SCHWAB CHARLES CORP 10-Q

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations INTRODUCTION The Charles Schwab Corporation (CSC) is a savings and loan holding company. CSC engages, through its subsidiaries (collectively referred to as Schwab or the Company), in wealth management, securities brokerage, banking, asset management, custody, and financial advisory services. Principal business subsidiaries of CSC include the following: • Charles Schwab & Co., Inc. (CS&Co), incorporated in 1971, a securities broker-dealer; • TD Ameritrade, Inc., an introducing securities broker-dealer; • TD Ameritrade Clearing, Inc. (TDAC), a securities broker-dealer that provides trade execution and clearing services to TD Ameritrade, Inc.; • Charles Schwab Bank, SSB (CSB), our principal banking entity; and • Charles Schwab Investment Management, Inc. (CSIM), the investment advisor for Schwab’s proprietary mutual funds (Schwab Funds ® ) and for Schwab’s exchange-traded funds (Schwab ETFs ™ ). Unless otherwise indicated, the terms “Schwab,” “the Company,” “we,” “us,” or “our” mean CSC together with its consolidated subsidiaries. Schwab provides financial services to individuals and institutional clients through two segments – Investor Services and Advisor Services. 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 registered investment advisors (RIAs), independent retirement advisors, and recordkeepers. Schwab was founded on the belief that all Americans deserve access to a better investing experience. Although much has changed in the intervening years, our purpose remains clear – to champion every client’s goals with passion and integrity. Guided by this purpose and our vision of creating the most trusted leader in investment services, management has adopted a strategy described as “Through Clients’ Eyes.” This strategy emphasizes placing clients’ perspectives, needs, and desires at the forefront. Because investing plays a fundamental role in building financial security, we strive to deliver a better investing experience for our clients – individual investors and the people and institutions who serve them – by disrupting longstanding industry practices on their behalf and providing superior service. We also aim to offer a broad range of products and solutions to meet client needs with a focus on transparency, value, and trust. In addition, management works to couple Schwab’s scale and resources with ongoing expense discipline to keep costs low and ensure that products and solutions are affordable as well as responsive to client needs. In combination, these are the key elements of our “no trade-offs” approach to serving investors. We believe that following this strategy is the best way to maximize our market valuation and stockholder returns over time. Management estimates that investable wealth in the United States (U.S.) (consisting of assets in defined contribution, retail wealth management and brokerage, and registered investment advisor channels, along with bank deposits) currently exceeds $60 trillion, which means the Company’s $7.58 trillion in client assets leaves substantial opportunity for growth. Our strategy is based on the principle that developing trusted relationships will translate into more assets from both new and existing clients, ultimately driving more revenue, and along with expense discipline and thoughtful capital management, will generate earnings growth and build long-term stockholder value. This Management’s Discussion and Analysis should be read in conjunction with our Annual Report on Form 10-K for the fiscal year ended December 31, 2022 (2022 Form 10-K). On our website, https://www.aboutschwab.com , we post the following filings after they are electronically filed with or furnished to the Securities and Exchange Commission (SEC or Commission): annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and any amendments to those reports filed or furnished pursuant to Section 13(a) - 1 - THE CHARLES SCHWAB CORPORATION Management’s Discussion and Analysis of Financial Condition and Results of Operations (Tabular Amounts in Millions, Except Ratios, or as Noted) or 15(d) of the Securities Exchange Act of 1934. In addition, the website also includes the Dodd-Frank stress test results, our regulatory capital disclosures based on Basel III, and our average liquidity coverage ratio (LCR). The SEC maintains a website at https://www.sec.gov that contains reports, proxy statements, and other information that we file electronically with them. FORWARD-LOOKING STATEMENTS In addition to historical information, this Quarterly Report on Form 10-Q contains “forward-looking statements” within the meaning of Section 27A of the Securities Act, and Section 21E of the Securities Exchange Act of 1934. Forward-looking statements are identified by words such as “believe,” “anticipate,” “expect,” “intend,” “plan,” “will,” “may,” “estimate,” “appear,” “could,” “would,” “expand,” “aim,” “maintain,” “continue,” “seek,” and other similar expressions. In addition, any statements that refer to expectations, projections, or other characterizations of future events or circumstances are forward-looking statements. These forward-looking statements, which reflect management’s beliefs, objectives, and expectations as of the date hereof, are estimates based on the best judgment of Schwab’s senior management. These statements relate to, among other things: • Maximizing our market valuation and stockholder returns over time; our belief that developing trusted relationships will translate into more client assets which drives revenue and, along with expense discipline and thoughtful capital management, generates earnings growth and builds stockholder value (see Introduction in Part I – Item 2); • Business momentum; investments to support growth in our client base; capital return (see Overview); • Expected timing for the TD Ameritrade client transitions; cost estimates and timing related to the TD Ameritrade integration, including acquisition and integration-related costs and capital expenditures, cost synergies, and exit and other related costs (see Overview and Exit and Other Related Liabilities in Part I – Item 1 – Financial Information – Notes to Condensed Consolidated Financial Statements (Item 1) – Note 10); • The expected impact of proposed rules (see Current Regulatory and Other Developments); • The adjustment of rates paid on client-related liabilities; the use and balances of supplemental funding; net interest revenue (see Results of Operations); • Capital expenditures (see Results of Operations); • Management of interest rate risk; the impact of changes in interest rates on net interest margin and revenue, bank deposit account fee revenue, economic value of equity, and liability and asset duration (see Risk Management); • The phase-out of the use of LIBOR (see Risk Management); • Sources and uses of liquidity and capital (see Liquidity Risk and Capital Management); • Capital management; the potential migration of insured deposit account balances (IDA balances) to our balance sheet; expectations about capital requirements, including accumulated other comprehensive income (AOCI); plans regarding capital and dividends (see Capital Management and Commitments and Contingencies in Item 1 – Note 9); • The expected impact of new accounting standards not yet adopted (see New Accounting Standards in Item 1 – Note 2); • The likelihood of indemnification and guarantee payment obligations and clients failing to fulfill contractual obligations (see Commitments and Contingencies in Item 1 – Note 9); and • The impact of legal proceedings and regulatory matters (see Commitments and Contingencies in Item 1 – Note 9 and Legal Proceedings in Part II – Item 1). Achievement of the expressed beliefs, objectives, and expectations described in these statements is subject to certain risks and uncertainties that could cause actual results to differ materially from the expressed beliefs, objectives, and expectations. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date of this Quarterly Report on Form 10-Q or, in the case of documents incorporated by reference, as of the date of those documents. Important factors that may cause actual results to differ include, but are not limited to: • General market conditions, including equity valuations and the level of interest rates; • The level and mix of client trading activity; • Our ability to attract and retain clients, develop trusted relationships, and grow client assets; • Client use of our advisory and lending solutions and other products and services; • The level of client assets, including cash balances; • Competitive pressure on pricing, including deposit rates; • Client sensitivity to rates; • Regulatory guidance and adverse impacts from new or changed legislation, rulemaking, or regulatory expectations; • Capital and liquidity needs and management; • Our ability to manage expenses; - 2 - THE CHARLES SCHWAB CORPORATION Management’s Discussion and Analysis of Financial Condition and Results of Operations (Tabular Amounts in Millions, Except Ratios, or as Noted) • Our ability to attract and retain talent; • Our ability to develop and launch new and enhanced products, services, and capabilities, as well as enhance our infrastructure, in a timely and successful manner; • Our ability to monetize client assets; • Our ability to support client activity levels; • The risk that expected cost synergies and other benefits from the TD Ameritrade acquisition may not be fully realized or may take longer to realize than expected and that integration-related expenses may be higher than expected; • Increased compensation and other costs due to inflationary pressures; • The timing and scope of integration-related and other technology projects; • Re al estate and workforce decisions; • Client cash allocations; • Migrations of bank deposit account balances (BDA balances); • Balance sheet positioning relative to changes in interest rates; • Interest-earning asset mix and growth; • Our ability to access and use supplemental funding sources; • Prepayment levels for mortgage-backed securities; • LIBOR trends; • Adverse developments in litigation or regulatory matters and any related charges; and • Potential breaches of contractual terms for which we have indemnification and guarantee obligations. Certain of these factors, as well as general risk factors affecting the Company, are discussed in greater detail in Part I – Item 1A – Risk Factors in the 2022 Form 10-K. - 3 - THE CHARLES SCHWAB CORPORATION Management’s Discussion and Analysis of Financial Condition and Results of Operations (Tabular Amounts in Millions, Except Ratios, or as Noted) OVERVIEW Management focuses on several client activity and financial metrics in evaluating Schwab’s financial position and operating performance. Results for the first quarter of 2023 and 2022 are as follows: Three Months Ended March 31, Percent Change 2023 2022 Client Metrics Net new client assets (in billions) (1) $ 150.7 $ 120.5 25 % Core net new client assets (in billions) $ 131.7 $ 120.5 9 % Client assets (in billions, at quarter end) $ 7,580.0 $ 7,862.1 (4) % Average client assets (in billions) $ 7,385.4 $ 7,766.4 (5) % New brokerage accounts (in thousands) 1,042 1,202 (13) % Active brokerage accounts (in thousands, at quarter end) 34,120 33,577 2 % Assets receiving ongoing advisory services (in billions, at quarter end) $ 3,895.5 $ 3,943.5 (1) % Client cash as a percentage of client assets (at quarter end) 11.6 % 11.4 % Company Financial Information and Metrics Total net revenues $ 5,116 $ 4,672 10 % Total expenses excluding interest 3,006 2,833 6 % Income before taxes on income 2,110 1,839 15 % Taxes on income 507 437 16 % Net income 1,603 1,402 14 % Preferred stock dividends and other 70 124 (44) % Net income available to common stockholders $ 1,533 $ 1,278 20 % Earnings per common share — diluted $ .83 $ .67 24 % Net revenue growth from prior year 10 % (1) % Pre-tax profit margin 41.2 % 39.4 % Return on average common stockholders’ equity (annualized) 23 % 12 % Expenses excluding interest as a percentage of average client assets (annualized) 0.17 % 0.15 % Consolidated Tier 1 Leverage Ratio (at quarter end) 7.1 % 6.1 % Non-GAAP Financial Measures (2) Adjusted total expenses (3) $ 2,773 $ 2,583 Adjusted diluted EPS $ .93 $ .77 Return on tangible common equity 83 % 26 % (1) The first quarter of 2023 includes inflows of $19.0 billion from off-platform certificates of deposit (CDs) issued by CSB. (2) See Non-GAAP Financial Measures for further details and a reconciliation of such measures to GAAP reported results. (3) Adjusted total expenses is a non-GAAP financial measure adjusting total expenses excluding interest. See Non-GAAP Financial Measures. The first quarter of 2023 presented a mixed macroeconomic background for our clients. While equity markets increased from year-end 2022 levels, investor sentiment remained bearish, especially following the onset of the banking industry turmoil in early March. Fixed income markets also reflected growing fears of an economic downturn as the 10-year U.S. Treasury yield declined approximately 50 basis points from its intra-quarter peak to end March just under 3.50%. The Federal Reserve continued its monetary tightening cycle, increasing the Federal Funds rate twice for a total of 50 basis points in the first quarter of 2023. Throughout this environment, Schwab remained a trusted partner to investors. Core net new assets totaled $131.7 billion in the first quarter of 2023, representing an annualized organic growth rate of over 7%, and total client assets were $7.58 trillion at March 31, 2023, up 8% from year-end 2022. Clients’ daily average trades (DATs) were 5.9 million in the first quarter of 2023, down 10% from the prior year amid softer investor sentiment. Clients opened 1.0 million new brokerage accounts in the first quarter of 2023, bringing active brokerage accounts to 34.1 million at quarter-end, up 2% year-over-year. Schwab’s financial results in the first quarter of 2023 reflected the Company’s sustained business momentum and the benefits of rising interest rates, partially offset by clients’ asset allocation decisions. Net income totaled $1.6 billion in the first quarter of 2023, rising 14% from the first quarter of 2022, and the Company produced diluted earnings per common share (EPS) of $.83, - 4 - THE CHARLES SCHWAB CORPORATION Management’s Discussion and Analysis of Financial Condition and Results of Operations (Tabular Amounts in Millions, Except Ratios, or as Noted) up 24% from the first quarter of 2022. Adjusted diluted EPS (1) , which excludes acquisition and integration-related costs, amortization of acquired intangible assets, and related income tax effects, was $.93, increasing 21% from the first quarter of 2022. Total net revenues rose 10% year-over-year to $5.1 billion in the first quarter of 2023. Net interest revenue increased to $2.8 billion, up 27% from the first quarter of 2022 as higher yields on interest-earning assets more than offset higher funding costs and lower average interest-earning assets. Asset management and administration fees totaled $1.1 billion in the first quarter of 2023, rising 5% year-over-year as growth in money market funds and the elimination of fee waivers more than offset lower average client asset balances due to declines in equity markets relative to the first quarter of 2022. Trading revenue was $892 million in the first quarter of 2023, decreasing 7% year-over-year due primarily to lower trading volume and changes in mix of client trading activity. Bank deposit account fee revenue was $151 million in the first quarter of 2023, down 49% due in part to $97 million in one-time breakage fees relating to ending our arrangements with certain third-party banks (see Results of Operations – Bank Deposit Account Fees). BDA balances totaled $106.5 billion at March 31, 2023, down 16% from year-end 2022 due primarily to client cash allocation decisions. Total expenses excluding interest were $3.0 billion in the first quarter of 2023, increasing 6% from the first quarter of 2022. Adjusted total expenses (1) were $2.8 billion, increasing 7% from the first quarter of 2022. These increases reflected higher compensation and benefits expense, higher occupancy and equipment expense, and higher depreciation and amortization expense, as we continued to invest in our people and technology to support ongoing growth in our client base. Acquisition and integration-related costs and amortization of acquired intangible assets were $98 million and $135 million, respectively, in the first quarter of 2023, up 2% and down 12%, respectively, from the first quarter of 2022. Amortization of acquired intangible assets decreased as certain assets from the TDA acquisition were fully amortized by the beginning of the fourth quarter of 2022. Return on average common stockholders’ equity increased to 23% in the first quarter of 2023 compared with 12% in the first quarter of 2022. Return on tangible common equity (1) (ROTCE) was 83% in the first quarter of 2023 compared with 26% in the first quarter of 2022. The increases in both return on average common stockholders’ equity and ROTCE were due primarily to lower stockholders’ equity and higher net income. Stockholders’ equity was lower in the first quarter of 2023 due to a year-over-year decrease in AOCI, as higher market interest rates resulted in larger unrealized losses on our available for sale (AFS) portfolio in the first quarter of 2023 compared with the first quarter of 2022. The Company continued its diligent approach to balance sheet management in the first quarter of 2023 to maintain capital and liquidity required to support Schwab’s long-term growth. Total balance sheet assets decreased 3% from year-end 2022 to March 31, 2023. With further increases in market interest rates in the first quarter of 2023 as the Federal Reserve continued its monetary tightening cycle, clients allocated more assets to higher yielding cash and fixed income alternatives. To facilitate these client cash movements and help build available cash, the Company utilized additional temporary funding sources including Federal Home Loan Bank (FHLB) borrowings and issuances of brokered CDs during the first quarter of 2023. During the first quarter of 2023, we increased our quarterly common dividend by 14% to $.25 per share, and returned capital via common and preferred stock repurchases, which totaled $2.8 billion and $467 million, respectively, during the first quarter of 2023. Inclusive of these actions, the Company’s Tier 1 Leverage Ratio finished the first quarter of 2023 at 7.1%. The Company suspended its active share repurchase program during the first quarter of 2023 in light of anticipated changes to regulatory expectations and capital requirements, though opportunistic capital return remains an important component of our ‘through the cycle’ financial formula. (1) Adjusted diluted EPS, adjusted total expenses, and return on tangible common equity are non-GAAP financial measures. See Non-GAAP Financial Measures for further details and a reconciliation of such measures to GAAP reported results. Integration of TD Ameritrade Effective October 6, 2020, the Company completed its acquisition of TD Ameritrade Holding Corporation (TDA Holding) and its consolidated subsidiaries (collectively referred to as “TD Ameritrade” or “TDA”). Integration work continued during the first three months of 2023, including the completion of the first client transition group in February 2023. The Company expects to complete most remaining 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. We expect to incur total acquisition and integration-related costs and capital expenditures of between $2.4 billion and $2.5 billion. - 5 - THE CHARLES SCHWAB CORPORATION Management’s Discussion and Analysis of Financial Condition and Results of Operations (Tabular Amounts in Millions, Except Ratios, or as Noted) The Company’s estimates of the nature, amounts, and timing of recognition of acquisition and integration-related costs remain subject to change based on a number of factors, including the expected duration and complexity of the integration process and the continued uncertainty of the economic environment. More specifically, factors that could cause variability in our expected acquisition and integration-related costs include the level of employee attrition and availability of third-party labor, workforce redeployment from eliminated positions into open roles, changes in the levels of client activity, as well as changes in the scope and cost of technology and real estate-related exit cost variability due to effects of changes in remote working trends. Acquisition and integration-related costs, which are inclusive of related exit costs, totaled $98 million and $96 million for the first quarters of 2023 and 2022, respectively. Over the course of the integration, we expect to realize annualized cost synergies of between $1.8 billion and $2.0 billion, and, through March 31, 2023, we have achieved approximately 75% of this amount on an annualized run-rate basis. The Company expects to realize the vast majority of the remaining estimated cost synergies by the end of 2024, with anticipated full year synergy realization beginning in 2025. Estimated timing and amounts of synergy realization are subject to change as we progress in the integration. Refer to Part II – Item 7 – Overview in our 2022 Form 10-K, Results of Operations – Total Expenses Excluding Interest, Non-GAAP Financial Measures, and Item 1 – Note 10 for additional information regarding our integration of TD Ameritrade. Subsequent Events On May 4, 2023, the Company executed a Second Amended and Restated Insured Deposit Account Agreement (2023 IDA agreement) with TD Bank USA, National Association and TD Bank, National Association (together, the TD Depository Institutions) that replaces and supersedes the previous amended and restated insured deposit account agreement dated November 24, 2019 that became effective October 6, 2020, as amended (the 2019 IDA agreement, and together with the 2023 IDA agreement, the IDA agreements). In accordance with the IDA agreements, cash held in 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. Under the 2023 IDA agreement, the service fee on client cash deposits held at the TD Depository Institutions remains at 15 basis points, as it was in the 2019 IDA agreement. As the 2023 IDA agreement was entered into on May 4, 2023, the results included in this Quarterly Report on Form 10-Q are pursuant to the 2019 IDA agreement. Disclosures regarding the Company’s future obligations reflect the terms of the 2023 IDA agreement. See Capital Management and Commitments and Contingencies in Item 1 – Note 9 for additional information on the IDA agreements. Current Regulatory and Other Developments In December 2022, the SEC proposed a set of four related equity market structure rules that would make significant changes to how national market system (NMS) stock orders are priced, executed and reported. The four proposed rules are described below. • The “Order Competition Rule” would require that, before most individual investors’ orders could be executed internally by a trading center (like wholesaler market makers), those orders must first be exposed to a qualifying order-by-order auction in which both market makers and institutional investors can participate. • “Regulation Best Execution” would establish an SEC-level best execution standard (in addition to the existing FINRA and MSRB best execution rules) for broker-dealers and require them to establish, maintain, and enforce written policies and procedures addressing how the broker-dealer will comply with the best execution standard and make routing or execution decisions for customer orders. Regulation Best Execution would apply not only to equities, but to all securities. • Amendments to Rule 605 of Regulation NMS requiring enhanced disclosures of order execution quality for large brokers that handle retail orders. • A rule to (i) amend minimum pricing increments (or tick sizes) that would apply to both the quoting and trading of NMS stocks, (ii) reduce the exchange access fee caps, and (iii) require transparency of odd-lots. The comment periods for the proposed rules ended on March 31, 2023 and the impact to Schwab cannot be assessed until the final rules are released. - 6 - THE CHARLES SCHWAB CORPORATION Management’s Discussion and Analysis of Financial Condition and Results of Operations (Tabular Amounts in Millions, Except Ratios, or as Noted) In November 2022, the SEC proposed a rule that would require substantial changes to the liquidity risk management programs for open-end mutual funds other than money market funds (funds) and require them to implement “swing pricing” and impose a “hard close” on the acceptance of purchase and redemption orders. Swing pricing would require funds to adjust the fund’s current net asset value (NAV) per share by a “swing factor” if the fund has either (i) net redemptions (no threshold) or (ii) net purchases that exceed a specified threshold (2% of the fund’s net assets). To implement the swing pricing requirements, the proposed rule also would require that a fund, its transfer agent, or a registered clearing agency receive purchase and redemption orders prior to the time the fund has established for determining the NAV, typically market close, in order to receive a given day’s NAV (a “hard close”). Current practices permit fund orders received by a financial intermediary prior to the fund cut-off time to be transmitted to the fund after the fund cut-off time and for the order to receive that day’s NAV. Under the proposed rule, orders received by the fund, its transfer agent or registered clearing agency after the fund cut-off time would receive the next day’s NAV. The comment period for the proposed rule ended on February 14, 2023 and the impact to Schwab cannot be assessed until the final rule is released. In May 2022, the federal banking agencies issued a joint notice of proposed rulemaking that would substantially revise how an insured depository institution’s Community Reinvestment Act (CRA) performance is evaluated. The proposed rule includes revisions relating to the delineation of assessment areas, the overall evaluation framework and performance standards and metrics, the definition of community development activities and data collection and reporting. The comment period for the proposed rule ended on August 5, 2022 and the impact to Schwab cannot be assessed until the final rule is released. RESULTS OF OPERATIONS Total Net Revenues The following table presents a comparison of revenue by category: 2023 2022 Three Months Ended March 31, Percent Change Amount % of Total Net Revenues Amount % of Total Net Revenues Net interest revenue Interest revenue 73 % $ 4,016 78 % $ 2,319 50 % Interest expense N/M (1,246) (24) % (136) (3) % Net interest revenue 27 % 2,770 54 % 2,183 47 % Asset management and administration fees Mutual funds, exchange-traded funds (ETFs), and collective trust funds (CTFs) 20 % 585 11 % 489 10 % Advice solutions (9) % 453 9 % 496 11 % Other (4) % 80 2 % 83 2 % Asset management and administration fees 5 % 1,118 22 % 1,068 23 % Trading revenue Commissions (13) % 422 8 % 484 10 % Order flow revenue (12) % 414 8 % 470 10 % Principal transactions N/M 56 1 % 9 — Trading revenue (7) % 892 17 % 963 20 % Bank deposit account fees (49) % 151 3 % 294 6 % Other 13 % 185 4 % 164 4 % Total net revenues 10 % $ 5,116 100 % $ 4,672 100 % N/M Not meaningful. Percent changes greater than 200% are presented as not meaningful. Net Interest Revenue Revenue on interest-earning assets is affected by various factors, such as the composition of assets, prevailing interest rates and spreads at the time of origination or purchase, changes in interest rates on floating-rate securities and loans, and changes in prepayment levels for mortgage-backed and other asset-backed securities and loans. Schwab establishes the rates paid on client- - 7 - THE CHARLES SCHWAB CORPORATION Management’s Discussion and Analysis of Financial Condition and Results of Operations (Tabular Amounts in Millions, Except Ratios, or as Noted) related liabilities, and management expects that it will generally adjust the rates paid on these liabilities at some fraction of any movement in short-term rates. Interest expense on long-term debt, FHLB borrowings, other short-term borrowings, and other funding sources is impacted by market interest rates at the time of borrowing and changes in interest rates on floating-rate liabilities. See also Risk Management – Interest Rate Risk Simulations. Interest rates increased significantly beginning late in the first quarter of 2022 through the first quarter of 2023. Short-term rates were near zero until the Federal Reserve began its aggressive tightening cycle in March 2022 in response to rising inflation, ultimately increasing the federal funds target overnight rate nine times between March 2022 and March 2023 for a total increase of 475 basis points. Long-term interest rates increased throughout 2022 and the first three months of 2023, though at a slower pace, leading to an inverted yield curve. Schwab’s average interest-earning assets in the first quarter of 2023 were lower compared with the first quarter of 2022 due primarily to client cash allocation movement to higher yielding investment solutions beginning in the second quarter of 2022 through the first quarter of 2023, which resulted primarily from the rapid increases to the federal funds overnight rate. These changes in client cash allocations reduced average balances of bank deposits and payables to brokerage clients. To support this client cash allocation activity, the Company utilized temporary supplemental funding in the fourth quarter of 2022 and first quarter of 2023, including drawing upon FHLB secured lending facilities and issuing brokered CDs. The following table presents net interest revenue information corresponding to interest-earning assets and funding sources on the condensed consolidated balance sheets: 2023 2022 Three Months Ended March 31, Average Balance Interest Revenue/ Expense Average Yield/Rate Average Balance Interest Revenue/ Expense Average Yield/Rate Interest-earning assets Cash and cash equivalents $ 37,056 $ 413 4.46 % $ 72,465 $ 34 0.19 % Cash and investments segregated 40,068 432 4.31 % 51,913 15 0.11 % Receivables from brokerage clients 60,543 1,084 7.16 % 84,204 626 2.97 % Available for sale securities (1) 155,791 825 2.12 % 284,526 947 1.33 % Held to maturity securities (1) 170,889 746 1.75 % 103,416 378 1.46 % Bank loans 40,248 391 3.92 % 35,852 187 2.10 % Total interest-earning assets 504,595 3,891 3.09 % 632,376 2,187 1.38 % Securities lending revenue 112 129 Other interest revenue 13 3 Total interest-earning assets $ 504,595 $ 4,016 3.19 % $ 632,376 $ 2,319 1.47 % Funding sources Bank deposits $ 343,105 $ 618 0.73 % $ 452,692 $ 16 0.01 % Payables to brokerage clients 77,169 75 0.39 % 105,929 2 0.01 % Other short-term borrowings (2) 6,917 86 5.05 % 4,717 4 0.33 % Federal Home Loan Bank borrowings (2,3) 24,458 304 5.05 % — — — Long-term debt 20,290 139 2.74 % 19,864 108 2.18 % Total interest-bearing liabilities 471,939 1,222 1.05 % 583,202 130 0.09 % Non-interest-bearing funding sources 32,656 49,174 Securities lending expense 22 7 Other interest expense 2 (1) Total funding sources $ 504,595 $ 1,246 1.00 % $ 632,376 $ 136 0.09 % Net interest revenue $ 2,770 2.19 % $ 2,183 1.38 % (1) Amounts have been calculated based on amortized cost. Interest revenue on investment securities is presented net of related premium amortization. (2) Beginning in the first quarter of 2023, Federal Home Loan Bank borrowings are presented separately from other short-term borrowings. Prior period amounts have been reclassified to reflect this change. (3) Average balance and interest expense was less than $500 thousand in the prior period. - 8 - THE CHARLES SCHWAB CORPORATION Management’s Discussion and Analysis of Financial Condition and Results of Operations (Tabular Amounts in Millions, Except Ratios, or as Noted) Net interest revenue increased $587 million, or 27%, in the first quarter of 2023 compared to the same period in 2022. This increase was due primarily to higher average yields on interest-earning assets as a result of higher market interest rates. With the increases in market interest rates, net premium amortization of investment securities decreased to $185 million in the first quarter of 2023 from $486 million in the first quarter of 2022. These benefits were partially offset by higher rates paid on funding sources, increased usage of FHLB borrowings, other short-term borrowings, and brokered CDs to support client cash allocations in the rising rate environment, and lower balances of interest-earning assets. Average interest-earning assets for the first quarter of 2023 were lower by 20% compared to the same period in 2022. This decrease was primarily due to lower bank deposits and payables to brokerage clients as a result of changes in client cash allocations due to higher market interest rates. Net interest margin increased to 2.19% during the first quarter of 2023 from 1.38% during the same period in 2022. Higher market interest rates improved yields on interest-earning assets, which more than offset the higher rates paid across interest-bearing funding sources. The Company’s higher average balances in the first quarter of 2023 of FHLB borrowings, other short-term borrowings, and brokered CDs resulted in higher funding costs. The Company expects to continue using these temporary funding sources to support clients’ cash allocation movement, with balances of supplemental funding sources expected to peak in 2023 and then decrease in 2024, with a limited portion remaining outstanding in early 2025. The usage of these higher-cost funding sources is expected to reduce net interest revenue in coming quarters. See also Risk Management – Liquidity Risk, Item 1 – Note 7 Bank Deposits, and Item 1 – Note 8 Borrowings for additional information on these and other funding sources. Asset Management and Administration Fees The following table presents asset management and administration fees, average client assets, and average fee yields: Three Months Ended March 31, 2023 2022 Average Client Assets Revenue Average Fee Average Client Assets Revenue Average Fee Schwab money market funds before fee waivers $ 316,391 $ 213 0.27 % $ 144,732 $ 102 0.29 % Fee waivers — (54) Schwab money market funds 316,391 213 0.27 % 144,732 48 0.13 % Schwab equity and bond funds, ETFs, and CTFs 450,581 91 0.08 % 456,326 97 0.09 % Mutual Fund OneSource ® and other no-transaction-fee (NTF) funds (1) 222,437 148 0.27 % 212,641 165 0.31 % Other third-party mutual funds and ETFs (1) 676,344 133 0.08 % 872,212 179 0.08 % Total mutual funds, ETFs, and CTFs (2) $ 1,665,753 585 0.14 % $ 1,685,911 489 0.12 % Advice solutions (2) Fee-based $ 443,027 453 0.41 % $ 469,325 496 0.43 % Non-fee-based 94,469 — — 90,335 — — Total advice solutions $ 537,496 453 0.34 % $ 559,660 496 0.36 % Other balance-based fees (3) 561,788 62 0.04 % 616,679 67 0.04 % Other (4) 18 16 Total asset management and administration fees $ 1,118 $ 1,068 (1) The first quarter of 2022 includes transfers from other third-party mutual funds and ETFs to Mutual Fund OneSource ® and other NTF funds. (2) Average client assets for advice solutions may also include the asset balances contained in the mutual fund and/or ETF categories listed above. (3) Includes various asset-related fees, such as trust fees, 401(k) recordkeeping fees, and mutual fund clearing fees and other service fees. (4) Includes miscellaneous service and transaction fees relating to mutual funds and ETFs that are not balance-based. Asset management and administration fees increased by $50 million, or 5%, in the first quarter of 2023 compared to the same period in 2022. The increase in the first quarter of 2023 was primarily a result of higher balances in Schwab money market funds and the elimination of fee waivers on those funds . Money market fund balances increased as clients shifted their cash allocations to higher yielding investment solutions, and money market fund fee waivers were eliminated during 2022 as a result of the Federal Reserve’s increases to the federal funds target overnight rate. These increases were partially offset by lower balances in other third-party mutual funds and advice solutions, primarily due to equity market weakness, which negatively impacted client asset valuations since the first quarter of 2022. - 9 - THE CHARLES SCHWAB CORPORATION Management’s Discussion and Analysis of Financial Condition and Results of Operations (Tabular Amounts in Millions, Except Ratios, or as Noted) The following table presents a roll forward of client assets for the Schwab money market funds, Schwab equity and bond funds, ETFs, and CTFs, and Mutual Fund OneSource ® and other NTF funds. These funds generated 40% and 29% of the asset management and administration fees earned in the first quarter of 2023 and 2022, respectively: Schwab Money Market Funds Schwab Equity and Bond Funds, ETFs, and CTFs Mutual Fund OneSource ® and Other NTF funds Three Months Ended March 31, 2023 2022 2023 2022 2023 2022 Balance at beginning of period $ 278,926 $ 146,509 $ 412,942 $ 454,864 $ 235,738 $ 234,940 Net inflows (outflows) 75,036 (3,420) 10,344 9,461 (4,629) (8,556) Net market gains (losses) and other (1) 3,860 16 20,433 (20,048) 13,153 9,081 Balance at end of period $ 357,822 $ 143,105 $ 443,719 $ 444,277 $ 244,262 $ 235,465 (1) Includes $14.2 billion of transfers from other third-party mutual funds and ETFs to Mutual Fund OneSource ® and Other NTF Funds in 2022. Trading Revenue Trading revenue includes commissions, order flow revenue, and principal transaction revenues. Commission revenue is affected by volume and mix of trades executed. Order flow revenue is comprised of payments received from trade execution venues to which our broker-dealer subsidiaries send equity and option orders. Order flow revenue is affected by volume and mix of client trades, as well as pricing received from trade execution venues. Principal transaction revenue is recognized primarily as a result of accommodating clients’ fixed income trading activity, and includes adjustments to the fair value of securities positions held to facilitate such client trading activity. Principal transactions revenue also includes unrealized gains and losses on cash and investments segregated for regulatory purposes. The following tables present trading revenue, trade details, and related information: Three Months Ended March 31, Percent Change 2023 2022 Commissions $ 422 $ 484 (13) % Order flow revenue Options 281 317 (11) % Equities 133 153 (13) % Total order flow revenue 414 470 (12) % Principal transactions 56 9 N/M Total trading revenue $ 892 $ 963 (7) % N/M Not meaningful. Percent changes greater than 200% are presented as not meaningful. Three Months Ended March 31, Percent Change 2023 2022 Clients' daily average trades (DATs) (in thousands) 5,895 6,578 (10) % Product as a percentage of DATs Equities 49 % 52 % Derivatives 23 % 23 % ETFs 21 % 19 % Mutual funds 5 % 5 % Fixed Income 2 % 1 % Number of trading days 62.0 62.0 — Revenue per trade (1) $ 2.44 $ 2.36 3% (1) Revenue per trade is calculated as trading revenue divided by DATs multiplied by the number of trading days. - 10 - THE CHARLES SCHWAB CORPORATION Management’s Discussion and Analysis of Financial Condition and Results of Operations (Tabular Amounts in Millions, Except Ratios, or as Noted) Trading revenue decreased $71 million in the first quarter of 2023 compared to the same period in 2022, primarily due to a decrease in commissions revenue resulting from lower client trading activity as well as changes in the mix of activity toward more ETFs and fewer single stocks. Additionally, order flow revenue decreased due to a shift in the mix of client trading activity toward more lower-dollar equity trades and index options and futures and fewer single stocks. Partially offsetting these decreases, principal transactions revenue increased as a result of higher volume in fixed income trading and higher market interest rates. Bank Deposit Account Fees The Company earns bank deposit account fee revenue from the TD Depository Institutions. These fees are affected by changes in interest rates and the composition of balances designated as fixed- and floating-rate obligation amounts. The following table presents bank deposit account fee revenue, average BDA balances, average net yield, and average balances earning fixed- and floating-rate yields: Three Months Ended March 31, Percent Change 2023 2022 Bank deposit account fees $ 151 $ 294 (49) % Average BDA balances $ 115,877 $ 155,809 (26) % Average net yield 0.52 % 0.75 % Percentage of average BDA balances designated as: Fixed-rate balances 92 % 77 % Floating-rate balances 8 % 23 % In January 2023, the Company ended its arrangements with other third-party banks to simplify bank sweep operations ahead of the first TD Ameritrade client transition group in February 2023. In addition, the FDIC implemented a 2-basis-point increase to the initial base deposit insurance assessment rate, which became effective for the first quarterly assessment period in 2023. This increase in the FDIC’s deposit insurance assessment results in a decrease to bank deposit account fee revenue, dependent on BDA balance levels. Bank deposit account fees decreased $143 million, or 49%, in the first quarter of 2023 compared to the same period in 2022, primarily due to breakage fees of $97 million incurred as a result of ending the other third-party bank arrangements, the decrease in average floating-rate BDA balances, and an increase in the amount paid to clients due to higher interest rates. These factors contributed to the decrease in average net yield in the first quarter of 2023 compared to the same period in 2022. The decrease in average BDA balances in the first quarter of 2023 compared with the first quarter of 2022 was primarily due to client cash allocation decisions in response to rising short-term market interest rates throughout 2022 and into the first quarter of 2023. The percentages of BDA balances designated as fixed-rate and floating-rate obligation amounts as of March 31, 2023 were 98% and 2%, respectively. See also Capital Management and Item 1 – Note 9 for discussion of the IDA agreements and the potential to move IDA balances to Schwab’s balance sheet. Other Revenue Other revenue includes exchange processing fees, certain service fees, other gains and losses from the sale of assets, and the provision for credit losses on bank loans. Other revenue increased $21 million in the first quarter of 2023 compared to the same period in 2022, primarily due to higher exchange processing fees and lower provision for credit losses on bank loans. Exchange processing fees increased as a result of higher average SEC fee rates. The provision for credit losses on bank loans was lower in the first quarter of 2023 compared with the first quarter of 2022, as during the first quarter of 2023, loan loss factors and the total balance of first lien residential real estate mortgage loans (First Mortgages) remained consistent with year-end 2022. The Company’s provision for credit losses on bank loans in the first quarter of 2022 reflected increased loan loss factors driven primarily by higher forecasted interest rates at the start of the Federal Reserve’s monetary tightening, as well as growth in the loan portfolio. - 11 - THE CHARLES SCHWAB CORPORATION Management’s Discussion and Analysis of Financial Condition and Results of Operations (Tabular Amounts in Millions, Except Ratios, or as Noted) Effective February 27, 2023, the SEC decreased its exchange processing fee rates by approximately 65% from the rate in effect since May 2022. This change will result in lower exchange processing fees per security transaction in other revenue and a corresponding decrease in other expense for the remainder of the year, resulting in no impact to net income. Total Expenses Excluding Interest The following table shows a comparison of expenses excluding interest: Three Months Ended March 31, Percent Change 2023 2022 Compensation and benefits Salaries and wages $ 972 $ 853 14 % Incentive compensation 364 417 (13) % Employee benefits and other 302 276 9 % Total compensation and benefits $ 1,638 $ 1,546 6 % Professional services 258 244 6 % Occupancy and equipment 299 269 11 % Advertising and market development 88 102 (14) % Communications 146 144 1 % Depreciation and amortization 177 150 18 % Amortization of acquired intangible assets 135 154 (12) % Regulatory fees and assessments 83 68 22 % Other 182 156 17 % Total expenses excluding interest $ 3,006 $ 2,833 6 % Expenses as a percentage of total net revenues Compensation and benefits 32 % 33 % Advertising and market development 2 % 2 % Full-time equivalent employees (in thousands) At quarter end 36.0 34.2 5 % Average 35.6 33.9 5 % Expenses excluding interest increased by $173 million or 6% in the first quarter of 2023, compared to the same period in 2022. Adjusted total expenses, which excludes acquisition and integration-related costs and amortization of acquired intangible assets, increased 7% in the first quarter of 2023, compared to the same period in 2022. See Non-GAAP Financial Measures for further details and a reconciliation of such measures to GAAP reported results. Total compensation and benefits increased in the first quarter of 2023 compared to the same period in 2022, primarily due to growth in employee headcount to support our expanding client base and TDA client account transitions, as well as annual merit increases. These increases were partially offset by lower incentive compensation. Compensation and benefits included acquisition and integration-related costs of $58 million and $56 million in the first quarter of 2023 and 2022, respectively. Professional services expense increased in the first quarter of 2023 compared to the same period in 2022, primarily due to increased utilization of technology-related and other professional services to support overall growth of the business and enhancement to technological infrastructure to support our expanding client base, as well as the TDA integration and client account transitions. Professional services included acquisition and integration-related costs of $33 million and $31 million in the first quarter of 2023 and 2022, respectively. Occupancy and equipment expense increased in the first quarter of 2023 compared to the same period in 2022, primarily due to an increase in software maintenance and other agreements as well as other technology equipment costs to support growth of the business and the integration of TD Ameritrade. Occupancy and equipment included acquisition and integration-related costs of $4 million in both the first quarter of 2023 and 2022. - 12 - THE CHARLES SCHWAB CORPORATION Management’s Discussion and Analysis of Financial Condition and Results of Operations (Tabular Amounts in Millions, Except Ratios, or as Noted) Advertising and market development expense decreased in the first quarter of 2023 compared to the same period in 2022, primarily due to lower media advertising spending as well as decreases in spending for marketing communications for TD Ameritrade. Depreciation and amortization expense increased in the first quarter of 2023 compared to the same period in 2022, primarily as a result of higher amortization of purchased and internally developed software and higher depreciation of hardware, driven by capital expenditures in 2022 and the first quarter of 2023 to support the TDA integration and enhance our technological infrastructure to support growth of the business. Amortization of acquired intangible assets decreased in the first quarter of 2023 compared to the same period in 2022, as certain assets from the TDA acquisition were fully amortized by the beginning of the fourth quarter of 2022. Regulatory fees and assessments increased in the first quarter of 2023 compared to the same period in 2022, primarily as a result of a 2-basis-point increase to the FDIC deposit insurance assessment rate, which became effective for the first quarterly assessment period in 2023, and other regulatory assessments due to growth in employee headcount and overall growth of the business. Other expense increased in the first quarter of 2023 compared to the same period in 2022, primarily as a result of higher exchange processing fees, partially offset by lower other clearing charges. Exchange processing fees increased due to higher SEC fee rates in effect during the first quarter of 2023 compared to those in effect during the first quarter of 2022. Effective February 27, 2023, the SEC decreased its exchange processing fee rates by approximately 65% from the rate in effect since May 2022. This change will result in lower exchange processing fees per security transaction in other expense and a corresponding decrease in other revenue for the remainder of the year, resulting in no impact to net income. Capital expenditures were $187 million and $209 million in the first quarter of 2023 and 2022, respectively. Capital expenditures decreased when compared to heightened integration-related spend in 2022 in preparation for TDA client account transitions. These decreases were partially offset by higher purchased software to enhance our technological infrastructure to support greater capacity for our expanding client base. We continue to anticipate capital expenditures for full-year 2023 will be approximately 3-4% of total net revenues. Taxes on Income Taxes on income were $507 million and $437 million for the first quarters of 2023 and 2022, respectively, resulting in effective income tax rates on income before taxes of 24.0% and 23.8%, respectively. The increase in the effective tax rate in the first quarter of 2023 compared to the same period in 2022 was primarily related to increased state tax expense and a decrease in equity compensation deduction benefits in 2023. Partially offsetting the increases in the effective tax rate from these items was the reversal of tax reserves due to the resolution of certain state tax matters during the first quarter of 2023. Segment Information Financial information for our segments is presented in the following tables: Investor Services Advisor Services Total Three Months Ended March 31, Percent Change 2023 2022 Percent Change 2023 2022 Percent Change 2023 2022 Net Revenues Net interest revenue 29 % $ 2,033 $ 1,574 21 % $ 737 $ 609 27 % $ 2,770 $ 2,183 Asset management and administration fees 3 % 805 781 9 % 313 287 5 % 1,118 1,068 Trading revenue (8) % 775 844 (2) % 117 119 (7) % 892 963 Bank deposit account fees (51) % 99 200 (45) % 52 94 (49) % 151 294 Other 19 % 151 127 (8) % 34 37 13 % 185 164 Total net revenues 10 % 3,863 3,526 9 % 1,253 1,146 10 % 5,116 4,672 Expenses Excluding Interest 5 % 2,233 2,131 10 % 773 702 6 % 3,006 2,833 Income before taxes on income 17 % $ 1,630 $ 1,395 8 % $ 480 $ 444 15 % $ 2,110 $ 1,839 Net New Client Assets (in billions) (1) 45 % $ 79.4 $ 54.6 8 % $ 71.3 $ 65.9 25 % $ 150.7 $ 120.5 (1) In the first quarter of 2023, Investor Services includes inflows of $19.0 billion from off-platform CDs issued by CSB. - 13 - THE CHARLES SCHWAB CORPORATION Management’s Discussion and Analysis of Financial Condition and Results of Operations (Tabular Amounts in Millions, Except Ratios, or as Noted) Segment Net Revenues Investor Services and Advisor Services total net revenues increased by 10% and 9%, respectively, in the first quarter of 2023 compared to the same quarter in 2022. Investor Services and Advisor Services growth was primarily driven by increases in net interest revenue as described above. Asset management and administration fees increased for both segments, primarily as a result of higher money market fund balances and the elimination of money market fund fee waivers since the first quarter of 2022. Other revenue increased for Investor Services due to higher exchange processing fees and a lower provision for credit losses on bank loans. Both segments saw a decrease in bank deposit account fees in the first quarter of 2023 due to several factors including breakage fees incurred as a result of ending certain third-party bank arrangements, lower average BDA balances, and higher yields paid to clients. Trading revenue also decreased for both segments due primarily to lower client trading activity and changes in client trading mix, resulting in lower commissions and order flow revenue. Segment Expenses Excluding Interest Investor Services total expenses excluding interest increased by 5% in the first quarter of 2023 compared to the same quarter in 2022, while Advisor Services total expenses excluding interest increased by 10% in the first quarter of 2023 compared to the same quarter in 2022. Both segments saw higher compensation and benefits expenses due to increases in headcount to support our expanding client base and TDA client account transitions, and annual merit increases, partially offset by lower incentive compensation. Occupancy and equipment expenses increased in both segments, primarily due to an increase in software maintenance and other agreements as well as other technology equipment costs to support growth of the business and the integration of TD Ameritrade. Depreciation and amortization increased for both segments primarily due to higher amortization of purchased and internally developed software and higher depreciation of hardware, driven by capital expenditures in 2022 and the first quarter of 2023 to enhance our technological infrastructure to support growth of the business. Regulatory fees and assessments increased in both segments in the first quarter of 2023 compared to the same quarter in 2022, primarily due to the FDIC deposit insurance assessment rate increase described above. Both segments also saw higher other expenses, primarily as a result of increased exchange processing fees. These increases were partially offset by lower amortization of acquired intangible assets as certain assets from the TDA acquisition became fully amortized in 2022. RISK MANAGEMENT Schwab’s business activities expose it to a variety of risks, including operational, compliance, credit, market, and liquidity risks. The Company has a comprehensive risk management program to identify and manage these risks and their associated potential for financial and reputational impact. For a discussion of our risk management programs, see Part II – Item 7 – Management’s Discussion and Analysis of Financial Condition and Results of Operations – Risk Management in the 2022 Form 10-K. Market Risk Market risk is the potential for changes in earnings or the value of financial instruments held by Schwab as a result of fluctuations in interest rates, equity prices, or market conditions. Schwab is exposed to market risk primarily from changes in interest rates within our interest-earning assets relative to changes in the costs of funding sources that finance these assets. To manage interest rate risk, we have established policies and procedures, which include setting limits on net interest revenue risk and economic value of equity (EVE) risk. To remain within these limits, we manage the maturity, repricing, and cash flow characteristics of the investment portfolios. Management monitors established guidelines to stay within the Company’s risk appetite. In 2023, the Company began to utilize interest rate swap derivative instruments to assist with managing interest rate risk. For further information on our interest rate risk management strategies utilizing interest rate swaps, see Item 1 – Note 11. Interest Rate Risk Simulations Net Interest Revenue Simulation For our net interest revenue sensitivity analysis, we use net interest revenue simulation modeling techniques to evaluate and manage the effect of changing interest rates. The simulations include all balance sheet interest rate-sensitive assets and liabilities. Key assumptions include the projection of interest rate scenarios with rate floors, rates and balances of non-maturity - 14 - THE CHARLES SCHWAB CORPORATION Management’s Discussion and Analysis of Financial Condition and Results of Operations (Tabular Amounts in Millions, Except Ratios, or as Noted) client cash held on the balance sheet, prepayment speeds of mortgage-related investments, repricing of financial instruments, and reinvestment of matured or paid-down securities and loans. Net interest revenue is affected by various factors, such as the distribution and composition of interest-earning assets and interest-bearing liabilities, the spread between yields earned on interest-earning assets and rates paid on interest-bearing liabilities, which may reprice at different times or by different amounts, and the spread between short- and long-term interest rates. Interest-earning assets include investment securities, margin loans, bank loans, and cash and cash equivalents. These assets are sensitive to changes in interest rates and changes in prepayment levels that tend to increase in a declining rate environment and decrease in a rising rate environment. Because we establish the rates paid on certain brokerage client cash balances and bank deposits and the rates charged on certain margin and bank loans, and control the composition of our investment securities, we have some ability to manage our net interest spread, depending on competitive factors and market conditions. When we have liquidity needs that exceed our primary sources of funding, the Company has needed to utilize higher cost funding sources, which can reduce net interest margin and net interest revenue. Net interest revenue sensitivity analysis assumes the asset and liability structure of the consolidated balance sheet would not be changed as a result of the simulated changes in interest rates. While this approach is useful to isolate the impact of changes in interest rates on a statically-sized asset and liability structure, it does not capture changes to client cash allocations. We conduct simulations on EVE to capture the impact of client cash allocation changes on our balance sheet. As we actively manage the consolidated balance sheet and interest rate exposure, we have taken and would typically seek to take steps to manage additional interest rate exposure that could result from changes in the interest rate environment. Higher short-term interest rates would generally positively impact net interest margin as yields on interest-earning assets are expected to rise faster than the cost of funding sources. If the cost of funding sources is greater than the increased revenue from repricing assets, however, net interest margin can be reduced. A decline in short-term interest rates could negatively impact the yield on the Company’s investment and loan portfolios to a greater degree than any offsetting reduction in interest expense from funding sources, compressing net interest margin. The following table shows simulated changes to net interest revenue over the next 12 months beginning March 31, 2023 and December 31, 2022 of a gradual increase or decrease in market interest rates relative to prevailing market rates at the end of each reporting period: March 31, 2023 December 31, 2022 Increase of 200 basis points 9.7 % 7.3 % Increase of 100 basis points 5.0 % 3.6 % Increase of 50 basis points 2.5 % 1.7 % Decrease of 50 basis points (2.7) % (1.5) % Decrease of 100 basis points (4.4) % (3.2) % Decrease of 200 basis points (7.9) % (6.7) % The Company’s simulated incremental increases in market interest rates had a larger impact on net interest revenue as of March 31, 2023 compared to December 31, 2022 primarily due to higher cash balances, which was partially offset by an increased allocation to FHLB borrowings and other short-term borrowings across the Company’s banking subsidiaries. Simulated incremental decreases in market interest rates had a larger impact on net interest revenue as of March 31, 2023 compared to December 31, 2022 primarily due to higher cash balances, while increased allocation to shorter-term liabilities contributed to lower interest expense in a lower rate environment. In addition to measuring the effect of gradual parallel increases or decreases in current interest rates, we regularly simulate the effects of non-parallel shifts and instantaneous shifts of interest rates on net interest revenue. Bank Deposit Account Fees Simulation Consistent with the presentation on the consolidated statement of income, the sensitivity of bank deposit account fee revenue to interest rate changes is assessed separately from the net interest revenue simulation described above. As of March 31, 2023 and December 31, 2022, simulated changes in bank deposit account fee revenue from gradual changes in market interest rates relative to prevailing market rates, under the interest rate scenarios described above for net interest revenue, did not have a significant impact on the Company’s total net revenues. - 15 - THE CHARLES SCHWAB CORPORATION Management’s Discussion and Analysis of Financial Condition and Results of Operations (Tabular Amounts in Millions, Except Ratios, or as Noted) Economic Value of Equity Simulation Management also uses EVE simulations to measure interest rate risk. EVE sensitivity measures the long-term impact of interest rate changes on the net present value of assets and liabilities. EVE is calculated by subjecting the balance sheet to hypothetical instantaneous shifts in the level of interest rates. This analysis is highly dependent upon asset and liability assumptions based on historical behaviors as well as our expectations of the economic environment. Key assumptions in our EVE calculation include projection of interest rate scenarios with rate floors, prepayment speeds of mortgage-related investments, term structure models of interest rates, behavior of non-maturity client cash held on the balance sheet, and pricing assumptions. Our net interest revenue, bank deposit account fee revenue, and EVE simulations reflect the assumption of non-negative investment yields. Effective Duration Effective duration measures price sensitivity relative to a change in prevailing interest rates, taking account of amortizing cash flows and prepayment optionality for mortgage-related securities and loans. Duration is measured in years and commonly interpreted as the average timing of principal and interest cash flows. We seek to manage the Company’s asset duration in relation to management’s estimate of the Company’s liability duration. The Company’s liability duration is impacted by the composition of funding sources, and typically decreases in periods of rising market interest rates and increases in periods of declining market interest rates. The estimated effective duration for the Company’s total AFS and held to maturity (HTM) investment securities portfolio was approximately 4.0 years and 4.6 years as of March 31, 2023 and 2022, respectively. AFS and HTM securities comprised approximately 58% and 55% of the Company’s consolidated total assets as of March 31, 2023 and 2022, respectively. The estimated effective duration of the remaining balance sheet assets in aggregate was less than one year as of both March 31, 2023 and 2022. The Company’s estimated effective duration of consolidated total assets was approximately 2.6 years at March 31, 2023 and approximately 2.7 years at March 31, 2022. Phase-out of LIBOR The Company has made significant progress to prepare for the phasing-out of LIBOR, as described in Part II – Item 7 – Management’s Discussion and Analysis of Financial Condition and Results of Operations – Risk Management in the 2022 Form 10-K, and additional transition efforts to prepare for the phasing-out of LIBOR are ongoing. Liquidity Risk Liquidity risk is the potential that Schwab will be unable to sell assets or meet cash flow obligations when they come due without incurring unacceptable losses. Due to its role as a source of financial strength, CSC’s liquidity needs are primarily driven by the liquidity and capital needs of: CS&Co, TD Ameritrade, Inc., and TDAC, our principal broker-dealer subsidiaries; the capital needs of the banking subsidiaries; principal and interest due on corporate debt; dividend payments on CSC’s preferred stock; and returns of capital to common stockholders. The liquidity needs of our broker-dealer subsidiaries are primarily driven by client activity including trading and margin lending activities and capital expenditures. The capital needs of the banking subsidiaries are primarily driven by client deposit levels and other borrowings. We have established liquidity policies to support the successful execution of business strategies, while ensuring ongoing and sufficient liquidity to meet operational needs and satisfy applicable regulatory requirements under both normal and stressed conditions. We seek to maintain client confidence in the balance sheet and the safety of client assets by maintaining liquidity and diversity of funding sources to allow the Company to meet its obligations. To this end, we have established limits and contingency funding plans to support liquidity levels during both business as usual and stressed conditions. We employ a variety of metrics to monitor and manage liquidity. We conduct regular liquidity stress testing to develop a view of liquidity risk exposures and to ensure our ability to maintain sufficient liquidity during market-related or company-specific liquidity stress events. Liquidity sources are also tested periodically and results are reported to the Financial Risk Oversight Committee. A number of early warning indicators are monitored to help identify emerging liquidity stresses in the market or within the organization and are reviewed with management periodically. - 16 - THE CHARLES SCHWAB CORPORATION Management’s Discussion and Analysis of Financial Condition and Results of Operations (Tabular Amounts in Millions, Except Ratios, or as Noted) Funding Sources Schwab’s primary source of funds is cash generated by client activity which includes bank deposits and cash balances in client brokerage accounts. These funds are used to purchase investment securities and extend loans to clients. Other sources of funds may include cash flows from operations, maturities and sales of investment securities, repayments on loans, securities lending of assets held in client brokerage accounts, FHLB borrowings, issuance of CDs, cash provided by securities issuances by CSC in the capital markets, and other facilities described below. To meet daily funding needs, we maintain liquidity in the form of overnight cash deposits and short-term investments. For unanticipated liquidity needs, we also maintain a buffer of highly liquid investments, including U.S. Treasury securities. Our clients’ bank deposits and cash balances in brokerage accounts primarily originate from our 34.1 million active brokerage accounts. More than 80% of our bank deposits qualified for FDIC insurance as of March 31, 2023. Our clients’ allocation of cash held on our balance sheet is sensitive to interest rate levels, with clients typically increasing their utilization of investment cash solutions such as purchased money market funds and certain fixed income products when those yields are higher than those of cash sweep features. Schwab’s need for borrowings from external debt facilities arises primarily from timing differences between cash flow requirements, including in the event the outflow of client cash from the balance sheet is greater than cash flows from operations and investment securities and bank loans; payments on interest-earning investments; movements of cash to meet regulatory brokerage client cash segregation requirements; and general corporate purposes. We maintain policies and procedures necessary to access funding, and test borrowing procedures on a periodic basis. Rollover risk is the risk that we will not be able to refinance or payoff borrowings as they mature. We manage rollover risk on borrowings, taking into account expected principal paydowns on our investment and loan portfolios along with expected deposit flows. The following table describes external debt facilities available at March 31, 2023: Description Borrower Outstanding Available Maturity of Amounts Outstanding Weighted-Average Interest Rate on Amounts Outstanding FHLB secured credit facilities Banking subsidiaries $ 45,600 $ 35,501 (1) April 2023 - August 2024 5.16% Federal Reserve discount window Banking subsidiaries — 9,398 (1) N/A — Federal Reserve Bank Term Funding Program Banking subsidiaries — 42,655 (1) N/A — Repurchase agreements Banking subsidiaries 6,822 — (2) August 2023 - January 2024 5.00% Uncommitted, unsecured lines of credit with various external banks CSC, CS&Co — 1,607 N/A — Unsecured commercial paper CSC 250 4,750 April 2023 4.74% Secured uncommitted lines of credit with various external banks TDAC — — (3) N/A — (1) Amounts shown as available from the FHLB and Federal Reserve facilities represent remaining capacity based on assets pledged as of March 31, 2023. Incremental borrowing capacity may be made available by pledging additional assets, subject to applicable facility terms. See below and Note 8 for additional information. (2) Secured borrowing capacity is made available based on the banking subsidiaries’ ability to provide collateral deemed acceptable by each respective counterparty. See Note 12 for additional information. (3) Secured borrowing capacity is made available based on TDAC’s ability to provide acceptable collateral to the lenders as determined by the credit agreements. N/A Not applicable. Available borrowing capacity from the FHLB and Federal Reserve facilities maintained by our banking subsidiaries is dependent on the value of assets pledged and the terms of the borrowing arrangements. As of March 31, 2023, the Company had additional investment securities with a par value of approximately $188 billion or a fair value of approximately $173 billion available to be pledged to obtain additional capacity. These securities could be used to provide additional borrowing capacity of up to $188 billion, dependent on the facility utilized. Additional details regarding availability and use of these facilities is described below. - 17 - THE CHARLES SCHWAB CORPORATION Management’s Discussion and Analysis of Financial Condition and Results of Operations (Tabular Amounts in Millions, Except Ratios, or as Noted) Amounts available under secured credit facilities with the FHLB are dependent on the value of our First Mortgages, home equity lines of credit (HELOCs), and the fair value of certain of our investment securities that are pledged as collateral. These credit facilities are also available as backup financing in the event the outflow of client cash from the banking subsidiaries’ respective balance sheets is greater than maturities and paydowns on investment securities and bank loans. CSC’s banking subsidiaries must each maintain positive tangible capital, as defined by the Federal Housing Finance Agency, in order to place new draws upon these credit facilities, and the Company manages capital with consideration of minimum tangible capital ratios at our banking subsidiaries. Tangible capital pursuant to the requirements of the FHLB borrowing facilities for our banking subsidiaries is common equity less goodwill and intangible assets. Our banking subsidiaries also have access to short-term secured funding through the Federal Reserve discount window. Amounts available under the Federal Reserve discount window are dependent on the fair value of certain investment securities that are pledged as collateral. Our banking subsidiaries may also engage with external financial institutions in repurchase agreements collateralized by investment securities as another source of short-term liquidity. Our banking subsidiaries are also counterparties to the standing repo facility with the Federal Reserve Bank of New York. On March 12, 2023, the Federal Reserve Board announced the creation of a new Bank Term Funding Program, offering loans of up to one year in length to eligible financial institutions with U.S. Treasury securities, agency debt, mortgage-backed securities, and other qualifying assets pledged as collateral. Borrowing capacity available under this program is dependent upon the par value of the investment securities that are pledged as collateral. The Company is eligible to obtain advances under this program. This facility was not used during the first quarter of 2023. CSC’s ratings for Commercial Paper Notes were P1 by Moody’s Investor Service (Moody’s), A1 by Standard & Poor’s Rating Group (Standard & Poor’s), and F1 by Fitch Ratings, Ltd (Fitch) at March 31, 2023 and December 31, 2022. Subsequent to March 31, 2023, Standard & Poor’s downgraded its rating from A1 to A2 for CSC’s Commercial Paper Notes and affirmed its outlook remained stable. Also subsequent to March 31, 2023, Moody’s affirmed its rating of P1 for CSC and changed its outlook from positive to stable. CSC also has a universal automatic shelf registration statement on file with the SEC, which enables it to issue debt, equity, and other securities. CS&Co maintains uncommitted, unsecured bank credit lines with a group of banks as a source of short-term liquidity, which can also be accessed by CSC. TDAC maintains secured uncommitted lines of credit, under which TDAC borrows on either a demand or short-term basis and pledges client margin securities as collateral. In the fourth quarter of 2022 and first quarter of 2023, CSB issued brokered CDs as a supplemental funding source. The following table provides information about CDs issued by CSB and outstanding as of March 31, 2023: Amount Outstanding Maturity Weighted-Average Interest Rate Brokered CDs $ 30,745 July 2023 - March 2025 4.96% Cash Flow Activity As a result of rapidly increasing short-term interest rates beginning in 2022, the Company saw an increase in the pace at which clients moved certain cash balances out of our sweep features and into higher yielding alternatives. As a result of these outflows, our banking subsidiaries have supplemented excess cash on hand and cash generated by maturities and paydowns on our investment securities portfolios with fixed- and floating-rate FHLB advances, repurchase agreements, and issuances of brokered CDs. The Company expects to use these types of temporary supplemental funding until the Company’s primary sources of liquidity are again greater than any outflows associated with client cash allocation decisions. During the first quarter of 2023, the Company’s cash and cash equivalents, excluding amounts restricted, increased by $9.0 billion to $49.2 billion as of March 31, 2023. This increase was driven by net cash provided by investing and operating activities, partially offset by net cash used for financing activities. Bank deposits decreased by a total of $41.0 billion during the first quarter of 2023; this was driven by a decrease of $63.7 billion in deposits swept from brokerage accounts due primarily to clients’ cash allocation decisions described above, partially offset by a net increase in brokered CDs of $24.7 billion. Offsetting the decrease in bank deposits, investing cash flows from our AFS and HTM securities totaled $12.0 billion in the first quarter of 2023, and the Company increased its FHLB borrowings and other short-term borrowings by a total of $35.6 billion. - 18 - THE CHARLES SCHWAB CORPORATION Management’s Discussion and Analysis of Financial Condition and Results of Operations (Tabular Amounts in Millions, Except Ratios, or as Noted) Subsequent to March 31, 2023, the Company’s banking subsidiaries had drawn an additional $3.0 billion of FHLB advances. The current average interest on these advances was 4.96%, with the earliest maturity occurring in May 2024. Our banking subsidiaries also borrowed an additional $1.0 billion under repurchase agreements with external financial institutions subsequent to March 31, 2023. The current average interest rate on these repurchase borrowings was 5.05% with the earliest maturity occurring in April 2024. The Company also issued $6.8 billion of brokered CDs subsequent to March 31, 2023 at a weighted average interest rate of 4.97%, with the earliest maturity occurring in April 2024. Liquidity Coverage Ratio Schwab is subject to the full LCR rule, which requires the Company to hold high quality liquid assets (HQLA) in an amount equal to at least 100% of the Company’s projected net cash outflows over a prospective 30-calendar-day period of acute liquidity stress, calculated on each business day. See Part I – Item 1 – Business – Regulation in the 2022 Form 10-K for additional information. The Company was in compliance with the LCR rule at March 31, 2023, and the table below presents information about our average daily LCR: Average for the Three Months Ended March 31, 2023 December 31, 2022 Total eligible HQLA $ 80,128 $ 93,986 Net cash outflows $ 62,163 $ 76,754 LCR 129 % 123 % To support growth in margin loan balances at our broker-dealer subsidiaries while meeting our LCR requirements, the Company may issue commercial paper or draw on secured lines of credit, in addition to capital markets issuances. Long-Term Borrowings The Company’s long-term debt is primarily comprised of Senior Notes and totaled $20.0 billion and $20.8 billion at March 31, 2023 and December 31, 2022, respectively. The following table provides information about our Senior Notes outstanding at March 31, 2023: March 31, 2023 Par Outstanding Maturity Weighted Average Interest Rate Moody’s Standard & Poor’s Fitch CSC Senior Notes $ 19,712 2024 - 2032 2.44% A2 A A TDA Holding Senior Notes $ 213 2024 - 2029 3.47% A2 A — Subsequent to March 31, 2023, Standard & Poor’s downgraded CSC’s and TDA Holding’s long-term issuer credit and senior unsecured debt ratings from A to A-, and affirmed its outlook remained stable. Also subsequent to March 31, 2023, Moody’s affirmed its rating of A2 for CSC and TDA Holding and changed its outlook from positive to stable. Schwab additionally enters into guarantees and other similar arrangements in the ordinary course of business. For information on these arrangements, see Item 1 – Notes 5, 6, 8, 9, and 12. Additional information regarding our sources and uses of liquidity and management of liquidity risk is included in Part II – Item 7 – Management’s Discussion and Analysis of Financial Condition and Results of Operations – Risk Management – Liquidity Risk in our 2022 Form 10-K. See also Item 1 – Condensed Consolidated Statements of Cash Flows, Item 1 – Note 7 for the Company’s bank deposits, Item 1 – Note 8 for the Company’s debt and borrowing facilities, and Item 1 – Note 14 for equity outstanding balances and activity. CAPITAL MANAGEMENT Schwab seeks to manage capital to a level and composition sufficient to support execution of our business strategy, including balance sheet growth over time, management of the IDA agreements inclusive of potential migration of IDA balances (see further discussion below), providing financial support to our subsidiaries, and sustained access to the capital markets, while at the same time meeting our regulatory capital requirements and serving as a source of financial strength to our banking subsidiaries. Schwab also seeks to return excess capital to stockholders. We may return excess capital through such activities as - 19 - THE CHARLES SCHWAB CORPORATION Management’s Discussion and Analysis of Financial Condition and Results of Operations (Tabular Amounts in Millions, Except Ratios, or as Noted) dividends, repurchases of common shares, preferred stock redemptions, and repurchases of our preferred stock represented by depositary shares. Schwab’s primary sources of capital are funds generated by the operations of subsidiaries and securities issuances by CSC in the capital markets. To ensure that Schwab has sufficient capital to absorb unanticipated losses or declines in asset values, we have adopted a policy to remain well capitalized even in stressed scenarios. Regulatory Capital Requirements CSC and certain subsidiaries including our banking and broker-dealer subsidiaries are subject to various capital requirements set by regulatory agencies as discussed in further detail in Part II – Item 7 – Management’s Discussion and Analysis of Financial Condition and Results of Operations – Capital Management of the 2022 Form 10-K and in Item 1 – Note 17. As of March 31, 2023, CSC and our banking subsidiaries are considered well capitalized, and CS&Co, TDAC, and TD Ameritrade, Inc. are in compliance with their respective net capital requirements. The following table details the capital ratios for CSC consolidated and CSB: March 31, 2023 December 31, 2022 CSC CSB CSC CSB Total stockholders’ equity $ 36,347 $ 9,777 $ 36,608 $ 7,664 Less: Preferred stock 9,191 — 9,706 — Common Equity Tier 1 Capital before regulatory adjustments $ 27,156 $ 9,777 $ 26,902 $ 7,664 Less: Goodwill, net of associated deferred tax liabilities $ 11,816 $ 13 $ 11,816 $ 13 Other intangible assets, net of associated deferred tax liabilities 6,967 — 7,079 — Deferred tax assets, net of valuation allowances and deferred tax liabilities 37 35 37 35 AOCI adjustment (1) (20,690) (17,965) (22,620) (19,680) Common Equity Tier 1 Capital $ 29,026 $ 27,694 $ 30,590 $ 27,296 Tier 1 Capital $ 38,217 $ 27,694 $ 40,296 $ 27,296 Total Capital 38,299 27,769 40,376 27,370 Risk-Weighted Assets 135,865 96,395 139,657 99,631 Total Leverage Exposure 544,266 364,578 566,809 375,846 Common Equity Tier 1 Capital/Risk-Weighted Assets 21.4 % 28.7 % 21.9 % 27.4 % Tier 1 Capital/Risk-Weighted Assets 28.1 % 28.7 % 28.9 % 27.4 % Total Capital/Risk-Weighted Assets 28.2 % 28.8 % 28.9 % 27.5 % Tier 1 Leverage Ratio 7.1 % 7.7 % 7.2 % 7.3 % Supplementary Leverage Ratio 7.0 % 7.6 % 7.1 % 7.3 % (1) Changes in market interest rates can result in unrealized gains or losses on AFS securities, which are included in AOCI. As a Category III banking organization, CSC has elected to exclude AOCI from regulatory capital. The Company’s consolidated Tier 1 Leverage Ratio decreased slightly to 7.1% at March 31, 2023 from 7.2% at year-end 2022. This decrease was primarily due to repurchases of $2.8 billion of common stock and $467 million of preferred stock, higher common stock dividends, and a decrease of $51 billion, or 11%, in total bank deposits and payables to brokerage clients due to client cash allocation decisions resulting from the rising interest rate environment. These factors were largely offset by first quarter 2023 net income. CSB’s Tier 1 Leverage Ratio increased from year-end 2022, ending the first quarter of 2023 at 7.7%. The Company suspended repurchase activity during the first quarter of 2023. In light of anticipated changes to regulatory expectations and capital requirements that could require Schwab and other firms to include AOCI in regulatory capital, the Company currently plans to accrete and retain capital and does not plan to resume repurchases until there is more regulatory clarity. IDA Agreement Certain brokerage client deposits are swept off-balance sheet to the TD Depository Institutions pursuant to the IDA agreements. During the first quarter of 2023, Schwab did not move IDA balances to its balance sheet. The Company’s overall capital management strategy includes supporting migration of IDA balances in future periods as available pursuant to the terms of the 2023 IDA agreement. The Company’s ability to migrate these balances to its balance sheet is dependent upon multiple factors - 20 - THE CHARLES SCHWAB CORPORATION Management’s Discussion and Analysis of Financial Condition and Results of Operations (Tabular Amounts in Millions, Except Ratios, or as Noted) including having sufficient capital levels to sustain these incremental deposits. See Item 1 – Note 9 for further information on the IDA agreements. Dividends On January 26, 2023, the Board of Directors of CSC declared a three cent, or 14%, increase in the quarterly cash dividend to $.25 per common share. Cash dividends paid and per share amounts, exclusive of amounts related to preferred stock repurchases, for the first three months of 2023 and 2022 are as follows: 2023 2022 Three Months Ended March 31, Cash Paid Per Share Amount Cash Paid Per Share Amount Common and Nonvoting Common Stock $ 463 $ .25 $ 381 $ .20 Preferred Stock: Series A (1) N/A N/A 14 35.00 Series D (2) 11 14.88 11 14.88 Series E (3) N/A N/A 14 2,312.50 Series F (4) — — — — Series G (2) 33 1,343.75 34 1,343.75 Series H (2) 24 1,000.00 25 1,000.00 Series I (2) 21 1,000.00 23 1,000.00 Series J (2) 7 11.13 7 11.13 Series K (5) 9 1,250.00 N/A N/A (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) Dividends paid quarterly. (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) Dividends paid semi-annually until December 1, 2027 and quarterly thereafter. (5) Series K was issued on March 4, 2022. Dividends are paid quarterly, and the first dividend was paid on June 1, 2022. N/A Not applicable. Share Repurchases On July 27, 2022, CSC publicly announced that its Board of Directors approved a new authorization to repurchase up to $15.0 billion of common stock, replacing the previous and now terminated share repurchase authorization of up to $4.0 billion of common stock. The new share repurchase authorization does not have an expiration date. CSC repurchased 37 million shares of its common stock for $2.8 billion during the three months ended March 31, 2023. As of March 31, 2023, approximately $8.7 billion remained on the new authorization. There were no repurchases of CSC’s common stock under the terminated authorization during the three months ended March 31, 2022. The Company repurchased 11,620 depositary shares representing interests in Series F preferred stock for $11 million, 42,036 depositary shares representing interests in Series G preferred stock for $42 million, 273,251 depositary shares representing interests in Series H preferred stock for $235 million, and 194,567 depositary shares representing interests in Series I preferred stock for $179 million on the open market during the three months ended March 31, 2023. The repurchase prices are inclusive of $3 million of dividends accrued by the stockholders as of the repurchase date. Beginning in 2023, share repurchases, net of issuances, are subject to a nondeductible 1% excise tax which was recognized as a direct and incremental cost associated with these transactions. For repurchases of common stock, the tax is recorded as part of the cost basis of the treasury stock repurchased, resulting in no impact to the condensed consolidated statement of income. For repurchases of preferred stock, the tax impact is included within preferred stock dividends and other on the condensed consolidated statement of income. - 21 - THE CHARLES SCHWAB CORPORATION Management’s Discussion and Analysis of Financial Condition and Results of Operations (Tabular Amounts in Millions, Except Ratios, or as Noted) OTHER Foreign Exposure At March 31, 2023, Schwab had exposure to non-sovereign financial and non-financial institutions in foreign countries, as well as agencies of foreign governments. At March 31, 2023, the fair value of these holdings totaled $11.2 billion, with the top three exposures being to issuers and counterparties domiciled in France at $3.1 billion, the United Kingdom at $1.8 billion, and Canada at $1.7 billion. At December 31, 2022, the fair value of these holdings totaled $16.4 billion, with the top three exposures being to issuers and counterparties domiciled in France at $5.1 billion, the United Kingdom at $4.8 billion, and Canada at $1.7 billion. In addition, Schwab had outstanding margin loans to foreign residents of $2.5 billion at both March 31, 2023 and December 31, 2022. CRITICAL ACCOUNTING ESTIMATES Certain of our accounting policies that involve a higher degree of judgment and complexity are discussed in Part II – Item 7 – Management’s Discussion and Analysis of Financial Condition and Results of Operations – Critical Accounting Estimates in the 2022 Form 10-K. There have been no changes to critical accounting estimates during the first three months of 2023. NON-GAAP FINANCIAL MEASURES In addition to disclosing financial results in accordance with generally accepted accounting principles in the U.S. (GAAP), Management’s Discussion and Analysis of Financial Condition and Results of Operations contain references to the non-GAAP financial measures described below. We believe these non-GAAP financial measures provide useful supplemental information about the financial performance of the Company, and facilitate meaningful comparison of Schwab’s results in the current period to both historic and future results. These non-GAAP measures should not be considered a substitute for, or superior to, financial measures calculated in accordance with GAAP, and may not be comparable to non-GAAP financial measures presented by other companies. Schwab’s use of non-GAAP measures is reflective of certain adjustments made to GAAP financial measures as described below. Non-GAAP Adjustment or Measure Definition Usefulness to Investors and Uses by Management Acquisition and integration-related costs and amortization of acquired intangible assets Schwab adjusts certain GAAP financial measures to exclude the impact of acquisition and integration-related costs incurred as a result of the Company’s acquisitions, amortization of acquired intangible assets, and, where applicable, the income tax effect of these expenses. Adjustments made to exclude amortization of acquired intangible assets are reflective of all acquired intangible assets, which were recorded as part of purchase accounting. These acquired intangible assets contribute to the Company’s revenue generation. Amortization of acquired intangible assets will continue in future periods over their remaining useful lives. We exclude acquisition and integration-related costs and amortization of acquired intangible assets for the purpose of calculating certain non-GAAP measures because we believe doing so provides additional transparency of Schwab’s ongoing operations, and is useful in both evaluating the operating performance of the business and facilitating comparison of results with prior and future periods. Acquisition and integration-related costs fluctuate based on the timing of acquisitions and integration activities, thereby limiting comparability of results among periods, and are not representative of the costs of running the Company’s ongoing business. Amortization of acquired intangible assets is excluded because management does not believe it is indicative of the Company’s underlying operating performance. Return on tangible common equity Return on tangible common equity represents annualized adjusted net income available to common stockholders as a percentage of average tangible common equity. Tangible common equity represents common equity less goodwill, acquired intangible assets – net, and related deferred tax liabilities. Acquisitions typically result in the recognition of significant amounts of goodwill and acquired intangible assets. We believe return on tangible common equity may be useful to investors as a supplemental measure to facilitate assessing capital efficiency and returns relative to the composition of Schwab’s balance sheet. The Company also uses adjusted diluted EPS and return on tangible common equity as components of performance criteria for employee bonus and certain executive management incentive compensation arrangements. The Compensation Committee of CSC’s Board of Directors maintains discretion in evaluating performance against these criteria. - 22 - THE CHARLES SCHWAB CORPORATION Management’s Discussion and Analysis of Financial Condition and Results of Operations (Tabular Amounts in Millions, Except Ratios, or as Noted) The following tables present reconciliations of GAAP measures to non-GAAP measures: Three Months Ended March 31, 2023 2022 Total expenses excluding interest (GAAP) $ 3,006 $ 2,833 Acquisition and integration-related costs (1) (98) (96) Amortization of acquired intangible assets (135) (154) Adjusted total expenses (non-GAAP) $ 2,773 $ 2,583 (1) Acquisition and integration-related costs for the three months ended March 31, 2023 primarily consist of $58 million of compensation and benefits, $33 million of professional services, and $4 million of occupancy and equipment. Acquisition and integration-related costs for the three months ended March 31, 2022 primarily consist of $56 million of compensation and benefits, $31 million of professional services, and $4 million of occupancy and equipment. Three Months Ended March 31, 2023 2022 Amount Diluted EPS Amount Diluted EPS Net income available to common stockholders (GAAP), Earnings per common share — diluted (GAAP) $ 1,533 $ .83 $ 1,278 $ .67 Acquisition and integration-related costs 98 .05 96 .05 Amortization of acquired intangible assets 135 .07 154 .08 Income tax effects (1) (56) (.02) (61) (.03) Adjusted net income available to common stockholders (non-GAAP), Adjusted diluted EPS (non-GAAP) $ 1,710 $ .93 $ 1,467 $ .77 (1) The income tax effects of the non-GAAP adjustments are determined using an effective tax rate reflecting the exclusion of non-deductible acquisition costs and are used to present the acquisition and integration-related costs and amortization of acquired intangible assets on an after-tax basis. Three Months Ended March 31, 2023 2022 Return on average common stockholders’ equity (GAAP) 23 % 12 % Average common stockholders’ equity $ 27,028 $ 41,856 Less: Average goodwill (11,951) (11,952) Less: Average acquired intangible assets — net (8,724) (9,303) Plus: Average deferred tax liabilities related to goodwill and acquired intangible assets — net 1,842 1,886 Average tangible common equity $ 8,195 $ 22,487 Adjusted net income available to common stockholders (1) $ 1,710 $ 1,467 Return on tangible common equity (non-GAAP) 83 % 26 % (1) See table above for the reconciliation of net income available to common stockholders to adjusted net income available to common stockholders (non-GAAP). - 23 - THE CHARLES SCHWAB CORPORATION