounted for as loans at amortized cost, equity method investments, AFS securities, or using the adjusted cost method. Aggregate assets are included in AFS securities, bank loans – net, or other assets on the consolidated balance sheets. Schwab’s maximum exposure to loss would result from the loss of the investments, including any committed amounts. Schwab’s funding of these remaining commitments is dependent upon the occurrence of certain conditions, and Schwab expects to pay substantially all of these commitments between 2023 and 2026. During the years ended December 31, 2022, 2021, and 2020, Schwab did not provide or intend to provide financial or other support to the VIEs that it was not contractually required to provide. 12. Bank Deposits Bank deposits consist of interest-bearing and non-interest-bearing deposits as follows: December 31, 2022 2021 Interest-bearing deposits: Deposits swept from brokerage accounts $ 333,754 $ 412,287 Checking 19,719 22,786 Time certificates of deposit (1) 6,047 — Savings and other 6,098 7,234 Total interest-bearing deposits 365,618 442,307 Non-interest-bearing deposits 1,106 1,471 Total bank deposits $ 366,724 $ 443,778 (1) As of December 31, 2022, the full amount of time certificates of deposit were brokered certificates of deposit for which underlying individual balances are assumed to be less than $250,000. Subsequent to December 31, 2022, the Company issued $ 9.4 billion of retail brokered certificates of deposit. 13. Borrowings CSC Senior Notes CSC’s Senior Notes are unsecured obligations. CSC may redeem some or all of the Senior Notes of each series prior to their maturity, subject to certain restrictions, and the payment of an applicable make-whole premium in certain instances. Interest is payable semi-annually for the fixed-rate Senior Notes and quarterly for the floating-rate Senior Notes. TDA Holding Senior Notes TDA Holding’s Senior Notes are unsecured obligations. TDA Holding may redeem some or all of the Senior Notes of each series prior to their maturity, subject to certain restrictions, and the payment of an applicable make-whole premium in certain instances. Interest is payable semi-annually for the fixed-rate Senior Notes. - 95 - THE CHARLES SCHWAB CORPORATION Notes to Consolidated Financial Statements (Tabular Amounts in Millions, Except Per Share Data, Option Price Amounts, Ratios, or as Noted) The following table lists long-term debt by instrument outstanding as of December 31, 2022 and 2021: Date of Principal Amount Outstanding Issuance 2022 2021 CSC Fixed-rate Senior Notes: 3.225 % due September 1, 2022 08/29/12 $ — $ 256 2.650 % due January 25, 2023 12/07/17 800 800 3.550 % due February 1, 2024 10/31/18 500 500 0.750 % due March 18, 2024 03/18/21 1,500 1,500 3.750 % due April 1, 2024 (1) 09/24/21 350 350 3.000 % due March 10, 2025 03/10/15 375 375 4.200 % due March 24, 2025 03/24/20 600 600 3.625 % due April 1, 2025 (1) 09/24/21 418 418 3.850 % due May 21, 2025 05/22/18 750 750 3.450 % due February 13, 2026 11/13/15 350 350 0.900 % due March 11, 2026 12/11/20 1,250 1,250 1.150 % due May 13, 2026 05/13/21 1,000 1,000 3.200 % due March 2, 2027 03/02/17 650 650 2.450 % due March 3, 2027 03/03/22 1,500 — 3.300 % due April 1, 2027 (1) 09/24/21 744 744 3.200 % due January 25, 2028 12/07/17 700 700 2.000 % due March 20, 2028 03/18/21 1,250 1,250 4.000 % due February 1, 2029 10/31/18 600 600 3.250 % due May 22, 2029 05/22/19 600 600 2.750 % due October 1, 2029 (1) 09/24/21 475 475 4.625 % due March 22, 2030 03/24/20 500 500 1.650 % due March 11, 2031 12/11/20 750 750 2.300 % due May 13, 2031 05/13/21 750 750 1.950 % due December 1, 2031 08/26/21 850 850 2.900 % due March 3, 2032 03/03/22 1,000 — CSC Floating-rate Senior Notes: SOFR + 0.500 % due March 18, 2024 03/18/21 1,250 1,250 SOFR + 0.520 % due May 13, 2026 05/13/21 500 500 SOFR + 1.050 % due March 3, 2027 03/03/22 500 — Total CSC Senior Notes 20,512 17,768 TDA Holding Fixed-rate Senior Notes: 2.950 % due April 1, 2022 03/09/15 — 750 3.750 % due April 1, 2024 (1) 11/01/18 50 50 3.625 % due April 1, 2025 (1) 10/22/14 82 82 3.300 % due April 1, 2027 (1) 04/27/17 56 56 2.750 % due October 1, 2029 (1) 08/16/19 25 25 Total TDA Holding Senior Notes 213 963 Finance lease liabilities 68 94 Unamortized premium — net 129 180 Debt issuance costs ( 94 ) ( 91 ) Total long-term debt $ 20,828 $ 18,914 (1) During 2021, we completed an offer to exchange certain senior notes issued by TDA Holding for senior notes issued by CSC. Of the approximately $ 2.2 billion in aggregate principal amount of TDA Holding’s senior notes offered in the exchange, 90 %, or approximately $ 2.0 billion, were tendered and accepted. The new senior notes issued by CSC have the same interest rates and maturity dates as the TDA Holding senior notes. At December 31, 2022, $ 213 million not exchanged remained outstanding across four series of senior notes issued by TDA Holding. The debt exchange was treated as a debt modification for accounting purposes. - 96 - THE CHARLES SCHWAB CORPORATION Notes to Consolidated Financial Statements (Tabular Amounts in Millions, Except Per Share Data, Option Price Amounts, Ratios, or as Noted) Annual maturities on all long-term debt outstanding at December 31, 2022, are as follows: Maturities 2023 $ 831 2024 3,675 2025 2,237 2026 3,100 2027 3,450 Thereafter 7,500 Total maturities 20,793 Unamortized premium — net 129 Debt issuance costs ( 94 ) Total long-term debt $ 20,828 Short-term borrowings: Total short-term borrowings outstanding at December 31, 2022 and 2021 were $ 17.1 billion and $ 4.9 billion, respectively, and had a weighted-average interest rate of 4.90 % and 0.27 %, respectively. Additional information regarding our short-term borrowings facilities is described below. CSC has the ability to issue up to $ 5.0 billion of commercial paper notes with maturities of up to 270 days. CSC had $ 250 million and $ 3.0 billion of commercial paper notes outstanding at December 31, 2022 and 2021, respectively. CSC and CS&Co also have access to uncommitted lines of credit with external banks with total borrowing capacity of $ 1.6 billion; no amounts were outstanding as of December 31, 2022 or 2021. Our banking subsidiaries maintain secured credit facilities with the FHLB. Amounts available under these facilities are dependent on the amount of bank loans and the fair value of certain investment securities that are pledged as collateral. As of December 31, 2022 and 2021, the collateral pledged provided a total borrowing capacity of $ 68.6 billion and $ 63.5 billion, respectively. There was $ 12.4 billion outstanding under the secured credit facilities as of December 31, 2022 and no balance outstanding as of December 31, 2021. Our banking subsidiaries have access to funding through the Federal Reserve discount window. Amounts available are dependent upon the fair value of certain investment securities that are pledged as collateral. As of December 31, 2022 and 2021, our collateral pledged provided total borrowing capacity of $ 7.8 billion and $ 12.0 billion, respectively, of which no amounts were outstanding at the end of either year. Our banking subsidiaries may engage with external financial institutions in repurchase agreements collateralized by investment securities as another source of short-term liquidity. The Company had $ 4.4 billion outstanding at December 31, 2022 and no borrowings outstanding at December 31, 2021 pursuant to such repurchase agreements. Repurchase agreements outstanding at December 31, 2022 mature between August 2023 to September 2023. TDAC maintains secured uncommitted lines of credit, under which TDAC borrows on either a demand or short-term basis and pledges client margin securities as collateral. There was no balance outstanding at December 31, 2022 and $ 1.9 billion outstanding under the secured uncommitted lines of credit as of and December 31, 2021. See Note 17 for additional information. TDAC maintained one senior unsecured committed revolving credit facility as of December 31, 2021 with an aggregate borrowing capacity of $ 600 million which matured in April 2022 and was not renewed. There were no borrowings outstanding under the TDAC senior revolving facility as of December 31, 2021. Subsequent to December 31, 2022, the Company’s banking subsidiaries had drawn an additional $ 13.0 billion of FHLB advances, and borrowed an additional $ 3.4 billion under repurchase agreements with external financial institutions. - 97 - THE CHARLES SCHWAB CORPORATION Notes to Consolidated Financial Statements (Tabular Amounts in Millions, Except Per Share Data, Option Price Amounts, Ratios, or as Noted) 14. Leases The following table details the amounts and locations of lease assets and liabilities on the consolidated balance sheet: December 31, 2022 2021 Lease assets: Balance Sheet Classification Operating lease ROU assets Other assets $ 894 $ 842 Finance lease ROU assets Equipment, office facilities, and property — net 66 93 Lease liabilities: Operating lease liabilities Accrued expenses and other liabilities $ 994 $ 932 Finance lease liabilities Long-term debt 68 94 The components of lease expense are as follows: Year Ended December 31, 2022 2021 2020 Lease Cost Operating lease cost (1) $ 242 $ 220 $ 166 Variable lease cost (2) 50 48 34 (1) Includes short-term lease cost, which is immaterial. (2) Includes payments that are entirely variable and amounts that represent the difference between payments based on an index or rate that is reflected in the lease liability and amounts actually incurred. The Company had immaterial finance lease cost and sublease income for the years ended December 31, 2022, 2021, and 2020. The following tables present supplemental operating lease information: December 31, 2022 2021 Lease Term and Discount Rate Weighted-average remaining lease term (years) 5.94 6.63 Weighted-average discount rate 3.00 % 2.48 % Maturity of Lease Liabilities Operating Leases 2023 $ 232 2024 219 2025 196 2026 123 2027 93 Thereafter 226 Total lease payments (1) 1,089 Less: Interest 95 Present value of lease liabilities $ 994 (1) Lease payments exclude $ 45 million of legally binding minimum lease payments for leases signed, but not yet commenced. These leases will commence between 2023 and 2024 with lease terms of five years to 15 years. 15. Commitments and Contingencies Loan Portfolio: CSB provides a co-branded loan origination program for CSB clients (the Program) with Rocket Mortgage, LLC (Rocket Mortgage ® ). Pursuant to the Program, Rocket Mortgage originates and services First Mortgages and HELOCs for CSB clients. Under the Program, CSB purchases certain First Mortgages and HELOCs that are originated by Rocket Mortgage. CSB purchased First Mortgages of $ 6.9 billion and $ 14.0 billion during 2022 and 2021, respectively. CSB purchased HELOCs with commitments of $ 315 million and $ 418 million during 2022 and 2021, respectively. - 98 - THE CHARLES SCHWAB CORPORATION Notes to Consolidated Financial Statements (Tabular Amounts in Millions, Except Per Share Data, Option Price Amounts, Ratios, or as Noted) The Company’s commitments to extend credit on lines of credit and to purchase First Mortgages are as follows: December 31, 2022 2021 Commitments to extend credit related to unused HELOCs, PALs, and other lines of credit $ 4,533 $ 6,193 Commitments to purchase First Mortgage loans 492 1,824 Total $ 5,025 $ 8,017 Guarantees and indemnifications: Schwab has clients that sell (i.e., write) listed option contracts that are cleared by the Options Clearing Corporation – a clearing house that establishes margin requirements on these transactions. We satisfy the margin requirements of these transactions through the pledging of certain client securities. For additional information on these pledged securities refer to Note 17. In connection with its securities lending activities, Schwab is required to provide collateral to certain brokerage clients. The Company satisfies the collateral requirements by providing cash as collateral. The Company also provides guarantees to securities clearing houses and exchanges under standard membership agreements, which require members to guarantee the performance of other members. Under the agreements, if another member becomes unable to satisfy its obligations to the clearing houses and exchanges, other members would be required to meet shortfalls. The Company’s liability under these arrangements is not quantifiable and may exceed the amounts it has posted as collateral. The Company also engages third-party firms to clear clients’ futures and options on futures transactions and to facilitate clients’ foreign exchange trading, and has agreed to indemnify these firms for any losses that they may incur from the client transactions introduced to them by the Company. The potential requirement for the Company to make payments under these arrangements is remote. Accordingly, no liability has been recognized for these guarantees. IDA agreement: The Company’s IDA agreement with the TD Depository Institutions became effective on October 6, 2020. The IDA agreement creates responsibilities of the Company and certain contingent obligations. Pursuant to the IDA agreement, uninvested cash within eligible brokerage client accounts is swept off-balance sheet to deposit accounts at the TD Depository Institutions. Schwab provides recordkeeping and support services to the TD Depository Institutions with respect to the deposit accounts for which Schwab receives an aggregate monthly fee. Though unlikely, in the event the sweep arrangement fee computation were to result in a negative amount in any given month, Schwab would be required to pay the TD Depository Institutions. The IDA agreement provides that, as of July 1, 2021, Schwab has the option to migrate up to $ 10 billion of IDA balances every 12 months to Schwab’s balance sheet, subject to certain limitations and adjustments. The Company’s ability to migrate these balances to its balance sheet is dependent upon multiple factors including having sufficient capital levels to sustain these incremental deposits and certain binding limitations specified in the IDA agreement. In addition, Schwab also must maintain a minimum $ 50 billion IDA balance through June 2031, and at least 80 % of the IDA balances must be designated as fixed-rate obligations through June 2026. If IDA balances were to decline below the required IDA balance minimum, Schwab could be required to direct additional sweep cash from its balance sheet to the IDA program. Schwab moved net amounts of $ 13.7 billion and $ 10.1 billion of IDA balances to its balance sheet during 2022 and 2021, respectively. As of December 31, 2022, the total ending IDA balance was $ 122.6 billion, of which $ 108.5 billion was fixed-rate obligation amounts and $ 14.1 billion was floating-rate obligation amounts. As of December 31, 2021, the total ending IDA balance was $ 147.2 billion, of which $ 117.4 billion was fixed-rate obligation amounts and $ 29.9 billion was floating-rate obligation amounts. The total ending IDA balances include the impact of client cash allocation decisions and Schwab’s movement of balances. Legal contingencies: Schwab is subject to claims and lawsuits in the ordinary course of business, including arbitrations, class actions and other litigation, some of which include claims for substantial or unspecified damages. The Company is also the subject of inquiries, investigations, and proceedings by regulatory and other governmental agencies. Predicting the outcome of a litigation or regulatory matter is inherently difficult, requiring significant judgment and evaluation of various factors, including the procedural status of the matter and any recent developments; prior experience and the experience of others in similar cases; available defenses, including potential opportunities to dispose of a case on the merits or procedural grounds before trial (e.g., motions to dismiss or for summary judgment); the progress of fact discovery; the opinions of counsel and experts regarding potential damages; and potential opportunities for settlement and the status of any settlement discussions. It may not be reasonably possible to estimate a range of potential liability until the matter is closer to resolution – pending, for example, further proceedings, the outcome of key motions or appeals, or discussions among the parties. Numerous issues may have to be developed, such as discovery of important factual matters and determination of threshold legal issues, which may - 99 - THE CHARLES SCHWAB CORPORATION Notes to Consolidated Financial Statements (Tabular Amounts in Millions, Except Per Share Data, Option Price Amounts, Ratios, or as Noted) include novel or unsettled questions of law. Reserves are established or adjusted or further disclosure and estimates of potential loss are provided as the matter progresses and more information becomes available. Schwab believes it has strong defenses in all significant matters currently pending and is contesting liability and any damages claimed. Nevertheless, some of these matters may result in adverse judgments or awards, including penalties, injunctions or other relief, and the Company may also determine to settle a matter because of the uncertainty and risks of litigation. Described below are matters in which there is a reasonable possibility that a material loss could be incurred or where the matter may otherwise be of significant interest to stockholders. Unless otherwise noted, the Company is unable to provide a reasonable estimate of any potential liability given the stage of proceedings in the matter. With respect to all other pending matters, based on current information and consultation with counsel, it does not appear reasonably possible that the outcome of any such matter would be material to the financial condition, operating results, or cash flows of the Company. Corrente Antitrust Litigation : On June 6, 2022, the Company was sued in the U.S. District Court for the Eastern District of Texas on behalf of a putative class of customers who purchased or sold securities through CS&Co or TD Ameritrade, Inc. from October 26, 2020 to the present. The lawsuit alleges that the Company’s acquisition of TD Ameritrade violated Section 7 of the Clayton Act because it has resulted in an anticompetitive market for the execution of retail customer orders. Plaintiffs seek unspecified damages, as well as injunctive and other relief. The Company is vigorously contesting the lawsuit and on August 29, 2022 filed a motion to dismiss the complaint, which remains pending. Schwab Intelligent Portfolios ® SEC Investigation : As disclosed on July 1, 2021, Schwab’s second quarter 2021 financial results included a liability and related charge of approximately $ 200 million in connection with a tentative agreement reached with SEC staff to resolve an enforcement investigation into past disclosures for the Schwab Intelligent Portfolios digital advisory solution. On June 13, 2022, the SEC announced the settlement under which CS&Co, Charles Schwab Investment Advisory, Inc., and Schwab Wealth Investment Advisory, Inc., without admitting or denying the SEC’s findings, resolved the matter and agreed to pay $ 186.5 million for deposit into a Fair Fund account for distribution to affected investors. TD Ameritrade Acquisition Litigation : As disclosed previously, on May 12, 2020, a putative class action lawsuit related to the acquisition was filed in the Delaware Court of Chancery (Hawkes v. Bettino et al.) on behalf of a proposed class of TD Ameritrade’s stockholders, excluding, among others, TD Bank. On February 5, 2021, plaintiff filed an amended complaint naming an officer and certain directors of TD Ameritrade at the time the acquisition was approved, as well as TD Bank, certain TD Bank related entities, and Schwab. The amended complaint asserts separate claims for breach of fiduciary duty by the TD Ameritrade officer, certain members of the TD Ameritrade board and TD Bank, and against Schwab for aiding and abetting such breaches, the allegation being that the amendment of the IDA agreement TD Bank negotiated directly with Schwab allowed TD Bank to divert merger consideration from TD Ameritrade’s minority public stockholders. Plaintiff seeks to recover monetary damages, costs and attorneys’ fees. Schwab and the other defendants consider the allegations to be entirely without merit and on April 29, 2021, the defendants filed motions to dismiss the amended complaint. On March 25, 2022, the parties filed a joint stipulation proposing a settlement of the lawsuit on a class basis. On September 21, 2022, the court entered final judgment and approved the terms of the settlement, under which Schwab is paying an immaterial amount on behalf of the former TD Ameritrade officer and director defendants pursuant to indemnification obligations. Crago Order Routing Litigation : On July 13, 2016, a securities class action lawsuit was filed in the U.S. District Court for the Northern District of California on behalf of a putative class of customers executing equity orders through CS&Co. The lawsuit names CS&Co and CSC as defendants and alleges that an agreement under which CS&Co routed orders to UBS Securities LLC between July 13, 2011 and December 31, 2014 violated CS&Co’s duty to seek best execution. Plaintiffs seek unspecified damages, interest, injunctive and equitable relief, and attorneys’ fees and costs. Defendants consider the allegations to be entirely without merit and have been vigorously contesting the lawsuit. After a first amended complaint was dismissed with leave to amend, plaintiffs filed a second amended complaint on August 14, 2017. Defendants again moved to dismiss, and in a decision issued December 5, 2017, the court denied the motion. Plaintiffs filed a motion for class certification on April 30, 2021, and in a decision on October 27, 2021, the court denied the motion and held that certification of a class action is inappropriate. Plaintiffs sought review of the order denying class certification by the Ninth Circuit Court of Appeals, which was denied. On September 23, 2022, plaintiffs filed a renewed motion for class certification and defendants moved to compel plaintiffs’ case to arbitration. On February 2, 2023, the court granted defendants’ motion, stayed the case pending the outcome of arbitration, and denied plaintiffs’ renewed motion for class certification as moot. Ford Order Routing Litigation : On September 15, 2014, TDA Holding, TD Ameritrade, Inc. and its former CEO, Frederick J. Tomczyk, were sued in the U.S. District Court for the District of Nebraska on behalf of a putative class of TD Ameritrade, Inc. clients alleging that defendants failed to seek best execution and made misrepresentations and omissions regarding its order - 100 - THE CHARLES SCHWAB CORPORATION Notes to Consolidated Financial Statements (Tabular Amounts in Millions, Except Per Share Data, Option Price Amounts, Ratios, or as Noted) routing practices. Plaintiffs seek unspecified damages and injunctive and other relief. Defendants consider the allegations to be entirely without merit and have been vigorously contesting the lawsuit. On September 14, 2018, the District Court granted plaintiffs’ motion for class certification, and defendants petitioned for an immediate appeal of the District Court’s class certification decision. On April 23, 2021, the U.S. Court of Appeals, 8th Circuit, issued a decision reversing the District Court’s certification of a class and remanding the case back to the District Court for further proceedings. Plaintiff renewed his motion for class certification, which the District Court granted on September 20, 2022. On October 26, 2022, the U.S. Court of Appeals, 8th Circuit, granted defendants’ petition for an immediate appeal of the District Court’s ruling. 16. Exit and Other Related Liabilities The Company completed its acquisition of TD Ameritrade effective October 6, 2020 and integration work continued during the year ended December 31, 2022. 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 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. Exit and other related costs are a component of the Company’s overall acquisition and integration-related spending, and support the Company’s ability to achieve integration objectives including expected synergies. Our estimates of the nature, amounts, and timing of recognition of acquisition and integration-related costs remain subject to change based on a number of factors, including the expected duration and complexity of the integration process and the continued uncertainty of the economic environment. More specifically, factors that could cause variability in our expected acquisition and integration-related costs include the level of employee attrition and availability of third-party labor, workforce redeployment from eliminated positions into open roles, changes in the levels of client activity, as well as changes in the scope and cost of technology and real estate-related exit cost variability due to the effects of changes in remote working trends. Inclusive of costs recognized through December 31, 2022, Schwab currently expects to incur total exit and other related costs for the integration of TD Ameritrade ranging from $ 500 million to $ 700 million, consisting of employee compensation and benefits, facility exit costs, and certain other costs. During each of the years ended December 31, 2022, 2021, and 2020, the Company recognized $ 34 million, $ 108 million, and $ 186 million of acquisition-related exit costs, respectively. The Company expects that remaining exit and other related costs will be incurred and charged to expense over the next 24 months, with some costs expected to be incurred after client transition to decommission duplicative platforms and complete integration work. In addition to ASC 420 Exit or Disposal Cost Obligations , certain of the costs associated with these activities are accounted for in accordance with ASC 360 Property, Plant and Equipment , ASC 712 Compensation – Nonretirement Post Employment Benefits , ASC 718 Compensation – Stock Compensation , and ASC 842 Leases . - 101 - THE CHARLES SCHWAB CORPORATION Notes to Consolidated Financial Statements (Tabular Amounts in Millions, Except Per Share Data, Option Price Amounts, Ratios, or as Noted) The following is a summary of the activity in the Company’s exit and other related liabilities for the years ended December 31, 2022 and 2021: Investor Services Employee Compensation and Benefits Advisor Services Employee Compensation and Benefits Total Balance at December 31, 2020 (1) $ 86 $ 24 $ 110 Amounts recognized in expense (2) 66 17 83 Costs paid or otherwise settled ( 124 ) ( 34 ) ( 158 ) Balance at December 31, 2021 (1) $ 28 $ 7 $ 35 Amounts recognized in expense (2) 19 6 25 Costs paid or otherwise settled ( 11 ) ( 3 ) ( 14 ) Balance at December 31, 2022 (1) $ 36 $ 10 $ 46 (1) Included in accrued and expenses and other liabilities on the consolidated balance sheets. (2) Amounts recognized in expense for severance pay and other termination benefits, as well as retention costs, are primarily included in compensation and benefits on the consolidated statements of income. The year ended December 31, 2021 includes a reduction of the liability resulting from changes in estimates of $ 9 million and $ 2 million in Investor Services and Advisor Services, respectively. The following table summarizes the exit and other related costs recognized in expense for the year ended December 31, 2022: Investor Services Advisor Services Employee Compensation and Benefits Facility Exit Costs (1) Investor Services Total Employee Compensation and Benefits Facility Exit Costs (1) Advisor Services Total Total Compensation and benefits $ 19 $ — $ 19 $ 6 $ — $ 6 $ 25 Occupancy and equipment — 7 7 — 2 2 9 Total $ 19 $ 7 $ 26 $ 6 $ 2 $ 8 $ 34 (1) Costs related to facility closures. These costs, which are primarily comprised of accelerated amortization of ROU assets, relate to the impact of abandoning leased and other properties. The following table summarizes the exit and other related costs recognized in expense for the year ended December 31, 2021: Investor Services Advisor Services Employee Compensation and Benefits Facility Exit Costs (1) Investor Services Total Employee Compensation and Benefits Facility Exit Costs (1) Advisor Services Total Total Compensation and benefits $ 66 $ — $ 66 $ 17 $ — $ 17 $ 83 Occupancy and equipment — 18 18 — 4 4 22 Professional services — 1 1 — — — 1 Other — 2 2 — — — 2 Total $ 66 $ 21 $ 87 $ 17 $ 4 $ 21 $ 108 (1) Costs related to facility closures. These costs, which are primarily comprised of accelerated amortization of ROU assets, relate to the impact of abandoning leased and other properties. The following table summarizes the exit and other related costs recognized in expense for the year ended December 31, 2020: Investor Services Advisor Services Employee Compensation and Benefits Facility Exit Costs (1) Investor Services Total Employee Compensation and Benefits Facility Exit Costs (1) Advisor Services Total Total Compensation and benefits $ 138 $ — $ 138 $ 38 $ — $ 38 $ 176 Occupancy and equipment — 6 6 — 1 1 7 Depreciation and amortization — 2 2 — 1 1 3 Total $ 138 $ 8 $ 146 $ 38 $ 2 $ 40 $ 186 (1) Costs related to facility closures. These costs, which are comprised of accelerated amortization of ROU assets and accelerated depreciation of fixed assets, relate to the impact of abandoning leased and other properties. - 102 - THE CHARLES SCHWAB CORPORATION Notes to Consolidated Financial Statements (Tabular Amounts in Millions, Except Per Share Data, Option Price Amounts, Ratios, or as Noted) The following table summarizes the exit and other related costs incurred from October 6, 2020 through December 31, 2022: Investor Services Advisor Services Employee Compensation and Benefits Facility Exit Costs (1) Investor Services Total Employee Compensation and Benefits Facility Exit Costs (1) Advisor Services Total Total Compensation and benefits $ 223 $ — $ 223 $ 61 $ — $ 61 $ 284 Occupancy and equipment — 31 31 — 7 7 38 Depreciation and amortization — 2 2 — 1 1 3 Professional services — 1 1 — — — 1 Other — 2 2 — — — 2 Total $ 223 $ 36 $ 259 $ 61 $ 8 $ 69 $ 328 (1) Costs related to facility closures. These costs, which are primarily comprised of accelerated amortization of ROU assets and accelerated depreciation of fixed assets, relate to the impact of abandoning leased and other properties. 17. Financial Instruments Subject to Off-Balance Sheet Credit Risk Resale agreements: Schwab enters into collateralized resale agreements principally with other broker-dealers, which could result in losses in the event the counterparty fails to purchase the securities held as collateral for the cash advanced and the fair value of the securities declines. To mitigate this risk, Schwab requires that the counterparty deliver securities to a custodian, to be held as collateral, with a fair value at or in excess of the resale price. Schwab also sets standards for the credit quality of the counterparty, monitors the fair value of the underlying securities as compared to the related receivable, including accrued interest, and requires additional collateral where deemed appropriate. The collateral provided under these resale agreements is utilized to meet obligations under broker-dealer client protection rules, which place limitations on our ability to access such segregated securities. For Schwab to repledge or sell this collateral, we would be required to deposit cash and/or securities of an equal amount into our segregated reserve bank accounts in order to meet our segregated cash and investments requirement. Schwab’s resale agreements as of December 31, 2022 and 2021 were not subject to master netting arrangements. Securities lending: Schwab loans brokerage client securities temporarily to other brokers and clearing houses in connection with its securities lending activities and receives cash as collateral for the securities loaned. Increases in security prices may cause the fair value of the securities loaned to exceed the amount of cash received as collateral. In the event the counterparty to these transactions does not return the loaned securities or provide additional cash collateral, we may be exposed to the risk of acquiring the securities at prevailing market prices in order to satisfy our client obligations. Schwab mitigates this risk by requiring credit approvals for counterparties, monitoring the fair value of securities loaned, and requiring additional cash as collateral when necessary. In addition, most of our securities lending transactions are through a program with a clearing organization, which guarantees the return of cash to us. We also borrow securities from other broker-dealers to fulfill short sales by brokerage clients and deliver cash to the lender in exchange for the securities. The fair value of these borrowed securities was $ 685 million and $ 566 million at December 31, 2022 and 2021, respectively. Our securities lending transactions are subject to enforceable master netting arrangements with other broker-dealers; however, we do not net securities lending transactions. Therefore, the securities loaned and securities borrowed are presented gross in the consolidated balance sheets. Repurchase agreements: Schwab enters into collateralized repurchase agreements with external financial institutions in which the Company’s banking subsidiaries sell securities and agree to repurchase these securities on a specified future date at a stated repurchase price. These repurchase agreements are collateralized by investment securities with a fair value equal to or in excess of the secured borrowing liability. Decreases in security prices posted as collateral for repurchase agreements may require Schwab to transfer cash or additional securities deemed acceptable by the counterparty. To mitigate this risk, Schwab monitors the fair value of underlying securities pledged as collateral compared to the related liability. Our collateralized repurchase agreements with each external financial institution are considered to be enforceable master netting arrangements. However, we do not net these arrangements. As such, the secured short-term borrowings associated with these collateralized repurchase agreements are presented gross in the consolidated balance sheets. - 103 - THE CHARLES SCHWAB CORPORATION Notes to Consolidated Financial Statements (Tabular Amounts in Millions, Except Per Share Data, Option Price Amounts, Ratios, or as Noted) The following table presents information about our resale agreements, securities lending, and other activity depicting the potential effect of rights of setoff between these recognized assets and recognized liabilities. Gross Assets/ Liabilities Gross Amounts Offset in the Consolidated Balance Sheets Net Amounts Presented in the Consolidated Balance Sheets Gross Amounts Not Offset in the Consolidated Balance Sheets Net Amount Counterparty Offsetting Collateral December 31, 2022 Assets Resale agreements (1) $ 12,159 $ — $ 12,159 $ — $ ( 12,159 ) (2) $ — Securities borrowed (3) 705 — 705 ( 331 ) ( 366 ) 8 Total $ 12,864 $ — $ 12,864 $ ( 331 ) $ ( 12,525 ) $ 8 Liabilities Securities loaned (4,5) $ 4,200 $ — $ 4,200 $ ( 331 ) $ ( 3,313 ) $ 556 Repurchase agreements (6) 4,402 — 4,402 — ( 4,402 ) — Total $ 8,602 $ — $ 8,602 $ ( 331 ) $ ( 7,715 ) $ 556 December 31, 2021 Assets Resale agreements (1) $ 13,096 $ — $ 13,096 $ — $ ( 13,096 ) (2) $ — Securities borrowed (3) 582 — 582 ( 383 ) ( 195 ) 4 Total $ 13,678 $ — $ 13,678 $ ( 383 ) $ ( 13,291 ) $ 4 Liabilities Securities loaned (4,5) $ 7,158 $ — $ 7,158 $ ( 383 ) $ ( 6,015 ) $ 760 Secured short-term borrowings (7) 1,850 — 1,850 — ( 1,850 ) — Total $ 9,008 $ — $ 9,008 $ ( 383 ) $ ( 7,865 ) $ 760 (1) Included in cash and investments segregated and on deposit for regulatory purposes in the consolidated balance sheets. (2) Actual collateral was greater than or equal to the value of the related assets. At December 31, 2022 and 2021, the fair value of collateral received in connection with resale agreements that are available to be repledged or sold was $ 12.3 billion and $ 13.4 billion, respectively. (3) Included in other assets in the consolidated balance sheets. (4) Included in accrued expenses and other liabilities in the consolidated balance sheets. The cash collateral received from counterparties under securities lending transactions was equal to or greater than the market value of the securities loaned at December 31, 2022 and 2021. (5) Securities loaned are predominantly comprised of equity securities held in client brokerage accounts with overnight and continuous remaining contractual maturities. (6) Included in short-term borrowings in the consolidated balance sheets. Actual collateral value was greater than or equal to the value of the related liabilities. At December 31, 2022, the fair value of collateral pledged in connection with repurchase agreements was $ 4.6 billion. See Note 13 for additional information. (7) Included in short-term borrowings in the consolidated balance sheets. See below for collateral pledged and Note 13 for additional information. Client trade settlement: Schwab is obligated to settle transactions with brokers and other financial institutions even if our clients fail to meet their obligations to us. Clients are required to complete their transactions on settlement date, generally two business days after the trade date. If clients do not fulfill their contractual obligations, we may incur losses. We have established procedures to reduce this risk by requiring deposits from clients in excess of amounts prescribed by regulatory requirements for certain types of trades, and therefore the potential to make payments under these client transactions is remote. Accordingly, no liability has been recognized for these transactions. - 104 - THE CHARLES SCHWAB CORPORATION Notes to Consolidated Financial Statements (Tabular Amounts in Millions, Except Per Share Data, Option Price Amounts, Ratios, or as Noted) Margin lending: Clients with margin loans have agreed to allow Schwab to pledge collateralized securities in their brokerage accounts in accordance with federal regulations. The following table summarizes the fair value of client securities that were available, under such regulations, that could have been used as collateral, as well as the fair value of securities that we had pledged to third parties under such regulations and from securities borrowed transactions: December 31, 2022 2021 Fair value of client securities available to be pledged $ 86,775 $ 120,306 Fair value of securities pledged for: Fulfillment of requirements with the Options Clearing Corporation (1) $ 11,717 $ 16,829 Fulfillment of client short sales 4,750 5,934 Securities lending to other broker-dealers 3,472 6,269 Collateral for secured short-term borrowings — 2,390 Total collateral pledged to third parties $ 19,939 $ 31,422 Note: Excludes amounts available and pledged for securities lending from fully-paid client securities. The fair value of fully-paid client securities available and pledged was $ 160 million as of December 31, 2022 and $ 118 million as of December 31, 2021. (1) Securities pledged to fulfill client margin requirements for open option contracts established with the Options Clearing Corporation. - 105 - THE CHARLES SCHWAB CORPORATION Notes to Consolidated Financial Statements (Tabular Amounts in Millions, Except Per Share Data, Option Price Amounts, Ratios, or as Noted) 18. Fair Values of Assets and Liabilities For a description of the fair value hierarchy and Schwab’s fair value methodologies, including the use of independent third-party pricing services, see Note 2. The Company did not adjust prices received from the primary independent third-party pricing service at December 31, 2022 or 2021. Assets and Liabilities Measured at Fair Value on a Recurring Basis The following tables present the fair value hierarchy for assets and liabilities measured at fair value on a recurring basis: December 31, 2022 Level 1 Level 2 Level 3 Balance at Fair Value Cash equivalents: Money market funds $ 14,007 $ — $ — $ 14,007 Commercial paper — 48 — 48 Total cash equivalents 14,007 48 — 14,055 Investments segregated and on deposit for regulatory purposes: U.S. Government securities — 23,645 — 23,645 Certificates of deposit — 1,000 — 1,000 Total investments segregated and on deposit for regulatory purposes — 24,645 — 24,645 Available for sale securities: U.S. agency mortgage-backed securities — 77,688 — 77,688 U.S. Treasury securities — 40,002 — 40,002 Asset-backed securities — 13,023 — 13,023 Corporate debt securities — 12,555 — 12,555 Certificates of deposit — 2,231 — 2,231 Foreign government agency securities — 969 — 969 U.S. state and municipal securities — 638 — 638 Non-agency commercial mortgage-backed securities — 450 — 450 Other — 315 — 315 Total available for sale securities — 147,871 — 147,871 Other assets: Equity, corporate debt, and other securities 755 55 — 810 Mutual funds and ETFs 596 — — 596 State and municipal debt obligations — 25 — 25 U.S. Government securities — 1 — 1 Total other assets 1,351 81 — 1,432 Total assets $ 15,358 $ 172,645 $ — $ 188,003 Accrued expenses and other liabilities $ 1,218 $ 43 $ — $ 1,261 Total liabilities $ 1,218 $ 43 $ — $ 1,261 - 106 - THE CHARLES SCHWAB CORPORATION Notes to Consolidated Financial Statements (Tabular Amounts in Millions, Except Per Share Data, Option Price Amounts, Ratios, or as Noted) December 31, 2021 Level 1 Level 2 Level 3 Balance at Fair Value Cash equivalents: Money market funds $ 11,719 $ — $ — $ 11,719 Total cash equivalents 11,719 — — 11,719 Investments segregated and on deposit for regulatory purposes: Certificates of deposit — 350 — 350 U.S. Government securities — 36,349 — 36,349 Total investments segregated and on deposit for regulatory purposes — 36,699 — 36,699 Available for sale securities: U.S. agency mortgage-backed securities — 334,355 — 334,355 U.S. Treasury securities — 21,282 — 21,282 Asset-backed securities — 17,546 — 17,546 Corporate debt securities — 12,344 — 12,344 U.S. state and municipal securities — 1,687 — 1,687 Non-agency commercial mortgage-backed securities — 1,190 — 1,190 Certificates of deposit — 999 — 999 Foreign government agency securities — 425 — 425 Commercial paper — 200 — 200 Other — 26 — 26 Total available for sale securities — 390,054 — 390,054 Other assets: Equity, corporate debt, and other securities 854 59 — 913 Mutual funds and ETFs 636 — — 636 State and municipal debt obligations — 32 — 32 U.S. Government securities — 3 — 3 Total other assets 1,490 94 — 1,584 Total assets $ 13,209 $ 426,847 $ — $ 440,056 Accrued expenses and other liabilities $ 1,354 $ 45 $ — $ 1,399 Total liabilities $ 1,354 $ 45 $ — $ 1,399 - 107 - THE CHARLES SCHWAB CORPORATION Notes to Consolidated Financial Statements (Tabular Amounts in Millions, Except Per Share Data, Option Price Amounts, Ratios, or as Noted) Fair Value of Other Financial Instruments The following tables present the fair value hierarchy for other financial instruments: December 31, 2022 Carrying Amount Level 1 Level 2 Level 3 Balance at Fair Value Assets Cash and cash equivalents $ 26,140 $ 26,140 $ — $ — $ 26,140 Cash and investments segregated and on deposit for regulatory purposes 18,288 6,156 12,132 — 18,288 Receivables from brokerage clients — net 66,573 — 66,573 — 66,573 Held to maturity securities: U.S. agency mortgage-backed securities 173,074 — 158,936 — 158,936 Total held to maturity securities 173,074 — 158,936 — 158,936 Bank loans — net: First Mortgages 25,132 — 22,201 — 22,201 HELOCs 593 — 657 — 657 Pledged asset lines 14,592 — 14,592 — 14,592 Other 188 — 188 — 188 Total bank loans — net 40,505 — 37,638 — 37,638 Other assets 3,788 — 3,788 — 3,788 Liabilities Bank deposits $ 366,724 $ — $ 366,724 $ — $ 366,724 Payables to brokerage clients 97,438 — 97,438 — 97,438 Accrued expenses and other liabilities 5,584 — 5,584 — 5,584 Short-term borrowings 17,050 — 17,050 — 17,050 Long-term debt 20,760 — 19,108 — 19,108 December 31, 2021 Carrying Amount Level 1 Level 2 Level 3 Balance at Fair Value Assets Cash and cash equivalents $ 51,256 $ 51,256 $ — $ — $ 51,256 Cash and investments segregated and on deposit for regulatory purposes 17,246 4,151 13,095 — 17,246 Receivables from brokerage clients — net 90,560 — 90,560 — 90,560 Bank loans — net: First Mortgages 21,077 — 21,027 — 21,027 HELOCs 646 — 668 — 668 Pledged asset lines 12,709 — 12,709 — 12,709 Other 204 — 204 — 204 Total bank loans — net 34,636 — 34,608 — 34,608 Other assets 3,561 — 3,561 — 3,561 Liabilities Bank deposits $ 443,778 $ — $ 443,778 $ — $ 443,778 Payables to brokerage clients 125,671 — 125,671 — 125,671 Accrued expenses and other liabilities 8,327 — 8,327 — 8,327 Short-term borrowings 4,855 — 4,855 — 4,855 Long-term debt 18,820 — 19,383 — 19,383 - 108 - THE CHARLES SCHWAB CORPORATION Notes to Consolidated Financial Statements (Tabular Amounts in Millions, Except Per Share Data, Option Price Amounts, Ratios, or as Noted) 19. Stockholders’ Equity Except in connection with the 2020 acquisition of TD Ameritrade as described below, CSC did not issue common shares through external offerings during the years ended December 31, 2022, 2021 or 2020. TD Ameritrade Acquisition On October 6, 2020, the Company completed its acquisition of TD Ameritrade. In conjunction with the acquisition, the Company issued shares of CSC common stock and a new, nonvoting class of CSC common stock. Immediately prior to the acquisition, on October 6, 2020, the Company amended its certificate of incorporation to create the nonvoting class of common stock with 300 million shares authorized for issuance and to increase the number of authorized shares of capital stock by the same amount. Each share of nonvoting common stock has identical rights to common stock, including liquidation and dividend rights, except that holders of nonvoting common stock have no voting rights other than over matters that significantly and adversely affect the rights or preferences of the nonvoting common stock, or as required by applicable law. Holders of nonvoting common stock are restricted from transferring shares except for permitted inside or outside transfers, as defined in the certificate of incorporation. Shares of nonvoting common stock transferred in a permitted outside transfer are automatically converted to shares of common stock. Pursuant to the Merger Agreement, CSC issued approximately 177 million shares of common stock and approximately 77 million shares of nonvoting common stock to TD Bank and its affiliates on October 6, 2020. Those shares of common stock and nonvoting common stock were issued in reliance upon an exemption from registration afforded by Section 4(a)(2) of the Securities Act. Following this issuance, TD Bank exchanged an aggregate of approximately 2 million shares of CSC common stock for an equal number of shares of CSC nonvoting common stock and held approximately 79 million shares of nonvoting common stock as of December 31, 2021. TD Bank and its affiliates are not permitted to own more than 9.9 % of CSC common stock. This limit is interpreted in accordance with the applicable rules of the Federal Reserve and includes shares of CSC common stock deemed to be beneficially owned directly or indirectly by TD Bank and its affiliates. On August 1, 2022, an affiliate of TD Bank executed a permitted outside transfer of 13 million shares of CSC nonvoting common stock, upon which the shares of nonvoting common stock automatically converted to shares of common stock. Following this transfer and CSC’s repurchase of nonvoting common stock described below, TD Bank and its affiliates held approximately 51 million shares of nonvoting common stock as of December 31, 2022. Share Repurchase Program On January 30, 2019, CSC publicly announced that its Board of Directors authorized a share repurchase program to repurchase up to $ 4.0 billion of common stock . The share repurchase 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, 2020, 2021, and 2022. On July 27, 2022, CSC publicly announced that its Board of Directors terminated the existing share repurchase authorization and replaced it with a new authorization to repurchase up to $ 15.0 billion of common stock. 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. As of December 31, 2022, $ 11.6 billion remained on the new authorization. Preferred Stock On March 18, 2021, the Company issued and sold 2,250,000 depositary shares, each representing a 1/100th ownership interest in a share of 4.000 % fixed-rate reset non-cumulative perpetual preferred stock, Series I, $ .01 par value per share, with a liquidation preference of $ 100,000 per share (equivalent of $ 1,000 per Depositary Share). The net proceeds of the offering were $ 2.2 billion, after deducting the underwriting discount and offering expenses. - 109 - THE CHARLES SCHWAB CORPORATION Notes to Consolidated Financial Statements (Tabular Amounts in Millions, Except Per Share Data, Option Price Amounts, Ratios, or as Noted) On March 30, 2021, the Company issued and sold 24,000,000 depositary shares, each representing a 1/40th ownership interest in a share of 4.450 % fixed-rate non-cumulative perpetual preferred stock, Series J, $ .01 par value, with a liquidation preference of $ 1,000 per share (equivalent of $ 25 per depositary share). The net proceeds of the offering were $ 584 million, after deducting the underwriting discount and offering expenses. On June 1, 2021, the Company redeemed all of the 600,000 outstanding shares of its 6.00 % non-cumulative perpetual preferred stock, Series C, and the corresponding 24,000,000 depositary shares, each representing a 1/40th interest in a share of the Series C preferred stock. The depositary shares were redeemed at a redemption price of $ 25 per depositary share for a total of $ 600 million. On March 4, 2022, the Company issued and sold 750,000 depositary shares, each representing a 1/100th ownership interest in a share of 5.000 % fixed-rate reset non-cumulative perpetual preferred stock, Series K, $ .01 par value, with a liquidation preference of $ 100,000 per share (equivalent of $ 1,000 per depositary share). The net proceeds of the offering were $ 740 million, after deducting the underwriting discount and offering expenses. On November 1, 2022, the Company redeemed all of the 400,000 outstanding share 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 6,000 outstanding shares of its fixed-to-floating rate non-cumulative perpetual preferred stock, Series E, and the corresponding 600,000 depositary shares, each representing a 1/100th interest in a share of the Series E preferred stock. The depositary shares were redeemed at a redemption price of $ 1,000 per depositary share for a total of $ 600 million. CSC was authorized to issue 9,940,000 shares of preferred stock, $ .01 par value, at December 31, 2022 and 2021. The following is a summary of CSC’s non-cumulative perpetual preferred stock outstanding as of such dates: Dividend Rate in Effect at December 31, 2022 Date at Which Dividend Rate Resets or Becomes Floating Reset / Floating Rate Margin Over Reset / Floating Rate Shares Issued and Outstanding (in ones) at December 31, Liquidation Preference Per Share Carrying Value at December 31, Earliest Redemption Date 2022 (1) 2021 (1) 2022 2021 Issue Date Fixed-rate: Series D 750,000 750,000 1,000 728 728 03/07/16 5.950 % 06/01/21 N/A N/A N/A Series J 600,000 600,000 1,000 584 584 03/30/21 4.450 % 06/01/26 N/A N/A N/A Fixed-to-floating-rate/Fixed-rate reset: Series A (2) — 400,000 — — 397 01/26/12 — — — — — Series E (2) — 6,000 — — 591 10/31/16 — — — — — Series F 5,000 5,000 100,000 492 492 10/31/17 5.000 % 12/01/27 12/01/27 3M LIBOR 2.575 % Series G (3) 25,000 25,000 100,000 2,470 2,470 04/30/20 5.375 % 06/01/25 06/01/25 5 -Year Treasury 4.971 % Series H (4) 25,000 25,000 100,000 2,470 2,470 12/11/20 4.000 % 12/01/30 12/01/30 10 -Year Treasury 3.079 % Series I (3) 22,500 22,500 100,000 2,222 2,222 03/18/21 4.000 % 06/01/26 06/01/26 5 -Year Treasury 3.168 % Series K (5) 7,500 — 100,000 740 — 03/04/22 5.000 % 06/01/27 06/01/27 5 -Year Treasury 3.256 % Total preferred stock 1,435,000 1,833,500 9,706 9,954 (1) Represented by depositary shares, except for Series A. (2) Series A and Series E were redeemed on November 1, 2022 and December 1, 2022, respectively. (3) The dividend rate for Series G and Series I resets on each five-year anniversary from the first reset date. (4) The dividend rate for Series H resets on each ten-year anniversary from the first reset date. (5) The dividend rate for Series K resets on each five-year anniversary beginning on June 1, 2027 based on a five-year Treasury rate, representing the average of the yields on actively traded U.S. Treasury securities adjusted to constant maturity for five-year maturities. Series K is only redeemable on dividend payment dates on or after the first reset date. N/A Not applicable. - 110 - THE CHARLES SCHWAB CORPORATION Notes to Consolidated Financial Statements (Tabular Amounts in Millions, Except Per Share Data, Option Price Amounts, Ratios, or as Noted) Dividends declared on the Company’s preferred stock are as follows: Year Ended December 31, 2022 2021 2020 Total Declared (in millions) Per Share Amount Total Declared (in millions) Per Share Amount Total Declared (in millions) Per Share Amount Series A (1) $ 19.1 $ 47.73 $ 28.0 $ 70.00 $ 28.0 $ 70.00 Series C (2) N/A N/A 18.0 30.00 36.0 60.00 Series D 44.6 59.52 44.6 59.52 44.6 59.52 Series E (3) 37.0 6,161.42 27.8 4,625.00 27.8 4,625.00 Series F 25.0 5,000.00 25.0 5,000.00 25.0 5,000.00 Series G (4) 134.4 5,375.00 134.4 5,375.00 78.8 3,150.35 Series H (5) 100.0 4,000.00 97.2 3,888.89 N/A N/A Series I (6) 90.0 4,000.00 63.2 2,811.11 N/A N/A Series J (7) 26.7 44.52 17.9 29.80 N/A N/A Series K (8) 27.8 3,708.33 N/A N/A N/A N/A Total $ 504.6 $ 456.1 $ 240.2 (1) Series A was redeemed on November 1, 2022. Prior to redemption, dividends were paid semi-annually until February 1, 2022 and quarterly thereafter. The final dividend was paid on November 1, 2022. (2) Series C was redeemed on June 1, 2021. Prior to redemption, dividends were paid quarterly and the final dividend was paid on June 1, 2021. (3) Series 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. (4) Series G was issued on April 30, 2020. Dividends are paid quarterly, and the first dividend was paid on September 1, 2020. (5) Series H was issued on December 11, 2020. Dividends are paid quarterly, and the first dividend was paid on March 1, 2021. (6) Series I was issued on March 18, 2021. Dividends are paid quarterly, and the first dividend was paid on June 1, 2021. (7) Series J was issued on March 30, 2021. Dividends are paid quarterly, and the first dividend was paid on June 1, 2021. (8) 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. Dividends on CSC’s preferred stock are not cumulative and will only be paid on a series of preferred stock for a dividend period if declared by CSC’s Board of Directors. Under the terms of each series of preferred stock, CSC’s ability to pay dividends on, make distributions with respect to, or to repurchase, redeem or acquire its common stock or any preferred stock ranking on parity with or junior to the series of preferred stock, is subject to restrictions in the event that CSC does not declare and either pay or set aside a sum sufficient for payment of dividends on the series of preferred stock for the immediately preceding dividend period. Dividends on fixed-rate and fixed-rate reset preferred stock are payable quarterly. Dividends on fixed-to-floating-rate preferred stock are payable semi-annually while at a fixed rate and will become payable quarterly after converting to a floating rate. Redemption Rights Each series of CSC’s preferred stock, except for Series G, may be redeemed at CSC’s option on any dividend payment date on or after the earliest redemption date for that series. Series G preferred stock may be redeemed at CSC’s option on any reset date on or after the earliest redemption date for the series. All outstanding preferred stock series may also be redeemed following a “capital treatment event,” as described in the terms of each series set forth in the relevant certificate of designations. Any redemption of CSC’s preferred stock is subject to approval from the Federal Reserve. - 111 - THE CHARLES SCHWAB CORPORATION Notes to Consolidated Financial Statements (Tabular Amounts in Millions, Except Per Share Data, Option Price Amounts, Ratios, or as Noted) 20. Accumulated Other Comprehensive Income AOCI represents cumulative gains and losses that are not reflected in earnings. AOCI balances and the components of other comprehensive income (loss) are as follows: Total AOCI Balance at December 31, 2019 $ 88 Available for sale securities: Net unrealized gain (loss), excluding transfers to available for sale from held to maturity, net of tax expense (benefit) of $ 1,322 4,246 Net unrealized gain on securities transferred to available for sale from held to maturity, net of tax expense (benefit) of $ 336 1,057 Other reclassifications included in other revenue, net of tax expense (benefit) of $( 1 ) ( 3 ) Other, net of tax expense (benefit) of $ 2 6 Balance at December 31, 2020 $ 5,394 Available for sale securities: Net unrealized gain (loss), net of tax expense (benefit) of $( 2,029 ) ( 6,492 ) Other reclassifications included in other revenue, net of tax expense (benefit) of $( 1 ) ( 3 ) Other, net of tax expense (benefit) of $( 3 ) ( 8 ) Balance at December 31, 2021 $ ( 1,109 ) Available for sale securities: Net unrealized gain (loss), excluding transfers to held to maturity, net of tax expense (benefit) of $( 6,994 ) ( 22,106 ) Net unrealized loss on securities transferred to held to maturity, net of tax benefit of $ 4,377 13,851 Other reclassifications included in other revenue, net of tax expense (benefit) of $ 2 7 Held to maturity securities: Net unrealized loss on securities transferred from available for sale, net of tax benefit of $ 4,377 ( 13,851 ) Amortization of amounts previously recorded upon transfer from available for sale, net of tax expense (benefit) of $ 165 542 Other, net of tax expense (benefit) of $ 15 45 Balance at December 31, 2022 $ ( 22,621 ) In October 2019, the Federal Reserve, the Office of the Comptroller of the Currency, and the FDIC jointly adopted a final rule which became effective on December 31, 2019, that revised the regulatory capital and liquidity requirements for large U.S. banking organizations with $100 billion or more in total consolidated assets. With total consolidated assets of $ 294.0 billion at December 31, 2019, CSC was designated as a Category III firm pursuant to the framework established by the final rules. Accordingly, the Company opted to exclude AOCI from its regulatory capital as permitted by the regulatory capital and liquidity rule beginning January 1, 2020. In accordance with ASC 320 Investment – Debt Securities and as of January 1, 2020, the Company transferred all of its investment securities designated as HTM to the AFS category without tainting our intent to hold other debt securities to maturity. At the date of transfer, these securities had a total amortized cost of $ 134.7 billion and a total net unrealized gain of $ 1.4 billion. The transfer resulted in a net of tax increase to AOCI of $ 1.1 billion. In January and November 2022, the Company transferred a portion of its AFS securities to the HTM category. See Note 6 for additional discussion on the transfers of AFS securities to HTM. - 112 - THE CHARLES SCHWAB CORPORATION Notes to Consolidated Financial Statements (Tabular Amounts in Millions, Except Per Share Data, Option Price Amounts, Ratios, or as Noted) 21. Employee Incentive, Retirement, Deferred Compensation, and Career Achievement Plans Schwab’s share-based incentive plans provide for granting options and restricted stock units to employees and non-employee directors. In addition, we offer retirement and employee stock purchase plans to eligible employees and sponsor deferred compensation plans for eligible officers and non-employee directors. A summary of share-based compensation expense and related income tax benefit is as follows: Year Ended December 31, 2022 2021 2020 Stock option expense $ 30 $ 36 $ 36 Restricted stock unit expense 311 200 156 Employee stock purchase plan expense 25 18 12 Total share-based compensation expense $ 366 $ 254 $ 204 Income tax benefit on share-based compensation expense (1) $ ( 88 ) $ ( 60 ) $ ( 49 ) (1) Excludes income tax benefits from stock options exercised and restricted stock units vested of $ 51 million, $ 93 million, and $ 14 million in 2022, 2021, and 2020, respectively. The Company issues shares for stock options and restricted stock units from treasury stock. On May 17, 2022, stockholders approved the 2022 Stock Incentive Plan which, among other things, increased the number of shares of common stock available for issuance to 113 million, plus up to 150 million shares from outstanding awards from predecessor stock incentive plans that expire, are forfeited or cancelled, or that are reacquired by the Company after May 17, 2022. At December 31, 2022, the Company was authorized to grant up to 114 million common shares under its existing stock incentive plans. Additionally, at December 31, 2022, the Company had 28 million shares reserved for future issuance under its employee stock purchase plan. As of December 31, 2022, there was $ 332 million of total unrecognized compensation cost related to outstanding stock options and restricted stock units, which is expected to be recognized through 2026 with a remaining weighted-average service period of 0.6 years for stock options, 1.8 years for restricted stock units without performance conditions, and 0.4 years for performance-based restricted stock units. Acquisition of TD Ameritrade: Upon the completion of the TD Ameritrade acquisition on October 6, 2020, TD Ameritrade’s equity awards, whether vested or unvested, were assumed by the Company and converted into equity awards based on CSC common stock taking into account the defined exchange ratio of 1.0837 . Otherwise, these share-based awards are subject to the same terms and conditions that were applicable immediately before the merger, except for performance-based restricted stock units which were converted into time-based restricted stock units. The fair value of the stock options assumed by the Company was determined using an option pricing model. The portion of the fair value of the replacement awards related to services provided prior to the acquisition was $ 94 million and was accounted for as consideration transferred. The remaining portion of the fair value of $ 73 million is associated with future services and had a remaining weighted-average service period of 1.9 years on the acquisition date. A change in the actual or estimated forfeiture rate from the amount originally or subsequently estimated will result in an adjustment to compensation expense based on the full acquisition-date fair value of awards not expected to vest, regardless of whether those awards were treated as consideration transferred or stock-based compensation for future services. Stock Option Plan Options are granted for the purchase of shares of common stock at an exercise price not less than market value on the date of grant, and expire ten years from the date of grant. Options generally vest annually over a one - to four-year period from the date of grant. - 113 - THE CHARLES SCHWAB CORPORATION Notes to Consolidated Financial Statements (Tabular Amounts in Millions, Except Per Share Data, Option Price Amounts, Ratios, or as Noted) Stock option activity is summarized below: Number of Options (in millions) Weighted- Average Exercise Price per Share Weighted- Average Remaining Contractual Life (in years) Aggregate Intrinsic Value Outstanding at December 31, 2021 17 $ 39.11 5.38 $ 782 Granted 1 76.89 Exercised ( 2 ) 29.64 Forfeited (1) — 46.84 Expired (1) — 41.30 Outstanding at December 31, 2022 16 $ 42.98 4.95 $ 646 Vested and expected to vest at December 31, 2022 16 $ 42.98 4.95 $ 646 Vested and exercisable at December 31, 2022 13 $ 38.08 4.15 $ 579 (1) Number of options was less than 500 thousand. The aggregate intrinsic value in the table above represents the difference between CSC’s closing stock price and the exercise price of each in-the-money option on the last trading day of the period presented. Information on stock options granted and exercised is presented below: Year Ended December 31, 2022 2021 2020 Weighted-average fair value of options granted per share $ 22.09 $ 19.51 $ 11.56 Cash received from options exercised 64 221 79 Tax benefit realized on options exercised 22 61 11 Aggregate intrinsic value of options exercised 113 322 71 We use an option pricing model to estimate the fair value of options granted. The model takes into account the contractual term of the stock option, expected volatility, dividend yield, and the risk-free interest rate. Expected volatility is based on the implied volatility of publicly-traded options on CSC’s stock. Dividend yield is based on the average historical CSC dividend yield. The risk-free interest rate is based on the yield of a U.S. Treasury zero-coupon issue with a remaining term similar to the contractual term of the option. We use historical option exercise data, which includes employee termination data, to estimate the probability of future option exercises. The assumptions used to value the options granted during the years presented and their expected lives were as follows: Year Ended December 31, 2022 2021 2020 Weighted-average expected dividend yield 1.18 % 1.36 % 2.08 % Weighted-average expected volatility 33 % 37 % 36 % Weighted-average risk-free interest rate 1.8 % 0.8 % 1.0 % Expected life (in years) 4.1 - 5.2 4.2 - 5.4 4.3 - 5.9 Restricted Stock Units Restricted stock units are awards that entitle the holder to receive shares of CSC’s common stock following a vesting period and are restricted from transfer or sale until vested. Restricted stock units without performance conditions generally vest annually over a one - to four-year period, while performance-based restricted stock units generally cliff vest over a three-year period and also require the Company to achieve certain financial or other measures prior to vesting. The fair value of restricted stock units is based on the market price of the Company’s stock on the date of grant. The fair value of the restricted stock units that vested during each of the years 2022, 2021, and 2020 was $ 282 million, $ 317 million, and $ 175 million, respectively. - 114 - THE CHARLES SCHWAB CORPORATION Notes to Consolidated Financial Statements (Tabular Amounts in Millions, Except Per Share Data, Option Price Amounts, Ratios, or as Noted) The Company’s restricted stock units activity is summarized below: Restricted Stock Units Without Performance Conditions (in millions) Performance-Based Restricted Stock Units (in millions) Total Number of Restricted Stock Units (in millions) Weighted- Average Grant Date Fair Value per Unit Outstanding at December 31, 2021 7 2 9 $ 49.69 Granted 3 2 5 72.96 Vested (1) ( 3 ) — ( 3 ) 46.43 Forfeited (1) — — — 55.60 Outstanding at December 31, 2022 7 4 11 $ 62.12 (1) Number of units was less than 500 thousand. Retirement and Deferred Compensation Plans Employees can participate in Schwab’s qualified retirement plan, the SchwabPlan Retirement Savings and Investment Plan. The Company may match certain employee contributions or make additional contributions to this plan at its discretion. The Company’s total expense was $ 217 million, $ 187 million, and $ 136 million in 2022, 2021, and 2020, respectively. Schwab’s deferred compensation plan for officers permits participants to defer the receipt of certain cash compensation. The deferred compensation plan for non-employee directors permits participants to defer receipt of all or a portion of their director fees and to receive either a grant of stock options, or upon ceasing service as a director, the number of shares of CSC’s common stock that would have resulted from investing the deferred fee amount into CSC’s common stock. The deferred compensation liability was $ 175 million and $ 194 million at December 31, 2022 and 2021, respectively. Effective upon the completion of the TD Ameritrade acquisition on October 6, 2020, TD Ameritrade’s 401(k) and deferred profit-sharing plan was terminated and all unvested balances in the plan became fully vested. TD Ameritrade employees employed immediately prior to the acquisition who continued as employees of TDA Holding, CSC, or any of their subsidiaries after completion of the acquisition became eligible to participate in the SchwabPlan Retirement Savings and Investment Plan and make rollover contributions from their TD Ameritrade plan balances to the SchwabPlan Retirement Savings and Investment Plan. Financial Consultant Career Achievement Plan The financial consultant career achievement plan is a noncontributory, unfunded, nonqualified plan for eligible financial consultants. A financial consultant is eligible for earned cash payments after retirement contingent upon meeting certain performance levels, tenure, age, and client transitioning requirements. Allocations to the plan are calculated annually based on performance levels achieved and eligible compensation, and are subject to general creditors of the Company. Full vesting occurs when a financial consultant reaches 60 years of age and has at least ten years of service with the Company. The following table presents the changes in projected benefit obligation: December 31, 2022 2021 Projected benefit obligation at beginning of year $ 119 $ 92 Benefit cost (1) 19 16 Actuarial (gain)/loss (2) ( 60 ) 11 Projected benefit obligation at end of year (3) $ 78 $ 119 (1) Includes service cost and interest cost, which are recognized in compensation and benefits expense and other expense, respectively, in the consolidated statements of income. (2) Actuarial gain/loss is reflected in the consolidated statements of comprehensive income and is included in AOCI on the consolidated balance sheets and amortized over the participants’ expected remaining service period. (3) This amount is recognized as a liability in accrued expenses and other liabilities on the consolidated balance sheets. - 115 - THE CHARLES SCHWAB CORPORATION Notes to Consolidated Financial Statements (Tabular Amounts in Millions, Except Per Share Data, Option Price Amounts, Ratios, or as Noted) 22. Taxes on Income The components of taxes on income are as follows: Year Ended December 31, 2022 2021 2020 Current: Federal $ 1,889 $ 1,507 $ 967 State 334 298 172 Total current 2,223 1,805 1,139 Deferred: Federal ( 26 ) 38 ( 113 ) State 8 15 ( 25 ) Total deferred ( 18 ) 53 ( 138 ) Taxes on income $ 2,205 $ 1,858 $ 1,001 The temporary differences that created deferred tax assets and liabilities are detailed below: December 31, 2022 2021 Deferred tax assets: Net unrealized loss on available for sale securities $ 7,159 $ 347 Employee compensation, severance, and benefits 251 237 Operating lease liabilities 242 225 Reserves and allowances 69 74 Net operating loss carryforwards 9 8 Other 185 87 Total deferred tax assets 7,915 978 Valuation allowance ( 9 ) ( 8 ) Deferred tax assets — net of valuation allowance 7,906 970 Deferred tax liabilities: Amortization of acquired intangible assets ( 1,837 ) ( 1,888 ) Operating lease ROU assets ( 224 ) ( 210 ) Capitalized internal-use software development costs ( 187 ) ( 142 ) Equipment, office facilities, and property ( 151 ) ( 91 ) Other ( 137 ) ( 121 ) Total deferred tax liabilities ( 2,536 ) ( 2,452 ) Deferred tax asset (liability) — net (1) $ 5,370 $ ( 1,482 ) (1) Amounts are included in other assets on the consolidated balance sheet at December 31, 2022 and in accrued expenses and other liabilities on the consolidated balance sheet at December 31, 2021. A reconciliation of the federal statutory income tax rate to the effective income tax rate is as follows: Year Ended December 31, 2022 2021 2020 Federal statutory income tax rate 21.0 % 21.0 % 21.0 % State income taxes, net of federal tax benefit 3.5 3.4 3.2 Equity compensation benefit ( 0.5 ) ( 1.2 ) ( 0.3 ) Other ( 0.5 ) 0.9 ( 0.6 ) Effective income tax rate 23.5 % 24.1 % 23.3 % - 116 - THE CHARLES SCHWAB CORPORATION Notes to Consolidated Financial Statements (Tabular Amounts in Millions, Except Per Share Data, Option Price Amounts, Ratios, or as Noted) A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows: December 31, 2022 2021 Balance at beginning of year $ 271 $ 248 Additions for tax positions related to the current year 36 34 Additions for tax positions related to prior years 12 15 Reductions for tax positions related to prior years ( 59 ) ( 15 ) Reductions due to lapse of statute of limitations ( 13 ) ( 8 ) Reductions for settlements with tax authorities ( 42 ) ( 3 ) Balance at end of year $ 205 $ 271 Unrecognized tax benefits totaled $ 205 million and $ 271 million as of December 31, 2022 and 2021, respectively, $ 165 million and $ 221 million of which if recognized, would affect the annual effective tax rate. Interest and penalties were accrued related to unrecognized tax benefits in tax expense. At December 31, 2022 and 2021, we had accrued approximately $ 41 million and $ 68 million, respectively, for the payment of interest and penalties. The Company and its subsidiaries are subject to routine examinations by the respective federal, state, and applicable local jurisdictions’ taxing authorities. Federal returns for 2017 through 2021 remain subject to examination. The years open to examination by state and local governments vary by jurisdiction. 23. Regulatory Requirements CSC is a savings and loan holding company and is subject to examination, supervision, and regulation by the Federal Reserve. CSB, CSC’s primary depository institution subsidiary, is a Texas-chartered state savings bank and is a member of the Federal Reserve system. CSB is subject to examination, supervision, and regulation by the Federal Reserve, the TDSML, the CFPB, and the FDIC as its deposit insurer. CSC is required to serve as a source of strength for CSB. CSB is subject to various requirements and restrictions under federal and state laws, including regulatory capital requirements and requirements that restrict and govern the terms of affiliate transactions, such as extensions of credit to, or asset purchases from CSC or its other subsidiaries by CSB. In addition, our banking subsidiaries are required to provide notice to, and are required to obtain approval from, the Federal Reserve and the banking subsidiaries’ state regulators in order to declare and pay dividends to CSC in excess of the amount of recent net income and retained earnings. The federal banking agencies have broad powers to enforce regulations, including the power to terminate deposit insurance, impose substantial fines and other civil and criminal penalties, and appoint a conservator or receiver. Under the prompt corrective action provisions of the Federal Deposit Insurance Act, CSB could be subject to restrictive actions if it were to fall within one of the lowest three of five capital categories. CSC and CSB are required to maintain minimum capital levels as specified in federal banking regulations. Failure to meet the minimum levels could result in certain mandatory, and possibly additional discretionary actions by the regulators that, if undertaken, could have a direct material effect on CSC and CSB. At December 31, 2022, both CSC and CSB met all of their respective capital requirements. - 117 - THE CHARLES SCHWAB CORPORATION Notes to Consolidated Financial Statements (Tabular Amounts in Millions, Except Per Share Data, Option Price Amounts, Ratios, or as Noted) The regulatory capital and ratios for CSC (consolidated) and CSB are as follows: Actual Minimum to be Well Capitalized Minimum Capital Requirement December 31, 2022 Amount Ratio Amount Ratio Amount Ratio (1) CSC Common Equity Tier 1 Risk-Based Capital $ 30,590 21.9 % N/A $ 6,285 4.5 % Tier 1 Risk-Based Capital 40,296 28.9 % N/A 8,379 6.0 % Total Risk-Based Capital 40,376 28.9 % N/A 11,173 8.0 % Tier 1 Leverage 40,296 7.2 % N/A 22,512 4.0 % Supplementary Leverage Ratio 40,296 7.1 % N/A 17,004 3.0 % CSB Common Equity Tier 1 Risk-Based Capital $ 27,296 27.4 % $ 6,476 6.5 % $ 4,483 4.5 % Tier 1 Risk-Based Capital 27,296 27.4 % 7,970 8.0 % 5,978 6.0 % Total Risk-Based Capital 27,370 27.5 % 9,963 10.0 % 7,970 8.0 % Tier 1 Leverage 27,296 7.3 % 18,640 5.0 % 14,912 4.0 % Supplementary Leverage Ratio 27,296 7.3 % N/A 11,275 3.0 % December 31, 2021 CSC Common Equity Tier 1 Risk-Based Capital $ 27,967 19.7 % N/A $ 6,389 4.5 % Tier 1 Risk-Based Capital 37,921 26.7 % N/A 8,518 6.0 % Total Risk-Based Capital 37,950 26.7 % N/A 11,358 8.0 % Tier 1 Leverage 37,921 6.2 % N/A 24,346 4.0 % Supplementary Leverage Ratio 37,921 6.2 % N/A 18,434 3.0 % CSB Common Equity Tier 1 Risk-Based Capital $ 28,014 26.8 % $ 6,787 6.5 % $ 4,698 4.5 % Tier 1 Risk-Based Capital 28,014 26.8 % 8,353 8.0 % 6,265 6.0 % Total Risk-Based Capital 28,033 26.8 % 10,441 10.0 % 8,353 8.0 % Tier 1 Leverage 28,014 7.1 % 19,790 5.0 % 15,832 4.0 % Supplementary Leverage Ratio 28,014 7.0 % N/A 12,016 3.0 % (1) Under risk-based capital rules, CSC and CSB are also required to maintain additional capital buffers above the regulatory minimum risk-based capital ratios. As of December 31, 2022, CSC was subject to a stress capital buffer of 2.5%. In June 2022, CSC received its 2022 stress capital buffer requirement from the Federal Reserve of 2.5%, which became effective beginning October 1, 2022. In addition, CSB is required to maintain a capital conservation buffer of 2.5%. CSC and CSB are also required to maintain a countercyclical capital buffer above the regulatory minimum risk-based capital ratios, which was zero for both periods presented. If a buffer falls below the minimum requirement, CSC and CSB would be subject to increasingly strict limits on capital distributions and discretionary bonus payments to executive officers. At December 31, 2022, the minimum capital ratio requirements for both CSC and CSB, inclusive of their respective buffers, were 7.0%, 8.5%, and 10.5% for Common Equity Tier 1 Risk-Based Capital, Tier 1 Risk-Based Capital, and Total Risk-Based Capital, respectively. N/A Not applicable. Based on its regulatory capital ratios at December 31, 2022 and 2021, CSB is considered well capitalized (the highest category) under its respective regulatory capital rules. There are no conditions or events since December 31, 2022 that management believes have changed CSB’s capital category. CSC’s other banking subsidiaries are Charles Schwab Premier Bank, SSB (CSPB) and Charles Schwab Trust Bank (Trust Bank). CSPB is a Texas-chartered state savings bank that provides banking and custody services, and Trust Bank is a Nevada-state chartered savings bank that provides trust and custody services. At December 31, 2022 and 2021, the balance sheets of CSPB and Trust Bank primarily consisted of investment securities. At December 31, 2022 and 2021, CSPB held total assets of $ 31.5 billion and $ 39.2 billion, respectively, and Trust Bank held total assets of $ 13.0 billion and $ 15.9 billion, respectively. Based on their regulatory capital ratios at December 31, 2022 and 2021, CSPB and Trust Bank are considered well capitalized under their respective regulatory capital rules. - 118 - THE CHARLES SCHWAB CORPORATION Notes to Consolidated Financial Statements (Tabular Amounts in Millions, Except Per Share Data, Option Price Amounts, Ratios, or as Noted) As securities broker-dealers, CS&Co, TDAC, and TD Ameritrade, Inc. are subject to the SEC’s Uniform Net Capital Rule. CS&Co, TDAC, and TD Ameritrade, Inc. each compute net capital under the alternative method permitted by the Uniform Net Capital Rule, which requires the maintenance of minimum net capital, as defined, of the greater of 2% of aggregate debit balances arising from client transactions or a minimum dollar requirement, which is based on the type of business conducted by the broker-dealer. Under the alternative method, a broker-dealer may not repay subordinated borrowings, pay cash dividends, or make any unsecured advances or loans if such payment would result in a net capital amount of less than 5% of aggregate debit balances or less than 120% of its minimum dollar requirement. Net capital and net capital requirements for CS&Co, TDAC, and TD Ameritrade, Inc., are as follows: December 31, 2022 2021 CS&Co Net capital $ 5,386 $ 5,231 Minimum dollar requirement (1) 0.250 0.250 2% of aggregate debit balances 778 941 Net capital in excess of required net capital $ 4,608 $ 4,290 TDAC Net capital $ 5,291 $ 5,337 Minimum dollar requirement 1.500 1.500 2% of aggregate debit balances 626 1,007 Net capital in excess of required net capital $ 4,665 $ 4,330 TD Ameritrade, Inc. Net capital $ 806 $ 711 Minimum dollar requirement 0.250 0.250 2% of aggregate debit balances — — Net capital in excess of required net capital $ 806 $ 711 (1) During 2021, CS&Co transferred its futures business to Charles Schwab Futures and Forex LLC, a wholly-owned subsidiary of CSC. This transfer was accounted for as a common control transaction and did not have an impact on the consolidated financial statements. CS&Co subsequently deregistered prior to December 31, 2021 as an FCM with the CFTC, and, therefore, is no longer subject to net capital requirements under CFTC Regulation 1.17 under the Commodity Exchange Act. Pursuant to the SEC’s Customer Protection Rule and other applicable regulations, Schwab had cash and investments segregated for the exclusive benefit of clients at December 31, 2022. The SEC’s Customer Protection Rule requires broker-dealers to segregate client fully-paid securities and cash balances not collateralizing margin positions and not swept to money market funds or bank deposit accounts. Amounts included in cash and investments segregated and on deposit for regulatory purposes represent actual balances on deposit, whereas cash and investments required to be segregated and on deposit for regulatory purposes at December 31, 2022 for CS&Co totaled $ 22.7 billion and for TDAC totaled $ 19.9 billion. As of January 4, 2023, CS&Co had deposited $ 986 million of cash and qualified securities into its segregated reserve accounts. As of January 3, 2023, TDAC had deposited $ 72 million of cash and qualified securities into its segregated reserve accounts. Cash and investments required to be segregated and on deposit for regulatory purposes at December 31, 2021 for CS&Co totaled $ 38.4 billion and for TDAC totaled $ 15.9 billion. Cash and cash equivalents included in cash and investments segregated and on deposit for regulatory purposes are presented as part of Schwab’s cash balances in the consolidated statements of cash flows. 24. Segment Information Schwab’s two reportable segments are Investor Services and Advisor Services. Schwab structures the operating segments according to its clients and the services provided to those clients. The Investor Services segment provides retail brokerage, investment advisory, and banking and trust services to individual investors, and retirement plan services, as well as other corporate brokerage services, to businesses and their employees. The Advisor Services segment provides custodial, trading, banking and trust, and support services, as well as retirement business services, to independent RIAs, independent retirement advisors, and recordkeepers. Revenues and expenses are attributed to the two segments based on which segment services the client. - 119 - THE CHARLES SCHWAB CORPORATION Notes to Consolidated Financial Statements (Tabular Amounts in Millions, Except Per Share Data, Option Price Amounts, Ratios, or as Noted) The Company integrated its business and asset acquisitions during 2020 into its two existing reportable segments. Revenues and expenses from our acquisition of USAA-IMCO are allocated to Investor Services only; revenues and expenses from TD Ameritrade and our other 2020 acquisitions are attributed to Investor Services and Advisor Services based on which segment services the client. See Note 3 for more information regarding business acquisitions. The accounting policies of the segments are the same as those described in Note 2. For the computation of its segment information, Schwab utilizes an activity-based costing model to allocate traditional income statement line item expenses (e.g., compensation and benefits, depreciation and amortization, and professional services) to the business activities driving segment expenses (e.g., client service, opening new accounts, or business development) and a funds transfer pricing methodology to allocate certain revenues. Management evaluates the performance of the segments on a pre-tax basis. Segment assets and liabilities are not used for evaluating segment performance or in deciding how to allocate resources to segments. There are no revenues from transactions between the segments. Financial information for the segments is presented in the following table: Investor Services Advisor Services Total Year Ended December 31, 2022 2021 2020 2022 2021 2020 2022 2021 2020 Net Revenues Net interest revenue $ 7,819 $ 6,052 $ 4,391 $ 2,863 $ 1,978 $ 1,722 $ 10,682 $ 8,030 $ 6,113 Asset management and administration fees 3,049 3,130 2,544 1,167 1,144 931 4,216 4,274 3,475 Trading revenue 3,181 3,753 1,156 492 399 260 3,673 4,152 1,416 Bank deposit account fees 916 964 255 493 351 100 1,409 1,315 355 Other 605 562 262 177 187 70 782 749 332 Total net revenues 15,570 14,461 8,608 5,192 4,059 3,083 20,762 18,520 11,691 Expenses Excluding Interest 8,514 8,289 5,529 2,860 2,518 1,862 11,374 10,807 7,391 Income before taxes on income $ 7,056 $ 6,172 $ 3,079 $ 2,332 $ 1,541 $ 1,221 $ 9,388 $ 7,713 $ 4,300 Capital expenditures $ 702 $ 771 $ 535 $ 250 $ 270 $ 206 $ 952 $ 1,041 $ 741 Depreciation and amortization $ 471 $ 399 $ 288 $ 181 $ 150 $ 126 $ 652 $ 549 $ 414 Amortization of acquired intangible assets $ 479 $ 499 $ 149 $ 117 $ 116 $ 41 $ 596 $ 615 $ 190 25. Earnings Per Common Share EPS is computed using the two-class method. Preferred stock dividends, and undistributed earnings and dividends allocated to participating securities are subtracted from net income in determining net income available to common stockholders. Basic EPS is computed by dividing net income available to common stockholders by the weighted-average number of common shares outstanding during the period. Diluted EPS is calculated similar to basic EPS except that the numerator and denominator are adjusted as necessary for any effects of dilutive potential common shares, which include, if dilutive, outstanding stock options and non-vested restricted stock units. For the years ended December 31, 2022 and 2021, the Company had voting and nonvoting common stock outstanding. Since the rights of the voting and nonvoting common stock are identical, except with respect to voting, the net income of the Company has been allocated on a proportionate basis to the two classes. Diluted earnings per share is calculated using the treasury stock method for outstanding stock options and non-vested restricted stock units and the if-converted method for nonvoting common stock. The if-converted method assumes conversion of all nonvoting common stock to common stock. - 120 - THE CHARLES SCHWAB CORPORATION Notes to Consolidated Financial Statements (Tabular Amounts in Millions, Except Per Share Data, Option Price Amounts, Ratios, or as Noted) EPS under the basic and diluted computations for both common stock and nonvoting common stock are as follows: Year Ended December 31, 2022 2021 2020 Common Stock Nonvoting Common Stock Common Stock Nonvoting Common Stock Common Stock Nonvoting Common Stock Basic earnings per share: Numerator Net income $ 6,926 $ 257 $ 5,610 $ 245 $ 3,255 $ 44 Preferred stock dividends and other (1) ( 528 ) ( 20 ) ( 474 ) ( 21 ) ( 253 ) ( 3 ) Net income available to common stockholders $ 6,398 $ 237 $ 5,136 $ 224 $ 3,002 $ 41 Denominator Weighted-average common shares outstanding — basic 1,818 67 1,808 79 1,410 19 Basic earnings per share $ 3.52 $ 3.52 $ 2.84 $ 2.84 $ 2.13 $ 2.13 Diluted earnings per share: Numerator Net income available to common stockholders $ 6,398 $ 237 $ 5,136 $ 224 $ 3,002 $ 41 Reallocation of net income available to common stockholders as a result of conversion of nonvoting to voting shares 237 — 224 — 41 — Allocation of net income available to common stockholders: $ 6,635 $ 237 $ 5,360 $ 224 $ 3,043 $ 41 Denominator Weighted-average common shares outstanding — basic 1,818 67 1,808 79 1,410 19 Conversion of nonvoting shares to voting shares 67 — 79 — 19 — Common stock equivalent shares related to stock incentive plans 9 — 10 — 6 — Weighted-average common shares outstanding — diluted (2) 1,894 67 1,897 79 1,435 19 Diluted earnings per share $ 3.50 $ 3.50 $ 2.83 $ 2.83 $ 2.12 $ 2.12 (1) Includes preferred stock dividends and undistributed earnings and dividends allocated to non-vested restricted stock units. (2) Antidilutive stock options and restricted stock units excluded from the calculation of diluted EPS totaled 15 million, 16 million, and 22 million in 2022, 2021, and 2020, respectively. - 121 - THE CHARLES SCHWAB CORPORATION Notes to Consolidated Financial Statements (Tabular Amounts in Millions, Except Per Share Data, Option Price Amounts, Ratios, or as Noted) 26. The Charles Schwab Corporation – Parent Company Only Financial Statements Condensed Statements of Income Year Ended December 31, 2022 2021 2020 Interest revenue $ 183 $ 11 $ 38 Interest expense ( 501 ) ( 355 ) ( 273 ) Net interest expense ( 318 ) ( 344 ) ( 235 ) Trading revenue — — 1 Other revenue ( 2 ) ( 2 ) ( 1 ) Expenses Excluding Interest: Compensation and benefits ( 73 ) ( 87 ) ( 62 ) Regulatory fees and assessments ( 21 ) ( 20 ) ( 14 ) Professional services ( 16 ) ( 17 ) ( 68 ) Other expenses excluding interest ( 108 ) ( 18 ) ( 9 ) Loss before income tax benefit and equity in net income of subsidiaries ( 538 ) ( 488 ) ( 388 ) Income tax benefit (expense) 32 32 45 Loss before equity in net income of subsidiaries ( 506 ) ( 456 ) ( 343 ) Equity in net income of subsidiaries: Equity in undistributed net income (distributions in excess of net income) of subsidiaries ( 2,432 ) 3,361 2,476 Dividends from bank subsidiaries 6,670 — — Dividends from non-bank subsidiaries 3,451 2,950 1,166 Net Income 7,183 5,855 3,299 Preferred stock dividends and other (1) 548 495 256 Net Income Available to Common Stockholders $ 6,635 $ 5,360 $ 3,043 (1) Includes preferred stock dividends and undistributed earnings and dividends allocated to non-vested restricted stock units. Condensed Balance Sheets December 31, 2022 2021 Assets Cash and cash equivalents $ 8,800 $ 6,839 Receivables from subsidiaries 1,266 1,288 Available for sale securities 4,112 4,218 Investment in non-bank subsidiaries 35,025 34,377 Investment in bank subsidiaries 8,245 30,720 Other assets 581 357 Total assets $ 58,029 $ 77,799 Liabilities and Stockholders’ Equity Accrued expenses and other liabilities $ 584 $ 618 Payables to subsidiaries 54 80 Short-term borrowings 248 3,005 Long-term debt 20,535 17,835 Total liabilities 21,421 21,538 Stockholders’ equity 36,608 56,261 Total liabilities and stockholders’ equity $ 58,029 $ 77,799 - 122 - THE CHARLES SCHWAB CORPORATION Notes to Consolidated Financial Statements (Tabular Amounts in Millions, Except Per Share Data, Option Price Amounts, Ratios, or as Noted) Condensed Statements of Cash Flows Year Ended December 31, 2022 2021 2020 Cash Flows from Operating Activities Net income $ 7,183 $ 5,855 $ 3,299 Adjustments to reconcile net income to net cash provided by (used for) operating activities: Dividends in excess of (equity in undistributed) earnings of subsidiaries 2,432 ( 3,361 ) ( 2,476 ) Other 53 21 41 Net change in: Other assets ( 230 ) 76 ( 65 ) Accrued expenses and other liabilities ( 5 ) 112 34 Net cash provided by (used for) operating activities 9,433 2,703 833 Cash Flows from Investing Activities Due from (to) subsidiaries — net 333 211 46 Increase in investments in subsidiaries ( 2,139 ) ( 10,926 ) ( 2,172 ) Purchases of available for sale securities ( 5,699 ) ( 8,002 ) ( 5,397 ) Proceeds from sales of available for sale securities 2 2 2 Principal payments on available for sale securities 5,803 8,754 2,395 Other investing activities ( 25 ) — — Net cash provided by (used for) investing activities ( 1,725 ) ( 9,961 ) ( 5,126 ) Cash Flows from Financing Activities Issuance of long-term debt 2,971 7,036 3,070 Repayment of long-term debt ( 256 ) ( 1,200 ) ( 700 ) Issuance of commercial paper 1,895 8,253 1,234 Repayments of commercial paper ( 4,656 ) ( 5,250 ) ( 1,234 ) Repurchases of common stock and nonvoting common stock ( 3,395 ) — — Net proceeds from preferred stock offerings 740 2,806 4,940 Redemption of preferred stock ( 1,000 ) ( 600 ) — Dividends paid ( 2,110 ) ( 1,822 ) ( 1,280 ) Proceeds from stock options exercised and other 64 220 79 Other financing activities — — ( 1 ) Net cash provided by (used for) financing activities ( 5,747 ) 9,443 6,108 Increase (Decrease) in Cash and Cash Equivalents 1,961 2,185 1,815 Cash and Cash Equivalents at Beginning of Year 6,839 4,654 2,839 Cash and Cash Equivalents at End of Year $ 8,800 $ 6,839 $ 4,654 Supplemental Cash Flow Information Non-Cash Investing and Financing Activity Exchange of TDA Holding-issued senior notes for CSC-issued senior notes $ — $ 1,987 $ — Common stock repurchased during the period but settled after period end $ 40 $ — $ — - 123 - THE CHARLES SCHWAB CORPORATION REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Stockholders and the Board of Directors of The Charles Schwab Corporation Opinions on the Financial Statements and Internal Control over Financial Reporting We have audited the accompanying consolidated balance sheets of The Charles Schwab Corporation and subsidiaries (the “Company”) as of December 31, 2022 and 2021, the related consolidated statements of income, comprehensive income, stockholders’ equity, and cash flows, for each of the three years in the period ended December 31, 2022, and the related notes (collectively referred to as the “financial statements”). We also have audited the Company’s internal control over financial reporting as of December 31, 2022, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2022 and 2021, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2022, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2022, based on criteria established in Internal Control – Integrated Framework (2013) issued by COSO. Basis for Opinions The Company’s management is responsible for these financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management's Report on Internal Control over Financial Reporting . Our responsibility is to express an opinion on these financial statements and an opinion on the Company’s internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures to respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions. Definition and Limitations of Internal Control over Financial Reporting A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. - 124 - THE CHARLES SCHWAB CORPORATION Critical Audit Matter The critical audit matter communicated below is a matter arising from the current-period audit of the financial statements that was communicated or required to be communicated to the audit committee and that (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates. Asset Management and Administration Fees (AMAF) and Trading Revenue – Refer to Note 4 to the financial statements Critical Audit Matter Description Net revenues from asset management and administrative fees (AMAF) are generated through proprietary, third-party mutual fund and exchange-traded funds (ETF) offerings, as well as fee-based advisory solutions. Trading revenue is generated through commissions earned for executing trades for clients in individual equities, options, and certain third-party mutual funds and ETFs. Both AMAF and trading revenues are made up of a significant volume of low-dollar transactions, and use automated systems to process and record these transactions based on underlying information sourced from multiple systems and contractual terms with individual investors and third-party mutual funds. Given that the Company’s process to record revenue is highly automated and involves multiple systems and databases, auditing these revenue streams was complex and challenging due to the extent of audit effort required and involvement of professionals with expertise in information technology (IT) necessary for us to identify, test, and evaluate the Company’s systems, software applications, and automated controls. How the Critical Audit Matter Was Addressed in the Audit Our audit procedures related to the Company’s systems to process the AMAF and trading revenue transactions included the following, among others: • With the assistance of our IT specialists, we: ◦ Identified the significant systems used to process revenue transactions and, using a risk-based approach, tested the relevant general IT controls over each of these systems. ◦ Performed testing of automated business controls and system interface controls (including batch processing) within the relevant revenue streams. • We tested internal controls within the relevant revenue business processes, including those in place to reconcile the various systems to the Company’s general ledger. • We created data visualizations to evaluate recorded revenue and evaluate trends in the revenue data. • For a sample of revenue transactions, we performed detail transaction testing by agreeing the amounts recognized to contractual agreements and testing the mathematical accuracy of the recorded revenue. • For a sample of accounts, we tested the accuracy and completeness of assets under management by obtaining independent pricing support and reconciling total positions to third-party statements. /s/ DELOITTE & TOUCHE LLP Dallas, TX February 24, 2023 We have served as the Company's auditor since 1976. - 125 - THE CHARLES SCHWAB CORPORATION Management’s Report on Internal Control Over Financial Reporting Management of The Charles Schwab Corporation, together with its subsidiaries (the Company), is responsible for establishing and maintaining adequate internal control over financial reporting. The Company’s internal control over financial reporting is a process designed under the supervision of and effected by the Company’s Chief Executive Officer and Chief Financial Officer to provide reasonable assurance regarding the reliability of financial reporting and the preparation of published financial statements in accordance with accounting principles generally accepted in the United States of America. As of December 31, 2022, management conducted an assessment of the effectiveness of the Company’s internal control over financial reporting based on the framework established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this assessment, management has determined that the Company’s internal control over financial reporting was effective as of December 31, 2022. The Company’s internal control over financial reporting includes policies and procedures that pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect transactions and dispositions of assets; provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with accounting principles generally accepted in the United States of America, and that receipts and expenditures are being made only in accordance with authorizations of management and the directors of the Company; and provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the Company’s financial statements. The Company’s internal control over financial reporting as of December 31, 2022, has been audited by Deloitte & Touche LLP, an independent registered public accounting firm, as stated in their report appearing on the previous pages. - 126 - THE CHARLES SCHWAB CORPORATION Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure None.