What changed in this filing

/stocks — the workspaceLOADING

Item 2. Management’s Discussion and Analysis

2023-11-08 compared with 2023-08-08 · 367 added, 328 removed, 736 unchanged (49% of the section changed)

43 unchanged sentences

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);

• Investments to support growth in the business;

business momentum (see Overview);

• Expected timing for the TD Ameritrade client transitions;

deal-related asset attrition;

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);

• Our planning to take actions to streamline our operations and expectation to realize at least $500 million of incremental run-rate cost savings and the timing and amount of associated exit and related costs that we will incur (see Overview, Results of Operations, and Exit and Other Related Liabilities in Item 1 – Note 10);

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

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

• Our actions to streamline our operations and expectation to realize at least $500 million of incremental run-rate cost savings and the timing and amount of associated exit and related costs that we will incur (see Overview, Results of Operations, and Exit and Other Related Liabilities in Item 1 – Note 10);

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

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

16 unchanged sentences

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;

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

• The level and mix of client trading activity;

32 unchanged sentences

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

Results for the second quarter and first six months of 2023 and 2022 are as follows:

Results for the third quarter and first nine months of 2023 and 2022 are as follows:

Three Months Ended

June 30, Percent

Change Six Months Ended

June 30, Percent

September 30, Percent

Change Nine Months Ended

September 30, Percent

2023 2022 2023 2022

31 unchanged sentences

Return on tangible common equity 58 % 74 % 66 % 42 %

(1) The second quarter and first six months of 2023 include inflows of $7.8 billion and $26.8 billion, respectively, from off-platform brokered certificates of deposit (CDs) issued by CSB and includes an inflow of $12.0 billion from a mutual fund clearing services client.

The second quarter and first six months of 2022 include an outflow of $20.8 billion from a mutual fund clearing services client.

(1) The third quarter and first nine months of 2023 include inflows of $3.3 billion and $30.1 billion, respectively, from off-platform brokered certificates of deposit (CDs) issued by CSB.

Also, the first nine months of 2023 include an inflow of $12.0 billion from a mutual fund clearing services client.

The third quarter and first nine months of 2023 also include an outflow of $0.8 billion from an international relationship.

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

(2) Client cash as a percentage of client assets excludes brokered CDs issued by CSB.

(3) Beginning in the third quarter of 2023, adjustments made to GAAP financial measures also include restructuring costs.

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

1 unchanged sentence

See Non-GAAP Financial Measures.

Schwab saw sustained strong client engagement and momentum during the second quarter and first six months of 2023 through an evolving macroeconomic environment.

Under its monetary tightening policy, the Federal Reserve raised the Federal Funds rate twice in the first quarter and once in the second quarter for a total of 75 basis points.

Investor sentiment was bearish throughout the first quarter, especially following the onset of banking industry turmoil in early March, but turned positive by the end of the second quarter, and Schwab’s clients were net buyers of equities in June.

Equity markets continued to rise from year-end 2022 levels in the second quarter, with the S&P 500 ® increasing 8% and 16% during the second quarter and first six months of 2023, respectively.

Core net new assets totaled $52.2 billion in the second quarter of 2023, bringing year-to-date asset gathering to $183.9 billion, representing an annualized organic growth rate of over 5%.

Total client assets were $8.02 trillion at June 30, 2023, up 14% from year-end 2022, supported by sustained asset gathering as well as market value gains.

Trading volume was lower throughout the first half of 2023 relative to the same period in 2022.

Clients’ daily average trades (DATs) were 5.3 million and 5.6 million in the second quarter and first half of 2023, respectively, down 15% and 13% from the respective prior periods.

Against a challenging macroeconomic and geopolitical backdrop, Schwab continued to be a trusted partner for investors throughout the third quarter and first nine months of 2023.

The Federal Reserve raised the Federal Funds rate again in July, representing the fourth time in 2023 for a total of 100 basis points.

Investor sentiment was bearish in the first quarter, particularly following the onset of the banking industry turmoil in March, before turning positive in the second quarter and then declining again into a bearish sentiment in the third quarter.

Equity markets declined during the third quarter, though remained positive on the year, with the S&P 500 ® down 4% in the third quarter and up 12% year-to-date.

Schwab gathered $45.7 billion in core net new assets in the third quarter, bringing our 2023 year-to-date total to $229.6 billion.

Total client assets were $7.82 trillion as of September 30, 2023, up 11% from year-end 2022 primarily as a result of asset gathering and market gains, partially offset by some expected deal-related asset attrition from clients originating at TD Ameritrade.

Trading volume continued to be lower in the third quarter and throughout the first nine months of 2023 when compared with the same periods in 2022.

Clients’ daily average trades (DATs) were 5.2 million and 5.5 million in the third

THE CHARLES SCHWAB CORPORATION

1 unchanged sentence

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

Clients opened 960 thousand and 2.0 million new brokerage accounts in the second quarter and first six months of 2023, respectively, bringing active brokerage accounts to 34.4 million at quarter-end, up 1% year-over-year.

Schwab’s financial performance in the second quarter and first six months of 2023 reflected effects of significantly increased interest rates and improvement in equity market valuations.

Net income totaled $1.3 billion and $2.9 billion in the second quarter and first six months of 2023, respectively, down 28% and 9% from the same periods in 2022.

The Company produced diluted earnings per share (EPS) of $.64 and $1.48 in the second quarter and first six months of 2023, respectively, down 26% and 4% from the comparable periods in the prior year.

Adjusted diluted EPS (1) , which excludes acquisition and integration-related costs, amortization of acquired intangible assets, and related income tax effects, was $.75 and $1.68 in the second quarter and first six months of 2023, respectively, down 23% and 3% from the comparable 2022 periods.

Total net revenues were $4.7 billion in the second quarter of 2023, down 9% from the prior year, which brought the year-to-date total to $9.8 billion, up slightly from the first half of 2022.

Net interest revenue was $2.3 billion and $5.1 billion in the second quarter and first six months of 2023, respectively, down 10% and up 7% from the comparable periods in 2022, as the benefits of significantly higher interest rates were more than offset in the second quarter by increased utilization of supplemental funding to facilitate client cash allocation decisions and lower interest-earning assets.

Asset management and administration fees totaled $1.2 billion and $2.3 billion in the second quarter and first six months of 2023, respectively, rising 12% and 8% from the comparable periods in 2022 due to growth in money market funds, partially offset by lower balances in other third-party mutual funds and ETFs.

Trading revenue was $803 million and $1.7 billion in the second quarter and first six months of 2023, respectively, down 9% and 8% from the comparable periods in 2022 due primarily to lower trading volume and change in mix of client trading activity.

Bank deposit account fee revenue was $175 million and $326 million in the second quarter and first six months of 2023, respectively, down 50% from both comparable periods in the prior year due to lower average BDA balances and lower net yields, as well as $97 million in one-time breakage fees related to ending our arrangements with certain third-party banks in the first quarter of 2023.

BDA balances totaled $102.7 billion at June 30, 2023, down 19% from year-end 2022 due primarily to client cash allocation decisions.

During the second quarter of 2023, the Company executed a Second Amended and Restated Insured Deposit Account Agreement (2023 IDA agreement) (see Results of Operations – Bank Deposit Account Fees).

Total expenses excluding interest were $3.0 billion and $6.0 billion in the second quarter and first six months of 2023, respectively, increasing 5% and 6% from the same periods in 2022.

Adjusted total expenses (1) were $2.7 billion and $5.5 billion in the second quarter and first six months of 2023, respectively, also higher by 5% and 6% from the comparable prior-year periods.

These increases reflected higher expenses for compensation and benefits, depreciation and amortization, and occupancy and equipment, due largely to investments in people and technology to support growth in the business and TD Ameritrade integration.

Acquisition and integration-related costs were $130 million and $228 million during the second quarter and first six months of 2023, respectively, up 38% and 20% from the same periods in 2022 due primarily to real estate exit costs incurred in the second quarter of 2023.

Amortization of acquired intangible assets was $134 million and $269 million in the second quarter and first six months of 2023, respectively, down 13% from both comparable periods in 2022 as certain assets from the TD Ameritrade acquisition were fully amortized at the beginning of the fourth quarter of 2022.

Return on average common stockholders’ equity was 17% and 20% for the second quarter and first six months of 2023, respectively, down from 19% and up from 15% from the same periods in 2022.

Return on tangible common equity (1) (ROTCE) was 62% and 71% for the second quarter and first six months of 2023, respectively, up from 45% and 32% in the same periods in 2022.

These changes reflected lower stockholders’ equity and lower net income in 2023 compared with 2022.

Stockholders’ equity was lower in the first six months of 2023 due to a year-over-year decrease in average AOCI driven by unrealized losses on our available for sale (AFS) portfolio and securities transferred from AFS to held to maturity (HTM) in 2022 (see Item 1 – Note 4).

The Company continued its diligent approach to balance sheet management throughout the first six months of 2023 to maintain capital and liquidity levels to sustain ongoing business momentum.

Total balance sheet assets decreased 7% from year-end 2022 to June 30, 2023.

Amid higher market interest rates in the first half of 2023, clients allocated assets to higher yielding cash and fixed income alternatives, and 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.

Amounts outstanding under FHLB borrowings, other short-term borrowings, and brokered CDs increased by a total of

quarter and first nine months of 2023, respectively, down 6% and 11% from the respective prior periods.

Clients opened 894 thousand and 2.9 million new brokerage accounts in the third quarter and first nine months of 2023, respectively, bringing active brokerage accounts to 34.5 million, at quarter-end, up 2% year-over-year.

Schwab’s net income totaled $1.1 billion and $4.0 billion in the third quarter and first nine months of 2023, respectively, down 44% and 23% from the same periods in 2022.

Diluted earnings per share (EPS) was $.56 and $2.03 in the third quarter and first nine months of 2023, respectively, down 43% and 20% from the comparable periods in the prior year.

Adjusted diluted EPS (1) was $.77 and $2.45 in the third quarter and first nine months of 2023, respectively, down 30% and 13% from the comparable 2022 periods.

Total net revenues were $4.6 billion and $14.4 billion for the third quarter and first nine months of 2023, respectively, down 16% and 6% from the same periods in 2022.

Net interest revenue was $2.2 billion and $7.3 billion in the third quarter and first nine months of 2023, respectively, down 24% and 5% from the same prior-year periods, reflecting the impact of client allocation decisions within a higher interest rate environment.

Asset management and administration fees totaled $1.2 billion and $3.5 billion in the third quarter and first nine months of 2023, respectively, rising 17% and 11% from the same periods in 2022, due primarily to growth in money market funds and other proprietary fund products.

Trading revenue was $768 million and $2.5 billion in the third quarter and first nine months of 2023, respectively, down 17% and 11% from the comparable 2022 periods primarily related to mix of client trading activity and overall lower trading volume.

Bank deposit account fee revenue was $205 million and $531 million in the third quarter and first nine months of 2023, respectively, down 50% from both comparable periods in the prior year due to lower average BDA balances and lower net yields, as well as $97 million in one-time breakage fees related to ending our arrangements with certain third-party banks in the first quarter of 2023.

BDA balances totaled $99.6 billion at September 30, 2023, down 21% from year-end 2022 due primarily to client cash allocation decisions.

Total expenses excluding interest were $3.2 billion and $9.2 billion in the third quarter and first nine months of 2023, respectively, increasing 14% and 8% from the same prior-year periods.

These increases were due primarily to restructuring charges in the third quarter of 2023, as well as higher expenses for compensation and benefits and depreciation and amortization, due primarily to growth in headcount and investment in technology to support growth in our client base and TD Ameritrade integration, as well as higher regulatory fees and assessments due to higher Federal Deposit Insurance Corporation (FDIC) assessments.

Adjusted total expenses (1) were $2.7 billion and $8.2 billion in the third quarter and first nine months of 2023, respectively, up 5% and 6% from the same periods in 2022.

Acquisition and integration-related costs were $106 million and $334 million in the third quarter and first nine months of 2023, respectively, up 5% and 15% from the same periods in 2022 due to higher real estate exit costs incurred primarily in the second quarter of 2023.

Amortization of acquired intangible assets was $135 million and $404 million in the third quarter and first nine months of 2023, respectively, down 11% and 12% from the same periods in 2022 as certain assets from the TD Ameritrade acquisition were fully amortized at the beginning of the fourth quarter of 2022.

Beginning in the third quarter of 2023, adjusted total expenses (1) also excludes restructuring costs, which were $279 million in the third quarter and first nine months of 2023.

Return on average common stockholders’ equity was 14% and 18% for the third quarter and first nine months of 2023, respectively, down from 25% in the third quarter of 2022 and flat with 18% in the first nine months of 2022.

Return on tangible common equity (1) (ROTCE) was 58% and 66% in the third quarter and first nine months of 2023, respectively, down from 74% and up from 42% during the same periods in 2022.

These changes reflected lower stockholders’ equity and lower net income in 2023.

Stockholders’ equity was lower in the first nine months of 2023 due to a year-over-year decrease in average AOCI driven by unrealized losses on our available for sale (AFS) investment securities portfolio and securities transferred from AFS to held to maturity (HTM) in 2022 (see Item 1 – Note 4).

The Company continued its diligent approach to balance sheet management in the first nine months of 2023 to maintain capital and liquidity levels to support our growing client base.

Total balance sheet assets were $475.2 billion at September 30, 2023, a decrease of 14% from year-end 2022 and 7% during the third quarter.

Amid higher market interest rates in the first nine months of 2023, clients allocated assets to higher yielding cash and fixed income alternatives, and 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.

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

3 unchanged sentences

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

$6.8 billion from March 31 to June 30, 2023, though the outstanding balance of these temporary funding sources declined $6.9 billion from an intra-quarter peak in May to quarter-end, as the pace of client cash reallocations declined significantly during the second quarter.

In addition, in May, the Company issued $2.5 billion in long-term debt which provided incremental liquidity to support growth and helped bolster our capital ratios at our banking subsidiaries.

Concurrently, driven by a combination of the Company’s first-half net income and a smaller balance sheet, our consolidated Tier 1 Leverage Ratio increased to 7.5% as of June 30, 2023.

Apart from an increase in August following the Federal Reserve’s July rate hike, the pace of client cash realignment decisions declined significantly during the second and third quarters of 2023.

Net cash flows from our investment portfolio were used to reduce the balance of supplemental borrowings during the third quarter of 2023.

Amounts outstanding under FHLB borrowings, other short-term borrowings, and brokered CDs decreased by a net total of $5.4 billion during the third quarter of 2023.

In May and August 2023, the Company issued long-term debt of $2.5 billion and $2.4 billion, respectively, which provided incremental liquidity, and the May issuance was also used to help bolster our capital ratios at our banking subsidiaries.

Driven by a combination of the Company’s net income and a smaller balance sheet in the first nine months of 2023, our consolidated Tier 1 Leverage Ratio increased to 8.2% as of September 30.

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 six months of 2023, including the completion of client transition groups in February and May 2023.

With the completion of the May transition group, which included more than five million client accounts, the Company has now transitioned approximately one-third of its TD Ameritrade client accounts to the Schwab platform.

The Company expects to complete most remaining client transitions from TD Ameritrade to Schwab across two groups over the remainder 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.

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 $130 million and $228 million for the second quarter and first six months of 2023, respectively, and $94 million and $190 million for the second quarter and first six months of 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 June 30, 2023, we have achieved approximately 75% of this amount on an annualized run-rate basis.

Effective October 6, 2020, the Company completed its acquisition of TD Ameritrade Holding Corporation, now TD Ameritrade Holding LLC (TDA Holding), and its consolidated subsidiaries (collectively referred to as “TD Ameritrade” or “TDA”).

The Company made significant progress in the integration during the first nine months of 2023, including the completion of three client transition groups.

We completed our third conversion in September, as we transitioned $1.3 trillion in client assets, including more than 7,000 RIAs and 3.6 million retail brokerage accounts.

The Company completed its fourth conversion of 2023 in November and we have now completed the transition of RIAs and nearly 90% of TD Ameritrade client accounts to the Schwab platform.

In connection with these transitions, we have experienced some deal-related attrition of client assets from retail accounts and RIAs consistent with our expectations.

The Company expects to complete the remaining client transitions from TD Ameritrade to Schwab in a final transition group in the first half of 2024.

We continue to expect to incur total acquisition and integration-related costs and capital expenditures of between $2.4 billion and $2.5 billion.

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 duration and complexity of the remaining 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, changes in the scope and cost of technology, the timeline to wind-down the TD Ameritrade broker-dealers, and real estate-related exit cost variability.

Many of these factors may continue to cause variability in our expected acquisition and integration-related costs through the remainder of the integration process.

Acquisition and integration-related costs, which are inclusive of related exit costs, totaled $106 million and $334 million for the third quarter and first nine months of 2023, respectively, and $101 million and $291 million for the third quarter and first nine months of 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 September 30, 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.

1 unchanged sentence

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.

In addition to cost synergies directly related to the integration of TD Ameritrade, the Company is planning incremental actions to streamline its operations to prepare for post-integration.

Schwab is currently assessing its real estate footprint, and plans to close or downsize certain corporate offices.

In addition, the Company plans to streamline its operational design, including through position eliminations.

In addition to cost synergies directly related to the integration of TD Ameritrade, the Company has begun to take incremental actions to streamline its operations to prepare for post-integration, including through position eliminations and decreasing its real estate footprint.

Through these actions, the Company expects to realize at least $500 million of incremental run-rate cost savings in addition to integration synergies.

Refer to Results of Operations – Total Expenses Excluding Interest for additional information.

In order to achieve these cost savings, the Company expects to incur total exit and related costs, primarily related to employee compensation and benefits and facility exit costs, of approximately $400 million to $500 million, inclusive of costs recognized through September 30, 2023.

During the third quarter of 2023, the Company incurred $279 million in exit costs, primarily related to position eliminations.

The Company anticipates the remaining costs related to position eliminations will be incurred in the fourth quarter of 2023, and costs related to real estate will be incurred in the fourth quarter of 2023 and during 2024.

Refer to Results of Operations – Total Expenses Excluding Interest and Item 1 – Note 10 for additional information.

Current Regulatory and Other Developments

In July 2023, the Board of Governors of the Federal Reserve System, in collaboration with the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corporation (FDIC), issued a notice of proposed rulemaking for amendments to the regulatory capital rule.

Among other things, the proposed rule would require us to include AOCI in regulatory capital and to calculate our risk-weighted assets using a revised risk-based approach, a component of which is based on operational risk , phased in over a three-year transition period beginning July 1, 2025 and ending July 1, 2028.

The comment period for the proposed rule ends on November 30, 2023.

In May 2023, the FDIC issued a notice of proposed rulemaking that would impose a special assessment to recover losses incurred by the Deposit Insurance Fund to protect uninsured depositors due to the March 2023 closures of two banks.

Based on the proposed rule, the Company estimates its total special assessment would be approximately $160 million, which would be

In October 2023, following previous attempts to expand fiduciary regulation for broker-dealers, the U.S.

Department of Labor released a proposed rule to significantly broaden the definition of “fiduciary” under the Employee Retirement Income Security

THE CHARLES SCHWAB CORPORATION

1 unchanged sentence

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

paid over eight quarters beginning in the first quarter of 2024.

Among other requirements, the proposed rule would subject broker-dealers who provide non-discretionary investment advice to retirement plans and accounts to a “best interest” standard.

The Company is currently evaluating the impact of the proposed rule.

In October 2023, the Board of Governors of the Federal Reserve System, in collaboration with the Office of the Comptroller of the Currency and the FDIC, issued a final rule that makes extensive revisions to the regulations implementing the Community Reinvestment Act (CRA).

These revisions include 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, and requires significant new lending by banks to low-and-moderate income communities.

The new rule generally becomes effective on January 1, 2026, with its additional data collection and reporting requirements effective January 1, 2027.

The Company is evaluating the impact of the new rule, but does not expect it to have a material impact on the Company’s business, financial condition, or results of operations.

In August 2023, the Board of Governors of the Federal Reserve System, in collaboration with the Office of the Comptroller of the Currency and the FDIC, issued a proposed rulemaking on long-term debt requirements for certain large banking organizations.

Among other things, the proposed rule would require CSC to maintain outstanding minimum levels of eligible long-term debt, as defined by the proposed rule, issued externally.

The proposed rule would also require our banking subsidiaries to maintain outstanding minimum levels of eligible long-term debt, which our banking subsidiaries would be required to issue internally to CSC.

The proposed rule would be phased-in over a three-year transition period.

The comment period for the proposed rule ends on November 30, 2023 and the rule proposal is subject to further modification.

The Company is currently evaluating the impact of the proposed rule, which would interact with the final provisions of the currently proposed amendments to the regulatory capital rules discussed below.

In July 2023, the Board of Governors of the Federal Reserve System, in collaboration with the Office of the Comptroller of the Currency and the FDIC, issued a notice of proposed rulemaking for amendments to the regulatory capital rules.

Among other things, the proposed rules would require us to include AOCI in regulatory capital and to calculate our risk-weighted assets using a revised risk-based approach, a component of which is based on operational risk , phased in over a three-year transition period beginning July 1, 2025 and ending July 1, 2028.

The comment period for the proposed rules was extended and will end on January 16, 2024.

Based on the proposed rule, the Company estimates its total special assessment would be approximately $160 million, which would be paid over eight quarters beginning in the first quarter of 2024.

Any special assessment will be recognized fully in earnings upon enactment of a final rule.

7 unchanged sentences

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

THE CHARLES SCHWAB CORPORATION

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

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

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.

4 unchanged sentences

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.

THE CHARLES SCHWAB CORPORATION

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

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

RESULTS OF OPERATIONS

1 unchanged sentence

The following tables present a comparison of revenue by category:

Three Months Ended June 30, Percent

Three Months Ended September 30, Percent

Change Amount % of

13 unchanged sentences

Order flow revenue (25) % 325 7 % 432 8 %

Principal transactions N/M 44 1 % 12 —

Principal transactions (22) % 49 1 % 63 1 %

Trading revenue (17) % 768 17 % 930 17 %

2 unchanged sentences

Total net revenues (16) % $ 4,606 100 % $ 5,500 100 %

Six Months Ended June 30, Percent

N/M Not meaningful.

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

THE CHARLES SCHWAB CORPORATION

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

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

Nine Months Ended September 30, Percent

Change Amount % of

12 unchanged sentences

Order flow revenue (17) % 1,104 8 % 1,332 9 %

Principal transactions N/M 100 1 % 21 1 %

Principal transactions 77 % 149 1 % 84 —

Trading revenue (11) % 2,463 17 % 2,778 18 %

4 unchanged sentences

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

THE CHARLES SCHWAB CORPORATION

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

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

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.

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 cash and cash equivalents, 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-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, Federal Home Loan Bank (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.

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 second 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 ten times between March 2022 and May 2023 for a total increase of 500 basis points.

Long-term interest rates increased throughout 2022 and the first six months of 2023, though at a slower pace, leading to an inverted yield curve.

Schwab’s average interest-earning assets in the second quarter and first six months of 2023 were lower compared with the same periods of 2022 due primarily to client cash allocation movement to higher yielding investment solutions beginning in the second quarter of 2022 through the second quarter of 2023, which resulted primarily from the rapid increases to the federal funds overnight rate.

Interest rates increased significantly beginning late in the first quarter of 2022 through the third 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 eleven times between March 2022 and September 2023 for a total increase of 525 basis points.

Long-term rates increased throughout 2022 and the first nine months of 2023, generally at a slower pace, thus leading to an inverted yield curve, though long-term rates increased significantly in the third quarter of 2023.

Schwab’s average interest-earning assets in the third quarter and first nine months of 2023 were lower compared with the same periods of 2022 due primarily to client cash allocation movement to higher yielding investment solutions beginning in the second quarter of 2022 through the third 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 beginning in the fourth quarter of 2022 and during the first half of 2023, including drawing upon FHLB secured lending facilities and issuing brokered CDs.

The average daily pace of client cash allocation out of sweep products into higher yielding investment solutions decreased significantly in the second quarter of 2023, and in June, the Company was able to accommodate these client cash movements without accessing additional FHLB borrowings or issuing additional brokered CDs.

To support this client cash allocation activity, the Company has been utilizing temporary supplemental funding beginning in the fourth quarter of 2022 and during the first nine months of 2023, including drawing upon FHLB secured lending facilities and issuing brokered CDs.

The average daily pace of client cash allocation out of sweep products into higher yielding investment solutions decreased significantly beginning in the second quarter of 2023 and, apart from an increase in August following the Federal Reserve’s July rate increase, continued to decline during the third quarter of 2023 to its slowest pace since the beginning of the current interest rate tightening cycle.

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 net interest revenue information corresponding to interest-earning assets and funding sources on the condensed consolidated balance sheets:

Three Months Ended June 30, 2023 Average Balance Interest Revenue/ Expense Average Yield/Rate Average Balance Interest Revenue/ Expense Average Yield/Rate

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

Interest-earning assets

26 unchanged sentences

Net interest revenue $ 2,237 1.94 % $ 2,926 1.97 %

(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, FHLB 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 were less than $500 thousand in the prior period.

THE CHARLES SCHWAB CORPORATION

1 unchanged sentence

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

Six Months Ended June 30, Average

Nine Months Ended September 30, Average

Balance Interest

31 unchanged sentences

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.

(2) Beginning in the first quarter of 2023, FHLB 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 were less than $500 thousand in the prior period.

Net interest revenue decreased $254 million, or 10%, in the second quarter of 2023 compared to the second quarter of 2022, primarily due to utilization of higher cost funding sources including FHLB borrowings, other short-term borrowings, and brokered CDs to support client cash allocations in the rising rate environment, and lower average interest-earning assets, which more than offset the benefits of higher average yields on interest-earning assets.

Net interest revenue in the first six months of 2023 increased $333 million, or 7%, compared to the same period in 2022, primarily due to higher average yields on interest-earning assets, partially offset by utilization of higher cost funding sources and lower average interest-earning assets.

With the increases in market interest rates during the first half of 2023, net premium amortization of investment securities decreased to $207 million and $392 million in the second quarter and first six months of 2023, respectively, from $382 million and $868 million in the second quarter and first six months of 2022, respectively.

Average interest-earning assets for the second quarter and first six months of 2023 were lower by 22% and 21%, respectively, compared to the same periods in 2022.

Net interest revenue decreased $689 million, or 24%, and $356 million, or 5%, in the third quarter of 2023 and first nine months of 2023, respectively, compared to the same periods in 2022.

These decreases were primarily due to utilization of higher cost supplemental funding sources to support client cash allocations in the rising rate environment, and lower average interest-earning assets, which more than offset the benefits of higher average yields on interest-earning assets.

Net premium amortization of investment securities decreased to $222 million and $614 million in the third quarter and first nine months of 2023, respectively, from $295 million and $1.2 billion in the third quarter and first nine months of 2022, respectively, as a result of increases in market interest rates and a smaller investment securities portfolio.

Average interest-earning assets for the third quarter and first nine months of 2023 were lower by 23% and 22%, respectively, compared to the same periods in 2022.

These decreases were 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 1.87% and 2.03% during the second quarter and first six months of 2023, respectively, from 1.62% and 1.50% during the same periods 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 second quarter and first six months of 2023 of FHLB borrowings, other short-term borrowings, and brokered CDs resulted in higher funding costs.

The Company currently expects its outstanding balances of supplemental funding sources to decrease between now and the end of 2024, with a limited portion remaining outstanding in early 2025.

Additional higher cost supplemental funding may be necessary if client cash allocation movements increase, which

Net interest margin decreased slightly to 1.94% during the third quarter of 2023 from 1.97% compared to the same period in 2022, as increased utilization of higher cost funding sources to facilitate client cash allocation decisions offset the benefits of higher average yields on interest-earning assets.

Net interest margin during the first nine months of 2023 increased to 2.00% from 1.65% in the same period in 2022 as 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 third quarter and first nine months of 2023 relative to the same periods in 2022 of FHLB borrowings, other short-term borrowings, and brokered CDs resulted in higher funding costs.

The Company continues to prioritize repayment of the outstanding balances of its supplemental funding sources, and during the third quarter of 2023, the outstanding balance decreased by $5.4 billion.

The Company’s use of these supplemental funding sources is dependent on several factors, including the volume and pace of clients’ cash allocation activity, which is driven primarily by changes in market interest rates, as well as asset gathering.

While client cash realignment activity has slowed significantly since the second

THE CHARLES SCHWAB CORPORATION

1 unchanged sentence

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

could reduce net interest revenue.

quarter of 2023, continued uncertainty remains regarding the path of market interest rates and client behavior.

The Company currently expects its outstanding balances of supplemental funding sources to decrease between now and the end of 2024, with some amount remaining outstanding into 2025.

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.

1 unchanged sentence

The following table presents asset management and administration fees, average client assets, and average fee yields:

Three Months Ended June 30, 2023 2022

Three Months Ended September 30, 2023 2022

Assets Revenue Average

7 unchanged sentences

Other third-party mutual funds and ETFs (1)

632,902 127 0.08 % 747,676 160 0.08 %

Total mutual funds, ETFs, and CTFs (2)

7 unchanged sentences

Total asset management and administration fees $ 1,224 $ 1,047

Six Months Ended June 30, Average

Nine Months Ended September 30, Average

Assets Revenue Average

17 unchanged sentences

Total asset management and administration fees $ 3,515 $ 3,167

(1) The third quarter and first nine months of 2023 and the first nine months of 2022 include 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.

1 unchanged sentence

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

(4) The first six months of 2022 include transfers from other third-party mutual funds and ETFs to Mutual Fund OneSource ® and other NTF funds.

Asset management and administration fees increased by $121 million, or 12%, and $171 million, or 8%, in the second quarter and first six months of 2023, respectively, compared to the same periods in 2022.

These increases were primarily a result of higher balances in Schwab money market funds and, for the first six months of 2023 , 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, both due primarily to 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 ETFs.

Asset management and administration fees increased by $177 million, or 17%, and $348 million, or 11%, in the third quarter and first nine months of 2023, respectively, compared to the same periods in 2022.

These increases were primarily a result of higher balances in Schwab money market funds and, for the first nine months of 2023 , the elimination of fee waivers on those funds as well as higher average client asset balances due to stronger equity markets.

Money market fund balances increased in 2023 as clients shifted their cash allocations to higher yielding investment solutions, and money market fund fee waivers were

THE CHARLES SCHWAB CORPORATION

1 unchanged sentence

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

eliminated during 2022, both due primarily to the Federal Reserve’s increases to the federal funds target overnight rate.

The increases in asset management and administration fees in the third quarter and first nine months of 2023 were also due to growth in Schwab equity and bond funds, ETFs, and CTFs, partially offset by lower balances of certain third-party mutual funds and ETFs.

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 42% and 41% of the asset management and administration fees earned in the second quarter and first six months of 2023, respectively, compared with 33% and 31% in the second quarter and first six months of 2022, respectively:

These funds generated 44% and 42% of the asset management and administration fees earned in the third quarter and first nine months of 2023, respectively, compared with 34% and 32% in the third quarter and first nine months of 2022, respectively:

Market Funds Schwab Equity and

1 unchanged sentence

and Other NTF funds

Three Months Ended June 30, 2023 2022 2023 2022 2023 2022

Three Months Ended September 30, 2023 2022 2023 2022 2023 2022

Balance at beginning of period $ 392,887 $ 159,231 $ 465,847 $ 387,211 $ 254,636 $ 196,578

1 unchanged sentence

Net market gains (losses) and other (1)

5,174 737 (14,763) (24,272) 40,416 (5,480)

Balance at end of period $ 436,326 $ 211,079 $ 454,094 $ 373,744 $ 287,992 $ 181,498

2 unchanged sentences

and Other NTF funds

Six Months Ended June 30, 2023 2022 2023 2022 2023 2022

Nine Months Ended September 30, 2023 2022 2023 2022 2023 2022

Balance at beginning of period $ 278,926 $ 146,509 $ 412,942 $ 454,864 $ 235,738 $ 234,940

3 unchanged sentences

Balance at end of period $ 436,326 $ 211,079 $ 454,094 $ 373,744 $ 287,992 $ 181,498

(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.

(1) Includes $39.8 billion of transfers from other third-party mutual funds and ETFs to Mutual Fund OneSource ® and Other NTF Funds for the three and nine months ended September 30, 2023.

Includes $14.2 billion of transfers from other third-party mutual funds and ETFs to Mutual Fund OneSource ® and Other NTF Funds for the nine months ended September 30, 2022.

Trading Revenue

7 unchanged sentences

Three Months Ended

June 30, Percent

Change Six Months Ended

June 30, Percent

September 30, Percent

Change Nine Months Ended

September 30, Percent

2023 2022 2023 2022

4 unchanged sentences

Total order flow revenue 325 432 (25) % 1,104 1,332 (17) %

Principal transactions 44 12 N/M 100 21 N/M

Principal transactions 49 63 (22) % 149 84 77 %

Total trading revenue $ 768 $ 930 (17) % $ 2,463 $ 2,778 (11) %

N/M Not meaningful.

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

THE CHARLES SCHWAB CORPORATION

2 unchanged sentences

Three Months Ended

June 30, Percent

Change Six Months Ended

June 30, Percent

September 30, Percent

Change Nine Months Ended

September 30, Percent

2023 2022 2023 2022

10 unchanged sentences

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

Trading revenue decreased $82 million and $153 million in the second quarter and first six months of 2023, respectively, compared to the same periods in 2022.

This change is primarily due to a decrease in commissions and order flow revenue resulting from lower client trading activity.

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.

Trading revenue decreased $162 million and $315 million in the third quarter and first nine months of 2023, respectively, compared to the same periods in 2022.

This change is primarily due to lower options order flow revenue from changes in the mix of client trading activity and narrower quoted spreads in the options market, and lower equity order flow revenue reflecting a shift toward more low-price securities and lower equity trading activity overall.

Additionally, commissions decreased as a result of lower client trading activity and fewer trading days.

Partially offsetting the decrease during the first nine months of 2023 compared to the same period in 2022, principal transactions revenue increased as a result of higher volume in fixed income trading and higher market interest rates.

Bank Deposit Account Fees

1 unchanged sentence

These fees are affected by changes in interest rates and the composition of balances designated as fixed- and floating-rate obligation amounts.

On May 4, 2023, the Company executed the 2023 IDA agreement with the TD Depository Institutions that replaced and superseded the previous agreement dated November 24, 2019, as amended (the 2019 IDA agreement).

On May 4, 2023, the Company executed the Second Amended and Restated Insured Deposit Account Agreement (2023 IDA agreement) with the TD Depository Institutions that replaced and superseded the previous agreement dated November 24, 2019, as amended (the 2019 IDA agreement).

In accordance with the 2023 IDA agreement, cash held in eligible brokerage client accounts is swept off-balance sheet to deposit accounts at the TD Depository Institutions, consistent with the 2019 IDA agreement.

3 unchanged sentences

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 June 30, Percent Change Six Months Ended

June 30, Percent Change

Three Months Ended September 30, Percent Change Nine Months Ended

September 30, Percent Change

2023 2022 2023 2022

11 unchanged sentences

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

Bank deposit account fees decreased $177 million, or 50%, and $320 million, or 50%, in the second quarter and first six months of 2023, respectively, compared to the same periods in 2022.

The decreases were primarily due to breakage fees of $97 million incurred during the first quarter of 2023 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 also contributed to the decrease in average net yield in the second quarter and first six months of 2023 compared to the same periods in 2022.

The decreases in average BDA balances in the second quarter and first six months of 2023 compared to the same periods in 2022 were primarily due to client cash allocation decisions in response to rising short-term market interest rates throughout 2022 and through the second quarter of 2023.

The percentages of BDA balances designated as fixed-rate and floating-rate obligation amounts as of June 30, 2023 were 94% and 6%, respectively.

Bank deposit account fees decreased $208 million, or 50%, and $528 million, or 50%, in the third quarter and first nine months of 2023, respectively, compared to the same periods in 2022.

The decreases were primarily due to lower average BDA balances, an increase in the amount paid to clients due to higher interest rates, and breakage fees of $97 million incurred during the first quarter of 2023 as a result of ending the other third-party bank arrangements.

These factors also contributed to the decrease in average net yield in the third quarter and first nine months of 2023 compared to the same periods in 2022.

The decreases in average BDA balances in the third quarter and first nine months of 2023 compared to the same periods in 2022 were primarily due to client cash allocation decisions in response to rising short-term market interest rates throughout 2022 and through the third quarter of 2023.

The percentages of BDA balances designated as fixed-rate and floating-rate obligation amounts as of September 30, 2023 were 89% and 11%, respectively.

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 decreased $45 million and $24 million in the second quarter and first six months of 2023, respectively, compared to the same periods in 2022, due to the impact of changes to exchange processing fees and net losses on sales of AFS securities, partially offset by lower provision for credit losses on bank loans and certain service fees.

Exchange processing fees decreased in the second quarter of 2023 compared to the second quarter of 2022 as a result of an SEC fee rate decrease which became effective February 27, 2023, and decreased the fee rate by approximately 65% from the rate in effect since May 2022.

Exchange processing fees were higher during the first six months of 2023 compared to the same period in 2022, due to a higher average SEC fee rate in effect during the first quarter of 2023.

The provision for credit losses on bank loans was lower in the second quarter and first six months of 2023 compared to the same periods in 2022, as 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 second quarter and first six months 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.

In addition, other revenue in the second quarter and first six months of 2022 included gains of $37 million and $46 million, respectively, on the sale of Schwab Compliance Technologies, Inc.

Other revenue decreased $12 million and $36 million in the third quarter and first nine months of 2023, respectively, compared to the same periods in 2022, due to the impact of changes to exchange processing fees and net losses on sales of AFS securities, partially offset by lower provision for credit losses on bank loans and certain service fees.

Exchange processing fees decreased in the third quarter and first nine months of 2023 compared to the same periods in 2022, primarily due to a decrease in the SEC fee rate and lower year-to-date options volume.

The provision for credit losses on bank loans was lower in the third quarter and first nine months of 2023 compared to the same periods in 2022, as loan loss factors decreased in the third quarter of 2023 while the total balance of first lien residential real estate mortgage loans (First Mortgages) increased slightly compared to year-end 2022.

The Company’s provision for credit losses on bank loans in the third quarter and first nine months of 2022 reflected increased loan loss factors driven primarily by higher forecasted interest rates earlier in the Federal Reserve’s monetary tightening, as well as growth in the loan portfolio.

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

and certain investments.

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)

Total Expenses Excluding Interest

1 unchanged sentence

Three Months Ended

June 30, Percent

Change Six Months Ended

June 30, Percent

September 30, Percent

Change Nine Months Ended

September 30, Percent

2023 2022 2023 2022

19 unchanged sentences

Average 36.1 35.2 3 % 36.0 34.5 4 %

Expenses excluding interest increased by $146 million, or 5%, and $319 million, or 6%, in the second quarter and first six months of 2023, respectively, compared to the same periods in 2022.

Adjusted total expenses, which excludes acquisition and integration-related costs and amortization of acquired intangible assets, increased 5% and 6% in the second quarter and first six months of 2023, respectively, compared to the same periods in 2022.

Expenses excluding interest increased by $400 million, or 14%, and $719 million, or 8%, in the third quarter and first nine months of 2023, respectively, compared to the same periods in 2022.

Adjusted total expenses, which excludes acquisition and

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)

integration-related costs, amortization of acquired intangible assets, and, beginning in the third quarter of 2023, restructuring costs, increased 5% and 6% in the third quarter and first nine months of 2023, respectively, compared to the same periods in 2022.

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

Total compensation and benefits expense increased in the second quarter and first six months of 2023 compared to the same periods 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.

The Company began incurring restructuring costs in the third quarter of 2023 in connection with actions to streamline its operations to prepare for post-integration of TD Ameritrade (see below and Overview – Other for additional information).

Total compensation and benefits expense increased in the third quarter and first nine months of 2023 compared to the same periods in 2022, primarily due to restructuring costs recognized during the third quarter of 2023 related to position eliminations, higher employee headcount to support our expanding client base and TDA client account transitions, and annual merit increases.

These increases were partially offset by lower incentive compensation.

Compensation and benefits included acquisition and integration-related costs of $48 million and $53 million in the second quarter of 2023 and 2022, respectively, and $106 million and $109 million in the first six months of 2023 and 2022, respectively.

Professional services expense increased in the second quarter and first six months of 2023 compared to the same periods in 2022, primarily due to increased utilization of 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 $41 million and $35 million in the second quarter of 2023 and 2022, respectively, and $74 million and $66 million in the first six months of 2023 and 2022, respectively.

Occupancy and equipment expense increased in the second quarter and first six months of 2023 compared to the same periods 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 $10 million and $4 million in the second quarter of 2023 and 2022, respectively, and $14 million and $8 million in the first six months of 2023 and 2022, respectively.

Advertising and market development expense decreased in the second quarter and first six months of 2023, compared to the same periods in 2022.

These decreases were primarily due to lower client promotional spending for TD Ameritrade.

Compensation and benefits included acquisition and integration-related costs of $52 million and $57 million in the third quarter of 2023 and 2022, respectively, and $158 million and $166 million in the first nine months of 2023 and 2022, respectively.

Compensation and benefits also included restructuring costs of $276 million in the third quarter and first nine months of 2023.

Professional services expense increased in the third quarter and first nine months of 2023 compared to the same periods in 2022, primarily due to increased utilization of professional services to support overall growth of the business, as well as the TDA integration and client account transitions.

Professional services included acquisition and integration-related costs of $37 million and $36 million in the third quarter of 2023 and 2022, respectively, and $111 million and $102 million in the first nine months of 2023 and 2022, respectively.

Occupancy and equipment expense increased in the third quarter and first nine months of 2023 compared to the same periods 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 $7 million and $6 million in the third quarter of 2023 and 2022, respectively, and $21 million and $14 million in the first nine months of 2023 and 2022, respectively.

Advertising and market development expense increased in the third quarter of 2023, compared to the same period in 2022, primarily due to higher traditional and digital advertising spending.

Advertising and market development expense decreased slightly in the first nine months of 2023, compared to the same period in 2022, primarily due to lower client promotional spending for TD Ameritrade.

Communications expense increased in the third quarter and first nine months of 2023, compared to the same periods in 2022, primarily a result of client communications related to TDA account transitions completed during the first nine months of 2023.

Depreciation and amortization expense increased in the third quarter and first nine months of 2023 compared to the same periods 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 nine months 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 third quarter and first nine months of 2023 compared to the same periods 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 third quarter and first nine months of 2023 compared to the same periods in 2022, primarily as a result of higher FDIC deposit insurance assessments, reflecting greater use of brokered CDs and a 2-basis-point increase to the FDIC deposit insurance assessment rate, which became effective for the first quarterly assessment period in 2023, partially offset by lower assessment bases.

Other expense decreased in the third quarter of 2023 and increased slightly in the first nine months of 2023, compared to the same periods in 2022.

The decrease in the third quarter was primarily due to lower exchange processing fees, partially offset by impairment of leased assets related to facility closures.

Exchange processing fees decreased in the third quarter of 2023 compared to the third quarter of 2022 as a result of a decrease in SEC fee rates.

The increase in other expense in the first nine months of 2023 was primarily a result of impairment of leased assets related to facility closures.

Other expense included acquisition and integration-related costs of $4 million and $26 million in the third quarter and first nine months of 2023, respectively.

Capital expenditures were $250 million and $193 million in the third quarter of 2023 and 2022, respectively, and $605 million and $741 million for the first nine months of 2023 and 2022, respectively.

Capital expenditures increased for the third quarter of

THE CHARLES SCHWAB CORPORATION

1 unchanged sentence

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

Communications expense increased in the second quarter and first six months of 2023, compared to the same periods in 2022.

These increases were primarily a result of client communications related to TDA account transitions completed during the second quarter.

Depreciation and amortization expense increased in the second quarter and first six months of 2023 compared to the same periods 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 six months 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 second quarter and first six months of 2023 compared to the same periods 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 second quarter and first six months of 2023 compared to the same periods 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.

Other expense decreased in the second quarter of 2023 and increased in the first six months of 2023, compared to the same periods in 2022.

The decrease in the second quarter was primarily due to lower exchange processing fees, partially offset by impairment of leased assets related to facility closures.

The increase in other expense in the first six months of 2023 was primarily a result of impairment of leased assets related to facility closures and higher exchange processing fees.

Exchange processing fees were higher during the first six months of 2023 compared to the same period in 2022, due to a higher average SEC fee rate in effect during the first quarter of 2023.

Other expense included acquisition and integration-related costs of $20 million and $22 million in the second quarter and first six months of 2023, respectively.

Capital expenditures were $168 million and $339 million in the second quarter of 2023 and 2022, respectively, and $355 million and $548 million for the first six months 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 our expanding client base.

2023, primarily due to higher purchased software to enhance our technological infrastructure to support our expanding client base, partially offset by lower integration-related equipment purchases compared to 2022.

Capital expenditures in the first nine months of 2023 decreased when compared to heightened integration-related spend in 2022 in preparation for TDA client account transitions, partially offset by higher purchased software.

We continue to anticipate capital expenditures for full-year 2023 will be approximately 3-4% of total net revenues.

With significant progress now made in the integration of TD Ameritrade, the Company is planning incremental actions to streamline its operations to prepare for post-integration.

Schwab is currently assessing its real estate footprint, and plans to close or downsize certain corporate offices.

In addition, the Company plans to reduce its operating costs primarily through lower headcount and professional services.

The Company is still evaluating both its real estate locations and its organizational headcount, though Schwab expects to realize at least $500 million of total annual run-rate cost savings to be achieved through these actions.

In order to achieve these cost savings, the Company will incur exit and related costs, which could be significant, primarily related to employee compensation and benefits and facility exit costs.

The Company anticipates most costs related to position eliminations will be incurred in the second half of 2023, and costs related to real estate will be incurred in 2023 and 2024;

however, amounts related to these planned actions are not yet estimable.

Taxes on Income

Taxes on income were $397 million and $481 million for the second quarter of 2023 and 2022, respectively, resulting in effective tax rates of 23.5% and 21.2%, respectively.

Taxes on income were $904 million and $918 million for the first six months of 2023 and 2022, respectively, resulting in effective tax rates of 23.8% and 22.3%, respectively.

The increase in the effective tax rates in the second quarter and first six months of 2023 compared to the same periods in 2022 was primarily related to a decrease in reserve releases in 2023, tax benefits recognized on the portion of a regulatory matter charge that was determined upon settlement to be deductible in the second quarter of 2022, and increased 2023 state tax expense.

THE CHARLES SCHWAB CORPORATION

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

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

Taxes on income were $258 million and $657 million for the third quarter of 2023 and 2022, respectively, resulting in effective tax rates of 18.7% and 24.5%, respectively.

Taxes on income were $1.2 billion and $1.6 billion for the first nine months of 2023 and 2022, respectively, resulting in effective tax rates of 22.4% and 23.2%, respectively.

The decrease in the effective tax rates in the third quarter and first nine months of 2023 compared to the same periods in 2022 was primarily related to the recognition of certain tax credits, partially offset by an increase in 2023 state tax expense.

Segment Information

1 unchanged sentence

Investor Services Advisor Services Total

Three Months Ended June 30, Percent Change 2023 2022 Percent Change 2023 2022 Percent Change 2023 2022

Three Months Ended September 30, Percent Change 2023 2022 Percent Change 2023 2022 Percent Change 2023 2022

Net interest revenue (20) % $ 1,710 $ 2,143 (33) % $ 527 $ 783 (24) % $ 2,237 $ 2,926

7 unchanged sentences

Net New Client Assets (in billions) (1)

N/M $ 36.0 $ 8.8 4 % $ 36.0 $ 34.6 66 % $ 72.0 $ 43.4

(48) % $ 28.6 $ 55.1 (67) % $ 19.6 $ 59.5 (58) % $ 48.2 $ 114.6

Investor Services Advisor Services Total

Six Months Ended June 30, Percent Change 2023 2022 Percent Change 2023 2022 Percent Change 2023 2022

Nine Months Ended September 30, Percent Change 2023 2022 Percent Change 2023 2022 Percent Change 2023 2022

Net interest revenue (2) % $ 5,448 $ 5,551 (12) % $ 1,849 $ 2,102 (5) % $ 7,297 $ 7,653

8 unchanged sentences

22 % $ 144.0 $ 118.5 (21) % $ 126.9 $ 160.0 (3) % $ 270.9 $ 278.5

(1) In the second quarter and first six months of 2023, Investor Services includes inflows of $7.8 billion and $26.8 billion, respectively, from off-platform brokered CDs issued by CSB.

Also, in the second quarter and first six months of 2023, Investor Services includes an inflow of $12.0 billion from a mutual fund clearing services client.

In the second quarter and first six months of 2022, Investor Services includes an outflow of $20.8 billion from a mutual fund clearing services client.

N/M Not meaningful.

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

(1) In the third quarter and first nine months of 2023, Investor Services includes net inflows of $3.3 billion and $30.1 billion, respectively, from off-platform brokered CDs issued by CSB.

Also, in the first nine months of 2023, Investor Services includes an inflow of $12.0 billion from a mutual fund clearing services client.

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

In the third quarter and first nine months of 2023, Advisor Services includes an outflow of $0.8 billion from an international relationship.

Segment Net Revenues

Investor Services total net revenues decreased by 6% and increased by 1% in the second quarter and first six months of 2023, respectively, compared to the same periods in 2022, while Advisor Services total net revenues decreased by 16% and 4%, in the second quarter and first six months of 2023, respectively, compared to the same periods in 2022.

Decreases in Investor Services and Advisor Services revenues for the second quarter were primarily driven by decreases in net interest revenue due to higher cost funding sources and certain lower average interest-earning asset balances, as described above.

For the six-month period, the increase in Investor Services revenues was primarily driven by higher net interest revenue due to higher yields on interest-earning assets as described above, while Advisor Services net interest revenue was flat.

Both segments saw a decrease in bank deposit account fees in the second quarter and first six months of 2023 due to lower average BDA balances and higher yields paid to clients, as well as, for the six-month period, breakage fees incurred as a result of ending certain third-party bank arrangements.

Trading revenue decreased in the second quarter and first six months of 2023 for both segments primarily due to lower client trading activity and changes in client trading mix, resulting in lower commissions and order flow revenue.

Other revenue also decreased in the second quarter and first six months of 2023 for both segments primarily due to gains on the sale of certain investments in 2022 and net losses on sales of AFS securities in 2023.

These decreases were partially offset by increased asset management and administration fees in both segments in the second quarter and first six months of 2023, primarily as a result of higher money market fund balances and, for the six-month period, the elimination of money market fund fee waivers during 2022.

Investor Services total net revenues decreased by 13% and 4% in the third quarter and first nine months of 2023, respectively, compared to the same periods in 2022, while Advisor Services total net revenues decreased by 25% and 11% in the third quarter and first nine months of 2023, respectively, compared to the same periods in 2022.

Net interest revenue decreased for both segments in the third quarter and first nine months of 2023 due to higher cost funding sources and lower average interest-

THE CHARLES SCHWAB CORPORATION

1 unchanged sentence

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

earning asset balances, as described above.

Both segments saw a decrease in bank deposit account fees in the third quarter and first nine months of 2023 due to lower average BDA balances and higher yields paid to clients, as well as, for the first nine months of 2023, breakage fees incurred as a result of ending certain third-party bank arrangements.

Trading revenue decreased in the third quarter and first nine months of 2023 for both segments primarily as a result of changes in client trading mix and lower client trading activity as described above.

Other revenue decreased in the third quarter and first nine months of 2023 for both segments primarily due to lower exchange processing fees, net losses on sales of AFS securities, and for the first nine months of 2023, gains on the sale of certain investments in 2022, partially offset by lower provision for credit losses on bank loans.

These decreases were partially offset by higher asset management and administration fees in both segments in the third quarter and first nine months of 2023, primarily as a result of higher money market fund balances and, for the nine-month period, the elimination of money market fund fee waivers during 2022 and growth in Schwab equity and bond funds, ETFs, and CTFs, partially offset by lower balances of certain third-party funds.

Segment Expenses Excluding Interest

Investor Services total expenses excluding interest increased by 4% in the second quarter and first six months of 2023 compared to the same periods in 2022, while Advisor Services total expenses excluding interest increased by 9% and 10% in the second quarter and first six months of 2023, respectively, compared to the same periods 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.

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 six months of 2023 to enhance our technological infrastructure to support growth of the business.

Investor Services total expenses excluding interest increased by 11% and 7% in the third quarter and first nine months of 2023, respectively, compared to the same periods in 2022, while Advisor Services total expenses excluding interest increased by 23% and 14% in the third quarter and first nine months of 2023, respectively, compared to the same periods in 2022.

Both segments saw higher compensation and benefits expenses due to restructuring costs recognized in the third quarter of 2023, increases in headcount to support our expanding client base and TDA client account transitions, and annual merit increases, partially offset by lower incentive compensation.

Regulatory fees and assessments increased in both segments in the third quarter and first nine months of 2023 compared to the same periods in 2022, primarily due to higher FDIC deposit insurance assessments described above.

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 nine months of 2023 to enhance our technological infrastructure to support growth of the business.

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.

Both segments saw higher communications expenses due to client communications related to TDA account transitions and overall growth of the business.

Regulatory fees and assessments increased in both segments in the second quarter and first six months of 2023 compared to the same periods in 2022, primarily due to the FDIC deposit insurance assessment rate increase described above.

Both segments saw higher communications expenses due to client communications related to TDA account transitions.

In Investor Services, these increases were partially offset by lower amortization of acquired intangible assets as certain assets from the TDA acquisition became fully amortized in 2022.

8 unchanged sentences

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.

In 2023, the Company began to utilize interest rate swap derivative instruments to assist with managing interest rate risk, the effects of which are incorporated into the Company’s net interest revenue and EVE analyses.

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 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

The simulations include all balance sheet interest rate-sensitive assets and liabilities, and include derivative instruments.

Key assumptions include the projection of interest rate scenarios with rate floors,

THE CHARLES SCHWAB CORPORATION

1 unchanged sentence

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

rates and balances of non-maturity 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.

We use independent third-party models to simulate net interest revenue sensitivity and related analyses.

Fixed income analytical vendors provide term structure models, prepayment speed models for mortgage-backed securities and mortgage loans, and cash flow projections based on interest income, contractual maturities, and prepayments.

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.

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.

6 unchanged sentences

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 June 30, 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:

June 30, 2023 December 31, 2022

The following table shows simulated changes to net interest revenue over the next 12 months beginning September 30, 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:

September 30, 2023 December 31, 2022

Increase of 200 basis points 9.6 % 7.3 %

4 unchanged sentences

Decrease of 200 basis points (6.8) % (6.7) %

The Company’s simulated incremental increases in market interest rates had a larger impact on net interest revenue as of June 30, 2023 compared to December 31, 2022 primarily due to higher cash and margin loan 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 June 30, 2023 compared to December 31, 2022 primarily due to higher cash and margin loan balances, while increased allocation to shorter-term liabilities contributed to lower interest expense in a lower rate environment.

The Company’s simulated incremental increases in market interest rates had a larger impact on net interest revenue as of September 30, 2023 compared to December 31, 2022 primarily due to higher margin loan and 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 September 30, 2023 compared to December 31, 2022 primarily due to higher margin loan and 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 June 30, 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.

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.

THE CHARLES SCHWAB CORPORATION

6 unchanged sentences

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 of our AFS investment securities portfolio was approximately 2.4 years and 3.4 years as of June 30, 2023 and 2022, respectively.

The estimated effective duration for the Company’s total AFS and HTM investment securities portfolio was approximately 4.0 years and 4.1 years as of June 30, 2023 and 2022, respectively.

AFS and HTM securities comprised approximately 57% of the Company’s consolidated total assets as of both June 30, 2023 and 2022.

The estimated effective duration of the remaining balance sheet assets in aggregate was less than one year as of both June 30, 2023 and 2022.

The Company’s estimated effective duration of consolidated total assets was approximately 2.5 years at June 30, 2023 and 2022.

The Company’s estimated effective duration of consolidated total assets was approximately 2.5 years at both September 30, 2023 (inclusive of the impact of derivative instruments), and September 30, 2022.

The estimated effective duration of our AFS investment securities portfolio was approximately 2.5 years (2.2 years inclusive of the impact of derivative instruments) and 3.3 years as of September 30, 2023 and 2022, respectively.

This change in the estimated effective duration of our AFS portfolio was due primarily to the 2022 transfer of securities from the AFS category to the HTM category (see also Item 1 – Note 4).

The estimated effective duration for the Company’s total AFS and HTM investment securities portfolio was approximately 4.0 years (3.9 years inclusive of the impact of derivative instruments on AFS securities) and 3.9 years as of September 30, 2023 and 2022, respectively.

AFS and HTM securities comprised approximately 57% of the Company’s consolidated total assets as of both September 30, 2023 and 2022.

The estimated effective duration of the remaining balance sheet assets in aggregate was less than one year as of both September 30, 2023 and 2022.

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, and includes the impact of derivative instruments.

While EVE does not have a direct accounting relationship, the measure aims to capture a theoretical value of assets and liabilities under a variety of interest rate environments.

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.

We use both proprietary and independent third-party models to simulate EVE sensitivity and related analyses.

We develop and maintain client credits and deposits run-off models internally based on historical experience and prevailing client cash realignment behaviors.

We rely on third-party models for term structure modeling, prepayment speed modeling for mortgage-backed securities and mortgage loans, and cash flow projections based on interest income, contractual maturities, and prepayments.

As interest rates rose through the first nine months of 2023, EVE sensitivity generally trended higher due to a shortening of liability duration.

While the Company’s asset duration remained largely stable during the period of rising interest rates, liability duration shortened significantly and is now shorter than asset duration.

Bank Deposit Account Fees Simulation

As of September 30, 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.

Our net interest revenue, EVE, and bank deposit account fee revenue simulations reflect the assumption of non-negative investment yields.

Phase-out of LIBOR

Effective June 30, 2023, publication of the London Interbank Offered Rate (LIBOR) ceased.

While we completed all LIBOR transition work that could be done prior to June 30, 2023, we will continue to monitor and manage the LIBOR substitution for certain investment securities that we hold and the portfolio of legacy loans that we have for which scheduled interest rate resets or related interest rate transitions will occur in future periods.

We will also monitor our financial models and systems that previously referenced LIBOR.

While we completed all LIBOR transition work that could be done prior to June 30, 2023, we continue to monitor and manage the LIBOR substitution for certain investment securities that we hold and the portfolio of legacy loans that we have for which scheduled interest rate resets or related interest rate transitions will occur in future periods.

We also continue to monitor our financial models and systems that previously referenced LIBOR.

See also Part II – Item 7 – Management’s Discussion and Analysis of Financial Condition and Results of Operations – Risk Management in the 2022 Form 10-K.

THE CHARLES SCHWAB CORPORATION

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

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

Liquidity Risk

17 unchanged sentences

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.

THE CHARLES SCHWAB CORPORATION

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

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

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

2 unchanged sentences

Our clients’ bank deposits and brokerage cash balances primarily originate from our 34.5 million active brokerage accounts.

More than 80% of our bank deposits qualified for FDIC insurance as of June 30, 2023.

More than 80% of our bank deposits qualified for FDIC insurance as of September 30, 2023.

Our clients’ allocation of cash held on our balance sheet as bank deposits or payables to brokerage clients 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.

6 unchanged sentences

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 June 30, 2023:

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 describes external debt facilities available at September 30, 2023:

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

FHLB secured credit facilities Banking subsidiaries $ 31,800 $ 55,593 (1)

July 2023 - September 2024 5.14%

October 2023 - September 2024 5.17%

Federal Reserve discount window Banking subsidiaries — 7,225 (1)

Federal Reserve Bank Term Funding Program Banking subsidiaries — 40,157 (1)

Repurchase agreements Banking subsidiaries 7,831 — (2)

August 2023 - April 2024 5.01%

Repurchase agreements Banking subsidiaries, CSC 6,515 — (2)

October 2023 - July 2024 5.34%

Uncommitted, unsecured lines of credit with

various external banks CSC, CS&Co — 1,767 N/A —

Unsecured commercial paper CSC — 5,000 N/A —

Secured uncommitted line of credit with external bank CS&Co — — (3)

Unsecured commercial paper CSC 85 4,915 December 2023 5.65%

Secured uncommitted lines of credit with various external banks

CS&Co 950 — (3)

November 2023 - January 2024 5.67%

Secured uncommitted lines of credit with various

external banks TDAC — — (4)

(1) Amounts shown as available from the FHLB and Federal Reserve facilities represent remaining capacity based on assets pledged as of June 30, 2023.

(1) Amounts shown as available from the FHLB and Federal Reserve facilities represent remaining capacity based on assets pledged as of September 30, 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.

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

See Note 12 for additional information.

(3) In the second quarter of 2023, CS&Co entered into a secured, uncommitted line of credit agreement with an external bank.

Secured borrowing capacity is made available based on CS&Co’s ability to provide acceptable collateral to lender as determined by the credit agreement.

(3) In the second and third quarter of 2023, CS&Co entered into three secured, uncommitted line of credit agreements with external banks.

Secured borrowing capacity is made available based on CS&Co’s ability to provide acceptable collateral to the lenders as determined by the credit agreements.

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

1 unchanged sentence

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 June 30, 2023, the Company had additional investment securities with a par value of approximately $172 billion or a fair value of approximately $156 billion available to be pledged to obtain additional capacity.

As of September 30, 2023, the Company had additional investment securities with a par value of approximately $146 billion or a fair value of approximately $131 billion available to be pledged to obtain additional capacity.

These securities could be used to provide additional borrowing capacity of up to $146 billion, dependent on the facility utilized.

6 unchanged sentences

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

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)

agreements collateralized by investment securities as another source of short-term liquidity.

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

In addition, our banking subsidiaries are counterparties to the standing repo facility with the Federal Reserve Bank of New York;

other than de minimis tests performed to satisfy the Federal Reserve Bank of New York’s testing requirements, this facility was not used during the first six months of 2023 and there were no amounts outstanding at June 30, 2023.

other than de minimis tests performed to satisfy the Federal Reserve Bank of New York’s testing requirements, this facility was not used during the first nine months of 2023 and there were no amounts outstanding at September 30, 2023.

Beginning in the second quarter of 2023, CSC maintains a standing bilateral repurchase agreement with an external bank.

Other than a de minimis test, this facility was not used during the second quarter of 2023 and there were no amounts outstanding under this facility at June 30, 2023.

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.

Other than de minimis tests, this facility was not used during the second or third quarter of 2023 and there were no amounts outstanding under this facility at September 30, 2023.

On March 12, 2023, the Federal Reserve Board announced the creation of a new Bank Term Funding Program, offering loans through March 11, 2024 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.

1 unchanged sentence

The Company is eligible to obtain advances under this program.

This facility was not used during the first six months of 2023.

CSC’s ratings for Commercial Paper Notes were P1 by Moody’s Investor Service (Moody’s), A2 by Standard & Poor’s Rating Group (Standard & Poor’s), and F1 by Fitch Ratings, Ltd (Fitch) at June 30, 2023.

This facility was not used during the first nine months of 2023.

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)

During the second quarter of 2023, Standard & Poor’s downgraded its rating of CSC’s Commercial Paper Notes from A1 to A2, and Moody’s changed its outlook from positive to stable.

1 unchanged sentence

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.

Beginning in the second quarter of 2023, CS&Co also maintains a secured, uncommitted line of credit, under which CS&Co may borrow on a short-term basis and pledge either client margin securities or firm securities as collateral.

CS&Co also maintains secured, uncommitted lines of credit, under which CS&Co may borrow on a short-term basis and pledge either client margin securities or firm securities as collateral, based on the terms of the agreements.

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 six months of 2023, CSB issued brokered CDs as a supplemental funding source.

The following table provides information about brokered CDs issued by CSB and outstanding as of June 30, 2023:

In the fourth quarter of 2022 and first nine months of 2023, CSB issued brokered CDs as a supplemental funding source.

The following table provides information about brokered CDs issued by CSB and outstanding as of September 30, 2023:

Amount Outstanding Maturity Weighted-Average Interest Rate

Brokered CDs $ 41,368 July 2023 - April 2025 4.97%

Brokered CDs $ 45,418 November 2023 - April 2025 5.06%

Cash Flow Activity

1 unchanged sentence

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.

During the second quarter of 2023, the pace of client cash allocations out of our sweep features decreased significantly, and in June, the Company was able to cover these client cash movements without drawing upon additional FHLB borrowings or issuing additional brokered CDs.

In the second quarter of 2023, the Company’s FHLB borrowings and other short-term borrowings decreased by $3.8 billion as a result of FHLB maturities during the period.

Bank deposits also decreased during the second quarter of 2023 by $21.3 billion, resulting from a decrease of $29.5 billion in deposits swept from brokerage accounts due to ongoing changes in client cash allocations and a slight increase in client equities purchases, which was partially offset by a net increase in brokered CDs of $10.6 billion.

During the first six months of 2023, the Company’s cash and cash equivalents, excluding amounts restricted, increased by $7.5 billion to $47.7 billion as of June 30, 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 $62.3 billion during the first six months of 2023;

The average daily pace of client cash allocations out of our sweep products into higher yielding investment solutions decreased significantly beginning in the second quarter of 2023, and, apart from an increase in August following the Federal Reserve’s July rate increase, continued to decline during the third quarter of 2023 to its slowest pace since the beginning of the current interest rate tightening cycle.

In the third quarter of 2023, the Company’s FHLB borrowings and other short-term borrowings decreased by $9.5 billion as a result of repayments during the period.

Bank deposits decreased during the third quarter of 2023 by $20.0 billion, resulting from a decrease of $23.1 billion in deposits swept from brokerage accounts due to client cash allocations, partially offset by a net increase in brokered CDs of $4.1 billion.

During the first nine months of 2023, the Company’s cash and cash equivalents, excluding amounts restricted, decreased by $6.9 billion to $33.3 billion as of September 30, 2023.

This decrease was driven by net cash used for financing activities, partially offset by net cash provided by investing activities.

Bank deposits decreased by a total of $82.3 billion during the first nine months of 2023;

this was driven by a decrease of $116.2 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 $39.4 billion.

Offsetting the decrease in bank deposits, investing cash flows from our AFS and HTM securities totaled $30.8 billion in the first six months of 2023, and the Company increased its FHLB borrowings and other short-term borrowings by a total of $31.8 billion.

Offsetting the decrease in bank deposits, investing net cash flows from our AFS and HTM securities totaled $49.2 billion in the first nine months of 2023, and the Company increased its FHLB borrowings and other short-term borrowings by a total of $22.3 billion.

THE CHARLES SCHWAB CORPORATION

4 unchanged sentences

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 June 30, 2023, and the table below presents information about our average daily LCR:

The Company was in compliance with the LCR rule at September 30, 2023, and the table below presents information about our average daily LCR:

Average for the Three Months Ended

June 30, 2023 March 31, 2023

September 30, 2023 June 30, 2023

Total eligible HQLA $ 60,781 $ 65,738

6 unchanged sentences

ASF is calculated by assessing the stability of the Company’s funding sources and RSF is calculated by evaluating the characteristics of the Company’s assets, derivatives, and off-balance-sheet exposures.

The Company was in compliance with the NSFR rule at June 30, 2023, and the table below presents information about our average NSFR:

Average for the Three Months Ended

June 30, 2023 March 31, 2023

ASF $ 200,512 $ 202,504

RSF 166,428 163,622

NSFR 120 % 124 %

The Company was in compliance with the NSFR rule at September 30, 2023.

Long-Term Borrowings

The Company’s long-term debt is primarily comprised of Senior Notes and totaled $22.5 billion and $20.8 billion at June 30, 2023 and December 31, 2022, respectively.

The following table provides information about our Senior Notes outstanding at June 30, 2023:

June 30, 2023 Par

The Company’s long-term debt is primarily comprised of Senior Notes and totaled $24.8 billion and $20.8 billion at September 30, 2023 and December 31, 2022, respectively.

The following table provides information about our Senior Notes outstanding at September 30, 2023:

September 30, 2023 Par

Outstanding Maturity Weighted Average

5 unchanged sentences

Moody’s also affirmed its rating of A2 for CSC and TDA Holding and changed its outlook from positive to stable.

THE CHARLES SCHWAB CORPORATION

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

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

New Debt Issuances

The below debt issuances in the first six months of 2023 were senior unsecured obligations.

The below debt issuances in the first nine months of 2023 were senior unsecured obligations.

Additional details are as follows:

2 unchanged sentences

May 19, 2023 1,300 05/19/2034 5.853% (1)

(1) Interest rates presented are those in effect at June 30, 2023.

August 24, 2023 1,350 08/24/2034 6.136% (1)

August 24, 2023 1,000 08/24/2026 5.875%

(1) Interest rates presented are those in effect at September 30, 2023.

For additional information regarding future interest rates on fixed-to-floating rate Senior Notes, see Item 1 – Note 8.

1 unchanged sentence

For information on these arrangements, see Item 1 – Notes 5, 6, 8, 9, and 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)

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.

8 unchanged sentences

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 June 30, 2023, CSC and our banking subsidiaries are considered well capitalized, and CS&Co, TDAC, and TD Ameritrade, Inc.

As of September 30, 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 CHARLES SCHWAB CORPORATION

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

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

The following table details the capital ratios for CSC consolidated and CSB:

June 30, 2023 December 31, 2022

September 30, 2023 December 31, 2022

CSC CSB CSC CSB

20 unchanged sentences

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

The Company’s consolidated Tier 1 Leverage Ratio increased to 7.5% at June 30, 2023 from 7.1% at March 31, 2023 and 7.2% at year-end 2022.

This increase during the second quarter was primarily due to net income during the quarter and a decrease in the Company’s total assets.

Total balance sheet assets decreased $24.0 billion, or 4%, during the second quarter of 2023 due primarily to a decrease of $24.1 billion, or 6%, in total bank deposits and payables to brokerage clients due to client cash allocation decisions resulting from the rising interest rate environment.

CSB’s Tier 1 Leverage Ratio increased from year-end 2022, ending the second quarter of 2023 at 8.9% primarily as a result of capital contributions from CSC enabled by the Company’s issuance of $2.5 billion of long-term debt in May 2023.

The Company’s consolidated Tier 1 Leverage Ratio increased to 8.2% at September 30, 2023 from 7.5% at June 30, 2023 and 7.2% at year-end 2022.

This increase during the third quarter was primarily due to net income during the quarter and a decrease in the Company’s total assets.

Total balance sheet assets decreased $36.3 billion, or 7%, during the third quarter of 2023 due

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)

primarily to a decrease of $32.0 billion, or 8%, in total bank deposits and payables to brokerage clients due to client cash allocation decisions resulting from the rising interest rate environment.

CSB’s Tier 1 Leverage Ratio increased from year-end 2022, ending the third quarter of 2023 at 9.6% primarily as a result of capital contributions from CSC as well as net income.

The Board of Governors of the Federal Reserve System recently issued a notice of proposed changes to the regulatory capital rules that would require us to include AOCI in regulatory capital, phased in over a three-year transition period beginning July 1, 2025 (see Current Regulatory and Other Developments).

As of June 30, 2023, our adjusted Tier 1 Leverage Ratio, which reflects the inclusion of AOCI in the ratio, was 3.7% for CSC consolidated and 4.0% for CSB (see Non-GAAP Financial Measures for further details and a reconciliation of such measures to GAAP reported results).

The Company is continuing to accrete and retain capital while it continues to evaluate the impacts of the proposal.

The Company currently anticipates meeting the proposed capital requirements organically well ahead of the transition period provided within the proposal.

As of September 30, 2023, our adjusted Tier 1 Leverage Ratio, which reflects the inclusion of AOCI in the ratio, was 4.1% for CSC consolidated and 4.4% for CSB (see Non-GAAP Financial Measures for further details and a reconciliation of such measures to GAAP reported results).

In anticipation of the rules being adopted, the Company is continuing to retain and accrete capital organically well ahead of the proposed transition period.

IDA Agreement

Certain brokerage client deposits are swept off-balance sheet to the TD Depository Institutions pursuant to the 2023 IDA agreement.

During the first six months of 2023, Schwab did not move IDA balances to its balance sheet.

During the first nine months 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.

2 unchanged sentences

On January 26, 2023, the Board of Directors (Board) of CSC declared a three cent, or 14%, increase in the quarterly cash dividend to $.25 per common share.

THE CHARLES SCHWAB CORPORATION

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

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

Cash dividends paid and per share amounts, exclusive of amounts related to preferred stock repurchases, for the first six months of 2023 and 2022 are as follows:

Six Months Ended June 30, Cash Paid Per Share

Cash dividends paid and per share amounts, exclusive of amounts related to preferred stock repurchases, for the first nine months of 2023 and 2022 are as follows:

Nine Months Ended September 30, Cash Paid Per Share

Amount Cash Paid Per Share

24 unchanged sentences

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

There were no repurchases of CSC’s common stock during the three months ended June 30, 2023.

CSC repurchased 37 million shares of its common stock for $2.8 billion during the six months ended June 30, 2023.

As of June 30, 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 six months ended June 30, 2022.

There were no repurchases of CSC’s preferred stock during the three months ended June 30, 2023 .

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 six months ended June 30, 2023 .

There were no repurchases of CSC’s common stock during the three months ended September 30, 2023.

CSC repurchased 37 million shares of

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)

its common stock for $2.8 billion during the nine months ended September 30, 2023.

As of September 30, 2023, approximately $8.7 billion remained on the new authorization.

There were no repurchases of CSC’s preferred stock during the three months ended September 30, 2023 .

The repurchase prices are inclusive of $3 million of dividends accrued by the stockholders as of the repurchase date.

3 unchanged sentences

Foreign Exposure

At June 30, 2023, Schwab had exposure to non-sovereign financial and non-financial institutions in foreign countries, as well as agencies of foreign governments.

At June 30, 2023, the fair value of these holdings totaled $10.5 billion, with the top three exposures being to issuers and counterparties domiciled in France at $2.9 billion, the United Kingdom at $2.4 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

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)

Canada at $1.7 billion.

In addition, Schwab had outstanding margin loans to foreign residents of $2.7 billion and $2.5 billion at June 30, 2023 and December 31, 2022, respectively.

At September 30, 2023, Schwab had exposure to non-sovereign financial and non-financial institutions in foreign countries, as well as agencies of foreign governments.

At September 30, 2023, the fair value of these holdings totaled $7.8 billion, with the top three exposures being to issuers and counterparties domiciled in France at $2.0 billion, Canada at $1.5 billion, and the United Kingdom at $908 million.

In addition, Schwab had outstanding margin loans to foreign residents of $2.7 billion and $2.5 billion at September 30, 2023 and December 31, 2022, respectively.

CRITICAL ACCOUNTING ESTIMATES

Certain of our accounting policies that involve a higher degree of judgment and complexity are discussed in Part II – Item 7 – Management’s Discussion and Analysis of Financial Condition and Results of Operations – Critical Accounting Estimates in the 2022 Form 10-K.

There have been no changes to critical accounting estimates during the first six months of 2023.

There have been no changes to critical accounting estimates during the first nine months of 2023.

NON-GAAP FINANCIAL MEASURES

3 unchanged sentences

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.

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)

Schwab’s use of non-GAAP measures is reflective of certain adjustments made to GAAP financial measures as described below.

Beginning in the third quarter of 2023, these adjustments also include restructuring costs, which the Company began incurring in connection with its previously announced plans to streamline its operations to prepare for post-integration of TD Ameritrade.

See Part I – Item 1 – Note 10 for additional information.

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.

Acquisition and integration-related costs, amortization of acquired intangible assets and restructuring costs

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, restructuring costs 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.

1 unchanged sentence

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.

We exclude acquisition and integration-related costs, amortization of acquired intangible assets and restructuring costs 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.

Costs related to acquisition and integration or restructuring fluctuate based on the timing of acquisitions, integration and restructuring 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.

8 unchanged sentences

The Compensation Committee of CSC’s Board of Directors maintains discretion in evaluating performance against these criteria.

THE CHARLES SCHWAB CORPORATION

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

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

The following tables present reconciliations of GAAP measures to non-GAAP measures:

Three Months Ended June 30, Six Months Ended June 30,

Three Months Ended September 30, Nine Months Ended September 30,

2023 2022 2023 2022

3 unchanged sentences

Amortization of acquired intangible assets (135) (152) (404) (460)

Restructuring costs (2)

(279) — (279) —

Adjusted total expenses (non-GAAP) $ 2,703 $ 2,570 $ 8,177 $ 7,724

(1) Acquisition and integration-related costs for the three and six months ended June 30, 2023 primarily consist of $48 million and $106 million of compensation and benefits, $41 million and $74 million of professional services, $10 million and $14 million of occupancy and equipment, and $20 million and $22 million of other.

Acquisition and integration-related costs for the three and six months ended June 30, 2022 primarily consist of $53 million and $109 million of compensation and benefits, $35 million and $66 million of professional services, and $4 million and $8 million of occupancy and equipment.

Three Months Ended June 30, Six Months Ended June 30,

(1) Acquisition and integration-related costs for the three and nine months ended September 30, 2023 primarily consist of $52 million and $158 million of compensation and benefits, $37 million and $111 million of professional services, $7 million and $21 million of occupancy and equipment, and $4 million and $26 million of other.

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

(2) Restructuring costs for the three and nine months ended September 30, 2023 primarily consist of $276 million of compensation and benefits.

There were no restructuring costs for the three and nine months ended September 30, 2022.

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)

Three Months Ended September 30, Nine Months Ended September 30,

2023 2022 2023 2022

4 unchanged sentences

Amortization of acquired intangible assets 135 .07 152 .08 404 .22 460 .24

Restructuring costs 279 .15 — — 279 .15 — —

Income tax effects (1)

2 unchanged sentences

(non-GAAP), Adjusted diluted EPS (non-GAAP) $ 1,410 $ .77 $ 2,075 $ 1.10 $ 4,493 $ 2.45 $ 5,382 $ 2.83

(1) The income tax effects of the non-GAAP adjustments are determined using an effective tax rate reflecting the exclusion of non-deductible acquisition costs and are used to present the acquisition and integration-related costs and amortization of acquired intangible assets on an after-tax basis.

Three Months Ended June 30, Six Months Ended June 30,

(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, amortization of acquired intangible assets and restructuring costs on an after-tax basis.

Three Months Ended September 30, Nine Months Ended September 30,

2023 2022 2023 2022

10 unchanged sentences

(1) See table above for the reconciliation of net income available to common stockholders to adjusted net income available to common stockholders (non-GAAP).

June 30, 2023

September 30, 2023

Tier 1 Leverage Ratio (GAAP)

9 unchanged sentences

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis